When Barbara Cevallos arrived at the University of Massachusetts as its assistant vice president and university controller in November 2017, she joined a team effort in progress to draft a reserves policy for the university. In just over one year, the team completed its draft policy, which was approved in September 2018.
Prior to this effort, the university hadn’t had a policy on reserves or a codified process for how to handle them. "In developing a board policy to define reserves and explain how we would fund them, it was important to our CBO that we make sure our system of building up and budgeting for the use of reserves is appropriate, including how we move funds within our reserves," says Cevallos. "We also wanted clear and consistent reporting on our reserves, so we had to make sure we had broad understanding across all campuses."
Another push for this effort came from the university’s rating agencies, says Cevallos. "They wanted to know what we were doing to build our reserves and increase our ratios."
Delineate Your Reserves
While the university talks about reserves in terms of net position, its policy also addresses components of unrestricted reserves, including unexpended plant and facility projects, auxiliary enterprises, educational programs, and quasi-endowment funds, explains Cevallos.
The university’s stabilization fund is another core aspect of its policy. This exists to "support university system operations in the event of an unanticipated disruption in planned funding due to economic uncertainty, adverse market conditions, cyclical recession, catastrophic interruption of service, or other unanticipated volatility in the operating environment." At the end of each fiscal year, the university thought of its stabilization fund as a rainy-day fund, says Cevallos. "While we have always followed this approach, it was not well-defined."
The process of defining reserves categories has been quite helpful for communicating to a variety of stakeholders, notes Cevallos. "Whereas faculty previously might look at our unrestricted net assets and think we have cash to spend, by showing this in context of our net position categories, it became clear that this was not free money."
This process also illuminated how the university might better manage its reserves to determine where additional savings are needed and where spending for certain initiatives would come from, says Cevallos. "Having a reserves policy and clear communication about how to break down net position for priority areas has likewise helped enhance our focus on figuring out where we should build up reserves."
Follow the Plan
Now that the university has adopted a policy and followed its guidelines for funding stabilization reserves, the next phase to roll out in 2022 will be to report quarterly on transfers in and out of reserves at the campus level, says Cevallos. "This should help us fine-tune our reporting model and test whether the process we’ve outlined is meaningful without being too difficult or overwhelming for each campus." According to Cevallos, this phase should further clarify activity across all campuses and provide leaders with actionable steps to better maintain appropriate reserves.
Greater clarity surrounding deferred maintenance spending should also help the state better understand the university’s needs. In recent years, the Massachusetts legislature has provided greater assistance with higher education deferred maintenance projects versus new capital funding, explains Cevallos.
Among the upsides of having developed and implemented a reserves policy is that it improves the connection between actions and strategies, notes Cevallos. In addition, when leaders met with the university’s rating agencies two months after finalizing its policy, the agencies were pleased with the policy and its contribution to the university’s overall financial management practices. The existence of the reserves policy was one of the reasons they upgraded the university’s rating, says Cevallos. "Aside from internal gratification for developing a policy and seeing it work as planned, it was meaningful to have this external validation."
KARLA HIGNITE, Fort Walton Beach, Fla., is a contributing editor for Business Officer.