SUNDAY EDITION | Long-awaited ‘forensic’ audit aims to untangle University of Louisville Foundation
The long-awaited 'forensic' investigation of the University of Louisville Foundation will be released Thursday. It's another milestone in the organization's transformation following the era of former U of L President James Ramsey.
LOUISVILLE, Ky. (WDRB) -- In the eight months since James Ramsey resigned as president of the University of Louisville Foundation, the nonprofit organization with nearly $1 billion in assets has made so many changes that it hardly resembles its former self.
The foundation’s board members are almost entirely new.
The foundation board even changed its bylaws so that the dual role Ramsey occupied – as president of the university and the foundation – will never be repeated.
But perhaps the biggest milestone in the foundation’s transformation arrives Thursday, when a six-month “forensic investigation” into the organization’s finances is released.
The report, expected to cost the university about $2 million, will thoroughly probe the foundation’s web of about 30 sub-organizations, its compensation of university employees, its many local real estate deals and its contracts with outside vendors -- among other areas.
The foundation, which is legally independent of U of L, is the custodian of most gifts to the university and of the school’s $790 million endowment, a pool of donated funds that is supposed to last forever through investment returns.
Whatever the report may uncover, university and foundation leaders say it’s a necessary step to regain the confidence of major U of L donors, such as the James Graham Brown Foundation, who have put their support on hold because of questions about the U of L foundation’s oversight.
“Obviously there is nothing we can do about what happened, but … donors gave money to the foundation, and they have a right to know how those dollars were used,” U of L interim President Greg Postel said in an interview Friday.
The report could even lead to legal action against “officers and directors or former board members” of the foundation, Craig Dilger, a lawyer working for U of L, told the Kentucky General Assembly’s contracts committee on April 11.
One day later, U of L trustees chairman David Grissom told board members that it was imperative they not discuss the audit before its release to preserve attorney-client privileges in any lawsuit that may follow.
Grissom, who has ultimate oversight of the audit, declined to comment for this story.
Some are skeptical that the report will end up justifying a total cost of about $2 million, including associated legal fees already incurred before its release.
Former university and foundation board chairman Bob Hughes, who was one of Ramsey’s staunchest allies, views it as a fishing expedition fueled by media hype and Ramsey’s detractors on the former trustee board, which Gov. Matt Bevin overhauled last year.
“The perpetual search for major facts to support the negative narrative has continued, and I now like many others wait to see what the findings are,” Hughes said in an email.
Hughes added that overblown negativity about the foundation has meant “incalculable costs to the university and individuals in terms of reputation damage” and stopped “the amazing progress that the University of Louisville made in the (last) ten years.”
Donations to the foundation are down $31 million, or 57 percent, during the first 10 months of the fiscal year. Foundation officials have said some big donors remain "on the sidelines" until the report's release.
Audit about ‘hitting re-set button’
Alvarez & Marsal, the Chicago firm performing the investigation under a $1.7 million contract with the university, will present its findings to U of L’s board of trustees in a special meeting Thursday.
A&M is charged with showing how the foundation handled hundreds of millions of dollars in its custody from 2010 to 2016, according to the company’s contract with the university.
A&M’s hiring was one of the last acts of the former U of L board of trustees appointed by former Gov. Steve Beshear, before the state legislature in January cleared the way for Bevin to remake the board with his own appointees.
Larry Benz, who chaired the former board, said the idea of a ‘forensic’ probe grew out of his and other board members’ frustration getting answers about which university employees were getting paid by the foundation, the organization’s investments and real estate deals and the shuffling of millions of dollars between the university and foundation.
“The forensic audit was a promise and a commitment to the public to hit the re-set button and remember why the foundation was established and its core mission of academic support for the university,” Benz said in an interview last week.
University and foundation leaders have been tight-lipped about what specific angles A&M is pursuing and any preliminary findings.
Grissom said neither he nor Diane Medley, the foundation’s chairwoman, will see the report before it is released on Thursday.
A&M’s contract has nearly doubled since it was first approved last November, which Dilger attributed to the foundation’s complicated structure and “difficult document trail.”
“You have to think about the foundation more as a pretty complex financial institution. There are a lot of transactions -- a lot of entities associated with the foundation, a lot of money moving back and forth,” Dilger told the legislative committee.
A&M reviewed 700,000 emails and planned to interview 35-40 people – mainly current and former employees and board members of the foundation and of the university, Dilger said in April.
He said three people refused to speak with A&M. He did not name them.
It’s unclear whether Ramsey, who was pushed out of the university for a $690,000 buyout in July 2016, agreed to be interviewed.
“We offered to answer all of their questions,” Ramsey’s attorney, Steve Pence, said in an email. He did not reply to follow-up questions, such as whether Ramsey’s offer was for in-person answers or in writing.
Ramsey’s former chief of staff Kathleen Smith, who had an integral role at the foundation, “cooperated completely” with the investigation, including meeting in person with A&M, according to Smith’s attorney, Ann Oldfather.
“She answered every inquiry they had into the numerous successful projects of the Foundation over the last ten-plus years,” Oldfather said in an emailed statement.
She added that Smith talked about how the foundation laid the “groundwork” to cushion U of L against declining financial support from the state, for the university’s ascendance in athletics to the Atlantic Coast Conference and “to equip the university to recruit and graduate quality students.”
Smith remains a foundation employee, though she has been on administrative leave since September. A few months before he resigned, Ramsey appointed Smith the foundation’s chief administrative officer, and the foundation has continued the honor the $242,000 annual salary Ramsey gave to Smith through July 31, 2017.
Compensation, loans fueled scrutiny
The foundation first came under intense scrutiny in 2015, when public tax forms showed multi-million payments to Ramsey, Smith and other top university administrators.
Ultimately, the foundation accrued over $20 million in “deferred compensation” payments to about a dozen administrators.
Two the foundation’s many limited liability companies were set up just to handle deferred compensation, a move the foundation’s former attorney said was motivated by “obfuscation.”
Former foundation board members have said they gave Ramsey broad authority to decide who got extra payments, how much and on what terms. The Ramsey administration claimed the university’s board of trustees approved the program in 2006 by authorizing Ramsey to award “appropriate one-time bonuses” to members of his "leadership team."
While the official purpose was to give key administrators an incentive to remain at the university over the long term, some of the payments were not “deferred” for very long. In 2011, for instance, Ramsey gave Smith an extra $53,587, to which she became entitled the following day.
The foundation never budgeted for the payments and chose to dip into its largest individual gift -- $25 million from the late Owsley Brown Frazier – to meet payout demands from Ramsey and other administrators last year.
Earlier this year, WDRB revealed that Ramsey used the foundation to promise $6 million, and possibly much more, in retention payments to U of L athletics director Tom Jurich. The agreement obligated the university athletics association, which Ramsey chaired, to fund the payout, though the athletics board never considered the deal.
Under Ramsey, the foundation also created a sub-organization called University Holdings Inc., which in turn made extra payments to Smith, foundation chief financial officer Jason Tomlinson, former U of L provost Shirley Willihnganz and other president’s office administrators.
University Holdings, which funded many operations and real estate investment at the foundation, regularly borrowed from the university’s endowment, racking up a $73 million in debt over eight years.
The foundation allowed University Holdings to borrow more from the endowment than the foundation board authorized, a fact the foundation’s independent auditor, BKD, acknowledged in its annual report last year after WDRB reported extensively on the topic.
The $73 million IOU from University Holdings remains an asset of the university’s $790 endowment, but the foundation’s director of investments said at a board meeting Tuesday that there will be “comprehensive review” of whether the IOU is really worth that much.
In 2015, Ramsey approved a temporary repayment of some of University Holding’s endowment borrowings – by lending $38 million of the university’s short-term cash to the U of L Real Estate Foundation, a sister organization run by the main foundation’s staff.
That transaction, which was not approved by any board, showed lack of proper oversight, State Auditor Mike Harmon said in his “governance review” of the foundation released in December.
Among the many things A&M has been asked to examine are any contracts between the foundation and employees or board members.
In 2013, Ramsey gave a six-figure, no-bid foundation consulting contract to Burt Deutsch, who served on the foundation board for more than 20 years and was the longtime chairman of its finance committee, without consulting the board.
Keith Sherman, the foundation’s interim executive director, said last week he hopes the forensic audit will reveal “very few things that haven’t been addressed” already among the myriad of changes the organization has undergone in the last six months.
“Those that haven’t (been addressed), we will address quickly, and the donors can feel much more comfortable again,” he said.