1 83. Standard 9. Financial Resources 1. Description 1.1. Financial stability Bentley University has not reported an operating deficit since it became a not-for-profit organization in Fiscal year 2012 produced a positive change in net assets from operating activities of $5.0 million on total net revenues of $185.2 million. Expendable financial resources at June 30, 2012 were $114.2 million compared with total direct debt of $136.0 million. Using Moody s calculations, Bentley s average operating margin for the three years ended June 30, 2012 is 4.9% (up from 4.0% in 2011), and expendable financial resources to debt at June 30, 2012 is 0.84:1 (down from 0.97:1 in 2011). Moody s rates the university s bonds A3 with a stable outlook. Moody s medians for A3 rated private universities with enrollment of at least 3,000 in 2011 (the most recent year available) are 3.1% operating margin and 0.82:1 expendable financial resources to debt. Bentley s ratios have historically been in-line with Moody s medians and are expected to continue to be strong for the foreseeable future. Bentley has transferred more than $30 million in operating cash to the endowment to increase investment earnings and buffer against unexpected contingencies over the last decade. Combining operating cash with unrestricted endowment and the committed $25 million line of credit produces sufficient resources to cover well over a half year of operating expenses, deemed adequate to cover unanticipated financial emergencies. The market value of the endowment at June 30, 2012 was $203.1 million. This represents a total return of negative 1.1% compared to a FY 2011 market value of $207.8 million and a positive return of 19.2% for the prior year. With two major equity downturns since 2000, the endowment distribution has remained fairly steady during the period contributing to Bentley weathering the 2008 financial crisis without significant budget cuts. During the past three years, Bentley has been able to keep its endowment distribution under the 5% policy. Bentley s ten-year endowment return is 4.2%. Exhibit 9.1 shows that Bentley s total debt outstanding peaked at just over $150 million at June 30, 2008 but has since declined to $139 million at June 30, In the eight years since June 30, 2004, the university invested $180 million in capital spending, though indebtedness increased by only $8 million. In response to the financial crisis of 2008, Bentley modified its debt strategy to become more weighted in fixed rather than variable debt instruments. As a result, interest rate swaps that had been used to hedge existing variable rate debt were no longer used as a hedge, thereby creating naked swaps. Due to the unexpectedly low interest rates over an extended period, the university has paid the swap counterparty net amounts that it had not
2 Long-term Debt Outstanding (millions) Average Opera ng Margin (%) Standard 9. anticipated when it entered the contracts. Bentley has covered the additional swap payments from operations and fully budgets the expected payments. In FY12, this amounted to $2.3 million. The swaps have a present market value liability of $34.7 million at June 30, 2012 and have increased from a liability of $18.7 million at June 30, The additional liability of $16.0 million during fiscal year 2012 was the primary reason expendable financial resources (and the resulting Moody s ratio referenced on page 1 of this standard) declined from 2011 to The university does not expect to terminate the swap contracts unless the general interest rate environment improves and the mark to market becomes favorable. Should the low interest rate environment continue through 2014, the university will consider refunding its GE Capital debt to variable rate debt with amortization aligned to the swaps, thereby creating an effective hedge. This would effectively produce a synthetic fixed rate of approximately 4.7% until the swap contracts terminate. Exhibit 9.1: Average operating margin and total debt outstanding % % % % % % Long-term Debt Outstanding Average Opera ng Margin % 0.0% Total operating revenues are increasing annually although the rate of increase has declined in the past few years due to the economy s impact on financial aid and the constrained ability to increase tuition. In FY 2007, the increase in net tuition and fees was 4.7% compared to 1.1% in FY The university has maintained its services primarily by making efficiency improvements. The university has a goal of becoming less tuition dependent and expects to make headway toward that goal with enhanced fundraising. In 2002 and 2005, Bentley made market adjustments to tuition that provided substantial growth in operating revenues. This revenue growth in part provided the resources that made possible campus improvements described in Standard 8. The university subsequently decided to slow the rate of tuition pricing growth to 3-4%. The total tuition and fee sticker price has increased less than 4% each year since fiscal year Total financial aid has been growing as a percentage of the sticker price. The total discount rate has increased from 30.2% in 2008 to approximately 34.9% in 2013, reflecting Bentley s continued and growing commitment to under-represented minority students, its commitment to maintaining a high-quality student body, and the increasing market competition for the students the university aims to serve. Exhibit 9.2 graphs net tuition per student over the past ten years and shows that, while the university has never experienced a year-over-year decline in net tuition per
3 85. student, the increases have leveled out, putting greater pressure on the operating budget. Based on five-year projections, the university believes it will be able to continue to support its current level of services to students primarily through greater fundraising and additional operating efficiencies. Exhibit 9.2: Net tuition per student The Ellucian Banner System 1 provides a comprehensive, integrated financial management application that includes online data query, decentralized query, and reporting based on user-defined security. Managers use the Banner system as well as the Cognos TM web-based business-intelligence reporting tool to review expense and revenue transactions, encumbrances and budget activity and forecasting (see Standard 8 for further information). Cognos TM is an end-user reporting tool that reports from user-defined datamarts to improve the expediency, flexibility and quality of management reporting. Institutional dashboards have been built that provide a quick snapshot of important financial and other information for executive and trustee viewing Financial organizational responsibilities The vice president for Administration and Finance is the chief financial officer of the university, responsible for budget and financial planning, risk management, accounting services, student financial services, treasury and debt services, and investments. He is also responsible for operations such as information technology, public and environmental health and safety, purchasing, administrative and campus services, the conference center, and facilities management. Kenneth B. Cody 2 was formally named to this newly created position by the Board of Trustees on October 25 th 2012, and began his duties on December 1 st. The vice president provides reports at least three times per year to the Business and Finance committee, which in turn updates the entire board. The reports address the current year budget forecast, five-year financial plans, cash flow projections, and updates on the status of the university s debt and derivatives strategies. Should the forecasts 1 Formerly SCT and SunGard. 2 Cody was most recently the vice chancellor and treasurer/cfo for the University System of New Hampshire.
4 Standard 9. indicate an anticipated deficit or need for realignment of resources, the President s Cabinet (see Standard 3 for description of the Cabinet) meets to approve any changes before it is submitted for Board review. The Investment committee of the Board of Trustees is made up of experienced fund managers and financial services senior executives, and is advised by outside investment advisors, Cambridge Associates. The formal investment policy was last updated in May The committee meets at least four times each year, although during the financial crisis from 2008 to 2010, it met more frequently. Assisted by Cambridge Associates, the committee assesses the current market, reviews performance and makes adjustments to reflect opportunity and risks, and selects investment managers that it believes will maximize investment performance for the university. The vice president advises the committee on income requirements, provides performance summaries, negotiates manager, custodian and consultant agreements, and generally works with Cambridge Associates to execute the instructions of the committee Financial planning and reporting The annual budget cycle begins in October when Financial Operations staff provides preliminary instructions to the operating divisions regarding growth in operating expenses and budget limitations. The division leadership engages responsible faculty and staff to obtain input on the financial needs of the divisions consistent with the university s strategic plan. Each division reviews opportunities for efficiencies. During the budget preparation period, the cabinet evaluates the state of the economy, demographics and other external and internal factors and develops the assumptions that will drive major portions of the budget including tuition and fee rates, salary increases, endowment support, estimates of gift revenue, benefit costs, inflation and any other current issues that may impact resources. The vice president works closely with the vice president for Enrollment Management and her staff to assure that the financial aid budget is strategically and financially consistent with the university s goals, capabilities and strategies. The Executive Committee of the Board of Trustees approves the tuition increase in early January. The Cabinet conducts an annual budget retreat during which members discuss the budget, strategic priorities, assumptions and forecasts, and assure that the budget is aligned with the strategic plan. At the conclusion of the retreat, consensus agreement is reached on all aspects of the proposed budget along with assumptions five years into the future. The budget is reviewed in detail with the Business and Finance committee. If the committee is satisfied with the budget, it recommends it to the full Board of Trustees. Financial Operations, the Cabinet, and the Business and Finance committee review a forecast against the original budget three times each year (the current budget, forecast and five-year plan are presented in Exhibit 9.3). Bentley has a long history of conservative budget management resulting in uninterrupted operating surpluses, adequate reserves, excellent physical plant, and an A3 bond rating. All of Bentley s financial resources are used directly and exclusively for the benefit of its educational mission. Bentley has no outside interests, programs, or subsidiaries that would divert resources 3. Cash balances, when appropriate, are transferred to the endowment and the resultant distributions are directly applied to mission related operations. 3 Based on IRS form 990 reporting, 95% of Bentley revenue goes directly to mission related activities.
5 Fundraising and development The Division of University Advancement oversees Bentley University s fund-raising. During the five fiscal years ending June 30, 2012, Bentley raised approximately $24.2 million in total gifts per the audited financial statements. These gifts have supported a range of capital projects and provided operating support to the budget. The university s Gift Acceptance Policy outlines policies and procedures for the acceptance and stewardship of gifts in accord with donor wishes. The policy is currently being reviewed and updated to reflect best practices to assure that all gifts to Bentley are structured to provide maximum benefits to the donor and the institution. The president and trustees have identified increasing unrestricted annual support as Bentley s chief fund-raising objective. The goal is to increase unrestricted philanthropic support for current operations by three to five percent in each of the next five fiscal years. The division of University Advancement is led by William A. Torrey, who came to Bentley in the fall of 2011, following a twenty-four year career at Bowdoin College, where he served as chief development officer and secretary of the college. Torrey is in the process of rebuilding the staff and infrastructure in preparation for the launch of a comprehensive capital campaign to coincide with the university s centennial in Enterprise risk management The president and Board of Trustees formed a Risk Management committee in 2010 that includes faculty, staff and a trustee. A dynamic dashboard identifies various risks, staff responsible for managing the risk, and board committee responsibility for monitoring the risks. The risk dashboard is updated periodically and included as the first page of the Board s agenda book for each of its three meetings annually. Further refinement to the enterprise risk management (ERM) process to bring it to the next level will be considered with a presentation and discussion led by the KPMG national higher education practice partner at the full Board meeting in February Financial systems and controls Banner TM has been used by Bentley University since 1991 and includes integrated modules for accounts receivable, accounts payable, purchasing, general ledger and endowments; also fully integrated, are human resources, payroll, and student information systems (for enrollment, registrar, financial aid, and housing). The university upgraded to Banner Version 8.6 in Upgrades continue to provide enhanced functionality. Bentley recently implemented the Millennium TM software solution for its advancement functions and is currently building interfaces to Banner and fine-tuning processes and reports. Human Resources staff maintains position control, reflecting current staffing at the university and the number of full-time equivalent positions that have been approved and budgeted Financial Oversight and Control KPMG audits the university s financial statements and reports its findings in detail to the Audit Committee of the Board of Trustees. Bentley customarily receives an unqualified opinion and no management letter comments. The Cabinet, Audit Committee, Business and Finance Committee, and the full board review the financial statements, together with KPMG s certification, before they are approved for publication. Once approved, the financial statements are made available on the university s website (see for the past eight years of audited statements.)
6 Standard 9. Bentley has outsourced its internal audit function to the Boston Consortium, an alliance of fifteen greater Boston universities. Regular audits are scheduled based on a periodic risk assessment by management and the board. Among other duties of the Audit committee as outlined in the Audit Committee Charter is oversight of the university s annual conflict of interest disclosure completed by trustees and managers. The committee reviews, discusses and takes action as needed on disclosures. 2. Appraisal Bentley has enjoyed a long history of financial stability during which it has successfully balanced current financial needs, investments for long-term growth, and moderate tuition increases while at the same time managing financial stability as measured against multiple-year financial goals. Net operating income targets are established to assure the university s ability to fund routine capital expenditures and debt service principal payments out of operating cash flow. The university has consistently achieved or exceeded its budgeted financial goals. Bentley was subject to the same financial challenges that resulted from the 2008 financial crisis as the rest of higher education. Despite this, the university has increased cash balances, reduced its debt, increased reserves, and by most measures enjoys an enviable financial picture that will allow it to continue its excellent operations in future years. However, the university remains highly tuition dependent. The administration and board are constantly looking for ways to diversify revenue streams and examining the institution s operations to become more efficient. This has included outsourcing certain auxiliary functions, eliminating unprofitable operations, and implementing new state-of-the-art systems (e.g., Cognos TM, ImageNow TM and Millennium TM ). Refining the use of the risk management dashboard and other risk management processes will enhance this examination. The next level of academic excellence described in the university s strategic plan framework includes a continued emphasis on research. The economy, increases in financial aid, unfavorable demographics, and the need to moderate tuition increases, all suggest that identifying the resources to support this ambitious strategy will be a growing challenge. It is anticipated that fundraising will be a major enabler of these goals; continuing to build the capacity of University Advancement is critical. The present five-year balanced financial projection includes the continuing PhD programs and the new Bentley MBA, important parts of the strategic plan. It does not, however, anticipate significant incremental revenues from these programs, thereby creating more financial pressure on the rest of the university. Communication with faculty and staff about Bentley s fiscal condition and processes has been less frequent than optimal over the past few years. For example, many faculty members are not aware that the administration is currently benchmarking both business and arts and sciences faculty salaries by function and rank in order to determine market adjustments. Another example is that many community members are unaware that it will take three to five years before significant resources may be realized from a capital campaign. Enhancing communication with internal stakeholders is a priority. A summary of the most current update to the FY13 forecast against budget and five-year financial projections is included in Exhibit 9.3. The FY14 budget and resulting five-year financial plan and related five-year capital budget are currently in process of development and will not be ready for consideration by the Business and Finance
7 89. Committee until early April. The Executive Committee has approved tuition and fee price increases for Fall 2013 that result in an overall price increase of 3.7% for a typical full-time undergraduate living on campus. Expectations are that the Board will be presented with an FY14 budget and five-year plan that will target a reasonable operating margin and retain Moody s ratios similar to past years, thereby continuing Bentley s good stewardship of its financial resources for future generations of students. Exhibit 9.3 Results, budget, forecast and financial plan Actuals Budget Forecast Plan OPERATING STATEMENT Gross Tuition & Fees 183, , , , , , , , ,261 Room & Board 40,090 41,211 42,394 42,359 43,870 45,399 46,981 48,618 50,312 Less Aid & Scholarships -59,543-62,320-66,827-68,121-69,947-73,435-75,564-78,062-80,469 Net Tuition, Room, Board 163, , , , , , , , ,105 Other Auxiliary Revenues 5,433 5,112 5,382 5,390 5,454 5,533 5,613 5,695 5,779 Endowment Support 1 7,123 7,333 8,966 7,966 9,359 9,940 10,229 10,529 10,800 Grants & Miscellaneous 4,096 4,018 3,671 3,661 3,705 3,491 3,491 3,491 3,491 New Operating Gifts 2,456 2,470 2,785 2,650 2,847 2,911 2,976 3,043 3,113 Net Assets Released NET REVENUE 183, , , , , , , , ,738 TOTAL EXPENSES 149, , , , , , , , ,907 OPERATING CASH FLOW 33,545 30,921 27,729 32,403 27,628 27,101 27,823 28,892 30,831 Depreciation 18,050 18,243 19,543 19,130 20,439 20,874 21,207 21,100 21,025 Interest 9,754 7,706 7,187 7,938 6,621 5,769 6,045 5,808 5,582 NET OPERATING INCOME 5,741 4,972 1,000 5, ,985 4,223 EXPENSE ANALYSIS Academic Affairs 49,940 51,579 55,706 53,742 Enrollment Management 5,139 5,294 5,695 5,644 Finance & Administration 30,753 28,291 31,509 30,567 President's Office 5,469 6,536 5,583 5,484 University Advancement 6,381 6,720 6,926 6,774 Marketing, Com. & Public Affairs 4,274 6,206 5,340 5,344 Student Affairs 11,012 11,175 11,360 11,476 International Program Expense 3,825 4,122 4,636 3,883 Student Org Expenses 1,136 1,200 1,226 1,329 Meeting & Conference Services 839 1,223 1,361 1,310 Meal Plan Expense 6,164 6,412 6,400 6,581 Fringe Benefits 21,763 22,416 22,978 22,661 Grants & Other Fund Expenses 3,174 3,116 3,417 3,417 TOTAL EXPENSES 149, , , ,212 1: Adjusted to reflect all components of endowment distribution as endowment support to agree to financial statement presentation. 2: Forecast for Financial Year 2013 as at February 2013.
8 Standard Projection Recognizing that the risk management dashboard has been used primarily as a static document, Bentley will explore options to upgrade the dashboard to enhance its use as a management tool. Timeline: Commencing Spring 2013: Vice President for Administration and Finance and Risk Committee. In preparation for the next capital campaign, the University Advancement Office will continue to rebuild its staff and infrastructure with particular attention to increasing unrestricted philanthropic support for current operations by three to five percent in each of the next five fiscal years and to enhanced alumni annual giving leading to larger gift cultivation. TimeLine: On Going: Vice President for University Advancement. Personnel in the Finance Office will review Bentley s budgeting and financial forecasting process and make recommendations to the Board of Trustees on any needed adjustments. Timeline: Commencing Spring 2013: Vice President for Administration and Finance. The Vice President for University Advancement recently made a presentation to the Faculty Senate outlining issues in the division and changes in process. The new Vice President for Administration and Finance addressed the Faculty Senate regarding his views on budgeting and financial planning in early February. Continuing and expanding communication about Bentley s financial situation, budgeting process, and related issues is a goal for 2013 and beyond. TimeLine: Ongoing: Vice presidents for University Advancement and Administration and Finance, and the Cabinet. 4. Institutional Effectiveness As discussed previously in this standard, the university uses both internal and external mechanisms to evaluate its financial situation and financial management processes. Working with the Board of Trustees and the President s Cabinet, the Vice President for Administration and Finance analyzes and assesses the information gathered through these internal and external mechanisms to make evidence-based decisions and implement changes with a goal of continuous improvement.