Expert Report The Preparation of the Annual Operating Expenses for a Proposed Community College in Erie County Prepared for Presentation to the Pennsylvania State Board of Education Prepared by Joseph P. Maloney CPA, CFE CFF am currently a partner in the certified public accounting firm of Maloney, Reed, Scarpitti & Company, LLP, where | have practiced since 1973. 1 hold a Bachelor of Science degree in accounting from Gannon University which | received in 1970. In addition, | have certifications in Fraud Examination (2006) and Financial Forensics (2015). | am a member of the American Institute of Certified Public Accountants and the Pennsylvania Institute of Certified Public Accountants. | have served on the Taxation and Forensic Accounting Committees for the PICPA. | have provided accounting, consulting and tax services to a wide variety of clients, including businesses, individuals and public and private institutions, for nearly fifty years. For over thirty-eight years, | have served as the financial advisor for the County Council of Erie, County Pennsylvania, In that capacity, | have provided consulting services and advice on budgetary issues, financial transactions, bond issues, and other financial matters as needed and requested. In addition, | have conducted audits and provided advisory services for a number of educational institutions and government bodies which has provided me with a thorough understanding of the operation of educational institutions. | have previously reviewed a financial proposal for a community college in 2010 and have provided auditing services to an educational institution that followed the community college guidelines. Asa result of my past experience, | am familiar with the guidelines issued by the Department of Education for the establishment of a public community college in Pennsylvania, as well as the statutory elements for approval of a plan to establish a community college as set forth in Article XIX-A of the Public School Code. In September of 2026, Erie County requested that I, in my role as their financial advisor, work with a team assembled by the County to create a plan for the establishment of a community college that the County would sponsor. I was further tasked with the preparation of the financial portion of the plan that would ultimately be submitted to the State Board of Education for approval, and to determine ‘whether there was sufficient available funding and local sponsor wealth to sustain a community college In Erie, Based upon my review and analysis, and my nearly fifty years of professional accounting experience, itis my professional opinion, to a reasonable degree of accounting certainty that (1) the financial plan set forth in the county’s application is financially sound and viable; (2) that there is. adequate funding available to sustain the proposed community college’s operations, and make reasonable projections for capital improvements; and (3) the plan is sustainable through student tuition and fee revenue, state, and local funding sources that would allow the proposed college to operate without the need for local tax revenue for at least a decade. Under the PDE’s Guidelines for the Establishment of a Public Community Colleges in Pennsylvania {August 2016) (Guidelines) the local sponsor is required to submit a plan and part of that plan must contain a financial program for operation of the proposed college. “This plan must call for the local sponsor to appropriate to the community college an amount “at least equal to the community college’s annual operating costs less the student tuition..less the Commonwealth's payment...” The plan mustalso contain an estimate of the annual operating expenses for a five-year period, annual capital expenditures for a ten year period, tuition to be charged to the students(sponsored, non-sponsored, out of state) and 2 statement of the taxing plan (assessed valuation and proposed millage to be levied). “The Guidelines further state that start-up budget should be included and provided additional detail of the information required in the Financial plan. {In order to prepare the financial plan for the proposed community college, | first reviewed the community college plan submitted in 2010. From there, | reviewed PDE’s guidelines on establishing a public community college in Pennsylvania. also relied on information provided by other consultants ‘that were part of the team of professionals assisting the County in the preparation of the plan. Those professionals included Dr. Roy Church, Nichole Parker of Parker Philips, Inc., and Dale Roth a local architect with community college experience. The original financial plan was completed in June of 2017 and inclucled as part of the County's application submitted to this Board in June of 2017. Following a review and feedback from PDE of the originally submitted application, the financial projections and, analysis were revised to take a more conservative approach. The revised plan was submitted to this Board in December of 2018, and included a financial plan that (1) significantly reduced the projected funding commitment by the Commonwealth and local sources for startup expenses and as well as the rst five years of operation; (2) significantly lowered the capital and operational investment; (3) cut projected local funding commitments; (4) lowered full time student projections; (4) reduced full time faculty needs; all while maintaining extremely affordable tuition rates. Based upon the revised plan, PDE issued a report finding that the plan satisfied the statutory criteria for the establishment of a ‘community college, The balance of this report will discuss the specific findings set forth in the County's application (including. all supplements) to this Board. The specific contents of those submissions are deemed to be part of, and incorporated in, this Report. In construction of the financial plan for the college, each year of the operating plan starts with a summary showing the revenues and the expenses by bureau. Each year has separate computation of the tuition to be charged, instructional costs, academic support costs, student services costs, institutional support costs and operational facilities costs. Included in Exhibit A are the plans with the original enrollment with six different periods. The first packet is the financial plan for the pre-operating period label year zero. Then there are five packets showing the plans for years one through five of the ‘operating budgets. The year zero is considered capital cost under the Guidelines and is funded at fifty percent by the Commonwealth and fifty per cent by the local sponsor. Year zero would be the period when the college is starting up, hiring staff, developing curriculum, setting up policies and obtaining facilities, Also Included in Exhibit A are a summary of the five operating years, the sources and uses of funds for both local sponsor and the Commonwealth. In addition, in Exhibit A is the expected transaction that would incur in the Erie County Gaming Fund through 2025. Exhibit B contains the same information for the revised enrollment periods. On the tuition page there is the computation on the lower left hand of the sheet which shows that each year the student's contribution is always less than one-third of the operating expenses, as required in the guidelines. In each subsequent year after year one an inflation factor of three percent was used with cost also increasing as the result of the increase enrollment.The first order of business was what kind of revenue the college could expect to receive, The Commonwealth portion of revenue was the toughest to determine, No new community colleges had been added in Pennsylvania since 1994, When the original fourteen community colleges were established, they were reimbursed at the rate of one-third of the operating cost. The cost then was split one-third student, one-third local sponsor and one-third Commonwealth. As the ful-time equivalent (FTé)student population increased, the revenue generated from the Commonwealth increased. In recent history the Commonwealth has provided only a percentage increase over the previous budget. No matter how many students increased, the community college would only receive a percentage increase over what was received in the previous years. This created a problem for our start up college ‘which would have significant increase in students in the initial years. The decision was made to use a dollar amount per student based on the average the Commonwealth was paying on a per student basi to the other fourteen community colleges. The National Center for Education Statistics (NCES) provided the financial information for all fourteen Pennsylvania community colleges for the fiscal year 2014-15. This gave the breakdown of all different sources of revenue and expenditures the colleges had for 2014- 15 year. also was able to obtain the FTEs for this period. From there | was able to compute what the average reimbursement the colleges received from the Commonwealth. In the year 2014-15 the Commonwealth reimbursed on average $2,103 per student to the fourteen Pennsylvania community colleges. On the original enrollment $2,800 was used and on the revised enrollment $2,000 was use per FTE. This was still a conservative figure based on the amount the other community colleges were receiving. In the future periods the Commonwealth share increase two percent. If we were under the original one-third plan the Commonwealth would be reimbursing $3,039 per FTE under original enrollment and under revised enrollment it would be $3,678 per FTE. For the student charge, per credit charge of $105 plus $22 per credit for fees for a total of $127 per credit charge in the original enrollment plan and changed to $125 per credit plus $22 a credit for fees for a total of $147 per credit charge under the revised enrollment plan. Based on information provided by NCES, the average charge per credit for the original fourteen community colleges was $137 per credit in the 2014-15 year. In future years these figures were increased for infiation. Students from outside Erle ‘County would pay double these amounts and those from outside Pennsylvania would pay three times these rates. ‘The Local Sponsor share is the difference of total operating costs less the revenue generated from the ‘Commonwealth, students and ancillary revenue. This works out to be $2,861 per FTE for the original enrollment and $3,800 per FTE in the revised enrollment. This resulted in the County share of operating costs ranging from $2,200,000 in the first year of the original enrollment growing to $3,500,000 in the fifth year, Under the revised enrollment the County share of operating costs ranged from $1,900,000 in the first year to $2,300,000 in the fifth year. Local support doesn’t just include the amount received from the local sponsor, it also includes the ‘amount received from the Erie Community Foundation and the Erie County Gaming Revenue Fund grant and other community sponsors. Local support can also include in kind contributions. For instance, if a building is donated to the college it will be shown as a cost and reimbursed by the Commonwealth, reducing the local sponsor support. The plan as presented doesn’t include any in kind contributions, but the college would fully expect this type of in-kind contributions will be received.The issue for the County was to find a source of funding for the community college other than tax revenue. The County has been the recipient of gaming revenue from the casino located in Summit Township Erie County since 2007. The County has received as much as $12,000,000 under the agreement with the Commonwealth, In recent years this amount has been just under $11,000,000. As part of this agreement the County gets to keep fifty percent of the funds for any purpose they choose. The other fifty percent is split between the Erie County Gaming Revenue Authority, The Land Bank and Summit Township. The County has decided to use these funds for transformational projects in the County. The County has used their share of the funds to fund the expansion of the Erie Airport Runway and the improvements to the Erie Insurance Arena. Since these projects were winding down, funds would be available to use to fund the community college. Based on the projections there are enough funds in the gaming funds in the next five years to provide the local match required under the financial plan for the Erie County Community College and not use the full amount of the annual funding from ‘gaming revenue. The minimum amount the County will received under the Gaming Revenue act is $10,000,000 a year. Based on the Parker Philips feasibility report, it was determined that Erie County Community College will have 769 FTE students in the first year and grow that student population to 1,379 FTE in the fifth year. The first-year student population would break down with having 203 students taking a full credit load of. 24 credits a year and 630 part-time students carrying an average of 15 credits a year and 180 summer students taking an average 5 credits. In addition, there would be 23 full time students and 70 part-time students carrying 15 credits per year and 20 summer students carrying a S-credit load from outside Erie County. The plan doesn’t have any out of state students. Included in the projections are 314 hours of ‘occupational noncredit hours and 1200 hours of job training in the first year. Based on this information, the full time equivalent would be 769 students. in the revised plan the first year FTE were revised to 500 FTEs and the FTEs in future years were reduced, This information then allowed for the calculation of expenditures. The first bureau in the plan was the Instructional bureau. Based on a formula that Dr. Church provide from Cuyahoga Community College, the number of faculty we would need was calculated. In the first year the college would have 769 FTE taking 24 credits which computes to 18,456 credits. if on average each course was 3 credits and you had 20 students per course, you would need 308 sections to be taught by the faculty. Assuming you had 18 full time staff they would cover on the average 9 sections for a total of 162 of the 308 sections being covered by the full-time staff. In addition, historically full- time staff will take additional sections for additional compensation and this resulted in an addition 46 sections being covered by the full-time staff. This then left 100 sections to be covered by adjunct staff. Compensation was based on the Parker Phillips feasibility study that indicated that a full-time faculty member would earn $63,539 on 9/10-month basis in a two-year public institution in Pennsylvania. In Parker Phillips feasibility study also found that adjunct staff were paid between $2,000 and $4,000 per section. The $63,539 was used in the plan as the salary for full time staff and the average of $3,000 was used as compensation per section for the other sections. Payroll taxes were based on the Social Security and Medicare rate of 7.65%. Retirement compensation was based on 8% of compensation for full time faculty. Medical insurance was based on $1,200 a month for the full-time staff. The remaining benefits were based on formulas. The remaining instructional cost were based on cost as incurred at other community colleges.In the Academic support bureau salaries were based on salaries paid in other institution in Pennsylvania. The positions were determined based on the typical community college staffing in this area and with Dr. Church's experience in his community college. Fringes were computing using the same rates used in computing full ime staff costs. Overhead in the Academic support bureau was computed using other community colleges as references. Student services bureau staffing was determined by a comparison of the staffing required in community colleges of the proposed size of the college in the plan. The salaries were again the result of Parker Phillips study and Dr. Church’s experience with community colleges. Benefits were computed using the same formulas used for faculty. Library books and audio/video material cost were based on the expected cost of research material needed for the student population of the college. Library books for the college are consider capital cost and are reimbursed through the capital budget. Institutional support staffing was again determined by a comparison of the staffing required in ‘community colleges. Salaries were computed using information provided by other community colleges. Fringes were computing using the same rates used in computing full time staff costs. The Vice President of Development is an important position for the long-term success of the college. It will be responsible for establishing an endowment fund and obtaining other sources of funding for the college. Itis anticipated in the future outside funding will offset a portion the local sponsor share. Other ‘overhead costs were based on cost incurred at other community colleges. The final bureau in the plan was the operational facilities bureau. A facilities committee was formed which along with Parker Philips, provided information for the computation of the facilities cost. For this plan purpose it is expected that the college would rent space for its campus. It was determined that for ‘each FTE the college would require eighty-five square feet of space. This then resulted in the initial year of operation the college would require 65,365 square feet. After review of facilities presently in the market it was determined fifteen dollars a square foot would be the fair rental value. Other occupancy costs were computed based on the square footage using rates found in various surveys. The cost of ‘equipment was based on having 769 FTE and each FTE costing $241 per student, Depreciation was computed using the straight-line method over periods of seven years for equipment and fifteen years for leasehold improvements. The remaining occupancy cost were based on information provide from other community college The revenue and expenditures in the financial plan under the revised enrollment were based on the same information used in the original enrollment. Costs were reduced as the result of the decrease in FTEs. ‘The Guidelines requires a capital budget for the first ten years of the college. “Capital expenses shall include library books and complementary audio-visual equipment purchased during the first five years after establishment. Included in the ten-year projection of capital expenditures required in the enabling. act, shall be a plan for over-all campus development. This campus master plan shall also include student center, cultural center, brary and adequate faculty and student parking.” The funding for the capital portion of the college comes from a different line item in the Commonwealth budget at fifty percent of the costs 1n preparing the capital budget, an estimate was made as to what equipment would be required for the administration office, classrooms, labs and computer labs in year zero. In years one through five theequipment needed for the student center, library and faculty resource centers were added. In year zero and year one additional costs were added for leasehold improvements to cover any renovation that would need to be done to existing facilities. As student enrollment increased, so did the need for additional equipment and labs. The capital budget covers those additional needs. In the revised enrollment capital budget these costs were reduce to account for reduction in FTES. The capital budget also funds the cost for the occupancy rental and equipment rental costs. The cost as shown on in the operation facilities sheet for equipment and leasehold rentals are also shown in the capital budget and are reimbursed at fifty percent. As required in the Guidelines an academic building was added in the seventh year of the college and a student center was added in the tenth year. Based on the Schoo! Facilities Cost Calculator report from February 2014, the replacement cost for a schoo! facility is $250 per square foot, The academic building ‘would need to be 148,400 square foot building to handle the expected enrollment in the seventh year. This facility would be funded through a thirty-year bond at an interest rate of four percent. In year ten a student center would be added at a cost of $2,650,000 funded with a thirty-year bond issue at four percent, Under the revised enrollment figures the square footage of these building would be reduced. Atrue test of the plan would be how it benchmarks against actual results from like institutions. The like institutions for the college would be the already established fourteen community colleges in Pennsylvania. The information received off the NCES site for 2014-15 school year compares very favorably with the results in the college plan. In comparison with the original enrollment plan the fourteen community college tuition and fee charge per credit was an average of $137 per credit as ‘compared to the Erie County Community College plan which was $105 per credit in tuition and $22 per credit for fees for a total of $127. The operating cost per FTE on average for the fourteen community colleges was $8,763 and the college plan was $9,118. When comparing the Commonwealth appropriation for the fourteen community colleges received $2,103 per FTE, the college plan used only $1,800 per FTE. If the Commonwealth would contribute the same average amount it would reduce the local sponsor share. When comparing the local sponsor share per FTE the fourteen community colleges received $2,941 per FTE and the plan shows $2,861 per FTE. So overall the information in the plan is conservative. ‘An additional opportunity to benchmark the plan result against an existing operation was a proposal received from Butler Community College to offer community college course in Erie County from December 16, 2016. Under this proposal Butler was expecting to have 400 full time students and 800 part-time students computing to 800 FTEs. This compared favorably with the plan's original enrollment. This proposal also indicated that they would need a 50,000 square footage building to provide for these students. The college’s plan first year required square footage of 65,368. ‘The financial plans demonstrate the proposed operating costs are reasonable and within the ranges of costs incurred by the other community colleges. The real positive is in the funding of the local support. With the donation from the Erie Community Foundation and the Erie County Gaming Revenue grant of $3.7 million, the college has enough to operate the community college for most of the first two years. ‘Add in the funds available from the gaming fund, the plan has more than enough to fund operations and capital requirements for the first five years of operations and a strong likelihood to fund operations for at least ten years. The revenues in the plan are solid and expenses are reasonable. Even if the enrollment as projected by the Pennsylvania Department of Education of 1,739 to 2,318 FTES is reached,there is enough local support available to fund this level. Each of the opinions contained herein is toa reasonable degree of accounting certainty, based upon my professional experience. fens v beset {Sseph P. 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(IG OND RON TEDL,ores sateen eyeing a isasveeverythin) ang ste ear amen coe eh aoe x0 wapmuitg(5869 sn a0 29) .0) 07g seco opensssd Os 58 wo st poy aumbs yas ad anawuinda Tvs NOWWIDS¥eaa SSLLTULN avINa¥aTONAS¥E WINGY ENAWAINDT WIOL samasns.INIVW ana Wiok ‘SIOVLNOD AINA WIOL ONYUNSN! Ltte¥IT WoL, ADIN ALNINIIS WOK IAUIS GRLIVALNOD TW10L \senmzed jeuopes9do,sere eet ata ainay mentoseer royals seein fe sonata se dane ean 5 NMOL s ‘ne oN reweeyyotgrosa mane “ht Sats ane ase ping (te sree apseerect eyo arsine eae nano venues ES TT ST OE EE Yon TWNOWSAIOW SOLeestor wp achyen sso sotto roar owen em, ov aupy 98 GH steewey xr oeLaoon MEEseopexpeeonedo, noes saNRT——S arse axawuinda TVS stss NOWLVIOANIEG 560 sous vitor saULrTLAN, wopmsod ys cSt sous suse amy ie es ‘e081 ot soos wou 0008 ooo'st ONVUNSNT ALTHEWIT WO sce soc 00's SWDiawas ALNIN3S W1OL wr sory ws mevoCurriculum Vitae of : Joseph P. Maloney Specialist Field _: Certified Public Accountant On Behalf County of Erie, PAA Prepared for Pennsylvania Department of Education Joseph P. Maloney Curriculum Vitae Qualification, training, accreditation Bachelor of Science degree in accounting from Gannon University 1970; Certified Public Accountant 1972; Certified Fraud Examiner 2006; Certified in Financial Forensics 2015, Past and Present positions Present position: Partner in the firm Maloney, Reed, Scarpitti & Company LLP a CPA firm (1973 to present) Past Position: Manager in the firm of Brown, Schwab & Bergquist CPAs (1967 to 1973) Principal professional speci: {have been a practicing CPA providing accounting, consulting and tax services to wide variety of clients; | have provided prospective financial statements; I have provided consulting services in the area of, budgets and operations; | have served as Financial Advisor on bond issues; ! have provided forensic services, Professional responsibilities {have been the Financial Advisor for County of Erie Council for over 38 years; providing them advice on budgets, financial transactions, bond issues and other financial matters as needed Memberships of professional organizations am member of the American Institute of Certified Public Accountants and Pennsylvania Institute of Certified Public Accountants; | have served on the Pennsylvania Institutes of Certified Public Accountants committees of Taxation and Forensic Accounting. Qualifications I have been involved in audits and advisory services to a number of educational and government bodies ‘which has given me an excellent knowledge on the operation of educational institutions; | served as the primary review of the financial proposal for a community college in 2010; | have audited an educational institution that followed the community college guidelines.