Carry-forward and Year-End balances Guidelines

The following fund management guidelines are in effect (version 1.0 dated 12/20/2019).  Questions may be directed to Budget and Resource Management in Budget Analysis & Planning.

Summary

This document sets forth guidance to all campus units and fund managers regarding responsible accumulation and management of fiscal year-end balances carried forward as budget to the next fiscal year, to ensure resources are being used in a timely and effective manner.

As a general rule, a prudent level of reserve at year-end falls within the range of 10-15% of total annual expenses for academic units and academic and institutional support units and the range of 15-25% for auxiliary enterprises or sales and services units. These ranges are meant to ensure a buffer equivalent to one month of operating expense coverage is available, or three months for auxiliaries and sales and service units due to their more volatile revenue sources.  However, this general rule is superseded by more specific rules based on the type of fund, intended activity or use of the monies, and funding agency requirements.   Certainly, there may be fund sources with dynamic levels of annual revenue or dynamic expenses that may need to maintain a higher level of prudent reserve. 

This document does not provide guidance related to managing carry-forward balances associated with sponsored awards or plant fund accounts. These balances are managed according to established University accounting policies, generally accepted accounting practices, and/or specific contractual terms. It also does not provide guidance related to balance sheet accounts, which are not budgeted and represent non-discretionary, future obligations.

Definitions

Budget or Operating Budget: An amount authorized for expenditure and/or revenue projected as applicable by fund type. Budget is a financial placeholder representing the unit’s authorization to spend, based on either allocations that originated from campus leadership or UCOP decisions or models or from revenue projections for a fiscal year in applicable activities (e.g. self-supporting, auxiliary, student fees, sales, etc.). Actual revenues may be different than projected revenues.

Carry-forward budget:  The unexpended balance at the end of a prior fiscal year that has been rolled forward to the next fiscal year. Carry-forward budget can be positive (funds available to spend) or negative (a deficit that needs to be covered).

Note: Not all fiscal year-end balances are carried forward because of their nature (ex. balance transfers to/from balance sheet, etc.). For more information about year-end balances excluded from carry-forward, please contact Budget and Resource Management or Enterprise Financial Systems.

Deficit balance: A fiscal year-end balance that is less than $0.00. Such balances are subject to interest at the then current STIP rate. See https://planning.ucsc.edu/budget/rates-and-assessments/negative-stip-charges.pdf for more information on this process.

Expense:  A payment, charge, or booked cost for receipt of goods and services or other legal commitment.

Encumbrance or Lien:  A legal commitment to pay for goods or services when received. Transactional examples include signed contracts, purchase orders, and projected salary and benefit costs of current employees.

Fiscal year-end balance: The unexpended balance at the end of a fiscal year. These balances are generally calculated as: total operating budget less total expenses. For self-supporting, auxiliary, and other revenue-generating activities, carry-forward is calculated as: total operating budget plus total revenue less total expenses.

Level of reserve. The level of reserve is calculated as prior fiscal year-end balance (excluding encumbrances) divided by prior year-end expenses. This places the carry-forward balance in context by expressing its magnitude relative to annual expenditures. This is the measure or calculation used to define prudent reserve levels.

Revenue: Amount received or deposited for goods or services. Examples include tuition and fees, state claims, extramural funds, gifts, endowment, sales, etc.

STIP or Short-Term Investment Pool:  The amount of interest earned on aggregated cash balances managed at UCOP as a single pool to generate interest income.

Guidelines

General Rule:

The following chart defines by function (a.k.a. program code) the prudent range of year-end balance, as a percentage of total expenses.

 Specific rules that override the general rules (not an all-inclusive list):

Campus-based fee funds:  Certain campus-based fees (a.k.a., student referenda or measures) require a reserve for future building maintenance, construction, or debt service. The language in the fee referenda sets forth the specific requirements. All other campus-based fee revenue is intended to be spent in the current year in support of the population of students who paid the fee. The general rule of 10-15% range applies.

Contracts and Grants and other funds with defined end dates:  Such funds must be spent in accordance with funding agency requirements and, as applicable, specific contractual requirements.

Course fee funds:  Course fees are intended to have zero carryforward budget. Per policy year-end balances cannot be negative, and positive balances may result in lowering the fee rate. See Miscellaneous Fees and Course Fees

Debt service:  Some external financing and long-term debt commitments require the unit demonstrate annual operating surpluses of 125% (annual revenues exceed expenses by a factor of 1.25). In such cases, the debt instrument defines the range of acceptable level of reserve and therefore carry-forward amount.

Gifts and endowments:  Donors provide charitable gifts for specific impactful purposes (a.k.a., designation) that benefit the institution. Gift and endowment funds must be spent in a timely manner per the designation by the donor. The general rule of 10-15% range applies.

Faculty Start-up:  As a condition of hire, ladder-rank faculty typically receive start-up packages in support of their transition for costs for establishing their initial research and academic capabilities. Start-up funding is intended to be fully spent by faculty on activities to get them to tenure. Funds should not persist beyond tenure.  In general, faculty start-up funds must be spent within 3-5 years or they may be forfeit depending on the practice of individual deans. At the discretion of the dean, certain disciplines (e.g. book-based, etc.) may be given longer timelines that align with the research pace of such disciplines.  Deans should state in the faculty hiring letter the specific applicable requirements to be followed.

Miscellaneous Fees:  A prudent range for the level of reserve depends on the purpose of the fee. See Miscellaneous Fees and Course Fees.

Plant construction funds:  Construction funds remain available through the end of the project until capitalized. This guideline does not apply to construction funds.

Recharge:  A prudent range of carry-forward for recharge activities is +/- 15%. See recharge policies.

Reserves (designated):  This specific fund type is generally used by self-supporting and auxiliary enterprises, as well as certain campus-based fees and the student services fee. Reserves are monies purposely set aside for a specific future use. The most common purposes are reserves for equipment and reserves for improvements such as building maintenance or capital construction. Because the nature of a reserve is to save money for the future, the level of acceptable carry-forward depends on the purpose of the reserve. Long-term cash-flow analysis should be conducted on at least an annual basis. Units may request assistance from Budget and Resource Management in conducting cash-flow analyses, if necessary.

Provisions:  Provisions are budget clearing accounts or collection centers used by academic divisions and central campus for activities such as faculty provision placeholders, managing campus liabilities, etc. Because provision accounts cannot technically incur expenses, a prudent carry-forward range as defined in this guideline cannot be calculated. An action item for the coming year is to define an alternative method for setting a prudent range of reserve for provision accounts.

University Student Aid Program (USAP):  There is a long-standing UC systemwide policy that year-end balances in USAP funds not exceed 10% across all USAP funds sources.

Recommendations

Appropriate use of carry-forward budget:

Positive carry-forward balances usually accumulate from an unexpected increase in revenue or an unplanned decrease in expenses, such as staffing vacancies resulting in salary savings. If the level of reserve falls within the prudent range, it is expected the monies will likely be used for status quo operational support.

Year-end balances higher than prudent level, unless prohibited by fund source restrictions, should be used in one-time investments in strategic initiatives, such as systems, process improvements, or developing new/enhanced services that benefit faculty and students and move forward campus mission and goals. If year-end balances are consistently higher than the prudent level of reserve, comparing across three or more years, principal officers may be asked to provide a rationale or spending plan for the balances. In the case of fee revenue, a reduced rate may be recommended. The request may originate from the offices of Budget and Resource Management, Internal Audit, or the Campus Provost/Executive Vice Chancellor, as appropriate.

Year-end balances lower than appropriate level, on a consistent basis comparing across three or more years, leave the unit with little ability to weather normal variations and remain out of deficit status. Principal officers may be asked to provide a savings plan or revenue generation strategy in this instance. The request may originate from the offices of Budget and Resource Management, Internal Audit, or the Campus Provost/Executive Vice Chancellor, as appropriate.