University of Louisville Foundation audit 'paints disturbing picture' of excessive spending and attempts to conceal truth
Under former University of Louisville President James Ramsey, the U of L’s nonprofit foundation depleted the university’s endowment to fund excessive spending on things ranging from compensation to real estate to football tickets, according to special audit released Thursday.
LOUISVILLE, Ky. (WDRB) -- Under former University of Louisville President James Ramsey, the U of L’s nonprofit foundation depleted the university’s endowment to fund excessive spending on things ranging from compensation to real estate to football tickets, according to special audit released Thursday.
And, emails revealed in the audit show Ramsey’s former chief of staff, Kathleen Smith, “expressed an interest in concealing” the foundation’s more-than $20 million in extra compensation from public records and journalists, according to the report.
In 2014, for example, Smith told the foundation’s outside attorney that an obscure name was needed for the foundation’s new subsidiary company that handled deferred compensation – to make it “difficult to figure out for (the) media.”
The report, completed by Chicago firm Alvarez & Marsal, “paints a disturbing picture,” U of L board of trustees Chairman David Grissom said in a public statement Thursday.
Grissom said the trustees haven’t yet decided whether to pursue litigation based on the report’s findings. The board reviewed the report behind closed doors for three-and-a-half hours Thursday.
"This report should answer many questions about the past and close the door on a sad chapter in the university’s history," interim U of L President Greg Postel said.
Alvarez & Marsal, a Chicago consulting firm, completed the 132-page report under a $1.7 million contract with the university.
The foundation, a charitable organization that exists to support U of L, has already undergone a myriad of reforms since Ramsey's departure last year. Ramsey served as president of the university and of the foundation for 14 years.
For example, the organization’s new board of directors eliminated the deferred compensation program under which the foundation paid out more-than $20 million in incentive bonuses to Ramsey and other administrators over the last decade.
Ramsey’s attorney said the report was too voluminous to provide a comment Thursday. Smith’s attorney said the audit amounts to a "one-sided smear campaign" that doesn't say anyone was overpaid and that failed to mention her raising "more than $100 million" in "new money" for the foundation through grants and the 60-80 hour weeks she worked.
Smith still receives a $242,000 salary from the organization while on administrative leave since September. A few months before he left last year, Ramsey appointed Smith's the foundation's chief administrative officer, though the appointment was not ratified by the foundation board as required.
The report said Ramsey’s administration raided the university’s endowment – a pool of investments worth about $800 million – to fund at least $42 million in unbudgeted or excessive expenses.
When all the unbudgeted and shoddy accounting are factored in, A&M said the foundation spent as much as 15 percent of the endowment annually – about three times the typical rate for universities.
The audit shows that the overspending continued through the end of Ramsey’s tenure last year despite warnings in 2012 and 2013 that it could not be sustained.
In a 2012 memo, the foundation’s professional investment adviser warned that if the spending was not reined in, “there is a non-trivial chance that the endowment could cease to exist within the next 20 years.”
Then in 2013, the university’s former vice president for finance Mike Curtin said wrote in a memo that the foundation had to sell off $15 million to $25 million in investments in the endowment each year just to come up with cash to meet spending needs.
The foundation’s former longtime finance committee chairman, Burt Deutsch, disputed the accuracy of Curtin’s figures, according to an email included in the audit.
Curtin would later take a retirement buyout from U of L, while the foundation gave Deutsch a six-figure, no-bid contract to do consulting work, as WDRB reported in 2015.
And even with the spending issues, the endowment itself is overstated by about $72 million, according to the audit -- confirming WDRB’s previous reporting about a foundation shell company that borrowed heavily from the bigger fund.
The $72 million essentially represents an IOU, with interest, that has been growing for years. But the endowment is unlikely to see that money be repaid, A&M said.
The shell company, called University Holdings Inc., paid $1.7 million in extra salaries to administrators, and “at least a portion” of those salaries were funded by money taken from the endowment, according to the A&M report.
WDRB first reported last September that University Holdings had a generous credit line with the endowment, and that the company – whose purpose was to manage other foundation companies – had for years paid extra salaries to foundation and university administrators.
The audit noted that the endowment borrowings far exceeded the limit the foundation board had set in 2011, which WDRB reported in December.
An email cited in the audit shows that Smith asked in 2015 whether the pay from University Holdings could be shielded from a reporter’s public records request for compensation documents.
A&M: Compensation program not approved
The audit puts the total cost of the foundation’s now-defunct “deferred compensation” program at $21.8 million and notes that Ramsey’s administration used some of the university’s record $25 million gift from the late Owsley Brown Frazier to pay out Ramsey and other administrators last year, both of which WDRB had previously reported.
A&M said it “appears” the extra pay program was not approved by the foundation’s board of directors – an assertion at odds with previous statements by former board members, most of whom were loyal to Ramsey.
“I am certain that Dr. Ramsey does not want any of these to end up in the hands of the (newspaper),” she wrote.
In 2012, former Provost Shirley Willihnganz emailed Smith to say she was “worried” about “being overcompensated” and referenced an extra $50,000 annual payment that was not in her contract. Smith told Willihnganz “you make a good point” but that the deferred pay agreements could be construed liberally.
“We are deliberately ambiguous because ambiguity is in the employee’s favor,” Smith wrote.
In a 2013 email to the foundation’s attorney, Smith said there as a need to “protect” UHI – the shell company that made extra payments by borrowing from the endowment – and Minerva, a foundation subsidiary company that kept the deferred compensation, from public records requests.
She asked, “how can we move our LLCs into something more obscure that would be difficult to find through (open records requests).”
In that same email, she said, “I would like to make the paper trail to our holdings as obscure as possible” to a former university vice president who at the time was being forced into retirement and, according to Smith, had an axe to grind against Ramsey’s administration.
Earlier this year the foundation’s former longtime outside attorney David Saffer made headlines when he said during a board meeting that the foundation had created separate companies to manage the deferred compensation “for obfuscation purposes, clearly.”
In a 2014 email unearthed in the audit, Saffer told Smith and a colleague at his firm that he was worried about the public relations implications of a plan to put the deferred compensation under the same foundation subsidiary involved in real estate development projects such as the ShelbyHurst office buildings in eastern Jefferson County.
Saffer said it was already a “problem” that deferred compensation contracts could be “discovered” in public records requestss.
“(W)e all admit that a carefully worded open records request could get at it,” Saffer said.
Any link between the extra pay and real estate development could exacerbate the bad press, he wrote.
Saffer instead suggested changing the name of the foundation subsidiary that handled the deferred pay to something innocuous like “DCPA, LLC.”
“That would still not solve the carefully worded requests problem, but it would not give the press another story about why this arrangement was located in a property development company,” he wrote.
The foundation created DCPA and consolidated the deferred pay into that company later that year.
Here is the full 132-page audit: