UCR Policies and Procedures

Printer Friendly Version


Campus Policy Number: 300-66B
Auxiliary and Self Supporting Enterprises: Budget and Rate Reviews
Policy Oversight and Administration: Academic Planning & Budget
Effective Date: 01/01/2009
I.                   TABLE OF CONTENTS
II.                 Policy Objective and Overview
III.               Policy Definition of an Auxiliary and Self Supporting Enterprise
IV.              Budgetary Principle and Guidelines
V.                 Functional Definitions
VI.              Policy Implementation and Responsibilities
In accordance with the University of California Business and Finance Bulletin BUS 72 (Establishment and Review of Auxiliary Enterprises), the Chancellor is responsible for the financial review of campus auxiliary and self supporting enterprises.
The purpose of this policy is to address the need for efficient and effective financial management of auxiliary and self supporting enterprise on campus. These operations are affected with a deep campus interest in that they impact the campus through their pricing and quality decisions, charging practices, and their billing methods and cycles. While these auxiliary and self supporting enterprise have the advantage of being campus based, they are simultaneously constrained by University wide and campus policy decisions, such as those related to employee classifications union contract provisions, salary / range adjustments, employee benefits, etc.
This policy is intended to encompass all budgetary and financial policy aspects of the auxiliary and self supporting enterprise including the establishment of budgets, rates, allowable cost, reviewing cycles, and full-costing principles.
This policy does not cover Sales & Service (S&S) activities as those businesses are more geared toward internal recharges operations on campus. For further details on S&S and the Committee on Sales & Service Activities (COSSA) please see Campus Policy Number 300-66.
In carrying out this responsibility, this policy shall provide the framework for financial reporting and accountability that includes describing the content and timing of budget and rate proposals.
Auxiliary and self supporting enterprises are entities that exist to furnish goods and / or services to students, faculty, or staff. Each enterprise operates on a self supporting basis through fees charged that are directly related but not necessarily equal to the cost of providing the good or service.
The customers of auxiliary and self supporting enterprises will be charged a specific fee that is at least equal to the allowable:
-         direct cost
-         indirect cost
-         debt service obligations
-         renewal and replacement reserve
-         operating contingency reserve
-         capital improvements reserve
Examples of auxiliary and self supporting enterprise are:
-         housing service operations
-         dinning service operations
-         parking operations
-         bookstore operations
-         child-care operations
-         student commons
-         university extension
-         faculty housing program
-         recreation center
There are two steps in the process of initiating an auxiliary or self supporting operation on campus.
1)      The Enterprise Concept Approval, and
2)      The Enterprise Proposal Approval
The first step is to establish a conceptual approval that begins as a new business prospect in the sponsoring Dean or Vice Chancellor's office. The business concept that has been selected to proceed in the process should be further developed with their pertinent CFAO.
Before development of the formal proposal, a preliminary discussion between the organizational CFAO and AP&B should take place. This discussion should evaluate the axillaries or self supporting enterprises operational feasibility, costing concerns, and policy compliance.
The second step is to develop and submit a detailed proposal to AP&B for review and recommendation. The establishment of a new auxiliary or self supporting enterprise must have written authorization from the Executive Vice Chancellor & Provost. The AP&B recommendation for authorization would be based on the following:
-         The business need for the proposed auxiliary and self supporting enterprise including the type of goods and / or services that will be offered, the location of the enterprise, and the targeted customers, and resources used in providing the goods or service.
-         The cost / benefit analysis for providing this good or service. To include the potential availability of the goods or services offered outside the campus (i.e. outside of UCR control) and potential outsourcing alternatives to providing the goods and services using UC resources.
-         A minimum of three-year projected pro-forma income statements (five-year is preferable).
-         Supplemental materials should be provided that describes revenue generated by activity or customer, debt service obligations, other sources of capital (e.g. funding, investment, seed money, or other cash), pricing polices, rates charged, and rate design methodologies.
-         Any other supporting documentation demonstrating the need for the operation to function on a self supporting basis.
Please refer to the University of California Business and Finance Bulletins BUS 72 (Establishment and Review of Auxiliary Enterprises) for a detailed explanation of how to establish a commercial type activity on campus.
Once authorized, the auxiliary or self supporting enterprise must comply with the University of California Riverside Policy and Procedure Manual, Accounting Manual, University of California Business and Finance Bulletins, and any other applicable rules and regulations.
A.     Auxiliary and self supporting enterprises will be required to maintain the appropriate financial standing (i.e. recovers, at a minimum, the full direct and indirect costs of the operation). This should include sufficient working capital, renewal and replacement / future investment reserves, and compliance with key performance indicator (KPI) targets. The source for applicable KPI's will include the University of California Office of the President, AP&B, and other offices as appropriate. See Functional Definitions for a description and partial list of KPI's.
B.     Each enterprise which maintains inventories or accounts receivable should have sufficient working capital and fund balances to support these assets or pay interest on cost of capital. Any deficit activity incurred in meeting this requirement or complying with convents shall result in interest charges levied against the enterprise.
C.     Renewal and replacement reserves should be accumulated in sufficient amounts needed to support the current or future purchase of Property Plant & Equipment (PP&E), provide capital for start up operations, and to ensure the long-term viability / sustainability of the enterprise. By "sufficient" it is intended that the reserves be capable of paying all or a partial contribution (if being used in conjunction with another funding source, e.g. debt financing) towards the costs of said PP&E. Approval for the use of these funds during inter-budgetary periods shall be made by the designated enterprise management and will require review and approval by AP&B before fund use. It is especially important that current year earnings or accumulated reserves not be used to support activities unrelated to the auxiliary or self supporting enterprise. Use of surpluses and or reserves for activities outside of the originating auxiliary or self supporting enterprise will be deemed inappropriate and subject to reimbursement within 30 days of learning of the disallowed use. Reimbursements include reversing the impact of the original transaction with respect to STIP accumulation. See Functional Definitions for a description and partial list of inappropriate uses. Planned Capital Improvements (i.e. PP&E) should be based on departmental estimates reviewed and approved by AP&B. Renewal and Replacements will be based upon the replacement costs or depreciation of PP&E used in the operation of the unit.
D.     The auxiliary or self supporting enterprise is expected to pay its appropriate share of costs for physical plant services, central campus administration, and other direct and indirect support costs (e.g. Administrative Cost Recovery and insurance costs).
E.      Auxiliary or self supporting enterprises should use the appropriate business and financial systems used by all operations at the University of California, Riverside campus. This will ensure data integrity is maintained and secured.
F.      Incomes are expected to align with expenses on a timely basis. For example, prompt monthly billing will more adequately ensure proper cost recovery. Progress billings should be considered where appropriate. Receivables should be minimized and tracked by age.
G.     Any debt and lease financing must be reviewed and approved by AP&B prior to the processing of a loan, lease, or before accepting title to property. This would be an example of the incremental budget and rate change mentioned in the review cycle below. As the result of an approved investment in PP&E, AP&B would issue an IRS Declaration letter to the Office of the Treasurer declaring the intent to use of tax exempt financing, allowing the campus to avoid the higher costs of taxable financing. Failure to submit a timely filing (no later than 60 days after the expenditure) would prevent the unit from using tax exempt financing for investments in PP&E.
H.     Auxiliary or self supporting enterprises should attempt to charge their customers the full cost of providing the good and / or service while delivering high quality services in a cost effective manner. An allotment for the required or needed level of reserves should be considered when determining the prices for products or services.
I.        Enterprise management will provide for administrative, accounting, financial oversight, and timely budget and rate reviews submitted to AP&B (through appropriate Dean or Vice Chancellor) for review, feedback, and recommendation.
J.       An accumulation of earnings (in addition to renewal and replacement funds) for potential or expected operating contingencies are permitted to be carried on the balance sheet at 5% - 10% of revenues. These percentages should be considered guidelines as some enterprises may require amounts in excess of 10% to meet future capital investments and / or operating contingencies. Examples of its use can be, but are not limited to general loss possibilities (e.g. business volume variances), temporary operating shortfalls, and other unforeseen events.
K.    Subsidy can be authorized by campus management to reduce the cost of service, but they can only come from non-State revenue sources and must be included as a fund source in the annual financial statements.
L.      With the exception of incidental servicing (e.g. the serving of unintended customers), the enterprise should not provide or advertise its goods or service to the general public for consumption. It is the University’s policy not to sell goods or services to outside consumers except where such goods or services are unique or such sales would not be in competition with commercial sources. Please see the Business and Finance Bulletin A 56 for further details.
M.   Capital costs (i.e. PP&E) with a value over $5K and with a useful life over one year will have to be carried on the enterprise Balance Sheet as a capitalizable asset with associated costs covered over the asset's useful life using the appropriate depreciation methodology (booked as an expense on the Income Statement). See Functional Definitions for a description of appropriate depreciation methodologies.
-         Administrative Cost Recovery (ACR) is the mechanism in which various indirect costs on campus are charged to the auxiliary or self supporting using an allocation base (e.g. square footage, volume of sales, and actual expenditures). See Campus Policy Number 300-02 for further details.
-         Balance Sheet is a statement showing an auxiliaries financial position at the end of a fiscal year (Assets, Liabilities, and Equity)
-         Book Value is the net amount shown for an asset on the balance sheet or the purchase cost less the accumulated depreciation
-         Break-Even is when the operating focus is not on generating significant profits or losses over the long-term. This is achieved while working within the constraints of establishing rates based on projected revenues, expenses, and reserve accumulation (establishment would be based on forecasting foreseen and potential unforeseen financial events).
-         Cash Flow is a statement showing from what sources cash has come into the auxiliaries and how the cash has been spent.
-         Debt Service is determined by the terms of the debt instrument.
-         Direct Cost isacost that can be specifically identified with a unit of output (e.g. goods or services).
-         Depreciation is the apportionment of the original cost of an asset over its estimated useful life. This is a Generally Accepted Accounting Principles approach that is consistent and uniformly applied. It usually represents a decline in the value of an asset due to its use, deterioration, and or technical obsolescence.
-         Depreciation Methodologies UCR has required a straight-line approach which assumes a constant benefit in each period therefore an equal depreciation charge to operations each year until book value is zero.
-         Income Statement is a list of the elements used in arriving at the auxiliaries profit (i.e. reserve accumulation) or loss for a fiscal year.
-         Indirect Cost is a cost that cannot be specifically identified with a unit of output (e.g. goods or services). Examples are but not limited to management salaries, office supplies, and Administrative Cost Recovery (ACR), which is a campus overhead cost allocation.
-         Inappropriate Use of Revenues and Reserves would be using revenues generated by one auxiliary or self supporting enterprise to support another enterprise or other unit on campus. These uses could include for example, the transferring of funds from a surplus operation to a deficit operation or the investment of enterprise surpluses into other campus construction and remodel programs that do not have a direct relationship to the originating enterprise's operation or mission.
-         Key Performance Indicators (KPI) helps measure progress towards future goals in predetermined and quantifiable ways. Examples include but are not limited to operating margin ratios, debt service ratios, inventory turnover ratios, and vacancy rates.
-         Property, Plant, and Equipment (PP&E) tend to be long-lived assets that generate future earnings. Examples include but are not limited to production capacity space, residence halls, parking lots, and furnishings.
The Office of Academic Planning & Budget (AP&B) is charged with the primary responsibility exercising central campus oversight for the application and interpretation of this policy. In the broader context of ensuring effective and responsible campus-wide fiduciary management, AP&B provides consultation, oversight, and guidance for auxiliary and self supporting enterprise activities in general.
Within the above noted responsibilities, AP&B will develop recommendations, standardize financial reporting, initiate / draft necessary policies, and provide rate recommendations (after consultation with the affected enterprise) for approval by the Executive Vice Chancellor & Provost.
AP&B will be responsible for reviewing and recommending approval of annual budget and rates to the Executive Vice Chancellor & Provost. However, AP&B will consult with unit managers (in cooperation with the Dean and Vice Chancellor's office) prior to furnishing a recommendation. After this consultation, AP&B will provide the recommendation to the Executive Vice Chancellor & Provost to obtain a preliminary budget and rate approval. AP&B will then present this preliminary approval to the Executive Vice Chancellor & Provost's Operations Counsel for feedback. The preliminary proposal is then submitted back to the Executive Vice Chancellor & Provost for final approval. This will allow for an appropriate level of discussion regarding the final recommendation and outcomes.
The budget and rates will not be considered approved until written authorization is issued by the Executive Vice Chancellor & Provost.
In the case of Housing Services, the University of California, Riverside Campus Fee Certification will be submitted by AP&B to the Office of the Vice President for Financial Management as a result of said reviews and authorizations per requirements of the Office of the President. This submission certifies that net revenues are sufficient to comply with covenants in the UC Bond Indenture(s) and other loan provisions.
AP&B will also be responsible for reviewing the pro-forma and recommending the approval of a new proposal for investments having a material impact on rates (e.g. typically resulting in a material change in rates or overall dollar impacts or the addition of a new customer base or service line). A proposal template would be furnished by AP&B to help facilitate this process. Examples of investments requiring advanced approval of the pro-forma are the expected acquisition of a parking structure, student apartments, or spin-offs of consolidated operations.
AP&B's review will consider:
-         cash management
-         pricing policies
-         rates charged
-         administrative overhead assessments
-         balance sheet
-         revenue and expense reports
-         debt service obligations
-         the use of accumulated reserves
-         surpluses and deficits generation
-         financial policy and standards compliance
-         financial performance metrics and target achievement
-         other relevant matters as appropriate
AP&B will provide the units with a workbook containing the standardized format for providing financial information useful for review. This reporting process will be the communication vehicle for annual and incremental process (described below).
This workbook will contain:
-         Executive Summary
-         Balance Sheet
-         Income Statement
-         Cash Flow Statement
-         Service Line Revenue
-         Staffing Report
-         PP&E Investment Forecasts
-         PP&E Book Value
-         Debt Service Schedule
-         Other Schedules as necessary
In additions, units will be required to submit an organization chart along with a pricing sheet, rate design methodology, or any other information deemed necessary by the unit under review or AP&B.
After the budget and rate proposal (including any supporting documentation) has been generated at the departmental level and approved at the organizational level, they will be provided to AP&B for review on an annual basis (mandatory) or if outside the initial review process (on an as needed basis).
The AP&B auxiliary and self supporting enterprise review cycle will be as follows:
-         Annually, an annual financial reporting package shall be completed by the enterprise and submitted to AP&B for review. The content of the workbook along with other information will become the basis for a recommendation to the Executive Vice Chancellor & Provost. This annual process will include an AP&B presentation to the Executive Vice Chancellor & Provost's Operations Counsel. An approval would result in rates that become effective in the upcoming fiscal year. Based on the enterprise's business cycle it may have to advertise rates that have not yet been approved through the annual budget review process. In these cases, appropriate language should be included in the rate notification which allows for rates to change in response to fiscal changes (ex. Housing Services).
-         Mid-year, incrementally or as appropriate, as the financial condition of the enterprise changes, an incremental financial reporting package may become necessary. The impetus for this is driven by issues that were unforeseen during the established review process yet warrant an interim financial response, approval, and budget and rate change. AP&B will then provide a recommendation to the Executive Vice Chancellor & Provost for the basis of an approval or disapproval of the budget and rates. This will allow for a more timely response to issues should they arise during the fiscal year. This process will only be presented by AP&B to the Executive Vice Chancellor & Provost's Operations Counsel when deemed necessary by executive management.
Call letters would be issued out in January and would state that the due dates for the budget and rate proposals will be March 15th. After receipt of the proposals, AP&B would conduct a thorough analysis and develop recommendations (in the form of an advisory letter) for Executive Vice Chancellor & Provost's review and approval. Prior to submission of this letter, AP&B will consult with unit managers (in cooperation with the Dean and Vice Chancellor's office) regarding the basis of the recommendations. During this period, AP&B will also be conducting presentations to the Executive Vice Chancellor & Provost's Operations Counsel. Preliminary approvals and counsel presentations should be completed by May 31st. By June 30th the Executive Vice Chancellor & Provost will provide a decision in written form for distribution by AP&B to the appropriate parties. The objective is to realize an approved budget and rates that become effective July 1st.
The total process is envisioned to be completed in three-and-a-half months (submittal to approval). The timeline for an incremental review will be dictated by the urgency or materiality of the proposed change in operations.
Sources and References to Policies