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Business Officer Magazine

Telling Information in Transparent Times

Colleges and universities have been under intense scrutiny, frequently fielding requests for information. NACUBO President and CEO John Walda reports on responses to last year’s Internal Revenue Service questionnaire, which confirm that higher education institutions employ sound business and governance practices.

By John Walda

In recent years, our institutions have been thoroughly scrutinized by policy makers, regulators, and the media. We've filed 990s, answered congressional questionnaires and presented at hearings, been regularly subjected to state and local oversight, participated in surveys, and explained our financial and business practices in the context of recession-induced resource shortfalls. In fact, one might think there is little that we have not disclosed and even less left to discover.

In the current financial climate, with all our resources stretched, it is hard to embrace any additional requests for information. Yet, one such query—from the Internal Revenue Service late last year—has afforded us the opportunity to tell a very positive story about higher education while demonstrating the transparency that today's times demand and deserve.

The IRS questionnaires, sent to about 400 colleges and universities, sought information on income and expenses, unrelated business income (UBI), endowment management, governance, and executive compensation. In partnership with the Association of Governing Boards, we asked that responses be sent to us so that we could compile and interpret the resulting data; 146 schools did so. The answers provide a snapshot of the business and financial status of universities in 2006. While we will soon release a detailed report, I can tell you now that the data confirm higher education's employment of compliant and sound business and governance practices.

Strong Governance, Sound Investment Policy

The data serve as clear reminders that public colleges and universities already operate under significant governmental oversight with considerable transparency. Private institutions also have strong and evolving governance programs to ensure that their educational mission is achieved, while protecting against conflicts or noncompliance. And on conflict-of-interest policies, nearly 98 percent of both public and private institutions reported having written policies in place to govern top management officials. A further example of transparency: 91 percent of the respondents currently make their audited financial statements available to the public.

An impressive number—99 percent—of all respondents had a formal investment policy, while 94 percent had an investment committee for their endowment fund. Such committees were almost universally involved in selecting external managers, carefully monitoring endowment distributions, and reporting on related results. Finally, regarding endowment spending, 97 percent of respondents reported target spending rates of 4 percent or more; 70 percent reported rates of 5 percent or more. Importantly, the most frequent endowment expenditure was to support student financial aid.

Compensation Issues in the Spotlight

The IRS questionnaire asked for detailed information on the five highest-paid individuals at an institution. The data indicate that levels for faculty and senior academic and administrative leadership are in one range, with median faculty compensation at $149,000, median department head compensation at $152,000, and median administrator compensation at $147,000. The other range covers athletic staff, where median compensation for a sports coach totals $404,000. While the data on fringe benefits showed nothing striking, the IRS is initiating follow-up audits with some 30 institutions.

Scrutiny of Business Income

The data do not shed significant light on why many activities that generate UBI fail to also generate federal tax revenue. For example, each of at least 47 different ways listed by the IRS as options by which institutions could earn UBI was checked by at least one school among the 146 that responded. At the same time, in the aggregate, institutions reported current operating losses on their Forms 990-T. Such data is almost certain to reinforce the perception among some policy makers that the UBI tax rules need to be reviewed.

The IRS has stated that it intends to use these questionnaires as a part of its “ongoing efforts to increase voluntary compliance.” Undoubtedly, the Service will identify individual cases for which additional administrative due diligence is necessary. Nevertheless, I am happy to note that the larger news is the proof that we are an overwhelmingly compliant community with regard to accountable governance, financial transparency, and sound business practice. This is certainly a message worth broadcasting.

JOHN WALDA is president and CEO of NACUBO.