POLICY STATEMENT

Responsible fiscal management requires adequate reserves, or fund balances, to mitigate current and future risks. Adequate fund balances are essential to offsetting cyclical variations in revenues and expenditures and to protect against (1) catastrophic events, (2) unforeseen revenue declines and expenditure caps, (3) unexpected legal obligations, and (4) failures and health/safety/code issues in infrastructure or major business systems. 

The focus of this policy is fund balances within the budget and operations funds, which are the primary operating funds through which all basic instruction and institution administration occur. Budgeted operations funds include state General Funds and Other Funds Limited, made up principally of student tuition and fees and also including educational department sales and services, indirect cost recovery, and other operating revenues. 

For the purpose of gauging their relative value, budgeted operations fund balances can be expressed either as a percentage of annual budget of operating revenues or as operating expenditures sufficient to fund a specific period. The Government Finance Officers Association, for example, recommends that fund balances be maintained at a level that represents 5 to 15% of operating revenues, or is sufficient to fund no less than one to two months of operating expenditures. Obviously, the level of budgeted operations fund balance should be related to the likelihood of need. Given the timing of tuition assessments, revenue cycles at all OUS institutions tend to spike quarterly while expenditures remain relatively flat.  When combined with the volatility of state funding over the past several biennial—as well as the fluctuations in enrollment and tuition dollars—the need to maintain fund balances sufficient to stabilize the operating revenue stream for short periods is clearly imperative.  The institutions, for example, are particularly vulnerable to shortfalls and revenue collections during the first quarter of each biennium. 

Responsible fiscal policy, then, suggests that institutions should maintain ending biennial budget and operations fund balances sufficient to stabilize the operating revenue stream and cover unforeseen contingencies equal to approximately one month's operating expenditures, or about 10% of their annual budget of operations revenues.

At the same time, because of the funding mix of state general funds and student tuition and fees, any excess balances could be interpreted to represent unwarranted tuition and fee rates. Consequently, ending biennial budget and operations fund balances should not exceed approximately 2 months of budgeted operations expenditures, or about 15% of annual budget and operations revenues. 

DEFINITIONS

Fund Balance:

Fund balance is defined as the difference between the assets and liabilities of a fund. Given this definition, fund balance can be described as the available resources of the fund, which can be significantly different than cash balance is due to accrual accounting. For instance, at June 30th of each fiscal year, campuses have received payments for summer session tuition and fees. Since summer session activity occurs predominantly in July, these receipts are recorded as a liability (deferred revenue) at June 30th to comport with accounting rules. As a result, cash balances may be higher than fund balances. 

As noted above fund balance is the difference between the assets and liabilities of a fund. Generally Accepted Accounting Principles (GAAP) promulgated by independent standard-setting groups set forth rules for the proper recording of valuation of assets and liabilities.  Each OUS institution is required to follow GAAP.  Therefore, fund balance is defined consistently across all OUS institutions.

Institution Fund Balance Commitments:

Higher education institutions operate in a fiscal environment and on a business cycle that does not tightly correlate with the biennial budget process.  As a result, institution management may make certain internal budgetary commitments against their fund balances. Among other reasons, these internal budgetary commitments are necessary in order to help maintain continuity of programs and provide funds for entrepreneurial activities and/or to provide incentives for certain desired outcomes. Examples of these budgetary commitments include, but are not limited to, commitments to maintain balances for certain departments, commitments to fund certain to future actions, or contractual commitments to provide funding for programs startup. Generally Accepted Accounting Principles do not call for such commitments to be recorded in the accounting records and, therefore they do not impact fund balance. In the event of an emergency, these internal budgetary commitments could be funded from future resources (revenue increases or expenditure decreases), modified, or eliminated in order to meet the short-term need.  Therefore, internal fund balance commitments support a balance within a policy range, but they do not reduce the fund balance.

POLICY STATEMENT

Budgeted Operations Fund Balance Policy Proposal 

OUS institutions shall develop budgets that target an ending biennial budget and operations fund balance of approximately 10% of annual budget of operations revenues. For the purposes of this policy, budgeted operations funds are defined as all funds including in Fund Type 11 (Education and General) in the Oregon University system accounting records. Budgeted operations fund balances will be monitored as part of the quarterly projections included in the managerial reports provided to the board and the institution president shall advise the board in the event projected or actual ending balances for the biennium either fall below 5% or rise above 15% of revenues. Included in the information provided by the presidents will be an explanation for the variance and a plan to rebalance the budgeted operations fund balance is overtime to approximately 10% of annual budget of operations revenues

This policy previously was Adopted by the Oregon State Board of Higher Education.