Fourth Edition 4/6/99 Chief Financial Officer

First Edition: 12/14/1998 Monday

Second Edition: 12/23/1998 Wednesday

Third Edition: 01/22/1999 Friday

Fourth Edition: 04/06/1999 Tuesday

1.0 Introduction

2.0 Overview

3.0 Sources of Revenues

3.1 State Appropriations

3.2 Tuition and Fees

3.3 Property Taxes

3.4 Other General Fund Sources

3.5 Non-General Fund Sources

3.6 Total Revenues

4.0 Accounting and Fund Management

5.0 Budget Development

6.0 Budget Allocation

7.0 Capital Allocation

8.0 Budget Control

8.1 Internal Control

8.2 External Control

9.0 Summary of Past and Present

10.0 Survey Results

11.0 Future Plans and Directions

11.1 Sources of Revenues

11.2 Accounting and Fund Management

11.3 Budget Development

11.4 Budget Allocation

11.5 Capital Allocation

11.6 Budget Control

11.7 Summary of Future

11.8 Future Expectations and Evaluations

Appendix A: Cities and Townships in Four Counties

Appendix B: Ballenger Trust and Other General Fund Sources

Appendix C: A List of All Funds (with brief descriptions)

Appendix D: Activity Classification Structure (ACS) Definitions

1.0 Introduction

Financially speaking Mott Community College (MCC) is standing at a threshold and, like many other public higher educational institutions, will have to face harsh economic realities. However, it is only through challenges and crises that an institution will innovate in order to survive and thrive. Financial resources are essential to an institution as blood is to a body, but it is not the sole reason one exists. Financial resources at MCC were, are, and will always be directed in accordance with the mission and goals of the College. This chapter provides detailed information on the present, but focuses also on the future. Sections 2.0 through 9.0 explain the current financial conditions at MCC while Section 10.0 discusses the survey results and Section 11.0 elucidates the future plans of improvement and structure.

2.0 Overview

The financial system at MCC is developed due, in part, to the requirements of the State of Michigan, Department of Education, Office of Postsecondary Education. The Activities Classification Structure (ACS) requires community colleges to report all activities (including financial) to the State in specific formats according to preset definitions. Overall, the financial structure at MCC meets all legal requirements and professional standards, including generally accepted accounting principles (GAAP), and is in accordance with the Manual for Uniform Financial Reporting, Michigan Public Community Colleges.

3.0 Sources of Operating Revenues

The three major sources of operating revenues are state appropriations, tuition and fees, and property taxes. Other revenue sources include sales and rentals, investment income, and federal and state grants. The proportions remained quite consistent during the past five years as indicated by the following data table and pie charts:

Sources of Operating Revenues:

Sources of Operating Revenues (cont’d):

3.1 State Appropriations

State appropriations are based on a formula established by law through the legislation process (Public Act 117 of 1984). However during the past few years, due to budgetary constraints, the formula has not been fully funded. The assurance from the State to community colleges is that each institution will receive at least the same funding for the current year as a guarantee for the following year even though the formula is prorated. This action resulted in diminishing importance of student enrollment for funding calculation purposes. Another major impact from the State is cash flow. Beginning in the 1998-99 academic year, the State pays out the appropriations with 11 payments each year starting in October, which is the beginning of the State’s fiscal year. Since MCC’s fiscal year begins in July, the delay caused a significant cash shortfall for about 4 months from July to October 1998. The trend of the past five years is illustrated in the following graph:

Tuition and fees are set by the Board of Trustees as a matter of policy. In 1992-93, the Board approved the tuition to be charged based on contact hours instead of credit hours. During the past five years tuition increases have been relatively minor, in line with the consumer price index (or annual inflation rate). As a philosophy and direction from the Board Trustees, together with the President, MCC has been holding the line on increases in order to provide affordable postsecondary education to as many students as possible.

Since the increases in the past few years have been lower than the consumer price index, students are able to take advantage of the Michigan tuition tax credits. The following charts and data tables show the different rates depending on residence and percentage increases in the past five years:

Property taxes are levied on 11 cities and 28 townships in four counties: nearly all of Genesee County and portions of Lapeer, Livingston, and Oakland Counties (see Appendix A). The College’s tax base is basically the same as the Genesee Intermediate School District’s (GISD). In 1969, when the College was separated from the Flint School Board of Education as an independent postsecondary educational institution, the Flint Community Junior College (later named Mott Community College) was chartered with 1.40 mills for operating purposes (which was rolled back to 1.3745 mills in 1995, under Article IX Section 31 of the Michigan Constitution and the Headlee Amendment) and 0.5 mill for debt services. The rate has remained the same for the past 30 years reflecting the Board’s policy in being fiscally prudent.

The Board of Trustees is empowered to levy whatever millage is necessary to cover debt service payments without voter approval. As a matter of principle, debt services (repayments of bonds) have never exceeded 0.5 mill.

As of June 1998, the 1998 taxable values of real property in the Genesee Intermediate School District total $7,748,744,624. The following graph and data table shows MCC’s property tax revenues from these four counties during the past five years:

The largest of the other general fund sources is the investment income from the Ballenger Trust. The rest is made up of various federal, state, and local sources (see Appendix B for a listing of all General Fund Revenue sources). The following graph and data table show incomes from the Ballenger Trust and other miscellaneous sources during the past five years:

The most significant source of non-general fund revenues is restricted gifts and grants funds which account for 43% of the non-general fund’s total. The rest is made up of restricted, designated, auxiliary, agency, plant, and other funds (see Appendix C for a description of all funds). The following graph and data table show incomes from the restricted funds and other non-general funds during the past five years:

This is the summary of all revenue sources in all funds. The following graph and data table show all revenues from all sources during the past five years:

[General Instructional Requirements (GIR) # 21: Its financial practices, records, and reports demonstrate fiscal viability.]

[General Instructional Requirements (GIR) # 24: It makes available upon request information that accurately describes its financial condition.]

MCC uses the modified accrual method of accounting with the fiscal year beginning July 1. Total revenue and expenditures are separated by funds, with the General Fund being the primary focus. The non-general funds are usually designated for specific use (such as the Building and Site Fund) or restrictive use (such as grants and agency funds). Appendix C contains a list of all the funds with a brief explanation of each fund at MCC. Currently, MCC uses Colleague, (a Datatel software package for storage and processing of financial, personnel, and student data) for operational tracking and information archival. Financial, personnel, and student data are available on a real time basis since 1997 when Colleague was installed. Archived data of all past year records are kept in accordance with federal and state legal requirements.

5.0 Budget Development

[General Instructional Requirements (GIR) # 21: Its financial practices, records, and reports demonstrate fiscal viability.]

The budgeting process at MCC has gone through many changes, in part due to the change of the Chief Financial Officer during the past five years. In general it follows a semi-decentralized model, with active participation from budget managers who are administrators, department heads, and associate deans of various academic departments in the College. Each year, budget planning begins around January with input from budget managers. The Executive Cabinet (which is comprised of the President, three Vice Presidents, the Executive Director of Human Resources, and the Chief Financial Officer) provides general direction and guidelines in terms of activities and revenue forecast. Between January and April each year, dialogues between all budget managers and their respective direct supervisors, with several revisions, lead to a formally prepared budget proposal for the Board of Trustees’ approval. For the past five years, the budget has been approved by the Board of Trustees in May each year.

6.0 Operating Budget Allocation

[General Instructional Requirements (GIR) # 20: Its financial documents demonstrate the appropriate allocation and use of resources to support its educational programs.]

[General Instructional Requirements (GIR) # 21: Its financial practices, records, and reports demonstrate fiscal viability.]

In accordance with the College’s mission, during the past five years the majority of the expenditures have been spent on academic programs. In the General Fund, an average of 46.5% has been allocated and spent on instruction alone. When instructional support and student services are included, the percentage of spending rises as high as 73.5%.

The following data table and pie charts illustrate the details:

In addition, various non-general funds were used to augment the operation of the College, mostly in academic programs and needs. The most notable are the Lapeer Center (moved from Fund 02 to Fund 01, the General Fund, in accordance with the State of Michigan Activities Classification Structure - ACS codes), Building and Site (Fund 71), and Scholarships and Endowments (Funds 11-63). In aggregate, some $48 to $58 million dollars from all funds were allocated during the past five years:

Capital allocation can be disbursed in two major categories: building and equipment. During the past five years, several major projects were initiated: over $6 million had been spent on building projects (e.g., boilers, roofs, a/c, floors, lights, parking lots, energy conservation, etc.) and $15 million on equipment projects (e.g., Information System mainframe computer, networks, software, personal computers, laboratories, and operational vehicles, etc). The scope and size of all projects re such that MCC had to raise the funds through bond sales supplemented by limited state and investment incomes:

[General Instructional Requirements (GIR) # 21: Its financial practices, records, and reports demonstrate fiscal viability.]

Budget control is implemented in two parts: internal and external.

8.1 Internal Control

From the budget monitoring perspective, each month a budget summary report is produced for each general and grant funds cost center manager showing every line item of revenue (as applicable) and expenditures. Consolidated summary reports for the Executive Cabinet members are also printed for overview of the budget each month. From the spending perspective, purchasing policy and procedures are in place to meet legal requirements as well as Board policies. The computer system allows electronic signature approval from supervisors and prevents spending from accounts that are overdrawn or not budgeted. All purchases have proper invoices and approvals and all salary payments have either signed contracts and/or signed time sheets.

8.2 External Control

[General Instructional Requirements (GIR) # 19: It has external financial audit by a certified public accountant or a public audit agency at least every two years.]

Dupuis and Ryden, PC, of Flint, Michigan have been MCC’s financial auditors for more than 25 years. During all these years, there have been no major fault findings. Each year, Dupuis and Ryden presents the audit to the Board of Trustees formally at a public Board meeting in October or November. Suggestions for improvement have always been taken seriously and acted upon accordingly. In addition, the Board Audit Committee, which is comprised of external community members, and College Board members and staff, acts as an advisory group for any major financial issues, and reviews each year the audit findings before the formal presentation to the Board.

9.0 Summary of Past and Present

The institution’s financial strength does not come from processes alone. An appropriate level of fund equity assures the ability of the institution to handle surprises in cash flow, crises in unexpected revenue shortfall or expenditure spending, and also plans for future strategic investments in academic/operational programs. During the past five years, the fund equity at MCC has not been strong. But, it is improving:

(In Thousands)

The results of the NCA Employee Survey were compiled and published in December 1998. Among the questions, the following nine are related directly or indirectly to fiscal resources in terms of the respondents’ perspectives. These questions asked about the respondents’ general satisfaction with the following issues. Agreeing means satisfaction.

Survey Questions Agree Neutral Disagree

Compensation and Benefit Package 71% 14% 13%

Systematic procedures to allocate resources 18% 27% 46%

Clear understanding of process for distribution of resources 15% 23% 54%

Adequate funds to support instructional programs 15% 28% 43%

Adequate funds to support student services 19% 32% 37%

Effective system of budget accountability 18% 37% 34%

Adequate safeguards against misuse of resources 20% 35% 32%

Effective/adequate system to match budget to strategic goals 14% 40% 34%

Input into budget/expenditure decisions 26% 22% 41%

Other than the fact that most people like their total compensation package, there were more negative than positive responses to the remaining eight questions. Not counting those who responded as "NA," neutral responses accounted for about 30% of total. Hence, the comparison is really between the "Agrees" and the "Disagrees".

Several probable conjectures may explain the survey results. One major impact is the fact that the budgeting processes have changed many times during the past few years with different Chief Financial Officers. Another reason is the lack of experience in managing a budget that includes both revenue and expenditures vs. a budget that has only the expenditures. When one third of the revenue budget is not guaranteed (such as tuition and fees), expenditures must be adjusted accordingly when revenue changes, even in the middle of a fiscal year. The challenge for the individuals and the College is to develop a level of expertise and expectations in regards to fiscal resources. From the institutional perspective, a consistent Management Control System (MCS) needs to be developed. From the individual perspective, one must be able and willing to take on the authority as well as the responsibility. It takes time and effort of both the institution and the individual. The rest is communication, and more communication.

The survey results also present a general perception, whether or not it is factually accurate, that respondents have different opinions of the mission and goals of the College vis-à-vis of Administration which is being perceived as top heavy.

11.0 Future Plans and Directions

Sections 2.0 through 9.0 above provide the setting for what has been the actual financial status and processes during the past five years, including this current year. While knowing one’s past and understanding the present are essential, it is more important to plan for the future. The following sections outline plans of action to be implemented in the coming years. The fundamental principle is continuous improvement: While MCC is compliant with all legal and professional standards at present, future goals should be to exceed what is required with 100% accuracy, on-time performance, and maximum efficiency.

11.1 Sources of Revenues

The three major sources of revenues will most likely continue in the future.

State appropriation may undergo some changes in its formula allocation, one of which is the focus on performance based funding through ten core indicators. No matter what the changes are, it is anticipated that the dollar amount will remain the largest single source of revenue to the College. Organizational and accounting changes will be in place to accommodate any requirements from the State (such as accounting for the Lapeer Center’s activities in the General Fund).

Tuition and fees will rely more on the increase in enrollment and meeting business/community needs than on the increase in charges to students. As MCC is becoming the regional center for technology training with its to-be-built Regional Technology Center (RTC), overall student enrollment is expected to increase due to additional course/curriculum offerings, wider customer base, and larger geographic area. The Board of Trustees, together with the President, will preserve the philosophy and direction of providing affordable postsecondary education to as many students as possible.

Income from property taxes is expected to grow as Genesee County and its surrounding areas are projecting economic growth on multiple fronts. The diminishing dominance of the auto industry allows as well as pushes the college district to diversify economically, even though General Motors is still the largest employer in this area.

The fourth major source of revenue is the State’s special allocation of $16.7 million for the construction of the RTC mentioned above. It is a matching fund to the College since the voters approved the capital bond of $35.9 million dollars in May 1998.

Grants and endowments are crucial components of the fiscal health of MCC. The College will continue to apply for federal, state, and local grants as appropriate. General endowments and specific scholarships for students reflect community support of the mission and goals of the College.

11.2 Accounting and Fund Management

Accounting and fund management are components of a larger effort in building an Executive Information System (EIS). When completed, EIS will have three major areas, four levels of reporting, ten years of past history, real-time information on the current year, and five years of future projections for "what if" analyses. The three areas are: financial, personnel, and student records. In the financial area, Level 1 reports are summaries whereas Level 4 reports include every transaction in every account number. It is planned that the EIS project will take five years and three major revisions before it goes into steady state. No fundamental changes in principle are expected in accounting (i.e., modified accrued method) or fund management (i.e., Funds 01 through 74). However, accounts will be re-designed to meet multiple criterion requirements: (1) The State of Michigan ACS, (2) functional categories: instruction, instructional support, student services, operations, and administration, (3) organizational structure: by cost centers and funds, and (4) types of income: federal, state, local, etc., and types of spending: salaries, benefits, services, supplies, utilities, capital equipment, transfers, and miscellaneous.

11.3 Budget Development

A budget planning model is being tested at present. The model will start in September each year for grounding of directions and processes first, and will end by May of the following year for the Board of Trustees formal adoption. The model is flexible enough to handle both centralized and decentralized approaches. Regardless of the degree of centralization or decentralization, the basic principle is a management control system (MCS) that matches job description and responsibilities with corresponding authority and accountability.

11.4 Budget Allocation

Allocation of financial resources will continue to be focused on the five functional categories: instruction, instructional support, student services, operations, and administration. The budget planning model and MCS will ensure that the allocation is the result of continuous dialogue and conscientious decision, not a carry-over from prior years.

11.5 Capital Allocation

As of the writing of this section, the following major projects have been either identified or contemplated for the next three years:

. Construction of the Regional Technology Center (RTC)

This is not just a construction of a physical plant but also the development of curricula to meet academic, community, and economic needs being one of the State designated Michigan Technology Centers (Total cost estimated at $34 million).

. Upgrading the technology for academic and administrative use

The extensive use of computer technology is a major focus at MCC for both academic and administrative applications. This effort started with the installation of new hardware and software in 1997 and will continue in the next five years (Total cost estimated at $5 million).

. Major renovation and updating of the College’s buildings and grounds

While building the RTC presents an exciting future in every aspect of the College and community, attention is also being paid to existing facilities and campuses. Over the next eight years, major renovations (including, but not limited to, heating, ventilation, and air conditioning (HVAC) systems, laboratories and rooms) will be started as discrete projects (Total cost estimated at $10 million).

11.6 Budget Control

The Management Control System (MCS) is a model not only to align responsibility with accountability but also to prevent inconsistency in organizational structure. One simple example is an account line item for some sort of reserve purpose for which no one is directly responsible but rather an account that everyone can spend against. In this scenario, no one is held accountable to the budget nor does anyone know what, how much, when, or how the money is spent. The only time this approach is appropriate is a small dollar amount with many users. The benefit of tracking the use is not worth the cost and effort. Hence, control must first come from a systemic approach, followed by people who are trained at every level of the College, and finally by a computer system. Without a working MCS in place, even the most well-meaning and budget savvy manager may lose control. Account numbers and cost centers should change each time there is a major organizational change. However, no changes should be necessary when there is no organizational change, (e.g., people changing jobs). By 1999-2000, all account numbers and cost centers will be changed to match individual job responsibilities.

Annual audits will continue to be performed by an external certified public accounting firm. Findings will be presented to the Board formally in public in October or November each year. Any major violations will be dealt with immediately and suggestions for improvement will be acted upon accordingly.

11.7 Summary of Future

The unrestricted fund balance should be within 5 to 15% of total revenue each year in order to be prepared for cash flow needs, unexpected expenditures, and strategic investment for long term goals. Below 5%, the institution is at risk of deficit spending and postponing problems. Above 15%, the institution is hoarding financial resources and not providing adequate level of services. In the next five years, MCC is planning to strengthen the financial position by reaching the 5% threshold in the unrestricted fund balance.

11.8 Future Expectations and Evaluations

"Good things happen by planning; bad things just happen." Even though no one can predict the future, having a plan in place provides the direction for all of us to follow. The financial predictions presented here are conservative and probable given the current situation. However, it does not mean that the road ahead is easy. Many challenges and potential changes will constantly impact, both positively and negatively, the achievement of those goals. Only perpetual vigilance and diligence of all staff at MCC would make these predictions a reality.

The following is a summary of the financial strengths, weaknesses, opportunities, and threats (the "SWOT" model) facing Mott Community College in the future:

Strengths:

MCC’s financial strength is in its diversity. Outside of the General Fund, the College has a healthy base of scholarships and endowments. In addition, the community support in passing bond issues for capital projects is a vital strength for the future of the College. Indirectly, MCC’s flexibility and commitment to community needs contribute to financial stability in terms of tuition and donations.

Weaknesses:

The most obvious financial weakness is the College’s balance sheet. The General Fund’s fund equity is less than 3% well under the Board’s set target of 5%. Fund equity is needed for cash flow purposes, as well as the ability to meet unexpected emergencies, and plan for future strategic initiatives. In a less tangible manner, negative feelings about financial matters as indicated by the survey are also a weakness.

Opportunities

Financial opportunities for public educational institutions are quite limited in general. However, MCC has been able to get additional capital and curriculum development funding at the state and federal levels. These are the results of administrative leadership and faculty collaboration. As the community college system changes with the times, new financial opportunities do exist with closer ties to business and industry in meeting their training needs.

Threats:

Financial threats usually come from two dimensions: revenue shortfalls and expenditure overdraws. Revenue shortfalls are very real in terms of decreases in enrollment, smaller increase or even a decrease in local property values, federal and state grants cuts. Expenditure overdraws are equally real in terms of inattention to the budget and budget manager’s deficient knowledge of accounting in a semi or fully decentralized budgeting environment.

To reiterate the commitment and philosophy, financial resources to an institution, like blood to a body, are absolutely vital to the survival of the entity. However, they are the means, not the end, to achieving organizational goals, accomplishing institutional missions, and fulfilling its destiny.

Appendix A: Cities and Townships in Four Counties

Current Funds

Fund 01 General Fund

Fund 11 Agency Scholarships Fund

Funds held by the College for The Bruin Club of Genesee County a 501C(3) non-profit organization with its own Board. The Bruin Club sole purpose is to raise funds for athletics for Mott Community College. The College acts only as custodian of these resources.

Restricted Funds (41-46)

Fund 41 Federal Grants Fund

Fund 51 Student Loan Fund

Fund 61 Endowment Funds Administered by the College

Fund 71 Building and Site Fund

A valuation fund to account for land, land improvements, buildings, building improvements, and equipment owned by the College, with the exception of any held for investment in Endowment Funds.

Appendix D: Activity Classification Structure (ACS) Definitions

"The Michigan Community College Activities Classification Structure (ACS) is a set of categories and related definitions which allows users to examine the operation of an institution as they relate to the accomplishment of that institution's objectives. It is a logical framework for arraying information by activity classifications, in which an "Activity" is defined as an aggregation of activities serving a common set of objectives. Activities are assigned to classifications on the basis of the institutional objective served by the activities." (Michigan Department of Education, Activities Classification Structure Manual, June 1996, p.5).

Mott Community College carries out its operations with five major ACS activities, as defined in the ACS Manual (pp.6-37). For purposes of uniform reporting, all Community Colleges in Michigan are required to report financial and other data on an annual basis to the State using these definitions: