1. The Myths and Perils of Carryforward Balances Maria Anguiano, University of California, Riverside Kelly M. Ratliff, University of California, Davis Su-Lin Shum, University of California, Davis

2. | September 22, 2014 1.Systemwide perspective 2.Campus background and context 3.Campus approach Agenda

3. | September 22, 2014 The University of California includes 10 Campuses, 5 Academic Medical Centers and 3 National Laboratories Established in 1868 and Governed by a 26-member constitutionally autonomous Board of Regents Educated over 235,000 full-time equivalent students in FY2012-2013 Employs 140,000 full-time equivalent employees UC’s assets total $53 billion UC’s research enterprise includes more than 800 research centers, institutes, laboratories and programs

4. | September 22, 2014 Daily/ monthly & seasonal needs (debt service) Reserving for extraordinary circumstances Incoming cash flow patterns Balancing investments vis-à-vis timing of operational needs Framing institution’s policy for various constituent groups Rating impacts Opportunity costs Institutionalizing requirements Operational Liquidity THINGS TO CONSIDER

5. | September 22, 2014 UC’s financial strength benefits from diverse revenue streams which flow in throughout the year Supplies 9% Over the past five years, UC has consistently focused on optimizing liquidity KEY QUESTIONS: What is the “right” level of liquidity to maintain on hand, given our operational needs and ratings agency requirements? How do we evaluate the trade-off of holding liquidity vs. investing in longer term assets? Given a target level of liquidity, how can we work with campuses to ensure those targets are met? Total $24.3 Billion Medical Centers & Auxiliaries 45% DOE Labs 4% State 10% Other 6% Student Tuition & Fees 14% Grants & Contracts 22% Revenues in FY2012-13

6. | September 22, 2014 UC’s Target Liquidity Policy Daily Operating Needs Meet Rating Agency Requirements Sufficient Long-term Liquidity Diversify Investment Portfolio Investments should be sufficient and liquid enough to cover daily operating needs (such as payroll, debt service, etc) Short-term assets should hold enough rating agency defined investments to meet daily and weekly coverage requirements Funds should cover “extraordinary” liquidity needs and comparable metrics of days cash to other universities Remainder moved to longer- term investment vehicles to increase potential returns as risk profile permits

7. | September 22, 2014 UC has 2 Investment Vehicles for Current Funds: The Short-Term Investment Pool (STIP) & Total Return Investment Pool (TRIP) Short-Term Investment Pool (STIP) is the investment vehicle for all operating funds of the University All revenues flow into STIP, and all expenditures (operations, payroll, debt service) are paid from STIP Target Return Rate: 2.4% Asset Allocation: 100% Fixed Income Total Return Investment Pool (TRIP) was launched in 8/2008 as an alternative investment to STIP TRIP is designed to maximize return on long-term working capital, subject to an acceptable level of risk, by investing across a broad range of asset classes Target Return Rate: 4.75% Asset Allocation: 50% Public Equity; 20% Fixed Income; 30% Alternatives STIP TRIP

8. | September 22, 2014 UC Liquidity is a vast ocean with ripples on top The most significant inflows and outflows of liquidity are planned, and represent large expenses such as payroll and debt service Since 2004, we have not had a “black swan” scenario affect liquidity STIP Daily Inflow/Outflow as a % of Total 2004-2012 99% of the time between 6% (+/-)

9. | September 22, 2014 Liquidity is aggregated into STIP each day, and then a portion is invested in TRIP Funds used across campus STIP: Aggregated Working Capital STIP TRIP All campus funds are aggregated into one “pot” of working capital Working capital all goes into STIP Money gets moved to TRIP as a % of total cash, not fund by fund

10. | September 22, 2014 We have gone through a multi-year process to move “excess” investments in short-term assets into TRIP UC STIP/TRIP Ratios Former (2010)Future (2014) From Oct 2010 – June 2013, we moved $2 billion to TRIP  Resulted in incremental $100 mm in interest income over that period Liquidity optimization work in 2012 / 2013 identified remaining ~$2 billion over- investment in short-term assets  Currently moving $2 billion from STIP to TRIP

11. | September 22, 2014 Campus Perspective

12. | September 22, 2014 There’s an Elephant in the room We call him Carry Forward

13. | September 22, 2014 What has UC Davis done to get him out in the open?

14. | September 22, 2014 UC Davis Campus Facts Started in 1905 as the "farm" for UC Berkeley. Founded as a separate campus in 1959. Students as of fall 2013: 34,000 4 colleges, 6 professional schools 99 undergraduate majors 90 graduate programs 23 intercollegiate sports (NCAA Division I) UC Davis accounts for $6.9 billion and 69,000 jobs 22,500 employees (4,100 academic, 14,900 staff, 3,500 students) Member of the Association of American Universities 1 st in the world for agriculture and forestry (QS World University Rankings, 2014) 9 th ranked public university by U.S. News & World Report 1 st in Sierra Magazine 2012 “Cool Schools” Survey Health System: Top Hospital and "A" Hospital Safety Award, Leapfrog Group Consumer Choice Award, National Research Corporation Research Funding: 13 th among U.S. ranked public universities 21 nd among public and private universities

15. | September 22, 2014

16. | New Budget Model

17. | September 22, 2014 2020 Initiative

18. | September 22, 2014 What are Carryforward Balances? Unexpended balances at the end of the year net revenue, plus prior year balances designated use is not easily reflected in the balance often the result of salary or other savings occur in most fund sources

19. | September 22, 2014 Fiscally responsible management practice Secure funds for multi- year commitments in advance Manage financial risk Note: few formal mandates prohibiting balances at UC Why are Carryforward Balances Important?

20. | September 22, 2014 Highly decentralized management of funds No uniform policy or guidance about appropriate levels Multiple approaches about management of funds Inconsistent information A LOOK BACK Carryforward Balances

21. | September 22, 2014 LACK OF UNDERSTANDING Units: “We have no money!” Leadership: “Why is there so much money?” ENTITLEMENT “This is my money!” “I/my department have critical plans” FEAR “You are going to take it all!” MYTHS What we Hear in the Absence of Carryforward Guidance

22. | September 22, 2014 We had to centrally assess carryforward funds in 2012 as a result of a significant budget shortfall; this practice is not viewed as routine. Disclaimer !

23. | September 22, 2014 Lack of stewardship for our students, citizens, other funders Inconsistent reporting limits strategic planning Mismatch between priorities and funding sources PERILS What we Risk in the Absence of Carryforward Balances

24. | September 22, 2014 Strategic decision making Consistency Transparency Flexibility Current and future fiscal scenarios Impact to student fees New budget model 2020 Initiative Enrollment growth Campus and unit priorities What we Wanted While Considering

25. | September 22, 2014 OVERVIEW What Did we Do? 1. Researched best practices 2. Engaged the education advisory board 3. Partnered with accounting and key campus units to establish methodology 4. Issued guidance – white papers Policy Framework Reporting and Recording Guidance 5. Consulted with key campus stakeholders 6. Repeat step 5

26. | September 22, 2014 Options Considered ApproachMethodologyDescription A Unit Held and Used Units accumulate and use carryforwards/reserves at their discretion B Central Campus Review Carryforward amounts reviewed centrally and assessed for “reasonableness”; no prescribed limits or further policy set C Spend Down Options seen at other institutions: - full/partial spend down expected in the next year - full/partial spend down prior to asking for additional central funds D Levy (tax/holdback) Applied A central campus levy or holdback e.g., 3%, 15%, 25%, 85% applied on carryforward balances E Percentage- Based Limits Specific %-based limits established (e.g. 0.2%, 2%, 2.5%, 3%, 5%, 10%) and applied on an account, fund type or budget basis by unit F Absolute Limits Pre-determined dollar limits established (e.g. $10k, $25k, $50k, $100k, $150k, $300k) and applied on an account, fund type or budget basis by unit/college. Approaches E and F can also work in combination

27. | September 22, 2014

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29. | APPROACH TAKEN B with Guidance 10-15% (30-60 DAYS CASH) For funds managed through campus budget model (state, tuition) and all student fees 25% (90 DAYS CASH) For funds with a higher degree of volatility e.g., indirect costs, patent funds, unrestricted funds, etc.

30. | September 22, 2014 COBL and KOBL RECORDING FUTURE COMMITMENTS Consistent process to account for funds already committed COMMITTED OBLIGATIONS (COBL) Hard commitments that restrict the use of funds and/or may be legally binding KNOWN OBLIGATIONS (KOBL) Potential expenditures

31. | September 22, 2014 Start-up funding for faculty recruitment and retentions Graduate fellowships Endowed chairs Contract employees Equipment Renovation Bridge funding Examples

32. | September 22, 2014 Process STEP ONE Create a standard reporting template

33. | September 22, 2014 Process STEP TWO Spring review

34. | September 22, 2014 Process STEP THREE Fall review

35. | September 22, 2014 Process STEP FOUR Strategic decisions

36. | September 22, 2014 What we are Seeing USE OF CARRYFORWARD FUNDS Engaging in new conversations with decision-makers Investments to meet local priorities Better timing of budget information Advancing Chancellor and Provost goals

37. | September 22, 2014 Budget and Institutional Analysis: http://budget.ucdavis.edu Carryforward White Papers: http://budget.ucdavis.edu/analyses-reports-white- papers/carryforward.html Education Advisory Board: http://www.eab.com/Research-and-Insights/Business- Affairs-Forum/Custom/2012/08/Calculating-and- Communicating-Carry-Forward-and-Reserve-Policies Resources