How Not To Do Higher Education Budgeting (Part I)

August, 2013

Washington -- The University of Wisconsin and Iowa State University recently demonstrated bad practices in higher education budgeting; both are paying for it with bad press and public distrust.

Officials at UW failed to disclose that they had built up a cash reserve of hundreds of millions of dollars all the while raising tuition and asking the state legislature for more tax support. The university's financial reports obfuscated the size of the surplus; UW officials tried to explain it away by saying much of it was obligated and attributed the rest to fiscal prudence. State legislators were not amused by what they considered hoarding and an astonishing lack of transparency in a public institution; they reduced a planned tax support increase.

Iowa State earmarked a percentage of tuition increases for financial aid to the low income. Some Iowans jumped to the conclusion that better-off students were therefore paying for the education of the poor. State legislators waded in with a bill to stop the practice and earmarked tax dollars for need-based financial aid; the governor signed the legislation. Moody's took a dim view of it all and said the legislation would hurt ISU's financial ratings because of all the unusual earmarking.

What few seemed to have considered at ISU is that all its students receive tax-subsidized tuition: some more, some less. And that tax support and tuition, under generally accepted accounting principles, both go into a university's unrestricted general fund operating budget; it was quite unnecessary to do any earmarking in the first place.

So at ISU, it all seems to have been a big misunderstanding that could have been avoided. Unfortunately, the national attention devoted to the ISU dust-up took attention away from many universities' policies to aid the better off at the expense of the low income, not through earmarking but through misguided enrollment management practices that put institutional prestige rankings above basic student affordabilty and access. Ironically, ISU seems to have been trying to do the right thing, but went about it the wrong way.

The Wisconsin example of bad budgeting that hurt UW reminds me of a similar situation many years ago in Nebraska. The University of Nebraska tried to build cash reserves by underestimating tuition revenue for an ensuing year, persuading the state legislature to give it more tax support to maintain the same or growing levels of expenditures. The following year, NU would put the higher actual tuition revenue on its books and, like UW, say it was obligated or necessary for cash flow. The gimmick didn't work any better in Nebraska that it did in Wisconsin. The NU president, Woody Varner, soon resigned, saying he had lost the confidence of the people in the statehouse. He was right.

The governor of Nebraska at the time, Jim Exon, took a dim view of gimmickry in higher education funding. He proposed instead a tax support level at least at the average per-capita higher education spending of surrounding states. Institutional governing boards and administrators would then be free to manage; there would be no gamesmanship among funds, hidden or not. The university could coordinate cash flow needs with the state itself, he volunteered. It never happened.

These three examples serve as reminders that budget gimmickry, misadventures in fund accounting, and a lack of transparency can come back to hurt an institution and dimish trust in its leadership.