Colleges are playing by the rules in their financial affairs and are generally being good stewards of their resources, concludes a new report by two higher-education associations that reviewed the financial data nearly 150 institutions recently submitted to the Internal Revenue Service.
But, the report says, the practices of individual institutions, such as decisions to invest their endowments in risky ventures or to grant multimillion-dollar pay packages to athletics coaches and other top employees, may still raise red flags for policy makers, the public, and the federal tax agency, which is investigating how higher education does business.
In 2008 the IRS sent a 42-page questionnaire to 400 private and public colleges across the country, asking them to disclose details of their finances, including whether their myriad business ventures were turning a profit and what kind of perks they provided their executives in 2006.
The IRS and key members of Congress have taken a growing interest in nonprofit governance and management in recent years, with a similar in-depth study in progress on how nonprofit hospitals operate. The questionnaire to colleges, sent to institutions of varying sizes, is meant to examine potential discrepancies between financial activities and how they are reported to the IRS. The agency says it will not publicly disclose data from individual colleges, but will issue a study of its collective findings, probably in the coming year. Information in the colleges’ reports to the IRS could also trigger audits and penalties.
After the IRS issued its questionnaire, the Association of Governing Boards of Colleges and Universities and the National Association of College and University Business Officers asked colleges to let the accounting firm of Ernst & Young evaluate the data collectively and release its own assessment, and 146 colleges submitted their completed questionnaires to the firm.
Richard D. Legon, president of the Association of Governing Boards, said there was no doubt that the federal tax agency would perform only a fair and impartial analysis of the information. But the associations wanted to take their own measure of the data, to report to their members on areas of specific concern, such as governance practices.
Sen. Charles E. Grassley of Iowa, who has turned a skeptical eye toward nonprofit groups’ compensation and related issues in recent years, said he appreciated the effort at “voluntary transparency” but criticized the associations’ report as limited.
“The names of the colleges weren’t released, and the data itself wasn’t released,” said Mr. Grassley, the top Republican on the Senate Finance Committee, “so there’s no chance of independent organizations’ being able to review the data and make their own conclusions.”
Negative Publicity
In their analysis, which was released this afternoon, the associations concluded that the governance of most institutions is sound and nearly all colleges have enacted policies meant to prevent trustees and campus leaders from enriching themselves with insider dealing, a major concern of the federal tax agency.
But the groups also acknowledged that the range of salaries paid to executives, athletics coaches, and faculty members could spur negative publicity. The IRS asked for the amount and sources of compensation for each institution’s five highest-paid employees, and separately the salaries and benefits of the six highest-paid executives.
The average annual salary of athletics coaches was $684,000 among those responding to the associations’ survey -- far higher than the average salary of head football and basketball coaches among NCAA members.
Individual reports of coaches’ salaries, however, reveal that they were paid even more than is widely known. For example, Michigan State University’s men’s head basketball coach, Tom Izzo, was paid more than $8.7-million in 2006, according to the institution’s compliance questionnaire, obtained by The Chronicle through an open-records request. John L. Smith, then the head football coach at Michigan State, was paid $3.8-million.
At the University of Colorado at Boulder, the head football coach at the time, Gary Lee Barnett, was paid more than $3-million, according to that institution’s report to the IRS, also obtained through an open-records request. Mr. Barnett resigned late in 2005, following a long-running scandal over allegations of gang rapes of women committed by football players and recruits.
Individual reports may also reveal salaries and perks for executives that are not publicly available. At Michigan State, for example, the highest-paid executive in 2006 was Fred L. Poston, the university’s vice president for finance and operations. Mr. Poston’s base salary was $270,000, but he also received $400,000 in other compensation, including deferred pay that had yet to vest, according to a university official. In comparison, Michigan State’s president, Lou Anna K. Simon, was paid more than $457,000 that year.
Risky Investments
The IRS also asked a series of questions relating to the management of university endowments, including whether the institution had an investment policy and a target spending rate, and in what broad areas the institutions had invested their assets.
The associations’ survey found that nearly all institutions have an investment committee -- typically including trustees -- that monitors the investment strategy and chooses any outside consultants that are engaged to manage the endowment. Governing-board members also are involved in setting the compensation for outside groups that manage the investments, the associations reported.
Individual institutions’ responses to the IRS also show how much some colleges were investing in risky ventures just a few years before 2008’s financial crash. For example, the University of North Carolina at Chapel Hill had more than 40 percent of its $1.6-billion endowment in hedge funds in 2006, according to its report to the IRS. Michigan State had placed 23 percent of its $1.4-billion endowment in hedge funds that year.
John D. Walda, president of the association of college business officers, said it’s important to remember that those investment strategies had been successful for several years, until the current economic meltdown. In addition, officials of the business-officer group said, not all hedge funds operate in the same way and they have varying levels of risk.
The IRS questionnaire also focused on colleges’ business ventures, in order to find out how institutions report their profits or losses on those activities, which include catalog sales, travel tours, and even royalties from gas and oil interests. Many of those activities are taxable unless they lose money.
The associations’ survey found that the most common of such businesses were facility rentals, bookstores, and food services, and that, over all, institutions were not generating profits from those activities. The IRS has noted in the past that nearly half of all such unrelated business activities earn no profit or take a loss.
The associations concluded that the information in their survey does not help explain why so many of those operations are unprofitable, and that the IRS’s rules for reporting such activities may need to be clarified.
