Institutional Reserves Fund (C-55)
Original Implementation: July 13, 2006
Definition and Purpose
An appropriate institutional reserves fund helps maintain financial strength, provides the foundation for debt management and issuance, protects against external volatility, and allows flexibility in planning for the needs of the University.
The institutional reserves fund balance refers to resources that are not allocated to any specific unit of the University, but are held centrally within the University's financial system. Additions to the institutional reserves fund balance include revenues that exceed expenditures. Deductions include the use of reserves to fund operating budgets, construction projects and unanticipated institutional requirements.
The purpose of an institutional reserves fund is to provide contingent support for potential significant financial occurrences, including:
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unanticipated or uninsured catastrophic events;
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temporary institutional revenue shortfalls or expenditure gaps;
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unforeseen legal obligations and costs;
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failures in central infrastructure; or
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failures of major business systems.
Institutional Reserves Fund Budgeting
The SFA Board of Regents through the Vice President of Finance and Administration shall set aside revenue to fund the reserves as an annual budget practice during periods of revenue growth and stability. During periods that revenue support is needed, the Board may choose to augment revenue by utilizing institutional reserves. Reasons that the Board would use reserves to support an annual operating budget include, but are not limited to:
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expenses that are fixed term in nature (usually 3 years or less);
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transfers to other centrally allocated funds to support expenditures that should be funded from sources other than tuition or state appropriations;
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a general contingency for unplanned or unexpected financial needs that may arise during the fiscal year; and
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strategic analysis of reserves when the balance is significantly above the target.
Institutional Reserves Fund Size
The target amount of reserves that an institution should maintain is determined using a calculation called the primary reserve ratio. The ratio is calculated by dividing expendable net assets by total expenses, net of depreciation and amortization. The higher education industry benchmark for the primary reserve ratio is .40. This means that an institution's reserves fund should total 40% of its annual operating budget, thus providing approximately five months of operational capacity.
A primary reserve ratio below .10 to .15 indicates that the institution's expendable net asset balances are critically low, since resources cover only one to two months of expenses. The low ratio also indicates the institution struggles to have sufficient resources for reinvestment. In addition, institutions with a low primary reserve ratio generally lack sufficient resources for strategic initiatives and may have less operating flexibility. Consequently, when the primary reserve ratio calculation is .20 or less, the institution will take immediate steps to implement a reserves restoration commitment.
At the end of each fiscal year, the primary reserve ratio calculation will be used to measure the distance from the reserves target. The amount of the institutional reserves fund and the reserves gap will be reported to the Board of Regents when year end information is available.
Under normal circumstances, the institutional reserves fund should at a minimum, total 40% of the annual operating budget. In the event reserves are utilized, a restoration plan should include a three year target payback period.
Source of Authority: Board of Regents
Cross Reference: None
Contact for Revision: Vice President for Finance and Administration
Forms: None