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Financial Reserves

LMC Revised Date

Office of Origin: Finance
Date Adopted: 03-28-17
Last Date Reviewed: 03-28-17
Last Date Modified & Approved: 03-28-17

Philosophy & Scope

Lake Michigan College (the College) recognizes that it is important to maintain the financial reserves of the College to ensure availability of funding in the event of unforeseen expenditures and as a prudent measure in protecting against unexpected changes in funding.  Reserves may also provide a funding source for College initiatives and unfunded mandates from external constituencies.

The need for adequate reserves is reinforced by the standards of the Higher Learning Commission (HLC), which requires that an accredited institution be able to meet its financial obligations.

This policy is intended to guide the creation, maintenance, and use of College reserves.

Use of Cash Reserves

The College’s Cash Reserves represent cash funds set aside to ensure the long-term financial stability of the College by providing resources to address emergency situations that require immediate funding to address critical, unforeseen, non-discretionary items. 

In addition, Cash Reserves are available to fund such items only when Strategic Reserves (described below) are fully exhausted.

Any use or appropriation of the Cash Reserves requires approval by the Board of Trustees, and must meet one of the following criteria:

  1. Funding for non-discretionary, immediate, significant, one-time expenses that cannot be funded in the current fiscal year through the operating or routine capital budget, despite assessing the potential for budget amendments;  
  2. Funding to avoid the need to substantially raise rates or reduce service levels due to temporary funding shortfalls;
  3. Funding for budgeted expenditures due to a significant unanticipated shortfall in revenue; or,
  4. Funding for other emergencies or opportunities, as determined by the Board of Trustees.

When a portion of the Cash Reserves is used that causes the balance to fall below the minimum described below, the balance will be restored as described in the section “Falling Below the Cash Reserve Threshold” below.   

Calculating Cash Reserves

Cash Reserves are set at amount equivalent to 120 days of average daily expenses. 

More specifically, average daily expenses are calculated based on the general fund cash expenses as of the preceding fiscal year, adjusted to remove significant, non-recurring expenses.  Examples of exclusions include significant expenses related to sale of property, settlement of a lawsuit, or effects of a strike.

For example, if the audited financial statements of the College as of June 30 show total general fund expenses of $35 million, depreciation expense of $5 million, and loss on sale of a land parcel of $1,000,000, the Cash Reserve would be set as follows for the subsequent fiscal year: 

$ 35,000,000

total general fund expenses

-

5,000,000

depreciation expense (non-cash)

-

1,000,000

significant, non-recurring expense (loss on sale of parcel)

=

29,000,000

net recurring annual expense

÷

365

days

=

79,450

average daily expense

x

120

days cash to maintain

=

$ 9,534,000

Cash Reserve

Cash Reserves will be calculated by the Chief Financial Officer (CFO) at each fiscal year end and the calculated amount will serve as the reserve level for the subsequent year.  Cash Reserves will be reported on the balance sheet separately from all other cash and investment balances.

Internally Allocated Reserves

Internally Allocated Reserves are defined as that funding which will be needed through end of the current fiscal year for the following:

  • Routine Capital in accordance with “Capital Assets – Approval, Safeguarding, & Accounting” procedure,
  • Major Capital projects in accordance with “Capital Assets – Approval, Safeguarding, & Accounting” procedure and “Major Capital” policy, and
  • principal payments on existing or anticipated debt.

The use of Internally Allocated Funds has already been approved by the Board of Trustees through the approval of the capital budgets or debit issuance, and accordingly does not require additional approval to expend.

Board Designated Fund

The Board of Trustees has the ability to designate an amount of cash for a defined use or purpose, known as a “board designated fund.”  A Board Designated Fund is restricted by a condition placed by the Board of Trustees on how an amount of money is to be used.  All Board Designated Funds are to be funded by cash or cash equivalents.

Prior to establishing a Board Designated Fund, the following components must be addressed:

  • Purpose
  • Calculation of Target Amount
  • Intended Use
  • Authority over Use
  • Monitoring & Reporting
  • Replenishing

A Board Designated Fund is established at the discretion of the Board of Trustees and based on an action by the Board of Trustees.  Use of a Board Designated Fund is at the discretion of the Board of Trustees.

Falling Below the Cash Reserve Threshold

The availability of cash for Cash Reserves is determined based upon the total balances of cash, cash equivalents, and short-term investments less Board Designated or Internally Allocated Reserves. 

The sufficiency of Cash Reserves will be assessed monthly.  If at any point should the College fall below the Cash Reserves threshold, the President will present a financial plan that details how the minimum reserve level will be restored to the Board of Trustees at the next board meeting.  Such a plan could include actions such as:

  • reducing routine capital spending,
  • increasing rates or fees,
  • creating new or expanding existing income generating programs or services,
  • eliminating unprofitable programs, services, or activities,
  • restricting expenditures,
  • imposing more stringent cost-cutting measures,
  • reducing headcount, or
  • discontinuing approved strategic initiatives that have not yet started.

Availability of Strategic Reserves

Strategic Reserves, if available, are any cash balances in excess of Cash Reserves, Internally Allocated Funds, and Board Designated Funds. 

Due to the cyclical nature of the College’s cash collections, the low point in cash holdings has historically been in August of each year.  Accordingly, the availability of Strategic Reserves is calculated as of August 31 of each year by the CFO.

Strategic Reserves may be maintained as-is in the general cash account, set aside into board designated fund(s), expended within the current year for strategic initiatives, or used for emergency needs consistent with the requirements of the Cash Reserves.  These funds are not intended to be used to address structural financial deficiencies (e.g., ongoing capital or operating budget shortfalls, emergencies resulting from lack of planning.) 

Any use or designation of Strategic Reserves is at the discretion of the Board of Trustees and must be approved by the Board of Trustees.

If expended for non-emergency needs, these funds are intended to allow the College to take advantage of opportunities and pursue initiatives that are non-recurring in nature.  In addition, use of Strategic Reserves must not financially obligate the College for more than one year unless the initiative is self-sustaining beyond that period.

Examples of items that could be funded by the Strategic Reserve include:

  • self-supporting programs or services in the first year of operations (e.g., startup expenses that are incurred before revenues are collected);
  • significant, strategic, non-recurring capital or operational investments (e.g., equipment purchases, special repairs or maintenance of equipment or facilities, targeted consulting projects, short-term special project employment, etc.);
  • major capital expenditures for which use of Strategic Reserves have been planned; and,
  • other appropriate uses as determined by the Board of Trustees at its discretion.

Responsibilities

With the assistance of the CFO and the Cabinet as a whole, it is the responsibility of the President of the College to manage Cash Reserves. 

Annual Operating Budget and Operating Reserve

In an effort to ensure that the College is able to meet operating measures to generate appropriate cash and maintain cash reserve levels, the College will only present to the Board of Trustees for adoption an annual general fund operating budget that is at least break-even or better, including depreciation and amortization.

To provide sufficient opportunity to address routine contingencies (e.g., price increases, unanticipated or inadvertently unbudgeted costs, less material revenue shortfalls, unanticipated opportunities), the College will include in its annual operating budget a reserve of approximately 1% of prior fiscal year general fund expenditures.  These funds will be held in a designated, restricted use reserve.

Any transfers from the operating reserve require approval by the CFO and will be reported to the President on a periodic basis.

Responsibility:  Chief Financial Officer

References:  none

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