May 30, 2019
Ms. Elaine Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
Dear Ms. Howle:
This is the response of the California State University (CSU) to the draft audit report regarding CSU outside accounts and parking programs. The CSU is committed to – and has a strong record of – prudent management of resources entrusted to it. The university is transparent in all its dealings, including those with the state Legislature, students, faculty, staff, and the community.
The report accurately makes findings that reflect positively on CSU’s practices to safeguard its outside accounts and expenditure and investments of parking revenues.
However, the report severely mischaracterizes the nature of monies invested by the CSU and the manner in which these funds have been reported. Throughout the report, CSU’s designated reserves reported in its annual audited financial statements and investment reports are called “discretionary surpluses” suggesting that CSU is failing to deploy monies that may be used for any purpose.
Tuition and other fees paid by CSU students are authorized for specified purposes by Education Code Section 89700 et seq. Education Code Section 89750 provides that all money appropriated to the CSU, including tuition and fees, must be used “for the support and maintenance of the California State University.” CSU’s designated reserves, such as the $1.5 billion referenced in Figure 5 of the audit report, are used in several ways to deal with non-recurring expenses by (1) managing short-term obligations and commitments, (2) providing funding for capital infrastructure repairs and maintenance, and (3) helping to ensure that operating costs can be paid during times of economic and budget uncertainty.
In other words, it is inappropriate to characterize these reserves are either “discretionary” or “surpluses.” In the same way a family utilizes a savings account for one-time expenses and uncertainties, these funds constitute an essential element of our system’s fiduciary responsibilities to manage the university and ensure continued operation in the face of economic uncertainty.
Moreover, as noted in Appendix B, the overall designated reserve amount, representing about 2% of annual expenses, is distributed among 23 campuses and the Chancellor’s Office—all to support the education of more than 480,000 students.
In addition, except for a very general reference under “Other Areas We Reviewed,” the audit report fails to mention that more than 30 public reports provided by CSU – during the 10-year audit period – included detailed information about investment balances and net assets (including what the report refers to as “surpluses”). Paramount among these public reports are annual audited financial statements published by the CSU – notably, one of the few state agencies to publish externally audited financial statements.
Moreover, the audit report fails to mention detailed letters we provided at the request of state legislators in 2017 and 2018 that contained specifics regarding balances in accounts held outside the state treasury.
Nor does the audit report disclose that these same balances are reported, as required by statute, to the California State Controller’s Office in the annual State of California Budgetary/Legal Basis Annual Report.
The point is all of CSU’s financial resources are available to state government officials and the public.
The audit report does, however, note that CSU has already taken steps toward further enhancing transparency over available financial resources via a new website (www.calstate.edu/financial-transparency).
Finally, to the extent possible, we will implement recommendations in the audit report and provide more details about our implementation efforts in our follow-up responses.
Please do not hesitate to contact me if you have questions.
Timothy P. White
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE
FROM THE CALIFORNIA STATE UNIVERSITY
To provide clarity and perspective, we are commenting on CSU’s response to our audit. The numbers below correspond to the numbers we have placed in the margin of CSU’s response.
The Chancellor’s Office has not been transparent in all of its dealings with the Legislature and students and has not made information about the full extent of CSU’s financial resources available. Specifically, as we discuss in the report, starting here, the Chancellor’s Office failed to disclose CSU’s discretionary surplus when projecting its available resources for legislators or when consulting with students about the need to raise tuition. We acknowledge in Table 4 and in this footnote that CSU submits certain reports to the State, which include information about CSU’s investments. However, neither these reports nor CSU’s audited financial statements provide the detail or the context necessary for the Legislature to easily understand that CSU had $1.5 billion that was in essence a discretionary surplus that it could use to fund operations and instruction.
We have not mischaracterized the nature of CSU’s surplus. As we state here in the Introduction, the surplus is money that CSU does not need for current expenses. Some of the surplus comes from restricted revenue sources that can only be used for purposes specified in law, but the $1.5 billion component of the surplus that we discuss in the report comes from revenue sources—primarily tuition—that state law gives CSU great discretion to use for the broad purposes of providing materials, services, and facilities. Although CSU designates portions of the discretionary surplus for more specific uses within the confines of those broad purposes, these designations are flexible, and campuses and the Chancellor’s Office have the discretion to use the surplus as they deem necessary.
CSU’s response appears to suggest that the discretionary surplus is an insignificant amount. We believe that the $1.5 billion CSU accumulated primarily from tuition is a significant amount.
In August 2017 and April 2018, the Chancellor’s Office provided the referenced letters to certain legislators who had inquired about CSU’s outside accounts. Although the legislator who requested this audit referred to the information provided in the August 2017 letter, she had additional questions, in particular about the unrestricted, discretionary money CSU held in outside accounts. These letters did not adequately disclose the amount or discretionary nature of CSU’s surplus.
The State of California Budgetary/Legal Basis Annual Report For the Fiscal Year Ended June 30,2018 does not disclose the discretionary surplus that CSU can use to fund operations and instruction. Although it includes information about the total balance of CSU’s outside investment account, similar to the reports we describe in comment number one, this report would not allow legislators, students, or the public to easily understand CSU’s available resources.
As we state here, after we shared our findings with the Chancellor’s Office, it developed and published a website in May 2019 that is a step towards improving transparency. However, as of June 2019 the website did not clearly identify the amount of CSU’s surplus that is discretionary or the amount of tuition contributing to that surplus. To ensure that the website provides meaningful information to a broad audience, the Chancellor’s Office will need to more completely disclose information about its surplus.
We believe that it is imperative for the Chancellor’s Office to implement all of our recommendations. We look forward to the Chancellor’s Office’s 60-day response to our audit report, which should include documentation demonstrating the actions it is taking to implement our recommendations.