The following is a report done by Howard Bunsis, national Treasurer of the American Association of University Professors, Professor of Accounting.  He analyzed SFAI's finances over the past four years to determine whether or not the school was actually in a state of financial exigency this winter, as the Board of Trustees claimed.  His conclusion: SFAI WAS NOT AND IS NOT IN A STATE OF FINANCIAL EXIGENCY!

 

 

Howard J Bunsis

Professor of Accounting Faculty Advisor for Accounting Club Faculty Advisor for Beta Alpha Psi

Ph.D. University of Chicago (1993)

M.B.A. University of Chicago (1987)

J.D. Fordham Law School (1984)

B.S. University of Pennsylvania (1981)

300 W. Michigan Avenue 524 Gary M. Owen Building

 

Please see original file here.

 

 

 

Memo: 

From:  Howard Bunsis 

To:  Faculty Union of the San Francisco Art Institute 

Date:  April 18, 2009 

Re:  Financial Analysis 

 

The SFAI administration has made a claim that SFAI is in financial exigency, which is 

defined as “the critical and urgent need for the Institute to reorder its expenditures in such 

a way as to retain solvency.” 

 

My conclusion is that no such financial exigency exists.   

 

Here are the reasons for my conclusion: 

 

1. SFAI has asserted that it had to borrow increased amounts from the bank.  

However, the financial statements and other information that has been provided 

do not support this claim.  Here is a compilation of the borrowings SFAI has had 

over the last several years: 

 

 

What can we conclude from this? 

 

• The amount of total debt as of 2/28/09 is actually lower than it was at the end of 

the last fiscal year. 

 

• The SFAI administration has claimed that new borrowing was done in August of 

2008.  This statement is either false or incredibly misleading.  SFAI may have 

borrowed money at that time, but it also repaid some old debt at the same time.  If 

there was $5 million of new debt in August, somehow it escaped the auditors who 

created the financial statements.  In fact, total debt is $3.5 million lower now than 

it was at the end of fiscal 2008. 

 

• There is a claim that the organization needs concessions to operate.  However, 

what the organization needs, and what it has been able to do in the past and will 

be able to do in the future, is simply borrow money to deal with an uneven inflow 

of cash.  Universities, like many businesses, borrow money to meet operational 

needs.  It is very common for an organization that receives cash flows in an 

uneven manner to borrow money. Many healthy, profitable companies and 

nonprofit organizations borrow money throughout a year; the fact that SFAI needs 

to borrow money is NOT evidence of financial exigency.  If the need to borrow 

money were the critical factor in the definition of financial exigency, then the vast  

majority of public institutions of higher learning would be financially exigent.  Of 

course, this is not the case.   

 

2. The notes to the financial statements for June 30, 2008 do not indicate that SFAI 

is having problems borrowing money.  The notes state (and as I insisted in the 

past, these notes do contain very important information): 

a. Subsequent to the year ending June 30, 2008, the Institute entered a bridge 

loan with a bank in the amount of $650,000, which was secured by 

substantially ALL of the Institute’s assets.  As of 2/29/2009 (the last day 

for which a balance sheet was created), all of the Institute’s assets were 

$14.5 million.  This bridge loan reflects recent ability of the Institute to 

borrow money.    

 

b. The Institute has a $5,000,000 revolving line of credit with a bank 

expiring April 1, 2009.  As of 2/29/2009, the balance appeared to be 

$381,354.  The line of credit appeared to be secured by the Institute’s 

investments.  The investment balance was down to $6.1 million on 

2/28/09 (from over $9 million at June 30, 2008).  However, given its 

operational surplus and steady flow of tuition revenue, SFAI should be 

able to borrow effectively.  Also, given that the S&P 500 is up 

approximately 17% from the end of February until now, the investment 

balance is likely to be higher (by approximately $1 million).  Additionally, 

it is clear that the total assets of SFAI, and not just the investment account, 

have been used as collateral by SFAI for the purpose of interim financing.   

 

c. The notes to the statements indicate that SFAI was in violation of certain 

covenants as of June 30, 2008, but that SFAI obtained a waiver from the 

bondholders of $8 million of the debt.  Given the total principal owed is 

about $8 million, it is likely that the violations of these covenants are not 

causing any financial difficulties for SFAI. 

 

3. Financial exigency is defined as a critical and urgent 

a. First, the budget that was approved for the 2008-09 year is as follows: 

 need to reorder its 

expenditures.  The operating results for the first 8 months of the year indicate 

anything but a critical and urgent need.  In addition, when we look at the full year 

budget, we find that SFAI is achieving results even better than was planned. 

 

 

 

b. Now, what has happened the first 8 months of this fiscal year? 

 

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So what has happened? 

 

• SFAI has performed more than $1 million better than expected so far in 2009.   

There was projected to be an operating surplus that was 2.2% of revenues, and it 

turned into a surplus of 13% of revenues (before considering depreciation 

expense, which is non-cash). 

 

• How did they get there? 

 

o Net tuition revenue for the first 8 months of the year has been $9,384,316.  

Budgeted tuition revenue was $9,298,986.  Therefore, net tuition revenue 

has been $85,330 or 1% HIGHER than expected.   

o Total expenses are $1 million or 10% LOWER than expected.   

o A combination of revenues being higher than budgeted, and expenses 

lower than budgeted, leads to a surplus.   

o A surplus is not the same as financial exigency – not even close. 

 

• The one aspect of the financial results that is negative is that the endowment has 

lost $2.8 million so far in 2009.  But consider this: The amount of endowment 

income that SFAI budgeted for the 2009 year was ZERO.  In other words, SFAI 

did not plan for the endowment income to support operations, and the losses in 

the endowment are not cash losses – they are paper losses.   

 

My conclusion is as follows:  

There is no financial exigency, as the results of the current year have led to over $1 

million of surplus.  The cash flow analysis of March 13, 2009 seems to indicate that there 

is sufficient cash for the fiscal year.  One issue may be the need for SFAI to borrow 

money on an interim basis during the next fiscal year.  However, this is not indicative of 

an organization in financial trouble.  This borrowing has been consistent for a few years, 

and though it may cost more to borrow, an organization like SFAI with an operational 

surplus and a steady flow of tuition revenue should be able to borrow effectively.   

 

Other issues that need to be considered: 

(i) The audited financial statements certified that there are weaknesses in internal 

controls.  These weaknesses are not related in any way, shape, or form to 

financial exigency, but they are evidence that the administration of SFAI is 

not following proper accounting procedures. 

 

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(ii) The audited financial statements reflect that a $200,000 residential loan was 

made to SFAI’s President, half of which was set to be forgiven in 2009, and 

the other half is set to be forgiven in the future.   

 

(iii) There was a change in auditors, which is often a red flag that something is 

amiss. FUSFAI should try to ascertain the reason that this change was made.  

It is common for auditors to be changed every 5 years or so, but given the 

situation at SFAI, the change in auditors is very curious.