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In light of the recent cyberattacks in higher education across the US, more and more institutions are finding themselves no longer immune to these activities. Security by obscurity is no longer an effective approach—all institutions are potential targets. Colleges and universities must take action to ensure processes and documentation are in place to prepare for and respond appropriately to a potential cybersecurity incident.

In my last blog, I defined the what and the why of data governance, and outlined the value of data governance in higher education environments. I also asserted data isn’t the problem―the real culprit is our handling of the data (or rather, our deferral of data responsibility to others).

Focus on the people: How higher ed institutions can successfully make an ERP system change

The enterprise resource planning (ERP) system is the heart of an institution’s business, maintaining all aspects of day-to-day operations, from student registration to staff payroll. Many institutions have used the same ERP systems for decades and face challenges to meet the changing demands of staff and students. As new ERP vendors enter the marketplace with new features and functionality, institutions are considering a change. Some things to consider.

“The world is one big data problem,” says MIT scientist and visionary Andrew McAfee.

That’s a daunting (though hardly surprising) quote for many in data-rich sectors, including higher education. Yet blaming data is like blaming air for a malfunctioning wind turbine. Data is a valuable asset that can make your institution move.

As a new year is upon us, many people think about “out with the old and in with the new”. For those of us who think about technology, and in particular, blockchain technology, the new year brings with it the realization that blockchain is here to stay (at least in some form).

A capital campaign is a big undertaking. During the planning stage of a capital campaign you need to not only focus on your donor outreach strategy, but also on outreach materials. 

Good fundraising and good accounting do not always seamlessly align. While they all feed the same mission, fundraisers work to meet revenue goals while accountants focus on recording transactions in compliance with accounting standards. 

With the wind down of the Federal Perkins Loan Program and announcement that the Federal Capital Contribution (FCC) (the federal funds contributed to the loan program over time) will begin to be repaid, higher education institutions must now decide how to handle these outstanding loans.

Cloud services are becoming more and more omnipresent, and rapidly changing how companies and organizations conduct their day-to-day business.

The late science fiction writer (and college professor) Isaac Asimov once said: “I do not fear computers. I fear the lack of them.” Had Asimov worked in higher ed IT management, he might have added: “but above all else, I fear the lack of computer staff.”

The first time a student walks into a business class, they may expect to learn a lot about numbers. What they might not realize is they are walking into a foreign language class! 

As a leader in a higher education institution, you'll be familiar with this paradox: Every solution can lead to more problems, and every answer can lead to more questions. It’s like navigating an endless maze. When it comes to mobile apps, the same holds true. 

The relationship between people, processes, and technology is as elemental as earth—and older than civilization. From the first sharpened rock to the Internet of Things, the three have been crucially intertwined and interdependent. 

The Federal Perkins Loan Program expiration date has passed without extension and now the countdown is on for the program wind-down.

While GASB has been talking about split-interest agreements for a long time (the proposal first released in June of 2015, with GASB Statement No. 81, Irrevocable Split-Interest Agreements released in March of 2016), time is quickly running out for a well-planned implementation.

We humans have a complex attitude toward change. In one sense, we like finding it. For instance: “Now I can buy something from the vending machine!” In reality, we try to avoid change as much as possible. Why? 

We’ve all heard stories about organizations spending thousands on software projects that take longer than expected and exceed original budgets. One of the reasons this occurs is that organizations often don’t realize that purchasing a large, commercial off-the-shelf (COTS) system is a significant undertaking.

As we begin the second year of Uniform Guidance, here’s what we’ve learned from year one, and some strategies you can use to approach various challenges, all told from a runner's point of view.

Digital assets, such as cryptocurrencies and non-fungible tokens (NFTs), are changing how consumers and businesses pay, bank, and invest. A recent survey by Capitalize found that 60% of respondents would like a cryptocurrency investment option in their 401(k) plans. Several service providers, including Fidelity, have responded to that request by offering 401(k) participants direct but limited cryptocurrency investment options. Meanwhile, earlier this year, the Department of Labor (DOL) issued a stern warning about cryptocurrencies in 401(k) accounts. Here are some ways the federal government is assessing the benefits and risks cryptocurrencies pose to consumers, investors, and businesses.

White House calls for research on digital assets

In March 2022, the Biden administration issued an executive order calling for the federal government to report its findings on the risks and benefits of cryptocurrencies and other digital assets. For six months, various agencies conducted research and offered recommendations for responsibly developing the US digital asset industry. The result of this work was a fact sheet that was released in September. It outlines six main concepts for the development of responsible digital assets nationally and globally: consumer and investor protection; promoting financial stability; countering illicit finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.

Protecting consumers, investors, and businesses

The US government believes that without a solid framework of rules and regulations for digital assets, innovations in this sector could be harmful to consumers, investors, and businesses alike. In response to the White House calling for research on digital assets, several federal agencies issued reports addressing the potential benefits and challenges in protecting Americans from some of the potential risks posed by digital assets.

The Treasury Department’s report noted that about 12% of Americans own some form of digital asset. While the number of people holding these assets has grown, the volume of fraud and other scams has also increased. The Federal Trade Commission (FTC) reported that more than 46,000 incidents of cryptocurrency-related fraud occurred between January 1, 2021, and March 31, 2022, valued at more than $1 billion.

The Treasury Department’s report made four main recommendations:

  • Expand regulatory oversight
    Regulators including the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) should expand and increase investigations and enforcement related to digital assets, especially regarding potential misrepresentations made to consumers. Agencies also should increase their coordination of enforcement efforts between agencies as such efforts have been effective in shutting down fraudulent actions.
  • Increase focus on scams in online activities like gaming and entertainment
    The Consumer Financial Protection Bureau (CFPB) and FTC should expand investigations into consumer complaints. The Department of Labor should also ensure that 401(k) plans and participants are protected from aggressive marketing, conflicts of interest, and bad-faith cryptocurrency investments.
  • Encourage cross-collaboration between agencies
    While several regulatory agencies have issued guidance to deal with increasing cryptocurrency issues, the Treasury Department would like to see more cross-collaboration among agencies to create more comprehensive oversight. Building a more connected, cross-agency response is critical to promote safety and reduce consumer, investor, and business confusion, as well as the potential for fraud.
  • Educate consumers on digital assets
    Through its website MyMoney.gov, the Financial Literacy and Education Commission (FLEC) has taken the lead on educating consumers, investors, and businesses on financial issues. Now the FLEC will educate the public on common digital asset risks and scams and ways to report abuse. FLEC member agencies will also review the lack of information available to more vulnerable groups to help better understand the risks and opportunities they face. Lastly, the FLEC will engage with industry experts and academics to promote and coordinate public/private partnerships for financial education outreach.

Take a long-term approach to digital assets

Financial advisors often encourage investors to focus on the long-term and avoid trying to time the market with their 401(k) investments. Similarly, plan sponsors may want to take a long‑term perspective regarding their own approach to digital assets. Given today’s massive surge in the variety and scope of digital assets, plan sponsors should seek to understand their role in the financial landscape before rushing to implement changes.

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Digital assets: Potential benefits and risks for employee benefit plans

The US Department of the Treasury and the Internal Revenue Service on November 29 announced the release of guidance providing taxpayers information on how to satisfy the prevailing wage and apprenticeship requirements to qualify for enhanced tax benefits under the Inflation Reduction Act’s clean energy provisions. 

The publication of Notice 2022-61 and further guidance in the Federal Register—published on November 30, 2022—begins the 60-day period for these key labor provisions to take effect. In other words, these requirements will apply to qualifying facilities, projects, property, or equipment for which construction begins on or after January 30, 2023. So, in order to receive increased incentives, taxpayers must meet the prevailing wage and apprenticeship requirements for facilities where construction begins on or after January 30, 2023.

Prevailing wage and apprenticeship requirements

The Inflation Reduction Act, which President Biden signed into law on August 16, 2022, introduced a new credit structure whereby many clean energy tax incentives are subject to a base rate and a “bonus multiplier” of 5X. To qualify for the bonus rate, projects must satisfy certain wage and apprenticeship requirements implemented to ensure both the payment of prevailing wages and that a certain percentage of total labor hours are performed by qualified apprentices. 

Projects under 1MW or that begin construction within sixty days of the date when the Treasury publishes guidance regarding the wage and apprenticeship requirements are automatically eligible for the bonus credit.

The newly released guidance addresses the Inflation Reduction Act's two labor requirements—providing prevailing wages and employing a certain amount of registered apprentices—that taxpayers must meet for clean energy developments to qualify for the bonus rate. Both the prevailing wage and apprenticeship requirements apply to the following tax incentives:

  • Advanced energy project credit
  • Alternative fuel refueling property credit
  • Credit for carbon oxide sequestration
  • Clean fuel production credit
  • Credit for production of clean hydrogen
  • Energy-efficient commercial buildings deduction
  • Renewable energy production tax credit
  • Renewable energy property investment tax credit

The prevailing wages requirements also apply to the following tax incentives:

  • New zero-efficient home credit
  • Zero-emissions nuclear power production credit

New guidance

The new guidance describes the process for identifying the applicable wage determination for a specific geographic area and job classification on the Department of Labor’s sam.gov website. If no prevailing wage determination is posted for a specific geographic area and/or job classification, the notice provides that taxpayers should contact the DOL’s Wage and Hour Division, which would then provide the taxpayer with the labor classifications and wage rates to use.

For purposes of the apprenticeship requirements, the guidance provides specific information regarding the apprenticeship labor hour, ratio, and participation requirements. The guidance also describes the good faith effort exception, whereby a taxpayer will be deemed to have satisfied the apprenticeship requirements with respect to a facility if the taxpayer has requested qualified apprentices from a registered apprenticeship program and the request has been denied or the program fails to respond the request within five business days.

The guidance also specifies the recordkeeping requirements taxpayers must comply with to substantiate that they paid workers a prevailing wage and satisfied the apprenticeship requirements.

Beginning of construction guidance

As mentioned above, taxpayers must meet the prevailing wage and apprenticeship requirements with respect to a facility to receive the increased credit or deduction amounts if construction of the facility begins on or after the date sixty days after the Treasury publishes guidance. Notice 2022-61 confirms the use of long-standing methods for establishing the date of beginning of construction:

  • The physical work test (starting physical work of a significant nature)
  • The 5% safe harbor (incurring 5% or more of the total cost of the facility)

For purposes of both tests, taxpayers must demonstrate either continuous construction or continuous efforts—the continuity requirement—for beginning of construction to be satisfied.

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Treasury issues prevailing wage and apprenticeship requirements guidance

So far in our value acceleration article series, we have talked about increasing the value of your business and building liquidity into your life starting with taking inventory of where you are at and aligning values, reducing risk, and increasing intangible value.

In this article, we are going to focus on planning and execution. How these action items are introduced and executed may be just as important as the action items themselves. We still need to protect value before we can help it grow. Let’s say you had a plan, a good plan, to sell your business and start a new one. Maybe a bed-and-breakfast on the coast? You’ve earmarked the 70% in cash proceeds to bolster your retirement accounts. The remaining 30% was designed to generate cash for the down payment on the bed-and-breakfast. And it is stuck in escrow or, worse yet, tied to an earn-out. Now, the waiting begins. When do you get to move on to the next phase? After all that hard work in the value acceleration process, you still didn’t get where you wanted to go. What went wrong?

Many business owners stumble at the end because they lack a master plan that incorporates their business action items and personal action items. Planning and execution in the value acceleration process was the focus of our conversation with a group of business owners and advisors on Thursday, April 11th.

Business valuation master plan steps to take

A master plan should include both business actions and personal actions. We uncovered a number of points that resonated with business owners in the room. Almost every business owner has some sort of action item related to employees, whether it’s hiring new employees, advancing employees into new roles, or helping employees succeed in their current roles. A review of financial practices may also benefit many businesses. For example, by revisiting variable vs. fixed costs, companies may improve their bidding process and enhance profitability. 

Master plan business improvement action items:

  • Customer diversification and contract implementation
  • Inventory management
  • Use of relevant metrics and dashboards
  • Financial history and projections
  • Systems and process refinement

A comprehensive master plan should also include personal action items. Personal goals and objectives play a huge role in the actions taken by a business. As with the hypothetical bed-and-breakfast example, personal goals may influence your exit options and the selected deal structure. 

Master plan personal action items:

  •  Family involvement in the business
  •  Needs vs. wants
  •  Development of an advisory team
  •  Life after planning

A master plan incorporates all of the previously identified action items into an implementation timeline. Each master plan is different and reflects the underlying realities of the specific business. However, a practical framework to use as guidance is presented below.

The value acceleration process requires critical thinking and hard work. Just as important as identifying action items is creating a process to execute them effectively. Through proper planning and execution, we help our clients not only become wealthier but to use their wealth to better their lives. 

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations. 

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Planning and execution: Value acceleration series part four (of five)

Read this if you are a plan sponsor of employee benefit plans.

UPDATE: On December 1, 2022, the proposed rule was finalized with changes and will be effective 60 days after publication in the Federal Register (therefore, January 30, 2023).

The Department of Labor (DOL) is preparing to finalize a proposed rule that changes the way environmental, social, and governance (ESG) factors are viewed in a plan sponsor’s investment process and proxy voting methods. The proposal, which was issued in October 2021, aims to help plan sponsors understand their responsibilities when investing in ESG strategies and makes significant changes to two previously issued ESG rules.

Here, we provide an update on the DOL’s proposed rule and seek to help plan sponsors understand their potential new responsibilities when considering ESG investments. 

Background on ESG rules

For many years, the DOL has considered how non-financial factors, such as the effects of climate change, may affect plan sponsors’ fiduciary obligations. Amid an increasing focus on ESG investments, the Trump administration issued a final rule on ESG in November 2020 that required plan fiduciaries to only consider financial returns on investments—and to disregard non-financial factors like environmental or social effects. The rule also banned plan sponsors from using ESG investments as the Qualified Default Investment Alternative (QDIA).

A separate ruling issued in December 2020 said that managing proxy and shareholder duties (for investments within the plan) should be done for the sole benefit of the participants and beneficiaries—not for environmental or social advancements. It also stated that fiduciaries weren’t required to vote on every proxy and exercise every shareholder right.

In March 2021, the Biden Administration said it would not enforce the previous year’s rulings until it finished its own review. The current proposed rule is the result of that research.

Overview of the new proposed ESG rule

In October 2021, the DOL proposed a new rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” According to the proposed rule, fiduciaries may be required to consider the economic effects of climate change and other ESG factors when making investment decisions and exercising proxy voting and other shareholder rights. The proposal states that fiduciaries must consider ESG issues when they are material to an investment’s risk/return profile. The rule also reversed a previous provision on QDIAs, paving the way for ESG investment options to be used in automatic enrollment as long as such investment options meet QDIA requirements.

The new ESG rule also made several changes to fiduciaries’ responsibilities when exercising shareholder rights. First, it changed a provision on proxy voting, giving fiduciaries more responsibility in deciding whether voting is in the best interest of the plan. Second, it removed two “safe harbor” examples of proxy voting policies. Next, the proposed rule eliminated fiduciaries’ need to monitor third-party proxy voting services. Lastly, the proposal removed the requirement to keep detailed records on proxy voting and other shareholder rights.

In addition, the DOL updated the “tie-breaker test” to allow fiduciaries the ability to choose an investment that has separate benefits (e.g., ESG factors) if competing investments equally serve the financial interests of the plan.

Comment letter analysis shows broad support for the proposed rule

The DOL received more than 22,000 comment letters for the proposed regulation. Ninety-seven percent of respondents support the proposed changes according to an analysis of the comment letters by the Forum for Sustainable and Responsible Investment (US SIF), a membership association that promotes sustainable investing. While some respondents asked the DOL to revisit the tie-breaker provision and other specifics of the proposed rule, many respondents agreed that the proposed rule clears the way for fiduciaries to consider adding ESG investment options to benefit plans.

Insight: Consider how the proposed ESG rule affects your plan today

Based on the typical timeline for similar rule changes, the DOL is expected to issue its final version of the proposed rule by mid- to late-2022. This means that plan sponsors shouldn’t have to wait long for clarification on their ability to add ESG investments to their plans. To prepare for the potential changes, plan sponsors should review the proposed rule and consider creating a prudent selection process that reviews all aspects that are relevant to an investment’s risk and return profile. As always, documentation is a critical step in this process.

If you have any questions about your specific situation, please reach out to our employee benefit consulting team. We're here to help.

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DOL proposes changes to ESG investing and shareholder rights: What plan sponsors need to know

What are the top three areas of improvement right now for your business? In this third article of our series, we will focus on how to increase business value by aligning values, decreasing risk, and improving what we call the “four C’s”: human capital, structural capital, social capital, and consumer capital.

To back up for a minute, value acceleration is the process of helping clients increase the value of their business and build liquidity into their lives. Previously, we looked at the Discover stage, in which business owners take inventory of their personal, financial, and business goals and assemble information into a prioritized action plan. Here, we are going to focus on the Prepare stage of the value acceleration process.

Aligning values may sound like an abstract concept, but it has a real world impact on business performance and profitability. For example, if a business has multiple owners with different future plans, the company can be pulled in two competing directions. Another example of poor alignment would be if a shareholder’s business plans (such as expanding the asset base to drive revenue) compete with personal plans (such as pulling money out of the business to fund retirement). Friction creates problems. The first step in the Prepare stage is therefore to reduce friction by aligning values.

Reducing risk

Personal risk creates business risk, and business risk creates personal risk. For example, if a business owner suddenly needs cash to fund unexpected medical bills, planned business expansion may be delayed to provide liquidity to the owner. If a key employee unexpectedly quits, the business owner may have to carve time away from their personal life to juggle new responsibilities. 

Business owners should therefore seek to reduce risk in their personal lives, (e.g., life insurance, use of wills, time management planning) and in their business, (e.g., employee contracts, customer contracts, supplier and customer diversification).

Intangible value and the four C's

Now more than ever, the value of a business is driven by intangible value rather than tangible asset value. One study found that intangible asset value made up 87% of S&P 500 market value in 2015 (up from 17% in 1975). Therefore, we look at how to increase business value by increasing intangible asset value and, specifically, the four C’s of intangible asset value: human capital, structural capital, social capital, and consumer capital. 

Here are two ways you can increase intangible asset value. First of all, do a cost-benefit analysis before implementing any strategies to boost intangible asset value. Second, to avoid employee burnout, break planned improvements into 90-day increments with specific targets.

At BerryDunn, we often diagram company performance on the underlying drivers of the 4 C’s (below). We use this tool to identify and assess the areas for greatest potential improvements:

By aligning values, decreasing risk, and improving the four C’s, business owners can achieve a spike in cash flow and business value, and obtain liquidity to fund their plans outside of their business.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations.

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The four C's: Value acceleration series part three (of five)