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

|September 22, 2014

1. Systemwide perspective

2. Campus background and context

3. Campus approach

Agenda

|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

|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

|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

|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

|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

0

5

10

$15B

2013

Working

Capital

$13.8B

Working capital

|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

7/20

04

11/2

004

3/20

05

7/20

05

11/2

005

3/20

06

7/20

06

11/2

006

3/20

07

7/20

07

11/2

007

3/20

08

7/20

08

11/2

008

3/20

09

7/20

09

11/2

009

3/20

10

7/20

10

11/2

010

3/20

11

7/20

11

11/2

011

3/20

12

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

STIP Inflow/Outflow

STIP Daily Inflow/Outflow as a % of Total 2004-2012

99% of the time between 6% (+/-)

|September 22, 2014

Liquidity is aggregated into STIP each day, and then a portion is invested in TRIP

Funds used across campus

Med compSales & Service

Gifts & Endowment

Fees

ReservesGeneral funds

PlantGrants & Contracts

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

|September 22, 2014

We have gone through a multi-year

process to move “excess”

investments in short-term assets into TRIP

0

25

50

75

100%

Ratio

6/30/2010

STIP

78%

TRIP

22%

STIP / TRIP ratio

0

25

50

75

100%

Potential

Future Ratio

STIP

52%

STIP / TRIP ratio

TRIP

48%

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

|September 22, 2014

Campus Perspective

|September 22, 2014

There’s an Elephant in the room

We call him Carry

Forward

|September 22, 2014

What has UC Davis done to get him

out in the open?

|September 22, 2014

UC DavisCampus 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

1st in the world for agriculture and forestry (QS World University Rankings, 2014)

9th ranked public university by U.S. News & World Report

1st 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:

• 13th among U.S. ranked public universities

• 21nd among public and private universities

|September 22, 2014

|September 22, 2014

New Budget Model

|September 22, 2014

2020 Initiative

2011 2012 2013 2014 2015 2016 2017 2018 2019 20200

5000

10000

15000

20000

25000

30000

2020 Growth Plan

CA National & International

|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

|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?

|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

|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

|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

!

|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

|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

|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

|September 22, 2014

Options ConsideredApproach Methodology Description

A Unit Held and Used

Units accumulate and use carryforwards/reserves at their discretion

BCentral 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

DLevy (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

|September 22, 2014

|September 22, 2014

|September 22, 2014

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.

|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

|September 22, 2014

Start-up funding for faculty recruitment and retentionsGraduate fellowshipsEndowed chairsContract employeesEquipmentRenovationBridge funding

Examples

|September 22, 2014

Process

STEP ONE

Create a standard reporting template

|September 22, 2014

Process

STEP TWO

Spring review

|September 22, 2014

Process

STEP THREE

Fall review

|September 22, 2014

Process

STEP FOUR

Strategic decisions

|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

|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