1. KU Alumni Association “Finance 101”
Presented to Board of Directors – January 25, 2013

2. A little vocabulary…
Non-profit accounting may have some unfamiliar terms:
Statement of Financial Position (or Statement of Net Assets) - Equivalent of the balance sheet in the business world.
Statement of Activities or Statement of Revenue, Support & Expense - Counterpart of business world’s Statement of Profit and Loss or Statement of Income.

3. Statement of Financial Position

4. Statement of Revenue, Support & Expense

5. More vocabulary…
Net assets = dollar amount of resources available for accomplishing mission
Net assets are classified into 3 categories: Unrestricted, temporarily restricted, and permanently restricted

6. Vocabulary continued…
Unrestricted net assets – Any resources not permanently or temporarily restricted. In effect, net resources available to be used for mission accomplishment. Includes board-designated amounts [e.g. life membership reserve fund].
Temporarily restricted assets are donor restricted for either purpose or time [e.g. operation/maintenance of the Adams Alumni Center].
Permanently restricted assets are endowments. Underlying gift can never be expended.

8. Modified Cash Basis…
We say our interim internal financial statements are 'Modified Cash Basis‘
Combines two major accounting methods, the cash method and the accrual method.
Cash method recognizes income when it is received and expenses when they are paid for
Accrual method recognizes income when it is earned even if not received and expenses when they are incurred even if not yet paid.
Only non-accrual method item on interim internal financial statements is membership dues, which are budgeted and recorded on cash basis.

9. GAAP not Gap… GAAP = Generally Accepted Accounting Principles
Refers to the standardized hierarchy of guidelines for financial accounting; generally known as accounting standards or Standard accounting practice.
Might hear reference to “U.S. GAAP” since supposedly moving toward International Financial Reporting Standards (IFRS)
Cash basis not really GAAP

10. Lots of math…
Statement of Financial Position is fairly self-explanatory – but for 3 major items:
“Investments Held at KUEA” and “Other Investments”
“Beneficial interests in Endowment Funds”
“Deferred Revenue”

12. Investments at KUEA & Other Investments-$6.3M:
Includes Life Membership Reserve Fund of about $4M
Invested in KU Endowment long-term pool
Earns about $185k investment income/year
Balance “frozen” by Board policy (e.g. Board designated)
Also includes Operating Reserve of about $2.2M
Combination of CD’s and S-T/L-T investments at KUEA
Goal is 6 months of average operating budget for last 3 years [goal roughly $2.6M]
Allows for deliberate, considered long-term planning

13. Beneficial Interests in Endowment Funds - $10.8M
Gifts to KU Endowment for Alumni Association’s benefit
Mostly invested in KU long-term investment program although includes pledges receivable too
“Endowed” so no spending of principal –> receive income distributions based on KUEA spending rate

14. KUEA’s Long-term Investment Program
Professionally managed, diversified portfolio comprised of 80% equity and 20% fixed income securities
Equity element includes US, foreign, alternative investments, inflation protected, private equity, etc
Managed for liquidity, diversification, and overall risk/return profile
Current spending rate is 5.5 percent of the average market value of the previous 12 quarters with:
4.6% allocated to fund participants &
0.9% allocated to KUEA an administrative fee
Performance Objective - Over the long term, objective is a total return that meets or exceeds the rate of inflation, measured by the Consumer Price Index, plus the Long-term Investment Program’s total spending rate

15. UPMIFA’s the Game…
The Uniform Prudent Management of Institutional Funds Act (UPMIFA)
Provides guidance on investment decisions and endowment expenditures for nonprofit and charitable organizations
Predecessor act called the Uniform Management of Institutional Funds Act (UMIFA)
Under UMIFA spending from an endowment fund on only allowed for appreciation above the historic dollar value (HDV) of original gift - never allowed to spend endowment below HDV
Hardship on non-profit if stock market dropped
Potentially short-sighted investment decisions (e.g. income rather than
L-T growth)
UPMIFA allows spending from an underwater endowment if the governing board determines it is prudent
Governing board can consider expected L-T investment return

16. Investments & Endowments

17. Deferred revenue (long-term) - $3.3M:
Long-term deferred income = membership dues
Cash has been received – still need to provide services
Annually adjusted and amortized into income over estimated service period
Annual = 12 months; Life = 40 years
$2.9M = life memberships; $0.4M = annual dues
Join
Become a member

18. Statement of Revenue, Support and Expense…
Formatted for analysis of both short-term & long-term results
Short-term results of operations (modified cash-basis) sub-total
Long-term and non-cash items are presented “below the line”
Changes to the underlying assets of these items do not directly impact cash available for day-to-day operating activities.
Includes depreciation, gain/loss on investments, restricted contributions, etc.

19. Revenue comes from a number of sources …

20. Membership Dues = Largest Revenue Source

21. Contributions Are Important

22. Unrestricted Contributions Help Balance the Budget…

23. Royalties Contribute 20% of Operating Budget

24. Some revenue sources are easier than others…

25. 63% of expenses relate to employee salaries and benefits…

26. But we’re efficient…

27. “Frillion isn’t an actual number…
…No matter what Mike Davis tells you!”
William “Heath” Peterson 2013

28. Budgeting… Science or Art?
Annual operating budget (modified cash-basis) for FY13 is $5.2M
Excludes “non-cash” and certain “special” items, such as market value adjustments to investments and restricted contributions.
Expenses are allocated over twenty program and management cost centers and managed by individual budget managers
Annual budgets are prepared somewhat differently than might expect in for-profit enterprise (e.g. ROI, earnings/share, etc)
Bottom-up from individual budget managers
Mission-driven – e.g. what do we want to accomplish
Expense-driven – how much will desired programming cost
Then – what resources (revenues) are required to accomplish programming goals
Tend to budget for breakeven. Strive to manage for positive cash-flow

29. Expenses by Function & Program

30. Organization & Tax Status
KUAA is an independent affiliate of the University of Kansas
maintains own Board of Directors, by-laws and articles of incorporation
has been granted tax exempt status by the Internal Revenue Service (IRS) under Section 501(c)(3) of the Internal Revenue Code
A university-wide (including affiliated corporations) IRS exam for years through June 30, 1995 was completed in August 1999 and upheld the Association’s status as a 501(c)(3) entity
Consistent with 501(c)(3) status:
Payments received by KUAA (including membership dues) are tax deductible, to the extent that no goods or services are returned
The Alumni Association annually prepares and files Form 990 & 990-T with the IRS
The Alumni Association is generally exempt from income taxes
Exception to exemption is net income derived from unrelated business activities; however, no tax has been due in recent years
Examples of unrelated business activity include advertising, the Flying Jayhawks program, and non-University banquet services activities

31. Insurance Matters
KUAA is protected by a standard property and liability insurance program. Limits include:
$1M for general liability
$10M of umbrella liability
$3M for directors’ and officers’ liability
$13M of building coverage
$2M of contents coverage

32. Questions?