California State University, Fullerton Planning, Resources and Budget Committee
Report to the Academic Senate regarding the California State Auditor’s Report of December 1999
Background:The Academic Senate charged the PRBC with the responsibility of investigating the response of the university to the State Auditor’s report of December 1999, which alleged mismanagement in several areas of university administration. The PRBC was not charged with the responsibility of independently investigating the allegations raised in the State Auditor’s report. Rather, the committee's charge was to determine if adequate policies and procedures had been put in place to avoid future problems in areas where the Auditor’s concerns appeared to be legitimate.
In addition to the State Auditor's report, the PRBC was provided with copies of the CSUF Financial Management Review prepared by K. Scott Hughes Associates, the KPMG final audit report of the University Advancement Foundation, and a number of news reports relating to the State Auditor's report.
The Auditor’s report contained ten specific allegations. Six of these related primarily to the operations of the Business and Financial Affairs Division (BFA), and the remaining four related primarily to the establishment and operations of the University Advancement Foundation (UAF).
We note that the CFO informed the committee that investigators from the State Auditor's Office never interviewed her during their 18-month investigation. Since many of the complaints concerned operations in BFA, it seems highly unusual that no attempt was made to interview the person in charge of this division. Some of the issues raised in the report probably could have been resolved if such an interview had taken place.
Process:
The PRBC elected a subcommittee to formulate a set of proposed questions to be asked of appropriate administrators from BFA and UAF. These proposed questions were reviewed by the entire committee, and were approved with minor modifications. A copy of the questions as finally approved by the PRBC is attached as Appendix A.
The questions were then forwarded to the administration via Executive Vice President Anderson with the understanding that written responses would be welcome, but not required. At the same time the PRBC invited CFO Newcomb and Vice President for Advancement Gianneschi to appear before the committee to respond to the questions that were relevant to their areas of operation. Since both CFO Newcomb and Vice President Gianneschi are members of the PRBC, they had copies of the questions available to them well in advance of these meetings.
No written responses to the questions were provided; however, some additional written material was provided to the committee. CFO Newcomb asked if our meetings were going to be tape-recorded. In the interests of candor and openness, the committee agreed not to tape-record its meetings. The committee also voted not to keep formal minutes of these discussions, although individual members were invited to keep whatever notes they desired.
CFO Newcomb and Vice President Gianneschi each met individually with the full committee for several hours to discuss the issues raised by the Auditor's report. These discussions were guided by the set of questions formally approved by the committee, but included questions from individual members that covered essentially all of the issues raised by the State Auditor.
Results:
The State Auditor raised questions about trust
accounts established in the early 1990's. On the basis of our discussions
with the CFO, it appears that the State Auditor's concerns regarding the
establishment of the University Trust Project were well founded. This particular
trust account was established before the tenure of the present CFO began,
and had been reviewed periodically by system auditors. It appears that
one purpose of this account was to carry over unspent utility funds from
one year to the next, rather than to return these surplus funds to the
state general fund. However, applicable regulations and laws did not permit
the establishment of a trust account for this purpose.
At the time the CFO assumed her duties, the university was managing a very large number of trust accounts. Approximately 90 of these trust accounts have been terminated, and those remaining are well within the scope of applicable laws and regulations according to the CFO.
In the interim regulations have been changed to allow
the university more flexibility in carrying over unspent funds from one
year to the next. Campus guidelines for the establishment and operation
of trust accounts were adopted this spring. The Chancellor’s Office, KPMG
and K Scott Hughes Associates reviewed these guidelines prior to implementation.
We recommend that the university voluntarily submit its trust account records
for post-audit annually.
The hiring and contracting issues raised by the
State Auditor were complex. The CFO averred that errors of fact and omission
had been made by the State Auditor in relation to certain of the contracting
and hiring issues. In addition, the CFO explained that at the time these
no-bid service contracts were awarded, some confusion existed regarding
the procedures for awarding such contracts. Apparently, the Chancellor's
Office was allowing greater flexibility in the awarding of contracts in
which the amounts in question were less than $50,000.
At the time these contracts were awarded BFA was dealing with some major problems of long standing, and the CFO was attempting to resolve these situations and to modernize procedures in the division. The use of no-bid service contracts appears to have been justified in two of the three cases questioned by the State Auditor because of the urgent need to correct certain problems in the BFA division. However, it appears that one no-bid service contract was awarded primarily for convenience, but did meet an important need of the division. The situation was further complicated by the fact that the two contractors whose no-bid service contracts appear to have been awarded for good reasons later were hired for regular positions in BFA. The State Auditor raised questions concerning the appropriateness of several other hires and reassignments made by the CFO during her reorganization of her division. The State Auditor did not claim that these actions violated regulations or university policy, but did suggest that some actions by the CFO may have limited open competition for these positions.
The CFO explained in detail her hiring practices, about which she consulted regularly with the Human Resources Office. She emphasized the necessity of effecting the reorganization of her division in an appropriate manner. Since our committee did not have direct access to evidence, we were not able to make judgements regarding the competing claims of the State Auditor and the CFO. Nevertheless, we note that it appears that the manner in which certain contracts were awarded and certain positions filled in BFA initially exacerbated some personnel problems in the division.
We recommend the establishment and/or revision of
university policies for MPP hiring to ensure that such positions are filled
through either local or national searches as appropriate except in cases
where an urgent need to bypass the search procedure can be demonstrated.
Such requests should be documented by the requestor, and should require
written approval from his or her supervisor.
Most of the disagreements between the CFO and
the State Auditor over the collection of fees for the management of trust
accounts and other services to campus cost centers outside of BFA appear
to be of an accounting nature. The fees charged and/or the interest retained
appears to be within the limits allowed by system policy. The level of
fees charged appears to be reasonably related to the costs of the services
provided. We note that fee and interest income now is deposited in the
general fund, which avoids problems in this area.
The State Auditor raised a number of questions
about the establishment and operation of the UAF. From our interviews with
the Vice President for University Advancement we learned that the UAF had
been established as an independent 501c.3 foundation, rather than as an
official university auxiliary, primarily to avoid the requirements of the
various "open meeting" acts that an official university auxiliary has to
meet. This allowed the Board of Directors of the UAF to hold closed meetings
in order to discuss potential donations from donors who did not wish to
have their names made public, and to conduct its other business in private.
While the desire to maintain donor confidentiality is understandable, the overall effect was to establish a foundation that had fiduciary responsibility for a relatively large amount of university funds, which was not accountable directly to the university. One of the major deficiencies of this arrangement was that, in contrast to the CSUF Foundation, there were no faculty or student members on the UAF board of directors.
The State Auditor claimed that the method of establishment of the UAF was contrary to various state laws and regulations. In particular, the California Code of Regulations (CCR, Title 5, Sec. 42400) states that "an auxiliary organization is any organization... representing an official relationship with a campus, or in which any campus official participates as a director as part of his or her official position". Vice President Gianneschi claimed that the UAF could be considered not to be an official university auxiliary because the president was acting as a private citizen in his capacity as a member of the UAF board, and that the UAF did not have any "official" relationship with the university. However, the UAF was involved in the day-to-day management of numerous accounts that once had been housed in the CSUF Foundation. It would also appear that the president was acting in his official capacity when he was serving as a member of the UAF board.
Fortunately, this situation has been resolved. The UAF board agreed to change the UAF bylaws to make it an official university auxiliary, and it now includes a faculty member and at least one student on its board. We recommend that normal Academic Senate procedures should be used to select the faculty member(s) of the UAF board of directors.
The State Auditor raised concerns regarding the rate of return on UAF funds. It appears to us that the State Auditor made no distinction between ordinary operating funds and endowment funds. The rate of return on operating funds is low because these are held in demand accounts. However, the rate of return on endowment funds is consistent with national norms. The UAF provides the endowment "mirror" accounts interest at the rate of 5%. Periodically, the individual endowments are credited with their pro-rata share of the gains in excess of 5% (less reasonable management costs). The 5% figure is normal and prudent for income from university endowments. The overall gain on UAF endowment investments has averaged slightly more than 12% for the past five years. This figure is in line with national norms for endowment funds during this period. The overall management of university endowment accounts by the UAF appears to be prudent and proper.
The State Auditor also questioned some transfers between scholarship and/or endowment accounts and UAF operating accounts. Most of these questionable transfers appear to be the result of errors. It appears to us that essentially all of these mistakes have been corrected, and that improved accounting procedures have been, or are being instituted by the UAF to prevent such errors in the future.
The State Auditor also raised questions about abuses
of discretionary funds. In particular, the Auditor questioned the use of
funds for a retreat for UAF staff.
The Vice President for Advancement explained that theretreat was used to
build staff morale during a period when his office had advancement personnel
assigned to the various schools. While this expenditure probably did not
violate any university policy, it subjected the university to considerable
negative publicity. We suggest that policies regarding the expenditure
of university funds for retreats and similar activities be reexamined and
revised to ensure that funds are used only for appropriate activities.
The State Auditor raised questions concerning
expenditures of state and UAF funds that appeared to benefit state employees
inappropriately. Of the several issues raised, the most troubling are funds
spent for a laptop computer and state employees using state funds for business
lunches during the normal work day. We were not provided with a convincing
rationale for the purchase of the laptop computer that was given
to a campus executive upon retirement. The committee recommends that a
policy be developed to govern the extent to which university and
auxiliary funds can be used to provide retirement gifts to faculty, staff,
and administrators. The committee also recommends that the new CSUF policy
on reimbursement for business-related meals be communicated in a more formal
manner to the University community.
The State Auditor criticized University Advancement
for reporting the gross rather than the net proceeds from Front and Center
and similar fundraising events. While it is commonplace for advancement
officials to report gross proceeds from fundraising efforts, it is important
for a public university to be very careful not to mislead the public about
its fundraising activities. This statement is particularly true in the
case of high-cost events such as Front and Center, which serve both marketing
and fundraising purposes. University Advancement now reports the net or
"expected net" from such events. We think that this is a more appropriate
policy.
We learned that our overall fundraising costs are very favorable in comparison to national averages. We suggest that more emphasis be placed on informing the public about our low overall fundraising costs. We also suggest that there be a periodic review of the high cost events to ensure that they continue to meet their objectives.
The State Auditor raised concerns about the fact
that all funds donated for the President's Scholars awards were not distributed
in the same year they were received. This appears to us to be a misunderstanding
on the part of the Auditor of the nature of the President's Scholars program.
President's Scholars are guaranteed awards for four years provided they
meet certain criteria. This clearly requires that a portion of donated
funds be sequestered to meet the amortized needs of the program. Other
minor problems with expenditures for the program appear to have been corrected;
however, it would be good to have a written policy that addresses the amortization
issue and operating fund issues for the program.
The Report of the State Auditor lays out a number
of specific issues, the most serious of which we have addressed in the
preceding sections of this, our report to the Academic Senate. The State
Auditor has suggested that the events investigated warrant corrective actions
by unspecified administrators beyond those actions taken to this point.
It is true that some of the practices investigated by the Auditor were
ill conceived, and in the light of twenty-twenty hindsight, likely would
not have been done as they were. But it seems to us that those individuals
identified by the Auditor, the CFO and the VPUA in particular, at all times
acted with the best interests of the University and State as their guiding
principles. We believe that policy changes that already have been implemented
together with those policy changes recommended herein adequately address
the State Auditor's concerns.
The personnel problems in BFA might have been handled with greater tact and diplomacy. But given that major changes in the operations of this division were long overdue owing to operational deficiencies and to the advances of technology - and that the then recently appointed CFO moved aggressively to institute such changes, it is hardly surprising that some members of the staff of this division felt that events were not proceeding appropriately. We see no evidence, however, that the CFO acted with the intent to violate State, CSU System, or local campus rules and procedures in her personnel activities during the reorganization she instituted.
In the case of the UAF, the chief motivation for its creation seems to have been to enable closed discussions related to potential and actual donors not then allowed in auxiliaries such as the CSUF Foundation. Subsequent CSU commitments to changes in law and regulations have removed this problem, and the UAF has been reconstituted as a formal auxiliary of the University. It appears that poor accounting practices occurred on occasion in the UAF during the first few years of its operation. But those deficient practices identified by the State Auditor have either been stopped, or brought into line with norms of standard practice in the CSU System. The system has instituted regular biennial audits of auxiliaries, and one is now underway for the UAF.
Regarding the use of State funds or private donations for activities where State employees were the chief beneficiaries, poor judgment led to mistakes being made. But we find no evidence that those mistakes were made with the intent to violate any law, regulation, or policy. And their seriousness does not rise to the level that would suggest further administrative action is needed beyond policy changes that already have been implemented or recommended herein.
We have noted that a number of policy changes already
have been made to address the concerns raised in the State Auditor's report.
We also have, in the foregoing sections, made several suggestions that
additional specific policy and guidelines be developed and/or implemented
to minimize the recurrence of problems identified in the State Auditor’s
Report. We urge the Academic Senate to pursue these suggestions.
Minority Report Two members of the committee were of the opinion that the current system-wide policy that allows service contracts up to $50,000 to be awarded without a formal bid procedure creates the potential for significant abuse. These members recommend the adoption of local policies that would provide greater oversight in this area.