Messiah College

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Messiah College

• Institutional Planning Finance
• May 30, 2007
• Understanding Higher Ed Finance

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Understanding Higher Ed

• Understanding Financial Statements
• Statement of Activities (Operating Stmt)
• Statement of Financial Position (Balance Sheet)
• Statement of Cash Flows
• Why not-for-profits need surpluses
• Contextualizing Financial Performance
• Comparative Performance
• Composite Financial Index (CFI)
• Summary

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Three External Financial Statements

• Statement of Activities (Operating Stmt)
• Summarizes the institutional financial
  performance during the course of one fiscal year
• Statement of Financial Position (Balance Sheet)
• Summarizes the institutional financial
  performance life-to-date by organizing
  financial data into assets, liabilities, and net
  assets
• Statement of Cash Flows
• Displays one years financial activity by
  summarizing the sources and uses of cash

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Messiah CollegeStatement of ActivitiesYear
Ending June 30, 2006
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Activity Asset Categories

• Unrestricted Assets that are not subject to
  donor-imposed stipulations can be designated by
  trustees or limited by contractual relationships
• Temporarily Restricted Assets subject to
  donor-imposed directions that can be fulfilled by
  the College, or that expire at some future date
• Example Grants that stipulate the activities
  or assets that must be funded by the grant.

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Activity Asset Categories

• Permanently Restricted Assets that donors
  stipulate must be maintained permanently by the
  College, although the College generally has the
  use of part or all of the income earned on the
  assets
• Example Donors endowment gifts

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Activity Asset Categories

• Note that the ONLY way anything can be
  categorized as a Temporarily or Permanently
  Restricted Asset is IF it is donated, and IF the
  donor has specifically restricted its use.
  Revenues from all other sources such as fees,
  sales, et cetera have to be recorded as
  Unrestricted.
• At the end of each fiscal year, the net of all
  unrestricted income and expense is closed out
  to Unrestricted Net Assets on the Statement of
  Financial Position, and a new fiscal year begins.

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What Happens at Year-End?

• So at the beginning of FY06, we had 178 million
  in net assets, our net assets increased by 14
  million so the year-end value was 192 million, a
  healthy increase of 7.8

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Statement of Financial Position

• Assets - Liabilities Net Assets
• OR
• Assets Liabilities Net Assets
• OR
• What you own, less what you owe, equals your net
  worth

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If were a non-profit, why do we have (or need)
surpluses?

• Not-for-profit is a better term
• Distinguishes us from for-profits whose primary
  reason for existence is to provide a monetary
  return on money invested
• Not-for Profits exist to provide a public service
• Both types of corporations will have missions
  that further distinguish them

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If were a non-profit, why do we have (or need)
surpluses?

• However, both for-profits and not-for-profits
  have to generate cash and profits if
• They wish to grow or fund new initiatives
• They incur debt which has to be repaid
• They have capital assets (buildings and
  equipment) that need to be replaced at a cost
  that has increased since they were originally
  purchased

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Contextualizing Financial Performance

• Comparative Performance
• Net Assets (From Stmt of Financial Position)
• Net Assets Per Student
• Represents assets institution has acquired that
  help defray the current cost to the student
• Increase in Net Assets (Stmt of Activities)
• Composite Financial Index (CFI)
• CCCU
• CIC

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Net Assets
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Net Assets per Student
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Cumulative Change in Net Assets
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Why has Messiah Financial Performance Lagged in
Recent Years?

• We invested 75 million in new buildings and
  building repairs, about 20 million more than our
  benchmark group . . . which added to depreciation
  expense . . . (though other benefits)
• We received an average of 2,000 per year per
  student in private gifts versus 5,000 for
  benchmark institutions, and 2,600 for competitor
  institutions
• Calvin, Susquehanna, Hope

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Why has Messiah Financial Performance Lagged in
Recent Years?

• We increased our endowment spending rate in 2000
• A combination of fewer gifts, higher spending
  rate, and slightly below average returns median
  long-term investments of benchmark group
  increased by 15 million more than did Messiahs
• We had small or non-existent operating surpluses
  Elon

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BUT!

• Messiah still has approximately the same net
  assets per student as its benchmark group
• It still has more net assets per student than its
  nearest Competitors
• And it ranks at approximately the 75th percentile
  in both the CCCU and the CIC in a broader measure
  of financial health called the Composite Index

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Composite Financial Index

• An attempt to calculate a single number that
  represents an institutions relative financial
  health
• Consists of a weighted average of four financial
  ratios
• Return on Net Assets (20)
• Net Operating Revenue Ratio (10)
• Primary Reserve Ratio (35) - Exp. NA/TL Exp
• Viability Ratio (35) - Exp. NA/LT Debt

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Composite Financial Index - CCCU
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What do the numbers mean?
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Composite Financial Index - CIC
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Summary

• The Operating Plan only summarizes a portion of
  Messiahs financial picture. Other important
  items include
• Restricted gifts (gifts to endowment, capital
  projects, and other restrictions)
• Return on endowment and trust investments
• Sufficient cash flow
• Portion of net assets that are unrestricted

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Summary

• We need to generate surpluses so we can
• Pay the principal payments on our debt
• Generate the cash needed to replace aging assets
• Remain competitive (tuition pricing and quality
  program and facilities)

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Summary

• The Composite Index represents one vehicle for
  measuring relative financial position and health
• Strategies for strengthening our financial
  strength might include
• Increase net operating revenue
• Enhanced gifts (including endowment and capital)
• Enhance investment returns on endowment
• Gradually decrease endowment spending
• Control costs to improve Messiahs pricing
  position relative to competitors

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Summary

• Messiah financial position is strong, but we need
  to improve annual financial results if we are to
  remain strong