Supporting the educational mission of California s State Universities. Prepared by Auxiliary Organizations Association

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1 Prepared by Association February 2012

2 Overview What are they? Why were they created? What are the authorized function/roles? How they operate? Current issues impacting auxiliary organizations Association (AOA)

3 What Are They? Separately organized legal entities (currently 85) created to perform services and functions of benefit to the campuses 501 (c)(3) nonprofit public benefit corporations First auxiliary established in 1922 the Fresno State College Association Authorized under Education Code (State of California) Section et seq. Must Operate in Compliance with Title 5, California Code of Regulations

4 May only provide functions designated and approved by the Trustees of the California State University (CCR, Title 5, Section 42500) Must have an Operating Agreement with the CSU (five-year term) Must be fiscally viable, self-supporting, and have established reserves and a reserve policy Provide operational flexibility and support to the campus

5 Compliance Law: Nonprofit Corporations Code Education Code Title 5 (CCR) Internal Revenue Code and Revenue and Taxation Code Recent Compliance Requirements: Nonprofit Integrity Act of 2004 sets operational requirements and financial standards (i.e. Audit Committee requirements: $2 million or more in revenues, executive management compensation: CEO (ED) and CFO (Director of Finance), and rules when using commercial fundraisers and fundraising counsel) New IRS Form 990 McKee Transparency Act (January 1, 2012)

6 Governing Documents Articles of Incorporation filed with Secretary of State s Office Board adopted Bylaws set internal governance structure and alert directors to laws affecting organization IRS Form 990 Filing with the Registry of Charitable Trusts (AG) Board adopted Policies and Procedures (Board Handbook)

7 Even though auxiliary organizations may be organized as corporations, they are first and foremost auxiliary organizations of the CSU and must therefore operate pursuant to the specific statutes and regulations applicable to auxiliary organizations. Excerpts from Education Code 89900, Title 5 (42402), and Executive Order 698

8 Why Created? There are currently 85 CSU auxiliary organizations. These auxiliary organizations exist: To provide the fiscal means and the management procedures that allow the campus to carry on activities providing those instructional and service aids not normally furnished by the State budget, and To provide effective operation and to eliminate the undue difficulty which would otherwise arise under the usual governmental budgetary, purchasing, and other fiscal controls, and To provide fiscal procedures and management systems that allow effective coordination of the auxiliary activities with the campus in accordance with sound business practices (Title 5, California Code of Regulations, Section 42401)

9 CSU Requirements Must maintain recognition as an auxiliary in Good Standing Subject to compliance audit by Trustee auditor (every three years) Upon dissolution, assets revert to a successor organization approved by the campus president and Chancellor Campus president is responsible or ensuring expenditures are in accordance with Trustee policies Campus CFO is the single campus officer designated to ensure auxiliaries maintain sound systems of internal controls and remain in compliance with legal and regulatory requirements, including nonprofit law

10 Excerpts from Education Code , 89756, , and Title 5 (42402) Supporting the educational mission of A campus President is directly responsible by State statute "...for ascertaining that all expenditures..." by auxiliary organizations "...are in accordance with policies of the trustees,..." and to "...require that auxiliary operations operate in conformity with policy of the Board of Trustees and the campus." The campus president shall "be responsible for the propriety of all expenditures, and the integrity of the financial reporting, made by auxiliary organizations. For the campus president to exercise his/her responsibility over the entire campus program, each auxiliary organization is required to submit its annual budget(s) and program(s) for approval to the president. In reviewing the budget, the president may instruct the auxiliary not to implement a specific program or expenditure if it is determined not to be consistent with Board of Trustee policy or campus policy.

11 Executive Order 1000 Pay for direct costs plus an allocable portion of indirect costs associated with facilities, goods, and services provided by the University funded from the General Fund (CSU Operating fund) Costs are determined in accordance with a written cost allocation plan approved annually by the campus CFO University can recover costs with cash and/or a documented exchange of value and in-kind consideration. Auxiliary funds can transfer to the University, but University funds cannot be transferred to the auxiliary Auxiliary employees time can be donated to the University, but the cost of University employees must be reimbursed

12 Executive Order 1059 Campus establishes which of the permissible functions and activities will operate in its auxiliaries (Operating Agreement, MOU s, contracts for service) Governing concept in making a decision about proper placement of funds is Ownership Authority to sign related contracts Risk of business loss Legal responsibility and liability exposure Fiduciary duty Policies that will govern the conduct of the program Administrative control over expenditures

13 Ownership of an activity is NOT necessarily evidenced by which entity: Pays the employee or has signatory for the program Owns the facility where the activity occurs Has programmatic (i.e., subject matter) control over expenditures It does not matter if university employees, facilities or other resources are involved in the activity, so long as the state General Fund is reimbursed per the campus Cost Allocation Plan

14 Student body organizations Authorized Functions Bookstores, food services, and campus services (Commercial Services) Housing (e.g., faculty and staff for-sale housing) Student unions Supplementary health services Loans, scholarships, grants-in-aids, stipends and related financial assistance Externally funded projects including research, workshops, conferences and institutes

15 Instructionally-related programs (e.g., radio, athletics, etc.) Alumni programs Gifts, bequests, devises, endowments, trusts Public relations, fundraising, fund management and development Acquisition, development, sale and transfer of real and personal property, including financing transactions

16 How do Auxiliaries Operate? No state funds (General Fund appropriations) considered a gift of public funds Good private sector business practices (an alternative to governmental standards and state procedures), which enhance university capabilities Flexibility and adaptability make auxiliaries useful to their universities Auxiliaries held accountable, but subject to a different standard Subject to different laws and regulations e.g., different Wage & Hour provisions, different Open Meeting laws, different Records Disclosure requirements Considered a private employer subject to comparability requirements

17 Board Authority & Fiduciary Responsibilities The activities and affairs of an auxiliary organization shall be conducted under the direction of its governing board. Board members are required to perform such governance function in accordance with the following standards: (a) using due care; (b) performing such responsibilities with loyalty to the organization to the exclusion of competing interests; and (c) as to management of the organization s investments: avoiding speculation, complying with the organization s policies, and using due care in decision-making.

18 Board Authority & Fiduciary Responsibilities While performing these duties, it is important for the governing board to keep in mind that while the auxiliary organization is a separate legal entity, it is nevertheless related to the university that it serves, and as such is required to comply with state laws regulating auxiliary organizations, as well as directives and policies of the CSU and of the campus it serves. The intent of these laws is to integrate the auxiliary into the overall campus program subject to the oversight of the campus President.

19 Each auxiliary governing board must approve the amounts and purpose for expending auxiliary organization funds. This includes amounts for auxiliary operations as well as amounts and purpose of expenditures to augment State appropriations. Governing boards can accomplish this requirement by reviewing and approving an annual budget before the start of each fiscal year. Necessary changes to the budget may be made by the governing board as the fiscal year progresses. Excerpts from Education Code (89904) and Title 5 (42502)

20 Board Governance Powers and affairs must be exercised by Board or under Board direction Directors must exercise due diligence in the exercise of their fiduciary duties Duty of Care must act in charity s best interests Prudent Person Rule (contrasted with Business Judgment Rule ) Duty of Inquiry need to get full and accurate information for informed decisions Duty of Loyalty must avoid and disclose conflicts of interest; loyalty owed to organization, not constituency Duty to Investments must steward the corporate assets Directors exercise their authority collectively, not individually. Directors are individually liable: Directors must exercise reasonable diligence and care to avoid exposure to personal liability from injuries or losses caused by the organization Nonvoting directors prohibited Board members must review and approve executive compensation (CEO,CFO)

21 Role of California Attorney General s Office Supervision responsibility over financial affairs of public benefit corporations Registration and annual reporting required to the Registry of Charitable Trusts Certain transactions require Attorney General approval (e.g., disposition of all or substantively all assets, loans to officers or directors, self-dealing transactions)

22 What they are NOT Auxiliary organizations are NOT auxiliary enterprises or auxiliary services Examples are: Housing Dormitory Revenue Fund Parking Fund Continuing Education Reserve Fund (CERF) Student Health Center *Auxiliary enterprise funds are deposited in separate (Stateside) campus trust accounts and expenditure policies are governed by State/CSU policies (which can be restrictive)

23 Source of Funds Student Body Organization Programs (ASI) Revenues from student body fees Student Unions & Recreation Centers Revenues from student body center fees and facility operations Sponsored Programs & Instructionally-Related Programs Externally funded grant and contract activity conducted by faculty and staff Funding from various sources including student newspapers, radio and television stations, agricultural programs, etc.

24 Commercial Services Revenue from bookstore, dining services, child care centers, and other commercial activities (public/private developments) Auxiliaries can engage in public/private partnership projects (P3) to develop CSU or auxiliary owned land Philanthropic Foundation (Advancement) Donation Income and Endowment Earnings (source: gifts, bequests, deferred planning giving (CRATs, CRUTs, CGAs) Endowment Administrative Fee, and Gift Assessment Fee

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26 Advantages of Operate on a self-support basis Diversify resources by generating net revenues from commercial enterprises, contract and grant management, and gift administration Offer private-sector efficiency and flexibility Offer reduced operating costs and alternative employment relationships

27 Accept entrepreneurial and special program risk exposures which limits exposure for the campus Manage endowment funds outside State investment restrictions (e.g., invest in equities to maximize returns) Ability to Purchase property Provide seed money or loans for development of campus or auxiliary funded/financed projects Enter into public/private partnerships (shift of project risk and debt issuance) Facilitate project financings (i.e. SRB)

28 Auxiliaries cannot: Hold state funds appropriated to CSU through legislative process Hold tuition fee revenue Hold most other mandatory student fees required for registration Own or sponsor instructional programs awarding academic credit or Continuing Education Units Auxiliaries can: Invest in equities Buy, sell and hold real property without legislative action Engage in statewide education bond campaigns

29 Current Issues What is the value of auxiliaries in the current environment? Has it changed? Auxiliary Review Committee s review of the role of auxiliaries and existing policies (e.g., EO 1052) Changes in Stateside capability (e.g., what can be done in Trust accounts) Over the years some rule changes have giving CSU greater flexibility. Need for Governance Training for board members Synergy initiative; Shared Service model - search for efficiencies; eliminate duplication of effort

30 Achieve the right balance on a campus oversight and Board Governance Maintain distinction between campus and auxiliary employment (Additional Employment Policy) Accountability/Transparency Public Documents McKee Transparency Act Public sees auxiliaries and campus as one entity!

31 Association (AOA) Website Resources ( Resource sharing/network of expertise and knowledge, Legislative and legal updates, Library of resource materials, Job postings, Sample policies, procedures and forms, professional development AOA Annual Conference January of each year AORMA - group insurance and pooled benefit programs (cost savings and millions returned in dividends) Standing Committee resources and programs (e.g., AS/SU, Research, Financial Services, Human Resources, AORMA) Biennial salary survey for comparability requirements

32 Develop special projects and monographs Assist in creation of resources for member auxiliaries: Multi-employer VEBA Trust for managing post-retirement health benefit liability Act as a forum/resource for resolution of common issues affecting auxiliary members Represent interests of auxiliaries to policy-making groups of the CSU and State of California Point of contact with Chancellor s Office, CABO, FOA a partnership with the intent to seek joint solutions to common issues

33 QUESTIONS?