Understanding UNAEP: The Critical Financial Metric Often Overlooked

At our recent Higher Education Summit, financial consultant Chris Burnley delivered an eye-opening presentation on a critical but often overlooked financial metric: Unrestricted Net Assets exclusive of Plant (UNAEP). As higher education financial specialists, we found his insights particularly valuable for institutions navigating today's challenging financial landscape.

What Is UNAEP and Why Should Institutions Care?

Burnley explained that UNAEP represents the truly spendable unrestricted resources available to an institution. Unlike the standard unrestricted net assets (net assets without donor restrictions) figure on a statement of financial position, UNAEP excludes the value of physical assets (buildings, equipment, etc.) and adds back any related debt.

The calculation as Burnley presented it is:

Copy

UNAEP = Unrestricted Net Assets - Property, Plant & Equipment (net of depreciation) + Long-term debt related to PP&E

While currently only required by SACS (Southern Association of Colleges and Schools) accreditation, Burnley argued convincingly that all institutions should track this metric. His reasons included:

• It reveals true financial flexibility - Many institutions appear asset-rich on paper but may have little actual capacity to meet financial obligations
• It prevents misappropriation of funds - Negative UNAEP often indicates spending restricted funds for purposes other than their designation
• It provides early warning of financial distress - Institutions can hide operating deficits for years before traditional metrics reveal problems

Three Scenarios That Illustrate UNAEP's Importance

Burnley walked attendees through three illustrative scenarios, all with identical cash positions of $5 million at year-end:

Scenario A: An institution showing a $10M surplus on its statement of activities and $5M in positive UNAEP. This represents a healthy financial position where all obligations can be met.

Scenario B: An institution also showing a $10M surplus but with negative $5M in UNAEP due to excessive capital spending. While operationally sound, this institution has effectively "borrowed" from restricted funds to finance building projects.

Scenario C: An institution showing a $5M deficit and negative $5M in UNAEP due to excessive operational spending. This institution is burning through restricted funds just to keep the lights on - a serious red flag.

Both B and C face what Burnley called the central question of his presentation: Whose money are they spending? When donor funds designated for specific purposes are instead used for operations or capital projects, institutions enter dangerous territory - both ethically and potentially legally.

Recent Closures and Warning Signs

One of the most sobering parts of Burnley's presentation was his analysis of recently closed institutions like Cabrini, Eastern Nazarene College, and Birmingham Southern College. Most showed negative or rapidly declining UNAEP in the years before closure. More troubling still, Burnley noted he has analyzed many currently operating institutions with UNAEP metrics worse than those that have already closed.

His message was clear: an institution can operate with negative UNAEP for a while, but this is borrowed time. Without correction, closure or merger becomes increasingly likely.

Getting Back on Track: Burnley's Recommendations

For institutions that discover negative UNAEP, Burnley offered several paths forward:

1. Understand the problem - Make UNAEP a regular part of financial reporting to leadership and trustees
2. Balance the operating budget - No financial strategy succeeds long-term without this foundation
3. Be cautious with capital spending - Unfunded capital projects are a common path to financial distress
4. Consider strategic asset sales - For one-time corrections, selling extraneous properties or assets may help
5. Maintain adequate cash reserves - Keep enough cash at year-end to cover all restricted commitments

Our Takeaways

As auditors and consultants serving the higher education community, we found Burnley's presentation aligned with many concerns we've observed across campuses. UNAEP provides a window into financial health that traditional statements sometimes obscure.

In today's challenging enrollment environment, with demographic shifts and changing market demands, this level of financial clarity isn't just helpful—it's essential for institutional longevity. As Burnley emphasized, the key question every institution should be able to answer clearly is: Are you spending money you actually have?