Administrative tax on private donations stings poetry center

As spending at the UA becomes

more and more constrained, the

administration has had to seek ever-more creative ways of raising and allocating funds.

In April, President Manual T. Pacheco announced a new 1.5 percent fee to be levied on the market value of all endowments at the university. Shortly thereafter, the fee was retroactively applied to endowments for the 1994-95 academic year.

Though the president announced the new policy in April, the matter is long from settled for some endowment recipients.

Alison Deming, director of the UA Poetry Center, said she was stunned when she learned that the 1.5 percent fee meant that she lost $8,000 of the $21,000 the center's library acquisition endowment had earned last year.

On June 12 she wrote to Pacheco asking that he review the policy and consider exempting her endowment from the fee this year.

In an April 5 memo describing the administrative fee, Pacheco wrote, "Because this amount may be paid from income or gains, neither the pay out from individual endowments, nor the programs supported, should be significantly affected." The memo did not say that the fee would be retroactively applied to the past year.

But the fee, Deming pointed out, did significantly affect the poetry center's endowment. "I do not believe he intended it or that anyone knew the impact it would have on the poetry center," she said. But now that the impact is clear, she said, the administration should consider the center's unusual circumstances.

"The poetry center's situation is an anomaly and should be treated as such," she said.

Dennis Evans, associate director for development and associate dean at the College of Humanities, agreed.

"The situation with Alison is the most disturbing I know of," he said. "I think there is a great argument there for making an exception, but I don't know how willing the president will be."

But, he said, "if the president wanted to change this policy at any time, my impression is that he could do it with the sweep of a pen."

As of last week, Deming had received no response to her request.

Because another key element of

the new spending policy, which

will pay out a uniform rate to all university endowment holders, will go into effect for the coming year, the poetry center is likely to receive more money in the future, said Penny Krutchfield, an associate controller for the UA.

"But it didn't really give me a lot of comfort to be told it will be fine next year," Deming said.

Essentially, endowments are gifts to the university from outside sources. These gifts may come as cash, stocks or property. Whatever the form, these donations are managed, either by the university or by the University of Arizona Foundation, with the goal of keeping the endowments continually growing in value and producing revenue, which is the money recipients are able to spend.

The new spending policy was recommended by a committee of senior administrators, deans, UA Foundation board members and Alumni Association board members. The policy calls for calculation of the fee based on the total market value of an endowment. As of June 30, 1994, the last date for which figures were available, the market value of university endowments was $67 million and $37 million for foundation endowments.

Ed Frisch, director of resource

planning and management for

the office of academic affairs, said the fee is painful but necessary. He said the university has been spending approximately $2.5 million of local funds on development activities, which includes fund raising and its associated costs.

He said that the administration realized last year that the university would not have enough money to cover all of its costs for the coming year. So rather than go back to colleges, programs and activities and again ask them to give up part of their budgets, the administration decided it would directly tie the cost of development programs to the money that those programs generate.

Gary Scrivner, vice president of finance and administration for the UA Foundation, emphasized that the policy is really a "reallocation."

"People are focused on the fee but not on what it has accomplished around the university. We will have more money for the university, for educational expenses."

Sharon Kha, assistant to the president, said that the $2.5 million had in fact been reallocated last July to programs on the academic side of the university. So the funds had already been spent and the administration was committed to no longer using state money for development activities.

Krutchfield explained why the poetry center's situation was unusual and why it lost such a huge chunk of its spending money this year.

Their endowment, worth almost $540,000, is used for library acquisitions at the center and is one of the largest at the university. Approximately one half of this is held in stock that, despite its high value, has paid out very low revenues approximately 1 percent in the last few years. The other half is held in an investment pool, as are many university and foundation endowments. This portion paid out approximately 4 percent.

The combination of these two resulted in a fairly low return of 2.5 percent last year. But since the fee is based on the total value of an endowment, not how much it pays out, it resulted in a 38 percent reduction in the poetry center's library budget.

Had the new payout rate portion of the policy been in effect for this year, the poetry center would not have been hit so hard, Krutchfield said.

The university investment committee has set this rate at 4.5 percent for the coming year, said Ron Smith, UA controller.

In the past, recipients of university endowments found out on a month to month basis how much money they would have to spend, then each month the university paid out whatever cash an endowment earned in interest and dividends.

The new spending rule means that people will know exactly how much money they will get, whereas in the past they had to guess every month, Smith said.

Besides increased predictability, the new spending rule, he said, should help endowments grow. Rather than paying out all the money an endowment earns, the university will pay out 4.5 percent (for the coming year), deduct the 1.5 percent fee, and if there are any surplus earnings, they will be put back into the endowment fund.

"You are talking about a trade off between now and the future," Krutchfield said of the spending rule.

The UA Foundation has had a similar spending rule on its endowments for nearly 10 years, though the fee is new, Scrivner said.

Kha said the performance of foundation endowments, which have grown faster than university endowments, made the university want to follow the foundation's lead on spending.

Though programs with endow

ments that are unable to

produce the 1.5 percent fee for the university and also have enough money left to cover their budgets, may have to dip in to their capital gains (the increase in the value of the investment) to make up for the deficit. This, Scrivner said, would slow the growth of such endowments.

Deming said that the poetry center is considering such a move to make up for the loss in income this year.

Besides the objection to the $8,000 loss in the poetry center's library budget, Deming said she has ethical objections to the policy.

"That money was left by private donors with the stipulation that it was for the library acquisition account for the poetry center, not that it was for development activities university-wide, which is what we just kicked $8,000 in for," she said.

"If the university wants us to raise outside money to support our programs, they have to help us foster good donor relationships. Part of that is our being able to speak with integrity about how we are spending their money."

Since the donors of the poetry center endowments have long since departed this world, Deming can not be sure how they would react to the new policy.

Some live donors have expressed their dismay.

Frank Felix, associate director of scholarship development, said he has spent much of his time lately explaining the new policy to angry and confused donors.

The largest donor to the College of Social and Behavioral Sciences was enraged when she learned of the policy, said Julia Patterson, a development officer for SBS.

Because many UA donors remain anonymous, individual donors could not be reached for comment.

Before this policy was implemented, Scrivner said that donor groups and representatives from the Alumni Association were asked for their input on how to raise the money necessary to pay to development expenses.

Another idea that the university considered but rejected was a "front-end" tax on donations, a common policy at many Pac-10 schools, Patterson said. This would have meant extracting a fee from all donations, probably about 5 percent, as they came to the university.

The idea was abandoned, Scrivner said, for fear it would have a severe chilling effect on donations.

It remains to be seen at this early stage if the new policy adopted will have its own chilling effect.

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