University of Louisville Foundation holding company borrows millions from school's endowment

LOUISVILLE, Ky. (WDRB) --  The University of Louisville Foundation has withdrawn as much as $60 million from the endowment it manages for U of L since 2008 and lent the money to its own real estate holding company – an organization which, for years, has paid extra salaries to some university administrators.

The $681 million endowment is a pool of donations that is supposed to support the university forever through investment returns.

But for nearly nine years, the foundation has allowed its sub-organization called University Holdings Inc. to borrow from the endowment through a low-interest “line of credit” that has few limitations or controls, according to a four-month WDRB News investigation.

The foundation claims it does not even possess a record showing exactly how much University Holdings -- also known as UHI – has withdrawn and paid back to the endowment, including interest, over the life of the credit line.

UHI is the same organization that has cut paychecks for at least the last five years to a handful of administrators in the university president’s office, including former Ramsey Chief of Staff Kathleen Smith, and to former Provost Shirley Willihnganz, as WDRB reported last month.

And as UHI’s debt, including interest, to the endowment appeared to reach a peak of $69.4 million in mid-2015, former university and foundation president James Ramsey reduced the balance – at least temporarily – by lending university cash to the foundation, records show.

As WDRB first reported in May, Ramsey authorized a $38 million loan from U of L to the foundation for up to three years. A document shows that most of that money -- $22 million – was in turn used to pay down UHI’s credit line with the endowment.

“In essence, they (the foundation) borrowed money from us (the university) to pay down a borrowing that they made from themselves, to themselves,” said U of L Board of Trustees Chairman Larry Benz, who has called for a “forensic” audit of the foundation. “It just doesn’t make sense.”

Ramsey, who took a $690,000 buyout from the university on July 27 and then resigned under pressure from the foundation on Sept. 16, was “out of state” and unavailable for comment, according to Steve Pence, his attorney.

To settle a records dispute with WDRB, the foundation has offered to charge the news outlet for its chief financial officer’s time to reconstruct a sort of bank statement showing every transaction for the credit line since the borrowings began in 2008.

That information “cannot be generated by the push of a button or the copying of an existing record – it has to be manually created,” said David Saffer, the foundation’s outside attorney.

But the fact that the foundation doesn’t already have such a record is itself “damning,” said Edward Siedle, founder of Benchmark Financial Services, Inc., a Florida firm that specializes in investigating money management issues.

“If they don’t have a document that comprehensively, fully discloses what is going on with the money – where it is going, for what purpose, to whom, on what date and in what amounts, then they can’t possibly be doing their job,” said Siedle, a former attorney for the U.S. Securities & Exchange Commission.

Foundation Chief Financial Officer Jason Tomlinson said the information is not readily available because the endowment money is immediately passed from UHI to a number of limited liability companies owned by the foundation.

“You’re not borrowing from another entity – you are borrowing from yourself, and it all collapses” within the foundation’s accounting system, he said.

He defended the loans by saying UHI is a better investment opportunity for the endowment than lower-yielding bond funds.

“The endowment makes more money by loaning it out to line of credit than it would leaving it where it was invested before,” said Tomlinson, who is also the principal officer of UHI.

Despite those assurances, independent investment experts said the lack of documentation about the UHI debt – and the subsequent university loan to pay it down – is questionable.

“This, to me, is a variation of a Ponzi scheme – a circular flow of money that is disguising the true reality,” said Tim Keating, of Keating Wealth Management in Denver, who has written about endowment investing strategies.

Mark Hebner, founder of Index Fund Advisors in Irvine, Calif., said the situation smacks of “self-dealing.”

“It stinks, and the money is going in the wrong direction,” he said.

Borrowings not counted as endowment “spending”

The foundation already spends a large portion of U of L’s endowment every year compared to peer schools. Its policy is to set aside nearly 7.5 percent of the endowment’s rolling market value for spending.

Most of that money  – about $30 million to $40 million a year – goes to support U of L’s academic departments through scholarships, professor salaries and other things.

The more the endowment grows through investments, the more money the foundation can withdraw for spending that benefits U of L.

But when the foundation lets UHI borrow from the endowment, those loans are not considered “spending.”

Instead, the money that UHI withdraws – and the interest it owes -- is presented as just another “investment” of the endowment. As UHI borrows more money and accrues more interest, the investment’s value goes up.

The endowment’s UHI investment grew steadily, quarter after quarter, for at least three years before peaking at $69.4 million on June 30, 2015, according to reports from Cambridge Associates, the foundation’s outside investment advisor.

Tomlinson said that does not mean UHI actually owed $69.4 million to the endowment at that time. He said the figure is a “valuation” that measures not only UHI’s debt, but also the value of real estate in which UHI has invested.

It would take research to determine just how much of the reported value of the credit line is attributable to property appreciation and how much represents principal and interest at any single time, Tomlinson said.

Cambridge cannot vouch for Tomlinson’s explanation of how the line of credit’s value is calculated – because the firm does not manage that particular investment and gets all the information about it from the foundation, said Laetitia Johnson, Cambridge’s liaison to the foundation.

“Honestly, I don’t know what’s in there; it’s not under our purview,” Johnson said following a meeting of the foundation’s finance committee on June 23.

Separately, a federally required tax form shows UHI owed the foundation $58.5 million – $51.2 million in principal and $7.3 million in interest – as of June 30, 2015.

Asked about that, Tomlinson said the UHI credit line is “not the only debt UHI and its entities have.” But he has not provided examples of other debts UHI owes to the foundation or how the foundation funded those borrowings, if not through the endowment.

In any event, Cambridge’s reports show that, immediately after Ramsey authorized the $22 million university loan last year, the line of credit’s value dropped by $22.6 million, to $46.8 million.

Meanwhile, the line of credit investment had only $13 million in assets as of June 30, 2016, and $18 million in principal and interest owed, according to figures Tomlinson produced in response to an open records request.

He did not respond to a question about whether those figures show the investment is insolvent.

Tomlinson also did not respond to a question about how UHI can afford to repay the endowment given that it has almost no assets other than the money it’s borrowed from the foundation, according to its tax forms.

In a presentation on June 23, Cambridge’s Johnson told the foundation board members that U of L’s total endowment has outpaced the S&P 500 stock index by $230 million since 1995 – a fact the foundation often uses to defend its investment strategy.

Though Johnson swore off knowledge of the credit line, her analysis included the investment – then valued at $40.4 million – in the endowment’s “total return.”  

Board last approved borrowings in 2011

The foundation’s executive committee – a subgroup of its 15-member board – last authorized the UHI borrowings five years ago, board records show.

In 2011, the executive committee approved up to $35 million in “investments” in UHI. The resolution says the investments would come from the foundation, but not the endowment specifically.

The line of credit investment is seldom discussed at foundation board meetings. Bob Hughes, who chaired the foundation until Sept. 16, said earlier this month that he did not know what the credit line represents.

In response to a records request, the foundation’s custodian said there are no documents spelling out the terms of UHI’s borrowings from the endowment.

There is nothing that says, for example, how long the credit line lasts, how much can be drawn against it, or whether any collateral was pledged against the debt.

The rate of interest is simply the prime rate (currently 3.5 percent), the foundation custodian said, though there is document saying that.

Created by the foundation in 2007, UHI provides “oversight and management support” to other foundation sub-organizations, according to the foundation’s annual financial statement.

For example, UHI manages the companies formed to build the foundation’s research parks – the Nucleus area downtown, the ShelbyHurst office complex in eastern Jefferson County and the planned engineering park adjacent to Papa John’s Cardinal Stadium.

But UHI exists only on paper, with no distinct staff or office. Like the rest of the foundation, it has been run primarily by Ramsey, Tomlinson and Smith, Ramsey’s former chief of staff.

Apart from the endowment loans, UHI generates about $2 million a year and has operated at a loss – meaning it spent more than it took in – for the last two fiscal years, according to its tax forms.

Among UHI’s expenses are about $173,000 a year in wages and salaries. As WDRB reported in July, UHI’s highest paid employee the last five years has been Smith, who is due to receive $51,100 from the organization this year.

Meanwhile, the organization for years has paid extra money to a handful of administrators in the university president’s office who have no clear connection to the foundation.

Initially, the foundation didn’t attempt to explain those payments, but last week Tomlinson said in an email that all the employees of UHI have taken on additional duties for the organization that justify the extra payments. WDRB is seeking records to support that assertion.

Investment experts questioned whether the foundation can properly call the UHI borrowings an “asset” of the endowment if some of the money was used to pay expenses like salaries.

“It’s either an expense or an asset,” said Keating, the Denver investment adviser.

Cristian Tiu, an associate professor of finance at the University of Buffalo, said in general, it’s not a good idea to pay operating expenses like salaries with borrowed money.

In an email, Tomlinson did not dispute that the UHI borrowings have been used for payroll expenses.

But he then gave a seemingly conflicting explanation. On the one hand, the sub-companies UHI manages immediately repay any salaries funded by the line of credit, he said. But on the other hand, that those sub-organizations use the borrowed money to fund their expenses, including payroll.

 “If (UHI) draws for payroll, it recharges to the various (limited liability companies) and returns the funds to (the foundation),” he said. “… The investment lies in the LLCs. The LLCs use those funds to operate which include payroll expenses.”

Tomlinson did not respond to a request for clarification.

Reporter Chris Otts, 502-585-0822. cotts(at) Copyright 2016 WDRB News. All rights reserved.