— subject to amendment at
the meeting or by the ACFB chair in response to comments at the meeting
ACFB Preliminary
Recommendations on ACC Board “Set-Aside” Policies (for 10/7/03 ACC Board
meeting)
Overview:
The four policies identified as being included in this group (F-10, G-4, G-5, and G-6) all have substantial impact on the budget but differ in the issues they raise. The critical issue in F-10 is the compensation targets chosen, so the 4%-6% set-aside for closing the shortfall to those targets will not matter once they are reached, making this set-aside not an issue of strategic importance (it is not discussed further in this report). The G-4 facilities set-aside is driven by master-planning and bond-financing decisions, and is not formulaic in the same sense as the others (although it does raise some issues about integrated accounting of depreciation). The 4%-6% capital-equipment set-aside in G-5 provides a needed safeguard against raiding capital investment for immediate operational funds, but needs to be recast to better tie it into the planning structure and to make use of depreciation as called for in GASB34/35, providing a better basis for transfers than the admittedly ad hoc 4%-to-6% value.
Of these four policies, the 15%-to-25% reserves level called for by G-6 was seen by the committee as being most questionable, with a substantially lower figure seen as being more appropriate.
While the budget should include references to the GASB34/35 concepts such as depreciation and net assets (by providing beginning and ending pro-forma balance sheets and a pro-forma operating statement showing the implication of the proposed budget), the committee did not feel that simple reliance on maintaining net-asset levels is a sufficient basis for capital-asset budgeting. Instead, we recommend that sector-by-sector capital-asset plans (for facilities components as well as computers and instructional equipment) be developed as part of the master-planning process and be funded by a steady transfer from operational funds. Inclusion of depreciation in the budget will cover much of this transfer, but depreciation can be expected to be less than needed reinvestment in most sectors due to the effects of growth and inflation. In general, a budgeted growth of net assets (implying a modest surplus even after depreciation) will be required to prevent underinvestment.
These considerations are felt to apply to both G-4 and G-5, which could be combined into a single policy that states the principles that the Board wishes to be observed for capital investment and application of depreciation to budgeting and reports. But note that the committee does not at all feel that the current form of these policies is leading to overinvestment, so changes should not be seen as a way of releasing additional operational funds.
Appropriate reserve level for ACC:
While the committee wishes to look somewhat further into the pattern of cash flow at the college, there was a strongly-expressed consensus that the 15%-of-annual-revenues mandate for reserves in G-6 is much higher than can be justified by financial considerations. This opinion was reinforced by the comments from staff and the bond adviser in the budget document, but flows primarily from the financial robustness the college enjoys due to its far-below-market tuition level and its freedom from legislative constraints on when it can change tuition. There is no need to hoard tuition dollars in reserves – it is better to wait until they are needed before calling on them.
There is also some concern that dissimilar items are being lumped together by current policy as “reserves”. The term would best be used for undedicated funds that would be available if needed for emergencies, for which approximately 5% of annual expenses should suffice (we will refine this number when we have considered the cash-flow data we have asked for). Money already earmarked for a specific non-reserve use should be excluded.
Follow-up to this preliminary analysis:
The committee, after getting feedback to this preliminary report and some further information it has requested, will develop a set of recommended policy changes that can serve as initial input to the Board policy-development process. These should be ready by mid-November.