Amid funding cuts, University of Louisville loans $38 million to real estate foundation
University of Louisville officials often stress how U of L's nonprofit foundation provides critical funding to help cushion against state budget cuts. But last year, it was the university that loaned $38 million to a unit of the foundation in a transaction that neither the university’s Board of Trustees nor the foundation’s Board of Directors were asked to approve.
LOUISVILLE, Ky. (WDRB) -- University of Louisville officials often stress that the school's nonprofit foundation provides critical funding to help cushion against state budget cuts.
But last year, it was the university that loaned $38 million to a unit of the foundation in a transaction that neither the university’s Board of Trustees nor the foundation’s Board of Directors were asked to approve.
The transaction first surfaced earlier this year as a footnote in U of L’s annual financial statements, and now some trustees are questioning the deal amid the university’s financial pressures.
Last July, U of L President James Ramsey – who also runs the nonprofit foundation – OK'd the transfer of $38 million from the university’s bank account to the University of Louisville Real Estate Foundation, an organization the U of L Foundation created last year.
U of L's independent auditors called the deal a loan, but U of L Foundation chief financial officer Jason Tomlinson insists it is a “receivable agreement.”
The real estate foundation can use the money for up to three years for things like property purchases and road projects near campus while making interest-only payments at a rate of 1 percent, according to a July 1, 2015 Memorandum of Agreement obtained in an open records request.
Tomlinson said the arrangement benefits both the university and foundation, and represents “basic cash management” between two organizations that exchange funds every month.
Tomlinson signed off on the deal for the real estate foundation, and Ramsey for the university.
Trustees Chairman Larry Benz said he is looking into “how a loan of that size could have gone from the university to the U of L Foundation without Board of Trustees approval and the details of the spending of that loan.”
The loan comes at a time when the state auditor’s office is scrutinizing the relationship between the university and the foundation, and how the two organizations are overseen. The foundation manages U of L’s $650 million endowment while receiving all donations to the university.
The transaction also comes as the university works to absorb a 2 percent reduction in its state funding for the current fiscal year, followed by a 4.5 percent reduction over the next two budget years beginning July 1.
University officials may soon ask the Board of Trustees for a tuition increase for the coming academic year. In April, the Council on Postsecondary Education gave U of L and the University of Kentucky permission to raise tuition by no more than 5 percent.
But Tomlinson said the university could not use the $38 million it transferred to the real estate foundation for priorities like mitigating tuition increases or raising faculty pay because the money is already obligated for university expenses.
“It is all budgeted someplace, so you can’t dedicate it to something else,” he said.
At any given time, the university “sits on” $60 million to $80 million in cash, which earns minimal interest in an account at PNC Bank or a state government account, he said.
But by giving that same cash to the real estate foundation for a 1 percent “fee,” the university can earn four times as much interest on it, Tomlinson said.
Tomlinson said the deal also allows the foundation to leave more of the university’s $650 million endowment invested in financial markets, which means more investment returns for the university down the road.
“It was all done to benefit the university,” he said.
The memo says the foundation need only make interest payments until the $38 million comes back to the university in a “balloon” payment at the end of the three-year term.
Still, the university could get immediate access to the money anytime it is needed, Tomlinson said. The foundation would simply “liquidate” some of its investments and “send the money over,” he said.
The memo says the real estate foundation is to use the money for six purposes, the most significant of which is a $22 million payment back to the parent foundation for a “line of credit” in the name of University Holdings Inc., another foundation organization.
University Holdings, or UHI, is the predecessor to the real estate foundation, and the $22 million payment reflects the transfer of assets between the two organizations, Tomlinson said.
Others portions of the $38 million were to be used for matching funds for road and streetscape projects around U of L’s main campus ($10.7 million), purchasing the K&I Lumber property at Floyd and Lee streets ($3.2 million), construction of the Additive Manufacturing Competency Center on Arthur Street ($1.4 million); and renovations of the foundation-owned office building at 215 Central Avenue for a new tenant, the U of L Counseling Center ($500,000).
This is not the first time the university has loaned money to the foundation. In June 2014, the university agreed to loan up to $29 million to the foundation, and the loan was repaid by June 30, 2015, according to U of L's financial statements.
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