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Are Annual Audit Reports Important?
by Silence Dogood

If all of the university employees at SCSU were asked to raise their hand if they had ever read an SCSU annual financial report, how many hands would be raised? My guess is that there probably wouldn’t be a lot of hands being raised. Most annual reports of audit findings are just not that exciting! However, there is a lot of information, especially when looking at trends, which is at least interesting even if not exciting.

The following figure shows the Total Net Position, which, according to the Annual Report, “represents the residual interest in the University’s assets after liabilities are deducted.” In other words, it represents the ‘value’ of the university’s operation. The values given in the figure come from SCSU’s Annual Reports.

In looking at the graph, you would have to say that there has been a steady growth in the Total Net Position of $77.6 million from FY2008 through FY2013, which amounts to a growth of 55.9%. Clearly, these results are impressive! In FY2014, there was a loss of $7.5 million in the Total Net Position, which represents a decline of 3.5%. If this was a one-year ‘blip’ in the system, it might not be a big deal. However, if it was the beginning of a trend, it might be a bit more ominous.

When you try to understand these kinds of numbers, it is often helpful to look at the individual components, which make up a university’s budget. One of the revenue components is the state appropriation. The following figure shows the state appropriation from FY2008 through FY2014. The values given in the Figure come from SCSU’s Annual Reports.

The figure shows that, although decreasing from its high in FY2009 to FY2012, funding actually increased in FY2013 and again in FY2014. However, it is important to note that the increase in state appropriations for FY14 is the result of the state appropriation making up the difference because tuition was being held constant. Essentially, the increase in the state appropriation was intended to make up for the money that was ‘lost’ as a result of tuition being held constant.

Over the past several years, state appropriations have not kept up with tuition increases or inflation and as a result have become an increasingly smaller component of a university’s funding making tuition and fees a larger percentage of its revenue stream.

The largest single source of revenue for SCSU is Tuition and Fees. The following figure shows the Tuition and Fees from FY09 through FY14. The values given in the figure come from SCSU’s Annual Reports.

The figure shows steady growth from FY2009 to its peak in FY2011 followed by steady decline through FY2014. Some of the decline in tuition and fees was offset by an increase in the state appropriation for FY14. However, tuition and fees normally track very closely to enrollments. If enrollment is growing, tuition and fee revenue increases. If enrollment is decreasing, tuition and fees decrease concomitantly.

The following figure shows the FYE enrollment (the enrollment upon which state allocations are based) from FY2009 through FY2014. The values given in the figure come from the website of SCSU’s Office of Strategy, Planning and Effectiveness.

From its peak in FY2010, enrollment has dropped 2,761 FYE, which is a decrease of 18.3%. If each FYE represents an average of $11,500 in tuition, fees and state allocation, this decrease in enrollment converts into a loss of approximately $31,800,000.

Most of this data is not all that important on a day-to-day basis. However, it is most useful in recognizing trends. There are also other measures of a university’s financial health. One such measure is the Composite Financial Index (CFI). For SCSU, the CFI clearly shows that SCSU is not in a good place financially. For FY14, SCSU’s CFI is 0.07. Of the MnSCU universities, between FY 2008 and FY 2014, only Southwest Minnesota State University has had a CFI less than 1.00. In FY 2009, Southwest had the lowest CFI of 0.37 until SCSU took the title of the lowest CFI in MnSCU with its 0.07 in FY14. Some have even commented that SCSU’s CFI is “in the toilet.” However, no matter how SCSU’s CFI is described the trend is certainly headed in the wrong direction.

Another important measure of a university’s financial health is the amount of “Unrestricted Cash” it has on hand. The “Unrestricted Cash” is captured in the CFI but it may be masked by other measures, which make up the CFI. The following figure shows the amount of “Unrestricted Cash” as listed in SCSU’s Annual Reports from FY2008 through FY2014.

From FY2008 through FY2012, the “Unrestricted Cash” grew by $25,000,000, which represents a growth of nearly 350%! From FY2012 through FY2014, the “Unrestricted Cash” dropped by $16,900,000, which is a decrease of 52.3%!

The “Unrestricted Cash” is a significant way of looking at the health of a university. If a university takes in more money than it spends, it can usually increase the amount of “Unrestricted Cash” it has. On the other hand, if a university is spending more money than it is taking in, it has to take money out of its “Unrestricted Cash” or cut its budget. It is also possible for a university’s Unrestricted Cash to decrease because of “strategic investments.”

From FY2013 to FY2014, the SCSU’s Total Net Position decreased by $7,464,000. Since the “Unrestricted Cash” dropped by $13,000,000, clearly SCSU had to drawn down its “Unrestricted Cash” by $5,535,000 to cover its operating deficit in FY2014. Additionally, an annual $13,000,000 decrease in “Unrestricted Cash” is something that cannot be sustained over the long-term!

Given a CFI in FY2014 of 0.07 (by far the lowest value ever listed by MnSCU for a university), enrollment declines of 6.9%, 6.4%, and 5.1% from FY2012 through FY2014, a projected enrollment decline of 5% or more for FY2015, and a projected budget deficit of $9,542,000 for FY2015, it is clear that SCSU is in deep financial trouble.

Unlike the H.M.S. Titanic, MnSCU is not likely to allow SCSU to ‘sink.’ The question is how far down does SCSU have to go before the legislature or the administration recognize that there is a problem and step in?

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