There Are Buckets and Buckets of Money

In times of scarcity, thoughts and queries focus on the money in hand and how to employ it effectively. On campuses everywhere, constituents question vociferously, “Why are we spending money on that when we urgently need money for ________?” or aggressively, “There is money in those accounts! Why can’t we use it for ________?”

Likely, the answer received from the business officer is “We can’t use that money for that purpose.” Hard stop. Primal screams ensue as “the wall of no” seems to shield the coffers as if they were the Black Gates of Mordor. But why?

The reason some money can be used in one way but not in another depends on how the money is received, the source of the funds and associated restrictions (time, purpose, amount). Visualize the concept as “buckets of money.” Each revenue stream has its bucket. The bucket’s structure holds the contents together in one place for specific purposes and periods. Defining these buckets enables the institution to account for the monies accurately and ensure compliance with funders and state and federal law. While many elements are the same for private and public institutions, the following pertains primarily to state institutions.

Generally, there are five buckets (or fund categories): education and general (E&G), auxiliary, capital, private, and reserves.

Education and General Funds

Filled and emptied in nearly equal measure each year, this bucket holds monies from tuition (and state and federal appropriations). Funds must be used to support the institution’s primary mission (instruction only) in the year received. Therefore, the U.S. government affords the institution nonprofit status, and the institution is not required to pay taxes on the revenue received restricted to instructional purposes.

These are a few examples of what the E&G fund supports:

• Compensation for faculty and staff members academic departments and supporting functions
• Instructional support such as libraries, labs and tutoring centers
• Related overhead expenses such as utilities and maintenance for academic buildings
• Scholarships

Auxiliary Funds

This bucket contains monies generated by providing merchandise, services and other conveniences typically found off campus. Revenue from room and board, dining services, the bookstore, parking fees, certain student fees, medical facilities, and special activities ticketing (athletics, concerts, etc.) is included. Having them on campus benefits constituents, creates an enhanced residential college experience and provides an opportunity to generate additional funds.

Additionally, the auxiliary fund may include monies generated from other commercial ventures such as hotels, apartments and retail rental property managed by a separate real estate foundation formed to generate revenue for the institution.

Some of the revenue in auxiliary funds may be taxed by the IRS, others not. Different from E&G funds, the auxiliary fund bucket purposely is filled more than emptied to save for future expenditures such as capital expenditures related to the auxiliary function and other investments into institutional operations, as well as reserve funds (see below).

Some of the noninstructional operations auxiliary funds support include:

• Student and campus life staff compensation and related costs
• Facilities (parking, residence halls, student union, recreation)
• Student government, clubs and other student groups
• Dining and food services
• Athletics and student recreation staff and operations

The COVID-19 pandemic greatly impacted auxiliary revenue. There was little or no income from the operations mentioned above with students learning remotely. Without this income, many institutions couldn’t pay some employees or repay loans (see capital funds, below), utilities and other expenses related to auxiliary functions. Some institutions may have had funds in reserve, but most didn’t have sufficient funds to cover lost revenue for the length of shutdowns. The federal government’s CARES Act funding prevented some institutions from permanently closing.

Capital Funds

Capital funds support building construction, renovations and infrastructure improvement projects. Infrastructure includes heating and cooling, electrical, plumbing, telephone/internet systems, and some furnishings and equipment. Funds may be garnered from state appropriations, commercial (and governmental) loans, bonds, auxiliary revenue, restricted private funds, and/or loans from quasi endowments. (Large sums of monies from unrestricted gifts are often designated by the board as quasi endowments, or endowment-like, as to generate earnings from investing. The corpus may be released in whole or in part if allowed by board policies and vote.)

Lenders, investors, donors or governments restrict these funds. Legally binding agreements establish the scope of work, timeline for completion of work, purpose and repayment schedule (as applicable). Think of capital funds like you would a residential loan—the lender only allows the money to be used for purchasing a residence. You wouldn’t be permitted to start a business and pay employees with the funds.

Private Funds

Private funds (exclusive of loans) are secured via charitable contributions and sponsored agreements.

Charitable (also called philanthropic) contributions are given to the institution without the donor receiving anything of significant value in return. The gift may or may not have restrictions (purpose, distribution and amount), but the donor does not direct the expenditure further after the institution receives the funds. The donor may use the contribution as a deduction on their taxes. By virtue of an institution’s nonprofit status, the Internal Revenue Service considers this revenue nontaxable for the institution.

Sponsored agreements are entered into with an outside entity (i.e., a corporation, a foundation or governmental body). In exchange for funds, the institution provides a deliverable to the external entity such as a body of research, a study, programmatic outcomes or, in certain circumstances, advertising. This revenue is not taxable for the institution, but it is not considered a charitable contribution because the external entity receives something of value.

Reserve Funds

Reserve funds are what they sound like—a bucket of money set aside for emergencies, extraordinary expenses and one-time operational investments. Funds in this bucket typically come from auxiliary fund surpluses. Think of it as a savings account.

Reserve funds are essential for many reasons. Revenue doesn’t come in steadily during the fiscal year; the timing relates to the receipt of tuition and room and board payments. Cash on hand and an institution’s ability to repay debts affect credit ratings. Without having reserves, an institution may not withstand a catastrophic event (like the COVID-19 pandemic).

Some states dictate the amount institutions must hold in reserve (minimum and maximum amounts) based upon a percentage of the total budget. Most institutions set thresholds for the amount in reserve, such as six months’ cash on hand. They could pay employees and bills and service debt for six months if there was no revenue.

Conclusion

In order to move beyond “the wall of no,” constituents must stop imagining business officers as creatures disturbingly referring to the budget as “my precious.” Business officers aren’t calculating villains consumed by holding on to money as if it equated to all the power in the universe. Nor do they intend to provoke irrational behavior and get weird thrills from watching vicious fights occur about funding between departments (at least, I don’t think so?). Their role and responsibility is to follow rules to the letter and ensure compliance with funders.

The “wall of no” points to higher education’s patchwork of funding, the associated complexities of managing these funds and the limited amounts therein. With so many different revenue buckets (as well as associated restrictions and regulations), the financial model affords little flexibility and room for problem solving in times of scarcity. However, finding a smoother pathway to yes depends largely on understanding the purpose and allowable uses of various fund buckets.