UNDERSTANDING RESERVES Idaho State University

FINANCIAL GOALS OF ISU Sustainability/Financial Solvency Generate sufficient reserves to smooth out economic fluctuations Enrollment decreases Holdbacks or reduction in State funding Salaries for Faculty/Staff Increase salary competitiveness Maintenance of physical plant/assets Deferred Maintenance - $352M (Over the next 5 years)

FINANCIAL GOALS OF ISU For the last several years, ISU has been working to address the financial goals of the university. Recognizing that the goals could not be accomplished overnight, ISU has taken steps to address each goal by doing a little each year. Realignment of expenses Increase reserve amounts to be in compliance with SBOE reserve requirements Reducing operating costs also lower the amount of reserve required Offering merit increases over and above the state increases (in some cases when there was no state increase, ISU offered one). Maintenance on buildings/classrooms was prioritized and assets needing to be replaced were addressed.

WHAT ARE RESERVES? Reserves are money that is set aside for use at another time. Some reserves are for a specific purpose (Restricted), while others are for general use (Unrestricted). Reserves in an organization act the same way your personal savings account might. You likely have several different savings accounts; some for specific purposes, and some for general, as yet unspecified use. Some of your savings are more accessible than others. For example, a 401K plan is less accessible than a regular savings account. The reserve amount is based on the prior year’s operating expenses – which means the reserve # is a moving target. One year, ISU could be fully reserved, but the next, ISU could be under-reserved.

WHY DO WE NEED RESERVES? The volatility of state funding, (reductions, holdbacks) Fluctuations in enrollment and tuition revenue To avoid layoffs or furloughs Reserves impact the bond rating and credit worthiness of ISU as determined by external sources ISU’s bond rating is similar to your personal credit score

WHY DO WE NEED RESERVES? Reserves act as a cushion to keep ISU operating in the event that there was a government shutdown or other catastrophe that prevented inflows of cash. GASB Statutes change and impact our bottom line, such as the recent change requiring retirement liabilities be shown. Deferred Maintenance – ISU has $352M in deferred maintenance (over the next 5 years).

HOW MUCH SHOULD ISU HAVE IN RESERVES? State Board of Education (SBOE) requires a minimum of 5% of operating expenditures. (Strategic Plan, Goal 3, Objective A) Government Finance Officers Association (GFOA) recommends, “at a minimum, that general-purpose governments, regardless of size, maintain unrestricted fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.” TED.pdf TED.pdf GFOA’s minimum should not be interpreted as the maximum reserve level. Reserves can, and in many instances, should be higher than these recommendations. Recommendations for personal finance are 3-6 months of expenses in liquid form.

reporting.shtml HOW TO FIND ISU FINANCIAL DATA Financial data is available on the Controller’s Website.

HOW TO CALCULATE RESERVE RANGE Identify SBOE Minimum Reserves – 5% of Operating Expenses Step 1: Identify Operating Expenses from Prior Year Step 2: Take this figure and multiple by.05 Identify GFOA Minimum Reserves – 2 months of Operating Expenses Step 1: Identify Operating Expenses from Prior Year Step 2: Divide this total by 12 months Step 3: Multiple this total by 2 months

Calculating Reserves AOperating Expenses219,960, ,289, ,035,122 BTimes.05 (SBOE minimum)10,998,005 11,164,471 11,101,756 CLine A Divided by 12 months18,330,009 18,607,452 18,502,927 Line C Multiplied by 2 months = GFOA minimum 36,660,018 37,214,904 37,005,854

WHERE ARE ISU’S RESERVES NOW? Calculating reserves takes a few steps. We first have to identify the Unrestricted portion of our Net Position. We find this information on the Statement of Net Position. Note that only the unrestricted portion of Total Net Position is used for reserve calculations. Amounts that are restricted or invested are not accessible.

WHERE ARE ISU’S RESERVES? Now we need to determine what amount from the Unrestricted Net Assets amount is truly unrestricted – that is, not designated for another project. We look at the Unrestricted Net Assets – the $103,154,532. From there, we subtract items that are Obligated. Then we subtract items that are Designated. When the obligated and designated items are removed, we are left with the Unrestricted Available Balance – the amount of money that is true reserves.

Why were cost controls necessary? In FY08, ISU ended the year with only $205,771 in true reserves. That would have covered less than one day of operating expenses at ISU. ISU reserves have been increasing each year to remedy this shortfall.

At the end of FY11, reserves had increased enough to meet the 5% minimum standard set by the SBOE. At the end of FY14, ISU is just under the minimum 2 month operating expense reserve recommendation of GFOA.

NEXT STEPS ISU is nearing the 2 months of operating expenses reserve recommendation. What happens next? ISU released $6 million dollars back to departments in FY15 to provide additional funding. ISU continues to work towards funding merit increases to help faculty and staff wages to be competitive. Some cost control measures, such as requirements for using salary savings, have been relaxed to provide additional flexibility to departments. Continue to work on the $352M in deferred maintenance.