REVENUE FORECASTING AND FUNDING METHODOLOGIES Mark Hampton Eileen G. McLoughlin 2014 Managerial Accounting and Decision Support The Omni Charlotte, NC November 13 14, 2014 Agenda Significance in understanding revenue sources Influence of Institute business model, policies and practices on forecasting Review of Indicators/data/models/analyses to use in forecasting and measurement Improving understanding and accuracy in projections 1
Typical Significant Revenue Streams Student Revenues Tuition & Fees, Financial Aid Auxiliary Services Gift, Endowment & Investment Income Research Public Appropriations Alternative Sources How An Institution is Funded Influences the Economic Impact 100% 90% Other 80% Auxiliary Services 70% 60% Grants and F&A Recoveries 50% Endowment Distribution 40% 30% Annual Giving 20% State General Funds 10% 0% Small Private Master's College Medium Public Master's University Large Public Research University Large Private Research University Tuition 2
Top Line Pressure Tuition - Net tuition growth will be much lower than the past 10 years. (Moody s) State General Funds modest stabilization and improvement attaching financial allocations to performance, trend? (Grapevine) Philanthropy top 24% of schools received 84% of dollars (Commonfund) Research Funding Sequestration, Government Shutdown, new reality Questions To Consider Modest economic recovery or New Reality Tuition and Research Price sensitivity of newly admitted students. How might enrollment patterns change? What will be the level of Federal research funding? Net tuition decreasing? Collection efforts increasing? Cash flow issues? State General Funds Multiple years of budget reductions, maybe stable? Annual Giving Competition for philanthropy dollars 3
Questions To Consider Modest economic recovery or New Reality: Endowment Return and Distribution Underwater endowments? Distribution methodology - impact? Auxiliaries Anticipated return? Price pressures continue, facility needs Questions To Consider Alternative sources what kind of impact could they have? Innovation in Higher Education Impact? Prepared? - MOOC s, Coursera The non traditional student 4
Understand Your Criticality Need to consider the market position and business model of your Institution Understand the significance of each revenue stream to your budget Consider economic/other impacts on those revenue streams Focus efforts Student Revenues Need to Know Indicators Program Offerings Undergraduate, graduate, professional, outreach compelling? Price Cost of Attendance Tuition Rate Fees Housing and Board Rates Discount financial aid 5
Student Revenues Need to Know Indicators Enrollment New students freshman, transfers, graduate, professional In state, out of state enrollment International enrollment Retention of existing students Both at the Institution and in housing and board programs Fall and Spring retention Credits registered for part timers Impact on Undergraduate Enrollment New Students Fall Fall Enrollment Enrollment Year one Year Two STUDENT ENROLLMENT 1st time Freshmen 1,356 1,337 2nd Year 1,219 1,232 3rd Year 1,123 1,160 4th Year 1,044 1,078 5th Year-Regular 217 226 5th Year-Co-Terminal 67 6th Year 36 30 Transfers - new 109 103 Transfers - continuing 155 168 Navy 28 15 Spring Admits & Delayed grads 70 118 Subtotal 5,357 5,534 Coop & Non-credit Students -124-89 TOTAL FALL ENROLLMENT 5,233 5,445 Enroll conversion factor (due to spr melt) 97.9% 96.6% FTE effect -109-183 Enrollment FTE 5,124 5,262 6
Discount Impact and Total Undergraduate Revenue Calculation Fall Fall Enrollment Enrollment Year one Year Two TUITION RATE Tuition Rate 36,950 38,100 FINANCIAL RESULTS Gross Tuition for Fall Enrollment 197,683 210,898 Less for Coop / spring melt -8,609-10,523 Total Gross Tuition 189,073 200,375 5th Week Financial Aid 80,800 87,364 Year End Financial Aid 82,926 85,062 Year End Net Tuition Revenue 106,147 115,313 overall discount rate 43.9% 42.5% Gift Income Need to Know Indicators Potential prospects/economic factors Percentage of Alumni giving, giving capacity and willingness Penetration of corporate and foundation support Reasonableness of overall projected gift level Composition Cash is King! Current year expendable unrestricted versus restricted Endowed unrestricted versus restricted Research Capital/Equipment/IP Other Advancement Activity 7
Gift Projections Advancement Perspective Support by Source Fiscal Year Bequests 10.0 Annual Fund 10.0 Foundations 10.0 Corporations Cash 10.0 Subtotal $ 40.0 Other Individual Gifts 10.0 Total Cash $ 50.0 Gifts-in-Kind 10.0 Gifts of IP 10.0 Total Non-cash Gifts $ 20.0 Other Advancement Activity $ 30.0 Total Support $ 100.0 Gift Projections Budget Office Perspective Allocation to Purpose Expendable undesignated Annual Fund 10.0 Total $ 10.0 Expendable restricted Other Individuals 4.0 Corporations Cash 10.0 Foundations 10.0 Total $ 24.0 Endowment- Unrestricted Bequests 10.0 Other Individuals 2.0 Total $ 12.0 Capital Gifts - Cash Other Individuals 2.0 Total $ 2.0 Total Current Cash $ 48.0 Capital Gifts - In-kind 20.0 Deferred Gifts - Future Yrs Other Individuals 2.0 Total All Gifts $ 70.0 Total Grants $ 30.0 Total Support $ 100.0 8
Endowment and Investment Income Need to Know Indicators Market Implications/Performance Statistical analyses/projections provided by your Investment Office Current shares in terms of unrestricted versus restricted Gifts into the endowment Whether unrestricted versus restricted, effect on shares Spending Policy 5% spending based on a rolling average of performance, dividends, under water endowments, spend on new gifts Endowment Formula Spending Spending Fiscal Year UnRestricted Spending Restricted 9
Endowment and Investment Income Spending Allocation Ilustrated - based on 5% spending and market value rolling average 20 quarters Per Share Market Value Avg of Rolling 20 Qtrs $ 40.20 $ 39.80 $ 37.20 Spending Rate 5% 5% 5% Unrestricted Endowment Income Year one Year two Year three Spending Allocation per Unit/Share (gross) $ 2.01 $ 1.99 $ 1.86 # of Units @ Start Date 7,673,479.77 7,615,209.43 7,629,917.37 Projected U/R Endowment Income $ 15,423,694.34 $ 15,154,266.77 $ 14,191,646.30 Restricted Endowment Income Spending Allocation per Unit (gross) $ 2.01 $ 1.99 $ 1.86 Surcharge assessed to restricted endowment income 10.00% 10.00% 10.00% Spending Allocation per Unit less 10% surcharge (net) $ 1.81 $ 1.79 $ 1.67 # of Units @ Start Date 6,342,603.00 6,536,335.19 6,886,757.06 Total Projected Restricted Endow Income $ 11,465,681.04 $ 11,719,733.58 $ 11,504,028.80 Total Projected Endow Income $ 26,889,375.38 $ 26,874,000.35 $ 25,695,675.10 Research Need to Know Indicators Proposal, award, spending activity Composition Agency Spending Overhead rate 10
Conclusions From Research Model Proposals are the leading indicator Proposals down, research revenue will begin to decrease May need to evaluate impact on budget, why down? Proposal Activity up, Awards down positioning? Year-end backlog relates Awards received to date and spending Closest predictor of subsequent fiscal year revenues Measures unspent awards Within the year the closest predictor is overall year to date spending on research contracts Exception being a large known planned expenditure stimulus Award Activity 11
Award and Expenditure Activity Backlog Available Trend of awards received versus spent- determines backlog determines a portion of subsequent year spending 12
Sponsor Mix Drill by various Sponsor data project overhead return to the Institute Research Projections SPONSORED RESEARCH MODEL - October Projections Excludes Gen*NY*sis, gift based research, SERC, & financial aid grants First Qtr ($millions) Actual Budg Fcst Proj Proj Proj Proj Proj FY2003 FY2004 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 Proposals $ 234.2 251.8 251.8 277.0 304.7 335.1 368.7 405.5 Annual Growth Rate 20.9% 7.5% 7.5% 10.0% 10.0% 10.0% 10.0% 10.0% Awards $ 51.2 50.4 53.2 55.4 60.9 67.0 73.7 81.1 Acceptance rate within FY 21.9% 20.0% 21.1% 20.0% 20.0% 20.0% 20.0% 20.0% Annual Growth Rate -3.8% -1.6% 3.9% 4.1% 10.0% 10.0% 10.0% 10.0% Fiscal Year Expenditures - Direct & Indirect $ 45.0 49.3 50.0 54.5 59.4 64.8 70.6 76.9 Annual Growth Rate 9.2% 9.6% 11.1% 9.0% 9.0% 9.0% 9.0% 9.0% Beginning Balance Backlog $ 46.9 39.9 54.5 57.7 58.6 60.1 62.4 65.6 Backlog Spending - Assumes FIFO $ 45.0 39.9 50.0 54.5 58.6 60.1 62.4 65.6 % of Beg Bal Backlog Spent 95.9% 100.0% 91.7% 94.5% 100.0% 100.0% 100.0% 100.0% Ending Balance Backlog $ 54.5 41.0 57.7 58.6 60.1 62.4 65.6 69.8 Current Year Award Spending $ - 9.4 - - 0.8 4.7 8.2 11.3 % of Current Year Awards Spen 0.0% 18.7% 0.0% 0.0% 1.3% 6.9% 11.1% 14.0% Overhead Recovery $ 10.5 11.1 11.6 12.0 12.6 13.2 14.2 15.1 Yield % (indirect/total) 23.3% 22.5% 23.2% 22.0% 21.2% 20.4% 20.1% 19.7% Annual Growth Rate 16.7% 23.3% 10.5% 3.4% 5.0% 5.0% 7.0% 7.0% Proposals, Awards, spending, backlog and overheard recovery summarized 13
Sponsored Research Projection and Measurement Model SPONSORED RESEARCH excludes gifts, memberships and foundations Aw ards & Spending Proposals 70 Proposals 300 $MILLIONS 60 50 40 Spending Awards 250 200 150 100 30 50 20 0 Research Spending Trend YTD Spending Project annual spending and overheard recovery 14
Fee Based Program Worksheet Scenario I ARCH - CAD/CAM Technologies # Days 0 # Students 0 Per Student Rate $0 Income $0 Promotion F List Rentals $0 F Advertising $0 F Printing $0 F Postage $0 Total Promotion $0 A program needs to break even after covering the Institute s Overhead Hurdle Rate Direct Expenses Cost Per Cost for Day Course F RPI Instructor $0 $0 Comp F Emp Benefits $0 $0 F Contracted Instruction $0 $0 F Grad TA/Shop Monitor $0 V Computing Services $0 F Travel for invited spkrs $0 V Parking in Visitor's Lot $0 F Transportation $0 F Media Dev (students) $0 F Classroom Tech Support $0 F Distributed Delivery Costs $0 V Progam Materials $0 V Supplies $0 V Catering $0 $0 V Student Housing $0 V Student Meals $0 V Special Events $0 V Special Event: Welcome $0 V Special Event: Farewell $0 Total Direct Expenses $0 Total Program Expenses $0 Overhead on Program Expenses (xx% OH to Institute) $0 TOTAL EXPENSES $0 NET: Revenue less Total Expenses $0 State Appropriations Legislative environment Funding mechanisms Predictability/volatility Minimizing reliance Reporting requirements 15
Legislative Environment From public good to private benefit Desire to increase degrees awarded, and to see degree recipients succeeding in the labor market Increased pressure on state budgets Health, K-12, and other competition for tax dollars Economic realities Public aversion to taxes Legislative Environment In most states, decreasing numbers of students, which could drive funding down further Greater scrutiny Transparency around costs, particularly growth in administrative costs Questions about value added by education Questions about whether other models of higher education (e.g., MOOC-based degrees) might yield better bang-for-buck 16
Historical Relationship between State Appropriation and Tuition Funding Mechanisms Formula-based enrollment, typically Performance-based Goals Numerical targets Indirect from another state program Need based scholarships Academic based scholarships Earmarks 17
Predictability / Volatility Changes in elected leadership and bureaucracy, political discourse Governance of higher education Successive budget reductions Operating vs. capital State bond rating impact Use of debt to stimulate economy State Appropriations Change by State Figure 6 Educational Appropriations per FTE Percent Change by State, Fiscal 2008 2013 Note: Dollars adjusted by 2013 HECA, Cost of Living Adjustment, and Enrollment Index. Source: State Higher Education Executive Officers 18
Decreasing Reliance on State Increase tuition for traditional students Explore new and expand existing markets Out-of-state enrollment, particularly international Market-priced professional programs Distance education, including MOOCs Veterans Diversify revenues Fund-raising Indirect cost rates Sales and service activity Patents and royalty Tuition As a Growing Percentage of Public Higher Education Funding Figure 4 Net Tuition as a Percent of Public Higher Education Total Educational Revenue, U.S., Fiscal 1988 2013 Note: Net tuition revenue used for capital debt service is included in net tuition revenue, but excluded from total educational revenue in calculating the above figures. Source: State Higher Education Executive Officers 19
State Accountability Efforts Financial reporting Audited reports Projections Ad hoc reporting Non-financial reporting Student enrollment Square footage Student financial need State Accountability Efforts Performance metrics Retention and graduation rates Degree production Space utilization Cost of education Administrative costs Placement rates and earnings of graduate Compliance with statewide goals and master plan 20
Tracking Revenue Performance Measure the actual against each indicator or projection model identified Example freshman class on budget, but net undergraduate revenues are lower Why? Discount rate Upper class retention rates Example gift revenues higher than anticipated, budget or cash results not improved - Why? Look at composition was there a large gift in kind Research spending on budget, overhead recovery is lower Composition of sponsor and/or spending Understanding Actual Results Understand variances by indicators Identify what was projected inaccurately Determine cause and effect questions to consider earlier slides Modify projection models or information gathering if necessary Balance measurement/indicators against Institute priorities Inform decision making, recommend changes in action or strategy 21
ANY QUESTIONS? 22