Suggested Financial Benchmarks for College Trustees

As the California State Budget picture continues to change each year due to the Governor and the Legislature modifying the mix of state and local funds for the financing of community colleges; local district trustees are continually challenged to properly exercise their fiduciary responsibility. Traditional financial benchmarks can become outdated quickly as exampled by the demands for additional enrollment being met with increased tuition and reduced local property taxes. How can responsible trustees assure the proper financial management of their districts in such situations?

One solution might be the development of a set of benchmarks to be included in the quarterly financial reports required of each of the community college districts and in the annual financial audits. These benchmarks could be developed by the Community College League of California working with local trustees, the system office; our local financial auditing consultants, and our local district executives. When the district’s quarterly financial report or annual audit describes financial data significantly varying from the agreed upon benchmarks; the report should be required to include an explanation from the district’s CEO explaining the variance and how such variance will be resolved. As the quarterly financial report and annual audit are included as part of the local governing board’s Agenda, the board as well as the public, will have an opportunity to question the data and the rationale for the proper resolution of the potential problems. Such information is recommended to be delivered in both graphical and table form rather than by just a table of numbers. The graphs will more clearly described financial trends of the District’s financial condition.

While the type of the suggested benchmarks can be common among the districts, the level of the benchmarks may vary depending upon the size of the organization as well as other specific factors. The types of benchmarks that might be considered would be based, in part, upon the factors currently reviewed by the system office.

The system-wide factors are described in Title 5, Section 58311 of the California Code of Regulations and implementing documents (see below). Section 58311 begins as follows: “In any organization certain principles, when present and followed, promote an environment for growth, productivity, self-actualization, and progress. The following principles shall serve as the foundation for sound fiscal management in community college districts:”

1. Each district shall be responsible for the ongoing fiscal stability of the district through the responsible stewardship of available resources.
2. Each district will adequately safeguard and manage district assets to ensure the ongoing effective operations of the district. Management will maintain adequate cash reserves, implement and maintain effective internal controls, determine sources of revenues prior to making short-term and long-term commitments, and establish a plan for the repair and replacement of equipment and facilities.
3. District personnel practices will be consistent with legal requirements, make the most effective use of available human resources, and ensure that staffing costs do not exceed estimates of available financial resources.
4. Each district will adopt policies to ensure that all auxiliary activities that have a fiscal impact on the district comport with the educational objectives of the institution and comply with sound accounting and budgeting principles, public disclosures, and annual independent audit requirements.
5. Each district's organizational structure will incorporate a clear delineation of fiscal responsibilities and establish staff accountability.
6. Appropriate district administrators will keep the governing board current on the fiscal condition of the district as an integral part of the policy- and decision-making processes.
7. Each district will effectively develop and communicate fiscal policies, objectives, procedures, and constraints to the governing board, staff, and students.
8. Each district will have an adequate management information system that provides timely, accurate, and reliable fiscal information to appropriate staff for planning, decision-making, and budgetary control.
9. Each district will adhere to appropriate fiscal policies and procedures and have adequate controls to ensure that established fiscal objectives are met.
10. District management will have a process to evaluate significant changes in the fiscal environment and make necessary, timely, financial and educational adjustments.
11. District financial planning will include both short-term and long-term goals and objectives, and broad-based input, and will be coordinated with district educational planning.
12. Each district's capital outlay budget will be consistent with its five-year plan and reflect regional planning and needs assessments.

Although these narrative guidelines cannot be measured by just using numbers, the financial benchmarks are a starting point currently used by the system office and can be adopted by the local districts as early warning signs. The system office has issued the following explanation of the specific financial measurements:

Assessment of District's Financial Condition

(1) General Fund balance - Review of the current, historical, and Projected fund balance in relationship to General Fund expenditures. A notation is made if the district's actual Unrestricted General Fund balance is less than 5% of total expenditures and/or the district has experienced a decline in its Unrestricted General Fund balance from a previous period.

(2) Spending pattern - Review of the current, historical, and projected revenues and expenditures and their relationship and anticipated changes. A notation is made if the district engages in deficit spending in the current and/or prior years.

(3) Full-Time Equivalent Student(s) (FTES) - Review of FTES patterns in relation to statewide patterns and of their potential impact on revenues. A notation is made if FTES declines materially or grows significantly above fundable levels.

(4) Other factors - Review of all pertinent information that could bear upon the district's financial condition. A notation is made concerning any potential problem, including "going concern" audit citing, internal control audit citings, pending legal actions, and other fiscal or administrative problems.

The system office has developed even more financially specific measurements to further define the above criteria and these are described as follows:

I. General Fund Balance and Balance Sheet Accounts
A. Balance less than 3% of expenditures (minimum level)
B. Balance less than 5% of expenditures (prudent level)
C. Major decline of fund balance over several years
D. Borrowing funds at year end for cash flow
E. Transferring funds at year end from other funds for cash flow or to increase the fund balance while having a balance below 5%
NOTE: IA and IB may be set at different levels with adequate support.

II. Revenues and Expenditures
A. General Fund deficit spending pattern over several years
B. Salary increases exceeding a specified threshold (currently set at COLA) for two or more years
C. Staffing expenditures exceeding COLA for two or more years while maintaining a General Fund balance below 5%
D. Significant FTES decline
E. Significant unfunded FTES

III. Other
A. Notices or alerts from the district and/or the county
B. Significant transfers over several years from the General Fund to support other district operations while reducing the General Fund balance below 5% (applies primarily to Special Revenue Funds and Enterprise Funds)
C. Major audit citings
D. Commingling Certificate of Participation (COP) money with the general operation moneys of the district or using COP money for general operations
E. Significant delays in submission of required reports.”

The following benchmarks have been suggested for the Butte-Glenn Community College District but can be seen as an example of what might be adopted for other districts:

Proposed Quarterly Report Measurements:

General Budget Benchmarks:

Line 9710: Appropriation for Contingency. The amount of the Contingency divided by Total Expenditures to remain at 5% or above throughout the year.
Line 8980 Incoming Transfers. The amount of any incoming transfers divided by the Total Revenues (Line 8990) to remain below 0.10%.
The % change of Lines 1000, 2000, and 3000 combined greater than the % change in the COLA received in the current year by the District. .
Section III, Settlement of employee contracts. The % change of any employee contracts in excess of the % of COLA received by the district for the current fiscal year.
Section II, General Fund. Does the % amount reported in the line item for General Fund Expenditures exceed by more than 5% the appropriate amount for the quarter (25% for the 1st quarter, 50% for the 2nd quarter, 75% for the 3rd quarter and 100% for the 4th quarter)?
Section II, General Fund. Do the General Fund Revenues as reported, equal or exceed the amount for the General Fund Expenditures? If not, an explanation of a proposed resolution should be included.
Do any line items for either expenditures or revenues vary from the amount in the adopted budget by more than 5%? If so, an explanation should be provided for such variances.


Employee Cost Benchmarks:

The quarterly amount for all salaries and benefits (the sum of lines 1000, 2000, and 3000) divided by quarterly amount of total expenditures (line 8000) to be less than 1% above the same result of the same formula for the adopted budget.
The 50% calculation by academic semester.

Proposed Annual Budget /Annual Audit Measurements:

In addition to the above 9 annualized measurements, the following measurements and trends cab be used when considering the proposed annual budget and in review of the annual audit report.

a. The % of annual payments for long term debt divided by annual revenues budget to be less than 5%. .
b. The % of total unfunded liabilities divided by annual revenues budget to be less than 1%.
c. The % of the value of deferred maintenance divided by annual revenue budget to be less than 15% (10% in optimum budget periods).
d. The % of the value of deferred maintenance divided by value of entire plant to be less than 5%.
e. A 5 to 10 year trend line for the total revenues budget.
f. A 5 to10 year trend line for each of the property tax and state Prop. 98 revenues.
g. A 5 year trend line of the % of student FTE divided by the state general apportionment (line 8612).
h. A 5 year trend line for the % of debt retirement (line 7100) divided by the projected ending balance of the Capital projects fund.
i. 5 yr. trend line for $ value of the annual cost of instruction divided by the projected student FTE count.
j. 5 yr. trend lines for the $ value of technology support divided by the projected student FTE count.
k. The value of the projected cost savings divided by actual cost savings for any golden hand-shake plans implemented (always to be in the positive).
l. The % of $ value of total out years for labor agreements divided by current value of labor agreements as compared to the projected COLA % changes.

Student Performance Data:

a. A 5 to10 yr. trend line for the number of students successfully transferring to the University level.
b. A 5 to 10 yr. trend line for the number of vocations / certificated students successfully completing their programs at Butte College.
c. A 5 to 10 yr. trend line for student enrollment per 100 citizen count in the ages 18 to 24 in Butte and Glenn Counties.
d. A 5 to 10 yr. trend line for the % of students requiring remedial course work prior divided by the total number of new students by academic year.
e. A 5 to 10 yr. trend line for the student FTE count by fiscal year.
f. A 5 to 10 yr. trend line for the % of high school graduates per year in Butte and Glenn Counties enrolling in college for the Fall academic semester.
These benchmarks can be reported in the District’s quarterly financial report in a graphical format in addition to tables of numbers.
Alone, this data is not very indicative as to whether a district is holding up financially, or improving, or going down with the State’s deficit. However, by reviewing the periodic benchmarks each quarter along with the annual benchmarks and the annual audit, local governing boards can chart the variance to determine a trend for the year or over a period of two to three years. A trend line eventually can be developed for a five to ten year period in order to provide a more accurate picture of the District’s financial changes. Such a trend line will indicate to the trustees whether the District’s finances are being properly managed by the administration and controlled by the governing board.

Trustees can use such benchmarks to track the performance of their Community College District and to take steps early to preclude the necessity of the system office placing a district on a financial watch list. Trustees who ignore using such benchmarks on a regular basis expose their District to the risk of having their District placed on a financial watch list or worse, having the state appoint a financial trustee of the District. If local control is to be respected and maintained, local governing boards must fulfill their responsibilities to prevent fiscal difficulties.

Comments and suggestions concerning these recommendations will be appreciated and you may send them to: mcginnisbi@butte.edu.