Reserves
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4. Reserves
4.1 Policy on Current Fund Reserves (Revised 12/07)
Introduction
The University System Board of Trustees has a responsibility to “manage all income received and due from all sources including the authority to use the same in such manner as the trustees may determine.” The President of UNH has been del egated the responsibility and authority for:
• Assuring that units function with proper internal control procedures such that all budgets remain balanced and within authorized limits;
• Assuring that any and all transactions requiring higher level review and/or approval are identified and forwarded in an appropriate and timely manner; and
• Assuring explanations and documentation of authorized adjustments, transfers, and/or revenue/expense patterns be provided in an appropriate and timely manner to officials for reporting purposes.
These responsibilities require that the University manage its finances prudently to maintain and enhance the fiscal health of the institution and support the UNH Strategic Plan. One critical component of financial management at UNH is the management of financial reserves. Financial reserves are generated from unspent funds of the institution from all funding sources. Financal reserves allow the Univesity to protect itself against funding shortfalls and unanticipated expenses and plan for investments in strategic initiatves and physical plant. Financial reserves also allow the University to achieve greater debt capacity and maintain its bond rating.
The University has decentralized responsibility for the management of financial reserves to responsibility centers, however, the overall responsibility for the use and level of reserves rests with the UNH President. What follows is a policy for the management of financial reserves at UNH . The policy is organized into sections, each delineating the policy by type of fund. Units must actively manage reserves for all funds under its control and account for reserve balances in all short term and long term plans.
General and Auxiliary Fund Reserves
General funds are used to record tuition, Facilities and Administrative (F&A) recovery from grant activity, state appropriations , and the bulk of our academic and central administrative costs. This fund receives the most attention from the US NH Board of Trustees. The USNH Board of Trustees has policies in place regarding the use of reserves by USNH and ind ividual campuses.
Per Board of Trustee Policy, UNH must maintain a reserve balance equal to 3% of the prior year's general fund expenditures plus transfers. The UNH President has the authority to use general fund reserves in any one year in an amount up to .5 % (five tenths of one percent) of prior year expenditures and transfers, provided that the use does not reduce the remaining balance below the 3% minimum. Use of general fund reserves between the .5% and 1% levels must be approved by the Chancellor. Use of general fund reserves above 1% requires Board of Trustee Financial Affairs Committee approval.
The UNH Office of the Vice President for Finance and Administration (VPFA) is responsible for monitoring overall reserve use within USNH policy limits, reporting the same to the President, and duly informing the President of any instance of need to obtain System or Board approvals.
Auxiliary enterprises of the University of New Hampshire are responsible for their own revenue stream (derived primarily through mandatory student fees or fee for service) and from that revenue stream funding their own expenses – direct and ind irect as well as debt service and renewal and replacement of plant and equipment. Auxiliary operations are responsible for the generation and maintenance of financial reserves to help address operating budget shortfalls and planned investments. Generating net revenue gains annually should be part of every auxiliary enterprise budget in order to ensure that adequate reserve balances are available for the purpose of sustaining the plant and equipment operated by the auxiliary enterprise.
The appropriate general and auxiliary fund reserve level for each RC unit is between 6% and 10% of prior year general fund and auxiliary fund expenditures and transfers, espectively. Generally, a unit with low variability in its revenues, or operating with a low risk profile, i.e., a more diversified set of revenues and controllable expenditures, will have a reserve target closer to 6%. A unit with a high risk profile, i.e., reliance upon less diversified set of revenues and less control over expenditures, will have a reserve target closer to 10%. The VPFA Office works annually with each RC unit to determine the appropriate reserve level during the budget development process using the matrix in Appendix A. The specified reserve level is the MINIMUM reserve level a unit must maintain.
RC units may use General and Auxiliary Fund Reserves to:
• Cover operating losses, in which case the unit must have a mitigation plan subject to the approval of the appropriate Vice President, the Vice President for Finance and Administration and the President. Mitigation plans are required even in instances when the use of reserves for this purpose sustains reserve levels above the MINIMUM reserve level. See summary for Units in Financial Difficulty.
• Cover program enhancements, such as investments in equipment or start-up costs for faculty or new programs.
Specific approvals:
• The RC unit head may utilize up to one-third (1/3) of the unit's beginning reserve balance without any additional approval during the fiscal year as long as the amount used does not bring the reserve balance below the MINIMUM reserve level for that unit.
• The appropriate Vice President and the Vice President for Finance and Administration must be notified within 30 days of any use of reserves in order to review the planned use and assure overall reserve balances are in compliance with USNH Policy and evaluate the impact on the overall UNH balance sheet.
• Any use of reserves above 1/3 of the beginning reserve balance or use of reserves that would bring the balance below the minimum level requires the approval of the appropriate Vice President and the Vice President for Finance and Administration.
Internally Designated Fund Reserves
Internally designated funds are unrestricted operating funds that have been designated for a specific purpose by UNH or USNH administration. This designation can be removed at any time by UNH or USNH administration making those funds available for general operations. Internally designated activities are generally self-supporting (revenues greater than or equal to expenses) and are accounted for in individual funds. Examples include: annual workshops and conferences, research support or enhancement funding for faculty, and internal grants from central administration to departments or PI's. Internally designated funds are not allowed to have deficits.
Reserves accumulated in these funds can be used for the purpose of one-time investments in the designated activity (in the case of a Principal Investigator fund or a faculty startup fund), to protect against future downturns in revenues (in the case of a research or academic center) or assist in the funding of general fund activities of the RC unit. Reserves should not be held without a purpose for their use. Reserve balances will be monitored by Business Service Centers and the VPFA Office for their use and size.
Gift/Grant Fund Reserves
Gift and grant funds are externally restricted as to their use. Gift funds must be expended in accordance with donor restrictions and grant funds must be expected accordance with the stipulations in the grant/contract. Thus, any reserve funds that exist can only be used for those purposes and cannot be used for general operations of the University. Gift and grant fund reserves should be part of an RC unit's financial plan and should be leveraged to the fullest extent possible to help reduce financial pressures on general funds.
Unexpended Plant Funds
All units must account and accept responsibility for their own equipment, vehicles and physical assets including buildings (in the case of auxiliary units, NHPTV, UNHM and certain outlaying properties). University-wide Renewal and Replacement (R&R) funds are limited to academic, research and administrative buildings and infrastructure and no central funds exist for the replacement of equipment, vehicles, etc. Therefore, RC units should carry reserves in Unexpended Plant Funds for replacement of equipment and vehicles and if applicable, capital projects using a replacement schedule.
• As part of the annual budget process, each RC unit should develop and update an annual asset replacement schedule. The schedule should at a minimum list each item's cost, date purchased, projected replacement date, anticipated replacement value, and annual anticipated contributions to and expenses against reserves for each asset for each year.
• For capital projects, the RC unit should develop a funding schedule based on the anticipate date of the project, projected cost and the annual anticipated contribution to reserves to meet the schedule.
• In order to utilize unexpended plant fund reserves, the RC unit head must inform the responsible Vice President and Vice President for Finance and Administration as to the nature of the use of reserves.
• Units should budget any anticipated uses of reserves for the coming year during the budget process. Budgeted use of reserves in the original budget counts toward the one year authorized use for the coming year requiring RC unit head approval.
Appendix A
Operational Reserves - Minimum Target Matrix
Makeup
Makeup is the diversity of revenue sources under the responsibility of a RC unit. A greater mix of revenue sources will reduce the effect of a change in one source, but a higher dependence on one or two revenue sources is problematic for operations. If a unit has less diversification of revenues, the unit should have a higher reserve target and if a high diversification of revenues, a lower reserve target should be established.
Variability
Variability is the change over time of a revenue or expense category. A revenue or expense that has a high variability is difficult to predict and can cause operating problems. If a unit's revenues or expenses are highly variable, a higher reserve target should be established and if revenues and expenses are not variable, a lower reserve target should be established.
Influence
Influence is the degree to which a unit can affect revenues and expenses. If actual revenues or expenses can be highly influenced by a unit e.g. the unit has control over the results, a lower reserve target should be established. Conversely if a unit has little control or influence over revenues and expenses, a higher reserve target should be established.
Using the Matrix
A unit with a low diversification of revenue (makeup), high variability of revenues and/or expenses, and low influence over revenues and expenses requires a reserve target of 10%. A unit with a high diversification of revenue (makeup), low variability of revenues and/or expenses, and high influence over revenues and expenses requires a reserve target of 6%.
4.2 Oversight for Operations in Financial Difficulties
Overseeing the financial operations of the University is primarily the responsibility of the President and Vice President for Finance and Administration. Under RCM, the Vice Presidents are accountable for the financial performance of the RC units that fall under their direction. Below are the general guidelines the VPFA Office uses to monitor units that have operating deficits. Resolving operating deficits (Education & General Funds) is a University priority and need to be addressed in a timely manner
This should be used as a guideline for the oversight necessary for RC Units in deficit. Each situation is unique; therefore, specific oversight plans may differ from the procedures below. The specific oversight plan will be determined by the President in consultation with the VPFA and responsible VP.
Financial Projections
Four times per year, the RC Unit with a cumulative or annual deficit will produce financial reports for the VPFA and responsible Vice President with written summaries of significant variances.
Mitigation Plan
The RC unit head is responsible for the development and updating of a comprehensive mitigation plan that results in financial solvency within a specified time period (normally not to exceed 3 years) set by the VPFA and responsible VP. The plan should describe what actions the unit will take to enhance revenues and/or decrease expenses, when those actions will occur and who is responsible for those actions. The mitigation plan should also describe how the proposed actions would impact the unit’s ability to work toward the goals outlined in the University’s Academic Plan.
Mitigation Meetings
The RC unit head and unit financial director will meet with the responsible VP and VPFA at least quarterly during a fiscal year. The meetings will include a review of the most recent financial projections and progress on mitigation efforts as outlined in the unit mitigation plan.
Budget Changes
It is anticipated that any excess funds generated from revenue or personnel turnover will fall to reserve (to reduce the deficit). In the event that unanticipated revenue is generated from a new program, the appropriate Vice President may approve some use of these revenues to cover additional unanticipated expenditures.
