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Part of the Commission's charge is to help design an accountability structure for financing publicly supported higher education in Virginia. Since 1994 the "accountability relationship" between institutions of higher education and the central agencies has been evolving - through what has been called " financial management decentralization".
Today seven institutions (UVA, VPI, JMU, ODU, VCU, VMI W&M) disburse all payments from institutional bank accounts rather than the State Treasury. GMU disburses payroll, Radford disburses vendor payments and other non-payroll items.
All higher education institutions are eligible for decentralization. Those not mentioned above have elected not to request this authority. Decentralization has fundamentally altered the traditional internal controls which provide accountability for the rest of State government. Appropriated cash is still drawn from the Treasury to cover institutional disbursements, but it is reported to the Comptroller only at highly summarized level of detail. The purpose of expenditures cannot be independently verified, other than through a post audit, which may be as much as 18 months after the fact and which is designed to test for the material accuracy of the financial statements rather than for adherence to administrative or legislative policy or the use of "best practices".
Decentralization today is still legally a pilot because the only authorization for it is language in the Appropriation Act which has been there since 1994. Annual reports have been filed on these "pilots" with perhaps the most comprehensive issued by the Secretary of Finance in 1997.
Three things can be observed from the five year's of experience with decentralization. First, the nine institutions decentralized for financial management are capable of performing that role effectively. Over the past five years there have been no unusual audit findings related to fraud or serious breaches of proper internal control. There have been no appropriation deficits or unusual cash flow issues. For those limited areas where decentralized institutions continue to report performance statistics to the Comptroller, the decentralized institutions have performed at acceptable levels.
Second, evidence of measurable savings from increased efficiency as a result of financial decentralization is anecdotal at best. Nothing more than limited opportunities for staff reallocations or small cost savings have been presented by the institutions in any of the annual progress reports. However, several decentralized institutions have implemented integrated management information systems on their campuses to include financial modules as well as purchasing, human resource and other components. The effectiveness of these integrated systems could be significantly reduced if the institution were not decentralized.
Finally, today it is not realistic to view the nine decentralized financial operations as pilots. Not only is there little obvious to be gained by the thought of "recentralization", but the cost to the institutions of replacing five years worth of modifications to computer systems, organizational structures and business processes to realign to the central model would probably be prohibitive. Therefore, it is appropriate that financial decentralization for institutions of higher education now be recognized in the Code of Virginia with the proper balance between institutional and State priorities.
There are two important issues today which can contribute to achieving this proper balance. First, financial decentralization should be authorized in law but with a broader and more specific role for the Boards of Visitors. Second, the question on "local funds" must be resolved.
The Boards of Visitors for each institution should be directly and substantively involved in certifying the institution's continued readiness to manage institutional finances effectively. This certification should be renewed annually as part of the external audit process. Training for Board members will be crucial for such responsibilities as reading and understanding financial statements and understanding the strengths and limitations of the accounting systems used by the institution. Training will also be required on the various statutes that govern specific fiscal activities and will continue to apply to the institutions, such as the requirement that state agencies pay bills on time and take steps to collect all amounts owed to the institution. Finally, training will be needed on the importance of accurate and timely financial reporting that, if not done well, could jeopardize the Commonwealth's audit opinion and bond rating.
Boards should also establish and use audit committees and require that the institution employ a full complement of internal auditors. It would be unwise to believe that the annual external audit will have the scope of review or timeliness of oversight to afford the Board assurance that established policies, procedures and controls are be adhered to. It would be reasonable that Boards be required as a condition of decentralization to provide the Governor and the Chairs of the House Appropriations and Senate Finance with copies of all internal audit reports received by the audit committee of the Board.
At an earlier meeting of this Commission I briefed you on the issue of local funds. These are approximately $140 million in annual institutional revenue (this does not include foundation money) which is not deposited into the State Treasury and accounted for on the books of the Comptroller. There continue to be serious doubts about the legality of this practice. The Constitution requires that all revenues of the Commonwealth be deposited in the Treasury and not disbursed without an appropriation. The Code has a similar provision. Most of these funds are from the operations of auxiliary enterprises which other institutions have always considered State revenues and deposited into the Treasury. Today there is not much uniformity in how the institutions handle these funds.
Basically, we need to go one way or the other on how to view institutional revenue. I know there are many who argue for directly depositing all funds received by each college into local bank accounts. This would eliminate all central oversight of these monies including controls on legislative appropriations. It also could raise questions with bond rating agencies because they take great comfort in knowing that even bonds based solely on an individual institution's general revenue pledge are still subject to State accounting and legislative review.
If the policy decision is not to accept local deposit of all institutional revenue (even if this were found constitutional), then language should be considered to require that all monies collected by the institutions should be deposited into the Treasury. An exception could be structured for money held by the institution in a trust capacity such as student club money or money on deposit for a student's campus purchasing card but not yet earned by the institution.
In summary, financial management decentralization has been a success, in that it has not failed, and has offered institutions flexibility to organize their individual business processes to best support their needs. But the basic elements of constitutional accountability remain, i.e. all cash is recorded in the Treasury (with the continuing problem of "local funds"), and all payments made from the Treasury are pursuant to an appropriation. Decentralization should be incorporated in statute but with an expanded and strengthened role for the Board. The current practice for managing "local funds" should be eliminated.
Posted: July 16, 1999
By The Educational Policy Institute of Virginia Tech
sjanosik@vt.edu