1. Update on Higher Education
_____________________________________
November 13, 2018
Eric Sandridge, Audit Director
Auditor of Public Accounts

2. Report on §23.1-1309 (NCAA subsidy requirements)
Objectives
Report on § (NCAA subsidy requirements)
Report on Chapter 836, § (Implement JLARC recommendations)
Comparative Report on Higher Education (Virginia’s public four-year institutions)

3. Report on NCAA Subsidy Percentage Requirements
Initial calculations performed following review of each institutions fiscal year 2017 NCAA Schedule of Revenues and Expenses
All institutions met applicable subsidy percentage requirements provided in the Code section following exclusion of certain allowable items
ODU, JMU, LU, and CNU met after excluding all exclusions allowed per the Code - revenues for spirit groups, indirect cost requirements, previously approved debt service

4. Report on NCAA Subsidy Percentage Requirements
Each fiscal year, any percentage increase in the subsidy at an institution that complies with subsection C shall be matched by a like percentage increase in generated revenue, except that each such institution shall utilize a rolling average of the change in generated revenue and student fees over the immediately preceding five years for the purposes of such calculation.

5. Report on NCAA Subsidy Percentage Requirements
Will begin calculating increases in subsidy in accordance with subsection D as we move into future fiscal years and have more accurate/consistent data

6. Intercollegiate Athletics Fee Trends
Institution
Fiscal Year
Fiscal Year 2015 – 2019 (Post HB1897)
CNU
5.7%
3.2%
CWM
5.1%
3.1%
GMU
4.2%
0.5%
JMU
3.7%
3.0% LU
6.3%
0.9%
NSU
2.1%
ODU
7.8%
0.3% RU
7.1%
UMW
1.2%
UVA
3.9%
0.0%
VCU
7.7%
2.6%
VMI
4.4%
2.7%
VSU
5.3% VT
1.7%
2.4%
Average annual percent change, obtained from Higher Education Tuition and Fees Update presentation by Tony Maggio to House Appropriations Committee, September 2018

7. Report on Implementing JLARC Recommendations
Most institutions have completed implementation of the specific JLARC recommendations outlined in Chapter 836, 2017 Acts of Assembly
Work remains in progress for a few institutions, particularly related to increasing spans of control

8. Report on Implementing JLARC Recommendations
Difficult to quantify potential cost savings of implementing the recommendations at this time
Much of the impact relating to spans of control may be realized in future periods as institutions adjust hiring practices to reduce administrative overhead

9. Report on Implementing JLARC Recommendations
APA will follow up in Spring 2019 on recommendations remaining in progress as of June 2018 and provide an update on their status

10. Comparative Report on Higher Education
Planned annual report approved by JLARC as part of APA’s workplan
Uses ratio analysis to understand differences in financial activity, performance, and stability
Analyzes trends in performance to assess impacts of shifting trends in higher education on institution finances

11. Comparative Report on Higher Education
Analysis excludes VCCS
For purposes of the report, UVA includes Academic, Medical Center, and College at Wise divisions
VCU excludes VCU Health System Authority as it is considered a component unit under accounting standards
The College of William and Mary includes Richard Bland College and the Virginia Institute of Marine Science

12. Comparative Report on Higher Education
Compares institutions in the context of peer groups
Highest Research
Higher Research
Master’s and Baccalaureate
Financial Resource ratios - Resources available and how they are used
Activity-Based ratios - Current year spending/revenue performance

13. Comparative Report on Higher Education
Financial Resource ratios
Primary Reserve
Viability
Return on Net Position
Age of Facilities
Activity-Based ratios
Functional Classification
Net Operating Revenues
Auxiliary Income
Primary Reserve – how much in expendable resources available over total expenses (think of as expense coverage ratio)
Viability – ability to cover long-term debt/obligations at balance sheet date with expendable resources
Return on Net Position – total economic return (change in net position over beginning net position)
Age of Facilities – average age of buildings, infrastructure, improvements and how this impacts maintenance expense (accumulated depreciation divided by depreciation expense)
Functional Classification – how institutions spend
Net Operating Revenues – are institutions spending within its available resources (net income divided by total noncapital revenues)
Auxiliary Income – auxiliary revenue divided by auxiliary expenses
As there is uncertainty about how to adjust ratio analysis for the affect of new accounting standards related to Pensions/OPEBs, which significantly impact expendable resources shown on the Statement of Net Position for each institution, this ratio analysis intentionally excludes the impact of those standards.

14. Comparative Report on Higher Education
Composite Financial Index
Weighted combination of Primary Reserve, Viability, Return on Net Position, and Net Operating Revenues ratios
Designed by Prager, Sealy & Co., LLC as a means of providing a total metric by which to gauge institution health and is widely accepted

15. Endowment per FTE Student Master’s and Baccalaureate
Institution Endowment Data
Classification
Institution
FY17 Endowment
(in millions)1
Fall 2016 FTE Enrollment2
Endowment per FTE Student
Highest Research
GMU $
29,377
$ 2,645
UVA
6,400.0
24,329
263,061
VCU
1,840.0
28,496
64,570 VT
995.8
33,675
29,571
Higher Research
CWM
874.1
8,610
101,521
JMU
93.1
20,837
4,468
ODU
213.5
20,031
10,658
Master’s and Baccalaureate
CNU
24.1
4,986
4,834 LU
51.8
4,705
11,010
NSU
19.5
4,800
4,063 RU
50.1
9,165
5,466
UMW
47.9
4,296
11,150
VMI
435.1
1,953
222,785
VSU
36.1
4,505
8,013
National average endowment per student using NCSE data - $22,471, median - $9,423
Virginia average – $53,130, median - $10,834
Exceeds National Average

16. Primary Reserve Ratio
Investments comprise 62.7% of UVA’s total assets (they hold their own endowment unlike some institutions)
Capital assets aren’t expendable, which decreases primary reserve for institutions like NSU/UMW (87.2% and 91.8% of total assets)
Capital expansion can cause temporary declines in this ratio – important to view over time
RU and VMI –more liquid assets than peers, lower debt than peers

17. Viability Ratio
GMU – period of capital expansion – assets 75.1% of total assets
UMW – higher liabilities than peer groups (54.7% of total assets – roughly 10% higher than peers), lower expendable resources
CNU – significant debt (period of capital expansion)

18. Return on Net Position Ratio
Capital expansion increases this ratio when funded via capital appropriations (primarily VCBA 21st Century program)
Investment return can significantly impact this ratio (UVA swing from 2016 to 2017)
GMU – higher than others – smaller operating loss relative to peers and significant capital appropriations/grants/contributions
LU – Vice Presidential debate – significant increase in expenses during FY17 – resulting in decrease in overall net position for the year

19. Age of Facilities Ratio
Can provide a snapshot of potential needs related to capital maintenance (depending on average age of facilities)
Use of Operating Leases rather than building new buildings via debt or other means can inflate this ratio
Lowest age of facilities ratios are consistent with institutions with most capital expansion and physical footprint growth

20. Combined Function Classification Ratios
Spending on E&G activities as a percentage of Tuition, State Appropriation, Grant revenues (including Pell, federal, and state)
Those institutions with significant investment income or endowment distributions spend more in absolute terms as a percentage of E&G revenues because they have those additional revenue sources to supplement general and nongeneral fund revenues
Those less than 1, indicate spending on other operating activities like operating and maintenance of plant, depreciation, auxiliaries, and student aid

21. Functional Classification Ratios Spending Distribution
Shows each institutions spending on the three functional classification ratios as a percentage of total spending on those functions
Most institutions are fairly consistent with peer groups – VT’s spending on instruction, research, public service is higher as a percentage of the whole than peer group; however, this spending includes the agricultural extension office’s under VT’s oversight (same with VSU)
Educational Support – libraries, academic administration, admissions, financial aid
General Support – day-to-day operations/administration of institution (fiscal operations, security, legal)

22. Net Operating Revenues Ratio
Helps to see how an institution is performing without the volatility that capital revenues can cause
Net Income (less capital) divided by total noncapital revenues
It is not uncommon to see negative ratios here. Since the institutions are not primarily in the business of accruing resources/making money, there is no benchmark ratio. In some instances, institutions will accrue resources for future activities (capital maintenance on auxiliary facilities, for example), which can swing the ratio positive. Like with other ratios, gift and investment income can also cause volatility.
Maintenance reserve funds provided by the commonwealth would be included via operation and maintenance expense in the numerator, but excluded from the denominator, which can deflate the ratio
NSU – example of operating loss narrowing due to stabilization of enrollment and additional nonoperating funding (state appropriations)

23. Auxiliary Income Ratio
Reflection of current year auxiliary revenues to expenses
Can indicate management’s operating philosophy related to auxiliaries. In general, most institutions will show positive ratios due to budgeting of auxiliary reserves as part of fee creation process. Some institutions will intentionally run a negative ratio due to outside sources of revenue (UVA and VMI – significant funding via endowment distributions/foundation contributions). Negative ratios can also indicate intentional spend down of auxiliary reserves, or increased capital maintenance needs that require the use of auxiliary cash reserves.

24. Composite Financial Index (CFI)
Overall fiscal health – Benchmark ratio of 3.0 – most of the highest research institutions are close to the benchmark or exceed the benchmark.
1.0 is generally considered acceptable. Some institutions with ratios lower than expected receive significant increase when foundation activity/balances are considered as noted in the next slide. (e.g. William and Mary, VMI, VCU, VT)
Despite the low ratio, UMW’s primary reserve ratio and viability ratio have improved slightly over the last few years, indicating the institution may be improving its financial flexibility. The institutions CFI does increase slightly when including Foundation resources/support; however, remains below 1.0.

25. Composite Financial Index (CFI) Including Component Units
Shows the impact on CFI when considering foundation resources.

26. Questions? Eric M. Sandridge, CPA, CISA, CGFM
Director | Higher Education Programs
Auditor of Public Accounts | Commonwealth of Virginia
101 North 14th Street, 8th Floor | Richmond, VA 23219
(804) ext. 342 |