F6 – Operating Reserve Fund

Originator: Director, Financial Services
Approver: College Management Committee
Effective: December 9, 1997
Replaces: New

Introduction

In keeping with the philosophy of running the College like a business, it is desirable to have an appropriate amount of operating reserve funds available to provide for contingencies and uncertainties. Businesses build equity for many reasons including increasing shareholder wealth, providing for future development and expansion, and protecting against contingencies.

Government funding is becoming a smaller portion of the College’s revenue budget over time. This funding is being replaced by other, less certain sources of revenue, including strategic business units, fundraising and other miscellaneous revenues in addition to the specific contributions of students through day tuition. In the 1997/98 budget, sources of revenue (SBUs net of expenditures) other than government funding and day tuition represent $3 million or 7.4% of the College’s budget. Day tuition contributes another $5 million or a further 11%. Every effort is made to accurately predict these revenues but dependence on these sources leaves the College vulnerable to market fluctuations, competition, changing margins and pricing structures and other external factors beyond the College’s control. In the business world, where such uncertainties are frequently present, accumulated earnings allow companies time to make appropriate adjustments beyond the constraints of a fiscal year end. College dependence on these non-government sources of revenue requires a contingency fund to allow for the same type of adjustment process.

In addition, the accumulation of funding to provide for future development, renewal and expansion of both programming and infrastructure is a desirable goal for the College. The College also faces some significant issues related to its facilities that will require the availability of funding in the future. The existence of a reserve fund would also allow for forward planning of special projects or initiatives that cannot be achieved in only one year.

Unlike the business world, the College is heavily funded by public dollars. In the public sector (and in the whole not-for-profit sector), the accumulation of wealth by an organization is not seen as a desirable goal in and of itself. Instead, the funders of institutions like Red River expect that the funding they provide will be used to provide programs and services that benefit society. This means that the College must balance the issue of operating reserve accumulation between accumulating enough to protect itself from contingencies and plan for future growth and the level of reserve that could jeopardize future funding.

General Policy

1. All withdrawals from the operating reserve fund are subject to approval by the Board of Governors.
2. The appropriate level of operating reserve fund balance will be subject to periodic review by the Board of Governors.

Operating Guidelines

1. The College will provide for an operating reserve of between $500,000 and $800,000 (represents between 6.25% and 10% of the non-government revenue budget). This reserve will exist for the following purposes:
   1. to offset an annual deficit;
   2. to fund specific projects in the previous year’s budget which were subject to delays and not completed prior to year end;
   3. to provide repayable loans for revenue generating projects (similar to income funded projects but with a revenue stream extending beyond one year).
2. College Management Committee will identify any need to withdraw funds from the reserve. These will be submitted to the Board for approval. Requests for withdrawal of funds will include a plan for replenishment of the reserve to the recommended level.
3. If the operating reserve exceeds the approved amount, College Management Committee will make recommendations to the Board regarding the excess funds. Appropriate uses would be:
   1. Increasing the operating reserve or;
   2. One-time expenditures subject to the following conditions:
      • cannot be used to create ongoing positions
      • cannot be used to fund projects which would require ongoing salary, operating or capital dollars.

Approved expenditures from the excess operating reserve will be separately budgeted.