College and university finance

Preface

The general purpose in writing this book has been to Kghten the tasks of college administrators and to help make their work more satisfactory, both to themselves and to all those who have at heart the welfare of American colleges. The particular purpose in writing it, in response to numerous requests, has been to put into book form a statement of the principles underlying college accounting and the use and care of trust funds, and to describe a complete, yet simple, system of college accounts which has been tried and found satisfactory. It is hoped that business officers will find the book a help to them in performing their duties more intelligently and efficiently, and that presidents, as well as trustees, will be assisted in discharging their responsibilities. No attempt has been made to discuss educational problems, the text being limited to a discussion of business and financial problems only.

Chapters i to vi are devoted to a discussion of the principles underlying college organization and management and the problems of financial policy peculiar to the endowed college, particular emphasis being placed upon the principles which must be observed in accounting for trust funds and in maintaining them inviolate.

The remaining chapters deal with the principles, methods, and plans to be followed in recording, accounting, and reporting the financial transactions of colleges from the point of view of good practice, and are designed to help officials and employees who carry these responsibilities. In order to

VI PREFACE

render this portion of the book more effective an annual financial report of a supposititious college is included and explained at some length.

In addition to requests which have been received for information concerning a proper financial system, the officers of the General Education Board have been frequently asked to furnish college trustees with a suitable set of by-laws. To supply this demand a set of by-laws containing provisions for the conduct of an endowed college has been drafted and included.

Mention is made of the books of account and records needed, but detailed forms and headings have been studiously avoided. The principles and theory of college accounting, however, have been emphasized with the hope that officials in charge of this work will be stimulated to arrive at solutions best adapted to their own peculiar problems.

I wish to record my sincere appreciation of the many

helpful suggestions which have been made by my associates,

and especially to acknowledge the aid given by Mr. N. C.

Phmpton, Assistant Auditor of the University of Chicago,

and Dr. J. Spencer Dickerson, Secretary of the Board of

Trustees of the University of Chicago, my colleagues for

many years, and by Dr. Wallace Buttrick, Dr. Abraham

Flexner, and Mr. H. J. Thorkelson, my associates in the

General Education Board.

Trevor Arnett New York January 31, 1922

Table Of Contents

CHAPTER PAGE

I. Origin and Support of Colleges and Universities 1-9

II. Receipts 10-17

Contents

IX

CHAPTER

Comparison of Estimated Income with Income Received Previously ....

Chapter I Origin And Support Of Colleges And Universities

Colleges and universities of the United States derive part of their support from fees paid by students; the remainder comes from gifts, from income on endowment, or from taxation.^ While even tax-supported institutions mayderive part of their income from endowment,^ generally speaking, college and university income, aside from student fees, comes so largely either from endowment on the one hand, or from taxes on the other, that the colleges and universities of the United States are usually divided into two classes: first, the endowed institutions; second, the

1 In Bulletin No. 34 of the 1920 Series, published by the Commissioner of Education, the following interesting table is given showing the relative difference in the proportional distribution of the receipts for colleges, universities, and technical schools as compared with private institutions:

Percentages

Public

Private

Productive funds

3.9 72.9

0.7 22.5

27.7

Government, state, or city

3.8

Private benefactions

14.3

Student fees and other sources

54.2

100.0

100.0

2 For example, the budget of the University of California for 1921—22 is $7,692,162, of which $299,233 represents income from endowment, and $70,640 donations. In the budget of the University of Virginia for 1921—22 the estimated income is $821,046, of which $93,194 comes from endowment and $83,331 from gifts and bequests. v.

tax-supported institutions. The preservation and increase of endowment is so important to the well-being of an endowed college or university that the present volume is primarily written to meet the needs of those who are engaged in managing the financial affairs and developing such institutions. But, as a matter of fact, aside from the manner of obtaining the income, all colleges and universities encounter practically the same accounting and managerial problems. Despite the prominence, therefore, given in this volume to questions connected with endowment, it is hoped that the book may also prove serviceable to persons interested in tax-supported institutions.

Harvard College was the first institution of higher learning in this country, and the rehgious motive which led to its establishment continued for two centuries to be a powerful factor in the development of higher education in the United States. Even now it exerts a strong influence. The Puritan Fathers, having "builded houses, provided necessaries for their HveUhood, reared convenient places for God^s worship, and settled the civil government,'^ longed to "advance learning and perpetuate it to posterity, dreading to leave an illiterate ministry to the churches when their present ministers should He in the dust."^ Not infrequently the earliest classes of what are now strong and well-equipped colleges were held at the minister's house or at the meeting house, and instruction was given in a few subjects by the minister. As the number of students increased, special quarters were obtained. The minister associated with himself other persons able to share in the instruction, and appealed to the members of his particular denomination for gifts which would enable him to pay the expenses of the

1 New England's "First Fruits."

ORIGIN AND SUPPORT 3

growing enterprise. In course of time generous benefactors gave funds to be held in perpetuity, the income only to be used for the maintenance and development of the institution. Only in recent times have institutions been founded with considerable gifts from a single donor or group of donors.

Though Harvard was foimded in 1636, and a few other institutions in the seventeenth and eighteenth centuries, the foundation of colleges and universities did not become general until the second quarter of the nineteenth century. One other educational institution was estabhshed in the seventeenth century, twenty-one in the eighteenth, twenty-four in the first quarter, eighty-five in the second quarter, one hundred ninety-five in the third quarter, and one hundred forty-five in the last quarter of the nineteenth century up to and including 1897.

Since 1900 the cost of maintaining the endowed college has rapidly increased. In consequence men have in general sought to make financially secure colleges already in existence rather than create new ones. Though the colleges of Oxford and Cambridge, the oldest universities in England, are well endowed, their resources for the most part date back to the Middle Ages. At the present time in the United States more than anywhere else in the world institutions of learning are the recipients of large sums ranging from single gifts running into the millions, down to relatively small amounts contributed by those interested for one reason or another in the success and development of a given college or university. These gifts are sometimes made by individuals, sometimes by rehgious groups, sometimes gathered through efforts of alumni; not infrequently they come absolutely unexpected. From information gathered from publications of the Commissioner of Education, during the last three decades of the nineteenth century, gifts and bequests to education in the United States approximated in value $250,000,000; during the first decade of the present century they amounted to $216,000,000, and for the seven years of the second decade to $21 1,000,000. All but a small part of these great amounts was given for higher education.

Nor do these figures tell the whole story, for since 1918 practically all the endowed colleges and universities of the United States have been vigorously engaged in raising additional sums for endowment, largely for the special purpose of providing income with which to pay increased salaries. The rapid rise in the cost of living during the recent worldwar threw into bold rehef the inadequacy of the salaries paid to college and university teachers. There was for a time no inconsiderable danger that the teaching profession would be seriously damaged. It became necessary not only to bring the salaries back quickly to their purchasing power before the war, but, in justice to the teacher, to place them upon a higher level. Harvard undertook a campaign for $15,000,000, Princeton for $14,000,000, Cornell for $10,000,000. Every possible effort was made to interest and inform the public as to the situation. Mr. John D. Rockefeller gave to the General Education Board the sum of $50,000,000 in the hope that the board would decide "to use the principal as well as the income as promptly and as largely as may seem wise for the purpose of co-operating with higher institutions of learning in raising sums specifically devoted to the increase of teachers* salaries." It is probable that this movement will add another quarter of a billion of dollars to the endowment of American colleges and universities within the next five years.

ORIGIN AND SUPPORT 5

A few concrete examples will illustrate the rapid development which has Just been sketched. Yale University, over two hundred years old, had in 1900 an endowment of $4,942,166. Its endowment is now $25,677,010, and when existing pledges are collected will be $31,759,910. The endowment of Harvard University has increased since 1900 from $12,614,448 to $48,546,156. It will possess over $50,000,000 when its $15,000,000 fund has been fully paid in. Brown University, with $1,252,734 in 1900, now has $5,954,239. The endowment of Amherst College has increased in the same period from $1,679,252 to $4,825,015, and that of Smith College has risen from $707,786 to $4,243,000. Moreover, the funds of the last three colleges will be further increased when the present campaigns are completed. In the Middle West, the West, and the South, the same phenomenon may be observed, though the amounts involved are, with one exception, smaller. Grinnell College in Iowa had in 1900, $597,511 of endowment; in 1921 it had $2,477,483, and when it has succeeded in collecting all outstanding pledges it will have $3,021,580. Carleton College in Minnesota has seen its endowment increase from $422,494 to $1,617,068, and will see it increase to $3,136,632, when all outstanding pledges are collected. The new University of Chicago, founded in 1890, had in 1900 an endowment of $5,938,450, and now possesses an endowment of $31,537,826. These large sums added to endowment by no means represent the total increase in the resources of endowed colleges and universities. There have been correspondingly large sums spent for new buildings and equipment. In order to provide for the larger numbers of students now seeking higher education, it is still necessary to procure additional resources, partly for buildings and equipment, partly for maintenance.

To complete the picture and to show that the problems of accounting and management are not limited to endowed institutions, a brief statement should be made regarding the resources of tax-supported institutions. These institutions, some of which were founded toward the middle of the nineteenth century, have had their main development since the close of the Civil War. They are found chiefly in the western, the middle-western, and the southern states side by side with large or rapidly growing endowed institutions. Deriving their support either from the appropriations of state legislatures or from a fixed state tax, and in part from federal aid, their current annual budgets run in some instances to upward of $5,000,000. The annual budget for 1921-22 for current expenses of the State University of Illinois (exclusive of new buildings) is $4,658,726; of Wisconsin, $4,841,965; of Minnesota, $5,886,739; and of Michigan, $4,406,429. It is obvious that all these institutions, tax-supported and endowed, are large enterprises, the business management of which requires training and capacity of a high order.

It will be conceded that endowed colleges and universities in the United States have not generally developed sound and adequate accounting systems. The reasons for this unfortunate condition are not difficult to discover. For many years these institutions lived a hand-to-mouth existence- Gifts and contributions were at once swallowed up in the payment of salaries or bills not infrequently overdue. A record of cash receipts and disbursements was usually kept, and as a rule httle more. In many cases the president did not fully appreciate the need of careful account-

ORIGIN AND SUPPORT 7

ing and rarely had at his disposal funds with which to pay a competent bookkeeper. The trustees and friends of the college, though often successful men of affairs, accustomed in their own businesses to rigid financial accounting, trusted completely the college administrators and rarely insisted upon the adoption of strict business methods in the management of college finance. When they did undertake to conduct the financial affairs of the college in a businessKke way, often the best they could do was to impose upon the college an accounting system which, though admirably adapted to the needs of a commercial concern, was not applicable to an educational institution. A college is not a corporation operated for financial profit. Seldom, if ever, does its income even in this day permit the accumulation of a depreciation reserve for replacing buildings. In consequence, a commercial system of accounting which shows with meticulous care accruing income, building depreciation, etc., does not fit the peculiar financial problems encountered in the administration of an endowed institution dependent for its support and expansion upon gifts.

The accounting situation in colleges and universities is therefore a decidedly mixed one. Many institutions still use the primitive methods inherited from their days of poverty and small things. A smaller number, endeavoring to improve matters, have employed systems unsuited to their needs. Relatively few colleges are operated upon the budget system. Illogical classification and unsuitable terminology too often characterize the financial statements and the ledger accounts. Complete balance sheets are rare. Vague conceptions of the nature of endowment are quite common, and capital receipts and expenditures are not carefully distinguished from receipts and expenditures for current purposes. In consequence, the resources are often impaired, and misleading statements are made regarding them. Terms such as '^resources, " "assets and HabiHties," ''surplus, " which have a definite meaning, are often incorrectly used, with the result that even those connected with these institutions do not fully understand their actual financial situation.

The whole problem is not an altogether simple one to solve. The modern college with its rapidly growing endowment, its largely increased investment in buildings and equipment, and its more and more complicated business problems cannot be efficiently conducted, unless its staff includes someone versed in sound business principles. The officer in question must understand how to superintend the investment of funds, how to account for them, how to make and operate a budget which will tend to keep expenditures within the limits of income, how to prepare a balance sheet which will show, fully and clearly, the financial status of the institution, and finally, he must realize that college operation differs from the operation of a commercial or manufacturing concern. The larger colleges have not hesitated to incur the expense involved in maintaining an efficient financial department, realizing that it is the wisest thing to do, but as a matter of fact it is perhaps even more important that the smaller college, with its limited resources, should be conducted upon the most efficient business basis possible.

During the last few years the author has carefully examined the financial management and accounting of several hundred American colleges and universities. He can testify unreservedly and emphatically to the fact that practically without exception the financial affairs of these institutions are honestly conducted. Differences of opinion

ORIGIN AND SUPPORT 9

and errors of judgraent have been, of course, encountered, as they are encountered in the most carefully and competently managed business concerns. But not only are the administrators of the American college honest men, but they go too far as a rule in endeavoring to make a dollar do more than a dollar's worth of service, especially in the matter of salaries. Honesty of conduct, however, is not enough; there must needs be efficiency. Accounting methods employed are often poorly adapted to academic uses, and in their zeal to render public service college administrators have at times involved their institutions in financial difficulties through attempting more than they have the means to perform. Having no proper methods of accounting they are not infrequently surprised to find their institutions in serious financial difficulty. Common defects of academic financing and accounting may therefore be briefly summarized as follows: (1) the use of accounting systems unsuited to college needs, which fail to portray the actual financial status of the institution and, (2) the absence of a budget system which tends to keep expenditures within the limits of income.

Chapter II Receipts Sources

The receipts of endowed colleges are of three principal kinds: (1) student fees, (2) income on endowment, (3) gifts.

Some colleges also derive income from the operation of dormitories, dining-halls, bookstores, and other activities, but in these cases the net income only is available for their educational work. They occasionally receive income from the rental of college buildings, from the sale of obsolete and not needed equipment, and from miscellaneous sources.

student fees fall into four classes: (1) fees for tuition; (2) fees for laboratory materials and supplies; (3) fees for incidental expenses and library facilities; (4) fees for breakage, damage, and loss.

The fee for tuition is primarily designed to cover what is thought to be the student's share of the cost of furnishing the education which he receives. It is a generally accepted principle that a student should not be required to pay what it costs the college to provide his education, else students with slender resources may be deprived of the advantages of college training. Higher education should be conducted on a democratic basis. No definite practice has been followed by colleges in determining the part of the cost of education which should be borne by the student. Some college administrators have expressed the opinion that tuition fees should cover the amount of salaries paid for instruction, leaving the administrative expenses of the college and the cost of operating and maintaining its physical plant to be provided from other sources. The amount paid by the better-endowed colleges for instruction approximates about one-half the total expense incurred for strictly educational operation. ^ The amount received from tuition fees rarely equals or even approximates the sum paid for instruction. If the opinion stated above were to be adopted as a basis, the tuition fee should equal the salaries paid to teachers divided by the average number of students in attendance. But in fixiag its tuition fee the endowed college does not usually proceed upon this principle. It takes other things into consideration. The class of student it attracts, their economic status, the competition of neighboring colleges and of tax-supported institutions, and the desire to offer students of its own denomination the advantages of higher education under conditions which are beheved to be most favorable, are more often the deciding factors.

In Bulletin No. 30, 1918,2 of the Department of the Interior, Bureau of Education, a committee reporting on the resources and standards of colleges of arts and sciences stated that '^Institutions should strive to bring their endowment to the point where it will yield at least half the money needed for annual expenses." If this goal were attained, the other half of the annual expense would have to be provided from other sources, of which tuition fees are the chief.^

' "Strictly educational operation" includes administration, instruction, and the operation and maintenance of the physical plant of the college. The cost of the operation and maintenance of dormitories, dining-halls, and special schools is excluded.

Almost without exception college administrators prefer to keep tuition fees as low as possible. The increasing costs of college operation since the European war, however, especially for the operation of the physical plant and for the higher salaries which are being paid as a result of the efforts to put the salaries of the faculty on a basis commensurate with the increased cost of living, have impelled them to increase fees. If a fixed relation should exist between salaries and receipts from tuition the tuition fee should be increased as salaries are increased. There can be no sound objection to at least a proportionate increase in tuition fees, especially if provision is made for scholarships and for loan funds to care for worthy students unable to pay the higher rate.

The fee charged for laboratory materials and supplies is ordinarily supposed to be equivalent to their actual cost, including service, and is levied to reimburse the college and to put the courses in science requiring laboratory work financially on a par with those in the humanities.

Colleges also often impose specific fees: a matriculation fee, paid at the time of admission, which is supposed to cover the expense incurred in passing upon entrance credits and enrolling students; a graduation fee, paid when the student receives his degree; a library fee for the use of the library, which is usually devoted to the purchase of books; and an incidental fee to help defray the overhead cost of administration. There may be also athletic fees, locker rental fees, and fees for college concerts.

Breakage and deposit fees are exacted in advance to protect the college from loss arising through loaning students scientific material and keys, aiid from wilful damage to property. Any portion of the fee unused is refunded to the student at the end of the term.

Fines are imposed for failure to observe rules regarding registration, payment of fees, and the return of books and materials.

ADVANCE PAYMENT OF FEES

Students should be required to pay all fees within the first few days of the quarter or term, or to make satisfactory arrangements for their payment. This rule, announced by most colleges, is more honored in the breach than in the observance. It should, however, be followed strictly, for its observance operates as much to the advantage of the student by training him in good business principles as it benefits the college by the prompt receipt of cash, by eliminating the expense of collection, and by avoiding bad debts. The reason most frequently given for not insisting upon prompt payment is that it might work a hardship on the poor student and might exclude him from college. Experience shows that the enforcement of the rule has not had this effect, for almost without exception a student earnestly desiring an education will in some way obtain the needed money.

The enforcement of the rule is good policy, for the student whose obhgations are settled has a more wholesome attitude toward his college than one who is in its debt. If fees are not collected promptly the student is more likely to be captious and critical and offer complaints of various kinds as excuse for non-payment. Experience has shown that it is difficult to collect fees after the term has expired . A comparison between two institutions is instructive : One, a middle-western college, pursues a lenient policy; it does not insist upon prompt payment of fees, but allows its students time in which to pay their tuition, board, rent, and athletic fees, even furnishing several of these items at an immediate outlay of its own cash. It always has a large amount uncollected, a considerable proportion of which is never paid. The University of ,

in the same section, with a very much larger number of needy students, makes its collections in advance, exceptions being extremely rare, and in those cases it takes promissory notes bearing interest. No difficulty in enforcing the rule is experienced by the latter institution. Incidentally, the former teaches its students to be lax, the latter trains them to be prompt and businesslike.

INCOME ON ENDOWMENT

Income on endowment forms a large part of the receipts of an endowed college. It consists of interest on bonds, mortgages, and loans, dividends on stocks, and rentals from real estate in which the endowment funds are invested. It is perhaps impossible to say what particular proportion of the total income should come from endowment, but attempts have been made to prescribe the minimum amount of endowment which a college should possess. For example, the Indiana State Teachers' Training Board places as its standard in this respect for accrediting institutions a productive endowment beyond all indebtedness, of $500,000, or in lieu of this endowment a fixed annual income, independent of all student fees, of not less than $25,000. The Committee of the Federal Bureau of Education, to which reference has been made,^ held that the ^'minimum endowment of a college of arts and sciences should be $250,000." The North Central Association of Schools and Colleges requires a minimum endowment of $200,000 before classification is given an institution as an accredited college. This standard was established twenty-five years ago and is recog-

1 p. 11 of thisSchapter.

nized now as wholly inadequate. The Association of Colleges and Secondary Schools of the Southern States recently changed its minimum to $500,000. Colleges, however, try to get as large an endowment as possible so as to make their foundation secure and enable them to operate without a deficit.

With the exception of the fees received from students, an endowed college gets its income either from gifts and grants or from funds previously donated. Funds for endowment, for buildings, for purchase of land, for additional equipment and books, and provision for deficits, are procured through gifts and bequests. Gifts fall naturally into two classes: those which add to the permanent assets of the college, and those which are designed for current uses. They may be made by individuals, by groups of individuals and classes, or by synods, conventions, and conferences, but, whatever the source, they should be suitably acknowledged and properly recorded. Those which add to the permanent assets should be recorded among the capital assets, and those available for current expenses should be recorded among the current receipts.

SiQce endowed colleges depend so largely upon gifts for their maintenance and expansion, special efforts are made to stimulate them. In addition to the work which the president of the college does in this direction, an oflacer is often regularly employed, called a field agent or financial secretary. He visits the alumni and friends of the coUege, keeps them informed of its needs, and urges them to contribute to its funds. He conducts a campaign of education through correspondence, pubhcations, and news items. Special emphasis is now being placed upon annual contributions for current expenses. Many alumni and friends who cannot give a large sum for endowment are often willing to make annual contributions. However, uncertainty as to whether these gifts will be continued year after year makes it difficult for the college to determine its financial policy in advance, whereas if its needs are met by endowment, it knows precisely on what it can count. On the other hand, dependence on its constituency for annual contributions may keep it in closer touch with its friends and may discover others, while requests for funds may add new students as well as income. Since the college needs income it resorts to that method which to the fullest extent and in the most dependable manner provides additions to its current funds.

Gifts for current purposes are most useful if no particular conditions are attached to them. Donors often make gifts for prizes, lectures, or other restricted purposes, which, however useful, do not help the college to meet its pressing regular expenses. Moreover, it frequently happens that the acceptance of a gift for a special object involves the college in additional expense not covered by the amount of the gift. If so, provision should be made for meeting the additional expense before accepting the gift. Gifts for recitation buildings, libraries, and laboratories are examples. The upkeep and maintenance of such buildings cause an annual expense which often requires the income of a fund nearly equal to the original gift. In this sense every such building is a liability as well as an asset. Before accepting a gift for such a purpose — at any rate before taking any action toward the end contemplated by the gift — the college should obtain an endowment to provide for the annual expenses which its acceptance involves, or assure itself that in some other way it will have ample income for the purpose.

Besides the efforts made by the college authorities to obtain contributions, alumni maintain organizations for the same object. Classes and individuals are urged to be constant in helping their Alma Mater, especially by making annual contributions. Alumni often reserve the right to designate the objects to which their gifts shall be applied, but these, like other gifts, are most useful if absolutely unrestricted. An excellent example of the way in which alumni may assist by annual contributions is furnished by Yale University, whose graduates contribute yearly, through organized class effort, approximately half a million dollars to the University treasury. This is equivalent to the income at 5 per cent on an endowment of $10,000,000. Nor does the graduate feel that his annual subscription, large or small, finally discharges his obligation to his Alma Mater. On the contrary, giving to his college, once established as a habit, is likely to become a passion, as well as a duty. Large gifts and bequests may ultimately result from annual contributions, which, small at first, become larger as the graduates prosper.

Chapter III

A college expends its money for two general purposes: (1) for land, buildings, and equipment; and (2) for expenses of operation.