Financial Administration

Financial Management of Auxiliary Operations (F43) - Attachment 3

Revised: July 1, 2010


RESERVE ACCUMULATION POLICY

For those appropriation 128 activities that are operated as a going concern, sufficient reserve funds should be accumulated to meet debt service requirements, to ensure that equipment and facilities can be maintained, replaced, remodeled, or refurbished as needed, and to provide an operating cushion to offset short-term revenue losses or unanticipated expenditures. Institutions shall review their reserve balances and planned use of reserves annually to ensure that adequate but not excessive reserves are maintained. Reserve accumulations must be clearly linked to identifiable programmatic and operational needs.

To aid in identifying proper reserve levels, the auxiliary reserve shall consist of two components: an Operating Reserve and a Capital Reserve. The Operating Reserve will be used to mitigate risks associated with unforeseen short-term revenue losses or significant unanticipated expenditures. The Capital Reserve shall be used solely for large-scale capital expenditures due to facility/land acquisition or construction.

  1. The Operating Reserve maximum should be calculated as the sum of the following:
    • 15% of prior year revenue;
    • Two years of planned routine capital expenditures;
    • One year of debt service.
  2. The Capital Reserve maximum should consist of funds set aside for specific renovations, acquisitions, or building projects. The maximum reserve for each project should be tied to the funding plan. A reasonable objective includes the accumulation of funds beginning no more than four years prior to commencement of the project, unless there are documented extenuating circumstances. Funds designated for the Capital Reserve shall be deposited into Fund 228. Funds set aside for this purpose should have preliminary approval at one of the two following levels:
    • SUFAC approval of expenditure of segregated fees for facility/land acquisition or construction projects; or
    • UW System Board of Regents approval.
  3. Major building projects require additional approvals depending upon the magnitude of the project.

    Institutions should be prepared to justify the accumulation of reserves that exceed this benchmark.

A minimum reserve level should also be established for each operation in order to ensure that adequate funds are available for ongoing management. In reviewing the adequacy of reserve balances, System Administration will focus particular attention upon operations with a reserve balance that is less than 5% of the prior year revenue.