Report 2018-127 Recommendation 3 Responses

Report 2018-127: California State University: It Failed to Fully Disclose Its $1.5 Billion Surplus, and It Has Not Adequately Invested in Alternatives to Costly Parking Facilities (Release Date: June 2019)

Recommendation #3 To: University, California State

To improve CSU's financial transparency with students and other stakeholders, the Chancellor's Office, with the approval of the trustees, should revise CSU policy by October 2019 to require that it publish information about CSU's discretionary surplus. At a minimum, the Chancellor's Office should revise its reserve policy to establish and justify a minimum sufficient level of reserve for economic uncertainty and require the Chancellor's Office to provide additional oversight to ensure that CSU maintains that level. This oversight should include monitoring, approving, and notifying the trustees of any uses of the reserve for economic uncertainty.

Annual Follow-Up Agency Response From September 2023

The Chancellor's Office continues to assert this recommendation is fully implemented (as of August 2020). We have incorporated additional policy changes requiring campuses to notify the Chancellor's Office of planned uses of reserves during the budget year.

In addition, the Chancellor's Office continues to notify the Board of Trustees of uses of the reserve for economic uncertainties.

Moreover, details regarding designated balances and reserves continue to be published on the CSU's financial transparency portal.

We believe these steps, along with those we have reported in prior responses, are sufficient to satisfy appropriate oversight responsibilities and we do not plan to take any further action.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We continue to assess this recommendation as partially implemented. We stand by our recommendation that it should include in its policy additional monitoring and oversight of the reserve for economic uncertainty. In November 2019, the Chancellor's Office revised its reserve policy to establish that reserves for economic uncertainty should accumulate a minimum of three months, and a maximum of six months of the annual operating budget. It also revised its policy to specify that the Chancellor's Office will annually share information about designated balance and reserve levels with trustees and other stakeholders. However, it did not include additional oversight to ensure that CSU maintains the minimum sufficient level of reserve for economic uncertainty.

The executive order that the Chancellor's Office references in its prior response states that campus presidents shall ensure that sufficient reserves are established for funds operated outside the state treasury system, in accordance with CSU policies, standards, and definitions. Hence, the Chancellor's Office could update its policy to provide additional oversight of the reserve, including monitoring, approving, and notifying the trustees of any uses of the reserve for economic uncertainty. The Chancellor's Office should also obtain approval from the trustees for the revised policy.

Annual Follow-Up Agency Response From October 2022

The Chancellor's Office continues to assert this recommendation is fully implemented. We have incorporated additional policy changes requiring campuses to notify the Chancellor's Office of planned uses of reserves during the budget year.

In addition, the Chancellor's Office continues to notify the Board of Trustees of uses of the reserve for economic uncertainties.

Moreover, details regarding designated balances and reserves continue to be published on the CSU's financial transparency portal.

We believe these steps, along with those we have reported in prior responses, satisfy appropriate oversight responsibilities.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We continue to assess this recommendation as partially implemented. We stand by our recommendation that it should include in its policy additional monitoring and oversight of the reserve for economic uncertainty. In November 2019, the Chancellor's Office revised its reserve policy to establish that reserves for economic uncertainty should accumulate a minimum of three months, and a maximum of six months of the annual operating budget. It also revised its policy to specify that the Chancellor's Office will annually share information about designated balance and reserve levels with trustees and other stakeholders. However, it did not include additional oversight to ensure that CSU maintains the minimum sufficient level of reserve for economic uncertainty.

The executive order that the Chancellor's Office references in its prior response states that campus presidents shall ensure that sufficient reserves are established for funds operated outside the state treasury system, in accordance with CSU policies, standards, and definitions. Hence, the Chancellor's Office could update its policy to provide additional oversight of the reserve, including monitoring, approving, and notifying the trustees of any uses of the reserve for economic uncertainty. The Chancellor's Office should also obtain approval from the trustees for the revised policy.

Annual Follow-Up Agency Response From October 2021

The Chancellor's Office continues to assert this recommendation is fully implemented. We have incorporated additional policy changes requiring campuses to notify the Chancellor's Office of planned uses of reserves during the budget year.

In addition, the Chancellor's Office continues to notify the Board of Trustees of uses of the reserve for economic uncertainties. For example, in the first several months of the pandemic, the California State University (CSU) drew upon the reserves on a one-time basis to maintain operations in programs impacted by COVID-19. The 2020-21 year-end balances and explanatory detail were provided to the Board of Trustees in written and presentation form at their September 2021 meeting.

Moreover, details regarding designated balances and reserves continue to be published on the CSU's financial transparency portal.

We believe these steps, along with those we have reported in prior responses, satisfy appropriate oversight responsibilities.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Although CSU provided us with meeting minutes showing that it provided the trustees with information about the campuses' use of designated balances and reserves for economic uncertainty, we continue to assess this recommendation as partially implemented. We stand by our recommendation that it should include in its policy additional monitoring and oversight of the reserve for economic uncertainty. In November 2019, the Chancellor's Office revised its reserve policy to establish that reserves for economic uncertainty should accumulate a minimum of three months, and a maximum of six months of the annual operating budget. It also revised its policy to specify that the Chancellor's Office will annually share information about designated balance and reserve levels with trustees and other stakeholders. However, it did not include additional oversight to ensure that CSU maintains the minimum sufficient level of reserve for economic uncertainty.

The executive order that the Chancellor's Office references in its response states that campus presidents shall ensure that sufficient reserves are established for funds operated outside the state treasury system, in accordance with CSU policies, standards, and definitions. Hence, the Chancellor's Office could update its policy to provide additional oversight over the reserve, including monitoring, approving, and notifying the trustees of any uses of the reserve for economic uncertainty. The Chancellor's Office should also obtain approval from the trustees for the revised policy.

Annual Follow-Up Agency Response From November 2020

We have highlighted policy changes requiring campuses to notify the Chancellor's Office of planned uses of reserves during the 2020-2021 budget year and beyond. Campus budget submittals pursuant to these policy changes are reviewed by the systemwide budget office and approved by the chief financial officer at the Chancellor's Office.

Furthermore, as noted in our previous responses, Executive Order 1000- Delegation of Fiscal Authority and Responsibility requires that campus presidents provide effective oversight of all state funds held by the campuses and all funds held in a fiduciary capacity, including approval of the use of reserves for economic uncertainty.

With regard to the California State University's commitment to financial transparency, each year the Chancellor's Office provides a tuition proposal report to the California State Student Association that includes a discussion about operating fund designated balances and reserves, including the reserves for economic uncertainty, and designated balances and reserves are listed as one alternative for addressing any potential operating budget shortfall.

We believe the steps above enforce appropriate oversight responsibilities recommended by the California State Auditor that do not contradict existing Standing Orders of the Board of Trustees delegating authority and responsibility to the Chancellor and presidents for oversight of business and financial affairs of the 23 campuses. Further, these oversight actions avoid unnecessary and redundant work at the systemwide level to monitor transactions that are already reviewed by the chief financial officer of the California State University annually, reported in the annual audited financial statements, and published on the CSU Financial Transparency website. We respectfully request that the State Auditor consider reassessing this recommendation as fully implemented based on the information provided.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We continue to assess this recommendation as partially implemented. In its annual update, the Chancellor's Office provided a copy of campus budget submission instructions for fiscal year 2020-21. The instructions included information about budget codes campuses can use to identify that they are balancing revenues and expenditures in the CSU operating fund by drawing on their reserves for economic uncertainty. However, the Chancellor's Office did not indicate that it will use the budget information to notify the board of trustees about CSU's use of reserves. We maintain that there is a need for additional oversight from the board of trustees regarding CSU's accumulation and use of reserves. Specifically, we stand by our recommendation that the Chancellor's Office obtain the trustees' approval of CSU's reserve policy and notify the trustees of uses of the reserves for economic uncertainty.

1-Year Agency Response

The Chancellor's Office continues to assert this recommendation is fully implemented. We disagree that additional monitoring and oversight of the reserve for economic uncertainty is necessary. As noted previously, with regard to approval for the use of reserves for economic uncertainty, Executive Order 1000, issued pursuant to the Standing Orders of the Board of Trustees (BOT) and the California Education Code, delegates authority to the campus presidents for effective oversight of all state funds held by the campuses and all funds held in a fiduciary capacity. In addition, campuses prepare an annual budget submission that includes information about their reserves for economic uncertainty and this information is reviewed by the systemwide budget office and must be approved by the chief financial officer at the Chancellor's Office.

Moreover, each year since 2016, the Chancellor's Office has provided a tuition proposal report to the California State Student Association. The proposal includes a discussion about the use of operating fund designated balances and reserves, including the reserves for economic uncertainty and further demonstrates the California State University's commitment to financial transparency. The designated balances and reserves are listed as one alternative for addressing a potential operating budget shortfall.

We believe these steps satisfy appropriate oversight responsibilities. The additional monitoring and oversight recommended contradicts the Standing Orders of the BOT delegating authority and responsibility to the Chancellor and presidents. In addition, the recommendation would result in significant and unnecessary work at the systemwide level to monitor such transactions, which are already reported in the audited financial statements, on the CSU Financial Transparency website and reviewed by the Chief Financial Officer of the California State University annually in response to the CSU policy on designated balances and reserves.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

We continue to assess this recommendation as partially implemented. We stand by our recommendation that it should include in its policy additional monitoring and oversight of the reserve for economic uncertainty. In November 2019, the Chancellor's Office revised its reserve policy to establish that reserves for economic uncertainty should accumulate a minimum of three months, and a maximum of six months of the annual operating budget. It also revised its policy to specify that the Chancellor's Office will annually share information about designated balance and reserve levels with trustees and other stakeholders. However, it did not include additional oversight to ensure that CSU maintains the minimum sufficient level of reserve for economic uncertainty.

The executive order that the Chancellor's Office references in its response states that campus presidents shall ensure that sufficient reserves are established for funds operated outside the state treasury system, in accordance with CSU policies, standards, and definitions. Hence, the Chancellor's Office could update its policy to provide additional oversight over the reserve, including monitoring, approving, and notifying the trustees of any uses of the reserve for economic uncertainty. The Chancellor's Office should also obtain approval from the trustees for the revised policy.

6-Month Agency Response

The Chancellor's Office revised the reserve policy to require the publication of information about the designated balances and reserves and include information about a minimum sufficient level for reserves for economic uncertainty. The policy was presented at the November 2019 Board of Trustees meeting. Oversight of the reserve balances is achieved via the annual reporting requirements and sharing the information with the trustees annually. With regard to approval for the use of reserves for economic uncertainty, Executive Order 1000, Delegation of Fiscal Authority and Responsibility, issued pursuant to Standing Orders of the Board of Trustees and the California Education Code, delegates authority to the campus president for effective oversight of all state funds held by the campus and all funds held in a fiduciary capacity. In addition, campuses prepare an annual budget submission that includes information about their reserves for economic uncertainty and this information is reviewed by the systemwide budget office and must be approved by the chief financial officer at the Chancellor's Office.

Moreover, each year since 2016, the Chancellor's Office has provided a tuition proposal report to the California State Student Association. The proposal includes a discussion about the use of operating fund designated balances and reserves, including the reserves for economic uncertainty and further demonstrates the California State University's commitment to financial transparency. The designated balances and reserves are listed as one alternative for addressing a potential operating budget shortfall.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

In November 2019, the Chancellor's Office revised its reserve policy to establish that reserves for economic uncertainty should accumulate a minimum of three months, and a maximum of six months of the annual operating budget. It also revised its policy to specify that the Chancellor's Office will annually share information about designated balance and reserve levels with trustees and other stakeholders. The Chancellor's Office should update its policy to provide additional oversight over the reserve, including monitoring, approving, and notifying the trustees of any uses of the reserve for economic uncertainty. The Chancellor's Office should also obtain approval from the trustees for the revised policy.

60-Day Agency Response

The Chancellor's Office is drafting policy updates to implement the recommendation.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2018-127

Agency responses received are posted verbatim.