THE MANY BENEFITS OF A RESERVES ANALYSIS
While many use the terms interchangeably, cash balances are not the same as reserves, says Jean Vock, senior vice president, business affairs and CFO, University of Nevada, Las Vegas. When Vock joined UNLV as CFO in 2017, the university did not have a formal financial reserves policy in place. Soon after she arrived, with the assistance of public accounting firm Moss Adams, Vock and the university leadership set out to develop a comprehensive framework for defining and reporting reserves practices going forward, in part because some had expressed concern about what they thought were high levels of reserves, says Vock.
One problem with many college and university financial statements is that they do not indicate funds that are committed or internally designated, leaving some to assume that all unrestricted funds are available to spend. UNLV is currently working to develop a supplemental report that shows these commitments as part of its push to better educate and communicate what constitutes the university’s reserves, says Vock.
Four Reserves Buckets
From Vock’s perspective, while there has been some isolated benchmarking, no clear consensus has emerged around operating reserves across higher education. Many institutions don’t have defined reserves targets, and for those that do, targets range anywhere from one month to 12 months of available cash on hand. Nevertheless, says Vock, the process of identifying and developing policy language that addresses potential recessionary reverberations and other rainy-day scenarios is an important part of every institution’s strategic planning.
Although current leadership transitions have put a hold on formally adopting the proposed reserves policy, UNLV is already using the new framework to guide its actions, says Vock. Among the university’s strategic reasons for having reserves are supporting daily operations, mitigating risk, and building capacity for future investments in emerging needs. UNLV has identified sources of funding and different "buckets" of reserves, categorized into four carve-outs:
- Operating. As is true for most institutions, much of UNLV’s cash is already committed. For instance, of its total cash balance on hand in FY18, one-third was in accounts specified for capital projects, improvements, and renovations—money set aside that couldn’t be used for another purpose. Another third was distributed across the institution in unit operating reserves from revenues generated by the units, to be used for specific programs or large purposes such as equipment and renovations. The final third was held in central administrative accounts for both anticipated and unforeseen expenses.
- Strategic investments. Aside from operations, UNLV is seeking to identify funds for specific projects, such as more online programs and capital projects, that align with its vision—to be recognized as a top-tier public university in research, education, and community impact by 2025. Many initiatives require strategic investment because of the upfront need for funding of people and activities to launch a new effort, says Vock. "We’re currently updating our campus master plan, and this will inform our reserves policy and framework to ensure that we have adequate funding for strategic investments going forward."
- Infrastructure. Like most institutions, UNLV has a long list of deferred maintenance needs. Establishing infrastructure reserves can help institutions become more proactive with regard to system upgrades and replacement, says Vock. UNLV is in the process of completing a facilities condition assessment, which will inform the reserves policy with better data about specific needs. Vock also notes that it makes sense to identify technology as a separate bucket. UNLV has identified "technology" as an infrastructure subfund under hardware and software replacement, which is pulled from as needed to keep the engine of the university running.
- Real estate acquisition. Like most urban, landlocked institutions, UNLV must not only make better use of existing space, but also continually assess needs for additional space. "We’ve found it helpful to articulate this as part of our reserves policy, with a separate real estate acquisition reserves fund so that we can be proactive in anticipating what might become available on the market," says Vock. The university set aside specific funding for acquisitions in FY19 and now wants to replenish the fund to ensure that it can move quickly as opportunities emerge.
In developing reserves buckets, a key discussion point for UNLV leadership was whether the university might also need to reserve against the state operating budget. "Ultimately, we decided not to do so," says Vock. As she explains, UNLV’s state-appropriated funds have a specific function for the education mission. "We are not allowed to carry over those funds, so we always fully spend our state allocations."
Because UNLV has a high proportion of first-generation students—about 52 percent—there is huge sensitivity to raising tuition or fees for in-state residents, since a primary strategic goal is accessibility, according to Vock. She says that, for now, UNLV leaders presume the state will continue funding at what remains a fairly high level, covering about 60 percent of the university’s education mission through direct support to students.
One positive outcome of a deep dive into reserves analysis is identifying how your institution should report information, says Vock. "The process itself provides an opportunity to educate and communicate by explaining why we need these different reserves. It also gets everyone on the same page about appropriate amounts to have on hand."
KARLA HIGNITE, Fort Walton Beach, Fla., is a contributing editor for Business Officer.