The Minnesota State Colleges and Universities system is an Equal Opportunity employer and educator.

System Finances (Finance 101)

Board of Trustees October 2014

2

Agenda

Introduce board policy framework Review major trends Provide overview of the system’s operating budget

and capital investment program

3

Board policy framework

4

Board financial responsibilities

Provide oversight Set policy Approve certain decisions

5

Decisions requiring board approval Revenue and expenditure annual operating budget plans - establishment

of financial management policies including the reserve policy - acceptance and release of annual audited financial statements

Biennial budget requests -tuition and fee rates - optional fee maximums -room and board rates - student union facilities fees

Contracts of three million dollars or more (policy change to $1M pending) - sale or disposition of real property -retirement program administration and oversight

Criteria for multi-year capital budgets -prioritized multi-year capital investment program -revenue fund debt management and all bond sales

System information technology long range strategic plan -approval of finance and IT related policies

6

Financial authorities the board has delegated to the chancellor Procurement and professional/technical contracts over $100,000 less than

$3M (change to $1M under board consideration)

Master facilities plan for the colleges/universities

Execution and delivery of all documents regarding the acquisition, disposal, transfer or leasing of real property after Board approval

Systemwide reserve and institutional reserves per board policy

Oversight of college/university financial management

Naming of buildings, sites and common areas

Master technology plans for colleges/universities

Development and management of acceptable use procedure for information technology related resources and assets

7

Financial authorities the chancellor has delegated to the presidents Administrative and financial management

Budget monitoring

Composite financial index oversight

Purchases and professional/technical contracts Up to $100,000

Optional fees up to Board-approved maximums

Individual tuition and fee waivers per policy

Fundraising for the college/university

Acceptance of gifts & grants, except for real property

Leasing real property

College/university financial reporting

8

Vice chancellor assurance practices

Annual financial reviews with campus leadership Monthly, quarterly and semiannual monitoring reports Watch list and work out protocols Regional financial and facilities quarterly management

meetings Facilities program management reviews Strong communication systems

9

Board financial risk management strategy Annual financial statement/audit discipline

Operating budget reserves maintenance/improvement policy

Unrestricted net asset improvements

Composite financial index improvements

Capital improvements tied to facilities condition index

10

Major trends

11

Revenue drivers

State economic outlook Public support for public higher education Tuition rate and competitive environment Overall enrollment Federal and state financial aid funding policy

12

Cost drivers

Negotiated contracts (salaries and benefits) Enrollments Health care costs (employer-paid insurance cost) Technology (investments in new technology and

system maintenance) Size of campus physical plants, building operations,

maintenance and preservation

13

Primary dynamics Enrollment – local management within system strategic

framework Tuition and revenue – board establishes rates,

colleges/universities collect and spend Financial aid revenue – state and federal program guidelines Gifts and fund raising – colleges/universities solicit and spend State support – established by legislature, allocated per board

approved method Wage and benefit costs – based upon state or board approved

systemwide contracts

14

FYE enrollment grew rapidly but has fallen since its peak in 2011

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 est

2015 est

110,000

120,000

130,000

140,000

150,000

160,000

170,000

132,586

135,494 135,839

143,924

157,903

153,447

144,609

142,274

Fiscal Year

FYE

15

Tuition revenue and state support per FYE remains stable in constant dollars

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 est

2015 est

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$11,000

$7,187 $7,445

$8,501

$9,240 $8,811 $8,917

$9,679 $9,950

$7,187 $7,091

$7,586 $7,756

$7,280 $6,992 $7,331

$7,388

Actual Constant Dollars

16

State support increasing

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 est

2015 est

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

33.7%

44.7%47.4% 48.6%

55.2%60.1% 58.0% 56.1%

66.3%

55.3%52.6% 51.4%

44.8%

39.9%42.0%

43.9%

Tuition Appropriation

Changing relationship between tuition and state support

17

State support per student FYE has begun to improve in constant dollars, but is still 32% below 2002 levels

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 est

2015 est

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$4,766

$4,368

$3,924 $3,715

$3,994

$3,847

$3,980 $3,863

$3,261 $3,070

$2,787 $2,813

$3,079 $3,247

18

Minnesota’s most affordable higher education option

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$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

Most Expen-sive

Least Expensive

Minnesota State Colleges and Universities

Private colleges and universities; University of Minnesota

College/University

20

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Source: Chronicle of Higher Education, October 23, 2013

Affordability: Tuition & fees as a percent of median income

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

4.9% 4.9% 5.1% 5.1% 5.4% 5.6% 5.7% 5.7% 5.9% 5.8%

6.4%6.4% 6.7% 6.8% 7.3% 7.5% 7.7% 7.7% 8.1%

8.0%10.7%

10.9% 11.2% 11.6%12.8% 13.6% 14.3% 14.4% 15.0%

14.8%

27.7% 28.0%28.9% 29.1%

33.2%34.4%

35.5% 35.0%36.9% 37.0%

State Colleges State Universities University of Minnesota

Private Colleges and Universities

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19 Source: System Office Research – Academic and Student Affairs

20

Income Levels for State Grant Recipients

Average 2014-2015 Student Tuition Cost

Income Levels for State Grant Recipients

Average 2014-2015 Student Tuition Cost

Less than $20,000 $626 Less than $20,000 $801

$20,000 to $39,999 $1,197 $20,000 to $39,999 $1,254

$40,000 to $59,999 $2,062 $40,000 to $59,999 $2,671

$60,000 and above $3,134 $60,000 and above $4,419

Average for all state grant recipients

$1,247Average for all

state grant recipients$2,022

Non-state grant recipients $4,816 Non-state grant recipients $6,782

2014-2015 tuition rate for full-time students (30 Credits - 15 per term)minus estimated state and Pell grants

Estimated net student tuition cost in fiscal year 2015

State Colleges State Universities

21

Inflation adjusted expenses per FYE remain below pre-recession levels

FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 $6,000

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

$10,277 $10,249

$9,719 $9,599

$9,967 $10,052 $10,145 $10,313

$9,582 $9,325

$8,981

$9,442

22

Institutional support expenses per FYE

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 $1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

$1,700

$1,398 $1,417

$1,342

$1,436 $1,456

$1,455

$1,381 $1,357

$1,259

$1,327

Actual Adjusted for inflation

23

Reduction in the size of the system office

FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013$25

$27

$29

$31

$33

$35

$37

$39

$41

$43

$45

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

38.8

39.4

36.737.1

39.0

40.541.0

43.5

39.8

36.7

33.1 33.1

3.7%

3.6%

3.2% 3.2%

3.1% 3.1%

2.9%

3.0%

2.6%

2.3%

2.2%2.3%

System Office Appropriation System Office Percentage of Systemwide GEN Revenue

Appr

opria

tion

in M

illio

ns

24

Institutional spending restraint continues

System ranks 38th out of 51 in institutional spending per FYE

Rankings have averaged 37th-40th last four years Spending is 15% below the national average per FYE Spending levels per FYE are below all contiguous

neighbors (Iowa, WI, North Dakota, South Dakota)

25

Operating budget

26

Revenue Trends

State Appropriation Tuition (Gross) Total Change0%

10%

20%

30%

40%

50%

60%

70%

Percent Share of Revenue General Fund

FY2009 - FY2013(nominal dollars)

FY2009 FY2013

27

Expense Trends

Salaries & Benefits Operating Expenses Change0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

General fund expenses FY2009 vs FY2013(nominal dollars)

FY2009 FY2013

28

FY 2016-17 financial outlook

Improved, but risk of softening state funding environment

Continued commitment to affordable tuition Uncertain enrollment outlook Contract settlements known

29

Pressures from all sidesInvestment requirements for quality academic and student support are pressured by: Affordability commitment holding down tuition revenue Enrollment growth strategies needed to best serve the state State investment levels up slightly after years of sharp decline Capital investment requirements (buildings and technology)

competing for campus operating funds Accreditation agencies and Board of Trustees increasing focus

on financial sustainability of colleges and universities increasing pressure for net asset and operating margin improvements

30

FY2014-2015 all-funds budget

($ in millions)FY2014 Budget

FY2015 Budget

Dollar Change

Percent Change

Revenues $1,919.9 $1,924.7 $4.8 0.3%

Expenses $1,907.3 $1,919.9 $12.6 0.7%

Budget balance $12.6 $ 4.8

31

General fund budget

($ in millions)FY2014 Budget

FY2015 Budget

Dollar Change

Percent Change

RevenuesState appropriation $587.9 $622.1 $34.2 5.8%Tuition $811.8 $793.5 ($18.3) -2.3%Other revenues $113.4 $104.8 ($8.6) -7.6%

Programmed fund balance $14.9 $15.0 $0.1 0.3%Total budgeted revenues $1,528.0 $1,535.4 $7.4 0.5%

ExpensesCompensation $1,139.9 $1,156.7 $16.8 1.5%Other operating costs $379.4 $376.5 ($2.9) -0.8%

$1,519.3 $1,533.2 $13.9 0.9%

Budget balance $8.7 $2.2

Composite financial index Trends for college and universities

< 1.00 1.00 - 3.00 3.00 - 5.00 5.00 - 7.00 -

2

4

6

8

10

12

14

16

18

201120122013

Composite Financial Index

Num

ber o

f Ins

tituti

ons

33

K-12 Education42%

Health & Human Services

29%

All Other Expenses9%

Property Tax Aids & Credits

8%

Higher Education7%

Public Safety & Ju-diciary

5%

State of MinnesotaGeneral Fund Expenditures FY2014-2015 Biennium

$39.6 Billion Total

34

Office of Higher Ed-ucation

16%

University of Min-nesota

41%

MN State Colleges & Universities

43%

Higher Education State Funding FY2014-2015 Biennium$2.8 Billion Total

35

Tuition86557%

State Appropriation55337%

Other916%

Minnesota State Colleges and UniversitiesFY2013 General Fund– Revenues

$1,509 Million Total

Source: FY2013 Audited Financial State-ments

36

Allocation process

37

Revenue practices All tuition and fee revenue is collected and retained

by the colleges and universities. These funds are not centrally redistributed

All grants and gifts controlled by the colleges and universities

All auxiliary income controlled by the colleges and universities

All state funds appropriated to the Board and distributed to the colleges and universities in a lump sum

38

State support allocation

Institutional allocations: priority funds and institutional base allocations

Systemwide set asides: enterprise technology, debt service (system share), attorney general, etc.

System office support

39

“Allocation Framework” provides a method for distributing state funds to colleges and universities

A single model that equitably recognizes the diversity of Minnesota State College and University students' needs and supports the unique educational goals of each institution.

Allocation of funds are based on a number of factors such as enrollment, cost of instruction, national benchmark data, and other institutional data.

Allocation framework distributed $461M in FY2015 Framework changes now under study by the Charting the

Future implementation team on system incentives and rewards

40

Allocation framework design

Student Support and Administrative Services (30%)

Instruction (56%)

Facilities (8%)

Library (4%)

Research and Public Service (2%)

41

Allocation framework design principles

Methodology used to distribute base funds to colleges and universities:Rewards cost efficient instructionState funds follow enrollment changesSubstantially formulaic

CTF work asking: What does it incent and reward now? What should it incent and reward?

42

Capital investment

43

Capital financing

Campus resources from operating budget or gifts General obligation bonds sold by the state to finance

new construction, renovation or demolition of academic and program space to improve learning

Revenue bonds sold by the Board to finance revenue producing facilities such as dormitories, dining halls, student unions, etc.

Net assets by fund type FY2013(in millions)

44

General172283%

Revenue21810%

Other1437%

45

Total capital investment - bonds(FY2000-2014)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$0

$50

$100

$150

$200

$250

$300

Capital Projects HEAPR Revenue Fund

Mill

ions

GO debt service as percent of total expenses

46

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 $-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

While continuing to invest in infrastructure, debt service has remained a fraction of overall MnSCU expenses

Expenditures and Prinicipal Total G.O. Debt

Mill

ions

(nom

inal

dol

lars

) 1.1%1.0%

1.3%

1.2%1.3%

1.5% 1.1%1.5%

1.4%

47

Summary

Affordability commitment Enrollment growth strategies Capital budget development underway – spring 2015

approval Operating budget development underway - spring

2015 approval FY2014 audit underway – November 2014

presentation

48

End deck