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Financial Planning

By Mike Hernandez,2014-05-16 08:57
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Financial Planning

    Standard 7 FINANCE

Overview

    THIS CHAPTER PROVIDES DISCUSSION AND ANALYSIS OF THE

    REQUIREMENTS FOR STANDARD 7. FOUR SECTIONS ADDRESS FINANCIAL

    PLANNING, ADEQUACY OF FINANCIAL RESOURCES, FINANCIAL

    MANAGEMENT, AND FUNDRAISING AND DEVELOPMENT AT BYU.

     “Administrators must never lose sight that the funds we spend belong to the Lord and

    come mostly from the tithes of people with very average means. We can fund everything

    that’s necessary, but not everything that’s desirable. We need to be very prudent and

    conservative and willing to get along without some things.”

    Chairman of the Board of Trustees, President Gordon B. Hinckley, June 2001

Brigham Young University serves approximately twenty-nine thousand students through

    eleven colleges and other academic centers and programs. These academic activities are

    supported by twenty-eight auxiliary business areas. (CD 7.1) Administration of these

    academic and auxiliary activities is supported by a financial management process that

    plans for the development, allocation and protection of financial resources. The

    university’s mission and aims are coordinated through the pursuit of established priorities

    that are consistent with Board approved strategic objectives.

7A Financial Planning

DESCRIPTION AND ANALYSIS

The majority of academic funding is provided by the university’s sponsor, The Church of

    Jesus Christ of Latter-day Saints (the Church or sponsor), after the Board of Trustees (the

    Board) has approved the university’s annual Strategic Resource Plan. In accordance with

    broad guidelines established by the Board, the Strategic Resource Planning process

    includes all categories of university resources and begins at the lowest operating unit

    level. These guidelines primarily direct that the Board will:

    ? Provide annual guideline increases to certain budget categories.

    ? Specifically approve any increases to net square footage of physical plant space.

    ? Specifically approve additions to FTE employees or student enrollment.

    ? Be assured that budgets are closely monitored.

The Board then allows the university considerable autonomy and flexibility to reallocate

    resources consistent with these guidelines as it seeks to accomplish the institutional

    objectives as described in Standard 1. (7.A.1)

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    Strategic Resource Planning, Priorities and Strategy Financial planning is guided and defined by the university’s established mission and aims. Each unit prepares a three-year plan that begins with a report of its effectiveness in

    accomplishing the strategic objectives established during the previous years’ Strategic

    Resource Planning process. (CD 7.6.1-6) Units then identify specific objectives they

    desire to accomplish during the coming year, how these objectives contribute to

    accomplishing their overall three-year plan, and request the resources necessary to carry

    out their plan. As they evaluate their resource needs, each unit first assesses its existing

    resource base and considers reallocating those resources to meet new objectives. Each

    area’s plan is presented by their dean or director to the President’s Council which is

    composed of vice presidents representing all campus areas. (7.A.2)

During each annual Strategic Resource Planning cycle, the university also considers its

    five-year fundraising strategy, identifies that portion attributable to the coming year, and

    reviews plans to accomplish fundraising goals.

Facilities capital projects are also considered during Strategic Resource Planning through

    a three-year plan that is consistent with the objectives of university units. The facilities

    planning process includes a Capital Needs Analysis and Information Technology

    Infrastructure planning to assure infrastructure and technology equipment needs are

    considered and are substantially funded by the university’s sponsor.

Both academic and auxiliary projects, and their financing, are carefully reviewed and

    approved through the annual Strategic Resource Planning process before they are

    initiated. The shared philosophy of the university and its sponsor is that debt financing

    should be avoided in its business and educational operations. Accordingly, academic-

    related building funding is provided by the university’s sponsor, or through Board-authorized donor gifts. Auxiliary-related facilities are financed through operations, donor

    gifts, or through loans from the university’s sponsor, rather than through external debt financing. These loans are repaid from the units operations. Because of the generous support provided from its sponsor, the university’s only significant debt relates to loans for auxiliary-owned housing projects. The status of existing and planned sponsor loans

    for construction projects for the coming three-year period are addressed through Strategic

    Resource Planning. (7.A.4)

Following the annual Strategic Resource Planning process, the university prepares and

    submits its annual budget to the Board. Once approved by the Board, university

    organizations are notified of their approved budgets for the coming year. Approved

    budgets, together with any revisions subsequently requested, are reviewed by

    management against actual operating results on a regular monthly basis through financial

    reporting provided from the accounting system. (7.A.3)

7B Adequacy of Financial Resources

DESCRIPTION AND ANALYSIS

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During the annual Strategic Resource Planning process, available resources are allocated

    among university programs consistent with the university’s aims and strategic objectives.

    As shown in Figure 7.1, the university’s academic activities are supported primarily by

    its sponsor and by tuition revenue, which provided a combined 82% of academic

    revenues for 2004, exclusive of investment income. Donor contributions and research

    grants supporting targeted activities provided a combined 13% of academic revenues for

    2004. (RD 7.6)

    2004 Academic Revenue (Exlcuding Investment Income)

    Private gifts & Sponsor contractsappropriation and 9%tuition82%

     Government grants & contracts4%

    Other revenue 5%

    Figure 7.1

    BYU is primarily supported by

    Sponsor Appropriations and Tuition

The majority of academic funding is provided in the form of Church appropriations,

    which in turn come from the tithes of faithful church members. In this manner, a very

    large number of the Church’s twelve million world-wide members participate in funding the university’s operations. Church appropriations provide approximately 70% of the cost

    of a BYU undergraduate education, allowing tuition to remain very low.

The university is also supported by many generous donors who contribute to building

    programs, endow faculty chairs, professorships, scholarships, and support other academic

    activities.

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    BYU is primarily a teaching-oriented, undergraduate university, with sufficiently strong graduate programs and research work to be considered a major university. While government, business and private sponsored research (sponsored research) is vital to advancing academic experiences for faculty and students, BYU does not intend to become dependent upon external research funding to maintain its ongoing operations and mission. Though modest compared to major research universities, BYU’s research

    funding is obtained through a balanced approach. In addition to growing governmental agency funding, the university has strong programs of support from business and industry as well as other private research sponsors. A measure of its effective application of research funding, BYU typically ranks in the top ten in the nation in respect to return from technology transfer per research expenditure dollar. (7.B.1, CD 7.2.)

    BYU is also noteworthy for its practice of involving undergraduates in research and creative work. This initiative is supported heavily by alumni and other individual donors. Many undergraduate students become involved in mentored research and creative work through donor sponsored programs administered centrally, or through college and department level resources. Centrally administered programs provided for approximately 4,000 students to participate in mentored research and creative work during the 2003-2004 academic year. Commitment of additional department or college resources increased the number receiving this kind of mentored experience to greater than 30% of BYU students. Information included in the 2004 report of the National Survey of Student Engagement notes that 41% of BYU seniors reported having been involved in a research experience with faculty, or that they planned to have that experience before graduating. (CD 7.5)

The university’s computing environment and research activities have also been assisted

    through generous support from private individuals and corporations, resulting in the acquisition of super computing resources, among other initiatives.

Stability, Adequacy of Resources to Meet Debt Obligations

    The university has a strong balance sheet and stable sources of revenue. Assets are more than ten times greater than liabilities (RE 7.8) and academic revenues come primarily from sponsor appropriations and student tuition, rather than from sponsored research and donor contributions which have the potential for greater variability. (RE 7.6)

    The university does not rely upon debt financing for its academic operations, as shown in Figure 7.2. In addition to modest vendor payables, debt is limited to loans extended from the university’s sponsor to construct and renovate student housing buildings. Scheduled

    annual principal and interest payments through the year 2047 are relatively small and average $3.8 million over the coming forty years. While other projects could add to this debt burden in the future, no significant projects are currently approved. (7.B.2, RD 7.12,

    CD 7.15)

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     Portion of 2004 Total Assets Financed by Liabilities

    Vendor Loans due to payables, sponsorprepaid services4%5%

     Fully funded assets 91%

    Figure 7.2

    BYU operates with very limited debt

University assets are primarily composed of highly liquid investments and cash, and land,

    buildings and equipment, as shown in Figure 7.3:

    2004 Asset Categories

    % of total

     Assets

    Investments and cash 51%

    Receivables, inventories, other 9%

    Land, buildings, equipment 40%

     Total 100%

    Figure 7.3

    Assets are highly liquid

Financial aid planning is facilitated by the predictability of the university’s enrollment,

    which is limited to Board-authorized levels that remain relatively constant because there

    are more applicants for enrollment than can be accommodated by the university. The

    university’s sponsor provides a significant portion of scholarship funding and these

    factors are considered together through the Strategic Resource Planning process.

    Additional scholarship funding is planned for and achieved through university

    development and advancement programs. (7.B.6) (RD 7.5)

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    Auxiliary Enterprises The university’s mission is supported by several integral auxiliary enterprises including

    Bookstore, Housing, Dining Services, Intercollegiate Athletics and Student Health

    Services. Auxiliary enterprises are self-supporting and have adequate operating reserves.

    Surplus auxiliary resources are used on a very limited basis to accomplish a variety of

    academic purposes. (CD 7.18.) Auxiliary operations are not reliant upon academic and

    general resources to balance auxiliary operations. (7.B.8) (RD 7.3)

7C Financial Management

DESCRIPTION AND ANALYSIS

Board Relationship and Control Environment

    The university’s president has regular and frequent interactions with the Board of Trustees to keep them informed of university activities, including its financial affairs. The

    President has a very strong relationship with the Board built through many years of

    service in the Church’s ecclesiastical organization. This working relationship has

    established a pattern for regular communication and alignment of goals and sensitivities.

    The President reports to the Board when the annual Strategic Resource Planning requests

    are presented and at other times during the year when specific issues warrant

    communication and Board direction. In addition, the Church Education System

    Commissioner’s Office, which acts as a support staff to the Board, reviews the university’s monthly financial report and another report summarizing budget to actual

    comparisons of resources and expenditures for those resources provided by the

    university’s sponsor. (7.C.1, RD 7.15)

As a not-for-profit organization, the university is not subject to the Sarbanes-Oxley Act

    (the Act) and its requirement that board members shall be independent of the university.

    Though Board members are integrally involved in the governing leadership of the

    university’s sponsor, they are however independent of university operations. (CD 7.5)

    The Board has encouraged the university to comply with the Act ―where practicable.‖

    Accordingly, the university has incorporated applicable principles of the Act by

    implementing a financial code of conduct and assuring that the President, Chief Financial

    Officer and other key operating and financial personnel attest to the accuracy of recorded

    financial transactions. This attestation is available to the Board and to the independent

    auditors of the university. (CD 7.16) The university has also developed a procedure to

    receive information about questionable activities and to protect those who report them. In

    addition, the university is documenting its financial processes and related internal

    controls surrounding those processes, as discussed in the Control of Resources section

    below. (CD 7.4)

Financial Management Mission and Structure

    The financial management activities of the university are directed by the Chief Financial

    Officer who reports directly to the President. (7.C.2)

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The goals of the campus-wide financial organization are represented by its mission and

    vision statements:

    Controllers Mission Statement:

     To support the university’s mission, we promote and protect the economic

    interests of all BYU stakeholders.

    Controllers’ Vision Statement:

    We endeavor to be trusted business advisors in a self-service environment.

These concepts are central to the university’s financial management direction to assure

    that resources are effectively utilized and that system tools allow campus personnel to

    execute transactions in a timely and well controlled environment.

The campus-wide financial organization has integrated the elements of both a centralized

    and decentralized structure. Centralized accounting management is led by qualified

    financial directors who report directly to the Chief Financial Officer. These directors are

    responsible for Financial Accounting and Reporting, Regulatory Accounting and

    Reporting, Student Financial Services, Treasury Services, Budget Office, and Financial

    Solutions (consulting activities). In addition, the Chief Financial Officer maintains a

    close working relationship with the Purchasing and Travel departments, each of which

    are satellite departments of its sponsoring church and are located on BYU’s campus.

    These offices are dedicated to the support of university procurement needs and they do so

    through a centralized global supply management approach that allows BYU to take

    advantage of the Church’s world-wide volume purchasing and travel agreements that

    would otherwise not be available. (CD 7.3., CD 7.3.1.)

Colleges and auxiliary divisions are led by a total of thirty-four financial controllers who

    in turn direct the accounting activities of department financial support personnel within

    their area of stewardship. (CD 7.3.2.) Controllers report directly to deans and directors

    but maintain a strong liaison relationship with one of the central financial directors that

    report to the Chief Financial Officer. The challenge of organizing and communicating

    with this large financial structure is an ongoing effort. Central financial directors meet

    with college and division controllers on a regular basis in one-on-one meetings to

    consider matters specific to individual colleges and divisions. On a monthly basis,

    financial directors and the Chief Financial Officer also meet with controllers in

    Controllers Council meetings to discuss issues and set financial strategy. In addition,

    these Controllers Council members meet monthly with the rest of the campus financial

    personnel to discuss financial issues, train, and implement policies and procedures.

The Administrative Vice President is responsible for Human Resources, Physical

    Facilities and the business aspects associated with the most significant auxiliary

    operations. Each of these areas are led by qualified and capable leaders with experience

    dealing with university administration. (CD 7.8.)

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Control of Resources

    Central financial managers are continuing an evaluation and documentation of their

    internal control processes. These processes are being reviewed by the Internal Audit

    Department to identify key control procedures that can be routinely tested and relied

    upon to assure that an adequate internal control structure is in place. As this process

    matures, the university plans to extend this methodology to the distributed financial and

    non-financial processes of the campus as a means to strengthen the overall internal

    control environment.

Monthly financial results are electronically reported to campus managers on the fourth

    working day of the subsequent month. The timeliness of this reporting allows managers

    to evaluate their results rapidly and to monitor and correct potential errors. A monthly

    review of revenues and expenditures is also provided to the President and vice presidents

    to allow oversight of operating results. Auxiliary areas are reviewed for budget-to-actual

    differences and explanations to management are provided. The financial results of

    academic areas are also compared to budget and over expenditures are resolved. (7.C.3)

The university maintains policies for the use of operating funds, endowment funds, and

    investment portfolios. Under the direction of the university Investment Committee,

    investment funds are primarily invested in cash management, fixed income, and equity

    pools maintained with the university sponsor’s investment portfolios. Decisions regarding

    investment strategy are based upon approved criteria established by the Board and

    university management. (7.C.4, CD 7.9)

Accounting Practices

    The university’s monthly and annual financial statements are prepared on the accrual

    basis of accounting and conform to generally accepted accounting principles. Its

    underlying record keeping is based on principles of fund accounting that organize

    revenues and Fs according to sources of institutional resources and by natural revenue

    and expense classifications. (7.C.5, RD 7.14, RE 7.2)

The core financial system is an enterprise system that allows for common programming

    tools and core functional user skills to be developed across multiple modules. The

    university provides information access to its financial systems and other supporting

    systems through a common reporting tool that facilitates inquiry by authorized financial,

    academic and operating personnel. Imaged original documentation for a variety of

    financial transactions is also available for review by campus controllers who desire that

    access.

The administrative accounting system includes subsidiary software systems for the

    procurement and payment of goods and services that utilize self-service web technology

    and which retain electronic tracking of review and approval. (CD 7.7.) These include:

    ? Purchasing card and emergency checks for purchasing supplies under $2,000.

    ? Travel authorization, and travel and business reimbursement.

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    ? A system that allows authorized campus personnel to negotiate services and

    expedite payment when the purchase is with system-established vendors

    providing goods or services within authorized categories.

    ? eProcurement system allowing rapid online procurement functionality (planned

    for late 2006.)

Systems and programming processes are mature and use industry standard technology

    and vendor-developed software, in addition to internally developed systems.

    Administrative computing and the university’s recently constructed state-of-the-art data

    center facility are supported through the Office of Information Technology (OIT).

    Functional process owners and supporting OIT areas are pursuing a long term evaluation

    of business continuity planning. This continuity planning is considering the value and

    costs associated with the recovery of systems within the data center versus establishing

    alternate computing facilities. In addition, a determination of the minimum periods

    allowable for restoration of services in the event of a disaster is also being considered.

    When the evaluation of pilot projects is completed, priorities and resource needs will be

    determined and funding requirements will be included in Strategic Resources Resource

    Planning.

Auditing Practices

The Board is responsible for all independent auditing activity at the university. The CES

    Audit Committee (Audit Committee) has been established by the Board and it provides

    oversight to the accounting and financial reporting processes of the university and audits

    of its financial statements. (CD 7.10, CD 7.11)

The Audit Committee is composed of four members, all of whom are independent of the

    university and possess significant financial and management expertise. The Audit

    Committee is directly responsible for the appointment, compensation, and oversight of

    the work of the independent audit firm employed by the university and pre-approves all

    non-audit work performed by the university’s independent auditors. (7.C.6)

The independent auditor, currently Deloitte and Touche, LLP (Deloitte), has been

    selected through a competitive selection process involving appropriate accounting firms.

    The university’s financial statements are audited annually by Deloitte. (7.C.7, 7.C.8, RE

    7.2) Deloitte also conducts audits of compliance with federal statutes regarding both

    financial aid and research grants and contracts. (7.C.10) The results of audits, including

    management letters regarding outstanding accounting issues, are reported to the Board

    through the Audit Committee. (7.C.7, CD 7.12) The Chief Financial Officer provides

    responses to the management letter which are carefully considered in conjunction with

    other campus managers responsible for implementing and complying with policies and

    procedures. (7.C.12, RE 7.2)

Because it is a private institution, the university does not routinely make its financial

    information available to the public except as required by IPEDS guidelines. (RE 7.1)

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The Church Auditing Department, a department of the university’s sponsor, performs

    audits of the revenues and expenditures of the university’s intercollegiate athletics

    program and other selected expenditures of the university. The results of audits by the Church Auditing Department are reported to the Audit Committee as they are issued.

    BYU Internal Auditing Services conducts a broad range of activities contributing to the development and monitoring of the overall internal control structure of the university. The scope of Internal Auditing Services activities includes review of the processes

    designed to provide reasonable assurance in the following categories:

    ? Effectiveness and efficiency of operations.

    ? Reliability of financial reporting.

    ? Compliance with applicable laws and regulations.

    ? Safeguarding of assets.

The results of internal audit engagements are promptly reported to the appropriate

    administrative personnel at the university and significant issues are discussed with the Audit Committee. (7.C.11) Management is responsible for seeing that corrective action is taken for reported deficient conditions. Internal Auditing Services monitors the

    disposition of results communicated to management and reports the status of audit

    recommendations to the Audit Committee. (7.C.12, 7.C.13)

7D Fundraising and Development

DESCRIPTION AND ANALYSIS

Investment Management

    Board-established committees direct and monitor the investment policies of the

    university’s Investment Committee. The University Treasurer (Treasurer) complies with

    the policies and investment strategies established by the Investment Committee.

    The Investment Committee reviews and updates asset allocation guidelines periodically. Individual investment allocation decisions are made within approved benchmarks on a

    monthly basis and are reviewed quarterly to ratify investment actions taken by the

    Treasurer. (CD 7.9) Specific investment decisions are made by Ensign Peak Advisors, an affiliate of the university’s sponsoring church. The Treasurer also maintains complete records of investment activity. Records of individual endowments, and their investments and related earnings, are maintained and are referenced to assure compliance with gift purpose and intent. An annual statement of an endowment fund’s investment,

    performance, and payout distributions is made available to donors. Regular internal and independent audit oversight assures that endowment management and investment is

    compliant with university policy and legal requirements. (7.D.2)

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