There are buckets and buckets of money

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In times of scarcity, thoughts and questions focus on the cash in hand and how to use it effectively. Across campuses, voters are vehemently asking, “Why are we spending money on this when we urgently need the money for ________?” or aggressively, “There’s money in those accounts! Why can’t we use it for ________?”

Probably, the answer received from the business agent is “We cannot use this money for this purpose”. Sudden stop. Primal cries ensue as “the wall of no” seems to protect the chests as if they were the black gates of Mordor. But why?

Why a sum of money can be used one way but not another depends on how the money is received, the source of the funds and the associated restrictions (time, purpose, amount). Visualize the concept as “money buckets”. Every income stream has its bucket. The bucket structure keeps content together in one place for specific purposes and time periods. Defining these compartments allows the institution to account for funds accurately and ensure compliance with funders and state and federal laws. Although many elements are the same for both private and public institutions, the following elements relate primarily to public institutions.

Generally, there are five compartments (or categories of funds): education and general (E&G), auxiliary, capital, private and reserves.

Education funds and general funds

Filled and emptied roughly equally every year, this bucket contains tuition money (and state and federal credits). Funds must be used to support the primary mission of the institution (teaching only) in the year they are received. Therefore, the US government grants the institution nonprofit status, and the institution is not required to pay taxes on income earned for educational purposes.

Here are some examples of what the E&G fund supports:

  • Remuneration of faculty and staff in academic departments and support functions
  • Educational support such as libraries, laboratories and tutoring centers
  • Related overhead costs such as utilities and maintenance of university buildings
  • Scholarships

Auxiliary funds

This bucket contains funds generated from the provision of goods, services, and other amenities typically found off campus. Revenues from accommodation and meals, food services, bookstore, parking fees, some student fees, medical facilities and special event ticketing (athletics, concerts, etc.) are included. Having them on campus benefits voters, creates an enhanced residential college experience, and provides the opportunity to generate additional funds.

Additionally, the ancillary fund may include funds generated from other business ventures such as hotels, apartments, and rental properties managed by a separate real estate foundation created to generate income for the institution.

Some of the ancillary fund income may be taxed by the IRS, some may not. Different from E&G funds, the ancillary funds compartment is deliberately filled more than emptied to save for future expenses such as ancillary function capital expenditures and other investments in institutional operations, as well as reserve funds ( see below).

Some of the ancillary funds supporting non-academic operations include:

  • Remuneration of student staff and campus life and related costs
  • Facilities (parking, halls of residence, student union, recreation)
  • Student government, clubs, and other student groups
  • Catering and catering services
  • Student Sports and Recreation Staff and Operations

The COVID-19 pandemic has had a major impact on ancillary revenue. There was little to no revenue from the operations mentioned above with students learning remotely. Without this revenue, many institutions would not be able to pay some employees or repay loans (see capital funds, below), utilities, and other expenses related to ancillary functions. Some institutions may have had funds in reserve, but most did not have enough funds to cover revenue losses for the duration of the closures. The federal government’s CARES Act funding prevented some institutions from permanently closing.

Capital funds

Capital funds support infrastructure construction, renovation and improvement projects. The infrastructure includes heating and air conditioning, electrical, plumbing, telephone/internet systems, and some furniture and equipment. Funds can come from public credits, commercial (and government) loans, bonds, ancillary revenue, earmarked private funds, and/or quasi-endowment loans. (Large sums of money from unrestricted donations are often referred to by the board as quasi-endowments, or as endowments, in order to generate investment income. The corpus may be released in whole or in part if the policies and council vote authorizes it.)

Lenders, investors, donors or governments limit these funds. Legally binding agreements establish the scope of work, schedule for completion of work, target, and repayment schedule (if applicable). Think of capital funds as you would a home loan – the lender only authorizes the money to be used for the purchase of a home. You would not be allowed to start a business and pay employees with the funds.

Private funds

Private funds (excluding loans) are secured through charitable contributions and sponsored agreements.

Charitable (also called philanthropic) contributions are made to the institution without the donor receiving anything of significant value in return. The donation may or may not be subject to restrictions (purpose, distribution and amount), but the donor does not further direct spending once the institution has received the funds. The donor can use the contribution as a deduction on their taxes. Under an institution’s nonprofit status, the Internal Revenue Service considers such income non-taxable to the institution.

Sponsorship agreements are made with an outside entity (i.e. a corporation, foundation or government agency). In exchange for funds, the institution provides a deliverable to the external entity, such as a body of research, a study, programmatic results, or, in certain circumstances, publicity. This income is not taxable to the institution, but it is not considered a charitable contribution because the external entity is receiving something of value.

Reserve fund

Reserve funds are what they sound like – a bucket of money set aside for emergencies, extraordinary expenses, and one-time operational investments. Funds in this tranche generally come from the surpluses of ancillary funds. Think of it as a savings account.

Reserve funds are essential for many reasons. Income is not regular during the financial year; the schedule relates to the receipt of tuition fees and room and board payments. Cash on hand and an institution’s ability to repay debt affect credit ratings. Without reservations, an institution may not withstand a catastrophic event (such as the COVID-19 pandemic).

Some states dictate the amount institutions must hold in reserve (minimum and maximum amounts) based on a percentage of the total budget. Most institutions set thresholds for the amount in reserve, such as six months of cash. They could pay employees and bills and pay off debt for six months if there was no revenue.

Conclusion

In order to break through the “wall of no”, voters must stop imagining corporate leaders as creatures ominously referring to the budget as “my precious”. Corporate executives don’t calculate the wicked consumed by holding on to cash as if it equals all the power in the universe. They also don’t intend to cause irrational behavior and get weird chills watching vicious fights unfold over funding between departments (at least I don’t think so?). Their role and responsibility is to follow the rules to the letter and ensure compliance with funders.

The ‘wall of no’ indicates the patchwork of funding for higher education, the complexities associated with managing these funds and the limited amounts they contain. With so many different income brackets (and associated restrictions and regulations), the financial model offers little flexibility and leeway to solve problems in times of scarcity. However, finding a smoother path to yes largely depends on understanding the purpose and permissible uses of different categories of funds.

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