Coverage of legislation and regulatory activity that affects higher education
By Liz Clark, Mary M. Bachinger and Anne Gross
- Capitol Hill Embraces Two-Year Earmark Moratorium
- Campus Cards May Trigger New 1099-K Reporting Requirement
- State Authorization Requirements Cause Concern for Institutions Offering Distance Education
On February 1, Senate Appropriations Committee Chairman Daniel Inouye (D-HI) announced a two-year moratorium on earmarks, the federal budgeting tactic that allows individual members of Congress to direct funding to specific projects, typically in their home state or congressional district. This effectively eliminates the possibility of any earmarks appearing in the FY11 or FY12 federal budgets. Early drafts of FY11 spending bills had contained millions of dollars directed to such earmarks.
Although these specifically directed funds make up a relatively small proportion of the federal budget, as a sector, American higher education institutions have been recipients of considerable funding from this source. Colleges and universities that have recently sought congressionally directed appropriations need to consider the implications of this moratorium on earmarks.
Turning Away From Earmarks
While not necessarily the case, the practice of earmarking has long been considered an insider's game played by influential lobbyists with well-placed members of Congress. Over the past several years, national media attention and public scrutiny have intensified, especially after several scandals involving congressional appropriators unfolded.
In 2008 and 2009 new policies were implemented to disclose congressional earmark sponsors and their projects and again in 2010 to prevent earmarks from going to for-profit businesses and industries. The new light shed on the process did little to deter the practice, and by some accounts a better understanding of the process only intensified congressional efforts to direct appropriations to local projects. Nevertheless, earmarks continued to remain a hot-button issue during the fall 2010 election campaigns.
As a sector, American higher education institutions have been recipients of considerable funding from this source.
In November, when it became clear they would have the majority in their chamber, House Republicans voted to ban earmarks in the 112th Congress. President Obama followed suit, declaring in his 2011 State of the Union address, "If a bill comes to my desk with earmarks inside, I will veto it."
While the issue of earmarks is a major budget talking point for the media and many politicians, earmarks make up a relatively small proportion of the federal budget. Taxpayers for Common Sense, an independent group working to expose and eliminate government waste, estimates $15.9 billion in legislative earmarks in FY10, roughly half a percent of the $3.4 trillion federal budget and 1.2 percent of federal discretionary spending.
There is some disagreement about the exact definition of an earmark, leading Citizens Against Government Waste, another watchdog organization, to report a slightly higher number of $16.5 billion in congressional earmarks in FY10. An Inside Higher Ed analysis estimated that approximately $2 billion in earmarks that year were directed to colleges and universities, roughly 12 percent of all congressionally directed appropriations requests that year.
Implications for Higher Education
Individual colleges and universities have had differing attitudes toward earmarks. While some have welcomed them enthusiastically, others take strong positions against academic earmarks, arguing that the competitive, peer-review process is the appropriate mechanism through which to award federal funds.
However, there is no doubt that American higher education institutions have received considerable funding from earmarking dollars. Both the Chronicle of Higher Education and Inside Higher Ed have reported on the millions of dollars in earmarks annually designated for colleges and universities. In early 2010, the House banned earmarks to for-profit companies, but nonprofit and public universities remained fully eligible, reinvigorating efforts by some campuses to seek the directed funds.
There will be no FY11 or FY12 earmarks, and some policymakers have called for extra efforts to ensure that any unspent federal funds are not used for such purposes. The federal budget debate on Capitol Hill early this year included calls to halt the distribution of unobligated earmark funding from prior fiscal years.
Campuses that have recently sought congressionally directed appropriations should note:
- While we are well into FY11, some federal agencies may not yet have distributed FY10 earmarks to designated recipients. Campuses that were recipients of FY10 earmarks, but have not yet received funds, should follow up with the appropriate federal agency and program officers to determine how their project may be affected by recent budget actions, as recently enacted budget language may make those funds unavailable.
- Many earmarks were designated for colleges and universities in FY11 spending measures when they were marked up in the House or Senate appropriations committees in the 111th Congress. These FY11 projects will not be funded based upon the new rules agreed to by the 112th Congress and President Obama's stated position on earmarks.
- The earmark ban includes longstanding United States Department of Agriculture (USDA) research, education, and cooperative extension earmarks, and unlike in FY07, an alternative restoration of those funds is unlikely. In FY07, Congress eliminated earmarks at all agencies except the Department of Defense and the Department of Homeland Security. However, funds that had been designated for earmarks were largely invested back into respective federal agencies. That year, while all USDA Cooperative State Research, Education, and Extension Service (CSREES) earmarks to land-grant universities were eliminated in the final budget agreement, CSREES (now the National Institute for Food and Agriculture) was able to redistribute the dollars to institutions through a formula mechanism.
The FY11 continuing resolution passed in March found $2.6 billion in savings by reducing or eliminating funds that had been earmarked in the agriculture, commerce-justice-science, financial services, and interior-environment spending bills. It does not appear likely that those funds will be restored and, moreover, some agencies are facing deeper programmatic cuts in addition to the loss of congressionally directed earmarks.
While it is doubtful the moratorium will be lifted for FY12, there is no telling what the future may hold. This is not a permanent policy, and some parties agreed to the current ban begrudgingly.
Chairman Inouye, upon announcing the current moratorium, said, "Next year, when the consequences of this decision are fully understood by the members of this body, we will most certainly revisit this issue and explore ways to improve the earmarking process. At the appropriate time, I will once again urge the Senate to consider a transparent and fair earmark process that protects our rights as legislators to answer the petitions of our constituents, regardless of what the president or some federal bureaucrat thinks is right."
NACUBO CONTACT Liz Clark, director, congressional relations, 202.861.2552
Colleges and universities operating campus card programs that enable students to charge purchases at businesses unrelated to the institution will need to file a new information reporting form for 2011. Internal Revenue Service (IRS) Form 1099-K, Merchant Card and Third Party Network Payments, will be used to report payments to unrelated entities in settlement of payment transactions. This new reporting obligation was mandated by the Housing Assistance Tax Act of 2008 and is intended to ensure that businesses accurately report their income from such transactions.
Under final rules published by the IRS on Aug. 16, 2010, a college or university will need to file Form 1099-K if it operates a campus card program under which:
- Deposits are made by the cardholder and held by the institution, or charges to an account at the institution are permitted.
- The card is accepted by one or more merchants not related to the institution (no reporting is required to related entities).
- The institution is contractually obligated to pay participating merchants in settlement of transactions with cardholders.
The final regulations do not define "related." NACUBO is seeking clarification from the IRS about the types of vendors honoring campus cards that could be considered "unrelated" and, therefore, trigger 1099-K reporting. If a campus card program is outsourced to a bank or other third party, that entity, assuming it actually makes the payments to the merchants, will be required to file the Form 1099-K.
Required information. In addition to information about the filer, the following details need to be included on Form 1099-K:
- Name, address, and taxpayer identification number (TIN) of each participating payee to whom reportable payment transactions were made during the calendar year.
- The gross amount of aggregate reportable payment transactions for the calendar year.
- The gross amount of aggregate reportable payment transactions by month (this breakdown is required in order to make it easier to reconcile the amounts by fiscal year).
As with other types of 1099s, the Form 1099-K must be provided to the participating payee by January 31 of the following year, and a copy of the statement must be filed with the IRS by February 28.
NACUBO is seeking clarification from the IRS about types of vendors that could be considered "unrelated."
Backup withholding. If a participating payee does not provide the payor with its TIN or if the IRS tells the payor that the TIN is incorrect, the payor is required to perform backup withholding by deducting and withholding income tax from a reportable payment. To help minimize TIN errors, payors may check the TINs furnished by participating payees against the IRS database prior to making an information return.
RESOURCE LINK More information is available on the NACUBO Tax page.
Leaders of institutions that offer distance learning programs or courses are increasingly worried about their ability to comply by July 1 with new Department of Education (ED) regulations and cover the related costs. One of the many topics addressed in ED's program integrity rules issued last October was the long-standing requirement that colleges and universities be authorized by their home states to provide postsecondary education. The new rules are much more specific about the parameters of such approvals, including the nature of the approval and requirements for states to have a mechanism to handle complaints. While institutions generally have until
July 1 to obtain state approval, there may be possible extensions, if necessary, for states to modify their procedures to comport with the regulations.
In addition to authorizing or licensing institutions located within their borders to provide postsecondary education, a number of states also have laws covering distance education. Some institutions that offer a state's residents educational programming via the Internet or other remote means must be approved to do so, even though the institution has no physical presence in that state. Many colleges and universities were unaware of these state requirements, and few states appear to have followed up with outreach or enforcement.
Nevertheless, the ED regulations now tie eligibility for participation in Title IV federal student aid programs to obtaining all approvals required by any state. The department issued additional guidance in March that allows an extension to institutions seeking approval from other states for distance education programs-but only if the institution has submitted necessary applications before July 1 and is awaiting a response from the state.
ED regulations now tie eligibility for participation in Title IV federal student aid programs to obtaining all approvals required by any state.
Without the appropriate state authorization (if required), an institution would not be able to provide Title IV aid to distance education students who are residents of a state other than the one in which the institution is located. Further, the March letter confirms that an institution offering distance education programs needs to reevaluate each student's state of residence each time it makes a new award of federal aid. This is intended to ensure that (1) the student hasn't relocated to another state, and (2) if so, the institution is properly licensed in the state where the student now resides.
Applying for and maintaining approvals in multiple states may prove expensive as well as time-consuming. States vary considerably in the amounts they charge colleges and universities in application and licensure fees for approval to offer education to their residents. Some charge nominal amounts, others levy fees of $2,000 or more per program offered, and still others calculate fees as a percentage of tuition revenues received from students residing in the state. Some universities with extensive distance education programs have estimated initial costs of $200,000 or more.
NACUBO has joined many other associations, led by the American Council on Education, in seeking relief from these regulations. Having failed to convince ED to withdraw the requirement or delay implementation, higher education associations now are focusing their attention on Congress. In the meantime, an effort led by the Council of State Governments is working to develop a multistate distance education reciprocity compact to encourage development of a rational system for state licensure of higher education institutions appropriate for today's environment.
NACUBO CONTACT Anne Gross, vice president, regulatory affairs, 202.861.2544
RESOURCE LINK For more details about the state authorization requirement, go to the NACUBO Student Financial Services page.