Standard Nine
FINANCIAL RESOURCES
Description
Authority
Fiduciary responsibility for Boston University is vested in the Board of Trustees under the University’s Charter and By-Laws. The Board has for many years exercised its fiduciary oversight through three committees: the Finance and Budget Committee, the Audit Committee, and the Investment Committee.
The Finance and Budget Committee’s responsibility is to review budgets prepared by University administrators and recommend their adoption or modification to the Board; this committee also monitors Boston University’s budget performance and may recommend budget strategies, standards of operation, and budgetary goals for adoption by the Board. A subcommittee of the Finance and Budget Committee is specifically charged with reviewing campus planning, disposals or acquisitions of properties, and other real estate matters under consideration by Boston University.
The Audit Committee oversees Boston University’s financial systems and accounting practices, and also appoints and monitors the work of the University’s external auditor, PricewaterhouseCoopers LLP. PricewaterhouseCoopers performs an annual audit of Boston University’s financial statements as well as a review of the University’s federally sponsored research and financial aid programs, as required under the Office of Management and Budget (OMB) Circular A-133. External auditors meet at least three times a year with the Board of Trustees’ Audit Committee to present reports and offer advice as needed. PricewaterhouseCoopers also prepares an annual management letter. University administrators must respond to any issues raised in the management letter and outline actions they have taken, or propose to take, to address them. The Audit Committee requests status reports to ensure that the actions planned by management have been implemented.
The Investment Committee is responsible for and oversees the development of the University’s long-term investment strategy. In 2007, Boston University established an Investment Office and hired its first Chief Investment Officer (CIO), a vice president–level senior administrator, to provide full-time, day-to-day oversight, management, and monitoring of the University’s long-term pooled endowment assets. Specific responsibilities of the Investment Office and the CIO include portfolio positioning, manager selection, and performance reporting, as well as advising the Investment Committee in establishing risk and return objectives and investment policy. The Board of Trustees transferred the regular daily responsibility of managing the endowment to the Investment Office in acknowledgement of three important trends: a large and increasing number of alternative asset strategies, the growing complexity of understanding the sources of return and risk, and the rising standards of fiduciary prudence. The attention of a skilled full-time staff has allowed for more rigorous research and analysis, more efficient use of Investment Committee input and oversight, and an improved platform for decision making. Endowment and similar fund assets increased by a net amount of $44.1 million or 3.9% in FY 2008, and totaled an all-time high of $1.18 billion as of June 30, 2008.
Boston University has an established record as a carefully managed, fiscally responsible, and prudent institution. Without the advantage of a large endowment, Boston University has built a financial model based on revenue generation and expense control to accomplish its educational mission. By running auxiliary operations as profit centers and exercising budgetary discipline, Boston University generates funds for investments to support and enhance the academic program and student experience. Boston University has not had an operating deficit since 1971, and achieved its best operating results to date in fiscal year (FY) 2008, which ran from July 1, 2007 through June 30, 2008. In FY 2008, Boston University increased its net assets by more than $37.7 million. Over the past five fiscal years, from FY 2004 to FY 2008, the University’s total net assets increased by 49% and cash flow from operations increased by 190%.
Targeted transfers from the operating budget to the endowment, to school and college reserves designated primarily for programmatic needs and new academic initiatives, and in support of physical plant renewal and replacement totaled $109.7 million in FY 2008. Operating budget transfers to the endowment increased significantly in FY 2008 to $29.2 million, a more than tenfold increase over operating transfers to the endowment made in each of the last eight fiscal years. A major portion of the funding for these transfers was generated from several nonrecurring transactions during FY 2008, including the proceeds from a “swaption” contract option payment ($10 million); the sale of property in Tyngsboro, Massachusetts ($6.5 million); the Hillel House purchase escrow funding ($8.0 million); and realized gains from the liquidation of an incubation company ($1.2 million). These funds will positively impact the present and future level of Boston University’s “Expendable Resources” and serve as a positive factor in evaluations of the University’s financial strength from a credit perspective.
Boston University derives its operating revenue from five main sources: tuition and fees; Sponsored Programs activities; auxiliary enterprises such as housing, dining, and parking; sales and services; and gifts. Additional revenues are received from investment income and a variety of programmatic support. Total operating revenues of $1.46 billion in FY 2008 represented a 5.16% increase over the previous year. Enrollment in FY 2008 totaled 24,098 full-time equivalents—an increase of 231 from FY 2007. Tuition and fee revenue in FY 2008 totaled $933.3 million—an increase of $51.3 million, or 5.8%, which is attributable both to the 4.7% increase in tuition and fee charges from FY 2007 and to the increased enrollment. Auxiliary enterprise activities provided $238.8 million in revenue in FY 2008—a 5% increase from FY 2007. Sponsored Programs activities, exclusive of Agency Accounts, increased by $10.4 million, or 3.3%, in FY 2008. Direct costs reimbursed from grants and contracts increased by 1.2%, while indirect costs recovered increased by 6.3%.
Fiscal year 2008 operating expenses totaled $1.40 billion, reflecting a 4.9% increase in expenses for the year. Compensation and benefits costs represented slightly more than half of Boston University’s total operating expenses in each of the last two fiscal years. These costs totaled $878.7 million in fiscal year 2008, an increase of 5.5% over the prior fiscal year. Instruction and research expenses increased $17.1 million from the prior fiscal year, or 3.8%. Together these expenses represent the salaries (exclusive of fringe benefits) and operating expenses (excluding facility costs) for all of the University’s academic units. The growth in these expenses can be attributed to salary increases, new faculty positions and additional support of academic programs, and inflationary adjustments for operating expenses during the past fiscal year.
Boston University’s long-term liabilities—consisting of bonds, notes, and mortgages payable—totaled $1.267 billion on June 30, 2008. The University strives to preserve financial flexibility through access to capital markets at competitive interest rates and long-term debt capacity. Boston University issues a combination of fixed and variable rate debt to fund numerous projects, including academic facilities, residential housing and dining facilities, and other projects in support of its mission. As of June 30, 2008, Boston University’s weighted average cost of capital was 3.7% unhedged and 5.1% including variable interest rate hedges. Boston University uses interest rate exchange agreements to manage interest rate risk associated with variable rate debt. As of June 30, 2008, exclusive of interest rate exchange agreements, $468 million, or 37%, of the University’s debt portfolio bears fixed rates of interest. Interest rate exchange agreements effectively fix interest rates on an additional $594 million of debt principal, increasing the University’s fixed rate debt to $1.1 billion, or 85% of the total debt portfolio. Presently, Boston University is rated A2 by Moody’s and A- by Standard & Poor’s.*
In May 2008, Boston University finalized terms for the issue of $200 million tax-exempt debt. The structure of this financing is in the form of $150 million multimodal variable rate demand bonds with an overlay of an interest rate swap agreement, resulting in a synthetic fixed rate of 3.97%. The remaining $50 million was issued as a fixed rate put bond with a term of 13 months at a rate of 2.0%. In addition the University refinanced $336.4 million of the existing Series Q and R tax-exempt insured debt and converted $134.2 of Series N taxable insured auction securities from an MBIA insured security to a letter-of-credit-backed issuance. These steps are proactive measures taken by Boston University in response to deterioration of the credit quality and ratings of some of our bond insurers.
Budget and Monitoring Process
Boston University’s annual budget process begins in August of the preceding fiscal year. For example, the FY 2010 budget development process began in August 2008. The process begins with a thorough analysis of the prior year’s actual revenue and expenditures compared to budget. By reviewing historical performance prior to the development of new budgets, administrators at all levels of the University can identify areas where performance did not align with expectations and ensure that all major cost components of the budget are fully understood by managers and appropriately funded. This analysis is supplied to PricewaterhouseCoopers, for incorporation into their audit work papers and findings.
Simultaneous with the annual results analysis, the Budget Office will send requests to departments so they can provide multiyear projections of key budget drivers, such as enrollment, tuition, student financial aid, debt, utilities, inflation, salaries and benefits, and academic programmatic enhancements. Any assumptions on reserve requirements and nondiscretionary inflationary items are also included. This data is summarized and reviewed by senior administrators, and initiates the formal budget development process for the subsequent fiscal year. Below are some examples of what is included in the multiyear projections:
- Multiyear projections of enrollment and tuition income include assumptions about the numbers of entering students in each of the fall and spring semesters (separate estimates are prepared for freshman, undergraduate transfer students, graduate students, and non-degree students). Projections also take into account the number of students who are expected to leave Boston University, due to graduation or for other reasons. Finally, projections include assumptions of financial aid expenses.
- Multiyear projections for debt account for the effects of any new bond issues, additional draw-down of existing issues, balloon payments, and/or reserves for potential interest rate fluctuations on variable-rate issues.
After senior administrators complete this review and finalize their assumptions following the August meeting, the Budget Office sets preliminary budget targets for individual units, using the month end August 31 budgets as a base. These are based on an understanding of the units’ budgetary situation and strategic planning for the University as a whole. These targets are sent out in the beginning of September so that detailed budget development can begin. Budget development material, including budget target amounts, detailed budget reports, and policies relating to the submission of budget proposals, are issued to the deans, vice presidents, and other unit directors at this time. Each unit is required to submit a written budget proposal and submission for the following year. Departmental budget hearings begin in mid-October with the goal of having them completed by the beginning of December. These hearings are conducted by the President, Executive Vice President, and/or University Provost. During this time, the University will also have a better understanding of the current year’s enrollment and other budget issues. Mid-semester enrollment numbers, which become available in late October, play an important role in accurate enrollment projections for both the current and out-going year.
During the month of January, the central administration assesses requests and initiatives presented by the units, prioritizing those that align with Boston University’s strategic plan. This assessment exercise undergirds decision making about potential tuition increases. By February, the budget is basically in balance. Proposed increases to tuition and fees are presented to the Board of Trustees Executive Committee in February and units are given their budgets, conditional on the approval of the full Board of Trustees at its annual spring meeting in April. After the Board approves the University’s budget, approved individual unit budgets are issued to deans, vice presidents, and other unit directors, thus completing the budget process for that fiscal year.
Concurrent during this cycle, the budget is monitored constantly over the course of the current fiscal year, in order to identify budget variances—whether positive or negative—and to provide a basis for timely corrective action. Revised budgets, which are presented to the Board of Trustees at their winter and spring meetings, are based, in part, on data obtained through a variety of monitoring processes.
Enrollment projections are updated weekly during the first half of the fall and spring semesters, allowing administrators to predict enrollment-related income for the fiscal year with greater certainty. Also, as mentioned above, these projections will have an effect on the upcoming fiscal year. These enrollment reports are reviewed by those administrative and academic leaders who have responsibility for recruiting, admitting, teaching, and retaining students.
The overall budget is monitored through the quarterly confirmation process, which requires departments to submit current estimates of income and expense three times per fiscal year. Each department is required to submit an explanation for any variances, whether favorable or unfavorable, compared to budget. This monitoring effort constitutes an attempt to maintain an operating budget without unmanageable surprises. Administrators at all levels of the University are able to grasp budget-related problems and opportunities on a timely basis, mitigating potential shortfalls and allowing the administration to utilize positive operating trends, should they become available.
In addition to the annual budgeting process, Boston University maintains a long-range (five-year) budget model using a set of high-level assumptions for revenues and expenditures. This model—which is updated twice a year, at the beginning and end of the annual budget cycle—is part of the development of a five-year financial and capital planning process. It is used by administrators and the Board of Trustees to estimate revenues, expenditures, and funds available for the capital budget, and to predict the future financial health of the University.
Development
The Office of Development & Alumni Relations works to maximize philanthropic support to Boston University for its highest priorities and to inform, engage, and involve alumni, parents, and friends in the life of the institution. Development & Alumni Relations takes its direction from Boston University’s strategic plan as interpreted by the President, deans, and faculty. The Executive Committee of the Board of Trustees reviews named gifts, endowed gifts, and other gifts with unusual or pre-approved stipulations. The Office of Stewardship within Development & Alumni Relations works closely with offices responsible for financial accountability to ensure that all gifts are reviewed and donor intent is respected.
Development & Alumni Relations offers a wide range of programs and activities to achieve its goals. Alumni activities are hosted or co-hosted by more than 60 regional alumni clubs around the world, who together sponsor some 400 events attracting approximately 20,000 BU alumni each year. The Boston University Alumni Council is the executive body of alumni of Boston University’s 17 schools and colleges (in addition to alumni of some now-defunct academic units, such as the School of Nursing). Development activities also include formal ongoing efforts in areas such as annual giving, corporate and foundation relations, planned (estate) giving, leadership gifts, alumni, a parents’ fund, senior class giving, prospect research, and athletic fundraising. At the moment, all of these efforts are actively focused on planning a major comprehensive campaign.
Appraisal
Fiscal planning and capital planning are directly aligned with the academic mission of Boston University. The priorities outlined in the University’s strategic plan are explicitly used to guide the allocation of resources. Financial operating statements are prepared and issued by the Treasurer every month, reviewed by senior leadership, and presented to the Board of Trustees for both short-term budgetary monitoring and long-term planning.
Boston University has long been a tuition-dependent institution and remains so today, although we have seen significant gains in research funding and in fundraising. As a result, Boston University has developed both the means—in terms of planning and monitoring procedures and protocols—and the discipline to live within its resource capacities. The budget cycle, with its periodic reviews and checkpoints, provides early warning about any potential problems and enables administrators to respond in a timely manner. Multiyear projections, based on detailed information collection and analyses, allow Boston University to plan for a variety of contingencies, including external demographic and economic shifts.
The sensitivity of fiscal managers to current and projected conditions is reflected in Boston University’s quick response to the recent economic downturn. On October 1, 2008, the President put into effect a freeze on hiring and on new major construction projects that were not yet under contract. The hiring freeze applied to all but the most essential staff positions and did not affect approved faculty searches. Salaries of senior administrators (vice presidents, deans, and above), have also been frozen until July 2010 and exempt administrative staff who earn $150,000 or more were given no salary increases. Modest salary increases for faculty have been budgeted for FY 2010, a decision justified by the University’s desire to bring salaries in line with those at peer institutions in order to recruit and retain faculty of the highest caliber.
In addition, Boston University administrators moved quickly to increase financial aid reserves and to identify and retain students at risk of transferring. In the Fall 2008 semester, the Office of the Registrar saw a significant increase in the number of transcript requests, a potential precursor to transferring. Between September 2008 and January 2009, 630 new or additional requests for financial aid were filed—a 100% increase over the previous year. With approximately 60% of annual operating costs deriving from tuition, room, and board, Boston University’s primary focus in challenging economic times is on enrolling and retaining students. Equally imperative is a corollary focus on maintaining the quality of academic programs.
Evidence of Boston University’s seriousness about managing its resources prudently can be found in the 37-year record of no-deficit budgets approved by the Board of Trustees. The advantage of centralized collection and analysis of enrollment and financial data is that the ebbs and flows of individual units (as measured by enrollment or revenue) can be mitigated by adjustments in other areas of the University’s operating budgets.
Since the last comprehensive accreditation review, the role of the Office of Financial Affairs and Treasurer has changed significantly—from recording and reporting activities of the unit to a greater appreciation for and participation in the analysis, interpretation, and decision making which flows from these reporting activities—a change which has further strengthened the planning and implementation of short-term goals and objectives associated with Boston University’s financial assets and liabilities. As an example, the Office of Internal Audit provides the University with a comprehensive program of internal audit and consulting services to assist University management and the Trustee Audit Committee in the fulfillment of their duties.
Projection
It is not without irony that Boston University’s most successful fiscal year concluded on the eve of a major global economic downturn. As a private institution with relatively high tuition, Boston University is aware that in the foreseeable future increasing numbers of students and their parents may find it difficult to afford the cost of a BU education. Early indicators, such as the increase in transcript and financial aid requests, suggest that Boston University students and families are indeed feeling the effects of the recession.
Fortunately, Boston University is financially and administratively well positioned to respond to the current economic crisis. While the total endowment stood at approximately $897 million as of November 30, 2008—down 24.1% from its value five months earlier—Boston University’s strategies for managing during uncertain economic times are defined by its basic operating model. Transfers from endowment to operations have historically constituted between 1% and 3% of the budget. As a result, it is not anticipated that market-driven contraction of the University’s endowment will have a significant impact on the operating budget.
Moreover, the University’s history of operating surpluses has provided reserves and made possible capital improvements that might otherwise have stalled or needed to be postponed. For example, transfers from reserves generated in the last fiscal year will be directed to: the General University Support Fund ($10.0 million); the William Fairfield Warren Distinguished Professorship Fund ($9.0 million); the Hillel House Transaction Endowment Fund ($8.0); the Innovation Career Development Professorship Fund ($1.2 million); and the WBUR Endowment Fund ($1.0 million).
Even with the efforts described above, Boston University faces an anticipated $10 million shortfall in the FY 2010 budget which administrators are currently working to close. To this end, the President, University Provost, and Executive Vice President have identified a two-pronged approach to cutting costs without impacting student enrollment or the quality of academic programs: (1) reducing subsidies for activities that are not essential to the University’s core academic mission and strategic plan, including external organizations as well as internal centers, institutes, and units that were intended to be financially self-sustaining but whose business models have not achieved the desired results; and (2) reorganizing key administrative services—such as publication and Web-based production support, alumni and event functions, research administration, general financial administration, and information technology and desktop computer support—in order to increase efficiency and reduce redundancy. Although service organization may involve the elimination of some positions, the administration has emphasized to the Boston University community that there are no current plans for faculty layoffs nor are there plans to reduce positions related to public safety (for example, the Boston University Police Department). In sum, Boston University administrators are working to expand financial aid reserves while ensuring that the University remains in a position to preserve and enhance the quality of its academic and research programs, and to support the personnel needed to deliver them.
*In February 2008, Standard & Poor’s Rating Services raised its long‐term rating on Boston University debt to A‐ from BBB+. Moody’s upgraded Boston University’s rating to A2 from A3 in May 2008.
