Spring 2013 issue of Horizons

COLLEGES & UNIVERSITIES

at times, adjusted information submitted by institutions through the EZ audit process.

The majority of the adjustments that were inappropriately made related to differences between for-profit and not-for-profit accounting regulations, specifically related to endowments, promises to give, post- retirement benefits and property/equipment. In many cases, the report cites instances where the adjustments made by the department were not only applied inconsistently, but were also not compliant with the department’s regulations or Generally Accepted Accounting Principles, and, more importantly, were highly detrimental to the overall all-financial- responsibility test for the institution. 2. Expand Definition of Assets Second, if the department chooses not to modify its definition of total expenses (which is encompassed in the first recommendation), then the primary reserve ratio should be expanded to include all net assets (instead of just the unrestricted ones) in the calculation of an institution’s expendable net assets. institution’s endowment as a component of total expenses, which, during periods of substantial volatility, can have a tremendous impact on the ratios. The report cites the rationale that if such changes in value should be counted as a component of expenses, then the ratio calculation should allow the institution to count the underlying total value of the endowment (in all net asset classes, not just the portion in unrestricted). This rational is further supported by the recent passage (and related adoption in many states) of UPMIFA, which increases an institution’s spending flexibility of restricted endowment assets. The key issue highlighted by this recommendation pertains to the department’s historical insistence to frequently quantify decreases in an

Over half of the institutions that “failed” the test were forced to obtain letters of credit for the next year, which yielded substantial alterations to budgets, reductions of total credit capacity and changes to credit ratings, and, in some cases, postponed scheduled capital improvements. Because the number of institutions failing the department’s test increased so significantly from the prior year (as only a couple dozen schools nationwide had been failing in a given year), the National Association of Independent Colleges and Universities (NAICU) formed a task force to review the situation. In November of 2012, NAICU released a formal report with five different recommendations (including some that highlight the need to retain current provisions of the regulations related to alternative measures when failure occurs) and substantial revisions to the test for the Department of Education to consider. 1. Standard Definitions First, the department should consistently follow its own regulations regarding financial responsibility, and should utilize standard definitions when making determinations of financial responsibility.

The comprehensive review by the NAICU task force discovered that the department has,

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