Review of the Status of Auxiliary Organizations in the California State University Richard P. West Executive Vice Chancellor Emeritus January 25, 2011
Review Committee and Process Review Committee commissioned by Chancellor Reed in September 2010 In addition to the formal committee membership, all the Vice Chancellors and the Internal Auditor participated in the Committee meetings Committee met three times during the fall of 2010 Significant collaboration and communication outside of the formal meetings and in support of the Committee charge Final report will be issued in February 2011
Review Committee Members Trustee Nicole Anderson Vice President Bob Gardner, San Bernardino Vice President Neal Hoss, San Marcos Interim President Don Kassing, San José Vice President Larry Kelley, San Luis Obispo Vice President Tom McCarron, Northridge Vice President Leroy Morishita, San Francisco President Mohammad Qayoumi, East Bay Vice President Mary Stephens, Long Beach President Stephen Weber, San Diego President John Welty, Fresno
Charge Review the role and value of auxiliaries at the University in the current environment Determine if the number of auxiliaries are appropriate for the current operating environment Review existing policies and procedures and ensure proper controls are in place, and recommend changes, if necessary Ensure proper documentation is in place regarding both university and auxiliary employees Evaluate the long term debt held by auxiliaries
History and Legal Basis The first Fresno State College Association established in 1922 Created to perform functions common for universities, but due to California law and/or state funding, cannot be efficiently or effectively performed by the CSU Over the years some rule changes have given CSU greater flexibility, however during the same period university operations have gotten more complex Authority grounded in state statute (Education Code), Trustee policy, and California not-for-profit law
Authorized Functions Student body organizations Bookstores, food services, and campus services Housing Student unions Supplementary health services Loans, scholarships, grants-in-aids, stipends and related financial assistance Externally funded projects including research, workshops, conferences and institutes Instructionally-related programs (e.g. radio, athletics, etc.) Alumni programs Gifts, bequests, devises, endowments, trusts Public relations, fundraising, fund management, and development Acquisition, development, sale and transfer of real and personal property, including financing transactions
Types of Functions Student body organization programs: Funded from student fees, support student clubs and other activities as determined by governing board Commercial services: Revenues resulting from bookstore sales, food services, child care centers and other commercial activities Student union programs: Revenues from fees and operations in the facility
Externally funded projects: Types of Functions (con t) Funded from contract and grant awards conducted by both faculty and staff Instructionally-related programs: Funding comes from a variety of sources depending on the activity, which includes student newspapers, radio and television stations, agricultural programs, etc. Real and personal property: Auxiliaries can incur debt to purchase property and/or engage in partnership projects to develop property
Types of Functions (con t) Gifts, endowments, trusts and fundraising: Funds come from entities external to the university intended to support specific activity and other operations at the university, and typically 90% of donations are restricted as to use
Auxiliaries cannot, due to current CSU policy: Rules about Money Hold state funds appropriated to CSU through legislative process Hold tuition fee revenue Hold most other mandatory student fees required for registration Own or sponsor instructional programs awarding academic credit or Continuing Education Units (CEU) Since the CSU cannot, auxiliaries allow the University to: Invest in equities Buy, sell and hold real property without legislative action Engage in statewide education bond campaigns
Rules (con t) Activities that could be performed by either the university or an auxiliary, as long as authorized and with an operating agreement in place: Operation of student body organizations Research and sponsored programs Providing conference, workshop, meeting and program management support Operation of commercial services Acceptance of donor gifts Most campuses have traditionally provided these functions through auxiliaries
Auxiliary Organization Revenue and Expenses
Number of Auxiliary Organizations Since 1994, the number of auxiliary organizations has grown from 69 to 94 Increase in the number of auxiliaries due to: Addition of new campuses to the CSU Faculty and staff for-sale housing Creation of single purpose philanthropic foundations
Issues Identified Attorney General External Auditor University Auditor Public Policy Internal Groups
Responses to Issues Are there proper CSU controls over auxiliary expenditures of funds and auxiliary purposes and activities? Transparency of auxiliary operations Proper placement of funds Reimbursement of costs incurred by the CSU for auxiliary activity Do auxiliaries comply with applicable nonprofit law?
Funds, Purposes and Activities Are there proper controls over auxiliary expenditures of funds and purposes and activities?: Review the list of authorized functions and modify or clarify, if necessary Immediately review all operating agreements, assuring desired functions are being performed, and reaffirm campus president s authority over all auxiliary activity Operating agreements should be reviewed no less than every five years and include an evaluation of the auxiliary s viability
Funds, Purposes and Activities (con t) Are there proper controls over auxiliary expenditures of funds and auxiliary purposes and activities? (con t): Reaffirm president s authority, and formally identify campus CFO as person responsible for ensuring compliance and good internal controls Campus presidents should consult with the recognized student body organization regarding student representatives on auxiliary boards Review policy regarding comparability of salaries and benefits Review existing policy regarding employment status of those working on sponsored programs
Transparency of Operations Transparency of Auxiliary Operations: Trustees should consider sponsoring legislation that responds to additional disclosure, protecting certain activity Determine if the Public Records Act offers protection for proprietary terms in some vendor contracts Consider including in Title 5 and/or policy statements, guidelines regarding transparency of auxiliary operations
Proper Placement of Funds Proper placement of funds: Develop policy that re-implements the ownership tests to determine proper placement Campuses and the University Auditor should use these policy principles to resolve current outstanding audit findings Review current policy to separate issues of placement of funds from reimbursement of costs to the campus
University Cost Reimbursement Reimbursement of costs incurred by the university for auxiliary activity: Review policy addressing reimbursement of costs and affirm key principles Develop frequently asked questions (FAQs) to guide campuses regarding when in-kind or less than full cost reimbursement is appropriate
Nonprofit Requirements Auxiliary compliance with nonprofit requirements: Develop guidelines that identify critical criteria necessary in firms that audit auxiliary organizations Provide annual updates to campuses regarding changes in compliance requirements for nonprofit organizations Campuses assure each auxiliary audit firm is aware of these changes and incorporate them into the local audit plan Give guidance regarding governance training for board members Develop policy recognizing campus CFO as person responsible for ensuring auxiliary compliance with nonprofit requirements
Review group found no need for major changes Some policy gaps identified Summary In all cases, no violations of CSU policy, legal rules, or misappropriation of funds were found Need to strengthen some controls and provide additional transparency Increased number of auxiliaries is warranted Debt incurred by auxiliaries appropriately approved by Board and supported by revenue levels Responsibilities of presidents and CFOs need to be emphasized
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