University of Louisville Foundation scraps extra pay given to top administrators
The University of Louisville Foundation will no longer supplement the salaries of administrators at the school with “deferred compensation” payments that have already cost the nonprofit organization over $20 million.
LOUISVILLE, Ky. (WDRB) -- The University of Louisville Foundation will no longer supplement the salaries of administrators at the school with “deferred compensation” payments that have already cost the nonprofit organization over $20 million.
The foundation’s board of directors voted Tuesday to end the special incentive pay, which former U of L President James Ramsey doled out to about a dozen administrators before he resigned last year.
Looking to shore up the school’s $785 million endowment, the foundation also voted to cut at least $13 million – and probably more – from its annual support to the university beginning in the fiscal year that starts July 1.
The board also changed its bylaws so that no future president of the university can also serve as president of the foundation – a dual role that Ramsey held for about 14 years.
The formal end of the incentive pay comes a day after WDRB reported that the foundation dipped into U of L’s largest-ever individual gift – a $25 million donation from the late Owsley Brown Frazier – to meet payout demands from Ramsey and three other administrators who cashed out their deferred compensation plans last year.
And earlier this month, the foundation’s longtime attorney told the board that Ramsey’s administration housed the accounting for the special compensation in separate limited liability companies “for obfuscation purposes.”
“There’s been a lot of reports surrounding the deferred compensation, and it wasn’t well though-out,” said Diane Medley, who became the foundation’s chairwoman in January. “…We just felt like, we need to start a clean slate here and just draw a line in the sand.”
Medley would not rule out re-establishing a deferred compensation plan down the road, but that would be at least three years from now because of Internal Revenue Service rules.
The decision to end the incentive pay program will affect about six administrators who will no longer earn additional pay that had been promised to them for staying in their jobs until certain dates, according to Keith Sherman, the foundation’s interim executive director.
For example, Bill Pierce, U of L’s vice president for research, gets an extra $40,000 each July 1 through the program, according to records obtained by WDRB. Foundation chief financial officer Jason Tomlinson gets an extra $100,000 each Jan. 1, but he would forfeit the money if he leaves before 2021.
Any pay that had vested as of Tuesday will be honored, Sherman said.
In February, WDRB revealed that Ramsey had used the deferred pay program to promise an additional $6 million – and likely much more – to athletics director Tom Jurich if Jurich stays on the job through age 70.
Sherman said that benefit will be unaffected by Tuesday’s change because the athletics association had previously agreed to pay for it.
Spending cut to shore up endowment
The board also voted Tuesday to slash the percentage it spends each year from U of L’s $785 million endowment, which the foundation manages.
The endowment spending supports professor salaries and research through “endowed chairs” as well as scholarships, among other uses.
The foundation’s endowment spending reached a ten-year high of $71 million during the fiscal year ended June 30, 2016. The goal is to cut that to no more than $40 million in the fiscal year that starts July 1, said Vincent Tyra, who chairs the board’s finance committee.
The reduction will hit the academic departments of U of L, the university’s Office of Advancement -- which is funded by the endowment – and the Office of the President, which gets discretionary spending money from the fund.
“This a huge step forward, and it will be a big adjustment on campus,” Sherman said.
Enid Trucios-Haynes, a law professor who chairs U of L’s Faculty Senate, said Tuesday that faculty members are “concerned” about the change and trying to find out what it means for them. She declined to comment further.
Years of excessive spending have eroded the value of the endowment – a pool of donated funds that are supposed to last forever through investment returns, foundation board members said.
For example, the portion of the fund that is invested with Cambridge Associates, the foundation’s investment adviser, has been treading water since the end of the financial crisis despite a big run-up in stocks.
The Cambridge portion of the endowment stood at $577 million as of Dec. 31, significantly lower than in 2012 despite annualized investment returns of 6.8 percent during the five-year period.
“We are proud of the results we have generated for this portfolio, but it hasn’t been enough to keep up with the spend(ing),” Laetitia Johnson, of Cambridge Associates, told the board Tuesday.
The foundation will now aim to spend 5.51 percent of the endowment instead of 7.48 percent, which was the policy for the last few years under Ramsey.
Most universities spend 4 percent to 5.5 percent of their endowments annually, Cambridge officials told the board Tuesday.
“What we are trying to do is put some discipline in place on our spending,” Tyra said.
It’s impossible to say exactly how much the foundation will end up spending next year because the organization will still let academic departments access a total of $43 million in “carryover” funds – or unspent endowment dollars that departments squirreled away in previous years.
But under the change approved Tuesday, the foundation will allow only $30 million in new spending from the endowment, whereas the Ramsey-era policies would have generated $44 million.
Board member Tom Meeker, a former CEO of Louisville-based Churchill Downs Inc., said he fears the change doesn’t go far enough.
“The spend rate, I think, needs to come down even further,” he said.
Borrowed money not returning to endowment soon
Besides reducing the percentage, the foundation made other changes Tuesday aimed at curbing spending.
For example, the organization shrunk the base of assets on which it calculates the spending.
The foundation used to count, as part of the spending base, about $72 million that Ramsey’s administration withdrew from the endowment and spent on local real estate and other expenses.
As WDRB reported last year, the endowment withdrawals far exceeded limits the foundation board had approved in 2011.
The $72 million was spent by University Holdings – a foundation holding company that also cut extra paychecks and car allowances to administrators. While the money is supposed to be repaid to the endowment with interest, Sherman said that won’t happen anytime soon.
Because University Holdings is not actually generating income for the endowment, the $72 million should not be factored in when the foundation decides how much of the endowment it can spend, Sherman said.
“It was a prudent decision for us to make, to ensure we don’t end up over-spending again as we have in the past,” Sherman said.
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