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Business Acumen

David Bea, Ph.D.Executive Vice Chancellor for Finance and Administration

August 5, 2016

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Business acumen at PCC

• The ability to make sound operational decisions based on knowledge of the organization, its fiscal realities, and its strategic needs

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PCC Finance101

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PCC’s Financial Foundation• FY2016-17: $247.8

million budget$51 million lower than 2013

• Zero Debt• Strong Peer

Comparisons• Solid Net Assets• Aa1 Moody’s; AA

Standard and Poor’s• Minimal state aid risk

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FY 2017 AZ Community Colleges In-State Resident Tuition Rates + Fees per unit

Coconino Mohave Maricopa Pinal -Central Pima

Yuma/LaPaz - AZWestern

Graham -Eastern Cochise Yavapai

Navajo -Northland

Pioneer

FY 2017 Fees Per Unit $0.00 $7.00 $0.00 $0.00 $5.50 $0.00 $0.00 $0.00 $0.00 $0.00

FY 2017 Tuition Per Unit $102.00 $81.00 $86.00 $84.00 $78.50 $80.00 $80.00 $79.00 $79.00 $70.00

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

$100.00

$110.00

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AZ Community College Proposed Property Tax Rates for FY 2017 (Rates Per $100 Net Assessed Valuation. Proposed combined rates are shown)

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Graham Pinal Yuma/LaPaz

Cochise Yavapai Navajo Maricopa Pima Mohave Coconino

Primary Tax Rate Secondary Tax Rate

$3.1384

$2.6269$2.5607

$2.2860

$2.0561

$1.7884

$1.4651 $1.3733

$1.3288

$0.6214

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AZ Community College Cost per Full-time Student Equivalent (FTSE) FY 2017 (Proposed General Fund Budget)

$13,232

$12,439

$11,441

$10,325$9,740

$9,246 $9,094

$8,253$7,885

$5,783

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Navajo Mohave Yavapai Graham Pinal Coconino Maricopa Pima Yuma/LaPaz Cochise

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Net Position FY 2015Item FY 2015 FY 2014 $ Change

Cash and Cash Equivalents $ 40,034,277 $ 31,566,523 $ 8,467,754

Short + Long-term Investments 55,656,676 65,437,925 (9,781,249)

Other Current + Non-Current Assets 126,775,440 130,253,851 (3,478,411)

Total Assets $ 222,466,393 $ 227,258,299 ($ 4,791,906)

Total Liabilities 149,377,777 20,031,360 129,346,417

Net Position $ 67,985,945 $ 207,226,939 ($ 139,240,994)

Net Position

Invested in Capital Assets (net of related debt) $ 111,016,873 $ 116,017,978 ($ 5,001,105)

Restricted Net Position 8,869,962 10,665,356 1,795,394

Unrestricted Net Position ($ 51,900,890) $ 80,543,605 ($132,444,495)

Total Net Position $ 67,985,945 $ 207,226,939 ($ 139,240,994)

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PCC Challenges• Financial Metrics/sustainable

resources• Heavily fixed vs. variable expenses• Compliance challenges

– HLC– Title IV– Audit findings/remediation

• Lack of quality assurance• Coordination/inconsistent processes• Sub-optimally used resources

– Technology– Physical resources

• Other externally driven risks

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015CFI 4.35 3.14 3.03 3.53 4.25 5.69 5.88 6.46 5.00 4.70 4.05 4.05HLC High 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00HLC Low 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Composite Financial Index (CFI)

HLC Financial Ratios

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Primary Reserve 1.04 1.05 1.05 1.12 1.16 1.27 1.18 1.35 1.35 1.31 1.14 1.14Net Operating 3.96 2.05 1.81 1.90 2.70 4.70 2.84 4.08 0.16 -0.80 -2.10 -1.95Return on Net Assets 5.31 2.66 2.05 2.58 2.64 3.38 2.32 3.04 0.08 -0.31 -1.10 -1.17Viability 0.68 0.76 0.94 1.24 1.75 2.79 5.04 10.00 10.00 10.00 0.00 0.00Composite 3.95 2.85 2.76 3.21 3.86 5.17 5.34 5.88 4.55 4.27 3.68 3.68Ratio Benchmark 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

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8.00

9.00

10.00

PCC Financial Ratios vs. Benchmark Targets(1.0+ = meeting or exceeding the benchmark)

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Administrators - Regular 44 44 45 46 49 48 48 48 51 56 56 62 53 53 53 54 55 56 54

Faculty - Regular 358 359 363 364 364 378 378 361 380 380 362 387 389 388 392 391 391 391 377

Staff - Regular 769 772 777 811 959 1,022 1,043 1,059 1,017 1,020 927 1,023 1,047 1,016 1,037 1,059 1,019 1,051 1,056

Audited Full-time StudentEquivalents 14,997 16,652 17,404 17,819 18,027 19,026 20,611 20,425 20,393 19,993 19,806 20,222 20,889 22,021 22,906 22,027 19,515 17,963 16,458

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10,000

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- 100 200 300 400 500 600 700 800 900

1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000

FTSE

Staf

fing

PCC FTSE vs. Staffing Levels FY 1997-2015

Notes: 1. Figures for Regular positions are based on budgeted full-time equivalents. Figures for Adjunct, Temporary & Student positions are based on estimates from actual costs.2. Prior to 1997, Personnel Statistics were calculated using a different methodology.

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PCC Business Model Basics

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Four Components:1. Revenue Model2. Cost Structure3. Margin Model4. Resource Velocity

Profit Formula

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Key revenues

• Tuition and fees• Property taxes• Expenditure limitation

(yes, expenditure limitation)

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• Product of:1. In State enrollment credits2. Out of State enrollment credits3. Tuition Rates

– In State: $78.50 per unit– Out of State: $210/$300 per unit

• Facts to Remember:– +$1.00/unit = $450,000– +100 FTSE in-state = $100,000– +100 FTSE online OOS = $500,000– +100 FTSE international = $900,000

Tuition and Fees

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• Property Tax Levy amount is not enrollment based• New property is additive (growth)• Impacts residential and commercial property

– Assessment ratios differ by property type • Can increase 2 percent per year with Truth in Taxation

Process and BOG approval

Property Taxes

Housing Downturn Spurs Unfinished Development and Labor Surplus in American Southwest. Photographer. Encyclopædia Britannica ImageQuest. Web. 20 Jan 2015.http://quest.eb.com/#/search/115_1611799/1/115_1611799/cite

• Facts to Remember:– Growth of 2% = $2 million– 2.0% Levy increase = $2 million

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Expenditure Limitation (oh, no, not EL! I thought we fixed that problem!)

Then what did SB 1322 do?– Completely transparent formula– Avoided catastrophic reduction in

budget– Created a way to phase-in a gliding path– Added some important exclusions

It did not eliminate enrollment concerns

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$60,000

$70,000

$80,000

$90,000

$100,000

$110,000

$120,000

$130,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Expe

nditu

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imit

(in $

000'

s)Expenditure Limitation Projections

Estimated Limit Flat Enrollment Grow 500/Yr Actual Expenses

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PCC Business Model Basics - Expenses

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Bowen’s Law

1. Colleges will strive to attain educational excellence, prestige, and influence.

2. There is virtually no limit to the costs that can be accumulated attempting to attain educational goals.

3. Colleges and universities attempt to maximize their revenues.

4. Colleges and universities will spend all the money they raise.

5. As a result of the preceding four premises, colleges and universities will naturally tend toward ever-increasing expenditures.

Bowen, Howard R., The Costs of Higher Education, 1980

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Balancing Revenues & Expenditures and/or Expectations

Keep property tax rates low!Reduce state and federal taxes

Student Success

Outcomes

Employee benefits that attract candidates

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Why are costs increasing?• Exogenous factors

– Inflation, cost disease– Regulatory requirements

• Output choices/competition– “Arms race” to be the first or best– Marketing costs

• Operational inefficiencies– Budgeting– Administrative lattice and “function lust”– Academic Ratchet– Waste/inefficiencies– Socially imposed costs

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HEPI Index CPI Index

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Expenses

General Fund– Predominately personnel (~75%)– Operational expenses – little to cut/reduce– Capital expenses – need to operationalize/find a sustainable

revenue source

Facts to Remember– 1% increase in salaries and wages = $900,000– Health care increases ~ $1 million per year– Depreciation is $8 million per year– 1 % increase for adjunct faculty = $150,000

Admin

Fac

Staff

Other

Benefits

Operations

Capital

Transfers

Contingency

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PCC Cultural Disconnects/Dysfunctions

Lack of Urgency

Lack of Trust

Yours!

Lack of Constructive

Conflict

Follow ThroughLack of

Accountability

Inattention to Results

Poor Communication

and Coordination

Confounding Policies,

Processes and Procedures

Other challenges to College success

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Guiding Elements

Future State

Mission

Vision

Values College Priorities

Mission

Stra

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an

Education/FacilitiesMaster Plans

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Solutions

• Cost reductions• Efficiencies• Positions – productivity• Revenue enhancement• Clear and consistent objectives• Accountability• Alignment of incentives with goals

Culture of a Premier Organization

Effectiveness

Efficiencies

Added Value

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PCC Business Model Changes

• Reorganization – Unit-based budgeting– Program-based budgets– College-wide perspective

• Attrition/Vacancies/Position Alignment• Benchmarking

– Tuition Comparisons– Faculty and staff ratios

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Out of State and International Tuition Comparisons – 2 Year Colleges

$-

$50

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$150

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$250

$300

$350

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$450

0 20,000 40,000 60,000 80,000 100,000

Out of State Online Tuition Charges

Arizona Colleges

Peer Institutions

Other Institutions

PCC

$0

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$150

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$300

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0 20,000 40,000 60,000 80,000 100,000

International Tuition

Arizona Colleges

Peer Institutions

Other Institutions

PCC

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350

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450

13,000 14,000 15,000 16,000 17,000 18,000 19,000 20,000

Full

Tim

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Full Time Equivalent Students

General Fund FT Faculty: Student Ratio Targets

52.6 50.0 47.6 Budget

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50.0

100.0

150.0

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250.0

Sep-2015 Oct-2015 Nov-2015 Dec-2015 Jan-2016 Feb-2016 Mar-2016 Apr-2016 May-2016

Vacant and Temporarily Filled Positions, 9/2015 - 5/2016

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Future State Realities• Fewer Resources• Increased Accountability• Increased Responsibility• Increased Regulatory Compliance

Requiring the College to:• Be More Nimble, Adaptive, and Responsive

– Innovative, Entrepreneurial, Inventive• Continuously Improve

– Employ Evidence and Data Based Decision Making– Assess Effectiveness

• Improve Coordination & Communication

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Focus areas• Student Success = Mission fulfillment• More Students = More Revenue• More Students = More Spending Capacity

• Be engaged in reducing costs• Be engaged in implementing actual efficiencies• Support the reallocation of resources• Maximize productivity of staff

• Ask questions, be skeptical, recognize what you don’t know, and focus on value to the College and students

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Exercise – Great Ideas

Encyclopædia Britannica ImageQuest, "Sculling," accessed 29 Apr 2015,http://quest.eb.com/search/115_2660800/1/115_2660800/cite

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Project Assessment Framework

Finance Metrics

5/10 Year Budget

Get state funding

More Numbers!

RFID Time Cards

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COMPLEXITY

LOW HANGING FRUIT

IMPA

CT COMPLEXIMPORTANT

PROJECTS

LIMITED VALUE EASY WINS BIG UGLIES