Office of the Commissioner of Higher Education

MONTANA UNIVERSITY SYSTEM

2500 Broadway  à  PO Box 203101  à  Helena, Montana 59620-3101  à  (406)444-6570  à  FAX (406)444-1469

                                                                        MEMORANDUM

TO:                   The Board of Regents

FROM:              Laurie Neils

Director of Budget and Accounting

DATE:               October 30, 2001

SUBJECT:        Negative Fund Balances

During the September 2001 Board of Regents Budget Workshop several questions were asked concerning the negative fund balances reported in the campuses operating budgets.  Some of the negative balances reflect real and chronic problem accounts and the concerns of the Regents are justified.  Although the Montana University System is required by statute to report on instances of negative cash for two consecutive fiscal year-ends, the existence of negative fund balance for even one year-end deserves attention.

Before I identify the troublesome accounts, I think a brief accounting lesson will be helpful. For this tutorial, I am excerpting a page from College and University Business Administration (Fifth Edition, published by NACUBO), Volume 2, page 222:

CLASSIFICATION OF RESOURCES     

     The fundamental purpose of fund accounting is to properly account for all resources received and used.  Fund accounting classifies all resources into funds according to specific limitations placed on their use by the resource providers.  Classification recognizes the stewardship responsibility inherent in accepting restricted resources from external parties.

     Each fund is a self-balancing set of accounts.  Each fund has its own revenues, expenditures, transfers, assets, liabilities, and a fund balance.  A change in fund balance represents the difference between fund additions (revenues and transfers in) and deductions (expenditures and transfers out).  A fund balance is identified as the net difference between a fund’s assets and liabilities.

     Because of the variety of restrictions upon a higher education institution’s resources, it is not unusual for even a small institution to have one hundred or more individual accounts.  Large, complex research institutions can have thousands.

Although the Montana University System uses the standard Fund Groups of Current Funds, Loan Funds, Endowment and Similar Funds, Annuity and Life Income Funds, Agency Funds, and Plant Funds, there are hundreds of separate funds or accounts that are aggregated for reporting purposes into the fund groups.  Many of the funds reported in the operating budgets have numerous subfunds or accounts underlying them.  An account with a deficit fund balance is in effect borrowing from the accounts with positive fund balances.  That is why each individual fund with a deficit balance must remedy the deficit by generating more revenue than is expended.

For example, the Montana State University designated account, Bobcat Athletics shows a negative fund balance at the end of fiscal year 2001 of $582,099.  The entire designated fund group at MSU Bozeman has a total fund balance of almost $16 million.  Even though the Bobcat Athletics Account has in effect borrowed from the positive designated accounts, it would be inappropriate to require any of the other designated fund managers to permanently transfer their fund balances that have been generated for a specific purpose, to Bobcat Athletics.  Each fund manager is responsible for maintaining a positive fund balance.  In reality, even within the examples of the Bobcat Athletics Account or ASMSU, there are many budgeted accounts and managers for the individual sports or student clubs that are responsible for generating sufficient revenue or holding the line on expenses.

The cause of fund balance deficits can be summarized by saying the fund expenditures exceeded the fund revenues.  Because fund balance is a cumulative amount, this over-expenditure may have taken place over a number of years.    Sometimes there are unusual or exceptional expenditure requirements that cause a fund balance deficit in one year but sufficient revenues will be generated to offset the deficit in the following year.   The annual recording of compensated absences expenses cause many fund balances to be negative, but because compensated absences expenses are “off budget” and not a funded expense, the campuses report fund balances after adjustment for compensated absences.

I reviewed the operating budgets that were submitted by the campuses and the State’s SABHRS accounting records for fiscal year end 2001.  Based on that review and further detail that the campuses provided to me, the following table shows the accounts that require further monitoring.

It would be extraordinary to find no accounts with negative fund balances within the accounting records of an enterprise the size of the Montana University System.  The accounts that have been reported here are significant from either a dollar amount perspective or they have recurring negative balances over a number of years.

The University of Montana campuses at Helena, Montana Tech, and Western and Montana State University Northern have deficits in their current unrestricted general operating funds that have been carried forward for a number of years.  These deficits were the result of the Voluntary Termination Incentive Program that was offered in 1993.  The policy directed the campuses to fund the payouts within 10 years.  Enrollment declines (revenue shortfalls) and higher than expected termination payouts have made it extremely difficult for the campuses to meet their original solvency plans.

Montana State University Bozeman’s general operating deficit on the books at fiscal year end 2001 was $300,000.  However, a student accounts receivable overstatement and other adjustments may reduce MSU Bozeman’s fund balance to a deficit up to $2.7 million.  Montana State University has investigated this situation in detail and is planning to have a report and deficit elimination plan ready for review during the upcoming Regents’ meeting.

The athletics fund woes have been widely publicized and discussed.  The University of Montana deficit in athletics was due to actual revenue received being less than projected revenues.  UM Athletics is in year two of a three year plan to eliminate the negative balance.  The goal is to be achieved with increased revenue of $300,000 from the Grizzly Athletic Association, restoration of $200,000 in General Funds, and ticket sales revenue increases.  It is anticipated that additional revenue generated upon completion of related construction and subsequent scheduling of activities will restore a positive fund balance by the end of next fiscal year (FY 2003).  Montana State University hired a consultant to review their athletics program.  The MSU Bozeman report on athletics has yet to be released.

Other designated funds at The University of Montana Missoula with deficit fund balances are the Collegiate Licensing Account and the Continuing Education Account.  The Collegiate Licensing deficit resulted from substantial start up expenses (particularly patents).  The program is successful and the revenues are increasing, which should soon eliminate the deficit.  During FY02, Continuing Ed/Summer/Evening will stabilize income generation and attempt to reduce the deficit through the following means:

·         Increase the number of self-supporting programs

·         Increase the profit-margin of self-supporting programs

·         Engage in a leadership role in online learning

·         Continue seeking additional grants and contracts

·         Continue maintenance and development of state-support

MSU Northern’s two designated accounts with deficit balances have been problems for a number of years.  MSU Northern is working on a realistic solvency plan for these two accounts.  This plan may include ongoing discussions with appropriate management in these areas, increasing user fees, and reallocating expenses.  Northern’s goal is to have both deficits resolved by fiscal yearend 2004.

Several Auxiliary Enterprise Funds also report fund balance deficits.  At The University of Montana, recruitment of personnel to staff the new Adams Center organization resulted in an Executive Director assuming that position in October, 2000.  The Executive Director submitted a business plan and began filling critical positions.  Owing to the time associated with staffing up and the lead time required to book new events, it was not possible to meet budget projections for FY 2001.  It is expected that significant progress will be made towards meeting such projections in FY 2002.  The University of Montana Center at Salmon Lake has operated in the black for the past two years, while revenue has tripled over the last three years.  The fund balance deficit has been significantly reduced and will be eliminated completely in FY 2002.

The UM Western Outdoor Education Center at Birch Creek has a May through October season, and the setup costs are incurred right at fiscal year end, which skews a FYE look.  The Center is in the third year of a five-year operating plan to reduce the deficit.  Current operating plans and marketing have been successful and the center’s revenue has increased, but it has required some additional up front maintenance and operating costs to put the plan in place.  The 2000 summer fire season impacted the August programs.  This account is being monitored closely and decisions will be made this year on future directions.  The Dining account overcame a large negative balance through extreme cost reductions during FY 1999 and 2000.  During FY 2001 expenditures were required on deferred supply and maintenance issues.  Additionally, labor costs were not monitored as closely as required.  Reorganization, including personnel lay-offs, has occurred that will address this deficit this year.

Although it appears that The University of Montana Missoula and Western have more fund balance deficit problems in designated and auxiliary fund than the other campuses, I don’t believe that is the case.  These two campuses provided more detail in the reports they submitted and in some cases provide more detail on SABHRS, particularly in the Auxiliary area.  Some of the other campuses may well have auxiliary and designated accounts with deficits, but in aggregate the accounts as presented on SABHRS and the operating budgets have positive fund balances. 

In summary, there are funds with cumulative deficit fund balances.  Although it may be difficult in the short term to completely eliminate the deficits, it is important that the campuses have an action plan and that the fund managers and campus managers be held accountable for adhering to the plans.