Messiah College

Institutional Planning & Finance

May 30, 2007

Understanding Higher Ed Finance

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

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 year’s financial activity by

summarizing the sources and uses of cash

Messiah CollegeStatement of Activities

Year Ending June 30, 2006Temporarily Permanently FY06

Unrestricted Restricted Restricted TOTAL

45,207,176 45,207,176 1,732,754 - 1,732,754

965,025 1,377,306 2,342,331 5,123,647 5,123,647 4,311,701 4,311,701

17,227,448 17,227,448 926,152 (926,152) -

75,493,904 451,154 - 75,945,057

48,280,134 - - 48,280,134 15,374,846 15,374,846 10,703,568 10,703,568

74,358,548 - - 74,358,548 1,135,355 451,154 - 1,586,509

4,148,770 700,011 1,098,072 5,946,853 6,360,232 1,450,563 20,940 7,831,735

443,929 (885,695) 532,854 91,088 10,952,931 1,264,879 1,651,866 13,869,676 (1,613,965) (1,613,965)

10,474,321 1,716,033 1,651,866 13,842,220

149,738,463 11,821,125 16,889,568 178,449,156 160,212,784 13,537,158 18,541,434 192,291,376

Operating revenues and other additions:Net tuition and feesGovernment grants and appropriationsGifts and grants

Contributions for long-term purposesEndowment investment return, net of operations desg.

Endowment return designated for operationsOther sourcesAuxiliary enterprisesNet assets released from restriction

Net assets, end of year

Total revenues and other additions

Educational and generalAuxiliary enterprisesInstitutional support Total expenses and other deductionsChange in operating net assets

Total non-operating

Operating expenses and other deductions:

Non-operating revenues and expenses:

Cumulative effect in change in accounting principle

Total change in net assets

Other non-operating

Net assets, beginning of year

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.

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

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.

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%

Temporarily Permanently FY06Unrestricted Restricted Restricted TOTAL

10,474,321 1,716,033 1,651,866 13,842,220

149,738,463 11,821,125 16,889,568 178,449,156 160,212,784 13,537,158 18,541,434 192,291,376

Total change in net assets

Net assets, beginning of yearNet assets, end of year

Assets June 30, 2006 June 30, 3005Cash and cash equivalents 25,232,852 20,838,782Accounts receivable 5,417,585 5,217,419Prepaid expenses and other 1,183,718 790,661Investments 119,511,508 109,186,133Assets held in trust 22,747,572 22,691,474Deposits with trustees 5,295,072 5,080,716Property and equip, net of depr 111,011,705 113,704,583 Total Assets 290,400,012 277,509,768

Liabilities and Net AssetsLiabilities:Accounts payable 4,946,005 5,181,083Deposits 1,279,478 1,186,174Deferred revenue 416,608 392,793Annuities & trusts payable 19,665,985 19,801,891Long-term debt 64,885,516 67,261,050Other Liabilities 6,915,044 5,237,621 Total Liabilities 98,108,636 99,060,612

Net assets:Unrestricted 160,212,784 149,738,463Temporarily restricted 13,537,158 11,821,125Permanently restricted 18,541,434 16,889,568 Total Net Assets 192,291,376 178,449,156

Total Liabilities and Net Assets 290,400,012 277,509,768

Statement of Financial PositionFor years ending June 30, 2006 and 2005

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

2006Cash flows from operating activities:

Change in net assets $ 13,842,220   Adjustments to reconcile change in net assets to net cash provided by

operating activities:Depreciation and amortization 7,976,706   Net realized and unrealized gains on investments (11,105,252)  Net gain on sales of property & equipment and loss of debt refunding —    Cumulative effect of change in accounting principal 1,613,965   Contributions for long-term purposes (5,946,853)  Increase in other assets (1,100,316)  

Total adjustments (8,561,750)  Net cash provided by operating activities 5,280,470   

Cash flows from investing activities:Net proceeds & purchases of investments 449,709   Net proceeds & purchases of property and equipment (4,985,508)  Other cash flows from investing activities 173,822   

Net cash used in investing activities (4,361,977)  Cash flows from financing activities:

Principal payments on long-term debt (2,290,000)  Contributions for long-term purposes 5,946,853   Other cash flow from financing activities (181,276)  

Net cash provided by financing activities 3,475,577   Net increase in cash and cash equivalents 4,394,070   

Cash and cash equivalents, beginning of year 20,838,782   Cash and cash equivalents, end of year $ 25,232,852   

MESSIAH COLLEGEStatements of Cash FlowsYear ended June 30, 2006

If we’re 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

If we’re 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

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

Net AssetsFY98 to FY06 Net Assets

vs. Median of Competitor and Benchmark Groups

0

25,000

50,00075,000

100,000

125,000

150,000175,000

200,000

225,000

Messiah 151,345 163,812 183,293 170,983 161,658 154,974 167,376 178,449 192,291

Competitors 44,576 52,146 57,026 61,775 63,124 63,746 69,733 74,710 81,658

Benchmarks 120,722 138,743 155,234 154,681 157,006 157,078 172,855 187,566 207,449

FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06*

Net Assets per Student

FY98 to FY05 Net Assets per Student vs. Median of Competitors and Benchmark Groups

20,000

30,000

40,000

50,000

60,000

70,000

80,000

MC 59,196 61,839 68,181 62,018 57,380 54,320 57,379 61,919

Competitor 34,155 35,019 36,432 37,321

Benchmark 37,778 40,759 46,850 47,215 45,673 44,430 49,917 58,040

Messiah Ranking 7 8 8 9 9 9 10 9

FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05

Cumulative Change in Net Assets

FY98 to FY05 Median Increase in Net Assets

17.9%

53.0%46.6%

37.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Messiah Competitors Benchmarks Gen Bacc's

19% 18%

65%

93%

0%

20%

40%

60%

80%

100%

CP I Total NetAssets

MC Expenses MC Net Tuition

CUMULATIVE INCREASE IN KEY FINANCIAL DATA FY98 TO FY05

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

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 Messiah’s

• We had small or non-existent operating surpluses Elon

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”

Composite Financial Index

• An attempt to calculate a single number that represents an institution’s 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

Composite Financial Index - CCCU

CFI BY YEAR: CCCU PERCENTILES

-2

0

2

4

6

8

10

1998 1999 2000 2001 2002 2003

CFI

SC

OR

E

75th Percentile

50th Percentile

25th Percentile

MESSIAH

What do the numbers mean?

2000 2001 2002 2003 2004 2005 range

9 to 10

8.07 to 8

6.4 6.45 to 6

3.9 3.4 3.9 3 to 4

1 to 2

-1 to 0

deploy resources to achieve robust mission

allow experimentation with new initiatives

re-engineer the institution

assess viability to survive

focus resources to compete in future statedirect resources to allow transformation

strategy

Composite Financial Index - CIC

CFI BY YEAR: NATIONAL PERCENTILES

-2

0

2

4

6

8

10

1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

75th Percentile

50th Percentile

25th Percentile

MESSIAH

Threshold

Summary

• The Operating Plan only summarizes a portion of Messiah’s 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

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)

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 Messiah’s pricing

position relative to competitors

Summary

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