The University of Arkansas at Fayetteville won’t implement a “gift tax” on donations to offset a deficit in its Advancement Division, UA spokesman John Diamond said.
Chancellor G. David Gearhart has no plans to reconsider such a tax, also known as a “reinvestment fee,” after saying in January that he was postponing the idea.
When the Advancement Division finished the fiscal year that ended June 30, 2012, with a $3.37 million deficit, Gearhart considered implementing the gift tax to bring in $1.5 million a year.
When Gearhart told deans in an e-mail that he was postponing consideration of the gift tax, he said he would wait at least until the current fiscal year ended June 30 before implementing such a tax.
But the gift tax won’t be implemented in the next fiscal year either, Diamond said.
“The chancellor notified the deans in January that he had rejected that suggestion. He does not have any interest in reconsidering it,” Diamond said in an e-mail May 3 to the Arkansas Democrat-Gazette.
The idea for the gift tax was proposed in October by Brad Choate, UA’s vice chancellor for the Advancement Division. Choate, who has led the division since 2008, won’t be retained next year as a result of the deficit, Gearhart has said.
In an e-mail Oct. 27 to Choate about the proposed gift tax, Donald O. Pederson, UA’s vice chancellor for finance and administration, wrote, “I think getting the deans on board is going to be difficult and not necessarily a given.”
No UA dean responded to e-mails in May seeking comment about the chancellor’s decision not to reconsider the gift tax.
In January, several deans expressed relief that UA would wait on consideration of such a tax, according to their e-mails, which the Democrat-Gazette obtained through a Freedom of Information Act request.
The deficit in the
Advancement Division was attributed mainly to overspending on salaries to hire additional staff members in preparation for a fundraising campaign.
“By buying some time to work through this in an orderly fashion, you may have just saved the campaign from going over a cliff before it ever got started,” wrote Bob McMath, dean of UA’s Honors College, in an e-mail Jan. 10 to Gearhart.
FUNDING THE DIVISION
For more than a decade, UA has used income from both endowed and nonendowed donations to help fund its Advancement Division.
Endowments are donations set aside in perpetuity to earn income from capital gains, dividends and interest. The principal normally remains untouched while the income is used to support university programs.
There are three different ways UA draws revenue from donations to fund the Advancement Division, according to a proposed budget for fiscal year 2013. The rejected gift tax would have been the fourth.
Since 1999, one-half of 1 percent of the market value of UA-Fayetteville endowments has gone to fund the Advancement Division each year. That formula was expected to generate $2.9 million in fiscal 2013.
In addition, since the mid-1990s, nonendowed donations to UA have been used to fund the Advancement Division through a formula that entails taking 90 percent of the interest earned on the funds, then subtracting one-half of 1 percent. That formula was expected to generate about $1.5 million this fiscal year.
Also, there is a 15 percent gift tax on UA’s Annual Fund, which was established in 1955 by the Arkansas Alumni Association. That tax was projected to generate $141,614 this fiscal year.
The existing funding formulas generate about $4.5 million a year for the Advancement Division. That money, which normally makes up about half of the division’s annual budget, is used at least in part to help raise more money. The rest of the division’s budget has come from public funds.
The fee Gearhart was considering would have been taken from nonendowed donations, Diamond said.
With no new source of revenue proposed, it’s unclear how the Advancement Division will balance its budget in fiscal 2014, which begins July 1.
Diamond wouldn’t say what has been done so far to help correct the deficit in the Advancement Division or what is planned for the next fiscal year.
“Both budgets are still being worked on,” he said in an e-mail.
1999 FUNDING CHANGE
Gearhart was instrumental in getting the current mechanism in place to fund the Advancement Division. He was UA’s chief fundraiser for a decade before becoming chancellor in 2008.
The chancellor stopped talking to the Democrat-Gazette earlier this year about the deficit in the Advancement Division. He didn’t respond to an e-mail regarding the rejected gift tax.
According to a 1999 article in the Democrat-Gazette, it was Gearhart who proposed the formula on endowment income to help fund the Advancement Division. Gearheart said it was a common practice at foundations across the country, and it would make a difference in what UA fundraisers were able to do.
The UA board of trustees approved a policy that year.
The 1999 change is reflected in UA Board Policy 470.2, Section V(4), which states that the university “may allocate a portion of the income of an endowment to its reasonable and necessary costs of administering the endowment and effortsof the university to increase and enhance the endowment through other gifts and endowments.”
The policy is also applied to endowments that were given to UA before 1999.
Although the policy states that “a portion of income” from endowments can fund more fundraising, Diamond confirmed that the half-percent is calculated not on income but on the total market value of the endowments.
DONORS NOT BOTHERED
UA doesn’t specifically spell out the gift taxes to donors in its “gift agreement” documents. The documents donors receive state that the gift will “be subject to the policies and procedures” of the university, its trustees and the Arkansas Uniform Prudent Management of Institutional Funds Act. The act is codified as Arkansas Code Annotated 28-69-801 through ACA 28-69-810.
Robert A. Young III of Fort Smith, a UA donor, said he has no problem with theformulas that currently apply to donation income.
“That doesn’t bother me,” said Young. “It costs money to raise money. I think what they’re doing is perfectly normal, and nothing wrong with it.”
Young said the amounts being used for the Advancement Division are small.
“It’s so ‘de minimis,’ I don’t see why anybody would be so concerned about it,” he said. “If they were taking 20 percent, it would be a big deal.”
Other donors contacted for this story said they had no comment.
News of the Advancement Division’s deficit seemed to surprise many at UA when it came to light last fall.
Joy Sharp, Choate’s budget officer in the Advancement Division, was demoted and moved to another department. Sharp took the blame for most of the financial problems in the division. Gearhart said she was “in over her head.”
Choate and Sharp haven’t spoken to the media since the deficit was discovered.
Northwest Arkansas, Pages 15 on 05/19/2013