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Independent Analysis Released Exploring College Finances

Dec 21, 2009

In response to an ongoing investigation by the IRS into financial management practices at over 400 American higher education institutions, the Association of Governing Boards of Universities and Colleges (AGB) and the National Association of College and University Business Officers (NACUBO) recently released a voluntary survey of the same data by independent accounting firm Ernst & Young (E&Y).

the Association of Governing Boards of Universities and Colleges and the National Association of College and University Business Officers

A 'Quick Study' in Financial Management

In response to a growing governmental interest in the management of nonprofits, the Internal Revenue Service sent out a 42-page questionnaire to both public and private colleges and universities across the country. The survey, sent out in 2008, went to 400 schools and asked for intimate details on many different elements of their finances, including income and losses on business activities and spending on executive perks. The IRS hoped to use the data to both increase transparency in higher education and explore potential discrepancies between what institutions report to the IRS and how they actually operate.

Preliminary results from the IRS survey are expected in 2010, but in the meantime the Association of Governing Boards of Universities and Colleges (AGB) and the National Association of College and University Business Officers (NACUBO) decided to take matters into their own hands. In order to demonstrate that colleges are actively interested in increasing transparency and to get a third party opinion on the data, the two groups hired independent accounting firm Ernst & Young (E&Y) to review the schools' information. However, because the IRS would not release the names of the colleges they were surveying, the AGB and NACUBO simply had to put out an open call for schools to voluntarily submit copies of their data to E&Y. As a result, only 146 out of the full 400 schools responded - enough to get a decent picture of the financial state of higher education, but perhaps not enough to compare directly with the pending review from the IRS.

The E&Y analysis, which came out last week, has had a mixed reception. Members of Congress who have been actively critical of nonprofit management practices pointed out that while the effort at voluntary transparency is a start, it falls short of full cooperation - neither the participating schools' names nor the raw data were included in the report, preventing journalists and other agencies from conducting their own reviews. The AGB and NACUBO, however, seem pleased with the results, which assert that 'governance in higher education is working.'

Most of the findings in the E&Y review were positive, which may be confounded by their relatively small and fully voluntary sample - the schools that shared their information may have been willing to do so because they have nothing to hide. Acknowledging the obstacles to getting as much data as the IRS received, E&Y noted that the respondents to their study were mostly public institutions and that they tend to be larger than the overall population of nonprofit colleges in the U.S. They also noted that because the original 2008 survey could only include data as recent as tax year 2006, the financial picture at many of the participating universities may have changed.

Tuition Discount Percentages

From the 2008 Internal Revenue Service College and Universities Compliance Questionnaire Analysis by Ernst & Young, page 13.

Savings and Investment

Ernst & Young found that overall, colleges and universities have adopted many 'well-recognized best practices' in fiscal governance. Their key findings explored conflict of interest policies, endowment management, financial transparency, executive compensation rates, compensation for sports coaches and the availability of tuition discounts. The last issue is one that is especially interesting to the public at a time when college tuition costs seem to be rising out of control. E&Y note that it is difficult to use specific tuition and fees numbers to compare relative college costs in the U.S. because there is such a wide mix of public and private schools in a variety of geographic and academic settings. Instead, the IRS' Compliance Questionnaire asked about the average annual tuition discount offered to students. These discounts are typically institutionally funded scholarships or grants offered to students to offset the costs of tuition and fees. Looking at the IRS compliance data, E&Y found that over 70% of respondents offered tuition discounts greater than 10% and many institutions offered discounts over 20% (for more details, see the graph above). This is very good news for the thousands of current and incoming college students in the U.S. who are uncertain about financing their education.

The E&Y analysis also found positive results in another very important area of college finance: managing the endowment fund. Ninety-nine percent of respondents reported having an investment policy for their fund, and 94% also had a specific committee assigned to overseeing the investment process. Endowments are also carefully managed. All participants reported carefully tracking the allocation of funds to ensure that it matches donor intent, using multiple methods such as reports and audits to monitor endowment distribution.

Other key positive findings include the fact that 98% of public schools and 97% of private schools have a written conflict of interest policy, and 91% of the total respondents make all audited financial information available to the public.

Sports Coach Compensation

From the 2008 Internal Revenue Service College and Universities Compliance Questionnaire Analysis by Ernst & Young, page 12.

The Salary Problem

Other recent studies on finance in higher education have found that just as college tuition costs are rising, so are the salaries of college executives. While the E&Y findings on college president and chancellor compensation were not as alarming as past reports - most institutions reported executive salaries of $200,000 to $300,000 - the report does acknowledge that higher salaries have led to a lot of negative publicity.

This is especially true when it comes to the compensation of sports coaches, and E&Y found that their salaries far exceed those of college presidents. Thirty-eight percent of respondents reported paying sports coaches over $500,000, with an average salary of $684,000. In an open records request, the Chronicle of Higher Education found that many individual schools pay out far more than even critics realize. For example, Michigan State University (MSU) pays their head football coach a whopping $3.8 million and their head basketball coach an even more shocking $8.7 million. These figures are exceptionally troubling in light of a recent report by the Knight Commission on Intercollegiate Athletics indicating that current spending levels on college sports programs may be unsustainable.

College Finances

We'll have to wait until the IRS releases their findings to get a fuller picture of financial management in higher education. However, this early analysis does suggest that the people steering the ship are generally both well-intentioned and effective.

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