An Open Letter to the Iowa State Auditor

Dear State Auditor Sand,

For the past three and a half years — following the Iowa Board of Regents’ appointment of J. Bruce Harreld as president of the University of Iowa in September of 2015 — I have been paying close attention to the state’s public universities and to the board. While there is a good deal of information available from those institutions, and considerable reporting by local and state press about those institutions, over time I have encountered a number of questions that can only be answered by looking at the financial books of the schools, or of the regents as a whole. Because I have no ability to compel such access as a citizen, and as Iowa’s state auditor you obviously do, I am writing in that regard.  

While the state auditor’s website describes your position as the “Taxpayers’ Watchdog”, accounting for the disposition of tax revenue is only part of your oversight responsibility. Among Iowa’s state assets are everything from real estate to intellectual property, and determining whether assets are being used appropriately involves consideration of the laws and administrative rules by which state government functions. In that context, I was particularly impressed by your immediate response when the Iowa Finance Authority announced that paying out millions in legal settlements would not cost Iowa taxpayers a dime.

From Jason Clayworth at the Des Moines Register, on 02/06/19:

Two sexual harassment claims against a former state director fired last year will be paid from an interest-bearing account and not taxpayers, according to the state’s top economic director.

The announcement followed the Iowa Appeal Board’s $4.1 million approval Monday of settlements to two women who say they were repeatedly sexually harassed by former Iowa Finance Authority Director Dave Jamison.

“The payment is coming from a reserve fund comprised of interest earned on investments over time,” Debi Durham, the head of the Iowa Department of Economic Development who is now also the Finance Authority director, said in a statement. “It will not be funded by a program or taxpayer dollars.”

It isn’t clear which financial account the state plans to use to pay the settlements or how the state determined that taxpayers won’t be affected.

“It doesn’t make any difference to the people of Iowa,” Iowa Auditor Rob Sand said Wednesday. “Every penny of that is still taxpayer money.”

As you correctly pointed out, tax revenue is simply one component of Iowa’s overall asset picture, and all of Iowa’s assets belong to the people of the state. Money derived from an “interest-bearing account” is every bit “taxpayer money” as the revenue citizens contribute at tax time. Because the IFA was paying out $4M in settlements, that $4M could not be used to the benefit of the state — which Director Durham herself publicly acknowledged shortly thereafter.

Unfortunately, that kind of rhetorical shell game is so common at the Iowa Board of Regents as to represent de facto policy. Despite being a department of state government, the board has accomplished the rather neat trick of positioning itself in the public consciousness as something akin to an NGO (non-governmental organization), nonprofit organization or charitable trust. This implied extra-governmental status is reinforced in messaging both by and about the regents, which consistently refers to legislative appropriations as money received from the state — as if the state is a separate entity.

Along with taxes, a significant source of state revenue comes from fees collected for various services. In that context the Board of Regents is the state, just like the Department of Motor Vehicles or the Department of Natural Resources. If you want a hunting license you pay the DNR the appropriate fee, and that revenue — along with legislative funding — covers the cost of operating that department. If you want a driver’s license you pay the DMV the appropriate fee, and that revenue — along with legislative funding — covers the cost of that department.

In a similar vein, if you want a four-year college degree, or a professional degree which entitles you to become a doctor, dentist, or lawyer, you can go to one of Iowa’s three public, state-owned universities and pay the appropriate fees, including the fee we call tuition, and that revenue — along with legislative funding — covers the cost of operating those schools. And yet the board not only routinely perpetuates the false impression that it is somehow separate from the state, it actually positions itself as a victim of “state funding cuts”, which in turn then ostensibly compels the regents to hike tuition. And that’s true even when the legislature increases appropriations, but the dollar amount falls short of the board’s self-determined annual request.

Case in point, that seems to have happened just this week, with the legislature voting to increase appropriations by $12M for the regents, which falls $6M short of the board’s $18M request for FY20. That shortfall will now be used to justify increases in tuition by the board, even as those increases will almost inevitably overcompensate for that shortfall, perhaps multiple times over. That in turn brings us to a related de facto policy at the board, which is the systematic obscuring of the dollar value of new revenue generated by tuition and fee increases.

Where the board constantly refers to legislative appropriations in dollar amounts aggregated among the three regent universities, any increase in tuition is usually referenced as an abstract percentage, thus obscuring the degree to which increased revenue offsets any funding shortfall or cut. Even finding the dollar amount of revenue increases at one school can be difficult, and aggregated totals across the regents enterprise are almost never published by the board. Add in new revenue generated by fee increases, by differential tuition increases, and by discretionary increases at individual colleges — particularly at UI and ISU — and what is announced as a 3% increase may become 5% or 9% for students in certain programs, with a consequent increase in the total amount of generated revenue.

The best example I have found of the board’s deliberate attempt to omit revenue information is also the worst example, and occurred during FY18, when the board was setting tuition and fees for FY19. From the docket memo for Agenda Item 12 at the April 11-12 meetings (p. 5), which was the first reading for the planned FY19 hikes:

Projected Tuition Revenue
The proposed tuition rates for 2018-19 are projected generate approximately $24.9 million in incremental revenue for FY 2019. Assuming no further changes in state funding, the projected incremental tuition revenue partially offset by the recent state funding reduction, results in a projected 0.9% increase in the Regent Higher Education budget for FY 2019.

The Higher Education Price Index (HEPI) documents inflation affecting the higher education industry, allowing colleges and universities to determine the increase in funding required each year to maintain real investment. The Institute for Economic Research at the University of Iowa projects HEPI for FY 2019 to range between 1.2% and 2.8% with a midpoint of 2.0%.

Now here is the same section from the docket memo for Agenda Item 12 two months later, at the June 5-7 regent meetings, which was the final reading for the proposed hikes:

Higher Education Price Index
The Higher Education Price Index (HEPI) documents inflation affecting the higher education industry, allowing colleges and universities to determine the increase in funding required each year to maintain real investment. The Institute for Economic Research at the University of Iowa projects HEPI for FY 2019 to range between 1.2% and 2.8% with a midpoint of 2.0%.

As you can see, not only was the heading changed, but the paragraph referencing the expected revenue was actually scrubbed. And yet, the anomaly here is not that the projected revenue total was deleted, but that it ever appeared in a regent document in the first place.

The Iowa Board of Regents produces detailed and extensive reports on all manner of departmental operations, yet I have never found even the simplest graph or chart showing tuition revenue over time — either aggregated among the three state universities, or individual plots for each school. The total revenue generated by the board from legislative appropriations, tuition and fees, and charitable giving defines the budget available to the regents, yet the dollar value of the dominant piece of that financial puzzle — tuition revenue — is routinely omitted from official board documents.

The obvious question is why, but the answer was alluded to above. Though the Board of Regents is part of state government, it is to the financial advantage of the board to position itself as a victim of the state, rather than as a component part of the state’s sprawling and interrelated bureaucracy. It’s not that the board wants to increase tuition, or even benefits from increasing tuition, but that it has to increase tuition because of insufficient appropriations from the mean legislators.

Again, this cultivated impression runs counter to reality. Fortunately, despite the board’s efforts to obscure that reality, we can prove that assertion by digging through press reports and publicly available financial information at one of the state schools. Among the three regent universities, the University of Iowa is relatively forthcoming about its finances, and we can find a variety of helpful reports on the UI
Financial Management and Budget website. In fact, from four simple pie charts we can clearly see that annual tuition and fee revenue has increased $50M at UI over the past four years — even though the board itself never mentions that fact:

FY16 – $432.6M
FY17 – $459.8M
FY18 – $477.4M
FY19 – $482.8M

This does not mean, however, that UI is only $50M ahead over that time, let alone that the $50M increase was necessary to compensate for funding cuts and shortfalls. Instead, to grasp the full picture of how much additional tuition revenue has been generated since FY16, we first have to compound those annual increases. Assuming FY16 as baseline, here is how all of that new tuition revenue adds up through the end of the current fiscal year (FY19):

FY17: $27.2M = $27.2M
FY18: $27.2M + $17.6M = $44.8M
FY19: $44.8M + $5.4M = $50.2M
Total increase in tuition revenue FY16-FY19 = $122.2M

Even if you pay attention to the funding issues at the Board of Regents, chances are you have mostly heard about funding cuts and budget shortfalls, not about a massive tuition windfall generated by the state. So what about appropriations, and the funding cuts that got so much notice over the past two years — thus ostensibly triggering the need for multiple aggressive hikes?

Again, assuming FY16 as baseline, here are the annual changes in legislative appropriations for UI over the past four years, as determined by press reports:

FY17 appropriation: $1.3M
FY17 mid-year clawback: ($9.2M)
FY18 appropriation: ($6.2M)
FY18 mid-year clawback: ($5.2M)
FY19 appropriation: $3.2M
Annual change in appropriations FY16-FY19 = ($16.1M)

The University of Iowa did endure a number of funding cuts, largely triggered by the collapse of the state budget for two years running. We can also confirm this math by turning to a UI press release on 07/10/18, which makes pointed mention of the total amount of the cuts, while making no mention at all of the mountain of new tuition revenue generated from tuition hikes over that same time frame:

Since Fiscal Year 2016, the Iowa Legislature has cut the UI budget by $16 million.

Again, however, that’s just the relative change in annual funding. To see the aggregated effect we have to compound those cuts:

FY17: $1.3M + ($9.2M) = ($7.9M)
FY18: ($7.9M) + ($6.2M) + ($5.2M) = ($19.3M)
FY19: ($19.3M) + $3.2M = ($16.1M)
Total change in appropriations FY16-FY19 = ($43.3M)

From FY16 to FY19, the University of Iowa’s annual appropriations decreased by $16.1M, leading to an aggregated loss of $43.3M in legislative funding over that four-year period. Over that time frame, however, tuition-and-fee revenue increased $122.2M, or almost three times the loss. Even after subtracting all of the legislative cuts, the University of Iowa is still net-ahead $78.9M in total revenue, yet because of the board’s revenue blackout I am confident that you and most other Iowans had no idea that was the case. (Because of projected increases in both legislative funding and tuition for FY20, UI will be net-ahead another $20M or so in the coming fiscal year.)

Because the regent universities were in tuition lockstep until this year, we can also conclude that gains at UI over the past four years were replicated at UNI and ISU, meaning those schools also generated revenue significantly in excess of any funding cuts. And yet the narrative at the board — and consequently in the press — is that the regent universities have been struggling to find sources of new revenue. Instead, by diligently digging we can clearly see that the state of Iowa — meaning specifically the Board of Regents — is actually profiting from the ostensible need to replace legislative appropriations with money from students and families.

From all of the above we can see why the Board of Regents is so determined to suppress disclosure of tuition revenue at the state’s public universities. Instead of replacing lost funding with tuition increases on a dollar-for-dollar basis, the state — meaning the Board of Regents — has been taking almost two additional dollars for each dollar cut from the UI budget, beyond the dollar-for-dollar match. While the board certainly has the authority to raise tuition as it sees fit, I think most Iowans would agree that it should do so in a transparent manner, including explaining what all of that extra new revenue will be spent on — and not in a vague, abstract way.

It makes sense that most of the financial abuses in state government will be traced to improper expenditures. In order to understand the financial picture in any department, however, it is also important to understand the revenue side of the equation. With regard to the regents, it is not merely the case that the board obscures the amount of new revenue generated from tuition hikes, we have compelling evidence that the board does so because it is taking significantly more than necessary to maintain its overall budget.

To underscore the naked cynicism at work, even during the collapse of the state budget in FY17 and FY18 — which affected departments and services across the state — the regents used that fiscal crisis to pass multiple tuition hikes, thus raising tens of millions of dollars at UI in excess of concurrent cuts. Instead of shared sacrifice, the board was opportunistic, and used a legitimate crisis to loot student and family bank accounts. If spending money under false pretenses is worthy of investigation by the auditor’s office, the same should be true of raising money under false pretenses, and that’s particularly true given that all of that additional revenue is — in the parlance of higher education — unrestricted, meaning it can conceivably be spent on anything once it has been collected by Board of Regents.

To that end, here is my first question to you as State Auditor of Iowa:

Why is there no detailed annual public accounting of tuition and fee revenue from the Iowa Board of Regents?

Clearly the board has all of the relevant information, yet it rarely produces even the most basic numbers, and reporting across the state schools varies wildly. On a year-to-year basis, how has tuition and fee revenue changed both in the aggregate and at each of the state schools over the past five years? How much has base undergrad tuition increased, in dollars, and how much revenue was generated as a result? How much revenue has been generated from differential tuition increases? What about graduate tuition and tuition at the professional schools? (Note that only base undergraduate tuition is set by the Board of Regents, while individual schools and colleges are free to tack on increased costs to students, with only perfunctory permission granted by the board.)

While your predecessor pursued an exceedingly narrow mandate, I have been encouraged by your call for increased transparency in the reporting of financial information about the state, and for a broader exercise of the powers of your office in service of Iowa’s citizens. With regard to the concerns raised in this letter, I would cite the following authority for producing a detailed report on revenue at the Board of Regents — from Iowa Code:

11.4 Report of audits.

1.The auditor of state shall make or cause to be made and filed and kept in the auditor’s office written reports of all audits and examinations, which reports shall include, if applicable, the following:
a. The financial condition of the state or department.
…
e. Any other information which, in the auditor’s judgment, may be of value.

If there is any lingering doubt that the Board of Regents has been generating a mountain of new revenue from tuition and fees, simply because it can, note that despite having motivated prior hikes by referencing shortfalls and cuts, this year the board is dispensing with that pretense entirely. As of last fall, the board has instituted a five-year plan which will increase base undergraduate tuition a minimum of 3% per year at UI and ISU, if not more, irrespective of any legislative funding, and apart from inflation. Again, however, there are no estimated or projected dollar amounts attached to those increases, and those numbers will almost certainly never be reported.

Whether the board is acting out of arrogance or a sense of entitlement, the regents themselves are now decoupling legislative funding from the question of tuition and fees, and plan to increase tuition no matter how much taxpayer money is appropriated. As to where that money is destined we have vague assurances, but because we do not know how much money is in play it is impossible to make an informed judgment about whether those plans are an appropriate use of the statutory power to raise and spend revenue. Particularly at the auditor’s office, it would seem critical to have these revenue numbers, in order to determine whether or not state money — including over a billion dollars in tuition revenue — is being used in accordance with the statutory mission of the Board of Regents.

Sincerely,

Mark Barrett