How Universities Work

CHAPTER 8 Finance

69 Chapter 8 Finance While most university conversations focus on issues of academic substance—program content, research results, and curriculum issues, for example—almost every conversation carries a subtext about money. Universities use special words to describe money questions. They talk about “resources” or “program support” when what they actually mean is “money.” Part of this reluctance to talk directly and clearly about money comes from the organizational model of the undergraduate college. In an undergraduate college, students take courses in the humanities , social sciences, and sciences. Their majors differ from physics to fine arts, from American literature to political science . The college usually charges all students the same tuition regardless of the cost of the programs or courses they take. In this model, the college distributes its money not in relation to what individual departments earn but primarily in relation to the cost of the academic design of the curriculum. As a result, the key issue about money is indirect. If a guild’s academic specialties are central to the college’s academic design, the college will pay for them. The guilds, recognizing this, spend their 70 HOW UNIVERSITIES WORK time arguing about academic design. This makes the conversation sound philosophical and academic, but it is actually also a surrogate conversation about the distribution of money. Faculty, too, prefer to think of their work as mostly unconnected to money, although they have strong opinions about the importance of a living wage. Many academic people express their disdain toward the issue of money rather inconsistently. Most faculty do not think that the university should be driven by financial issues and dislike the notion of the university as “business,” but most faculty also think that the university’s money should be spent on their priorities for “support.” Indeed, the faculty expect the institution (through its administrative shell) to find the necessary resources (money). The faculty also assume it is their obligation to criticize the internal distribution of those resources without necessarily assuming an obligation to increase the university’s ability to earn money or to fully understand the financial structure of the institution. These attitudes operate in the abstract, for in real time and with real people, faculty are as carefully clear about money as anyone else. Faculty know what things cost, they know what the university pays other professors like themselves, they know what it costs to attract a graduate student, and they know how much it will take to set up a research laboratory. What they often do not know and frequently choose to ignore is the structure of the university’s finances. This ignorance is variable and often encouraged by administrators . If the faculty do not understand the financial structure of the university, they will surely criticize everything the administration does, but administrators will find it relatively easy to deflect this poorly informed criticism. Financial Reporting University financial reporting contributes to this state of useful confusion by focusing on the management of individual funds, Finance 71 or pots of money, and not directly on the income and expenses of the institution. This fund accounting can complicate university understanding because it obscures the key relationships among the income sources and expenses associated with university work. It makes the underlying financial structure of the institution and its programs less obvious than would other forms of financial accounting prevalent in commercial business enterprises. Universities, as not-for-profit organizations, do not focus on reporting how much profit they make during the year. Instead, universities must tell various organizations and individuals how the institution used the money that came from each identifiable source. Universities provide an accounting of their overall financial health and generate Statements of Net Assets similar to traditional balance sheets and other financial documents, but they organize their account books primarily around specific funds designated for particular purposes. For example, if a donor gives money to support student scholarships, the university must put that money in an identifiable fund. Then, each year, the university makes an accounting of that specific fund to determine whether the university spent the donor’s money on student scholarships. If the university spent the money on scholarships, it satisfies the fund accounting requirements. If the university has a fund for salaries, it must spend the dollars in that fund on salaries; if it has a fund for purchasing equipment, it must spend the money on equipment . At the end of the day...