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2.11.1

Financial Resources
The institution has a sound financial base and demonstrated financial stability to support the mission of the institution and the scope of its programs and services.

The member institution provides the following financial statements: (1) an institutional audit (or Standard Review Report issued in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA for those institutions audited as part of a systemwide or statewide audit) and written institutional management letter for the most recent fiscal year prepared by an independent certified public accountant and/or an appropriate governmental auditing agency employing the appropriate audit (or Standard Review Report) guide; (2) a statement of financial position of unrestricted net assets, exclusive of plant assets and plant-related debt, which represents the change in unrestricted net assets attributable to operations for the most recent year; and (3) an annual budget that is preceded by sound planning, is subject to sound fiscal procedures, and is approved by the governing board.

Audit requirements for applicant institutions may be found in the Commission policy “Accreditation Procedures for Applicant Institutions.”

Judgment
  Compliant      Non-Compliant      Not Applicable

Narrative

The College is in compliance with this core requirement. As the only private, historically black, liberal arts college for men in the nation, Morehouse has a special mission to develop men with disciplined minds who will lead lives of leadership and service. Founded in 1867, Morehouse has a documented capacity, including a sound financial base, demonstrated financial stability and adequate physical resources, to support its mission and the scope of its programs and services. With a student body of approximately 2,800 undergraduate students in three academic divisions, Morehouse had an endowment and invested funds over $150 million as of June 30, 2007, demonstrating a sound financial base. Operating revenues have grown at a pace sufficient to cover operating expenses over the last five years, demonstrating financial stability. The value of the endowment and other invested funds provides a sound financial base to support the mission and scope of the college. Financial stability is evidenced by the results of operations, with a surplus of revenues over expenses for each of the fiscal years from 2003 through 2007. The chart below (based on KPMG audit reports) shows that the results of operations between fiscal years 2003 through 2007 demonstrate a positive trend in key financial indicators. The KPMG audit reports show that Morehouse College has experienced growth in all of the following categories: total revenues, unrestricted net assets, permanently restricted net assets, and total net assets. The College’s unrestricted net assets, net of plant assets and plant related debt, has grown by over $16.2 million during this same period. The growth in unrestricted revenues has been sufficient to offset growth in expenditures and to produce a stable pattern of operating surpluses. Both Moody’s and Standard and Poor’s provided an “A” rating on the college’s 2007 debt issue, indicating a stable outlook for the College’s financial capabilities.




An institutional audit, prepared by KPMG, a major independent CPA firm, is available for fiscal years 2003 through 2007. (See Audited Financial Statements below.) A management letter is available for fiscal year 2007. KPMG also provides an independent Ratio Analysis for assessment of financial performance, financial position, and financial trends.

A statement of unrestricted net assets excluding plant assets and related debt is available for fiscal years 2003 through 2007.

The College prepares an annual budget that is preceded by sound planning, subject to sound fiscal procedures, and approved by the governing board. Morehouse College is the only all-male institution with a historic mission to serve the unique educational needs of African American men. Its uniqueness is its strength. Consistent with its mission, Morehouse perennially has led the nation in producing African American men with baccalaureate degrees in fields the institution offers. To further cultivate this rich heritage and retain this top honor, the College developed a strategic plan, “Enhancing a College of Distinction for the Leaders of Tomorrow,” for the academic years 2001 to 2006. Anticipating a change in the presidency, in April 2007 the Board approved the extension of the strategic plan through Academic years 2007-2008. This plan presents the strategic goals and objectives that underpin the resource allocation process. The plan is presented in four parts, which are derived from the College’s vision:

 

  • To be among the nation’s finest liberal arts colleges;
  • To be the college of choice for African American males;
  • To continue its emphasis on leadership development; and
  • To create an academic village.

Morehouse uses this strategic plan as a roadmap to focus its efforts and resources towards the vision of being among the best liberal arts colleges in the nation. Budget preparation is an institution-wide activity, with major priorities set through discussions among senior level administration and with each academic and operating unit having the opportunity to quantify and advocate for baseline and strategic needs within the College’s mission.

Some of the strategic issues and questions considered in the budget preparation process include:

  • Are the sources and uses of funds matched appropriately?
  • Is the institution practicing intergenerational equity?
  • Demographic changes
  • Rising prices for tuition and fees (affordability)
  • Financial aid costs (discount) and packaging
  • Deferred maintenance
  • Employee compensation
  • Information technology
  • Outcomes assessment

Revenue projections are completed as early as possible to provide the President with data needed to make sound fiscal decisions. Revenue estimates provide an upper boundary within which expense plans are developed to remain in balance. Budget needs and plans are built through a collaborative process that includes the resource requests of the individual academic departments and administrative units and are then aggregated into divisional and institutional budget plans. Final budgetary decisions rest with the president in consultation with vice presidents of the various divisions. The annual budget is approved by the Board of Trustees in its April meeting each year. The budget process also provides flexibility to respond to emerging issues and priorities through contingencies, planned surpluses, amendments, adjustments and revisions.


THE COMPOSITE FINANCIAL INDEX (CFI)

The Financial Indicators Tool (FIT) was developed as a pilot project for the Council of Independent Colleges (CIC) by The Austen Group in 2005 to test the feasibility of collecting relevant financial data from public sources as well as to assess the value of such a benchmarking report to CIC member presidents. Four of the indicators are commonly used financial ratios: the primary reserve, net income, return on net assets, and viability ratios. These four ratios are combined into a single index score, the Composite Financial Index (CFI). This method was developed by KPMG and Prager, Sealy & Co., LLC, for use in financial benchmarking in private higher education.

The CFI provides a more complex picture of the financial health of the institution at a point in time than is possible with simply comparing multiple indicators.

The Index is built with the values of its four component ratios:

  • Primary Reserve Ratio - A measure of the level of financial flexibility
  • Net Income Ratio - A measure of the operating performance
  • Return on Net Assets Ratio - A measure of overall asset return and performance
  • Viability Ratio - A measure of the ability to cover debt with available resources

Once each of the four ratios is calculated, the relative strength of the score, or strength factor, and its importance in the mix of creating a composite score, or weight, is computed. The result is one weighted score for each indicator that, when added together, produces the CFI. The strength factors and CFI score are standardized scores that fall along a scale of -1 to 10. A CFI score of 3 is a threshold of institutional financial health. A score of less than 3 indicates a need for serious attention to the institution’s financial condition. A score of greater than 3 indicates an opportunity for strategic investment of institutional resources to optimize the achievement of institutional mission. Morehouse College’s CFI score falls in the range between 6.47 and 7.89, with an average value of 7.16, for fiscal years 2004 through 2007, demonstrating that the institution is in good overall financial health.


Primary Reserve Ratio

The primary reserve ratio measures financial strength by comparing expendable net assets to total expenses. In other words, the total resources that an institution could spend on operations (unrestricted funds) are divided by the total expenses for the year. The ratio represents the percent of a year the institution could meet financial obligations with assets readily available. For example, if funds that could be spent equaled four million dollars and total expenses equaled two million dollars, the ratio would be 2.0 (4 divided by 2). Or, if the reverse were true and funds that could be spent were two million dollars and total expenses over the year were four million, the ratio would be .5 (2 divided by 4). In the first scenario, with a ratio of 2.0, the institution could exist for two years with no additional revenue before all the expendable resources were depleted. In the second scenario, the institution could operate for only six months.

The recommended threshold for the primary reserve ratio is .4 (reserves to cover 40% of a year, or 4.8 months), indicating sufficient cash for short-term needs, facilities maintenance, and contingency reserves. A ratio below .15 (15% of a year, or 1.8 months) indicates possible short-term borrowing and struggling to find reserves for reinvestments. A ratio of 1.0 or greater indicates reserves available to cover at least one year of expenses with no additional revenue. Morehouse College’s Primary Reserve Ratio falls in the range between 1.44 and 1.85 for fiscal years 2004 through 2007, demonstrating a sound financial base and sufficient resources to carry out its mission.

Net Income Ratio

The net income ratio indicates whether campus operations resulted in a surplus or a deficit. In other words, is the institution making money or losing money in its basic day-to-day function of educating students? The net income ratio is calculated by dividing the change in unrestricted assets from the beginning to the end of the year by the total unrestricted revenues, thereby setting aside anything having to do with restricted assets. If an institution loses money in its basic operations over a period of time, the viability of the institution will be jeopardized. Continued decline in the net income ratio may result in the institution reaching the stage when it is too late to make the necessary changes in operations that would turn the institution around. One of the purposes of the net income ratio is to provide a bellwether to warn of such impending financial distress.

The threshold for the net income ratio is the range of 2-4%. A deficit in a single year does not necessarily indicate a problem, but deficits over several years are a cause for concern and suggest the need for restructuring institutional finances. The challenge in calculating this ratio is determining what constitutes "normal operations" and what items are exceptional or outside of normal operations. For example, faculty salaries and routine campus maintenance would be considered normal operations, but constructing a new science building would not. Although the net income ratio only constitutes 10% of the Composite Financial Index, this small percentage is somewhat misleading since the surpluses or deficits indicated by the net income ratio in time have an impact on all of the other three ratios. Morehouse College’s net income ratio ranges between 1.51% and 15.67% for fiscal years 2004 through 2007, with an average ratio of 7.06% during this time frame. This fiscal performance demonstrates that the college has sufficient resources to maintain financial viability over time.

Return On Net Assets Ratio

The return on net assets indicates whether the institution’s total assets, both restricted and unrestricted, are increasing or decreasing. The ratio is calculated by taking the change in total net assets from the beginning of the year to the end and dividing that number by the total net assets at the beginning of the year. While similar to the net income ratio, the return on net assets ratio includes everything that happened over the year-expected, unexpected, the stock market, operations, and so on—whereas the net income ratio only includes the change in unrestricted net assets, thus limiting it more to operations.

The threshold for the return on net assets ratio falls in the range of 3-4% above the rate of inflation. In recent years the Consumer Price Index (CPI) has been around 3%, meaning that a healthy return on net assets ratio should be between 6% and 7%. Both unforeseen and planned events can and will affect asset performance and in some years, the ratio may be below the recommended level. Nevertheless, occasional decreases are not a cause for concern if the financial reason for the drop is understood and is a one time financial event from which the institution can recover. If, however, the return on net assets ratio is not 3-4% above inflation for a period of time, the institution should be concerned. Plant investment, a capital campaign, or a poor stock market call all affect this ration in any given year, but the performance over time should be positive. Morehouse College’s return on net assets ratio ranges between 3.74% and 10.04% between fiscal years 2004 through 2007, with an average ratio of 7.4% during this time frame. This indicates that the College’s total resources are increasing over time, demonstrating financial stability and long-term viability.

Viability Ratio

The viability ratio measures the ability of the institution to meet its entire debt obligation with expendable assets. In other words, the total resources that an institution could spend on operations (unrestricted funds) are divided by long-term debt. The numerator in the viability ratio—unrestricted funds—is identical to the numerator in the primary reserve ratio, but the viability ratio compares resources that could be spent to debt instead of to total expenses. When expendable funds equal long-term debt the ratio would be 1.0. When expendable funds are twice the amount of long-term debt, the ratio would be 2.0.

The threshold for the viability ratio falls in the range of 1.25 to 2.0. Falling below a ratio of 1.0 would limit the institution's ability to fund new initiatives through debt and will identify the institution as a credit risk. Certainly not all debt is bad, but excessive or extended levels of high debt are detrimental to the institution’s well being. A viability ratio greater than 2.0 is a strong indicator of financial health. Morehouse College’s Viability Ratio ranges between 1.93 and 2.19 for fiscal years 2004 through 2007, showing that there are sufficient resources to meet the institution’s mission and its debt obligations and demonstrating financial stability and long-term viability.

Morehouse College Composite Score

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

2004

2005

2006

2007

 

 

 

Composite Financial Index (CFI)

6.68

7.23

7.07

6.47

7.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Primary Reserve Ratio **

1.5

1.57

1.47

1.44

1.86

 

Strength factor (0.133)

11.28

11.80

11.05

10.83

13.98

 

Weighted value (35%)

3.95

4.13

3.87

3.79

4.89

 

 

 

 

 

Net Income Ratio **

0.049%

7.91%

15.67%

1.51%

3.67%

 

Strength factor (0.013)

0.0377

6.08

12.05

1.16

2.82

 

Weighted value (10%)

0.0038

0.61

1.21

0.12

0.28

 

 

 

 

 

Return on Net Assets Ratio **

4.33%

8.55%

3.74%

7.27%

10.24%

 

Strength factor (0.02)

2.17

4.28

1.87

3.64

5.12

 

Weighted value (20%)

0.43

0.86

0.37

0.73

1.02

 

 

 

 

 

Viability Ratio **

2.74

1.95

1.93

2.19

2.01

 

Strength factor (0.417)

6.57

4.68

4.63

5.25

4.82

 

Weighted value (35%)

2.30

1.64

1.62

1.84

1.69

 

 

 

 

 

** Source: KPMG audit report and management letter













 
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