Lift the Veil Off the Finances of Colleges and Universities

(Editor’s Note: Guest writer Robert A. Blumenthal is Professor of Mathematics at Oglethrope University in Atlanta. He expresses his views here on the problem of making college and university financial reports more detailed and transparent to the public.)

Two leading members of the Senate Finance Committee, Sen. Max Baucus (D-Mont.) and Sen. Charles Grassley (R-Iowa) are trying to increase transparency in the financial reporting by nonprofit organizations. Many of the reformes the senators propose—outlined in a May 29 letter to Treasury Secretary Hank Paulsen—would have a profound effect upon the kind of financial information that colleges and universities are required to disclose to the public.

Colleges and universities are required to file Form 990 annually with the IRS (available to the public through GuideStar). Baucus and Grassley propose a major overhaul of Form 990. They contend that the current form does not adequately encompass information regarding large, complex nonprofits such as universities. They call for more detailed reporting tailored to the specifics of these institutions and for making their financial reporting more transparent.

A major area of concern for the senators is endowments. They want nonprofit institutions to answer the following questions:

• What is the size of the endowment of the institution, and what definition of endowment is being used to arrive at the figure being reported?

• What is the amount and percentage of the endowment being spent?

• What are endowment funds being spent on?

• What endowment funds are earmarked for specific purposes and what are those purposes?

• How are endowment funds being invested?

• What are the costs of the management of the endowment?

The current Form 990 provides very little insight into these questions, and the situation is made all the more opaque by the fact that there isn’t even a uniform definition of “endowment.”

In addition to expanding the scope of the information reported on Form 990, Baucus and Grassley want to ensure that the form is filed and made available to the public in a timely fashion. They point out that extensions for filing are routine and that considerable time passes before the document is actually available.

The senators are to be commended for their efforts to bring about greater openness with regard to nonprofits, and the reforms they propose will increase transparency in the financial operations of colleges and universities. I believe, however, that their reforms do not go far enough. In their letter outlining the reforms to Treasury Secretary Henry Paulson, the senators say that it is time to “open the blinds.” While a step in the right direction, their proposals would still leave the blinds partially closed, excluding much important light from the eyes of the public.

We should require from colleges and universities — institutions which enjoy tax-exempt status and which are supported by tax dollars in a myriad of ways — the same level of transparency with regard to financial matters that we require from public companies, a point made by the two senators. Publicly traded companies are required to disclose their audited financial statements, together with the auditor’s notes to those statements. In order to be eligible for federal student aid funds, colleges and universities are required to produce and file a set of audited financial statements with the Department of Education annually. But, unlike the financial statements that publicly traded companies must file, there is no requirement that the financials of a college or university be made public.

All the public gets to see is the Form 990, a very poor substitute. The balance sheet and income statement portions of that form are sketchy at best and are not presented in standard accounting format. Moreover, the 990 includes neither a cash flow statement nor the auditor’s notes. In order to guarantee the same level of transparency that currently exists with regard to public companies, Form 990 should be modified to require that a college or university include its audited financial statements, complete with the auditor’s notes accompanying them.

Moreover, Form 990 should be made available to the public as soon as possible. Currently, it is not unusual for a college or university to post its Form 990 more than a year after the end of the relevant fiscal year. Public companies are required to furnish financial information in a timely manner. Colleges and universities should do so as well. These institutions should be required to annually furnish the necessary financial information within two months of the end of their fiscal year. Extended delay in providing information is not compatible with transparency.

The senators’ call for a uniform definition of endowment is also crucial . For colleges and universities, the term “endowment” can mean whatever the school’s governing board wants it to mean. Institutions are free to decide which of their assets to count as endowment and are free to change this determination whenever they choose. In some cases, “endowment” refers only to invested funds which generate income but whose principal cannot be spent. In other cases, it also includes funds designated by the board as “funds functioning as endowment” or “quasi-endowment funds.” These are funds labeled by the governing board as endowment, but which may be spent at any time at the discretion of the board. Thus, not only is there no consistency from one institution to the next, but there is also no guarantee of consistency within a single institution from one year to the next.

As long as the concept of endowment remains fuzzy, it will be impossible for the public to evaluate the effectiveness of any nonprofit entity. We need to have a clear definition.

The tax-exempt status enjoyed by colleges and universities is a privilege that should carry certain responsibilities with it. Among those responsibilities should be the requirement to provide, in a timely fashion and on a regular basis, a transparent picture of the financial position and operations of the institution. With that information, parents, donors, and public officials will be better able to evaluate the school’s activities.