1. Messiah College Institutional Planning & Finance May 30, 2007 Understanding Higher Ed Finance

2. Understanding Higher Ed $$$ Understanding Financial Statements –Statement of Activities (Operating Stmt) –Statement of Financial Position (Balance Sheet) –Statement of Cash Flows Why not-for-profits need surpluses Contextualizing Financial Performance –Comparative Performance –Composite Financial Index (CFI) Summary

3. Three External Financial Statements –Statement of Activities (Operating Stmt) Summarizes the institutional financial performance during the course of one fiscal year –Statement of Financial Position (Balance Sheet) Summarizes the institutional financial performance “life-to-date” by organizing financial data into assets, liabilities, and net assets –Statement of Cash Flows Displays one year’s financial activity by summarizing the sources and uses of cash

4. Messiah College Statement of Activities Year Ending June 30, 2006

5. Activity & Asset Categories Unrestricted: Assets that are not subject to donor-imposed stipulations; can be designated by trustees or limited by contractual relationships Temporarily Restricted: Assets subject to donor-imposed directions that can be fulfilled by the College, or that expire at some future date; Example: Grants that stipulate the activities or assets that must be funded by the grant.

6. Activity & Asset Categories Permanently Restricted: Assets that donors stipulate must be maintained permanently by the College, although the College generally has the use of part or all of the income earned on the assets Example: Donors’ endowment gifts

7. Activity & Asset Categories Note that the ONLY way anything can be categorized as a Temporarily or Permanently Restricted Asset is IF it is donated, and IF the donor has specifically restricted its use. Revenues from all other sources such as fees, sales, et cetera have to be recorded as Unrestricted. At the end of each fiscal year, the net of all unrestricted income and expense is “closed out” to Unrestricted Net Assets on the Statement of Financial Position, and a new fiscal year begins.

8. What Happens at Year-End? So at the beginning of FY06, we had $178 million in net assets, our net assets increased by $14 million so the year-end value was $192 million, a healthy increase of 7.8%

10. Statement of Financial Position Assets - Liabilities = Net Assets –OR Assets = Liabilities + Net Assets –OR What you own, less what you owe, equals your net worth

12. If we’re a non-profit, why do we have (or need) surpluses? Not-for-profit is a better term: –Distinguishes us from for-profits whose primary reason for existence is to provide a monetary return on money invested –Not-for Profits exist to provide a public service Both types of corporations will have missions that further distinguish them

13. If we’re a non-profit, why do we have (or need) surpluses? However, both for-profits and not-for- profits have to generate cash and profits if: –They wish to grow or fund new initiatives –They incur debt which has to be repaid –They have capital assets (buildings and equipment) that need to be replaced at a cost that has increased since they were originally purchased

14. Contextualizing Financial Performance Comparative Performance –Net Assets (From Stmt of Financial Position) –Net Assets Per Student Represents assets institution has acquired that help defray the current cost to the student –Increase in Net Assets (Stmt of Activities) Composite Financial Index (CFI) –CCCU –CIC

15. Net Assets

16. Net Assets per Student

17. Cumulative Change in Net Assets

19. Why has Messiah Financial Performance Lagged in Recent Years? We invested $75 million in new buildings and building repairs, about $20 million more than our benchmark group... which added to depreciation expense... (though other benefits) We received an average of $2,000 per year per student in private gifts versus $5,000 for benchmark institutions, and $2,600 for competitor institutions Calvin, Susquehanna, & Hope

20. Why has Messiah Financial Performance Lagged in Recent Years? We increased our endowment spending rate in 2000 A combination of fewer gifts, higher spending rate, and slightly below average returns = median long-term investments of benchmark group increased by $15 million more than did Messiah’s We had small or non-existent operating surpluses Elon

21. BUT! Messiah still has approximately the same net assets per student as its benchmark group; It still has more net assets per student than its nearest Competitors; And it ranks at approximately the 75 th percentile in both the CCCU and the CIC in a broader measure of financial health called the “Composite Index”

22. Composite Financial Index An attempt to calculate a single number that represents an institution’s relative financial health Consists of a weighted average of four financial ratios –Return on Net Assets (20%) –Net Operating Revenue Ratio (10%) –Primary Reserve Ratio (35%) - Exp. NA/TL Exp –Viability Ratio (35%) - Exp. NA/LT Debt

23. Composite Financial Index - CCCU

24. What do the numbers mean?

25. Composite Financial Index - CIC

26. Summary The Operating Plan only summarizes a portion of Messiah’s financial picture. Other important items include: –Restricted gifts (gifts to endowment, capital projects, and other restrictions) –Return on endowment and trust investments –Sufficient cash flow –Portion of net assets that are unrestricted

27. Summary We need to generate surpluses so we can: –Pay the principal payments on our debt –Generate the cash needed to replace aging assets –Remain competitive (tuition pricing and quality program and facilities)

28. Summary The Composite Index represents one vehicle for measuring relative financial position and health Strategies for strengthening our financial strength might include: –Increase net operating revenue –Enhanced gifts (including endowment and capital) –Enhance investment returns on endowment –Gradually decrease endowment spending –Control costs to improve Messiah’s pricing position relative to competitors

29. Summary Messiah financial position is strong, but we need to improve annual financial results if we are to remain strong