UA policy sets rules on loans

Focus on internal lending

A new fiscal policy adopted by the University of Arkansas System’s board of trustees sets rules for loaning money among funds within an institution.

Such internal loans “are not intended, and will not be used, to cover deficit spending,” the policy states.

The new policy comes after scrutiny from auditors and legislators last year seeking answers to how the University of Arkansas at Fayetteville’s main fundraising arm ran up a $4.19 million deficit over a two-year period that ended June 30, 2012.

Auditors faulted university management for failing to provide enough fiscal oversight during a time when spending in UA’s Advancement Division increased without a rise in revenue.

An Arkansas Division of Legislative Audit report singled out UA’s vice chancellor for the division, Brad Choate. Both Choate and an advancement budget director, Joy Sharp, lost their jobs.

The report, dated Sept. 10, 2013, also noted that improperly listing funds as “accounts receivables” helped to obscure the deficit and that UA should have done a better job in financial statements to report loans owed to the University of Arkansas Foundation, the conduit for most of UA’s private donations.

A separate UA System audit report noted the lack

of a UA policy for establishing internal loans. It stated that if deficits are to be reclassified as internal loans, there should be a board of trustees policy to approve such loans.

While no such reclassifications have taken place, the new policy comes about as a result of audit report recommendations, said UA System spokesman Nate Hinkel. Such internal loans are “not very common at all,” Hinkel added.

LOAN DETAILS

The new policy, adopted Sept. 12 by the UA System board, covers not only interfund loans but also interinstitutional loans, requiring the same application process.

It states that each unit seeking an internal loan “must submit a fiscally responsible and achievable plan in support of a timely repayment” to the UA System’s vice president for finance and chief financial officer.

Plans must include information about the borrowing need and amount of the loan. The plan must also include “other financing options available and why an internal loan is favored over other options.”

Repayment terms for loans of less than $500,000 are limited to five years, while repayment terms for loans of more than $500,000 have 10-year limits.

The policy refers to a “Request for Internal Loan” application form, but Hinkel said no form has yet been developed.

Loans require approval of the UA System board of trustees, the policy states.

“Moving forward, anytime there is a loan, it will be discussed at board meetings and therefore open to the public,” Hinkel said.

GARVAN GARDENS

The decision disclosed last month by UA to eliminate the approximately $5.7 million deficit of Garvan Woodland Gardens, a part of UA’s architecture school, is not considered an internal loan, Hinkel said.

“Using reserve funds for Garvan Gardens does not constitute a loan and would not need approval by the board,” Hinkel wrote in an email.

The Hot Springs venue attracts thousands of annual visitors with tulip and Christmas light displays, but it’s also described on the website for UA’s architecture school as a “living laboratory” for students and faculty members. The university received it as a gift after the death of Arkansas business leader Verna Cook Garvan.

UA officials described the elimination of the Garvan Woodland Gardens deficit as an accounting maneuver.

“There is no expectation that the funds be repaid,” UA spokesman Laura Jacobs wrote in an email.

The deficit elimination took place at the close of the most recent fiscal year, which ended June 30, according to UA officials.

Jacobs also wrote that there was “never a formal loan process” involving the botanical gardens and UA. The garden opened to the public in 2002, running up a deficit as UA officials said they hoped revenue eventually would make up for the shortfall.

I t never happened, though the garden, aided by state General Improvement Fund dollars, for the first time operated without a deficit in the fiscal year that ended June 30. UA is offering about $300,000 in financial support this fiscal year, with plans for similar commitments in future years, Tim O’Donnell, UA’s interim vice chancellor for finance and administration, has said.

POLICY PARTICULARS

Along with t he new policy on internal loans, a separate UA System policy adopted in January now requires institutions to report more frequently about deficits to the board of trustees.

As for the internal loan policy, Jacobs wrote: “We learned a lot though the audit and emerged a stronger institution demonstrated by financial and accounting process improvements. The UA System policy only helps to reinforce this.”

If internal loans are rare, Hinkel said the new policy allows the loans to be used almost like a “business incubator.”

“The goal would be to help these certain areas or entities flourish,” Hinkel said. Before being approved, “they’re going to have to be able to show some kind of revenue streams to pay that loan back,” Hinkel said.

The new policy specifically discusses repayment planned through private gifts, stating that there must be a signed statement from a unit head and institution chancellor pledging that there is “sufficient certainty” of repayment based on pledges already received.

The policy states the maximum and minimum amount for such loans, as well. Inter-fund loans may not exceed 10 percent of an institution’s available unrestricted reserves. At the close of the previous fiscal year, for example, UA had a total of about $142 million in such reserves, according to Jacobs. The same percentage limit is in place for the UA System in regard to any inter-institutional loans.

The minimum amount for such loans is $100,000, the policy states.