Financial Resources Strategies Implementation Team · alignment with NKU’s strategic plan;...

Financial Resources Strategies Implementation Team

March 6, 2014 (updated May 29 with possible intersections with other committees)

Ken Kline, Senior Director, Budget Office (Committee Chair)

Natasha Dempsey, Senior Budget Analyst, Budget Office

Eric Gentry, V.P., University Advancement

Kristian Johnson, Student

Russell Kerdolff, Comptroller, Comptroller’s Office

Rick Kolbe, Dean, College of Business

Karen Zerhusen Kruer, Executive Director, NKU Foundation Inc.

Thomas Lambert, Assistant Professor, Public Administration

James McGuffee, Chair, Computer Science

Bill Thompson, Director, Research, Grants & Contracts

Resource Members

Sue Hodges Moore, V.P., Institutional Effectiveness

Vicki Natale, Executive Director, Planning and Performance


INTRODUCTION

The Financial Resources Strategies Implementation Team was formed to identify strategies for

financing the 2013-18 Strategic Plan. Team members were asked to provide an assessment of the

current financial condition of the institution, establish priorities for maximizing the university’s

resources, and identify approaches to support the following strategies in NKU strategic plan:

a) Increase gifts and grants

b) Create a culture of philanthropy and stewardship among alumni, faculty, staff, and

students

c) Strongly advocate for adequate state support for operations and capital needs

d) Engage in entrepreneurial activities that generate additional revenue

e) Develop an "all-funds" approach to budgeting and ensure budget processes align

resources with strategic goals

f) Steward resources wisely and efficiently to achieve goals

g) Increase private funds for need-based student financial aid

CURRENT ASSESSMENT

Through the most recent economic downturn, NKU has demonstrated positive operating results

despite challenging financial circumstances. Moody’s Investor Service’s annual report stated

“the outlook for Northern Kentucky University's A1 underlying rating is stable, reflecting our

expectation of a return to solid student demand and good operating performance which should

generate sufficient cash flow to cover debt service, as well as healthy balance sheet growth that

provides good coverage of debt."

While recent results have been positive, NKU will continue to face financial challenges with

State funding. Medicaid, the justice system, and other necessary government expenditures

continue to consume a larger share of the Commonwealth’s budget leaving less money for

higher education. The Commonwealth is also addressing its unfunded pension obligation, which

is requiring significant State resources as well as leading to higher contribution requirements for

NKU. At this time, the possibility for new revenue streams necessary to materially expand the

State budget is uncertain in Kentucky.

NKU currently relies on net tuition and fees and state appropriations as its major source of

revenue (70% of its revenue base). The remainder of NKU’s revenues come from other non-

operating (13%), auxiliary enterprises (6%), grants and contracts (4%), sales and services of

other activities (5%), and the NKUF (2%). Moody’s has cited the need for diversification of

NKU’s revenue base to reduce future reliance on tuition and state appropriations.

NKU spends 64% of its money on salaries and benefits, 19% on operating expense, 11% on

depreciation and interest, and 6% on financial aid. Salary and benefits and operating expenses

per FTE student are less than NKU’s benchmarks and the other Kentucky Comprehensive

universities.


Over the past 10 years, NKU has brought in $7-14 million annually in new grant and contract

awards. Federal and federal flow-thru funds have historically been NKU’s most significant

portion of external funds for programming and research. This will likely continue despite

ongoing national budget issues.

As a historically “teaching institution” the largest portion of grant funding at NKU has in the past

been programmatic funding for areas such as instruction and public service (rather than

research). Support for those programs (student support services, STEM, etc.) is essential to

ongoing activities.

NKU Foundation (NKUF)

The Northern Kentucky University Foundation receives deposits and provides financial

management services related to the expenditure and investment of gifts for the exclusive benefit

of NKU. Total NKUF assets exceeded $100M for the first time in its history on December 31,

2013, and the endowment pool assets were $90M at that time (approximately 98% of the

endowment pool is either permanently or temporarily restricted).

In terms of investments, the NKUF has historically been a high performing foundation. June 30,

2013 NACUBO-COMMONFUND survey results show NKUF 1yr. (13.8%), 3yr. (11.2%), and

5yr. (5.8%) out-performance, exceeding the performance of endowments of all sizes. The 10yr.

(7.5%) exceeded endowments of $500M in size.

Over the years, NKUF has supported students, faculty and programs through operating,

scholarships and capital assistance. For the past five year period, total spending in support of

NKU is as follows: as of June 30, 2013 $4.5M; as of June 30, 2012 $4.4M; as of June 30, 2011

$4.3M (plus $6M capital); as of June 30, 2010 $5M; and as of June 30, 2009 $3.4M (plus $4.4M

capital).

IMPLEMENTATION STRATEGIES

A. Diversify and increase the revenue base, placing greatest emphasis on flexible unrestricted resources

Implementation Strategies Lead

Sponsor

Collaborators Timeline Fuel the

Flame

Priority

Matrix

Resources

Needed

++

Engage in one or more comprehensive undergraduate tuition

pricing studies and assess whether strategic initiatives are

positively impacting enrollment, retention and tuition rates.

AVP,

Enrollment

Management

Budget Office,

Admissions,

Student Financial

Aid, Bursar,

Deans, Student

Account

Services, Tuition

Committee, CPE

2014-15 5.3.b 1 – Easy Impl.

/ High Impact

$$$ ES, SRS

Study optimal graduate tuition rates based on finances and

program mission.

Assoc.

Provost for

Research,

Graduate

Studies and

Regional

Stewardship

Deans, Graduate

Program

Directors,

Comptroller, IR,

Budget Office

2015-16 5.3.b 3 – Difficult

Impl. / High

Impact

$$ ES

Aggressively pursue the development of a rational, state

funding model for higher education in Kentucky.

President Government &

Community

Relations, Budget

Office, CPE,

Provost, IR,

NKUF

2014-15 5.2.c 3 – Difficult

Impl. / High

Impact

$

Develop and implement a framework to support, encourage,

and evaluate entrepreneurial activity that generates additional

revenue for NKU including:

Identify all university hard assets and evaluate their

effectiveness and potential as revenue generators

Provost Exec. Team,

Research

Foundation,

Comptroller’s

Office, Asset

Managers,

Faculty, Staff

2015-16 5.2.d,

5.3.b

3 – Difficult

Impl. / High

Impact

N/A AI

Financial Resources Implementation Strategies

B. Increase the amount of funds made available through private fundraising


Sponsor


Flame

Priority

Matrix

Resources

Needed

++

Through collaboration with colleges, departments, and units,

develop university-wide fundraising priorities that are in

alignment with NKU’s strategic plan; including need based

student financial aid.

VP,

University

Advancement

President,

Provost, VP’s,

Deans, NKUF

2014-15 5.2.a,

1.5.c,

5.2.b

3 – Difficult

Impl. / High

Impact

N/A

Assess fundraising capacity through benchmarking and other

analysis. Make investments as necessary to reach goals.

VP,

University

Advancement

President,

NKUF

2014-15 5.2.a,

5.3.b

1 – Easy

Impl. / High

Impact

N/A

Explore approaches to build a culture of philanthropy at

NKU.

VP,

University

Advancement

Faculty Senate,

Staff Congress,

Student Affairs

2014-18 5.2.b 3 – Difficult

Impl. / High

Impact

$$

Create an effective participatory model for development that

includes training for faculty and staff.

VP,

University

Advancement

Provost, Deans,

Dept. Chairs

2014-16 5.2.a,

1.5.c,

5.2.b

1 – Easy

Impl. / High

Impact

$$

Plan and implement an aggressive fundraising campaign

focused on capacity building and meeting fundraising

priorities.

VP,

University

Advancement

Executive

Team, Deans

2016-18 5.2.a,

1.5.c,

5.2.b

3 – Difficult

Impl. / High

Impact

$$$$

Reassess and develop university naming guidelines and

endowment minimums in coordination with fundraising

priorities.

VP,

University

Advancement

NKUF, Board

of Regents,

Provost, Deans

2014-15 5.2.a,

1.5.c,

5.2.b

2 - Easy

Impl. / Low

Impact

N/A


C. Improve financial decision making through increased financial training, better financial information, and improved

budget and financial systems


Sponsor


Flame

Priority

Matrix

Resources

Needed

++

Implement a financial allocation model that allows both

direct and indirect revenues and costs to be tracked and

reported by program / course / unit. Develop a standard pro

forma statement that includes all direct and indirect revenues

and expenses for all revenue units, auxiliary units, and

colleges.

VP, Finance &

Administration

Provost,

College Deans,

Office of the

Comptroller,

Budget Office,

IT, VP’s

2014-16 5.3.a,

5.3.b

3 – Difficult

Impl. / High

Impact

$$$

Develop a new “all funds” budget development process and

implement a new budget system that supports the new

process.

President Budget Office,

Provost, budget

managers,

Comptroller,

IT, NKUF

2014-16 5.3.a 3 – Difficult

Impl. / High

Impact

$$$

Train faculty and staff for improved financial decision

making to ensure that the impact of revenues and costs are

considered. Develop for the training a standard university

decision tree on how to make sound financial decisions.

Through the training, promote a culture of transparency,

individual empowerment and initiative, and approachability.

Training &

Development

Budget Office,

Office of the

Comptroller,

NKUF, RGC,

HR

2016 5.3.b 3 - Difficult

Impl. / High

Impact

$$ HOD

Identify real costs for all decisions and disseminate as

appropriate.

President Exec. Team 2017 5.3.b 1 - Easy

Impl. / High

Impact

N/A


Reduce costs per student and/or increase revenue per student through innovative practices


Sponsor


Flame

Priority

Matrix

Resources

Needed

++

Create an investment pool for new initiatives that have

significant revenue potentials and low cost structures,

which will be realized within defined time horizons.

President Executive

Team, Budget

Office,

Associate

Provost for

Administration

2015 5.2.d.,

5.3.b

1 – Easy Impl.

/ High Impact

$$$$ AI

Create investment and incentive programs that allow

faculty and staff to experiment with innovative, cost

effective instructional methodologies and operational

activities that are then assessed from a university cost

reduction perspective.

President Executive

Team, Budget

Office,

Associate

Provost for

Administration

2015 5.3.b. 1 – Easy Impl.

/ High Impact

$$$$ AI


D. Take advantage of opportunities to achieve cost savings and greater efficiencies


Sponsor


Flame

Priority

Matrix

Resources

Needed

++

Explore or examine ways to contain / lower personnel

costs or increase productivity through:

an early retirement program for faculty / staff with a

centralized process to govern replacements.

improved communication and implementation of the

phased faculty retirement program.

an assessment of the levels of management and

average span of control for managers – set a target

percentage overall increase in average span of

control.

expanded use of student employees and/or part-time

staff that work less than 20 hours a week.

Senior

Director, HR

Exec. Team,

HR, Budget

Office,

President,

Campus Budget

Managers

2014 5.3.b 1 – Easy Impl.

/ High Impact

N/A HOD

Promote collaboration on efficiency and resource sharing

through an annual summit on cost savings and

efficiencies with administrative staff across campus.

VP,

Institutional

Effectiveness

Campus

Administrative

Staff

2014 5.3.b 1 – Easy Impl.

/ High Impact

$ HOD

Establish a committee to collect / review cost –savings

suggestions, propose policy changes / process

improvements and methods to develop effective

educational programs for their implementation and

dissemination. Consider including a compliance officer

on the committee to provide expertise on policy

enforcement.

VP,

Institutional

Effectiveness

President,

Executive Team

2014-15 5.3.b 1 – Easy Impl.

/ High Impact

N/A

Implement a university-wide process improvement

methodology such as Six Sigma and train all staff and

administrators in the methodology. Form a process

improvement committee that must approve all major new

processes on campus before they are implemented.

VP,

Institutional

Effectiveness

President,

Executive Team

2016-18 5.3.b 3 – Difficult

Impl. / High

Impact

$$$ HOD


E. Evaluate service offerings for mission centrality, quality, and necessity


Sponsor


Flame

Priority

Matrix

Resources

Needed

++

Create an inventory of services offered to both internally and

externally and consider if we should continue to offer these

services and whether we are maximizing revenues from these

services.

President Exec. Team,

Service Owners

2016-18 5.3.b 3- Difficult

Impl. / High

Impact

$$

Benchmark all programs and services to evaluate the

university’s level of investment.

President Executive

Team, All

Managers

2017-18 5.3.b 3- Difficult

Impl. / High

Impact

$$


F. Increase research grants and contracts in support of the strategic plan


Sponsor


Flame

Priority

Matrix

Resources

Needed

++

Continuing to attract new faculty who have experience and

interest in pursuing grant funds.

Provost Deans, Chairs,

Faculty

2014-2018 5.2.a 1- Easy Impl. /

High Impact

$$

Providing clear encouragement and support internally for

faculty to pursue funding; explore possible release time and

recognition for grant submissions during promotion and

tenure.

Provost Deans, Chairs 2014-2018 5.2.a 1- Easy Impl. /

High Impact

$$

Strategically identify existing or potential areas of NKU

strength in which to pursue significant grant funding.

Provost Deans, Chairs,

Faculty

2015 5.2.a 1- Easy Impl. /

High Impact

N/A

APPENDIX A

Current Financial Condition of NKU

Submitted by: Russell Kerdolff, Comptroller, Comptroller’s Office

Moody’s Review of University’s Financial Position

Moody's Investors Service’s annual review of the University’s credit rating provides an

independent summary of the University’s current financial position and future prospects. They

review the University’s strengths, challenges, market position/competitive strategy, operating

performance and balance sheet position, governance and management, legal security, debt

structure and other credit specific considerations that impact the University’s financial position

and associated credit rating.

In their November 2013 credit rating report Moody’s assigned an A1 rating for NKU’s bonds

based on the University’s established market position in a large metropolitan area, sound

financial resource cushion to debt (for A1 rated schools), and healthy liquidity. The rating also

reflects NKU’s moderate debt profile, including the bonds issued for the Rec Center Expansion

and Northern Terrace, limited fund raising, and the need to manage expenses in light of

limitations on tuition increases and weakened support from the Commonwealth.

The strengths cited by Moody’s include:

Established market position as a regional public university in the Greater-Cincinnati

metro area driven by “program draw and affordable pricing relative to competition”. Past

moderate enrollment growth tempered by recent declines in enrollment.

History of positive operating performance, particularly in FY11 and FY12.

Solid financial resources and liquidity for NKU’s rating level (A1).

The challenges cited by Moody’s include:

The Commonwealth is currently grappling with its pension funding and higher

contribution requirements which may result in a reduction in state funding for

operations. As a result, NKU’s reliance on net student tuition and fees for operating

revenue continues to grow. NKU needs to diversify its revenue base to reduce reliance

on tuition.

Softer operating margins in FY2013 highlight NKU’s need to tightly manage costs in

light of state limitations on tuition rate increases and to maintain moderate tuition levels

within its highly competitive market area.

NKU will be challenged to meet its enrollment targets given the increased competition

and a slight decline in HS graduates in the state of Kentucky and Ohio. Rating could

drop if we have any protracted decline in enrollment or deterioration of operating

performance.

Additional borrowing without offsetting financial improvements could impact the rating.


Moody’s stated “the outlook for Northern Kentucky University's A1 underlying rating is stable,

reflecting our expectation of a return to solid student demand and good operating performance

which should generate sufficient cash flow to cover debt service, as well as healthy balance

sheet growth that provides good coverage of debt.”

Operating Revenues/Sources (Figure 1, Table 1):

Net Tuition and Fees (49%) – Student tuition and fees have grown from 35% of NKU’s

total revenues in FY03 to 49% in FY13. This growth primarily driven by tuition rate

increases and a growth in graduate level programs and out-of-state/metro enrollment.

Resident undergraduate enrollment and associated tuition revenue has declined in recent

years.

State Appropriations (21%) - State appropriations have declined from 38% in FY03 to

21% in FY13. Our inflation adjusted state general fund appropriation per FTE declined

from $3,839 in FY03 to $2,931 in FY13. We receive the lowest funding per student of

any of the other comprehensive universities in the state based on FTE and degrees

awarded. Our state appropriation per FTE is also less than our Moody’s peer group and

our national benchmarks.

Nonoperating revenue (13%) – The major revenue source in this category is federal and

state financial aid programs. After significant increases in Pell revenue in FY10 and

FY11, Pell declined in FY12 ($17.9 M) and again in FY13 ($17.5M) due to more

stringent eligibility requirements. Pell revenue was up slightly in FY14 through Dec.

2013.

NKU Foundation Inc. Support (2%) - The NKU Foundation, Inc. manages private gifts

made in support of NKU. Over 95% of private gifts made have a restricted purpose (such

as scholarships, professorships and university programs). The Foundation currently

provides approx. $4 million per year to support these purposes.

Other revenues combined (15%) – Grant revenues, excluding federal earmarks, have

averaged $8.333 million from FY09-FY13. This excludes capital earmarks, which

averaged $1.5M for the same period). We received no federal earmark funding in FY13

or FY14 YTD. Revenues from self-supporting auxiliaries (housing, food service, parking,

bookstore) represent 6% of revenues.

Operating Expenses/Uses (Figure 2, Table 2):

Salary and benefits (64%) – Salary and benefits expenses per FTE are less than our

benchmarks and the other Ky. Comprehensive universities. Required KERS contributions

have increased significantly in recent years, with another $4.7 million increase in FY15.

Financial Aid (6%) – Institutionally funded aid increased for fall 2013, in part due to

new freshmen scholarship programs. The institutionally funded tuition and fee discount,

including the metro and Indiana rate discounts, was approximately 20% for fall 2013.

The University also funds $1.6 million each year in faculty, staff and dependent tuition

waivers.


Operating expenses (19%) – NKU’s operating expenses per FTE are less than

benchmarks and the other Ky. Comprehensive universities. This is due, in part, to the

University’s cost containment efforts.

Depreciation/Interest (11%) – Depreciation and interest expenses have increased from

8% of the University’s operating expenses in FY03 to 11% in FY13 as a result of the

dramatic growth in campus facilities. The campus was transformed with the addition of

Griffin Hall, The Bank of Kentucky Center, the James C. and Rachel M. Votruba Student

Union, a soccer complex, parking facilities and numerous campus beautification projects.

Sources/Uses - Capital for New Facilities/Renovations, Technology/Equip. (Figure 3, Table

3):

The University funded the majority of the capital assets constructed/acquired during the ten-year

period from FY04 – FY13 with NKU issued debt (36%) or institutional funds (25%). During this

period NKU also received state capital appropriations for the Bank of Ky. Center ($54 million)

and Griffin Hall ($35.5). In addition, NKU received federal, state and local governmental capital

grants totaling $18 million and private capital gifts totaling $19 million.

Generating sufficient funds to properly maintain and/or expand the University’s facilities and

technology capacity will continue to be a challenge. The University continues to pursue state

funding for academic buildings, such as the Health Innovations Center. However, the University

has had to rely on other funding sources, such as student fees and private gifts, to

construct/expand other critical facilities, such as the Student Union and the Albright Health

Center expansion.

The University needs to pursue all available avenues, including public/private partnerships, to

meet its capital renewal and replacement needs in the future. As a 501(c)3 nonprofit

organization, the NKU Foundation has the ability to serve as a partner for capital projects.

NKU’s bond capacity is limited and must be allocated based on the University’s strategic goals.

The NKU Foundation has the ability to facilitate Industrial Building Revenue Bonds to assist

with capital projects.


Figure 1 – Sources of operating funds – FY13

Table 1 – Sources of operating funds trend – FY03 – FY13 (millions)

FY03 FY06 FY09 FY13

Tuition , net 42.0 35% 65.5 40% 88.7 45% 109.6 49%

Sales & services/other 4.9 4% 8.9 6% 13.6 7% 11.9 5%

Grants & contracts 5.8 5% 8.6 5% 8.0 4% 8.5 4%

Auxiliary enterprises 4.2 4% 6.3 4% 11.4 6% 13.4 6%

State appropriations 45.3 38% 51.4 32% 53.9 27% 46.8 21%

Other nonoperating revenues 13.9 12% 18.1 11% 18.6 9% 28.7 13%

Foundation operating support 3.1 2% 3.5 2% 4.9 2% 4.6 2%

119.2 100% 162.3 100% 199.1 100% 223.5 100%

Tuition , net

49%

Sales &

services/other

5%

Grants &

contracts

4%

Auxiliary

enterprises

6%

State

appropriations

21%

Other

nonoperating

13%

Foundation

operating

sources

2%

FY13 operating sources


Figure 2 – Operating Expenses FY13

Table 2 – Operating Expenses FY03, etc. (millions)

FY03 FY06 FY09 FY13

Salaries & benefits 76.9 64% 94.0 65% 120.6 61% 144.8 64%

Student aid 10.1 8% 10.8 7% 13.0 6% 14.9 6%

Depreciation & interest 9.5 8% 11.8 8% 23.1 12% 24.6 11%

Operating 23.5 20% 28.8 20% 41.9 21% 43.4 19%

120.0 100% 145.4 100% 198.6 100% 227.7 100%

Salaries &

benefits

64%

Student aid

6%

Depreciation &

interest

11%

Operating

19%

FY13 operating uses - all funds


Figure 3 - Sources of Capital Funding

Table 3 – Sources of Capital Funding

5 yr total 5 yr %

7 yr total 7 yr %

10 yr total 10 yr %

Capital appropriations 35,420 26.9%

89,420 32.0%

89,746 27.6%

Capital grants 16,590 12.6%

17,549 6.3%

17,892 5.5%

NKU debt proceeds 18,029 13.7%

94,852 33.9%

118,170 36.3%

Capital gifts (via NKUF) 9,116 6.9%

13,648 4.9%

18,629 5.7%

Institutional funding 52,428 39.8%

64,011 22.9%

81,178 24.9%

131,583

279,480

325,615

Capital

appropriations

28%

Capital grants

5%

NKU debt

proceeds

36%

Capital Gifts (via

NKUF)

6%

Institutional

funding

25%

Sources of capital, FY04 - FY13


APPENDIX B

Current Financial Condition of the NKU Foundation, Inc.

Submitted by: Karen Zerhusen Kruer, Executive Director, NKU Foundation, Inc.

The Northern Kentucky University Foundation was incorporated in the Commonwealth

of Kentucky in 1970, with the mission to receive and manage private gifts for the

advancement and benefit of NKU. The Internal Revenue Service has granted it 501(c) 3

tax-exempt status, and it has been recognized by NKU as the primary and preferred entity

to receive for deposit and provide financial management services related to the

expenditure and investment of gifts for the exclusive benefit of NKU.

NKUF has an annual operating budget of $615,000. Revenue sources include an

administrative fee on the endowment pool, a gift fee on non-endowed gifts, a fee on non-

gift deposits, which total 96% of revenue sources. Other sources of support include

interest income on short-term cash investments, in-kind office space and other in-kind

services from NKU. Expenses for salaries and fringe benefits comprise 86% of the annual

operating budget.

NKUF is governed by its Articles of Incorporation, Bylaws and a Board of Directors

made up of 33 community volunteers, President Geoffrey Mearns, VP of Advancement

Eric Gentry, Regent Dennis Repenning and Regent Nathan Smith. The full Board meets

semi-annually, and conducts its work between full Board meetings through its Executive,

Investment, Audit, Finance, Governance, Membership, Development, Advocacy and Real

Estate Committees.

NKUF Consolidated Financial Statements for the year ended June 30, 2013, show total

assets of $96.7M, which included an investments valuation of $84M. Of those

investments, $80M are restricted as to purpose by the donor. Unaudited financial

statements as of December 31, 2013 show that NKUF exceeded $100M in total assets for

the first time in its history.

NKUF participates in the NACUBO-COMMONFUND Study of Endowments. June 30,

2013 results show NKUF 1yr. (13.8%) 3yr. (11.2%) 5yr. (5.8%) out-performance,

exceeding the performance of endowments of all sizes. The 10yr. (7.5%) exceeded

endowments of $500M in size.

Total spending in support of NKU as of June 30, 2013: $4.5M, as of June 30, 2012:

$4.4M, as of June 30, 2011: $4.3M (plus $6M capital), as of June 30, 2010: $5M, as of

June 30, 2009: $3.4M (plus $4.4M capital)

Gifts and bequests as of December 31, 2013 were $1.3M. Contributions receivable

continue to decrease as collections of pledges outpace new gift commitments.

Receivables as of January 31, 2014 are $3.3M.

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