Net Assets

April 10, 2012

As the University of Northern Iowa has announced a number of decisions intended to address budget shortfalls and plan for the future, questions have been raised about various aspects of the institution’s budget.  This summary is intended to clarify information that has been shared and discussed in public settings on campus and elsewhere. 

Regarding “unrestricted net assets”

The 2010-11 Comprehensive Annual Financial Report (CAFR) and its supplement describe various aspects of the University’s financial operations and status.  The University reported $70.8 million of “unrestricted net assets” in its financial statement as of June 30, 2011.  It has been suggested that these funds could be used to offset budget cuts that have been accomplished through program closures.  The following points may help clarify why this is not the case.

Four main points relative to this topic (followed by details):

  • A financial analysis based on financial statements alone (without also examining operating budgets) is incomplete.
  • Financial discussions should occur within the context of the university’s program planning.
  • “Unrestricted” does not mean “uncommitted.”  The net assets described in the report are committed.
  • One-time funds cannot, by definition, correct recurring budget shortfalls.

Financial statements vs. budgets

Overall, a shortcoming in the public discussion about the university’s finances is that the focus has been solely on financial statements without similar consideration of the operating budget.  Financial statements provide part of the overall picture, but not the entire picture. 

  • Financial statements summarize the financial status of an entity after the conclusion of a given fiscal year.  One part of the financial statement describes assets that the University holds at a moment in time (what has been referred to as the “net assets report”).
  • The operating budget of the university is a completely different document; it summarizes planned revenue and expenditures in advance of a given year.  This is the document that describes what funds are anticipated to be available and how they will be spent during the coming year.  The University is obliged to present to the Board of Regents a balanced budget and then live within it.
  • The University operating budget is approved by the Board of Regents in the spring prior to the start of each fiscal year which is July 1.  If changes are made that require the University to change its budget mid-year (due to lower enrollment or cut in appropriations), the University needs to adjust the budget and complete needed changes (so it balances) prior to the end of the fiscal year which is June 30. 
  • For the average person, looking at a statement of net assets is comparable to looking at your bank statement at the end of a year.  It might show you what assets you have at the end of the year, but it doesn’t tell you anything about your expenses and income in each of the months throughout the year.  More specifically, it doesn’t tell you if you have enough revenue every month to meet your expenses for that month. 

Unrestricted net asset commitments

The term “unrestricted net assets” does not mean uncommitted assets. The term “unrestricted net asset" is required under generally accepted accounting principles. These net assets have, in fact, been committed to specific programs and purposes across campus (see detail below).

Even if unrestricted net assets were uncommitted, these funds are a fixed amount of money and they do not represent cash flow (the FY11 balance is actually $6 million less than the previous year; see page 16, CAFR).  These funds cannot be used in a meaningful way to address on-going operating deficits.  Once these funds are spent, they are gone and any continuing operating deficit would remain unresolved.

The total of $70.7 million in “unrestricted net assets” are committed in the following ways:

  • General Education Fund = $2.4 million.  These funds are primarily committed to building repair projects which were encumbered by June 30, 2011. Repair and maintenance projects are under contract and have already been started. Board of Regents policy requires that all funds necessary to complete a project be on deposit at the time a contract is awarded so that full funding is available to complete the project once it is underway.
  • Bonded Enterprises = $19.9 million. These funds are governed by the respective bond indenture agreements for Academic Building Revenue Bonds, the Residence System, Maucker Union, Fieldhouse System, and the Student Health System. These funds include Improvement, Renewals and Replacement Reserves, Construction Funds and System Funds for these respective enterprises. These funds must be expended only for these operations according to the bond covenants.
  • Non-Bonded and Miscellaneous Auxiliaries = $2.5 million. These funds include Intercollegiate Athletics, Gallagher-Bluedorn Performing Arts Center, Wellness Recreation Center, Parking Operations (funds parking lot maintenance), Computer Resale, Registration Services, and Old Auditorium Events. “Miscellaneous” includes departments across campus which develop programs, projects and activities that help the unit meet its goals and objectives. Often these efforts generate income in some way and then use the income to support the special project or program. These take on many different forms and all involved funds are committed to the given program or activity.
  • Quasi Endowments = $6.7 million.  As a result of Principal Mutual demutualization, this funding was declared as a permanent endowment by the Board of Regents.  Interest income from these funds is used to help offset fringe benefit costs in the General Educational Fund.
  • Plant Funds = $11.5 million.  This group of funds includes the Telecom System, IT Equipment Replacement, Recharge Center Equipment Replacement, deferred maintenance and capital projects.
  • Organized Educational Activities & Programs = $27.7 million.  There are a total of 709 accounts that are summarized under this heading (in Schedule 3, Supplement to the CAFR, pp. 16-27) and each can be categorized under one of these purposes: 
    • Faculty and departmental research.  When a faculty member receives an external grant or contract, a small portion of the proceeds are committed back to the faculty member as well as to the department where the faculty member is housed.  These funds support future research efforts of the given faculty member and department, and are not GEF funds.  Of all accounts, 203 fall into this category. 
    • Student organizations.  Student organizations on campus receive allocations from student government.  Funds for this purpose come from student fees.  Student organizations also raise money through the collection of dues and various fundraising activities.  Of all accounts, 62 of them are accounts of student organizations.  Student fees are approved by the Board of Regents for specific purposes and fee income cannot be used for other purposes.
    • Technology replacement.  Student technology fees are partially allocated to colleges to maintain and replace equipment as needed.  Others are retained by ITS for the same purpose.  Student fees are approved by the Board of Regents for specific purposes and cannot be used for other purposes.  Other accounts allow for the accumulation of funds over time so they can be used to replace equipment like copy machines.
    • Student fees.  A number of university operations are supported by fees that are charged to students.  These funds maintain balances that are used to ensure that operations are not disrupted if there is a sudden change in income to the operation. Examples in this category include Student Service Fee, Technology Fee, Health Fee, and Recreation Fee.  Student fees that are deposited in these accounts are approved by the Board of Regents for specific purposes and this fee income cannot be used for other purposes. 
    • Health insurance and other benefits.  The university is self-insured when it comes to health insurance benefits provided to employees.  Section 509A.13A of the Code of Iowa requires the establishment of reserves in this case.  Funds are also held in reserve for workers’ compensation claims, rate stabilization, unemployment claims and others.
    • Programs and projects.  All across campus, departments develop programs, projects and activities that help the unit meet its goals and objectives.  Often these efforts generate income in some way and then use the income to support the special project or program.  These take on many different forms and all involve funds generated from different sources and committed to the given program or activity.
    • Grant match.  External grants often require matching funds be provided by the University.   A number of accounts in the report hold matching funds that are obligated by contract to Federal, state or foundation grant makers. 

Source of the report

A clarifying note:  It has been said that this report was prepared by government auditors or some entity outside of the University.  This is not correct. The report is prepared annually by the University’s Office of Financial Accounting and Reporting Services which is headed by University Treasurer and Controller Gary Shontz. The report is then audited by the Office of Auditor of State, State of Iowa. Any suggestion that this report discloses information that the university would rather not be known is simply not true. Questions about the Comprehensive Annual Financial Report can be addressed to either Financial Accounting and Reporting Services at 273-3576 or the Vice President for Administration and Financial Services at 273-2382.