Read the other articles in our three-part series about trends in higher education. Part one Part three
The first part of this feature covered a host of industry trends. Part II continues with a review of rising regulatory scrutiny, demographic changes that come with generational transitions, board relations and benefit adjustments amid economic fluctuations, and how to take advantage of the philanthropy boom.
Rise in regulatory scrutiny
Department of Education – program reviews, accreditation, and “gainful employment”
The U.S. Department of Education (DOE) is answering the White House’s call for accountability — not its own accountability, but yours. That means it is doubling down on its efforts to seek out and penalize institutions that fail to comply with the 600+ federal regulations governing student financial aid, even if that failure is unintentional or results from honest misinterpretation of the rules.
The DOE has publicly stated that if an institution does not have any findings in its annual federal audits over a period a few years, then it will likely be subjected to a program review. Why? Because a lack of findings is suspicious. It knows its own rules are too cumbersome to adhere to without blemish. And this threat isn’t idle; the DOE has added the peoplepower and resources to make good on its word. Our practitioners at CLA have indeed seen a measurable uptick in onsite program reviews and DOE contact.
Accreditation is caught up in the DOE’s overall accountability drive. Programs or certifications used to be casually approved via a phone call or e-mail. Re-accreditation was more of a formality, but now it has become an intensive process. Many schools have been caught off-guard when they are notified that their current programs have not been previously “formally” approved and that the federal aid given to their students should be returned. We encourage our clients and others in the industry to review their current accreditation and correct any issues before a formal review is scheduled.
The DOE is also preparing to enforce the new federal regulations for gainful employment and will soon be issuing its related audit guide. It now determines the for-profit institution’s success in equipping students with the “ability to pay” back their federal loans. Some nonprofits will have to adhere to these rules as well, depending on the types of programs and certifications they deliver. There are some indications that the gainful employment regulation will eventually apply to all schools — with incalculable impact on the entire industry.
Regulatory hot spots to watch for
IRS, state, and local regulators are compliance sticklers on a host of complex issues these days. Whether your organization is established as a nonprofit, governmental, or proprietary institution, in our practice we are seeing regulatory scrutiny related to these matters — and we recommend you pay extra attention to complying with them:
- President’s residence – Many colleges and universities house their presidents and other employees on campus on a tax-free basis. Recent IRS actions have muddied the waters on this issue, denying tax-free treatment even though compliance seemed to be in order. It would be wise to take a second look at your housing policies and document compliance with the IRS’s guiding rules.
- International student-workers – If your school employs non-resident aliens as student workers, it’s up to you to ensure they have a proper visa, review country treaties, report withholdings, and issue the required tax forms to the student. Most of the forms are different than what you would issue to a U.S. resident.
- Foreign vendors – Many institutions are not obtaining the appropriate W-8 forms when it comes to foreign vendors. If yours fails to withhold on payment to a foreign vendor, you could be stuck with a tax bill after the funds have left the bank.
Nonprofit and governmental institutions should also take care to address the following issues:
- Unrelated business income – Revenue from sources not directly tied to your school’s exempt purpose is considered unrelated business income and subject to tax scrutiny. It often comes from your school’s fitness and recreation centers, sports camps, facility rentals and usage, advertising and royalty agreements, and alternative investments, among other places.
- State-regulated activities – States and municipalities are cracking down on schools, too. They are looking closely at schools with adjunct professors, recruiters, or other employees residing outside of their home states and making inquiries about sales and use tax obligations or charitable solicitation registrations. They are also keenly interested in alternative investments and business partnerships.
Inevitable leadership transitions
In Part I of this feature, I noted that radical change in student demographics. You can also expect a significant shakeup in the makeup of your employees. High-ranking, long-term, and key people are retiring now or will be very soon. What happens when they depart? Will they take their institutional knowledge and know-how with them? Or will they leave it in capable hands before they go?
That depends on how well you prepare. Many of the individuals in their current positions are doing the same jobs they have done for the past 10 to 20 years. They know where to unearth the secret stashes in a budget crisis, for instance, or how to subdue faculty reactions to bad news. They deeply understand higher education, and you need to extract that wisdom from them and share it with their successors.
But while you capture that knowledge before it heads to the vacation homes, golf courses, and volunteer ranks for good, leave room for the younger generation to put their own stamp on the industry. Most of us agree that higher education needs a variety of operational reforms. In my practice I am constantly astonished and heartened by the brilliance and ingenuity of my younger counterparts, especially in technology. Pass on the necessary institutional knowledge, but give these up-and-comers the freedom to make the kinds of changes you never thought possible.
Board relations in times of economic turbulence
Traditionally, boards have graded leaders on the institution’s financial successes and failures of a given year without consideration of operational outcomes — and this trend worsens in economically trying times. You can help them better understand the relationship between the two — and what you can and cannot control — by delineating the financial picture through financial statements that show both operating and non-operating results separately, and copy the structure of the internal financial reports into audited financial statements so the board is trained into reading the results on a different level.
Imperiled employee benefits
Higher education employees haven’t been compensated at quite the level as those in private industries and at public companies, but their benefits have often been structured to make up for some of the disparity. Now those benefit programs are vulnerable to regulatory pressures that could ultimately impact the people who depend on them:
- In the past five years, almost all 403(b) plans have endured an annual audit process, and noncompliance is rampant in many of the current plans, sometimes resulting in penalties.
- The IRS and DOL are reviewing individual retirement plans for high-ranking officials and employees for noncompliance.
- The Affordable Care Act has impinged the generosity of many institutional health care plans.
- Necessary cost-cutting measures often start with employee benefits.
It will take some creativity and program reconstruction to maintain the benefits that have helped attract and retain your institution’s talent.
Philanthropy boom, continued
The wealth-transfer tsunami we discussed in Part I of this feature is your opportunity to inherit the windfall. Alumni and other donors are leaving what we call “whale” or “mini-whale” gifts to higher learning institutions as a way of investing in future generations and leaving their legacy behind. You can make your institution more attractive to donors with alternative giving structures such as annuity options that provide the donors returns on their investments, or expanding into trusts, stocks (even closely-held companies), bequests, buildings, land, and many more.
How we can help
Administrators and educators need solid data, a strong vision, and guidance to position schools for long-term success. CLA professionals are always available to discuss your institution’s goals and the issues of the day and, with your assistance, can develop business models and offer solutions rooted in industry best practices.