Monday, February 8, 2016

PASSHE Officials versus PASSHE Students - Part 15


Is PASSHE Trying to Justify Fund Balances Large Enough to Pay Off Future Financial Obligations?

PASSHE appears to be attempting to change the definition of “fund balance” from a modest and prudent fund capable of covering occasional revenue shortfalls, to a foolishly huge fund capable of covering both occasional revenue shortfalls as well as future pension and post-retirement obligations that won’t come due until years in the future—when future annual revenues would be available to pay for them. 

The 14 PASSHE universities include Bloomsburg, California, Cheyney, Clarion, East Stroudsburg, Edinboro, Indiana, Kutztown, Lock Haven, Mansfield, Millersville, Shippensburg, Slippery Rock and West Chester.

A Look at the Numbers
 
To answer the above question, it is necessary to look at the numbers that would be involved if PASSHE were to succeed in its attempt to change the definition of “fund balance” to cover all its future liabilities:  
 
·         PASSHE’s Total Fund Balance at the end of FY 2013 was about $600 million ($597,598,844), which was 38.4% of its $1.6 billion E&G operating budget that year.
 
·         According to PASSHE’s “MANAGEMENT DISCUSSION AND ANALYSIS” in its 2015 Audited Statements, the following future liabilities may need to be included under its new definition of “Net Position:”
 
Ø  $114.6 million - Compensated Absences Upon Employment Termination or Retirement (payouts for annual and sick leave balances);
Ø  $1.06 billion - Postretirement Benefits  (for employees in State System health care plans);
Ø  $798.7 million - Net Pension Liability (for employees in the State’s Retirement Systems). 
 
·         The above three items alone total nearly $2 billion ($1.97 billion) in current dollars.

·         Adding those three items to PASSHE’s FY 2013 fund balance would yield a total of over $2.5 billion.
 
What Would PASSHE Do with a $2.5 billion Fund Balance—Assuming it Could Amass One?

Let’s start with the dubious assumption that PASSHE could actually amass a $2.5 billion fund balance.

Whether called a “fund balance,” “unrestricted net assets,” or “net position,” PASSHE will never hoard a sum of money sufficient to cover all its future liabilities.  It would simply be impossible for many reasons:

·         The only sources of money available to go into PASSHE fund balances are the “occasional” surpluses of annual revenue over annual expenses occurring at the fourteen individual universities.

·         The entity consisting of the Office of the Chancellor and the Board of Governors (OOC+BOG) generates zero funds, and what it spends comes from the revenues provided by Tuition and State Appropriation. 

·         While OOC+BOG and some of the PASSHE universities have been able to generate huge fund balances in the past, those funds had to have come from annual surpluses of revenue over annual expenses.

·         With its high personnel costs and other mandatory expenses, the ability of PASSHE universities to generate increasingly large fund balances by banking on regular annual surpluses is severely limited.

·         PASSHE funding by the State (25% of E&G revenue) has been either stagnant or declining; PASSHE funding by Students, Parents and Alumni Donors (75%) is increasingly limited by tuition sticker-shock.

·         These factors weigh against PASSHE universities having a steady supply of future budget surpluses.

·         A pattern of ever-increasing fund balances can only mean that one or both of the following two things are happening: 1) That annual revenues are too large for legitimate expenses; or 2) That annual revenues are adequate, even if barely so, but decisions have been made to skimp on those legitimate expenses with the goal of hoarding money for purposes other than legitimate ones.

·         This hoarding tactic was openly, if quietly, encouraged to PASSHE presidents by PASSHE financial officers between 1992 and 2012. That is, the encouragement was always verbal but never in writing.

·         From my twenty-years of experience as a PASSHE university president I can assert without fear of contradiction that the individual PASSHE universities are not over-funded—provided that they are acting faithfully to deliver the “Pennsylvania Promise” contained in PASSHE’s statutory purpose according to Act 188: “To provide high quality education at the lowest possible cost to the students.”

·         There is compelling evidence to show from PASSHE’s official data that at least some of the PASSHE universities must be skimping on legitimate expenses, so much so that on average as a 14-university system, educational quality metrics have steadily eroded since 2002, and the Board of Governors has not provided a PASSHE education at anything like the lowest possible cost to the students in years. 

·         PASSHE’s large fund balances grew at the expense of PASSHE students, parents and alumni donors—who paid for high quality education at lowest possible cost to students—but haven’t been getting it.

 What Would PASSHE Do With a $2.5 Billion Fund Balance, Even if it Could Amass One?
 
From the numbers presented above, as much as $2 billion of a $2.5 billion fund balance wouldn’t be needed until some number of years into the future, meaning that the money would just be sitting there creating temptations for those for whom resistance to temptation might not be their strongest attribute.
 
If history teaches anything it is that, generally speaking, politicians cannot be trusted to keep their hands off public money that is not already totally, structurally and irrevocably denied to them.
 
The U.S. Congress and the Social Security Trust Fund

By way of example, if one Googles the term “Social Security Trust Fund,” one of the top entries is a Wikipedia article which contains the following revealing quotes:    

“The Social Security Administration collects payroll taxes and uses the money collected to pay Old-Age, Survivors, and Disability Insurance benefits by way of trust funds. When the program runs a surplus, the excess funds increase the value of the Trust Fund. At the end of 2014, the Trust Fund contained (or alternatively, was owed) $2.79 trillion, up $25 billion from 2013. The Trust Fund is required by law to be invested in non-marketable securities issued and guaranteed by the "full faith and credit" of the federal government. These securities earn a market rate of interest. (Emphasis added.)
Excess funds are used by the government for non-Social Security purposes, creating the obligations to the Social Security Administration and thus program recipients. However, Congress could cut these obligations by altering the law. Trust Fund obligations are considered "intra-governmental" debt, a component of the "public" or "national" debt. As of June 2015, the intragovernmental debt was $5.1 trillion of the $18.2 trillion national debt.”  (Emphasis added.)

To be continued.

Monday, February 1, 2016

PASSHE Officials versus PASSHE Students - Part 14


“Tis a lesson you should heed:

Try, try, try again.

If at first you don't succeed,

Try, try, try again.”

The above proverb was popularized by British writer W.E. Hickson (1803-1870), and I can recall it being recited to me and my classmates by teachers in elementary school.  I was reminded of this proverb the other day when I remembered that I first experienced PASSHE’s attempts to muddy the waters about “fund balances” during FY 1992-93, the very first of my twenty years as a PASSHE university president.
 
The relevance of this proverb to PASSHE’s attempts to muddy the waters about its embarrassing fund balances is seen in its most recent (2015) audited financial statements, although not in the main body of the 52-page audit report itself, but rather in Management’s 14-page response to the audit report¹ which is included in the overall report but appears under the following heading, exactly as presented below:
 
“MANAGEMENT’S DISCUSSION AND ANALYSIS
(Unaudited)”

For the benefit of those who may not know how the auditing game is played, the auditing firm puts its reputation on the line when it comes to any conclusions contained in the body of the main audit report.
 
But by using the term “(Unaudited),” the auditing firm is clearly taking no responsibility for what PASSHE’s management has to say about itself, or anything else the auditors may have touched upon in their report.

By its very nature—as an un-contradicted opportunity for management to paint the rosiest possible picture of itself—an unaudited “Management Discussion and Analysis” often resembles a PR piece. 
 
But the term “(Unaudited)” flashes a bright red “Caveat Emptor” sign, Latin for “Let the buyer beware.”
 
Governor Casey and the Board of Governors Clash in FY1992 over PASSHE’s Fund Balance
 
As described in an earlier blog post, the issue of large PASSHE fund balances had become a hot topic the year before my arrival in August of 1992 over Gov. Casey learning that PASSHE was sitting on a combined total fund balance of $90 million, while asking for more and more State Appropriation dollars every year.
 
My university inherited a fund balance of $2.5 million, or 5% of its $50 million annual revenue, while one other university with similar annual revenue was sitting on $19 million (21%) of PASSHE’s $90 million total!
 
To my way of thinking, PASSHE’s fund-balance problem, together with its solution, was totally obvious.
 
The Obvious Problem
 
Gov. Casey’s reported anger at PASSHE for hoarding large amounts of money, while continuing to ask for more money each year, was completely understandable for any number of reasons including these:

·         The only way to add to fund balance is to have annual revenues that are larger than annual expenses.

·         That might happen occasionally, but not so frequently that huge fund balances would be generated.  

·         A pattern of ever-increasing fund balances can only mean that one or both of the following two things were happening: 1) That your annual revenues were too large for your legitimate expenses; or 2) That your annual revenues were adequate, but decisions were being made to skimp on those legitimate expenses in order to hoard money for purposes “other” than legitimate ones. 

·         If Item 1) were true, that would mean that the State was already giving the universities more money than they legitimately needed—in which case they shouldn’t be asking for more money, for to do so would be to play the State, the Governor and Pennsylvania’s Taxpayers for fools.

·         If Item 2) were true, that would mean that although the revenues were adequate to cover legitimate expenses—such as those needed to fulfill PASSHE’s Act 188² Statutory Purpose: “To provide high quality education at the lowest possible cost to the students”—decisions were being made to ignore Act 188 and to divert money into the unrestricted fund balance, that could then be spent on virtually anything!

·         But to skimp on PASSHE’s Statutory Purpose is to play 100,000+ PASSHE students, parents and private donors, primarily PASSHE alumni, for fools.

 The Obvious Solution
 
To my mind, the solution to PASSHE’s obvious money-hoarding problem was simply to make a decision to “straighten up and fly right,” to quote the advice regularly given to high school students in an earlier era.
   
Around this time, while Chancellor James McCormick and his financial people were briefing the fourteen presidents on what Gov. Casey could or might do to punish PASSHE for having too large a fund balance, I tried to help by bringing up the following two-step proposal:  1) Seek an agreement with the Gov. Casey as to what an appropriate level of fund balance, as a percent of annual revenue, might be; and then 2) Ask the Board of Governors to approve a policy limiting PASSHE fund balances to the agreed-upon level.

That solution might help soften Gov. Casey’s anger and would also guarantee that PASSHE would no longer run the risk of insulting the State, the Governor and Pennsylvania’s taxpayers with its fund balance.
 
PASSHE’s First Attempt to Change the Definition of “Fund Balance
 
PASSHE’s then Vice-Chancellor for Administration and Finance, Wayne Failor, argued against my proposal and began to make a totally different case from the one that I had just made.  In effect, Failor argued that Gov. Casey was wrong and that PASSHE’s fund balance was not too large at all, for the following reason:  PASSHE had incurred enormous pension and postretirement obligations that amount to many millions of dollars, and that PASSHE’s fund balance, compared to those future liabilities, was in fact too small.
 
I replied in rebuttal that PASSHE having enough fund balance to cover future pension & postretirement obligations was equivalent to a homeowner having enough money in the bank to pay off the home mortgage.
 
The reader may not be surprised to learn that my proposal did not carry the day.

If at first you don’t succeed, Try, try, try again

Failor’s 1992 proposal may have been PASSHE’s first attempt to change the definition of “fund balance” from covering occasional current revenue shortfalls, to covering all current and future revenue shortfalls, even those that wouldn’t need to be paid until many years in the futurewhen future annual revenues would be available to pay them! 
 
While Failor’s attempt to change the definition of fund balance 23 years ago did not succeed, PASSHE’s 2015 “Unaudited Management Discussion and Analysis” suggests that PASSHE is determined to Try, try, try again.   
 
To be continued.

² https://www.keepandshare.com/doc/6772880/act188-pdf-405k.

Monday, January 25, 2016

PASSHE Officials versus PASSHE Students - Part 13


PASSHE Has Hoarded Money Under Both Democrats and Republicans

We have used similar headings in earlier blog posts and employ this one because it suggests something powerful and sinister about how decisions motivated totally by politics tend to play out.
 
That PASSHE has been hoarding money for the past thirty-two years—regardless of whether Democrats or Republicans were in charge says money-hoarding, while clearly political, is just as clearly non-partisan.
 
The PASSHE system of fourteen universities, with a central office in Harrisburg consisting of the Office of the Chancellor and the Board of Governors (OOC+BOG), is controlled almost totally on the basis of political expediency.   And money, lots of money, is needed—and available—to facilitate that political convenience.
 
The fourteen PASSHE universities include:   Bloomsburg, California, Cheyney, Clarion, East Stroudsburg, Edinboro, Indiana, Kutztown, Lock Haven, Mansfield, Millersville, Shippensburg, Slippery Rock and West Chester Universities.
 
Lest anyone doubt that PASSHE is controlled 100% by politics, just consider the following facts:

·         Every member of the 20-member PASSHE Board of Governors is either an elected official (5), the representative of an elected official (1), or a political appointee of elected officials (14); and

·         Every member of the eleven-member Councils of Trustees at the fourteen PASSHE universities (154 in all) is a political appointee of elected officials.
 
And while some political appointees to the PASSHE Board of Governors and the fourteen Councils of Trustees care about the best interests of the students at the fourteen universities, many other political appointees—based on my twenty years as a PASSHE university president (1992-2012)—made it clear that the primary goal of their “service” was their own personal enrichment via their political connections. 
 
Most of PASSHE’s political appointees get there, not by making donations to the Universities to provide desperately needed student scholarships, but by making political donations to politicians in the hopes of getting appointed, and reappointed, to their governance positions of power.

In return for political donations, many political appointees expect perks in return that PASSHE’s leaders are all too often happy to provide, as with all political transactions. 
 
Politics and Money: State Appropriation vs. Student Tuition and Fees

Pennsylvania’s PASSHE system of fourteen universities is like the other State systems of higher education throughout America in one key respect:  The bulk of its revenue for educational and general (E&G) matters comes from two main sources—State Appropriation and Student Tuition and Fees (a.k.a., Net Tuition).
 
But that is where the similarity with the majority of other 50 States ends.  The respective shares of funding coming to public higher education in America from those two sources range from 85% Appropriation and 15% Net Tuition at one end of the spectrum, to 15% Appropriation and 85% Net Tuition at the other end.
 
Net Tuition is the gross amount of tuition and fees, less state, Federal and institutional financial aid.      
 
Key evidence for this disparity in the level of public support for so-called “public” higher education across America comes from SHEEO, the State Higher Education Executive Officers Association.  Their reports show that over the twenty-five year period from 1989 to 2014, the share of revenue for “public” higher education coming from the Net Tuition paid by students grew by about one percent per year for those 25 years.  The U.S. average Net Tuition percentage grew steadily from 24.5% in 1989 to 47.1% in 2014.¹
 
The SHEEO report on Net tuition revenue by State for fiscal year 2014² reveals that the State of Wyoming, with 15.1% Net Tuition (and 84.9% from State Appropriation), is the most generous in America with its State funding for public higher education, followed by California, Alaska, New Mexico, and North Carolina. 
 
At the other extreme, that same SHEEO report reveals that the State of Vermont, with 84.5% Net Tuition (and 15.5% in State Appropriation) is the least generous in America with its State funding for public higher education, followed by New Hampshire, Delaware, Colorado and Pennsylvania.²  
 
Also revealing is a SHEEO report showing that the percent change in educational appropriations by State between 2009 and 2014 ranged from a high of 40.5% at one extreme, to a low of -38.4% at the other.   Louisiana came in dead last at -38.4%.  Pennsylvania came in next to last at -35%.³ 
 
These SHEEO Reports lead to two unavoidable conclusions:  1) Traditional—i.e., highly State-subsidized—public higher education is rapidly becoming a thing of the past in America; and 2) Pennsylvania is among the group of States currently leading the race to the bottom.   
   
Mystery Money Suddenly Appears and Disappears from OOC+BOG’s Fund Balance
 
Although the Commonwealth of Pennsylvania now provides only 25% of PASSHE’s annual operating revenue, PASSHE’s central office, OOC+BOG, has access to lots of money as our recent blog posts—based on official PASSHE data from Right to Know requests—have made clear.

As shown last week, despite the fact that OOC+BOG is limited by law to annual revenue equal to ½ of one percent of total PASSHE revenue (as precisely defined in Act 188), the OOC+BOG somehow managed to deposit more than $50 million into its fund balance over the four fiscal years (1998 and 2003-2005).
 
Based on PASSHE’s official reports that a large percentage of OOC+BOG’s annual revenue is consumed each year by high personnel and other mandatory costs, those $50 million in deposits had to have come from outside of OOC+BOG’s normal revenue sources, although not necessarily outside of PASSHE itself.
 
Then in FY 2006, OOC+BOG’s fund balance suddenly dropped by $35 million, meaning that those funds were either spent or otherwise transferred to another account controlled by OOC+BOG.  What did they buy with all that money?  Or, what account was all that money transferred into?
 
Nagging questions remain: Where did all that money come from?  Where did all that money go?

The Sources and Uses of PASSHE Money and OOC+BOG Money

The sources and uses of revenue for the PASSHE System as a whole—including the fourteen universities plus the central office known as OOC+BOG—are fairly well known.   But PASSHE leaders’ efforts to keep the financial transactions of the OOC+BOG out of public view have largely succeeded, at least up to now.  
 
To be continued.

² http://www.sheeo.org/sites/default/files/Figure%209.jpg.
³ http://www.sheeo.org/sites/default/files/Figure%208.jpg.

Monday, January 18, 2016

PASSHE Officials versus PASSHE Students - Part 12


Two Questions in Search of Answers
 
We concluded last week’s blog post with two tantalizing questions:
 
1.       Where did all that money come from?  And,
2.       Where did all that money go?
 
Both questions arise from looking at official PASSHE data on the fund balances (a.k.a., “unrestricted net assets,” or “net positions”) of the fourteen PASSHE universities together with the PASSHE central office in Harrisburg—designated in Act 188 of 1982 as the “Office of the Chancellor plus the PASSHE Board of Governors (OOC+BOG).”  The official PASSHE data in question was presented in Documents #1¹ and #2.²
 
The fourteen PASSHE universities include Bloomsburg, California, Cheyney, Clarion, East Stroudsburg, Edinboro, Indiana, Kutztown, Lock Haven, Mansfield, Millersville, Shippensburg, Slippery Rock and West Chester Universities.

Document #3: Highlighted OOC+BOG Fund Balances - FY 1993 to FY 2013

Document #3³ is a highlighted version of Document #2 and focuses attention on the following five fiscal years of official PASSHE data: 1998 and 2003 through 2006.

As shown in Document #3, those five years stand out from the other 16 years of data because the “operating margins” of the OOC+BOG for those years are larger than 100% of total annual revenue!
 
Recall that the term “operating margin” refers to the percentage of total annual revenue which is not spent in a given fiscal year because total expenses for that year came in lower than total revenue, thereby creating a one-time dollar surplus that can then be deposited to build the institution’s “fund balance.”
 
Operating margins in the real world tend to be quite small and typically range between 2% and 4% of annual revenue.  As seen in Document #3, for example, the 21-year average operating margin for the entity known as PASSHE—defined as the fourteen PASSHE universities plus OOC+BOG—is 1.7%.
 
However, the average operating  margin for OOC+BOG itself over those 21 years is 29.3%, which raises  questions about how PASSHE’s central office in Harrisburg has been operating, financially speaking.
 
Document #3 shows that, in addition to the OOC+BOG having a 21-year average operating margin of 29.3%, there were 5 fiscal years where OOC+BOG recorded operating margins greater than 100%! 
 
Question: Are Operating Margins Greater than 100% Really Possible?
 
·         Answer #1: No, not if deposits to fund balance come only from surpluses of annual revenues over annual expenditures—the premise on which PASSHE fund balances are supposedly based.

·         Answer#2: Yes, but only if deposits to fund balance come from sources other than surpluses of annual revenues over annual expenditures, that then get transferred directly into OOC+BOG’s fund balance.

OOC+BOG Data for FY 1998

According to Document #1:

·         The maximum revenue to OOC+BOG for that year (from the ½ of one percent limit imposed by Act 188) was $4,992,449.

·         Its “Total Expenditures and Transfers” for that year were $4,548,637, which yields a difference between Revenues and Expenditures of $443,812, corresponding to an operating margin of 8.9%.

·         OOC+BOG had 56.25 FTE (full-time equivalent) employees on its payroll that year, and its total personnel costs were $3,997,229, accounting for 88% of its expenses, with the other 12% of total expenses covering “Services, Supplies and Capital/Transfers.”

·         An operating margin of 8.9% means that 91.1% (100%-8.9%) of the annual revenue was spent.  But,

According to Document #3:

·         OOC+BOG added $5,423,054 dollars to its fund balance in 1998, which is $430,605 more than its total annual revenue ($4,992,449) in 1998, thus producing its 108.6% operating margin for that year.
 
Document #1 says that the operating margin for OOC+BOG in 1998 was 8.9%; Document #3 says it was 108.6%.

Since they can’t both be right, we need to dig a little deeper to discover which one—if either—is correct.     
 
OOC+BOG Data for FY 2003 - FY 2006

According to Document #3, three deposits totaling $49,470,781 entered the OOC+BOG fund balance:  $27,748,674 in 2003; $10,798,364 in 2004; and $10,923,743 in 2005.  OOC+BOG’s total revenue for those three years was only $19,611,246.
 
Where did that nearly $50 million in deposits come from?
 
There is no way that some $20 million in revenues could have generated nearly $50 million in deposits to OOC+BOG’s fund balance—while also paying for huge personnel and other mandatory expenses. 
 
That $50 million in deposits had to have come from another account which OOC+BOG also controlled!
 
But recall that, according to Act 188, the annual revenues to OOC+BOG are limited to ½ of one percent of total PASSHE revenue—a provision that would prohibit OOC+BOG from receiving any additional revenue.   
 
Note that the “other shoe” drops in 2006 as the OOC+BOG fund balance suddenly declines by $35,154,154 as those funds are either spent and/or been transferred to some other OOC+BOG controlled account.

"If it exists, it's possible."
John P. Grier
 
Earlier we posed the following question:  “Are Operating Margins Greater than 100% Really Possible?”

They are not only possible, they already exist in PASSHE’s OOC+BOG, as evidenced by PASSHE’s official data in Document #3 for fiscal years 1998 and 2003 to 2006. 
 
But operating margins greater than 100% can only exist if revenue accounts aside from OOC+BOG’s fund balance account are available to provide large deposits to fund balance, as seen in FY1998 & FY2003-FY2005.   
 
From FY2006 data, we see the other side of the coin in which large withdrawals are taken from the OOC+BOG fund balance, which could only mean one thing: OOC+BOG spent some or all of the $35 million in question and transferred all or some of the $35 million to a different account they also controlled.
 
To be continued. 

² https://www.keepandshare.com/doc/7770603/passhe-ooc-bog-annual-additions-and-subtractions-from-fund-balance-fy1993-to-fy2013-january.
³ https://www.keepandshare.com/doc/7781132/passhe-ooc-bog-highlighted-annual-additions-and-subtractions-from-fund-balance-fy1993-to-fy201.

Monday, January 11, 2016

PASSHE Officials versus PASSHE Students - Part 11


Follow the Money
 
Last week we looked at “Document #1:  OOC+BOG - Budget Request Summary - FY 1993 to FY 2013,” and saw that PASSHE changed its reporting format¹ for annual revenues and expenses associated with OOC+BOG—which is the combination of the PASSHE Office of the Chancellor and Board of Governors.

The OOC+BOG central office oversees the fourteen PASSHE universities which include Bloomsburg, California, Cheyney, Clarion, East Stroudsburg, Edinboro, Indiana, Kutztown, Lock Haven, Mansfield, Millersville, Shippensburg, Slippery Rock and West Chester Universities.
 
As Document #1 reveals, the sudden change in reporting format had the effect of hiding whether annual revenue exceeded, or fell short of, annual expenses for 12 out of 21 years.   And the accounting ploy used to hide that information involved adding “other revenues” and/or “other expenses” to the reports to make sure that the “total revenues” and “total expenses” figures would be exactly equal to each other.
 
Recall that PASSHE’s initial concept of “fund balance” (a.k.a., “unrestricted net assets” or “net position”) was that these funds would be generated from annual budgets in which surpluses in any year would be added to the fund balance, and deficits in any year would be taken from the fund balance.

Document #2: OOC+BOG Fund Balances - FY1993 to FY 2013
 
Document #2 is a spreadsheet² that I prepared in which the data entries are taken from official PASSHE responses to Right to Know (RTK) requests emailed to me on September 22, 2013 and August 25, 2014.
 
PASSHE’s Total Fund Balance Transactions
 
Column 1 in Document #2 lists the twenty-one fiscal years between 1993 and 2013.
 
Column 2 lists PASSHE’s total fund balance for those years and includes the fund balances of the fourteen PASSHE universities together with the fund balance of OOC+BOG, PASSHE’s central office in Harrisburg.  

PASSHE’s total fund balances grew by 242% from $174,497,737 in 1993 to $597,598,844 in 2013, with an average of $302,834,368 over those twenty-one years. That annual rate of growth is 6.35%/year.
 
Column 3 (Plus/Minus) lists the annual changes in PASSHE’s total fund balance and ranges from $20,759,571 in 1994 to $13,155,055 in 2013, with an average annual change of $21,155,055.
 
But PASSHE’s total fund balance history shows great volatility and includes enormous annual increases as well as an occasional equally large annual decrease.  For example PASSHE’s total fund balance showed the following annual increases larger than $40 million: $44 million in 2001; $50 million in 2002; $41 million in 2005; $90 million in 2011; and $73 million in 2012. 
 
In 1995, PASSHE’s total fund balance saw a one-year decline of $88,537,416! As one of the fourteen PASSHE presidents between 1992 and 2012, I recall that the presidents whose universities were sitting on the largest fund balances were pressured that year to spend down some of their fund balances.  
 
OOC+BOG’s Fund Balance Transactions
 
Column 4 lists the fund balances for OOC+BOG.  Note: The OOC+BOG Fund balance grew by 910% from $3,307,514 in 1993 to $33,412,369 in 2013 with an average of $26,383,249 over the twenty-one years.

That rate of increase corresponds to compound annual growth of 12.26% per year! 
 
Column 5 (Plus/Minus) lists the annual changes in the OOC+BOG fund balance and ranges from a positive $148,815 in 1994 to a negative $3,709,568 in 2013, with an average annual change of $1,505,243.
 
Column 6 lists the annual revenue to OOC+BOG which is limited to one-half of one percent of PASSHE’s total annual revenue (as defined by Act 188).
 
Column 7 lists PASSHE’s total revenue as defined by Act 188.
 
And Column 8 lists the annual Operating Margins for OOC+BOG.  

Follow the Leader

For anyone who may have been shocked to learn that PASSHE’s total fund balance grew by 242% (from $174 million to $597 million) between 1993 and 2013, it is important to note that the fourteen universities were apparently trying to follow the leader but were actually falling well behind OOC+BOG.
 
While PASSHE’s total fund balance was growing at 6.35% per year over twenty years, and was equal to 38% of annual revenue by 2013, the OOC+BOG fund balance was growing at 12.26% per year over twenty years and by 2013 had reached 363% of its annual revenue ($33,412,369/$9,197,567).
 
From Shocking to Inexplicable

While PASSHE’s total fund balance story may be seen as shocking, OOC+BOG’s fund balance story goes beyond shocking to inexplicable—for the following reasons:

1.       Fund balances are ostensibly generated by occasional annual budget surpluses that are offset by occasional annual budget deficits;

2.       In a world of 2% to 4% operating margins, it would take 25 years of consecutive 4% operating margins, and 50 years of consecutive 2% operating margins to get a fund balance equal to one year of revenue.

3.       Between 1993 and 2013, PASSHE’s total fund balance grew to 38% of its annual revenue by recording average annual operating margins of about 1.7% of revenue.

4.       But at the same time, the fund balance of OOC+BOG grew to 363% of annual revenue by recording average annual operating margins of 29.3% of revenue!

5.       As inexplicable as an average annual operating margin of 29.3% over twenty years might seem, there are specific years that are even more inexplicable.  For example, by comparing Columns 5 and 6, we find four fiscal years (1998, 2003, 2004 & 2005) in which the amount of money OOC+BOG put into its fund balance exceeded 100% of its total revenue for those same years!  And in those four fiscal years, the average annual revenue ranged from $5.0 million to $8.3 million, but the amounts transferred into OOC+BOG’s fund balance were $5.4 million, $27.7 million, $10.8 million, $10.9 million!

6.       Where did all that money come from? 

7.       And then in 2006, OOC+BOG transferred $35,154,154 out of its fund balance!

8.       Where did all that money go?

To be continued.

² https://www.keepandshare.com/doc/7770603/passhe-ooc-bog-annual-additions-and-subtractions-from-fund-balance-fy1993-to-fy2013-january.