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Financial Reserves

LMC Revised Date

Office of Origin: Finance
Responsibility: Chief Financial Officer
Date Adopted: 03-28-17
Last Date Reviewed: 03-28-17, 02-04-20
Last Date Modified & Approved: 02-04-20


Lake Michigan College (the College) recognizes the importance of maintaining financial reserves for the College to ensure availability of funds in the event of unforeseen expenditures and unexpected negative changes in funding. Reserves may also provide a funding source for College initiatives.

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 creation, maintenance, and use of College reserves.

Use of Cash Reserves

Cash Reserves represent cash funds set aside to promote long-term financial stability by providing resources to meet critical, unforeseen, non-discretionary needs. 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 (Board), and must meet one of the following criteria:

  1. Funding for significant, non-discretionary expenses that cannot be funded in the current fiscal year through the operating or capital budget, despite assessing the potential for budget amendments;
  2. Funding to avoid substantially raising rates or reducing service levels due to temporary;
  3. Significant unanticipated shortfall in revenue; or,
  4. Funding for emergencies or opportunities, as determined by the Board.

If use of Cash Reserves causes the balance to fall below the minimum described below, the shortfall should be addressed in accordance with “Falling below the Cash Reserve Threshold” below.

Calculating Cash Reserves

Cash Reserves are set at amount equivalent to 120 days of average daily expenses.
Average daily expenses are calculated based on the preceding fiscal year’s estimated general fund cash expenses, 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 funding that 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 in accordance with Capital Assets – Approval, Safeguarding, & Accounting” procedure and Major Capital policy, and
  • principal payments on existing or anticipated debt.

Use of Internally Allocated Funds is approved by the Board through approval of capital budgets or debit issuance, and accordingly does not require additional approval to expend.

Board Designated Fund

The Board can designate cash for a defined purpose, known as a “board designated fund.” A Board Designated Fund is restricted by a condition placed by the Board on how the funds are to be used. All Board Designated Funds are to be fully funded by cash or cash equivalents.

Before establishing a Board Designated Fund, the following must be documented:

  • 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 and requires Board action. Use of a Board Designated Fund is at the discretion of the Board.

Falling Below the Cash Reserve Threshold

The availability of cash for Cash Reserves equals the total of cash, cash equivalents, and short term investments less Board Designated Funds and Internally Allocated Reserves (collectively, Cash Holdings.)

The sufficiency of Cash Holdings compared to Cash Reserves will be assessed monthly. If Cash Holdings fall below the Cash Reserves threshold, the President will present a financial plan indicating how Cash Reserves will be restored to the Board at its next meeting. Such a plan could, for example:

  • 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
  • stopping initiatives that have not yet started.

Strategic Reserves

Strategic Reserves, if available, are Cash Holdings in excess of Cash Reserves.
Due to the cyclical nature of cash collections, the low point in Cash Holdings has historically been in August. Accordingly, the Strategic Reserves calculation is done as of August 31 of each year by the CFO.

Strategic Reserves may be maintained as-is in Cash Holdings, 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.

Strategic Reserves 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 and must be approved by the Board.

If expended for non-emergency needs, Strategic Reserves are intended to allow the College to take advantage of opportunities and pursue initiatives that are, at least initially, 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 or has other funding beyond that period.

Examples of appropriate use Strategic Reserves include:

  • cost of programs or services in a first year of operations that are ultimately planned to be self-supporting (e.g., startup expenses that happen before revenue is 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 was planned;
  • pre-payment of existing debt to reduce future interest costs; and,
  • other uses as determined by the Board at its discretion.

Responsibilities

With the assistance of the CFO and Cabinet, it is the responsibility of the President 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 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 operating budget approximately one-percent of prior fiscal year general fund expenditures as a reserve. These funds will be held in a designated, restricted use organization unit.

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

References:

Capital Assets – Approval, Safeguarding, & Accounting procedure

Major Capital policy

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