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STANDARD SEVEN

     

    STANDARD SEVEN:

   FINANCE

 INTRODUCTION

In recent years Montana State University - Bozeman (MSU) has faced some significant fiscal challenges.  In the face of static levels of state funding, the University has become increasingly dependent upon student tuition and fee revenue as its primary source of budget growth.  During this same period, the University concluded a major, four (4)-year initiative to increase faculty salaries (6.9% per year), but fulfilling this commitment required flat, or reduced, operations budgets for nearly all departments on campus.  These circumstances, and other events of recent years, have created some periods of fiscal constraint for the University.

In response to widely-expressed concerns from across campus, the President appointed a Special Review Committee (SRC) to examine all aspects of the University's finances.  In its May, 1998 report [Appendix 1-I, Special Review Committee Report], the SRC stated that:

          "Given the financial challenges facing higher education in the future, it is essential that a strategic planning process be initiated that will assess the entire University budget and develop a plan that insures the delivery of the highest quality academic programs."

As a result, at the beginning of the 1999 fiscal year, the President created the Strategic Planning and Budget Committee (SPBC) as a first step towards the development of a new, one (1) to five (5) year strategic financial plan.  Two (2) key issues that will be the focus of this new initiative are:

        To ensure that the financial plan reflects the strategic priorities of the institution

        To ensure that the University is making the best possible use of all campus resources

The seven (7) tables (Table 5 is not applicable) required by the NASC can be found in:

        Appendix 7-A - Table 1, Current Funds Revenues

        Appendix 7-B - Table 2, Current Funds Expenditures and Transfers

        Appendix 7-C - Table 3, Summary Report of Revenues and Expenditures

        Appendix 7-D - Table 4, Sources of Financial Aid

        Appendix 7-E - Table 6, Direct Cost by Instructional Department

        Appendix 7-F - Table 7, Operating Gifts and Endowments

        Appendix 7-G - Table 8, Capital Investments

 FINANCIAL PLANNING

The Montana Legislature meets for ninety (90) days beginning in January, on odd-numbered years, to set a lump-sum biennial appropriation to the BOR for all institutions in the Montana University System (MUS) [Exhibit 7.01, Montana University System Organizational Chart].  In the summer prior to each Legislative session, the Commissioner of Higher Education (CHE) submits the MUS biennial budget request to the Governor.  The State's budget process is essentially a base-plus design.  Therefore, the focus of the biennial request is funding for enrollment growth, inflationary cost increases, and specific program enhancements.  During the autumn prior to a legislative year, the Governor determines what she/he will recommend as the biennium budget request for the university system.  Historically, the Governor's budget request is significantly less than what was submitted by the university system.  The Governor's Budget then becomes the proposed funding level from which all legislative discussions are based.  Historically, the final Legislative appropriation for the university system is significantly less than what was recommended by the Governor.

The CHE, on behalf of the BOR, distributes the state funds (not tuition) of the Legislative appropriation through a complex Cost of Education Allocation Model.  This model essentially allocates the available state funds to each campus in proportionate shares which reflect the number of Montana residents (not total students) on each campus, and the relative cost of education for each institution's compliment of academic programs.

Overall, there are few legislative mandates which govern budget decisions within the university system.  The Legislature does establish annual salary increases and benefit levels through the State Pay Plan, and the university system does abide by these guidelines, except in special cases.  Otherwise, limits on the University's autonomy are usually in the form of unique or specific priorities established by the Legislature from one (1) biennium to the next.  For example, in the Appropriations Bill for the 1997-1999 biennium, the Legislature requested that all agencies of the state reduce their costs for travel and dues.  In that same bill, the Legislature earmarked $200,000 of the annual MSU budget (in a line-item appropriation) for a specific public service Family Practice Residency Program in Billings.  Similarly, in the Appropriations Bill for the 1999-2001 biennium, the Legislature has stated its preference that 13% of each campus budget be spent in the physical plant program (in order to invest more resources in the maintenance of state-owned facilities).

As part of the biennial budget process, each institution in the university system develops its resident student enrollment growth projections for the coming two (2) years, and these become part of the budget request that is submitted to the Governor.  All resident student enrollment growth full-time equivalent (FTE) is funded by the Legislature at what the Governor has determined to be the "marginal cost of education", which is about $1,837 of general fund, plus the associated tuition revenue.  The Legislature, however, is apprehensive about providing funds for inflated resident student projections.  So, in addition to having Legislative Fiscal Analysts review all enrollment projections, the Legislature also requires that the university system revert general fund monies to the state for any projected resident FTE that is not realized during the biennium.

The Governor has defined the "marginal cost of education" as the average per FTE cost of three (3) programs in the general operations budget:  Instruction, Student Services, and Fee Waivers.  For FY00, the Governor has calculated this marginal cost as $4,049, and has assumed that $2,212 of that cost will be funded with tuition revenues.

In addition to requiring a reversion of general fund monies for unrealized resident FTE, state statute also limits the university's opportunities for managing cash flow at year end.  While it does allow carrying forward a balance from the first to the second year of the biennium, it does not allow the University to carry forward a balance from one (1) biennium to the next.  This restricts the University's ability to manage resources for any long-term goals.

Each institution in the university system is responsible for submitting its tuition rates for approval by the BOR. The parameters of institutional autonomy within this process, however, are fairly rigid.  At the beginning of the process, the CHE establishes guidelines for maximum rate increases.  In addition, prior to each Legislative session, the university system's proposed rate increases, for both years of the coming biennium, are shared with the Governor's Budget Analyst and the Legislature's Fiscal Analyst; and the projected revenue from these increases are built into the Governor's proposed budget.

In addition to their control of tuition rate increases, the BOR also establishes rigid parameters for annual salary increases for all categories of employees throughout the university system.  Except for these, however, the BOR does not establish guidelines or controls for the development of the university's annual budgets.  The general operations budget is submitted to the BOR for review and approval each year, and this provides for what might be described as a benign level of oversight.  This annual review, however, has never resulted in the BOR directing the University to alter its budget proposal.

One (1) aspect of fiscal affairs in which the University experiences a high level of autonomy is in Grants and Contracts (G&C).  In 1990 the Legislature authorized the University to retain all Indirect Costs (IDC) on its G&C.  This policy established a significant fiscal incentive for pursuing G&C awards, and created undeniable results.  Total G&C sponsored program activity has grown from $14,900,000 in 1988 to $51,900,000 in 1998.

BUDGET DEVELOPMENT

In its report, the SRC recommended that the charge of the newly created SPBC include the following:

        Make strategic planning and budgeting recommendations to the President relative to funding priorities that fit the academic mission and institutional goals of MSU

        Provide recommendations concerning all university program revisions, enhancements, reductions, and/or eliminations

        Provide oversight concerning whether existing programs and proposed new programs fit the institutional mission, and have adequate funding and resources

        Provide recommendations concerning revenue enhancement goals, student enrollment goals, fund-raising goals and priorities, grants and contracts goals, use of Other Lawful Purpose (OLP) funds, and use of auxiliary revenues

        Determine how to specifically meet the goals set by the Long Range Planning Committee (LRPC)

        Evaluate priorities for use of all University funds

        Evaluate priorities for bonding programs

        Review budget adjustments on an as-needed basis, but at least semi-annually

The University is required by law to submit to the BOR, by September 1 st of each year, its annual General Operations Budget, by Program, and by categories of personal services, operations, and capital [Exhibit 7.02, 1999 MSU General Operating Budgets; Exhibit 7.03, 1998 MSU General Operating Budgets; and Exhibit 7.04, 1997 MSU General Operating Budgets]. The University. s detailed general operating budget is summarized by the University Budget Office into the annual BOR Budget and submitted to the Commissioner for approval by the BOR.  The Commissioner's Office distributes copies to all appropriate constituencies and other state agencies.  The University expects that in the future the dissemination of information will be enhanced by technological advances.  A new administrative and student services software system, SCT Banner2000, is scheduled to be implemented during the 1999 calendar year.  This system will service all campuses of MSU:  MSU - Bozeman, MSU - Billings, MSU - Northern, and the College of Technology - Great Falls.  Common reporting guidelines among all MSU campuses will improve the reporting and processing of all data for the BOR, the CHE, the Governor, as well as for the campuses themselves. [See also Appendix 7-H, Inventory of Reports Regularly Submitted to Regents; Exhibit 7.05, FY99 CHE Budget; Exhibit 7.06, FY98 CHE Budget; Exhibit 7.07, FY97 CHE Budget; and Exhibit 7.08, FY96 CHE Budget.]

The current process for developing the University's general operations budget begins in late winter.  The University Budget Office projects the budgeted revenue for the coming year and identifies all anticipated expenditures for the base budget, as well as all one (1)-time commitments.  This is reviewed by the President's Executive Council (PEC), which includes the President; the Provost and Vice President for Academic Affairs; the Vice President for Research, Creativity and Technology Transfer; the Vice President for Administration and Finance; and the Vice President for Student Affairs.  Through this council, all major divisions of the University are represented in the financial planning process.  Planning for enrollment is done by the Enrollment Management Team, which includes the Vice President for Student Affairs, the Executive Director of University Budgets, the Director of New Student Services, the Registrar, and the Director of Institutional Research.  Projections are made for two (2) years in advance of the current fiscal year.

In early spring, MSU conducts budget development meetings, open to the public, through its budget committee (now the SPBC).  The purpose of these meetings is to review year-to-date and fiscal year-end projections for the current year, and to present the preliminary PEC budget recommendations for the coming year.  Over the course of several weeks, the SPBC will discuss, and then recommend, budget priorities to the PEC for the coming fiscal year [Appendix 7-I, FY2000 Budget Development Schedule].

The University Budget Office disseminates the PEC-approved salary guidelines for the campus through each member of the PEC.  These are clearly defined and are followed by all areas of the University.  In addition, all faculty salaries are reviewed by the university's Salary Review Committee.  Allocations to Vice Presidents are generally based upon prior year allocations plus authorized salary increases, and other additions approved by the PEC, after discussions with the SPBC.  Fiscal policies on the carryover of fund balances into the coming fiscal year are determined by the PEC and communicated to deans and directors by their respective Vice President.  

Vice Presidents are responsible for distributing allocations to each of their deans and/or directors; and, the deans/directors have full responsibility for distributing allocations to each of their department heads.  There is no standard guideline for distributing these allocations.  Therefore, the philosophies and practices vary widely from one  (1) college to another.

During the fiscal year, budget revisions may be required as enrollments change or other needs are identified.  Again, a review of all significant revisions will have appropriate input and be submitted to the SPBC for comment before a decision is made by the PEC.

While this process is sound, it is utilized only for the development of the general operations budget.  There is no central oversight during the development of budgets for other university operations that are not part of the general operating budget.  This includes all self-supporting operations and activities, the Auxiliaries, and all research programs.  This policy provides flexibility for the departments to enhance their individual goals, but it provides limited strategic central planning.

[See also Exhibit 7.09, MSU Financial Report FY98 Exhibit 7.10, MSU Financial Report FY97; Exhibit 7.11, MSU Financial Report FY96; Exhibit 7.12, FY 98 (Integrated Postsecondary Educational Data System (IPEDS) Financial Section Reports Including Agricultural Experiment Station (AES), Extension Service (ES), and Fire Services Training School (FSTS); Exhibit 7.13, FY 97 IPEDS Financial Section Reports Including AES/ES/FSTS; and Exhibit 7.14, FY 96 IPEDS Financial Section Reports Including AES/ES/FSTS.]


STRATEGIC PLANNING

The SPBC was formed to merge short-term strategic planning and budget planning in order to realize the mission and goals of the University.  To date, the SPBC has been given the charge to:

        "Develop a Plan that will take the University from where it is now, to where it wants to be [according to the MSU Long Range Plan]; and for the short term, identify issues to address in order to develop this Plan."

In the past, a broad range of constituent representatives participated in the development of the University's general operating budget.  There was no formal process, however, to link the University's mission and goals to the budget plan.  That is the intended purpose of the newly created SPBC.  Despite its limited number of members, and its new focus, the design of the SPBC is intended to continue a tradition of broad constituent representation.  All areas of the University are encouraged to provide input to the SPBC process through, but not limited to, the Faculty Council [Exhibit 1.13, Faculty Council], Professional Council [Exhibit 1.14, Professional Council], Classified Employees [Exhibit 1,15, Classified Employees Personnel Advisory Committee Advisory Committee], and Deans. Council [Exhibit 6.17, Dean's Council].  At present, however, the level of participation and representation for classified staff appears to be in question.  In the campus Classified Survey administered in December 1998, less than 5% of the respondents agreed with the statement that "Classified employees are given sufficient opportunity for input into the planning of the university budget" [Appendix 1-L, Classified Staff Survey].  Responses from the Faculty Survey reflect a similar view [Appendix 1-K, Faculty Survey].  Only about 10% of those responding agreed with the statement that "...the budgeting process at MSU is an open process;" and, only about 12% agreed with the statement that "Faculty have adequate opportunity for input into the university budgetary process."

Given the level of state support for higher education over the past several years, the University has come to accept the fact that, for the most part, additional funds for program enhancements are going to come from areas other than the state general fund, primarily tuition and fees.  As shown in Appendix 7-J, Ten-Year Budget Trend Overview, over the past ten (10) years (1988-98), state support per resident FTE, adjusted for Consumer Price Index (CPI) inflation, has decreased by nearly 18%.  During the same time period, the resident student tuition rate, adjusted for CPI inflation, has increased by nearly 80%.

The concept has been discussed of having the University administration and the SPBC take a more proactive stance in the financial planning and management of all institutional fund sources.  Some view this as a way to better ensure that all available resources are focused towards the accomplishment of the University's primary goals.  Others view this as an abridgement of college or departmental autonomy.

For the past five (5) to six (6) years, the University has placed a great deal of emphasis on the recruitment of new students; and more recently, the University has begun to focus on the production of a higher retention rate for continuing students.  Several of the University's colleges are utilizing freshman seminars to help attract, as well as retain, students.  A financial plan is in place through the General Studies department to fund the GENS 101 - Freshman Seminar.  The FY99 original budget for this new program was $31,640.  An additional investment of $11,800 will also be provided in FY99 to enhance this effort.  Freshman programs are also  continuing in the College of Letters and Science and the College of Business.

As shown in Appendix 7-J, during the past ten (10) years the University. s resident enrollment has declined slightly, while its nonresident enrollment has grown over 132%.  As a result, the University's percentage of nonresident students has grown from 12.6% to 26.6%.  For the long term, this trend isn. t likely to change.  Historically, the University enrolls about 18% of all high school graduates in the state.  The total number of graduates, however, is relatively small.  The most recent Western Interstate Commission for Higher Education (WICHE) data indicates healthy growth in the near term, with the number of Montana high school graduates projected to increase steadily until FY03, from 11,367 to 12,414.  A steady decline is projected from FY04 through FY12, however, when the projected number of high school graduates falls to only 11,015.  Given this, if the University intends to continue to increase its enrollment as a primary source of revenue enhancement, it will have to continue to look beyond the borders of the state for its students.

There are over twenty (20) specific "goal attainment strategies" currently listed in MSU's Long Range Plan (LRP) [Appendix 1-E, Long Range Plan Goals and Strategies (Revised 1998)] which have direct financial consequences.  These include the following:

        1.A.11.   Move toward more state-of-the-art library, computing facilities, and equipment to support     

                       undergraduate education

        1.A.12     Increase opportunities for visiting professors and guest speakers to interact with undergraduate

                         students

        1.B.2.      Move toward more state-of-the-art library, computing facilities, and equipment to support graduate

                        education

        1.B.4       Develop and adequately support new graduate programs that are critical to the achievement of

                        institutional goals

        1.B.5       Develop effective means to increase availability of graduate assistantships, fee waivers, and 

                         other financial incentives to make MSU competitive with respect to the recruitment of graduate

                         students

        1.B.6       Increase the number of graduate assistantships for under-represented groups

        2.2           Increase the level of State support for faculty research/creative activities to a level similar

                         to that found  at other Land Grant universities

        4.F.1        Offer incoming salaries and benefits competitive with those at comparable universities and provide

                         adequate resources for faculty recruitment, relocation, and start-up costs where applicable

        4.F.2        Increase salaries to at least the average compensation paid at comparable universities, and provide for

                           salary enhancement mechanisms

        4.F.4        Provide resources to enable faculty to utilize new educational techniques and to teach

                          innovative  courses

        4.F.5        Provide resources to enable faculty to have involvement in research and creative activities and

                          to  participate in professional conferences

        4.F.9        Increase the number of sabbatical opportunities for faculty

        4.F.11      Emphasize the hiring of tenure-track faculty over adjunct faculty

        4.P.1        Recommend salaries and benefits [for Professional Staff] be competitive with those at

                          comparable universities

        4.P.3        Provide increased opportunities for professional development

        4.C.1       Encourage the State Department of Administration to provide a more competitive and equitable

                         salary structure for all classified staff

        4.C.3       Provide a structure to allow for merit raises for union-exempt classified employees

        5.2           Increase MSU. s commitment to undergraduate and graduate scholarship programs

        5.6           Expand and strengthen the University Honors Program

        6.2           Increase the number of diversity-based scholarships awarded to qualified students

        7.0           Provide information technology infrastructure and services necessary to support and enhance, in

                         the  most cost-effective manner, the teaching, research/creative activities, and outreach activities

        8.0           Upgrade and maintain the university facilities and grounds to provide for efficient use of our

                         resources  and for a safe, supportive, and accessible environment

To date, no financial plan has been developed for the accomplishment of these strategies.  As elements of various strategic initiatives are developed, however, the University and its individual campuses will require a foundation of financial data upon which it will draw and build.  To that end, the university's Chief Fiscal Officers (CFO) have made the commitment to create and maintain campus-specific, 'rolling' three (3)-year financial plans which will reflect pertinent external factors, enrollment projections, and revenue/expenditure models [Exhibit 7.15, MSU Strategic Plan].  Also in this document, the CFOs pledged to address the following items in the very near future:

        The development of a financial model for distance delivery offerings

        A financial model for the operation of Higher Education Centers

        The investigation of potential energy procurement strategies for the future

        The utilization of the enhanced capabilities of the Banner2000 system to develop more meaningful and useful decision support information (i.e. unit cost/contribution comparisons)

A recent strategic initiative of the University was the Architecture Pilot Program, established in FY99.  In the Spring of 1998, all Deans were asked to submit proposals identifying a project that would permanently enhance the finances of both their college, and the University overall.  The School of Architecture initiated a pilot program that, to date, has met its goal of increased enrollment and retention of students.  As a result, a significant portion of the increased student tuition revenue has been provided to the College of Arts and Architecture as a base budget adjustment.

In 1998-99 the CHE funded the University's first significant initiative for the development of distance learning courses.  Funds have been provided for faculty development, planning grants, pilot projects, and course development.  To date, the University has offered distance learning courses in Computer Literacy in Cyberspace, Introduction to Computer Science, astronomy, and a master's degree in education.

A plan to update and maintain global computer labs for students has been developed and a stream of funding has been identified to ensure future success.  The University has a long-standing commitment to earmark funds from the Student Computing Fee revenues for this purpose.  Each year, approximately one-third of all equipment in the labs is updated or replaced.

DEBT SERVICE

There are basically two (2) areas of University capital: institutional and bonded capital.  The major sources of institutional capital are earmarked student and equipment fees, auxiliary funds, and G&C funding.  The total capital purchases in the current unrestricted general operating category are small, and are not usually made until the fiscal year-end, when departments can confirm that they will stay within their authorized budget.  Fiscal year-end 1998 total capital expenditures in general operations was $2,381,600, which was 3.54% of the total expenditures (less fee waivers).  Because there is a small level of expenditures for capital from general operating funds, there is not an unreasonable drain on funds available for educational purposes.  

For bonded capital, there is no stated BOR policy on debt levels for an institution.  Rather, it is the responsibility of the University to exercise prudent fiscal policies so as to not commit to bond debt in a manner that might jeopardize the existing bond debt service coverage rates stated in the covenants of the indentures (generally 110% or 120%).  In addition, the University has a formal and legal inter-institution bond agreement that binds all MSU units to specific terms of bond debt service repayments to the funding institution in the event that a particular unit is not able to fully service their own institutional debt, for all legally cross-pledged bond issues.

All other long term debt service, such as State Intercap or Norwest loans, are evaluated by the requesting party and the treasurer to ensure that the identified source(s) of repayment are adequate to address the debt service, based upon a review of historical, as well as projected revenue generation.  These formal funding agencies will not process a loan application from any MSU unit that has not been approved in writing by the MSU Treasurer.  Other long term debt resulting from leases and vendor-financed purchases are subject to the series of reviews associated with purchasing policies and regulations.

Even though there is not a BOR policy on debt service, all proposals must be reviewed and approved by the BOR. Although there is currently no campus-wide review of indentures, the standard practice of the University is to have the PEC responsible for formally approving any new revenue bond proposal.  In addition, beginning in January 1999, the PEC initiated the practice of reviewing, on a semi-annual basis, a regularly updated five (5)-year revenue/expenditure plan for all bonded institutional debt service obligations [Appendix 7-K, Debt Service Schedule].  Bond insurers require an annual revenue bond disclosure in the form of an annual, independently audited, revenue bond report.  The disclosures require a historical perspective of revenue bond peformance by indenture and by bond fund.  In addition, all revenue bond issues have historically required a ten (10)-year projection of revenues and expenditures in a pro forma statement to show projections including new sources of pledged revenue and the impact of additional debt service.  These statements are required by the Securities Exchange Commission (SEC) and the bond rating agencies prior to the issuance of a revenue bond official statement for the bond offering.  The SEC continues to expand the annual disclosure requirements for insurers of revenue bonds.

The University's primary source of capital construction and maintenance of educational facilities continues to be the State Legislature's Long Range Building Program (LRBP).  Campus building requests must be submitted to the PEC and approved by the President before submittal to the BOR for inclusion in the MUS LRBP [Exhibit 8.03, Long Range Building Program].  All requests from throughout the university system are ranked by the BOR, and then submitted to the Governor.  The Governor, in turn, ranks all requests from throughout state government and includes only the highest priority requests in her/his official biennial budget proposal.  Final funding decisions are made by the Legislature.  A more complete discussion of this subject is presented in Standard Eight, pp. 266.

 ADEQUACY OF RESOURCES

DEBT SERVICE REQUIREMENTS

The University does require centralized approval (by the treasurer) for a department's use of the University's established loan programs.  The most common of these are the State Intercap Loan fund and the contractual Norwest Installment Loans fund.  There is no centralized point of approval, however, for all non-bond financing.  Commitments made by departments through vendor financing agreements may not be known by anyone within the University's central group of financial managers.  Thus, in these cases, there are no executive-level assurances that adequate resources are available to meet debt requirements without adversely affecting the quality of educational programs. Whenever non-bond financing is approved centrally, the Budget Office and associated Vice Presidents, deans, directors, and department heads are notified of the financing to help ensure that the required debt service will be identified in the annual budgeting process for the duration of the contractual agreement.

The University follows several sources of guidelines for recording and classifying transfers and interfund borrowing.  These include the College and University Business Administration (CUBA), the Montana Code Annotated (MCA), the BOR Policies and Procedures, and the Montana Operations Manual (MOM).  Interfund borrowing outside the


agency sub-fund level is required to be transacted by the Office of the Commissioner of Higher Education (OCHE)

on behalf of the unit.  Intrafund borrowing is left to the agency's discretion.  Transfers are largely governed by Generally Accepted Accounting Principles (GAAP), and are transacted based upon sound and prudent financial planning and control.  Agency processing requires all cash transfer entries to balance within each internal journal voucher transfer document.  Transfers among the MSU units must be recorded on no-warrant transfers rather than journal vouchers, and they too require that cash entries balance.  The Accounting Division of the State Department of Administration identifies and holds any such documents that do not balance, due to Statewide Budgeting and Accounting System (SBAS) edits that automatically flag such entries.  Internal and external audits provide checks to ascertain that these guidelines and procedures are followed.  Internal inter-entity loans, for whatever purpose, are formally approved centrally, formally recorded in the accounting records, and monitored and amended centrally as the need arises.  A three (3)-year history of borrowing (as identified centrally) is shown in Appendix 7-L.

Also in Appendix 7-L, a nine (9)-year summary of prior year and future debt repayments is shown for each indenture and formal loan document or agreement recorded centrally.  While the level of legally pledged revenues is adequate to meet the bond debt service requirements, internal policy decisions have been made to release certain levels of funding from the indenture, for use in operating budgets.  The effect of these decisions precludes the addition of any significant capital commitments or revenue bond debt unless the subject of the new indenture will generate sufficient revenues to service the new debt, or the University's current practice is revised to allow the retention of already existing pledged revenues.

The University, with BOR approval, has the ability to set and adjust the building and user fees which comprise 68.6% of the gross pledged revenue.  Thus, while the revenue stream for debt service is highly dependent upon student FTE, it is not subject to Legislative appropriation or approval.  Non-bond debt service may be dependent upon the Legislature if a department relies upon appropriated general fund monies to service the debt.  The ratios of earning to debt service for the revenue bond program for the past five (5) years were:  FY94-2.66%, FY95-2.25%, FY96-1.98%, FY97-2.06%, and FY98-2.15%.

GENERAL OPERATIONS

The Montana Legislature appropriates a "lump sum" amount of state general fund monies to the BOR of the MUS  to support a portion of the general operations cost for all the MUS campuses.  The basic philosophy of the state. s funding methodology is to provide state support for approximately two-thirds of the FTE "cost of education" for resident students.  The state bases its calculation of the "cost of education" as essentially that which was expended in the prior year, plus adjustments for added costs such as legislatively approved salary increases.  All institutions are expected to maintain tuition rates which recover the full FTE "cost of education" from nonresident students.

The model that the CHE uses to distribute the Legislature's lump sum appropriation of state general fund among the MUS campuses is an adaptation of one that was developed in New Mexico.  The model is based upon the actual student credit hour (SCH) production for each campus, by discipline.  It involves variable student/faculty ratios as "productivity targets" and it reflects "peer institution" average faculty salaries, by discipline.

The underlying concept for fund distribution, both at the state and at the university system level, is fundamentally sound.  The total number of Montana high school graduates is not expected to increase significantly in the near future. Therefore, neither the state nor the University is faced with funding excessive enrollment growth.  The overall level of state funding for the university system, however, is less than desired.  In addition, the current MUS funding model is undergoing a review which could ultimately result in revisions that would reallocate a significant portion of state funds away from MSU, to smaller campuses within the system.

One change in the MUS funding model has already been adopted by the BOR, in an effort to maintain affordable tuition rates for the colleges of technology and lower division courses at our smallest four (4)-year campuses.  In FY00, the tuition rates will be frozen at the FY99 levels for those smaller campuses noted above.  In order to do this, the tuition rates at all larger campuses will be increased by an additional 0.36%.  Then, an amount of general fund equivalent to the added tuition revenue will be transferred from the larger campuses to the smaller ones.

For the most part, the allocation of general operating funds within the University has been done through a "base plus" approach for several years.  Thus, the enhancement of existing programs, or the creation of new programs, has been accomplished with marginal portions of annual increases in tuition revenue.  The reallocation of funds from within the existing budget has not been attempted to any significant degree.  As a result, there are those within the University who claim that the current distribution of funds among programs does not substantially reflect institutional priorities nor student enrollments.

In recent years, the University's desired level of expenditures for its general operations. programs has exceeded the associated level of revenues.  A significant contributing factor to this challenge is the fact that there has been no real

growth in the level of support from the state in recent years.  Two (2) examples which characterize the state's level of support for higher education are as follows:

        When the University's base budget for the 2000-2001 biennium was calculated by the Governor's budget office in preparation for the legislative session, a 3% "vacancy savings" reduction was applied to all non-instructional personal services expenditures.

        During the 1997 legislative session, the University was given the authority to retain interest earnings from invested cash balances of tuition and general fund.  That was offset, however, with a reduction in the general fund appropriation, which turned out to be greater than the interest earned.

In fact, as shown in Appendix 7-J, state support per resident student FTE, when adjusted for CPI inflation, declined by nearly 18% from FY88 to FY98.  Because of that, student tuition and fees have become the University's primary sources of revenue growth. Tuition rates have increased significantly, and two (2) new mandatory increases have been enacted: an equipment fee and an athletic fee [Exhibit 7.16, Description of Student Fees].  As shown in Appendix 7-J, resident tuition, when adjusted for CPI inflation, has still increased nearly 80% in the past ten (10) years.  At this point, some believe that the University has established tuition rates which limit access for resident students, and which .discourages the applications of many nonresident students.  In addition, the BOR believes that any large tuition rate increase in the near future would draw a great deal of public criticism-from students, parents, and legislators.    Given this, tuition rate increases in FY2000 and FY2001 will likely be 4.36% per year, or less.

A recent BOR policy limits the number of undergraduate hours a Montana resident can accumulate at state-subsidized tuition rates.  After the limit has been exceeded, the student will be charged the full cost of education, which is equivalent to the fees and tuition paid by non-resident students, for all additional undergraduate hours until a baccalaureate degree is awarded.  Beginning with the 1996 fall semester, this limit was set at 150 credits.  Due to appeals from Student Senate representatives, the BOR have increased this "credit cap" to 170 credits.

The University is highly dependent on student tuition as its primary source of revenue growth.  In fact, in any given year, the level of commitment the university budgets for program enhancements, and even faculty salary increases, is almost entirely dependent on the level of tuition revenue that is projected for the coming year.  For that reason, great care is taken to develop enrollment projections that are accurate (e.g. cautiously optimistic, but not over-stated).  Given this, student enrollment and tuition revenue are carefully monitored each semester, and budget commitments are then adjusted accordingly.

In Appendix 7-L, Comparison of FY98 MSU General Operating Budget to Peer Institutions, the FY98 revenues and expenditures of MSU are compared to those of its peer institutions.  The most pertinent results of this comparison are as follows:

          For MSU, state general fund support comprised less than 50% of all revenues.  For the peer institutions, state support comprised nearly 70% of all revenues.

          For MSU, the average level of state support per resident FTE was $4,510.  For the peer institutions, the level of state support was nearly double, at $8,237 per resident FTE.

          For MSU, total expenditures per FTE student were $6,709.  The expenditure level for peer institutions was over 30% greater, at $8,807.

          At MSU, nearly 57% of all revenues were expended in the Instruction Program, while at the peer institutions, this figure was only about 51%.

The most significant strategic initiative the University has embraced to date is the enhancement of faculty and professional employee salaries.  Over a four (4)-year period, from FY96 through FY99, the University awarded (average) faculty salary increases of 6.9% per year.  During the same period, most professional employee salaries were increased, on average, about 1% less than that per year.  An indication of the results this initiative produced can be seen in Appendix 7-J, which reflects only the first three (3) years of salary increases.  For MSU, the average salary expenditure per faculty FTE escalated from $30,657 in FY88, to $48,673 in FY98.  During the same period, peer institution average faculty salaries increased from $34,675 in FY88, to $48,188 in FY98.    

This was, however, an initiative of significant cost, and was done during a period of little enrollment growth.  As a result, very few other program budget enhancements were possible during this period.  In fact, during the final year of this initiative (FY99), in order to balance the University. s budget and still award the full 6.9% faculty salary increases, the University had to delay the start date of the salary increases to February 1st (1999), had to impose base budget reductions totaling $1,300,000 across the full breadth of the general operations budget, and had to impose a larger . administrative fee. on all expenditures in designated and auxiliary accounts.  The distribution of the FY99 base budget reductions is shown in Appendix 7-M, FY99 Base Budget Reductions.  In several cases, these reductions resulted in the elimination of classified staff positions, and a corresponding increase in workload.  As a result, certain departments are now experiencing significant increases in their rate of employee turnover.

In accordance with the requirements of its bond indentures, the University maintains a surety bond for its debt service obligations, in addition to a Repair and Replacement (R&R) reserve.  For the university's general operating budget, however, circumstances are considerably different.

In order to protect the general operations budget from unforeseen revenue losses or expenditure increases, the University has adopted a variety of prudent practices.  The University always attempts to base its budget on a conservative estimate of student enrollment; utilities. budgets are based on severe weather conditions; funds are earmarked for year-end retirement payout costs; and the beginning year budget includes a $200,000 reserve.

While the majority of student financial aid has been, and will continue to be, from federal funding sources, the University, as well as the BOR, has recognized that financial aid funding from non-federal sources is extremely important if students of limited means are to have sufficient funding to pay for necessary educational costs, particularly when tuition costs continue to rise.  In this regard, scholarship funds generated by the University Foundation for the various university, college, or departmental scholarship programs have increased by approximately 50% over the past four (4) years and it is expected that this trend will continue.  Fee waivers that are funded from within the general operations budget are carefully budgeted by the Fee Waiver Committee, and managed by the Student Financial Aid Director.  The budget allocated for these fee waivers has increased annually at a rate equivalent to the increase in the tuition rate. The majority of these fee waivers are used to encourage enrollment at the University, and to recognize outstanding academic and athletic performance.

In 1997, the BOR created a new student financial aid program known as the Montana Tuition Assistance Program (MTAP).  For the first two (2) years of its existence, MTAP. s only funding was from interest earnings on tuition and general fund monies that were in excess of budgeted levels earmarked by the BOR for general operations costs at each of the MUS campuses.  For the current biennium (FY00/01), the 1999 Legislature appropriated $1,500,000 in general funds each year to provide grants of $500 to an additional 3,000 resident students who qualify for the MTAP Program.

In addition to MTAP, the 1997 Legislature authorized the BOR to implement a state higher-education savings program for parents who contribute up to $3,000 per year per taxpayer.  This program was implemented in 1998 as the Montana Family Education Savings Program and is being administered by the College Savings Bank in Princeton, New Jersey. This program will permit parents to save substantial amounts of money and tax free interest earnings for their children's educational costs in future years.

Efforts have also been made to inform students about the availability of financial aid funds that are available from the private sector.  Funding received by MSU students from private scholarship foundations, as well as from private lending institutions, has increased approximately 10% per year.  With limited increases anticipated in federal student aid appropriations, alternative sources of educational support will continue to play an important role in providing funding for students.

The University recognizes that no single source of funds is adequate to fund the student financial aid needs, neither now nor in the future.  We expect, however, that through a combination of funding sources, including parent and student contributions, the student's ability to pay her or his educational costs can still be attained.

[See also Exhibit 7.17, Official U.S. Department of Education Student Loan Default Rate (FY95 and FY96).]

While state funding has languished, G&C revenue has grown dramatically each year for several years.  This growth is an enhancement to the educational mission in that it diversifies our faculty expertise, provides opportunities for exposing undergraduate students to research, and offers another source of funding for needed equipment.  Maintaining the university. s current level of research grants is a continuing challenge because some, such as those for the Experimental Program to Stimulate Competitive Research (EPSCoR), require significant matches.  The 1999 Legislature took action which holds the promise to significantly enhance the University's ability to maintain State matching funds for these purposes.  House Bill 260 establishes a $5,000,000 per year, permanent source of funding for research and commercialization grants.  Although this legislation may face a legal challenge from the legislature's minority party, the University is hopeful that this legislation will become the permanent source of State grant match funds that we have been lacking in prior years.

The University's main auxiliary operations are Residence Life, Family Housing, University Food Services, Strand Union Building, and university parking.  For many years it has been the University. s practice to maintain a clear separation between the revenues and expenditures of its general operations budget and those of its auxiliary operations. The auxiliary operations are expected to be fully-self funding, and have never been subsidized by general operations funds.  Auxiliary operations are, however, expected to provide a proportionate level of support to the general operations budget for institutional support and physical plant services that are provided centrally.

Through this "recharge" process, the university's auxiliary operations pay for about $2,000,000 of direct and indirect central services [Exhibit 7.18, Auxiliary Budget (Actuals), and Exhibit 7.19, Auxiliary Budget].

 FINANCIAL MANAGEMENT

The SRC was also charged with the responsibility of reviewing the university's overall process of budgeting and managing funds.  As a result of that review and subsequent committee recommendations, the President realigned his organization, created the position of Executive Director of University Budgets, and established the University Budget Office in a direct reporting line to the President.

The Executive Director of University Budgets is responsible for general oversight of all institutional budgets, in coordination with Vice Presidents and other finance officers who hold management responsibility for major segments of the total university budget.  The Vice President for Administration and Finance is the CFO of MSU, whose responsibilities include general oversight of finances on all four MSU campuses and of all financial entities of MSU. University Business Services and the University Treasurer are responsible to the Vice President for Administration and Finance.  G&C operations are under the Vice President for Research, Creativity and Technology Transfer; and Auxiliary operations and Student Financial Aid are under the Vice President for Student Affairs.  In addition, the Office of the Provost and Vice President for Academic Affairs has a Budget/Fiscal Director. [See Exhibit 7.20, Vice President for Administration and Finance Organizational Chart, and Exhibit 7.21, MSU Organizational Chart; Exhibit 7.22, Position Descriptions for Administration and Finance Key Personnel; and Exhibit 7.23, Resumes of Administration and Finance Professional Staff.]

Each autumn the University submits an operating budget report to the BOR for their review and approval. The report provides a detailed summary of actual expenditures and revenue for the previous year, and projected levels of revenue and expenses for the current year.  University income from all sources, and all related expenditures, are recorded in the institution's Financial Records System, by source, and in accordance with all applicable fund accounting guidelines. Beginning July 1, 1999, the University will process its accounting records using SCT Banner2000's financial module. These systems have been designed to allow the financial statements to be presented in accordance with GAAP.  In addition, an official summary is maintained in the State of Montana accounting system.  All transactions are regulated by federal, state, BOR, and University policy.

Cash management is defined by industry best practices and institutional needs.  State policies and/or statutes, however, provide written guidelines in defining the maximum time that an overall fund group may have a negative fund balance.  There are no limitations on how long a specific accounting entity balance within a fund group may be negative, how long cash balances may remain uninvested, or how large an uninvested balance may be.

Institutional policies which ensure that all income is accounted for and administered by the institutional administration, or agents thereof, are addressed in the MOM Chapter 2-1200 [Exhibit 7.24, MOM Chapter 2-1200], the University System Accounting Manual (USAM) Chapter 30 [Exhibit 7.25 USAM Chapter 30], and the MSU Business Procedures Manual Section 250.2 and 260.0 [Exhibit 7.26, Business Procedures Manual Section 250.2 and 260.0].  Important aspects of cash management from the MOM manual include:

          All cash collected by a university system must be promptly deposited intact in a bank to the credit of the State Treasury

          All negotiable instruments must be restrictively endorsed, preferable on acceptance

          All collections shall be deposited at least weekly or whenever total collections accumulate to $500 or accumulative cash equals $100

          All collections must be adequately secured and access to safekeeping facilities appropriately restricted

          Every deposit made in the State Treasury must be documented on a bank deposit ticket and a State collection report (Form 241)

          All the financial gifts and checks payable to MSU will be provided to the MSU President's Office; the President's Office is responsible for correctly depositing these funds

The Office of Financial Aid Services (OFAS) disburses all federal, state, and institutional financial aid assistance according to appropriate federal and state guidelines and regulations, BOR policies, and institutional directives [Exhibit 6.04, BOR Policy and Procedures Manual].  Examples include:  BOR Policy 501.1 High School Honor Scholarships, BOR Policy 504.1 Resident Student Financial Assistance Program, BOR Policy 504.5 Graduate Scholarships, BOR Policy 505 Guaranteed Student Loan Program, and the U.S. Department of Education's Grant Administration and Payment System (GAPS) [Exhibit 7.27, Grant Administration and Payment System].  The OFAS must abide by these regulations that govern not only how financial aid funds are requested and drawndown from the funding entities, but how those funds are awarded and disbursed.  Both federal and state fiscal, and program audits, prescribed at intervals, as well as unscheduled internal reviews, help to ensure appropriate control and oversight in the management of financial aid funds.

The four (4)-year trends shown in Appendix 7-N, Financial Stability (Four-Year Trend), reflect a stable trend of overall operating surplus.  MSU operates under a BOR mandate which requires the University to report any accounting entity which has a negative fund balance, and to provide a deficit reduction plan.  In addition, the Legislature requires that the University report any accounting entity that has a negative cash balance for two (2) consecutive year-end periods.  The combination of these reporting requirements has resulted in strict management of entities within the university's fund structure.  The financial directors monitor all funds for negative cash and fund balances, with particular emphasis at year-end, and the financial staff work with departments to identify additional resources, or expenditure reductions, to eliminate any deficits.

Choice of investments is strictly limited by state statute, both for direct investments and for the state-pooled fund, which may be used for short-term investment needs.  Bond indentures further define permitted investments.  All investments are made either through the Bond Trustee or the state investment pool, which has a rate of return that

is far below the average.

INSTITUTIONAL AUDITS

The MSU institutions are subject to a series of various financial compliance and performance audit requirements.  As per state statute, the general institutional financial statements are subject to independent audit by the Montana Legislative Audit Division (LAD).  This state statute requires the preparation of independently audited financial statements for each state agency on an annual basis.

The special purpose audits at MSU require only that they be conducted by independent auditors and that they be prepared annually.  Independent audits are typically selected via a bidding process by "qualified" firms, as determined by the LAD.  Included activities in this group of audits are KUSM, the MSU public television station, as an annual requirement of the Corporation for Public Broadcasting [Exhibit 7.28, 1998 KUSM Audit Report; and Exhibit 7.29, Memorandums of Understanding: Montana Public Television and Friends of Montana Public Television, Inc.]; the Athletics program, as required by the NCAA [Exhibit 7.30, 1998 NCAA Audit Report; Exhibit 7.31, Memorandums of Understanding MSU-Athletic Scholarship Association; Exhibit 7.32, Athletic Scholarship Association Financial Statement; and Exhibit 7.33, Intercollegiate Athletic Report]; the Museum of the Rockies, operated in conjunction with MSU [Exhibit 7.34, 1998 Museum of the Rockies Audit Report, and Exhibit 7.35, Memorandums of Understanding MSU/Museum of the Rockies]; and the revenue bond audit, as required by the SEC, the bond insurers, and as stated in the covenants of the governing indenture [Exhibit 7.36, FY98 Bond Audit Report; Exhibit 7.37, FY97 Bond Audit Report; Exhibit 7.38, FY96 Bond Audit Report; and Exhibit 7.39, FY95 Bond Audit Report].  Periodic audits of sponsored research programs are mandated and governed by the funding agency, in accordance with Federal Circular A-133, or as required/desired by state and private funding sources.  In some cases, certain federal agencies conduct their own audits of funds received by the University, even though the Single Audit, which is considered the audit of the university's federal funds, is conducted by the LAD.  All audit reports are considered public documents.

The University is audited by the LAD on a biennial basis, and the results are included in the statewide Single Audit Report.  This audit report complies with the reporting requirements of the Government Auditing Standards, the Single Audit Act of 1984, and the Office of Management and Budget (OMB) Circulars.  In conjunction with the Single Audit, the LAD conducts a financial compliance audit of the University to determine if the financial operations are properly conducted, the financial reports are presented fairly, and the University has complied with applicable laws and regulations [Exhibit 7.40, MSU Financial Compliance Audit Report].

All funds received by the University are subject to the audit conducted by the LAD.  In performing the financial compliance audit work, the LAD uses standards set forth by the American Institute of Certified Public Accountants (AICPA) and the United States General Accounting Office.  As a result of the financial compliance and Single Audit work performed, the LAD issues a report and management letter.

The university's Internal Audit Department reports directly to the President and has an Audit Charter, Policy and Procedures. document [Exhibit 7.41, University Audit Charter, Policy and Procedures Document].  This document describes the purpose, authority, structure, scope, and objectives of the department, and the procedures involved in handling allegations of fiscal misconduct.  The purpose of the department is to provide an independent appraisal function for all campuses and units of the University.  Internal Audit also coordinates external audits of university funds.

Recently, there have been two (2) instances of fiscal misconduct on campus.  After a detailed review of the circumstances involved with these occurrences, the Internal Audit Department not only recommended procedural changes in the affected offices, but also implemented new training sessions campus wide.  To raise awareness on campus about fraud and internal controls, Internal Audit presented an employee fraud seminar and now conducts a presentation about internal controls at the annual Business Procedures Workshop.

The LAD issues, at an exit conference, an audit report that includes their findings and recommendations.  The Internal Audit Department coordinates and compiles, in writing, the university response to each recommendation.  For audits of university funds performed by independent audit firms, Internal Audit coordinates the response to recommendations.  These management letters, including the university's written response to each recommendation, are carried forward from one audit period to the next.  While it is the audited department's responsibility to implement any action included in their response, Internal Audit follows up, throughout the year, on management's compliance with their agreed upon resolution to ensure compliance.  Any ongoing problems are reported to university administration.

 FUNDRAISING AND DEVELOPMENT

The MSU Foundation, Inc. (hereinafter Foundation) was incorporated in 1946 as an independent, not-for-profit corporation for the sole purpose of providing extramural support for MSU [Exhibit 6.22, MSU Foundation, Inc.].  The Foundation promotes the three (3)-fold mission of the University, including instruction, research/creative activities, and public service/outreach.  The Foundation's support is not intended to replace the obligation of the State of Montana to provide for the basic needs of the university's programs, but to support special projects and programs that enhance existing educational opportunities.  The Foundation accomplishes this by:

          Seeking gifts, grants, bequests, and other forms of financial support

          Conducting public relations programs with alumni, students, faculty, government entities, the business community, the general public, and other appropriate groups

          Managing the assets of the corporation in accordance with its purpose and fiduciary responsibilities

The Foundation is recognized under section 501(c)(3) of the Internal Revenue Service (IRS) Code.  All university fundraising activities comply with institutional policies and governmental requirements.  These policies and requirements are defined by the IRS, the State of Montana, MSU, the BOR, the MSU Foundation Board of Directors, the Council for Advancement and Support of Education (CASE), and GAAP for not-for-profit organizations.  

The Foundation serves as the university's development office.  Eight (8) campus-based fund raisers, all employees of the Foundation, are housed in MSU's colleges and report jointly to their respective college and to the Foundation.  The Foundation is organized exclusively to raise, accept, and hold gifts for the benefit of the entire University.  It is one (1) of six (6) university-affiliated organizations engaged in fundraising.  Others are the Alumni Association, Bobcat Boosters, Museum of the Rockies, Wheeler Center, and Friends of Montana Public Television (KUSM).  In theory, the Foundation coordinates and oversees the fundraising efforts of these affiliated organizations, but they function independently [Exhibit 7.42, MSU Foundation Policy Regarding Acceptance of Funds and Services Provided to Other Organizations].

The need for communication and coordination between the Foundation, the University, and the other affiliated organizations is imperative to fundraising and development activities.  Policies require all development efforts seeking funds over $5,000 to be reviewed and approved to ensure appropriate approaches and continued funding from the private sector.  The MSU Development Committee is the governing body for all fundraising and development activities that occur on behalf of MSU or its associated organizations [Exhibit 7.43, MSU Foundation Development Committee].  This committee is responsible for establishing and coordinating institutional priorities as they relate to development and fundraising.  While the University sets forth its priorities on an annual basis, those priorities can often change depending on necessities and circumstances.  The Committee strives to communicate those priorities to the development staff and campus community. Membership consists of the President of MSU (Chair); Vice President for Administration and Finance; Provost and Vice President for Academic Affairs; Vice President for Research, Creativity, and Technology Transfer; Vice President for Student Affairs; and the Executive Director of the MSU Foundation.  The staff member for the committee is the MSU Foundation's Director of Research.

Primary responsibility for developing external funding lies with the Office of Research, Creativity, and Technology Transfer; the Office of G&C; the MSU Foundation; and other organizations whose fundraising activities are coordinated by the Foundation.  Guidelines have been established to clarify the division of responsibilities to avoid confusion on the part of those seeking support, to promote greater cooperation and coordination, and, thereby, to increase productivity for the University as a whole [Exhibit 7.44, MSU Foundation Policy on Coordination of Responsibilities Regarding External Funding].

The Office of Research, Creativity, and Technology Transfer and the Office of G&C have primary responsibility for soliciting and administering government G&C. The Foundation has primary responsibility for soliciting and administering all philanthropic gifts, awards, and endowments.

The Foundation practices the highest standard of financial accountability to donors as monitored by its Board of Directors.  Confidential information pertaining to donors or prospective donors is carefully protected so that the relationship of trust, integrity of the institution, and right to privacy is maintained.  Independent accountants audit the Foundation. s annual financial statement [Exhibit 7.45, MSU Foundation 1997-98 Annual Report; and Exhibit 7.46, MSU Foundation 1997-98 Audit Report].  As stated in the Montana BOR Policy and Procedures Manual, Section 901.2, the Foundation is requested to submit an annual financial report through the CHE to the BOR at their December meeting.  Such statements should include an expression of opinion by an independent CPA.  In addition, the BOR recommends that the private foundations incorporate those fund structures and accounting principles promulgated by CUBA and the AICPA Audit Guide where applicable.

Staff members adhere to the highest standard of professional and ethical behavior in their conduct and fundraising practices [Exhibit 7.47, MSU Foundation Prospect Research Data Base Information Confidentiality Agreement]. Development staff and members of the Board of Directors engaged in fundraising efforts are guided by a variety of policies, procedures, and guidelines.  The development staff uses several means to remain informed and to think carefully and critically about the ethical issues that are essential to the success of MSU's fundraising program.  Resources include staff meetings, consultation with colleagues through list services on the Internet, affiliation with professional organizations, institutional membership in the Council for Advancement and Support of Education, and individual membership in a variety of fundraising organizations.

The Foundation is chartered to accept, hold, and invest charitable gifts on its own behalf and on behalf of MSU, its colleges, departments, programs, and affiliated activities.  A donor may either designate the gift to generally support the Foundation or the University, or may designate it to support a specific purpose or activity of the Foundation or the University.  Furthermore, the donor may designate that her or his gift, either an outright gift or a deferred gift, be held permanently in an endowment fund.

Cash donations, received by any unit of the MUS and made payable to that unit, will be deposited as state university system assets into the state Treasury and recorded on the statewide budgeting and accounting system unless documentation clearly provides evidence of other donor intent or identifies the donation as a result of campaigns or solicitations from a separately incorporated foundation acting on behalf of the university unit.  Copies of such documentation must be maintained by the university system campus.  When properly documented, such a cash donation may be forwarded to the separately incorporated foundation.

This policy does not preclude the university system campus from transferring funds to a separately incorporated foundation for investment or endowment management.  The university system campus, however, must retain the assets, in some form, on the SBAS records.  A yearly accounting, at minimum (the Foundation submits monthly statements), must be furnished to the campus by the separately incorporated foundation in order for the university system campus to prepare accounting adjustments related to interest earned and expenses incurred on the assets transferred for investment or management.

All Foundation funds are managed and invested in accordance with the "Statement of Investment Policies, Guidelines, and Objectives" [Exhibit 7.48, MSU Foundation Statement of Investment Policies, Guidelines, and Objectives].  The investment policy establishes clear understanding of the investment goals and objectives of the Foundation.  It sets forth the guidelines and restrictions to be followed by the investment managers including risk and return parameters, and the long term target asset allocation for the investment portfolio.  The Investment Committee of the Foundation's Board of Directors was established to carry out the investment policy of the Foundation, provide guidance to the Foundation Treasurer and the investment managers, and to review investment performance on a regular basis.

Life income gifts may be gifted directly to the Foundation, who will serve as trustee, or may be gifted through a corporate trustee.  As trustee, the Foundation manages and invests the assets of the trust in a pooled investment fund. Each trust established is separately accounted for in compliance with policies governing gift acceptance, investment, spending, and fee assessment [Exhibit 7.49, MSU Foundation Summary Statement Fee Assessment and Spending Policies].

Complete records are maintained for endowment and life income funds including the original gift agreement or contract signed by the donor, a record of the gift(s) transferred, a copy of the acknowledgment, and substantiation provided to the donor.  The Foundation refers to the gift agreement or contract to ensure that all terms of the gift are followed.  Donors who have established an individual endowment fund are provided with a fiscal year-end financial summary of the status of the fund including gifts credited, earnings and fees posted, and expenditures made.  Donors who have established life income gifts receive a calendar year-end financial summary showing the investment's change in fair market value and a report of annual income distributed to them.  The Foundation files the required reports for each of the trusts it holds.

The Foundation is an independent corporation whose relationship is governed by its Articles of Incorporation, Bylaws, and Operating Agreement [Exhibit 7.50, By-Laws of Montana State University Foundation, Inc.; and Exhibit 7.51, MSU Foundation Operating Agreement].  The relationship between the University and Foundation is arms-length.  The University agrees to encourage and maintain the independence of the Foundation and, at the same time, foster the cooperative relationship between the University and the Foundation.  The terms of the relationship and the responsibilities of the parties are defined in the Montana BOR Policy and Procedures Manual, Section 901.9, and in a detailed operating agreement that has been approved by the governing bodies of both entities.

[See also Exhibit 7.52, MSU Foundation Policy on Expenditure of Foundation Funds; and Exhibit 7.53, MSU Foundation Organizational Chart.]

      CONCLUSIONS

Overall the University does have sufficient autonomy to control the outcomes of its financial planning and management process.  Although the level of state support received from the Legislature cannot be controlled, enrollment levels can be influenced, and the University does have control over the program priorities and budget allocations within the campus.

Areas of success in the University's financial affairs include the following:

        The University has developed several standard practices which enhance the management of its debt service obligations.

        The PEC formally approves any new revenue bond proposal.  In addition, the PEC reviews, on a semi- annual basis, a regularly updated five (5)-year revenue/expenditure plan for all bonded institutional debt service obligations.

        Whenever non-bond financing is approved centrally, the Budget Office and associated Vice Presidents, deans, directors, and department heads are notified of the financing to help ensure that the required debt service will be identified in the annual budgeting process, for the duration of the contractual agreement.

        All inter-entity loans, for whatever purpose, are formally approved centrally, formally recorded in the accounting records, and are monitored and amended centrally as the need arises.

        Great care is taken to develop enrollment projections that are accurate (e.g. cautiously optimistic, but not over- stated).  Given this, student enrollment and tuition revenue are carefully monitored each semester, and budget commitments are then adjusted accordingly.

        In order to protect the general operations budget from unforeseen revenue losses or expenditure increases, the University has adopted a variety of prudent practices.  The University always attempts to base its budget on a conservative estimate of student enrollment; utilities. budgets are based on severe weather conditions; funds are earmarked for year-end retirement payout costs; and the beginning year budget includes a $200,000 reserve.

        The University, as well as the BOR, has recognized that financial aid funding from non-federal sources is extremely important if students of limited means are to have sufficient funding to pay for necessary educational costs.  In this regard, scholarship funds generated by the Foundation for the various University, college, or departmental scholarship programs have increased by approximately 50% over the past four (4) years, and it is expected that this trend will continue.

        In 1997, the BOR created a new student financial aid program known as MTAP.

        In addition to MTAP, the 1997 Legislature authorized the BOR to implement a state higher education savings program for parents, who can contribute up to $3,000 per year, per taxpayer.

        During the past ten (10) years, the Foundation has received from donors, on behalf of MSU, a total of $41,000,000.  In this same period, the Foundation has expended over $31,000,000 for MSU activities from its restricted accounts.  Additionally, the total endowment funds managed by the Foundation have risen from $5,700,000 in 1989 to over $26,400,000 in 1998.

        Recently, the Foundation hired eight (8) new fund raisers.  With the filling of these new positions, all MSU colleges and units will have dedicated fundraising professionals available for their development activities.  The current goals include developing and implementing operating plans for each fundraising unit, coordinated by an operating plan for the Foundation as a whole.  These new plans and fundraising resources mean the Foundation is improving to meet the challenge of increasing the level of private support of MSU on a continuing basis.


Elements of the university's financial affairs which should be addressed in the near future include the following:

        It appears that many classified employees do not believe that they are given sufficient opportunity for input into the planning of the University budget.  Similarly, many faculty do not view the development of the MSU budget as an open process, or feel that they have an adequate opportunity for input into the university's budgetary process.

        The university's CFO has made the commitment to create and maintain a rolling three (3)-year financial plan which will reflect pertinent external factors, enrollment projections, and a revenue/expenditure model.

        The university's CFO has also made the commitment to work with the other MSU CFO's to address the following items in the very near future:

        The development of a financial model for distance delivery offerings

        A financial model for the operation of Higher Education Centers

        The investigation of potential energy procurement strategies for the future

        The utilization of the enhanced capabilities of the Banner 2000 system to develop more meaningful and useful decision support information (i.e. unit cost/contribution comparisons)

        The role and responsibilities of the SPBC are not clear to most of the university community.  These should be clearly established, and broadly disseminated.  In addition, the SPBC should be charged with establishing mechanisms to ensure that all constituents within the university community are advised of that committee's activities on a timely basis, and provided an opportunity for frequent input.

        The PEC should take a more proactive stance in the financial planning and management of all institutional fund sources, rather than just in regard to its general operations budget.

        The University should initiate an open and participatory process of developing a realistic, strategic financial plan of reasonably attainable goals.

        For the most part, the allocation of general operating funds within the University has been a 'base plus' approach for several years.  Thus, the enhancement of existing programs, and the creation of new programs, have been accomplished with marginal portions of annual increases in tuition revenue.  The reallocation of funds, from within the existing budget, has not been attempted to any significant degree.  As a result, there are those within the University who claim that the current distribution of funds among programs does not substantially reflect institutional priorities nor student enrollments.

        The most significant strategic initiative the University has embraced to date is the enhancement of faculty and professional employee salaries.  In order to balance the university's budget and still award the full 6.9% faculty salary increases for the final year of this initiative, the University had to delay the start date of the salary increases to February 1st (1999), had to impose base budget reductions totaling $1,300,000 across the breadth of the general operations budget, and had to impose a larger 'administrative fee' on all expenditures in designated and auxiliary accounts.

        No financial plan has been developed for the accomplishment of the twenty (20) 'goal attainment strategies' currently listed in MSU's LRP.

        The University faces a steady decline in enrollment from FY04 through FY12, when the projected number of Montana high school graduates falls (by over 11%) to only 11,015.  Given this, if the University intends to continue to increase its enrollment as a primary source of revenue enhancement, it will have to:

        Aggressively recruit nonresident students

        Identify additional methods to control costs, and thus, tuition rate increases, in order to remain competitively priced

        Ensure it is doing all that it can to retain the students who come here

        The MSU Development Committee is responsible for establishing and coordinating institutional priorities as they relate to development and fundraising.  While the University sets forth its priorities on an annual basis, those priorities can often change depending on necessities and circumstances.  The Committee strives to communicate those priorities to the development staff and campus community.  

        Commitments made by departments through vendor financing agreements may not be known by anyone within the university's central group of financial managers.  Thus, in these cases, there are no executive-level assurances that adequate resources are available to meet debt service requirements without adversely affecting the quality of educational programs.

Over the past ten (10) years the University has faced many financial challenges: declining state support, intense competition for new faculty hires, increasing dependance on tuition revenue, and significant cost increases in a wide array of budget elements from technology to salaries to library acquisitions.  Considering all of this, the University has done quite well in meeting these challenges.  Student enrollment is stable and growing slightly, faculty and professional staff salaries have been enhanced significantly, and strategic initiatives for the new term are being developed


STANDARD SEVEN - LIST OF APPENDICES

Appendix 7-A

Table 1 - Current Funds Revenues

 

Appendix 7-B

Table 2 - Current Funds Expenditures and Transfers

 

Appendix 7-C

Table 3 - Summary Report of Revenues and Expenditures

 

Appendix 7-D

Table 4 - Sources of Financial Aid

 

Appendix 7-E

Table 6 - Direct Cost by Instructional Department

 

Appendix 7-F

Table 7 - Operating Gifts and Endowments

 

Appendix 7-G

Table 8 - Capital Investments

 

Appendix 7-H

Inventory of Reports Regularly Submitted to BOR

 

Appendix 7-I

FY2000 Budget Development Schedule

 

Appendix 7J

Ten-Year Budget Trend Overview

 

Appendix 7-K

Debt Service Schedule

 

Appendix 7-L

Comparison of FY98 MSU General Operating Budget to Peer Institutions

 

Appendix 7-M

FY99 Base Budget Reductions

 

Appendix 7-N

Financial Stability (Four-Year Trend)

 

STANDARD SEVEN - LIST OF EXHIBITS

Exhibit 7.01

Montana University System Organizational Chart

 

Exhibit 7.02

1999 MSU General Operating Budgets

 

Exhibit 7.03

1998 MSU General Operating Budgets

 

Exhibit 7.04

1997 MSU General Operating Budgets

 

Exhibit 7.05

FY99 CHE Budget

 

Exhibit 7.06

FY98 CHE Budget

 

Exhibit 7.07

FY97 CHE Budget

 

Exhibit 7.08

FY96 CHE Budget

 

Exhibit 7.09

MSU Financial Report FY98

 

Exhibit 7.10

MSU Financial Report FY97

 

Exhibit 7.11

MSU Financial Repor FY96

 

Exhibit 7.12

FY 98 IPEDS Financial Section Reports Including AES/ES/FSTS

 

Exhibit 7.13

FY 97 IPEDS Financial Section Reports Including AES/ES/FSTS

 

Exhibit 7.14

FY 96 IPEDS Financial Section Reports Including AES/ES/FSTS

 

Exhibit 7.15

MSU Strategic Plan

 

Exhibit 7.16

Description of Student Fees

 

Exhibit 7.17

Official U.S. Department of Education Student Loan Default Rates (FY95 and FY96)

 

Exhibit 7.18

FY98 Auxiliary Budget (Actuals)

 

Exhibit 7.19

FY99 Auxiliary Budget

 

Exhibit 7.20

Administration and Finance

Organizational Chart

 

Exhibit 7.21

MSU Organizational Chart

 

Exhibit 7.22

Position Descriptions for Administration and Finance Key Personnel

 

Exhibit 7.23

Resumes of Administration and Finance Professional Staff

 

Exhibit 7.24

MOM Chapter 2-1200

 

Exhibit 7.25

USAM Chapter 30

 

Exhibit 7.26

Business Procedures Manual, Sections 250.2 and 260.0

http://www.montana.edu/~aircj/manual/bus/bus200.html

Exhibit 7.27

Grant Administration and Payment System

 

Exhibit 7.28

1998 KUSM Audit Report

 

Exhibit 7.29

Memorandums of Understanding:  Montana Public Television and Friends of Montana Public Television, Inc.

 

Exhibit 7.30

1998 NCAA Audit Report

 

Exhibit 7.31

Memorandums of Understanding MSU-Athletic Scholarship Association

 

Exhibit 7.32

Athletic Scholarship Association Financial Statement

 

Exhibit 7.33

Intercollegiate Athletic Report

 

Exhibit 7.34

1998 Museum of the Rockies Audit Report

 

Exhibit 7.35

Memorandums of Understanding MSU/Museum of the Rockies

 

Exhibit 7.36

FY98 Bond Audit Report

 

Exhibit 7.37

FY97 Bond Audit Report

 

Exhibit 7.38

FY96 Bond Audit Report

 

Exhibit 7.39

FY95 Bond Audit Report

 

Exhibit 7.40

MSU Financial Compliance Audit Report

 

Exhibit 7.41

University Audit Charter, Policy and Procedures Document

 

Exhibit 7.42

MSU Foundation Policy Regarding Acceptance of Funds and Services Provided to Other Organizations

 

Exhibit 7.43

MSU Foundation Development Committee

http://www.montana.edu:80/wwwulf/

Exhibit 7.44

MSU Foundation Policy on Coordination of Responsibilities Regarding External Funding

 

Exhibit 7.45

MSU Foundation 1997-98 Annual Report

 

Exhibit 7.46

MSU Foundation 1997-98 Audit Report

 

Exhibit 7.47

MSU Foundation Prospect Research Data Base Information Confidentiality Agreement

 

Exhibit 7.48

MSU Foundation Statement of Investment Policies, Guidelines, and Objectives

 

Exhibit 7.49

MSU Foundation Summary Statement Fee Assessment and Spending Policies

 

Exhibit 7.50

By-Laws of Montana State University Foundation, Inc.

 

Exhibit 7.51

MSU Foundation Operating Agreement

 

Exhibit 7.52

MSU Foundation Policy on Expenditure of Foundation Funds

 

Exhibit 7.53

MSU Foundation Organizational Chart

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