Lane Community College shall maintain an “unrestricted” General Fund Ending Fund Balance equal to approximately 5% of total budgeted expenditures.  This amount shall be considered a “target” and the target range may fluctuate up to 1% above or below the target from year to year depending on financial conditions and the needs of the college. 

The Ending Fund Balance target shall include the Unappropriated Ending Fund Balance (UEFB) as set by Board policy (A.040).  When the Ending Fund Balance falls to 4% or less the college shall adopt a plan to replenish the Ending Fund Balance to 5% within two years.  When the Ending Fund Balance exceeds 6%, the excess shall be set aside for investment in one-time expenditures.

If the total Ending Fund Balance (including restricted) falls to levels that require short-term borrowing, the levels set by this policy shall be automatically reviewed and adjusted as necessary.

Executive Summary

Reasons to set adequate fund balance levels

• To mitigate current and future financial risks (e.g., revenue shortfalls and unanticipated expenditures);
• To ensure adequate cash flow over the summer months;
• To maximize bond ratings which decreases the costs of borrowing money or issuing bonds;
• To aid in long-term financial planning and stabilization;

Factors to consider in setting a fund balance level

• High reliance on state funding combined with unpredictability and instability in state resources;
• Low level of other reserves (e.g., reserves for capital expenditures, major maintenance, equipment replacement) and no overall reserve policies in force;
• The designation of substantial portions of the fund balance for specific purposes (e.g., what Lane calls “restricted” carryover);
• A higher likelihood that the college will need to borrow money to cover its obligations (e.g., PERS unfunded liability, delay of 4th quarter state payment into the next fiscal year, no capital reserves to take care of facilities emergencies);
• Income received from the investment of cash on hand.

Policies and practices of other community colleges

• Minimum targets at other Oregon community colleges for ending fund balances range from a low of 5% at PCC and Umpqua to a high of 10% at several colleges.
• In the latest data available, Maricopa Community College District showed an ending fund balance equal to approximately 25% of expenditures.
• The latest NACUBO Comparative Statistics study showed that the median ending fund balance for community colleges was 10% of all fund expenditures.  The first quartile was at 4% and the third quartile was at 19%.

Discussion

The Government Finance Officers Association (GFOA) issued a formal recommendation in 2002 that states, “it is essential that governments maintain adequate levels of fund balance to mitigate current and future risks (e.g., revenue shortfalls and unanticipated expenditures)…. Fund balance levels are a crucial consideration, too, in long-term financial planning.”

The GFOA recommendation goes on to state that “the adequacy of unreserved fund balance in the general fund should be assessed based upon a government’s own specific circumstances.  Nevertheless, GFOA recommends, at a minimum, that general-purpose governments, regardless of size, maintain unreserved fund balance in their general fund of no less than five to 15 percent of regular general fund operating revenues.” [emphasis added]

A 1999 report by Fitch Ratings lists a fund balance policy, contingency planning policies, and policies regarding nonrecurring revenue as three of its twelve “best financial management practices” for government agencies that issue bonds (whether routinely or occasionally).  These three items all are related to the ending fund balance issue.

Regarding a fund balance policy:  “Maintaining an operating reserve or rainy day fund is perhaps the most effective practice [a bond] issuer can use to enhance its credit rating….A financial reserve may be used to address unanticipated revenue shortfalls or unforeseen expenditures. This provides a first defense against deficit spending and helps maintain liquidity….”  

Regarding contingency planning policies: “Demonstration by an issuer of foresight and planning against unforeseen events is viewed positively….Issuers should have meaningful contingency plans against the possibility of voter-ordered tax cuts….[Governments should make] contingency plans for their proposed or adopted budgets, in the event that budget assumptions prove erroneous.”  Over the past few years, Lane has used its ending fund balance to make up for state revenue reductions caused by a variety of factors.

On policies regarding nonrecurring revenue: “Overreliance on nonrecurring revenues…to pay ongoing and recurring expenses is a credit concern, since it frequently contributes to budgetary stress and fiscal structural imbalances….From a credit perspective, nonrecurring revenues are best used for one-time or discretionary spending that will not entail spending pressures in future years.”  The fund balance is a nonrecurring resource and yet Lane has been using this nonrecurring resource in each of the last three years to pay for recurring operating expenditures.

Factors to consider in setting a target Ending Fund Balance:

Predictability of revenues and volatility of expenditures.  Over the last decade, the predictability of state revenues has been low, especially considering that source now makes up almost 40% of the college’s General Fund revenues.  The implementation of Measure 5 and Measures 47/50 certainly influenced negatively the predictability of state revenues. However, the recent state recession indicates that over-reliance on income taxes and the lack of a “rainy day fund” at the state level are structural problems that also significantly increase the unpredictability and unreliability of state revenues even in relatively good times.

Tuition and Property Tax revenues are much more predictable.  However, Lane’s reliance on state revenue is high enough that these two sources cannot make up for even small percentage shortfalls in state resources.

The availability of resources in other funds as well as the potential drain upon general fund resources from other funds.  Lane does not currently have any plant/facilities fund reserves and allocates a very small amount annually to major maintenance needs.  This is a significant concern that has already caused a net drain on General Fund resources.  For example, in FY02 the college had to allocate over $400,000 from Administrative Contingency for changes to the Health Tech Building alone to address workplace environment problems.  Lane needs to maintain an adequate Ending Fund Balance to avoid borrowing for emergency capital or other major needs.

Designations.  The GFOA recommendation states that “governments may wish to maintain higher levels of unreserved fund balance to compensate for any portion of unreserved fund balance already designated for a specific purpose.”  Lane’s current policy of allowing department balances to carryover into the next fiscal year in effect means that a major portion of the ending fund balance is designated for specific purposes.  This must be taken into account in setting an appropriate target.

The likelihood of the need to borrow.  Because of the state revenue shortfalls and because of the increasing PERS Unfunded Actuarial Liability, the likelihood that Lane will need to borrow additional money in the near future is increased significantly.  A fiscally sound Ending Fund Balance policy will help Lane to keep its credit rating high and thus decrease the costs of borrowing and/or issuing bonds.

The ability to meet cash flow needs.  Historically, Lane in an unplanned way has maintained an ending fund balance sufficient to meet its cash needs over the summer. However, there are a couple of factors in the current situation that demonstrate the need for a deliberate policy: (a) The last special session of the 2001-2003 legislature delayed 4th quarter payments to community colleges from April to July of the following fiscal year; and (b) Lane’s ending fund balances have decreased significantly in each of the last four fiscal years.  While the college needs to develop an adequate reporting system in order to thoroughly analyze cash flow needs, it is clear that cash flow is an issue that should have an impact on ending fund balance targets. However, it is also clear that the factors listed above are the primary driving factors in determining an ending fund balance target.  In Oregon, the generally accepted rule of thumb for community colleges is to attain at least a 5% to 10% ending fund balance in order to cover cash flow needs over the summer.

Income from investment of cash.  In Fiscal Year 2000, the college had a beginning fund balance of $11.3 million and realized $989,000 in interest income from investments. (Note: the ending fund balance in a fiscal year becomes the beginning fund balance in the following fiscal year.)  In FY04 the beginning fund balance was $6.9 million, or $4.4 million less than in FY00, and interest income is projected to be approximately $172,000. While declining interest rates have contributed to the decrease in interest income, approximately $200,000 annual recurring interest income has been lost simply because of the decrease in the beginning fund balance since FY00.

What policies/practices do other colleges follow?

The latest NACUBO Comparative Statistics study showed that the median ending fund balance for community colleges was 10% of all fund expenditures.  The first quartile was at 4% and the third quartile was at 19%.

Linn-Benton Community College has an ending fund balance target of 10% of budgeted resources (excluding carryover).

Treasure Valley Community College has a Board policy that the ending fund balance will be a minimum of 10% of the general fund operating budget.

Portland Community College has an internal financial management guideline that the ending fund balance will be a minimum of 5% of the annual budget in all funds.

Umpqua Community College tries to maintain an ending fund balance of at least 5%.

Blue Mountain Community College has a Board policy that the ending fund balance shall be not less than $1,000,000. This is approximately 9% of its FY02 general fund expenditures.

The latest data for Maricopa Community College District shows an ending fund balance equal to approximately 25% of all expenditures.

Lane’s ending fund balance (including the Unappropriated Ending Fund Balance) in FY03 was $6.9 million or approximately 10% of all general fund operating expenditures. This balance included $4.0 million in restricted funds.

Rationale for the recommendation of 4% to 6% as the target range for the “unrestricted” Ending Fund Balance.

• The normal range for ending fund balance targets in Oregon is five to 10% of budgeted expenditures. Because Lane has a mechanism for “restricted” carryover in both the General Fund and Fund IX, a policy setting minimum levels of the “unrestricted” ending fund balance can be set at the lower end of that range.
• Lane has no policies as yet on reserve levels for major maintenance or equipment replacement.  As a result, there are no reserves for these purposes. Prudent fiscal management in this case dictates that the ending fund balance should be toward the higher end of the normal range.
• The fact that state revenues are substantially down, and that PERS has an unfunded actuarial liability that is the responsibility of public employers, increases the probability that Lane will have to borrow money to meet its obligations in the next few years.  A more conservative ending fund balance policy would help to keep Lane’s bond ratings higher and keep the costs of borrowing lower.
• Lane needs to preserve as much as possible its recurring sources of income.  Interest income is directly dependent on the amount of cash that can be invested and that in turn is directly related to the ending fund balance. While interest income is not large as a percentage of  budget, it is not an insignificant amount of money.