the myths and perils of carryforward balances
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The Myths and Perils of Carryforward Balances Maria Anguiano, University of California , Riverside Kelly M. Ratliff, University of California, Davis Su-Lin Shum, University of California, Davis. Agenda. Systemwide perspective Campus background and context Campus approach. - PowerPoint PPT PresentationTRANSCRIPT
The Myths and Perils of Carryforward Balances
Maria Anguiano, University of California, Riverside
Kelly M. Ratliff, University of California, Davis
Su-Lin Shum, University of California, Davis
|September 22, 2014
1. Systemwide perspective
2. Campus background and context
3. Campus approach
Agenda
|September 22, 2014
The University of California includes 10 Campuses, 5 Academic Medical Centers and 3 National Laboratories
Established in 1868 and Governed by a 26-member constitutionally autonomous Board of Regents
Educated over 235,000 full-time equivalent students in FY2012-2013
Employs 140,000 full-time equivalent employees
UC’s assets total $53 billion
UC’s research enterprise includes more than 800 research centers, institutes, laboratories and programs
|September 22, 2014
Daily/ monthly & seasonal needs (debt service)
Reserving for extraordinary circumstances
Incoming cash flow patterns
Balancing investments vis-à-vis timing of operational needs
Framing institution’s policy for various constituent groups
Rating impacts
Opportunity costs
Institutionalizing requirements
Operational Liquidity THINGS TO CONSIDER
|September 22, 2014
UC’s financial strength benefits from diverse revenue streams which flow in throughout the year
Supplies 9%
Over the past five years, UC has consistently focused on optimizing liquidity
KEY QUESTIONS:
What is the “right” level of liquidity to maintain on hand, given our operational needs and ratings agency requirements?
How do we evaluate the trade-off of holding liquidity vs. investing in longer term assets?
Given a target level of liquidity, how can we work with campuses to ensure those targets are met?Total $24.3 Billion
Medical Centers & Auxiliaries
45%
DOE Labs 4%
State 10%
Other 6% Student
Tuition & Fees
14%
Grants & Contracts
22%
Revenues in FY2012-13
|September 22, 2014
UC’s Target Liquidity Policy
Daily Operating
Needs
Meet Rating Agency
Requirements
Sufficient Long-term Liquidity
Diversify Investment
Portfolio
Investments should be sufficient and liquid enough to cover daily operating needs (such as payroll,
debt service, etc)
Short-term assets should hold enough rating agency defined investments to meet daily and
weekly coverage requirements
Funds should cover “extraordinary” liquidity needs and comparable
metrics of days cash to other universities
Remainder moved to longer-term investment vehicles to increase potential returns as
risk profile permits
|September 22, 2014
UC has 2 Investment Vehicles for Current Funds: The Short-Term Investment Pool (STIP) & Total Return Investment Pool (TRIP)
• Short-Term Investment Pool (STIP) is the investment vehicle for all operating funds of the University
• All revenues flow into STIP, and all expenditures (operations, payroll, debt service) are paid from STIP
• Target Return Rate: 2.4%
• Asset Allocation: 100% Fixed Income
• Total Return Investment Pool (TRIP) was launched in 8/2008 as an alternative investment to STIP
• TRIP is designed to maximize return on long-term working capital, subject to an acceptable level of risk, by investing across a broad range of asset classes
• Target Return Rate: 4.75%
• Asset Allocation: 50% Public Equity; 20% Fixed Income; 30% Alternatives
STIP TRIP
0
5
10
$15B
2013
Working
Capital
$13.8B
Working capital
|September 22, 2014
UC Liquidity is a vast ocean with
ripples on top
The most significant inflows and outflows of liquidity are planned, and represent large expenses such as payroll and debt service
Since 2004, we have not had a “black swan” scenario affect liquidity
7/20
04
11/2
004
3/20
05
7/20
05
11/2
005
3/20
06
7/20
06
11/2
006
3/20
07
7/20
07
11/2
007
3/20
08
7/20
08
11/2
008
3/20
09
7/20
09
11/2
009
3/20
10
7/20
10
11/2
010
3/20
11
7/20
11
11/2
011
3/20
12
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
STIP Inflow/Outflow
STIP Daily Inflow/Outflow as a % of Total 2004-2012
99% of the time between 6% (+/-)
|September 22, 2014
Liquidity is aggregated into STIP each day, and then a portion is invested in TRIP
Funds used across campus
Med compSales & Service
Gifts & Endowment
Fees
ReservesGeneral funds
PlantGrants & Contracts
STIP:Aggregated
Working Capital
STIP TRIP
All campus funds are aggregated into one “pot” of working capital
Working capital all goes into STIP
Money gets moved to TRIP as a % of total cash, not fund by fund
|September 22, 2014
We have gone through a multi-year
process to move “excess”
investments in short-term assets into TRIP
0
25
50
75
100%
Ratio
6/30/2010
STIP
78%
TRIP
22%
STIP / TRIP ratio
0
25
50
75
100%
Potential
Future Ratio
STIP
52%
STIP / TRIP ratio
TRIP
48%
UC STIP/TRIP Ratios
Former (2010) Future (2014)
From Oct 2010 – June 2013, we moved $2 billion to TRIP Resulted in incremental $100 mm in interest income over that period
Liquidity optimization work in 2012 / 2013 identified remaining ~$2 billion over-investment in short-term assets Currently moving $2 billion from STIP to TRIP
|September 22, 2014
Campus Perspective
|September 22, 2014
There’s an Elephant in the room
We call him Carry
Forward
|September 22, 2014
What has UC Davis done to get him
out in the open?
|September 22, 2014
UC DavisCampus Facts
Started in 1905 as the "farm" for UC Berkeley. Founded as a separate campus in 1959.
Students as of fall 2013: 34,000
4 colleges, 6 professional schools
99 undergraduate majors
90 graduate programs
23 intercollegiate sports
(NCAA Division I)
UC Davis accounts for $6.9 billion and 69,000 jobs
22,500 employees (4,100 academic, 14,900 staff, 3,500 students)
Member of the Association of American Universities
1st in the world for agriculture and forestry (QS World University Rankings, 2014)
9th ranked public university by U.S. News & World Report
1st in Sierra Magazine 2012 “Cool Schools” Survey
Health System:• Top Hospital and
"A" Hospital Safety Award, Leapfrog Group
• Consumer Choice Award, National Research Corporation
Research Funding:
• 13th among U.S. ranked public universities
• 21nd among public and private universities
|September 22, 2014
|September 22, 2014
New Budget Model
|September 22, 2014
2020 Initiative
2011 2012 2013 2014 2015 2016 2017 2018 2019 20200
5000
10000
15000
20000
25000
30000
2020 Growth Plan
CA National & International
|September 22, 2014
What are Carryforward
Balances?Unexpended balances at the end of the year • net revenue, plus prior year
balances• designated use is not easily
reflected in the balance• often the result of salary or
other savings• occur in most fund sources
|September 22, 2014
Fiscally responsible management practice
Secure funds for multi-year commitments in advance
Manage financial risk
Note: few formal mandates prohibiting balances at UC
Why are Carryforward
Balances Important?
|September 22, 2014
Highly decentralized management of funds
No uniform policy or guidance about appropriate levels
Multiple approaches about management of funds
Inconsistent information
A LOOK BACK
Carryforward Balances
|September 22, 2014
LACK OF UNDERSTANDING
Units: “We have no money!”Leadership: “Why is there so much money?”
ENTITLEMENT
“This is my money!”“I/my department have critical plans”
FEAR
“You are going to take it all!”
MYTHS
What we Hear in the Absence of
Carryforward Guidance
|September 22, 2014
We had to centrally assess carryforward funds in 2012 as a result of a significant budget shortfall; this practice is not viewed as routine.
Disclaimer
!
|September 22, 2014
Lack of stewardship for our students, citizens, other funders
Inconsistent reporting limits strategic planning
Mismatch between priorities and funding sources
PERILS
What we Risk in the
Absence of Carryforward
Balances
|September 22, 2014
Strategic decision making
Consistency
Transparency
Flexibility
Current and future fiscal scenarios
Impact to student fees
New budget model
2020 Initiative
Enrollment growth
Campus and unit priorities
What we Wanted
While Considering
|September 22, 2014
OVERVIEW
What Did
we Do?
1. Researched best practices
2. Engaged the education advisory board
3. Partnered with accounting and key campus units to establish methodology
4. Issued guidance – white papers Policy Framework Reporting and Recording Guidance
5. Consulted with key campus stakeholders
6. Repeat step 5
|September 22, 2014
Options ConsideredApproach Methodology Description
A Unit Held and Used
Units accumulate and use carryforwards/reserves at their discretion
BCentral Campus Review
Carryforward amounts reviewed centrally and assessed for “reasonableness”; no prescribed limits or further policy set
C Spend Down
Options seen at other institutions: - full/partial spend down expected in the next year- full/partial spend down prior to asking for additional
central funds
DLevy (tax/holdback) Applied
A central campus levy or holdback e.g., 3%, 15%, 25%, 85% applied on carryforward balances
E Percentage-Based Limits
Specific %-based limits established (e.g. 0.2%, 2%, 2.5%, 3%, 5%, 10%) and applied on an account, fund type or budget basis by unit
F Absolute Limits
Pre-determined dollar limits established (e.g. $10k, $25k, $50k, $100k, $150k, $300k) and applied on an account, fund type or budget basis by unit/college. Approaches E and F can also work in combination
|September 22, 2014
|September 22, 2014
|September 22, 2014
APPROACH TAKEN
B with Guidance
10-15% (30-60 DAYS CASH)
For funds managed through campus budget model (state, tuition) and all student fees
25% (90 DAYS CASH)
For funds with a higher degree of volatility e.g., indirect costs, patent funds, unrestricted funds, etc.
|September 22, 2014
COBL and KOBL
RECORDING FUTURE COMMITMENTS
Consistent process to account for funds already committed
COMMITTED OBLIGATIONS (COBL)Hard commitments that restrict the use of funds and/or may be legally binding
KNOWN OBLIGATIONS (KOBL)Potential expenditures
|September 22, 2014
Start-up funding for faculty recruitment and retentionsGraduate fellowshipsEndowed chairsContract employeesEquipmentRenovationBridge funding
Examples
|September 22, 2014
Process
STEP ONE
Create a standard reporting template
|September 22, 2014
Process
STEP TWO
Spring review
|September 22, 2014
Process
STEP THREE
Fall review
|September 22, 2014
Process
STEP FOUR
Strategic decisions
|September 22, 2014
What we are Seeing
USE OF CARRYFORWARD FUNDS
Engaging in new conversations with decision-makers
Investments to meet local priorities
Better timing of budget information
Advancing Chancellor and Provost goals
|September 22, 2014
Budget and Institutional Analysis:http://budget.ucdavis.edu
Carryforward White Papers:http://budget.ucdavis.edu/analyses-reports-white-papers/carryforward.html
Education Advisory Board:http://www.eab.com/Research-and-Insights/Business-Affairs-Forum/Custom/2012/08/Calculating-and-Communicating-Carry-Forward-and-Reserve-Policies
Resources