25.05 - Establishing Required Cash Reserve Targets
Last updated August 3, 2005
A. General: Responsibility Center Managers shall establish appropriate cash reserves at the Responsibility Center (RC) level. Cash reserves are considered necessary because of the volatility in certain revenue generating activities to guard against economic downturns and other unexpected situations. Establishing a prudent reserve policy increases institutional net assets as well as creating greater financial strength and flexibility. (See APM 25.xx)
A-1. Cash Reserves Should Relate to Expenses. Annual expense activity demonstrates what is required for a unit to carryout its business. Expenses, rather than revenues, are better indicators of operating size or activity since they are typically less volatile and under direct management control. Accordingly, expense activity is the basis for determining appropriate cash reserve levels.
A-2. Target Cash Reserves at Five Percent (5%) of Expenses. Each RC cash reserve benchmark will be based on a rolling average of expenditures from the previous three years. The cash reserves should then be targeted at 5% of the average expenditure benchmark.
B. Procedures. Responsibility Centered Managers are responsible for developing cash reserves. These reserves should comply with the following criteria.
B-1. General Education and Other State Appropriations (Fund Types U1, D1, D2, D8). Unit administrators of appropriated funds are encouraged to maintain a level of cash reserve suitable for the unit for consideration of factors affecting state appropriations such as holdbacks, economic downturns and legislative decision-making. This balance may exceed the recommended 5% of average expenditures.
B-2. Gift/Donations (U4) Scholarships, Restricted (D3) and Grants and Contract (D4). These fund types are not required to maintain cash reserves.
B-3. Auxiliary and Local Services, (Fund Types X1, X2, U3, U4, U7). These fund types will establish cash reserve balances as a sound business practice. Specifically, the following criteria is identified for adequate cash reserves:
i) Rolling Average of Expenditures. Each RC cash reserve is based on a rolling average of expenditures from the previous three years.
ii) Required Cash Reserve. The target reserve (benchmark) balance is established with cash, not inventory or accounts receivable not booked, (accruals).
iii) Target Cash Reserve at 5%. The minimum reserve is targeted at 5% of the previous three-year average expenditure benchmark.
iv) Exceed Minimum Cash Reserves When Prudent. A greater minimum reserve may be established if activities are exceptionally volatile or other circumstances justify such.
v) Cash Reserves Required by June 30, 2006. Each RC shall be responsible for creating cash reserves at the 5% level by the end of fiscal year 2006.
vi) Adjusting Cash Reserve Balances. Ensuing cash reserve benchmarks will be adjusted to reflect the impact that current year expenditures have to the rolling three-year average.
B-4. Intervention and Remedial Actions: Annually, the Institutional Planning and Budget Office (IPBO) will report progress to the President on cash reserves. Throughout the year the RCs shall monitor their cash reserve accumulation toward their respective targets.
i) Required Reporting of Cash Reserve Deficiencies. If an RC fails to make progress in meeting the target, the RC will provide a plan to the President identifying the method and date certain the reserve accumulation will be back on schedule, but the June 30, 2006, target deadline must be met.
B-5. Annual Update of Average Expenditure Level. IPBO will create an annual report re-calculating the rolling three-year average of expenses and advise each RC of their revised cash reserve target.
C. Information. For additional information regarding establishment of cash reserve budgets contact IPBO at (111) 111-6718. Also, see Executive Council item EC 2003-0011.