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Running head: GOVERNMENTAL AND NONPROFIT UNIVERSITIES Government and Nonprofit Universities:




2 Introduction


From the start of the Greek Empire, with famous scholars like Plato, Aristotle, and Socrates, until


current day higher education has played a role in civilization. Today, higher education takes on the form


of Post-Secondary education. Traditionally, only the wealthy were able to attend private Post-Secondary


schools, but following many reforms it has become increasingly accessible to people of all income levels.


An example of this can be seen with the creation of numerous community colleges throughout the US


[Eck16]. While European history runs deep with notable colleges that are over a few hundred years old


the United States (US) history is still fairly young for the most part. Nonetheless, as a nation, US higher


education has always been a part of our roots. In fact, the first college in the American Colonies began in


1636 [ASH06]. That is 159 years before we declared our independence from the British and became the


great nation we are today.


Over time universities have expanded both publicly and privately. Today there are thousands of


post-secondary educational systems in the United States alone. Even though public and private


universities are similar in providing further educational studies to their students, both have their


differences based on their: accreditation, population demographics, growth, finances and of course their


governmental relationship. As presented below, while both public and private universities do share the


same general mission, they are very different when it comes to their accounting framework based on


reporting and recognizing of revenue and expenditures. For instance, public universities follow the


financial reporting that is similar to the government entities. While private universities follow the


financial reporting that is similar to other not-for-profit organizations.


Some of the differences might not seem like a big deal. It does pose challenges to both private


and public universities. For instance, in recent years for-profit universities are getting tightly regulated by


the US Government due to the grants and financial assistance provided to the students that attend these


universities. The other potential challenges will be discussed. GOVERNMENTAL AND NONPROFIT UNIVERSITIES


3 History


In the last couple of centuries, the growth of public and private universities has grown


exponentially since the Colonial Era in the United States. Public universities have evolved into one of the


most significant social institutions of contemporary society. Our country?s public colleges and


universities have democratized higher education, extending the opportunities for a college education to all


citizens and research to serve the diverse needs of society, and engaging with local communities and


regions to provide the knowledge and services critical to economic prosperity, public health, and national




Throughout the latter half of the twentieth century public and non-profit higher education


flourished, sustained by strong social policies, public funding, and economical donations from


investments in non-profit aimed at providing educational access and opportunity to a growing population.


The higher education system has been molded and influenced by a variety of historical forces. During the mid-1990s public educational institutions in many states faced increasing stringent state legislatures


that minimized the budgets of higher education institutes. Historically what role has the government has


in maintaining the higher education system? The federal government has long provided substantial


funding for higher education spending that has surpassing state spending as the main source of public


funding in higher education.


The role of state governments in maintaining public colleges and universities dates back to the


nation?s inception. Colleges and universities can be divided in broad categories of public and private nonprofit. The public institutions range from community colleges to large research institutions while nonprofit institutions that typically receive a portion of funding from state and local governments. Private


non-profit institutions include selective ivy leagues and are given tax-preferred status. When choosing a


college/university in the United States it?s so important to understand all of the options: such as public or


private vs. location, costs, and program of study. GOVERNMENTAL AND NONPROFIT UNIVERSITIES




Most public universities are different from other government institutions based on how they are


funded. Most do not budget by fund. Universities are to use the Financial Accounting Standards Board?s


(FASB?s) categories of restrictiveness for external reporting; however, they can use the American Institute


of CPAs model funds structure for internal accounting and reporting only [Gra16]. Public universities are


also likely to have an auxiliary enterprise such as bookstores and dormitories that are engaged in a


business type activity. Due to these and some other activities public universities have a choice of


reporting as special-purpose entities engaged only in business-type activities, as special-purpose entities


engaged in governmental activities, or in both (Granof et al, p. 590). Both private and public universities


are also required to show their tuition revenues net of discounts and net of estimated uncollectible


amounts. Instead of writing off uncollectable amounts as bad debt expense, they have to adjust their


revenue by reducing the estimated uncollectible amount (Granof et al, p. 598).


Both governmental and non-governmental universities have the same practices of classifying


revenue by sources such as tuition and fees, endowment, revenues from auxiliary enterprises or through


government appropriations. Both types of universities also classify expenses by function such as


academic support, student services and institutional support (Granof et al, p. 596). The National


Association of College and University Business officers (NACUBO) defines scholarship allowances as


the difference between the stated tuition charges and the actual amount paid by students. If the difference


is due to employee reduction the balance should be charged as a compensation expense. The same applies


for those differences due to graduate assistantship expenses as well as work-study programs. On the other


hand, if the reduction is not due to service related to the university, such as athletic scholarship, the


balance should be offset by a reduction in revenue (Granof et al, p. 599).


While most colleges and universities are clearly either public or private. Some, however, face an


accounting and reporting identity crisis. Private not-for-profit colleges and universities are subject to the


same FASB standards as are other not-for-profit entities. As pointed out in the previous section, most


government colleges and universities exercise the GASB Statement No. 34 option that permits them to GOVERNMENTAL AND NONPROFIT UNIVERSITIES




account for their activities in enterprise funds. Therefore, inasmuch as both government and not-for-profit


colleges and universities account for their activities on a full accrual basis, the differences are likely to be


less pronounced as they were when they used different models.


Colleges and universities are unique institutions that differ from other governments in how they


are funded and managed. For example, although colleges and universities have both restricted funds and


auxiliary enterprises, most do not budget by fund. (Granof et al, p. 589). More state legislatures are


seeking and holding public colleges to higher standards by implementing accountability regulations that


tie some funding to the performance of the institution. Nonprofit (Public) Universities in the US


Nonprofit colleges and universities sometimes receive unfavorable criticism from individuals and


groups who believe public universities/colleges are not as thorough or prestigious as their private


university and college counterparts. In any case, state universities and colleges offer numerous focal


points that may not be accessible at private universities and colleges. Private colleges tend to be smaller


and oriented towards specific degrees within a specific subject area while public colleges offer a variety


of degrees within numerous subject areas. This typically means public colleges have much larger


campuses and many more students. Public colleges are also likely to receive government funding.


Public institutions are regularly led by administrators, personnel and staff. These leaders are


frequently under the heading of a Board of Trustees. Public institutions usually offer low educational


costs to in-state and out-of-state students. The institutions are philanthropic organizations that


traditionally received a vast majority of their subsidizing from state government. According to one study,


public colleges ?received an average of 21 percent of their funding from state funds and 16 percent of


their funding from the federal government? [Woo15]. They also depend on educational costs they receive


for tuition and fees as well as grants, donations, and endowments. As of late as states have cut their


instruction spending plans to fix their budgets. GOVERNMENTAL AND NONPROFIT UNIVERSITIES




Accreditation is a way of certifying that a school or program meets a required academic standard.


It is very important to know that a college or university is accredited. Here, most public universities are


regionally accredited. This means that the institution has maintained, and will maintain, the standards


requisite for its graduates to gain admission to other reputable institutions of higher learning or to achieve


credentials for professional practice. Regional accreditation agencies are recognized by the US


Department of Education to accredit degree granting colleges and universities and the goal of


accreditation is to ensure that education provided by institutions of higher education meets acceptable


levels of quality. If you attend a college or university that is not accredited, you will likely be unable to


transfer your credits to an accredited college or university.


The number of degrees is another thing to consider when looking at public universities. Unlike


private universities, public universities and colleges can be huge. Academic programs range from


traditional liberal arts to highly specialized technical fields which may focus on engineering and computer


science. In general, public universities tend to offer a wider range of courses, degree programs and


activities than private colleges. They are generally less expensive to attend as well.


With a large student population comes a large student activities list. Smaller colleges usually offer


less than 50 student organizations. However, large public universities can easily have hundreds of


established student organizations, ranging from general interests to very specific focuses. Most students at


public institutions will not need to spend the time starting their own organizations because they will be


able to find anything they are looking for at a public university.


Many of the public institutions have name recognition in their area, and many are known


nationally. Numerous companies come to public universities/colleges seeking future interns and


employees for their companies or organizations. Students can meet these employers on campus at career


fairs, in career centers, or even through introductions from their professors. GOVERNMENTAL AND NONPROFIT UNIVERSITIES


7 Problems facing Nonprofit and Government Universities


Since the early 2000's, universities and colleges in the United States have been having a difficulty


earning and growing their revenue base to keep up with rising costs. The primary reasons for the lack of


revenue is a decline in enrollment and a decline in funding from the states [Sel13]. As State governments


continue struggling to balance their budgets, their allocation to their public universities has continued


sliding down. As pointed out by the American Association of State Colleges and Universities (2012) the


year 2011 turning point in which the major funding source for American public universities shifted from


the states backed by taxpayers to tuition payment of students and parents. Reasons for the decline in


enrollment include an improving economy, in which the unemployed are going back to work instead of


utilizing education in order to obtain a job, and a cost-value analysis that questions the investment in a


degree at today's prices. States are reducing appropriations to public colleges and universities due to tax


revenue decreases and the decision to create budget cuts instead of reducing spending and increasing


revenues [Mit16]. To compensate for this loss in revenue, educational institutions have acquired large


amounts of debt.


The magnitude of the impact regarding funding also differs depending on the type of university.


Research public universities are believed to be the hardest hit which would have an adverse impact on the


overall research outcome for the country. According to Peter Gwynne, a contributing editor at the


industrial research management institute, noted that public universities educate 85% of the undergraduate


students and 70 % of the graduate students enrolled in all research universities in the US [Gwy10]. The


research also indicated that 62% of all federally financed research is performed by public universities.


A number of groups are working to find a way to address these funding issues that public


universities face. Some suggest an improved public-private partnership while others suggest aligning the


public universities objectives with those of the state. One of these efforts built on performance based


funding was led by the Lumina Foundation for Education. The foundation focuses more on finding new GOVERNMENTAL AND NONPROFIT UNIVERSITIES




ways of servicing more students and producing quality education within the existing budgetary


constraints [Har11]. Colleges have also taken on the issuance of bonds and taking out loans.


According to (Seligo, 2013), colleges and universities have nearly doubled "the amount of debt


they've taken on in the last decade to fix aging campuses, keep up with competitors and lure students with


lavish amenities". Bonds issued by many colleges and universities have poor ratings. Moody's Investors


Service (2015) just recently increased their outlook for the U.S. higher education sector from negative to


stable, citing continuing fiscal challenges such as keeping expenses low and being able to invest


adequately. Many colleges and universities have closed, merged with other educational institutions, or


transitioned to a for-profit platform or have been bought by a for-profit school [Sel13]. Good investment


returns are a large part of Moody's upgrade in ratings, due to an upswing in the economy. Modest growth


of 3% in revenues and increases in reserves and endowments also contributed to the upgrade.


Earlier this month, NACUBO members had a discussion on Capitol Hill regarding Federal


policies that impact higher institutions as well as their students and families. Some of the discussions


were about how institutions are affected by recent government less appropriations and its impacted on


higher institution. Cost drivers in the sector were also raised (NACUBO, 2016). During these discussions,


NACUBO noted that there seems to be a tendency of law makers towards making an effort to work on tax


reform and reauthorization of higher education act (HEA) in the near future[Nat16]. According to


NACUBO (2016), there are ?efforts to reauthorize HEA will focus on making college more affordable,


providing students with better information about college costs and student aid, and increasing


instructional accountability for student access and success.?


FASB recently has issued a new standard for not-for-profit financial reporting: Topic 958. Topic


958 is applicable to colleges and universities for FY19. Early adoption of the standard is also allowed.


The update is an effort to try to address the issues on the current reporting requirements for not-for-profit


entities. One of the major changes is replacing the three classes of net assets currently in use by two GOVERNMENTAL AND NONPROFIT UNIVERSITIES




classes; net assets with donor restrictions and net assets without donor restrictions. Also, this update


relieved the requirement of disclosing the indirect method reconciliation for those not-for-profit entities?


statement of cash flows prepared under direct method. Regarding investment returns, not-for-profits are


no longer required to disclose netted expenses when reporting investment return. Investment returns are to


be reported net of external and direct internal investment expenses (FASB, 2016). Concluding Thoughts GOVERNMENTAL AND NONPROFIT UNIVERSITIES


10 References American Association of State Colleges and Universities. (2012). Top 10 higher education state policy


issues for 2012. Retrieved from AASCU:


ASHE. (2006, February 1). From the beginning: development of for-profit higher education in the united


states. ASHE Higher Education Report, 31(5), pp. 13-24.


Brubacher, J. S., & Rudy, W. (1997). Higher education in transition: a history of american college and


universities. London: Transaction Publishers.


Duderstadt, J. J., & Womack, F. W. (2004). The future of the public university in america: beyond the


crossroads. Baltimore: Johns Hopkins University Press.


Eckel, P. D., & King, J. E. (2016). An overview of higher education in the united states: diversity, access,


and the role of the marketplace. Retrieved from ACENET:


Financial Accounting Standards Board. (2016, August). Accounting standard update (ASU) No. 2016-14.


Retrieved from FASB:




Granof, M. H., Khumawala, S. B., Calabrese, T. D., & Smith, D. L. (2016). Government and not-forprofit accounting (7th ed.). New York: Wiley. GOVERNMENTAL AND NONPROFIT UNIVERSITIES




Gwyne, P. (2010). Public universities face funding crisis. Research Technology Management, 53(5), pp. 45. Retrieved from




Harnis, T. L. (2011). Performance based funding: a re-emerging strategy in public higher education


financing. Retrieved from AASCU:


Mitchell, M., Leachman, M., & Masterson, K. (2016). Funding down, tuition up. Retrieved from Center


on Budget and Policy Priorities:


National Association of College and University Business Officers. (2016, October 3). NACUBO members


discuss college cost drivers on capitol hill. Retrieved from NACUBO:




Seligo, J. J. (2013, April 13). Colleges struggling to stay afloat. Retrieved from The New York Times:


Sharma, P., & Fitzgerald, S. I. (2015). Modest revenue growth supports table outlook for us higher


education in 2016. Retrieved from Moody's Investors Service:


Woodhouse, K. (2015, June 12). Impact of pell surge: federal spending has overtaken state spending as


the main source of public funding in higher education. Retrieved from Inside Higher Ed: GOVERNMENTAL AND NONPROFIT UNIVERSITIES




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