Advice to State Governors: Keep Your Hands Out of College Foundation Cookie Jars

Rhode Island is the smallest state in the nation. It is easy to drive through it without realizing you were ever there. It is called the Ocean State, because despite its size, it has a tremendous amount of coastline. The Ocean State has among the highest unemployment rates in the nation and among the highest foreclosure rates in New England. Rhode Island is well known for corruption, along with a state government that has a poor record of managing its finances.

The latest questionable practice to emerge from Rhode Island is the governor receiving financial assistance from two college foundations for what many consider state business. Earlier this winter, Governor Gina Raimondo wanted to attend the World Economic Forum in Davos, Switzerland. News reports indicate that the University of Rhode Island Foundation “offered” to cover up to $10,000 of her travel costs.

In that same week, Raimondo wanted to create a state innovation office and the Rhode Island College Foundation agreed to create it. The office will have one employee, a chief innovation officer who will earn $210,000 a year and serve on the governor’s cabinet. I assume that the foundation will simply write a check to the state instead of running the innovation office out of the foundation.

Many in the state have questioned whether such spending is appropriate for the two institutions. The Rhode Island College Foundation’s associate vice president, who admits that the foundation’s mission is to support Rhode Island College, calls this an “out of the box” way to support the college.

The university and college already make payments to the state and local government using what are called “payments in lieu of taxes.” Such payments have generally been justified because the institutions use local services (such as police and fire protection) that do not come without a cost to the taxpayers. As much as government would like to suggest that such arrangements are normal, a recent study revealed that they only exist in 28 states, mostly in the Northeast. Of course, the wealthier institutions are in the northeast and where there is wealth, government revenue seekers will not be far behind.

Governor Raimondo indicates that she got this idea from the University of Connecticut Foundation, which paid for two trips by Connecticut Governor Malloy in 2012. The UConn foundation is not without controversy, something I have commented on in the past.

The University of Rhode Island and Rhode Island College foundations are both tax exempt under section 501(c)(3) of the Internal Revenue Code. As such, their spending limitations are restricted by the IRS regulations applicable to tax-exempt charitable institutions. This means that all spending must be in furtherance of the tax-exempt mission of each foundation.

What is the mission of each foundation? Each institution files IRS Form 990 and question one of Part 1 asks for a brief description of the organization’s mission. Rhode Island College said its mission is to “encourage and receive private and public support to enhance and expand Rhode Island College’s continued tradition of educational excellence.”  The University of Rhode Island indicated that its tax-exempt mission is “to inspire and steward philanthropic support benefitting the University of Rhode Island.”

So how does paying for travel to an international economic forum and a statewide innovation office fit into these tax-exempt missions? This is not just a question for each foundation, but is important to every taxpayer since proper spending by tax-exempt entities is the cornerstone of the tax-exempt status section of the Internal Revenue Code.

News reports of these transactions tended to focus on the reaction of the two foundation’s donors. Therefore, comments by foundation leaders may not be contextual to the thesis of this post. But one comment suggested that both payments came from the foundations’ unrestricted funds—money not designated by a donor for a specific purpose like scholarships or academic programs. The question of restricted or unrestricted money is irrelevant to the issue at hand.

According to IRS regulations, funds may only be spent to advance the tax-exempt mission of the charity. Unrestricted money cannot be spent on just anything, or spent “as the foundation sees fit,” as one article noted. In this respect, all of the funds of a tax-exempt charity are restricted to some degree—some more than others. The trip to Switzerland was cancelled due to a snow storm in Rhode Island, so the URI Foundation is off the hook. When the Rhode Island College Foundation is audited by its independent auditors this year, it will have to demonstrate how the expenditure for the innovation office advances the tax-exempt mission of the foundation.

The Rhode Island College associate vice president is quoted as saying that the foundation-funded state innovation office will mean research opportunities, fellowships and internships for faculty and students. If this is viewed as consistent with the mission to expand Rhode Island College’s continued tradition of educational excellence, then this payment is within the law. How would you rule if you were the auditor?