Inside Iowa State: Iowa State University

May 28, 2003

Q&A on new administrative fee

On July 1, Iowa State will begin assessing a 2 percent administrative fee on external income received by units of the university. Currently, about a half dozen units on campus pay an administrative fee, but not at a uniform rate. The goal, over several years, is to bring the rate up to 4 percent, which is fairly consistent with what other universities charge for like services.

Uniformly assessing an administrative fee at Iowa State was a recommendation this spring from the president's advisory committee on budget and planning. Initially, the idea was proposed to that committee via an e-mail to goodideas@iastate.edu. President Gregory Geoffroy studied the recommendation, talked with the vice presidents about the effects of implementation and approved it in late April.

The early estimate on how much additional income this fee will bring in for Iowa State in FY04 is $1.4 million.

Following is a series of common questions about the how and why of the fee. Answers were provided by members of the controller's department.

Why an "administrative" fee? What will it pay for?
The administrative fee will allow the university to recover part of the cost of providing institution-wide support services. These include human resources, payroll and purchasing, as well as accounting functions such as billing, intramural processing and cash management. It does not include other centralized functions such as public safety, environmental health and safety or building operation and maintenance. Currently, most of these services are being paid for with general university funds.

Who has to pay it?
All units of the university that generate external income not subject to indirect cost recovery must pay the fee. It will be based only on externally generated revenue. Many, though not all, of the units affected are self-supporting or auxiliary units of Iowa State.

How is this fee being calculated?
For the first three quarters of FY04, the fee will be based on an estimate of external revenues using data from FY02 and the first nine months of FY03, annualized. (Total revenues for 21 months ÷ 21 x 12). We needed some kind of a model and this is what we felt provided the best estimate of FY04 revenues.

However, in response to concerns raised from some units, the FY04 fourth quarter assessment will be adjusted to reflect actual FY04 revenues. The long-term goal is to automate the process so the administrative fee is assessed as external income is received.

Who is considered an "external" client?
Anyone who doesn't pay with an ISU intramural form is considered external.

What sorts of revenue are not subject to the fee?
The following revenues will be removed from a unit's total receipts to arrive at a base on which the administrative fee is calculated:

Student tuition and mandatory student fees
Intramural billings to other university departments
Internal transfers
Course and special program fees (ex. fees for study abroad)
Private funds raised by the ISU Foundation
Interest income

Will any income from students be subject to the fee?
Yes. Some examples include room and board paid to the residence system, bookstore purchases, prescriptions at the student health center and purchases made at the Microcomputer Product Center.

Why is the fee based on revenue, not another consideration such as operating expenses or FTEs?
If your unit operates on a zero-profit basis, the expenses and revenues should pretty much mirror each other. It's easier to distinguish external income from internal income for accounting purposes. In many cases, it would be impossible to identify which expenses relate to external sales.

As mentioned above, the plan is to automate this assessment in the future, modeling it on the indirect cost recovery process, which assesses the fee as the income is recorded.

Simplicity is another goal in implementing this fee. If we charge one fee for human resource-related services based on FTEs, and another fee for accounting or purchasing services based on volume of purchases made, the system becomes cumbersome, labor-intensive and thus expensive to administer. Under a system like that, units could pay even more.

Is this a quick-fix solution to state budget cuts?
This is a revenue-generating strategy considered in light of reduced state appropriations and the need to self-fund salary increases. New revenues from the administrative fee will reduce the impact of the cuts while also protecting the core mission of Iowa State, which is educating students. An alternative would be across-the-board budget cuts, which President Geoffroy said he wants to avoid this year.

The administrative fee is not an unusual feature on university campuses. Iowa State simply hasn't applied it consistently and in many cases, at all, up to now. More than half of Iowa State's peers among the land-grant 11 and the Big 12 conference universities assess administrative fees between 2 percent and 5 percent.

Isn't the "new" revenue from this fee merely "phantom" revenue -- or a reallocation from smaller units to a centralized pool?
One reason intramurals are excluded from the assessment is to avoid the transfer of funds among university accounts that generate no new revenue. We anticipate that most units will recover the fee by raising prices by 2 percent to their external customers. In that case, it is real revenue.

For a variety of reasons, including market considerations, we know that some units may not be able to adjust their pricing. In these cases, units will need to look for other cost-cutting measures in their budgets to accommodate the cost of the administrative fee.

Will units pay more than those services are worth, due to the university's tight budget situation?
The notion that all these support services of the university will continue to be covered by the general university fund is not as acceptable as it used to be. The trend in higher education, particularly at private schools, is to fully recover all such costs. We're not trying to recover all costs, but this is an attempt to recover some.

In just the last three years, the state of Iowa's reductions in appropriations to Iowa State, shortfall in salary funding and unavoidable cost increases has totaled more than $92 million. Without that trend, we may not have arrived at this recommendation, at least not yet.

Can we bill our clients for what these fees will cost us?
The fee can be passed on to external customers only -- not internal customers.

Do I have to pay an administrative fee on an account that is eliminated during the year?
The fee will be charged on external income each quarter until the account has a zero balance and the controller's department has been notified that the account can be closed. No fee will be charged to a closed account.

Can I get my unit exempted from paying this?
The short answer is no -- the administrative fee will be applied consistently -- but read on.

The group of units that will be assessed the administrative fee has been reviewed carefully; ISU budget officials believe it is accurate. All affected units should have been notified by now through their vice presidential offices. Each unit is encouraged to verify the reasonableness of the calculations, based on the model outlined above. Call associate controller Stephanie Fox, 4-2556, to discuss potential errors.

Units with larger concerns about the policy and how it's being applied should bring these to their vice president.