University Finances: Q&A with author Dean O. Smith

 Q: Why did you decide to write University Finances: Accounting and Budgeting Principles for Higher Education?

As a chief research officer and a chief academic and operating officer, I wrestled with university finances on a daily basis. Not as a scholar of higher education, but as a university executive officer responsible for generating sufficient revenue and managing expenditures to support the university’s mission.  Many times, I wished that I had a reference book explaining the theoretical basis of the numbers that I was working with. So, in retirement, I decided to write this book, clarifying the mysteries of university finance.

Q: What is new about your book that sets it apart from other books in the field?

The hallmark features of this book are its rigor and its breadth. It brings together theoretical and practical approaches to nearly all of the major issues confronting administrators in higher education. And, it provides useful examples of calculations that sometimes can be quite daunting. In fact, numerical examples throughout the book derive from two sets of core financial data, one for a private university and one for a public university. In that way, the respective examples are linked together. Pedagogically, this allows the reader to “follow the numbers” as they appear in various financial settings.

Moreover, to make the book more useful, I provide detailed calculations of topics that I encountered “on the job”: fringe benefit rates, indirect cost allocations, F&A rates, federal formula fund allocations, bond refunding, pension benefits, program closures, to name a few. These topics usually are seldom mentioned in other books on accounting and budgets. In that sense, University Finances is a trove of information not readily available to anybody but a few professional accountants.

Q: What were some of the most surprising things you learned while writing and researching the book?

The most surprising thing that I have learned while writing this book is the theoretical rigor of the accounting profession. As a medical school professor and university administrator, my work had entailed extensive analysis of data, so I was comfortable working with numbers. But, I had no training in accounting. So, as I began working on this book, I studied accounting assiduously: read textbooks, consulted experts, took courses, studied financial reports, and so forth. Ultimately, I developed an appreciation of the underlying principles; they make sense.

Q: Did you encounter any eye-opening statistics while writing University Finances?

Yes. I discovered that universities lose money on every research grant due to under-recovery of indirect costs. That discovery raised a question: Why do many universities strive to increase the number of grant awards? After analyzing statistically numerous potential benefits of increased research expenditures, I discovered that there were few significant advantages; the only significant financial reward is increased annual donations to the university, but the increased giving isn’t enough to offset the under-recovery of indirect costs. Otherwise, the major advantage to increased research is simply institutional prestige (which is worth a lot).

Q: Does your book uncover or debunk any longstanding myths?

The book debunks the suspicion that universities have large stashes of money available for general use. This suspicion becomes particularly prevalent during periods of budgetary stress. True, universities have sizeable reserves of money. But, as this book points out, nearly all of that money is restricted legally for specific uses, not including faculty and student salaries.

Q: What is the single most important fact revealed in University Finances and why is it significant?

Universities may appear wealthy on their balance sheets, but the use of this wealth is highly restricted. That is, use of the money isn’t discretionary; it must adhere to guidelines imposed by donors, bondholders, government regulators, and others. These restrictions are not always recognized or understood by many observers, including faculty members and legislators. 

Q: How do you envision the lasting impact of your book?

University Finances will become a trusted resource for members of the extended university community. It may sit on the shelf for a while, but when readers seek answers to specific financial questions, they will reach for this book, confident that it will provide the answers.

Q: What do you hope people will take away from reading University Finances?

Readers will develop a better understanding of university finances – of the underlying accounting principles and their practical application. Ultimately, this will improve university governance.

Dean O. Smith has served in the higher administration of four major universities: the University of Wisconsin–Madison, Texas Tech University, the University of Alabama in Huntsville, and the University of Hawaii, where he is now professor emeritus. He is the author of University Finances: Accounting and Budgeting Principles for Higher EducationManaging the Research University and Understanding Authority in Higher Education.