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Office of President and Provost sets new policy on restricted funds

STANFORD -- Q: What are "restricted funds?"

A: Restricted funds include all money received by the university that is earmarked for a specific purpose. Donors of funds often give money with the intention of supporting a specific activity within the university, and Stanford accepts the gift with the promise that the funds will be used in the ways intended. Restricted funds include gifts from individuals, foundations, and corporations, as well as research grants from various sources. Restricted gifts can be in the form of endowment, where the principal is invested and only a defined payout is used each year, or expendable, where the principal is expected to be spent for the purpose of the gift. Examples of restricted funds are a gift to be used for cancer research, a bequest to endow a professorship, and a grant from a foundation to support a department or school.

Restricted funds also include sponsored research grants, most of which are provided by the federal government. The rules regarding federal research grants are set by law, and therefore the policy changes will not apply to them. Many non-federal sponsored research grants include an amount for infrastructure or overhead costs. The new infrastructure charge will not apply to non-federal sponsored projects unless the indirect cost recovery associated with the grant is less than six percent.

Finally, the revised policies also will apply to "designated funds," which are managed by the schools but which are technically unrestricted. Certain types of special program fees received by schools are examples of designated funds.

Q: What is Stanford changing?

A: The Board of Trustees has changed Stanford's policies on restricted funds in two ways. First, they are requiring that as restricted funds (whether from an endowment account or an expendable account) are used, a portion of the money go to help defray the cost of infrastructure -- primarily building-related operating and maintenance costs such as custodial costs, routine maintenance, insurance, fire protection, and other safety costs. This change will commence with expenditures made after January 1, 1996. A separate utilities charge also will be assessed in each school's budget, a portion of which may -- at the dean's discretion -- be drawn from restricted funds.

Second, on most new expendable gifts received after January 1, 1996, the university will apply any interest earned while funds are waiting to be spent to general university expenses. Expendable funds in hand before January 1, 1996, will receive interest until August 31, 1996, after which any remaining balance will not be credited with interest. Endowment payout that is not spent will continue to be credited with earnings.

Q: Why is the infrastructure charge set at 6 percent?

A: It is impractical to attempt to determine the precise cost of space for any given project supported by restricted funds. Most of our faculty and students work in facilities with many uses -- teaching, research, and many other kinds of activities that contribute to the academic mission. We are unable to measure the amount of time spent on each separate activity in each room and building. We therefore have calculated an average cost of space that can be applied uniformly. The calculation is based on the actual average cost of maintaining space per square foot on campus. It further assumes that the use of space corresponds roughly with the use of various types of funds. The following example shows how the charge is computed using hypothetical numbers:

1. Number of square feet assigned to instruction, departmental research, and administration in the schools: 100,000 net square feet.

2. Estimated annual cost of infrastructure maintenance: $9.28 per square foot.

3. Estimated cost of infrastructure maintenance: $928,000.

4. Percentage of departmental budgets spent from restricted funds (excluding federally sponsored research, for which infrastructure costs are recovered through the indirect cost rate): 40%.

5. Infrastructure costs assigned to non-federal restricted funds:

$928,000 x 40% = $371,200.

6. Total non-federal restricted fund expenditures in the previous year: $6,187,000.

7. Assigned infrastructure costs as a percentage of non-federal restricted fund expenditures:

$371,200/$6,187,000 = 6%.

Q: Will all restricted funds be charged the same amount for infrastructure costs?

A: In general, yes. But there are some exceptions. We will not assess infrastructure costs on funds restricted to academic-year tenure-track faculty salary, or for undergraduate financial aid, graduate (pre-doctoral) financial aid or undergraduate research support. These types of gifts generally offset expenses that would otherwise be borne by the unrestricted portion of the budget. Gifts to student organizations will also be exempt, as will gifts for building projects.

Also, we will not assess the infrastructure charge on any existing fund where the donor has expressly prohibited it. (In some cases we will ask donors to reconsider this restriction, but we will respect donors' past instructions if they are not changed.)

Unlike some kinds of sponsored research indirect cost arrangements, the infrastructure charge will apply to all expenditures, including small equipment purchases.

Q: Why start this now?

A: he financial outlook for universities is changing rapidly. The assumption in the past was that infrastructure costs could be covered by general funds (primarily tuition and unrestricted gifts), while restricted gifts could be used for "extra" programs and projects. But activities supported by restricted funds have come to represent a significant percentage of the university's total activity. They add costs of operation that should not be borne entirely by tuition or other general income sources. They are no longer just "extra." Furthermore, as we look ahead we project that general funds will grow less rapidly than in the past, while the costs of maintaining and improving our infrastructure will continue to increase each year. If we are to maintain long-term financial stability, restricted funds must contribute a proportionate share of the cost of the university's infrastructure.

Q: Do other universities have similar charges?

A: Practices vary widely among colleges and universities, but many universities have some form of a charge on restricted funds. Some institutions take a percentage of each gift "off the top" to help defray costs. Others assess a charge as the funds are used or have other means of allocating costs to projects.

Q: Why the change in interest policy?

A: Restricted gifts are merged with other working cash of the university and managed in a single investment pool. Because of this merged approach, we can diversify the investments to increase the returns and at the same time guarantee that each gift is fully available when it is needed. In the aggregate, investment income is an important source of revenue for the university. However, since most restricted gifts reside in the pool for relatively short periods of time, the returns on individual gifts are small and usually not necessary to meet specific programmatic goals. We will inform donors in the future, therefore, that investment income from their gifts will be aggregated with other investment income and will be available for general university purposes.

Q: Will the change in the interest policy affect all gifts?

A: In general, yes, but again there will be a few exceptions. Gifts that are given for building projects and large equipment purchases (of $1 million or more) will be separately invested so that the interest earned can be devoted to the capital project. Also, existing expendable funds will be credited with interest until August 31, 1996, after which no interest will be credited unless the terms of the gift require it.

Q: I've heard that accounting rules are changing at Universities. How will this affect restricted gifts?

A: Universities and other not-for-profit organizations follow accounting rules established by the Financial Accounting Standards Board (FASB). There has been a general trend in recent years to bring university accounting standards more in line with other kinds of businesses and institutions. One recent change is to require that universities report restricted funds as the "first dollar spent" on their designated purposes. For example, if a gift is given in support of a particular project, any money spent on that project will be assumed to have come first from the gift rather than from general funds. If a balance is left in the project account at the end of the year, it will be shown as "unrestricted." This will not change the total amount of money available to the project, nor will it affect our commitment to use the money in keeping with the donor's intentions. But it will appear from the university's public financial statements that much more of the funds on hand are unrestricted than in the past.

The new accounting rules are only incidentally related to the policy changes at Stanford. They reflect a growing trend toward consolidation of all sources of funds for purposes of financial reporting, planning, and management.

Q: Will there be exceptions to these new policies?

A: In fairness both to donors and other university colleagues, it is important that these new policies be applied uniformly to all gifts and grants.


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