As vice president of university operations and CFO at Colorado State University, Fort Collins—CSU’s flagship land-grant university—Lynn Johnson also serves as the de facto deputy CFO for the system, which includes CSU Pueblo, a Hispanic-serving institution, and CSU Global, a fully online institution created in 2008.
In the years following the Great Recession, CSU’s leadership saw the system’s debt levels increase as it invested in long-overdue upgrades to campus facilities, ultimately recognizing the need to address balance sheet challenges relative to how it considers reserves. "We were hampered by the lack of an existing framework addressing how reserves should be accounted for and work across the system," says Johnson.
Start Where You Are
Johnson began the process of developing a systemwide reserves policy by looking at the ratios used by CSU’s credit agencies and the university’s accrediting body, the Higher Learning Commission. In both cases, unrestricted net assets were key to each of the ratios relied upon to assess financial health, so that’s where Johnson started.
The primary reserves ratio is one of the four ratios used to calculate the Composite Financial Index and accounts for 35 percent of this metric. The primary reserves ratio is a comparison of accumulated reserves to annual operating demands, and a ratio of 40 percent—which equates to between four-and-a-half and five months of operating capital—is considered sufficient.
"We currently have a reserves policy that requires a 40 percent primary reserves ratio for our Fort Collins and Pueblo campuses," says Johnson. The Global campus follows a bit of a different model, having worked with an outside firm that suggested 250 days of cash on hand as a reasonable benchmark. For Fort Collins and Pueblo to arrive at the 40 percent benchmark, they rely on the expendable resources of their respective foundations. "Eventually, we would like to bring all campuses in alignment with a target of between 120 and 150 days of cash on hand," says Johnson.
Specify What You Count
The primary reason why Johnson would like to transition to cash on hand is because it is a more understandable measure to most than unrestricted net position, though in theory both calculations should be close, she says. However, the introduction of several Governmental Accounting Standards around pensions and postretirement benefits have resulted in a much higher level of complexity in identifying expendable net assets, not to mention the discussion needed to educate board members.
Johnson cautions that starting a conversation on reserves can be confusing for many, since most people don’t understand exactly what constitutes reserves or their intended purpose; for those without an accounting background, the terminology can be challenging.
While Johnson is planning to transition to cash on hand, one point of discussion includes how to factor in CSU’s affiliated foundations. Its endowment and quasi-endowment funds are considered reserves and are currently included in university ratios. While the foundations provide a safety net, Johnson isn’t convinced it is wise for the university to base the financial viability of its operations on funds that might not be available when needed. "What we really need is to look within the university for what gives us the flexibility to continue operating."
Manage Proactively
In the meantime, CSU is proactively managing its reserves, in part by releasing funds for things such as deferred maintenance if enrollment and persistence targets are hit in the fall and spring.
During the past 10 years, enrollment growth has allowed additional resources to be set aside for future needs. Yet, no institution is going to be fully free of enrollment’s fluctuating impacts, suggests Johnson. "Even in states like ours [Colorado] where we fare well with high school graduates, we still have recruiters from other states competing for our students. Enrollment is looking good right now, but we still need to make sure we have plans in place in the event of a downturn," says Johnson. "Reserves should help us bridge that gap."
KARLA HIGNITE, Fort Walton Beach, Fla., is a contributing editor for Business Officer.