University Operating Fund Reserve Policy

Recommended By
President's Budget Advisory Committee
Approved
Judy K. Sakaki, President
Issue Date
Friday, September 7, 2018
Current Issue Date
Friday, September 7, 2018
Effective Date
Sunday, July 1, 2018
Contact Office
Vice President for Administration and Finance
Policy number
2018-3
  1. Purpose
    Effective October 1, 2015, the Integrated CSU Administrative Manual (ICSUAM Section 2001.00) formalized and established a systemwide policy on the creation and use of reserve balances. To further define the CSU Reserve Policy, Sonoma State has established the University Operating Fund Reserve Policy to guide University Operating Fund reserve planning efforts.
     
  2. Definitions
    Contingency: An ongoing, base budgeted source of funding that is set aside annually, yet is not committed for a specific purpose. The contingency may be used on an exception basis, as approved by the president, to cover unexpected costs or revenue decreases within a given year. Unspent contingency at year-end will be allocated to reserves. (Note: The Contingency is part of the annual operating budget and is not covered within the Reserve Policy.)
    Reserve: An accumulation of unrestricted funds set aside for economic uncertainties, unexpected expenses, losses, cash flow shortages, large repair or renovation projects, the acquisition and development of new facilities, and/or for future planning purposes. Reserves are a one-time source of funding. Once reserves are spent, they are gone, unless replenished from an alternate funding source.
    At a minimum, reserves in the following four areas need to be addressed:
    • Operating Reserve
    • Maintenance Reserve
    • Capital Reserve (Capital Improvement Fund)
    • Equipment Acquisition Reserve
       
  3. Reserve Policy Principles
    It is the policy of Sonoma State University to maintain financial reserves adequate to ensure responsible fiscal management, advance University priorities, and mitigate current and future risk.
    • Building reserves is an important component of long-term, strategic planning to meet the University’s objectives.
    • Reserves used to make up for unexpected revenue shortfalls or unforeseen costs should be accompanied by a near-term plan to increase revenue or reduce expenditures to replenish the reserve.
    • While it is appropriate to use reserves to resolve timing problems, reserves should be used only to provide a bridge to a solution rather than as a means to delay addressing a structural issue.
       
  4. Reserve Policy Guidelines
    It is the goal of the University to work toward funding reserves at the following levels:
    1. Operating Reserve
      The Operating Reserve provides flexibility to take mission-related risks and to absorb or respond to temporary changes in environment or circumstances. Without adequate reserves the University can suffer cash flow stress and become distracted from good long-term decision making. The Operating Reserve may also be used on a short-term basis to fund strategic initiatives. Any spending out of the Operating Reserve must be accompanied by a plan to replenish the reserve fund.
      • CSU Campus Reserves Policy (Reserve for Economic Uncertainty): Up to 6 months (50%) of budgeted operating costs
      • Operating Reserve Target: 10% of Base Budget Expenditures
    2. Maintenance Reserve
      The Maintenance Reserve provides protection against unforeseen facilities and infrastructure issues and emergencies that may arise during the year, such as a roof leak or a boiler that stops operating effectively. The Maintenance Reserve is not intended to be a sustained resource for planned deferred maintenance projects. A separate, ongoing deferred maintenance budget shall be established to address ongoing deferred maintenance and capital renewal needs. While the primary purpose of the Maintenance Reserve is to mitigate extraordinary events that have their roots in deferred maintenance issues, under special circumstances it may also be leveraged to support capital projects as long as the documented use of reserves is accompanied by a reserve replenishment plan.
      • CSU Campus Reserves Policy: No system-imposed ceiling – Association of Physical Plant Administrators (APPA) recommends a reserve level for capital and maintenance between 1% and 3% of the Current Replacement Value (CRV) of University facilities.
      • Maintenance Reserve Target: 1% of CRV
    3. Capital Reserve (Capital Improvement Fund)
      Beginning in 2014-15, the CSU capital funding framework was changed to require the CSU to self-fund future capital projects, which dictates the need for Sonoma State to maintain a Capital Reserve. The Capital Reserve provides the funding necessary for the University to acquire, develop, and/or renovate University facilities.
      • CSU Campus Reserves Policy: No system-imposed ceiling – the proposed CSU debt policy “requires campuses to set aside reserves to fund future projects costs for university facilities and infrastructure” (CSU Legal Manual Chapter 15 – Capital Projects – Funding for University Facilities). Campuses are expected to cover the costs of planning, working drawings, and equipment associated with each project, which are estimated at about 10% of the total project cost.
      • Capital Reserve Target: 10% of the cost of all capital projects included in the CSU Five-Year Capital Improvement Plan.
    4. Capitalized Equipment Replacement and Acquisition
      The Capitalized Equipment Replacement and Acquisition Reserve provides funding for any necessary equipment that may need to be purchased, outside of a department’s regular operations. Examples of this may include IT network infrastructure, large equipment, bleachers, etc.
      • CSU Campus Reserves Policy: No system imposed ceiling –Designation for Equipment Acquisition, per ICSUAM 2001.00.
      • Equipment Reserve Target: 10% of Current Replacement Value (CRV) of capitalized equipment.
         
  5. Funding Sources and Allocation
    The University Operating Fund Reserve will be primarily funded from year-end balances remaining within the University-Wide Division within the Operating Fund. Other funds may be allocated toward the Operating Fund Reserve at the discretion of the President. Unless otherwise outlined, new reserve funds will be proportionately distributed to the reserve categories based on the categories’ remaining funding need. The President has the discretion to allocate funds outside of this distribution to address strategic priorities.
     
  6. Reporting and Recalibration
    The University Budget Office will report annually to the President, the Cabinet and the PBAC regarding reserve balances and any uses of reserves. Due to annually changing budgets, capital projects, and replacement values, the amount of reserves goals should be recalculated on an annual basis. Once targets are reached on a stable basis, the policy should be revisited to recalibrate the targets to meet campus reserve planning needs.
     
  7. References
    ICSUAM Section 2001.00 – Campus Reserves Policy
    CSU Legal Manual Chapter 15 – Capital Projects – Funding for University Facilities
    CSU Debt Policy (not yet available)