(Adopted by the NELINET Board of Directors, June 2001, and revised January 2002)

Goals:

• To decrease the reliance of the NELINET annual operating budget on the performance of investments.
• To build the base budget with no more than half of the estimated annual investment income applied in advance of the revenues being realized.
• To ensure the long-term financial health of NELINET through the development of an Emergency Fund that would enable NELINET to meet its financial obligations for a minimum of six months, and preferably up to twelve months.
• To create and fund a Special Initiatives Fund to enable NELINET to set aside funds for the development of new programs and services in areas of emerging importance to the membership.
• To provide guidance to the NELINET management and Board to ensure that NELINET maintains a fiscally sound budget position.

Guidelines:

• Balanced Budgets. Each NELINET annual budget should be balanced, and optimally all budgets should be constructed to achieve a net revenue at the end of the fiscal year. In building the budget, both revenues and expenditures should bbe estimated conservatively. Should there be any net revenue, that revenue will be applied in accordance with section 5 (fund balance) below.
• Annual Operating Budget Growth Rate. The annual general budget net program revenue should grow at a rate of not less than 5% per year. About 2% of this growth should cover increased operating costs within the fiscal year. Net revenues at the end of the fiscal year should be sufficient to contribute at least an additional 3%.
• Revenue.
  • Investment Income: Short Term. The investment income earned on the short-term investments and cash and equivalents should be included as revenue and expended for operating purposes within the fiscal year earned. The proposed budget should be based upon a conservative estimate of income to be earned for the fiscal year, and should generally not exceed 4.5%.
  • Investment Income: Long Term.
    1. Spending Rule. NELINET has adopted a spending rule for long-term investments based upon a five (5) year rolling average of the return of long-term investment income. This percentage is calculated in accordance with the AIMR Performance Presentation Standards, and is based upon the total return, including unrealized gains and losses, realized gains and losses, dividends, and all interest income, net of all fees and expenses. This spending rule will be applied in conjunctions with the "support of the operating budget" percentages as reflected in section 3(b)3 below.
    2. Application of Principal. The long-term investment account should hold funds sufficient to support, at a minimum, the historical average of member advance payments on hand during the year. (The historical average is the amount of member advance payments that continue as a base from year-to-year.)
    3. Support of Operating Budget. Over a five year period, NELINET will decrease its dependence upon long-term investments as a means to balance the annual operating expenses. To achieve this goal, long term investment income will be used for the operating budget according to the following schedule:
       
       

       Fiscal Year	Allocation to Operating Budget	Allocation to Special Initiatives Fund
       FY2002	80%	20%
       FY2003	70%	30%
       FY2004	60%	40%
       FY2005	50%	50%

       
       After FY2005, (or whenever the 50/50 objective is achieved, whichever occurs earlier), NELINET should maintain allocation at 50% level of the projected long-term investment income for the operating budget and 50% to Special Initiatives Fund. (See below for additional guidelines concerning the Special Initiatives Fund.)
       
• Expenses.
  • Full Position Funding. The annual operating budget should be developed assuming that all positions are filled for the entire year (i.e., salaries and benefits will be budgeted at 100% staffing levels). Any budget savings arising from unfilled positions that devolve to the net revenue at the end of the year will be contributed to the fund balance, with allocations to the Emergency and Special Initiatives funds according to the schedule noted above.
  • Salary Incentive (Bonus) Program. The cost (if any) of salary bonuses under the NELINET incentive program approved by the Board should be paid as part of operating expenses. The expense will be accrued in and posted against the year in which the surplus was earned by NELINET.
• Fund Balance. The fund balance should be partitioned into two separate allocations:
  • Emergency Fund. To enable NELINET to operate under emergency conditions, NELINET should allocate a portion of the fund balance sufficient initially to meet the equivalent of a minimum of six months of operating costs (including salary, benefits, depreciation, facility, and travel). This fund should grow over a five year period to cover at least twelve months operating cost (or the number of months as recommended by the NELINET auditor).
  • Special Initiatives Fund. The Special Initiatives Fund should support special programs, services and projects, including startup and short-term operating costs. The size of the fund will likely vary depending upon expected long and short term program needs, but on average the fund should contain the equivalent of at least 10% of annual operating expenses.
    
    The Board will receive an itemization of the expenditures from Special Initiatives expenditures as part of the financial report at each Board meeting, and upon request.
    
    The Executive Director shall have the authority to spend no more than $25,000 total maximum of the Special Initiatives revenue in any one fiscal year without specific Board approval.
  • Allocation of New Net Revenue. After FY2001, annual net operating revenue (after any staff incentive bonus and additional allocation for maintenance level funding of emergency fund has been funded) at the end of each fiscal year will be allocated as follows:
    
    • Emergency Fund - 50%
    • Special Initiatives - 50%
    
    After the Emergency Fund has reached the equivalent of 12 months of operating expenses, all additional new net revenues will be placed into the Special Initiatives Fund. However, as operating expenses increase in each succeeding year, the Emergency Fund may continue to increase to maintain the fund at a level equivalent to 12 months of operating expenses.

For more information on the NELINET Budget Guidelines, please contact Arnold Hirshon (1.800.635.4638 x1934 or hirshon@nelinet.net).

April 2, 2004