Financial Administration

Financial Management of Auxiliary Operations (F43) - Attachment 3

Revised: June 18, 1999

MAXIMUM AND MINIMUM RESERVE ACCUMULATIONS

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 have a review process and multi-year plan in place to ensure that adequate but not excessive reserves are maintained. Reserve accumulations must be clearly linked to specific programmatic and operating needs.

In the report submitted to System Administration each August, institutions shall calculate two reserve maximums, one for comparison to the reserve balance for the fiscal year just completed and one for comparison to the planned reserve balance at the close of the fiscal year just begun. The reserve maximum shall be the sum of the following:

  1. Two years of debt service payments or the amount required by applicable bond indenture agreements.

  2. Four months of wages and fringe benefits as an allowance for operating contingencies for most auxiliary operations.

    However, for housing, student centers, food service and parking at Madison and Milwaukee, the operating contingency shall include two months of wages and fringe benefits, two months of fuels/utilities, the annual cost of irrevocable contracts and $5,000 for supplies and capital.

  3. Two and one half percent of the current replacement cost of all buildings financed by funds 128 and 137 representing an allowance for scheduled facilities maintenance and minor renovations. (This 2.5% is based on a four year funding cycle and represents 100% of current replacement cost for year one, 75% for year two, 50% for year three and 25% for year four.)

  4. A portion of the planned costs for facilities replacement, renovation (major) and maintenance (backlogged) and equipment repair and replacement based upon demonstrated need in the institution's multi-year plan.1 Four years of costs should be included - 100% of planned costs for the first year, 75% of planned costs for the second year, 50% of cost for the third year and 25% of costs for the fourth years. For purposes of comparison to the fiscal year just ended, the first of the four years included should be the current fiscal year. For purposes of comparison to the planned reserve balance at the close of the fiscal year just begun, the first of the four years included should be the ensuing fiscal year. Where statutory enumeration is required by s. 20.924(1)(a), Wis. Stats., a funding cycle of up to ten years is allowed.

  5. For parking operations, the reserve maximum shall include $75,000 plus 10% of the prior year's actual expenditures. Additional reserve accumulations are permitted where necessary to fund anticipated land acquisitions for parking operations.

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 25% of the calculated maximum.

_______________

1The allowance for equipment replacement may include major inventory items, such as mattresses, that are classified as "supplies" rather than as capital equipment in the accounting system because they individually cost less than the "equipment" capitalization threshold. For bookstore and textbook rental operations, 15% of inventory replacement costs may be included in the maximum reserve calculation representing the "equipment replacement" portion.