|Faculty Senate > Remarks from Vice President for Finance|
from Vice President for Finance, Virginia Gregg
For fiscal year 2002, we actually had anticipated that we would draw close to $30 million from the endowment. As the year ended up, we had an anticipated withdrawal from endowment of $17.6 million, slightly under $18M, because we had a strong cash position at the end of the fiscal year and because investment markets had been down so dramatically. This represents a commitment against the endowment, but we haven't made the actual withdrawal. We want to wait until we need the cash, and hopefully the investments are doing a bit better.
(Slide #3.) Net Undergraduate Tuition and Fees: This is net of our discount of approximately 40%. This was actually higher than budget last year by $3.7 million. There was a higher than anticipated freshman class, but most of that was due to improved upper class retention and transfers. We actually are under-budget this year.
Graduate tuition and Education for Working Professionals revenue was down over $4 million last year. This includes Hartford at a little over a million dollars and the Education for Working Professionals programs here on the Troy campus, for an excess of $3 million. This is before a change in pricing or support strategy for the graduate program. We have concluded that the negative variance here is solely due to the economy, and the fact that employers were pulling back the amount of education that they were willing to provide for their employees, both here and in Hartford.
In the sponsored research, contracts and grants area, in the Direct area we do have a negative $15.2 million variance. This almost solely relates to a NYSTAR grant, an equipment grant, for a little over $12 million that we had expected to receive last year but because of the State's funding position, we did not receive it. We have received a $22.5 million grant from NYSTAR relating to the Biotech building.
We did anticipate about a 6% to 7% growth in our federal spending last year. We actually realized about a 4% growth and consequently that is primarily the reason we had a negative variance in our overhead recovery of a million dollars. This carries through into this current year, and we are assessing its continuation as we move forward.
In the expendable gift area, we were substantially over budget. This primarily relates to $14 million of bequests we received last year which were unrestricted in their nature. We do have a trustee Bequest Committee that decides what to do with bequests; they are either put into endowments or used for facility purposes. The committee last year decided that the $14 million in bequests included in this number (see chart for year ended June 30, 2002 attached) would be set aside and used for facility renewal this year. That is how we are funding (other than the Biotech and EMPAC projects) facility renewal.
We count as revenue for internal purposes, the amount of reserves we expect to spend on faculty start-up and similar natures. We actually spent less than we had anticipated and also had less in SERC revenue than we expected. But that is also offset by a reduction in spending. (SERC is a program that is administered by Hartford, a State of Connecticut Dept. of Education Program, which has to do with Educational Outreach.)
So, overall we had anticipated slightly over $300 million in revenue, we came in at $295 million in revenue so we were off budget, but this combination of things might be a little misleading. We were over budget in the gift area, but under budget in the research area because of the equipment grant.
Looking at Expenses and Uses, Education and General, we had a positive variance of $13.4 million. This is a combination of things. A delay in spending on the Constellations (as we had anticipated that we would be able to start the hiring for the Constellations right away.) But, that is not a reality in hiring world-class faculty. In addition, we did see positive variances in all of the portfolios, as the ramp-up in spending expected (especially in certain areas like Administration) did not kick-in as fast as we had realized.
The Institutional Initiatives is a set-aside that we had anticipated of about $10 million. Added to that is primarily the bequest that has been designated for facility purposes for this current year, and again that is how we are paying for the facilities renewal, and the dormitory renewal that has and will go on.
Research is a positive variance. In the Restricted and Other area, this is a positive variance in spending related to the designated funds which. In the Capital Uses area, this is a matter of cash flow and the planning on when multi-year capital project spending was anticipated to occur, when the budget was setup, and when it actually did occur. We tend to have spillover into the summer months. Our fiscal year ends June 30, so we can see a substantial amount of spending in July and August.
On a net/net basis we did not end up making the draw that we expected to need for this year. In addition to that, although this is a commitment from the endowment, because of our cash balances, we have not made a withdrawal from the endowment.
We go through something that we call a "Sustainability Review" (slide #4.) What we do is try to classify our revenues and our expenses between those revenues that will recur, like compensation, debt service, utilities, and contractual obligations (like our contract with Sodexho) versus what are considered variable expenses (supplies, paper, things that we would have problems doing without, but are not multi-year commitments.) We try to look at both the revenues and expenses in terms of recurring for our baseline operation, vs. recurring and non-recurring for the initiatives that we're incurring.
For instance in the non-recurring category, we see start-up packages. Those are commitments for a finite period of time. We will continue to see those as we move forward, but the commitments we have right now do have a finite period.
We take a cut at our revenue and expenses in this fashion to try to monitor that as we are investing in plan initiatives, we are also not building in a structural deficit, referring to operations. Rensselaer did find itself having a structural deficit during the 1990’s, which was very painful to pull our way out of. So we try to monitor this on a year-to-year basis. We do have the bequest in the recurring category, just to point that out.
In looking at our recurring revenues vs. our recurring expenses, we actually had a substantial surplus for last year ($25.4 million) again that includes the bequest. When we add in the recurring, we still are at a surplus. The set-aside for capital purposes, and what we spent this year, are what bring us down to the commitment, or the withdrawal from the endowment. So for this particular year we are comfortable that we have not built in a recurring structural deficit and we will continue to look at this.
Moving forward, (slide #5) we look at our operations for internal purposes in a different fashion than we report externally. There are certain accounting conventions that colleges and universities are required to follow (based on generally accepted accounting principles) that would not be prudent to follow for budgeting purposes. To go over those, we do a reconciliation between what we discuss from a budgetary perspective internally, and what we report externally to our wider audiences. Again from the previous chart we start with the $17.6 million commitment from the endowment. For external reporting purposes, facilities gifts get reported as operating revenue. This includes, and is in large part, donated equipment. Those are non-cash items, so we don't consider those operating revenue for budgetary purposes.
For budgetary purposes, we show gifts on a cash basis. For external reporting purposes we show gifts on a pledge basis. When they were pledged we reported them as revenue. We actually had payments on restricted pledges during the year, which reduced the pledge activity, so we are reporting a negative here.
We are required to show depreciation for external purposes. For budgetary purposes, we show our cash outlays for capital, both for renewals to the buildings and our equipment purchases, and we also expense our principal payment. When we compare those expenses to our depreciation expenses, we actually charged more internally, than we would have if we had reflected depreciation. So for this particular year, that's a credit. That usually is a wash, but we are spending substantially more on capital renewal (or did in ‘02 and plan to in '03 and are considering for '04) than we have spent in many years.
The set-aside is the bequest, and the $10 million additional set-aside that I mentioned in our budgetary results, is cash we received that is set aside for future purposes. And then there are always "dogs and cats" at this level of activity and that is about $3 million in total. So when you add all this together for external purposes, we showed a surplus of about $16.6 million.
On the balance sheet, (slide #6) total assets at the end of June were in excess of $1 billion dollars, that's a slight increase over last year, even though we did incur a second year of investment losses. Our investment return for '02 was -13.4%; our investment return for '01 was -15+%; our return for 2000 was a positive 53%. About 15% of our endowment is in venture capital, which has stood us in very good stead for the past decade. However, it has been painful on the way down, although we did realize $160 million dollars in that long-term investment. We've been in venture capital for close to twenty years, as a result of the vision of one of our Trustee's, Glen Mueller, and that has actually served us in very good stead. On a three-year basis an endowment return is a little over 5%; on a five-year basis it is just under 10%. We have taken some defensive actions during FY 2002, and we have some more defensive strategies in place to reduce the volatility in the endowment.
The total liability did increase about $180 million on a net basis, from the previous year. This is the $200 million in borrowing that we incurred in May, to pay for the Biotech building, the Performing Arts Center, the parking garage, and other infrastructure investments. We actually reduced our cost of debt with this borrowing. It is a very favorable time to borrow. About one-quarter of the new borrowing remains at this variable rate, set at under 1.5%. We locked in the remainder to rule out volatility in the future.
There was a fair amount of activity in what is called the "non-operating" areas, or our capital charges or gains. I have listed those and again, because the investment losses that we have incurred over the past two years, these compare to a $196 million gain that we reported in 2000. We actually reflected a credit on our pension plan for FY 2002, vs. a charge in 2001. Defined benefit plans are going through a difficult time, especially with interest rates and equity market changes moving in tandem, liabilities are based on interest rates, so if interest rates decline liabilities grow. So, the investment market has not been favorable to the pension plan either. We mark from March-to-March for accounting charges on our pension plan, which is why we have a credit here (slide #6.) This March 2000 to March 2001 happened to be a trough. There was improvement in the equity market from March 2001 to March 2002. We are continuing to monitor the pension plan very closely, we teeter back and forth between fully funded, and under-funded status. But the plan remains funded, and will remain funded as we go forward.
We saw a substantial increase in endowment gifts in 2002: $15 million vs. $5 million the year before, and this is a very positive sign. Giving for endowment has been much lower than our peer institutions. Endowment giving has ranged between 1% and 3% at Rensselaer. At our peer and aspirant institutions, it is more in the 4% to 6% of market value of endowment.
We had capital losses for this particular year. But again, our assets did grow and the liability increase is certainly manageable. We also had positive cash flow at the end of this fiscal year (even with starting the ramp-up in investments) and positive cash flow the year before.
The next section is Financial Outlook for 2003 (slide #8) and again this was an end of September view, which I will update it as we go through. We are expecting a negative budget variance for undergraduate net tuition revenue for FY '03. The freshmen melt was higher than anticipated; this was about 4%, actually for the past several years we experienced no melt at all, which is very unusual. Four percent is about what we have seen in the recent past and that is not a bad level of melt, but it did hit us this year. My perspective is, as we have moved up and are looking at a higher quality of students, we are moving into a different class of competitors for the students that we are trying to attract.
We were impacted, as many institutions were, by the situation for international students. Twenty students were unable to get visas; we do anticipate that they will be able to enroll in January, which is a positive variance of about $300,000 that is not incorporated in these results. So there is some upside potential here. We also did see an improved graduation rate. Again, this is another increased quality indicator, but it does have a negative financial impact as students graduate more quickly.
We had anticipated at the end of September that there might be some potential offsets in financial aid discount improvement, but I think we are not seeing that. We have seen substantial positive variances on undergraduate revenue growth over the past three to five years. We are also seeing softening in our room and board revenue, which is another thing that is under review.
The budget was set for our residential graduate program (Slide 9) during the process when policy decisions were made, and it was set given the best information we had at the time, but before the transitioning strategies, the changes for students, had really been fully fleshed out. So, on a growth basis, we are reflecting a little over a million dollars negative budget variance for our full-time graduate program. Again, the budget was set before the transition plan was finalized and when we were discussing the budget with the Trustees last February we had indicated that we thought there was downsize potential here, and we're at the low-end of what we thought that downsize potential might be.
More continuing students were grandfathered than we had originally anticipated there would be, but again that whole strategy had not been completely finalized when we were getting budget approval. The clock was reset on continuing students; there was no longer extension time for these students and the degree-completion students.
Our overall enrollment is stable, although new students were substantially less than originally budgeted. But part of this, probably more than half of it, has to do with planned reduction. There was a planned reduction in Computer Science Master's students, a program that has been over-subscribed for years. In addition we have concluded that there was a reduction in new doctoral students brought in as a result of the departments and the schools normalizing, and making sure that they could both fully support new students they brought in and the continuing students also. An important point that we made and that we continue to see is that net tuition revenue from our "self-pays” has increased $1.4 million over the prior year. Now, mind you, I think that's from two to a little over four million, so it is modest. But it is a movement in the right direction and actually we are seeing more improvement, but I'm not at this point prepared to say the numbers. But this continues to improve. This has been a difficult transition period for everyone and we have been continuing through the fall, with some repackaging on students and providing support for students from research contracts.
This year we are seeing a positive variance in our education for working professional program, assuming we see the same enrollment through the spring. In Troy we had fewer part-time students than we anticipated, but more are paying the premium rate. Hartford has experienced some decline in enrollments for the past several years and has taken some tough action over this past year in order to try to resize and address themselves strategically. For 2003, the current year, distance enrollments have not dropped as we had anticipated they might. If they continue on track, they will realize the potential upside that is shown here, the $800,000 budget variance. (Eileen McLaughlin interjected that "it might be more like a million on the upside.") Again, we are still completing the first quarter forecast in order to report to the Board in December.
At the end of June we did see an increased award backlog (Slide 11.) The backlog was up $13 million, which was about 15% over the prior year. Although the lower than anticipated overhead growth we saw in 2002 does carry forward, we continue to expect to see about a million dollar negative variance in overhead recovery. Given what is happening with the Federal Government, from where we get the majority of our support, we are re-looking at the research area, looking for projections from the Schools, and looking at what we think we might see over the next several years, especially since it has taken a bit longer than we had originally anticipated to bring the constellation hires in.
Gift revenues were higher in the first two months of the year. We received $1 million from the Keck Foundation, support for the Terahertz research. Those numbers are running about neck-and-neck, maybe slightly less as of the end of November. The Technology Park is on target with their budget.
We are reflecting for the current year, a positive variance on our pension accounting expense. This again has to do with the point in time at which this accounting calculation is done and it relates to the decline in the variable liabilities and the fact that you smooth assets for this calculation. But, again, considering where interest rates have declined to and where assets values are, we are closely monitoring the funding status of the pension plan. We will make sure that it stays appropriately funded.
On a net/net basis we expect to be on budget, or to either draw or have a commitment against the endowment for $13.8 million for the current fiscal year and that has about stayed the same from what we are seeing from the first quarter.
The budget for capital spending for 2003 was $86.5 million we anticipate spending $67.8 million, the most significant variance between the budget and the forecast has to do with the pace of spending on the major construction projects. It is not that the projects are behind, it has to do with original estimates on what the cash flow would be over the next three to five years.
Highlights of capital spending for the year are: spending close to $20 million as the construction is underway on the Center for Biotechnology; a little over $10 million on the Boiler Plant and the South Campus Infrastructure; the pre-construction and site work for the EMPAC will be a little over $6 million; parking garage a little over $6 million (and that is on budget to my knowledge); Academy Hall is being renovated and will serve as a Student Life Services Center which will cost a little over $3 million; a variety of IT Upgrades, the data warehouse project, the GbE backbone is being updated, and an imaging project to improve administrative workflow is also underway. This summer $2.4 million was spent on renewals to Bray/Cary Hall and we anticipate renewing all of the freshmen dorms before fall '04. This is important as we move forward because it is an Achilles heel for us, as prospective students come on campus and look at where they might stay. We're also looking at our food contract. We are about $800,000 below budget on our room and board revenues this year. Primarily, it is more board than room, and it is because students are not electing to pick up the board contracts. They are finding alternative eating places/options, and the cost of attendance committee and auxiliaries are looking at this specifically to see if they are providing appropriate options.
There are a number of other relocations and renovations going on at about $1.5 million, neighborhood renewal and streetscape initiatives, to help Troy to invest in the neighborhoods and improve where we are by helping Troy to improve at $1.2 million. Safety initiatives and security upgrades at $1.1 million; earthquake simulators for the School of Engineering, at $1 million, most of this is external funding. Regardless of the funding source, the project is included in the capital budget this year. We are trying to be holistic, and look at what we are spending as a total, rather than based on funding source.
In conclusion, that is where we ended up in 2002, and what we expect for 2003, and I'd be happy to entertain any questions.
|July 29, 2004|