Trustee Talk: Financial Responsibilities of Community College Boards

January 19, 2021

 

 

Question:

What are a board's fiduciary duties with respect to college finances? For financial issues, what is a college's board supposed to know and do? 

Answer:

Part of a board’s fiduciary responsibilities require fiscal oversight and collaboration with the college CEO. Foremost, boards adopt policies that require “wise and prudent use of funds” (Smith 2000). In times of crisis and economic stress, when enrollments are no longer stable or predictable, boards and presidents particularly need to take care in making major decisions about the financial well-being and viability of the college. When funding is uncertain, boards and college presidents rely on relevant real-time financial data, realistic and appropriate budgeting scenarios, and the trust between each other to make the essential decisions on how the college moves forward. 

What does fiduciary mean for board members?

Technically, being a fiduciary means acting on behalf of the college to oversee the appropriate management of assets.  According to the Midwest Center for Nonprofit Leadership, a nonprofit board and its members individually have three fundamental fiduciary duties: a duty of care, a duty of loyalty, and a duty of obedience. A duty of care means overseeing management, providing strategic direction, attending and actively participating in board meetings, and being informed about important issues affecting the college. A duty of loyalty means putting personal agendas aside and keeping the college and students at the forefront of board policy.  The duty of obedience requires board members to act ethically and comply with board bylaws and codes of conduct, and state and federal laws and regulations.  

Without board members micromanaging or “getting into the weeds,” trust plays a major role in boards being able to oversee a college’s finances appropriately. Most importantly, having a fiduciary responsibility for boards means being entrusted with the welfare of the entire institution and not promoting personal agendas, but rather developing an open, trusting relationship with the CEO who administers college resources based on the board’s and the college’s priorities. As Noah Brown’s Trustee Quarterly article asserts, boards’ “fiduciary duty [is] more than just providing financial oversight” (see p. 22), but understanding your college’s finances is still important.

“Our trustees are the stewards of the college’s personnel, fiscal, and reputational assets. The board is instrumental in establishing our annual budget as we operationalize the college's strategic plan each year and set student fees,” says Cape Cod Community College President John Cox. “Lately, one of the major financial decisions that my board had to make was accepting the final price tag for our new $38 million science and engineering center before we moved forward with final design and construction. Through much dialogue, homework, and analyses, we garnered enough supporting materials to enable the trustees to collectively make a decision and commitment for the college. We continue to keep our board apprised of our progress in fundraising and the cash flow associated with the new building construction,” he adds.
 

Dashboards and Responding to Board Needs

During the August 2020 recent virtual Governance Leadership Institute (GLI) for New Trustees, Ken Burke, CPA, a former trustee from St. Petersburg College and former chair of the ACCT Board of Directors, emphasized that it is important for boards to work with the CEO to develop financial reports that are useful for board members. “Boards have a financial committee that reviews reports regularly. Boards should agree with the CEO which reports to give the board. If something big or unusual happens, unusual items need to be highlighted to the board,” he stated. “The CEO needs to be responsive to board needs.” 

GLI presenter Eduardo Marti, a former president of Queensborough Community College, agrees. “Communication should be underscored,” he says. “When the president sends the financial reports, trustees need to have a perspective. The CEO is spending the money, managing the resources. It is up to the CEO tell the board what is happening. The best thing is to have a dashboard with key elements and backed up with documents.”

At Cape Cod Community College, a monthly dashboard is provided to trustees that includes year-to-date performance against the trustee-approved budget and against the same period of the prior year, according to board chair Tammy Glivinski.  A presentation of variances is also presented. “This useful tool allows the trustees to understand the financial impact of expanding or declining enrollment, unexpected repairs or changes of educational environments (i.e., COVID) so we can support the president in adjustment planning.  Nor are we surprised by year-end outcomes,” she explains.

Which financial documents should be shared with the board?

In addition to the dashboard, top-level financial reports assist boards with comparing monthly revenue and expenses to the budget the board adopts annually. The reports summarize key revenues and expenses in categories such as state funds, county funds, and institutional funds (including revenues from local fees, grants, and contracts). Expenses can include salaries and wages, benefits, services and supplies, capital equipment, institutional scholarships, contingency funds, etc. On a monthly or quarterly basis, boards should expect the college’s finance and budget department to review the general fund, capital projects, physical plant fund and IT, auxiliary fund, board-designated fund, contingency budget allocation, fund balance/reserves and a comprehensive annual financial report (CAFR) with the board and/or the finance committee of the board.  

Chair Glivinski feels that her college president and vice president of finance and operations provide thorough and comprehensive fiscal data for trustees to make informed decisions on matters under their stewardship.  “To support the most important mission of offering equity of education to all students, all contracts, both budgeted and those that may come up due to unexpected circumstances (i.e., COVID-related technical upgrades and purchases), are reviewed by the trustees and analyzed to ensure ongoing need exists,” she explains. “The relationship between administration and the trustees allows for open dialogue, giving confidence to the trustees to move forward with approving larger obligations such as the $38 million science and engineering center.”

“We really are blessed to get good information, and the relationship between trustees and cabinet is such that we can and do ask questions and get valid answers,” Glivinski adds.

Alignment with the strategic plan

Trustees are very involved in the annual budget process, including reviewing data to support proposed tuition or program changes, as well as planned project spending. “The budget is where you as a board consider to be the priorities of the college,” Burke says. “It’s an ongoing process and should align with the college’s strategic plan. The budget is not a one-time process, but a continual process. Monitoring the budget is the responsibility of the board.”

“The budget is an expression of the strategic plan. Marry the strategic plan to the budget. If you don’t, you will more likely run into problems,” Burke adds. Marti agrees. “The strategic plan contains the college goals,” he says. “The budget is how to make the goals happen. The strategic plan aligns with the budget. Budgeting should always get back to the strategic plan.”

Asking budget questions

To be able to function appropriately, governing boards pose broad questions regarding their oversight responsibilities in order to show due diligence in following up in the best interests of their institutions. In many cases, this means to broadly oversee the management of the college’s financial assets (without getting into the weeds) and ask critical questions about the college’s budget. According to a recent survey  of college and university presidents by ABC Insights, budget issues that are arising due to the pandemic include the following questions:

  • What shape will our finances be in after fall?  
  •  Will administrative, staff, and faculty layoffs be necessary? 
  • Should the college impose a hiring freeze? How will the college handle position searches already in progress?
  • What strategies like early retirement bonuses should the college offer?
  • How much more investment in the new infrastructure for online learning do we need?
  • How can our online learning environments provide equity for students with disabilities? 
  • Do we have the economic resources to raise our level of what is needed for virtual learning?
  • What level of budget reduction is necessary to ensure sustainability?

These are some of the top-level questions that boards pose when exercising their fiduciary duty of care.

Reduction Planning

One of the findings in the survey indicates that a top priority for 86.7 percent of two-year community colleges will be administrative cost cutting for an anticipated 33.3 percent cut to academic programs in FY21. In many cases, community colleges and universities will maintain rather than increase tuition levels. Encouraged by boards to make enrollment easier for the many unemployed and underemployed workers from the pandemic, many colleges are working hard to provide free tuition and scholarships to low-income students. Currently, as the coronavirus spreads, next steps are not yet clear.

According to long-time college president and subsequent board member of the Colorado State Board for Community Colleges and Occupational Education Byron McClenney, there should be a process to determine how reductions are made. “There’s always enough money to do what is most important,” he says. “In conversations with the board, and hopefully throughout the college, the CEO and the board should cover what truly needs covering. Reduction planning is an annual process, and the board and CEO spend a lot of time in the realm of planning.”

Fiscal Controls

Boards are responsible for ensuring sufficient fiscal controls are in place. Federal and state agencies require colleges to account for how public funds are spent and to report the outcomes of programs supported by state and federal monies. Trustees are responsible for understanding reports submitted to agencies and should review monthly, quarterly, and annual financial reports, including accreditation reports and annual external audits. Local boards of trustees also adopt policies to ensure certain sound fiscal and management practices are in place, such as monitoring budget execution, maintaining systems of internal controls, and ensuring required audits are conducted to ensure prudent use of college funds. 

The annual audit of a college provides the board a view into the efficacy of the fiscal controls and systems needed to ensure that funds are appropriately secured and accounted. Most states and all accreditation agencies require an institutional audit for the most recent fiscal year prepared by an independent certified public accountant or appropriate governmental auditing agency. The board should assure that the president has a plan to address all audit findings and that appropriate corrections are implemented.

Focus on the Future

When reviewing financial reports and assessing the financial health of the college, boards focus not only on the immediate circumstances but also on the future. Boards have a fiduciary responsibility to ensure the fiscal strength of their colleges by approving annual budgets, understanding the sources of revenue, and reviewing the annual audit. While resources are managed by the college president and top administrative staff, fiscal oversight is the role of the board to ensure sound financial practices that safeguard the college’s sustainability.

Boards evaluate how effectively their colleges use resources to foster learning, student success and an educated citizenry, ensuring that college funds are managed wisely and that fiscal operations meet the board and audit standards. The board’s financial oversight role is a critical one. Every person, program, and action impacts or is impacted by the institution’s finances. Strong finances foster a strong future for the college.

Resources

For further education on trustees’ fiduciary responsibilities, ACCT has useful resources available:

Boards can also reference their regional accrediting agencies for detailed information on the requirements (standards) related to a college’s fiscal resources. All accrediting agencies specify the governing board’s fiduciary and financial oversight of the institution and its programs. 

Consult with legal counsel or college president

If readers have questions on this topic, it is best to consult with their college’s president and/or legal counsel as the rules vary from state to state and possibly local board practice.

Cited Sources

Fiduciary Responsibilities of Board Members, Board Source, 2020.

Midwest Center for Nonprofit Leadership, Oct 17, 2014

COVID-19 Strategy Survey of AACU Presidents, ABC Insights, April 3, 2020.

Disclaimer: This newsletter is offered for general informational purposes only. It is not offered as and does not constitute legal advice. The views and opinions expressed in this article are those of the author and they do not necessarily reflect the official policy or position of the association. 

If a reader has a question on a new topic of interest to community college boards, please email your question to Norma Goldstein at ngoldstein@acct.org.

 

ACCT Director of Trustee Education Norma Goldstein, Ph.D. can be reached at ngoldstein@acct.org.