University of Louisville endowment takes big loss on loans to foundation holding company
The University of Louisville’s endowment suffered a 5.8 percent investment loss in the year ended June 30 – its biggest decline since the 2008 financial crisis. And while many university funds had poor returns over the last year, U of L’s decline was made worse by a massive loss the school’s nonprofit foundation recognized on money its own company, University Holdings, borrowed from the endowment.
LOUISVILLE, Ky. (WDRB) -- The University of Louisville’s endowment suffered a 5.8 percent investment loss in the year that ended June 30 – its biggest decline since the 2008 financial crisis.
And while many university funds had poor returns over the last year, U of L’s decline was made worse by a massive loss the school’s nonprofit foundation recognized on money its own company, University Holdings, borrowed from the endowment over an 8-year period.
University Holdings, also known as UHI, used the borrowed money for things like real estate projects and extra salaries for administrators, as WDRB reported last month.
The foundation took a 50 percent loss on the so-called UHI Line of Credit for the year ended June 30, according to an investment report obtained under the Kentucky Open Records Act. (A copy of the report is below).
That, in turn, contributed to the 5.8 percent investment decline for the total endowment.
The decline puts U of L’s fund in the bottom five percent, in terms of annual performance, among 412 college and university endowments tracked by the foundation’s investment adviser, Cambridge Associates, according to the year-end report.
Combined with other factors like spending for U of L, the endowment’s total value dropped to $655 million, a 16 percent decline from a year earlier and its lowest point since 2010.
The endowment losses will be felt by U of L’s professors and students, as a portion of the fund is withdrawn every year to support “endowed chairs” in academic departments and scholarships. A smaller endowment means less money for academic support.
New endowment money available to the university already dropped to $30 million in the current budget year, down from $39 million the year before, after the foundation’s investments posted a slight loss in the 2015 fiscal year.
The credit line loss seems to belie what Foundation Chief Financial Officer Jason Tomlinson told the organization’s board last month: that the endowment gets a “guaranteed return” on the money UHI borrows.
Tomlinson referred questions for this story to the foundation’s attorneys.
In a statement, the foundation cautioned that the June 30 report – which has not yet been presented to the foundation board – is not final and could change.
Foundation attorney Kate Crosby declined to answer questions about the hit the endowment took from the foundation’s own borrowings through the UHI credit line. She said the situation will be addressed at a special meeting of the foundation board on Thursday.
But foundation chairwoman Brucie Moore has had “several conversations” in recent days about the topic with the foundation’s accounting staff and external auditors, “which have included discussing various options regarding the accounting treatment” related to the credit line, Crosby said.
She added that the report showing the huge loss may change “once final decisions are made.”
CFO: U of L investments “doing fine”
The dismal performance disclosed in the report comes after Tomlinson told the foundation board on Sept. 23 that the endowment’s investments are “doing fine.”
Without mentioning the foundation’s year-end results, Tomlinson told the board that many university endowments lost money on their investments in the most recent year. He listed losses as high as 3.4 percent at five other universities.
“Our portfolio of investments are doing what they’re supposed to do,” Tomlinson told the board, adding that U of L’s endowment realized gains in July and in August.
U of L’s endowment actually would have performed on-par with other endowments had the foundation not recognized big losses on its internal investments like the endowment money lent to its holding company, UHI.
The biggest portion of the endowment – a $565 million pool managed by Cambridge Associates – posted a better-than-average loss of 2.3 percent for the year, according to the June 30 report.
The median college and university endowment lost 2.9 percent on its investments during the same time period, according to Cambridge’s figures.
But U of L’s endowment was further dragged down by a 21 percent loss on “other endowment assets” – valued collectively at $122 million – that are directly managed by the foundation staff.
That includes the UHI Line of Credit valued at $43 million, down from $69 million a year earlier, according to June 30 report.
As WDRB first revealed last month, foundation records suggest as much as $60 million could have been withdrawn from the endowment and lent to UHI since 2008, and the credit line has little documentation and few restrictions.
The credit line is presented as an investment, rather than an expense, of the endowment, under the presumption that UHI will repay the money with interest.
Last year, former U of L and foundation President James Ramsey temporarily reduced the line of credit balance by loaning $22 million of the university’s short-term cash to repay the endowment for UHI’s debt – a situation one investment expert likened to a Ponzi scheme.
Now the foundation may be looking to extinguish UHI’s obligation to repay the endowment for at least some of the money UHI borrowed.
At the special meeting on Thursday, the foundation’s outside auditor is set to ask the board to approve “forgiveness of UHI, Inc. line of credit,” according to meeting agenda made public Wednesday.
Losses to credit line not mentioned
Despite his assertion that the UHI borrowings provide a “guaranteed” payback for the endowment, Tomlinson nonetheless hinted that some of the debt may be no good at the Sept. 23 board meeting.
He said some of the investments UHI made with the money “haven’t worked out as well as you hoped” and that the foundation “may have to take a loss on” on endowment funds lent through UHI to Nucleus, the foundation’s “innovation and entrepreneurship” affiliate that constructed an 8-story office building downtown.
But Tomlinson did not tell the board about the losses already shown for the credit line in the foundation’s March 31 and June 30 investment reports.
Chris Tobe, a Louisville investment consultant and former board member of the state’s main pension fund, said the credit line investment appears to lack transparency and is “not typical at all” for big institutional funds like U of L’s endowment.
“If I am a new president coming into U of L, I don’t want any part of this stuff,” Tobe said. “It’s just a black hole.”
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