Following the Money in Public Higher Education Foundations

Academic austerity in the midst of academic wealth.
By Martha T. McCluskey

As public funding for higher education has declined, many state college and university systems have increasingly come to depend on revenue from campus-related nonprofit foundations. Yet faculty, students, and members of the public often know little about how those foundations manage and spend vital academic resources. In recent years, numerous reports of alleged wrongdoing involving foundations at state academic institutions suggest the need for faculty to take a more active role in holding these entities accountable.

Campus foundations are technically separate legal entities from their affiliated public higher education institutions, incorporated as nonprofit tax-exempt charities dedicated to supporting specific state institutions. By acting through a foundation, a campus can receive, spend, and invest funds directly, often bypassing university governance procedures and the restrictions that would normally apply to state appropriations and to state procurement.

For these reasons, affiliated nonprofit foundations have become widespread in public higher education. But campus foundations can become vehicles not only for private giving to public higher education but also for private taking of significant resources from public academic purposes to advance outside private interests.

Together with my faculty colleagues in the AAUP chapter at the University at Buffalo, part of the State University of New York system, I have been working to promote transparency in our campus’s affiliated foundation. The University at Buffalo Foundation holds about $1 billion in assets for the benefit of the university and is governed by a self-perpetuating board consisting largely of private business leaders, along with the campus president. Over recent years, many board members appear to have had ties to businesses with interests related to the university or foundation. The foundation’s meetings are not open to the public or to faculty or students. As required by law, the foundation does disclose broad categories of revenue and spending both in annual tax filings and in annual accounting statements. But the foundation restricts public access to information about how it produces, manages, or spends funds on behalf of the state university.

For example, for a number of recent years, the University at Buffalo Foundation’s tax filings report expenditures in the range of $30 to $50 million a year for compensation, salary, or benefits to persons not employed by the foundation itself. This foundation spending on nonemployee compensation far outpaced its reported annual spending on student scholarships. Based on our AAUP chapter’s analysis of the limited information available, employee compensation amounted to 39.2 percent of foundation spending in 2013–14, in contrast to 6.9 percent of spending for student scholarships. In 2011, local journalist Buck Quigley obtained undated foundation records showing that a number of university administrators received foundation compensation of more than $100,000 and that two campus administrators received foundation compensation of $300,000 in addition to their annual state salaries.

In a Buffalo News story on our report, the foundation’s director explained that public university officials determine how the foundation’s money is spent. But little information appears to be available to faculty or to the public about which kinds of state university positions are funded by the foundation, the amount of each award, or the criteria and process for allocating foundation compensation to particular faculty or staff members. The goal of providing open information about foundation priorities for compensating university employees seems especially reasonable given the poverty-level compensation of faculty members in adjunct positions, who earn as little as $2,700 a course.

Over the past several years, both the faculty senate and the union representing faculty and professional staff have adopted resolutions calling for foundation budget transparency. University at Buffalo president Satish Tripathi, who serves on the University at Buffalo Foundation Board of Trustees, has so far declined to support those resolutions. In 2011, a lower court rejected a local journalist’s freedom of information law records request for foundation spending information, reasoning that the foundation was privately governed and held only private funds, even though it solicits donations in the university’s name.

To follow up on these efforts for transparency, in early 2016 our AAUP chapter issued a report (available here) providing evidence that a substantial portion of foundation revenue appeared to come from state resources and from fees levied under state authority. Our chapter’s call for transparency received support from an editorial in the local newspaper and from a faculty petition signed by more than one hundred tenured faculty members.

Causes for Concern

Our local initiative should be viewed in the larger context of public concern about campus foundation accountability. The idea that “sunshine is the best disinfectant,” as Supreme Court Justice Louis Brandeis famously said more than a century ago, has made government transparency a fundamental principle of democracy. Over the last two decades, a number of states have extended open-government laws to the nonprofit foundations affiliated with public campuses, typically with exemptions for donor anonymity. New York is among the many states in which the law remains unclear or unsettled, with conflicting lower-court opinions.

Why is it any of our business as faculty members or public citizens what a nonprofit organization run by private-sector volunteers does with what it claims as its money? Our AAUP chapter has faced strong criticism of its transparency efforts, including a document circulated to the faculty senate by the chair of that body (at the request of the campus president) accusing “dissident professors” of promulgating a “campaign of misinformation.”

One faculty concern has been that private fundraising risks turning a university’s reputation and resources into market commodities sold off for short-term gain. In appearance, if not in reality, campus foundation donations or board positions can enhance business deals, political ties, and credibility; although the results are sometimes harmless, the actions nonetheless deserve sunshine rather than secrecy. In 2004, the Associated Press reported that records released under order of Georgia’s attorney general revealed that companies donating to a University of Georgia System Foundation fund for supplementing the chancellor’s salary were awarded millions in contracts from campuses in that state system. Journalists also found that in the early 2000s about half of the board members of the University of Georgia’s affiliated foundation had ties to companies doing business with the foundation or university, and that the companies of these board members received over $30 million in business, often without disclosure of conflicts or evaluation of competing proposals. In 2015, an investigation by the Chicago Tribune revealed that board members of the foundation associated with the College of DuPage, a large public community college in Illinois, had received nearly $200 million in business contracts from the college, many of which were allegedly awarded without competitive bidding. Foundation leaders defended the practice of appointing foundation board members affiliated with university vendors on the ground that these board members are especially passionate about giving back to the institution.

Particularly disturbing deals have given big donors control over academic content. Advocacy groups and journalists have found evidence that Charles Koch’s extensive philanthropy to colleges and universities over the last decade has been tied to ideological control over academic content and faculty hiring in several institutions. What is perhaps less known is that the details of the Koch deals have sometimes been hidden by channeling donations through public university foundations that claim “private” status. George Mason University’s affiliated foundation, for example, has reportedly received more than $45 million in Koch donations since 2005 but has claimed privacy regarding the details. That university’s president, a public official, explained in an interview with Kojo Nnamdi on local National Public Radio station WAMU, “Listen, when a donor provides a gift to us or to any foundation, many of them, they in fact don’t like to have publicity of the details of their gift and we recognize that, and we respect that. . . . That is not just a practice of our university foundation but pretty much of any 501(c)(3) in the country.”

The problem is that university-affiliated foundations are not like most private nonprofits but instead are integrated into public academic institutions. The AAUP has advanced the idea that academic freedom and faculty governance are necessary because academic institutions are not like private businesses or other nonprofit organizations. Indeed, the special qualities of academic independence and integrity are probably precisely what attracted the Koch funders and other major industry-linked interests to public higher education institutions; the credibility lent by these institutions is a distinct addition to the agenda they are already pushing through their lavish funding of nonacademic think tanks and nonprofits that explicitly identify with particular ideologies and interests.

Though donations tied to ideological control are perhaps the easiest to challenge, other foundation practices may end up causing just as much academic damage. The status of foundations as both separate from and integral to public institutions means that they can serve as shells, blurring responsibility. Foundations often are structured so that public university administrators have dual loyalties and authority, combining the role of academic leader and government official with service to a foundation designed to avoid public and academic governance to maintain its “private” status. Foundations often pay a substantial portion of campus leaders’ compensation, or even the majority of it, exacerbating this dual allegiance.

At the same time, faculty members and students should not necessarily be reassured if foundation board members claim to defer to decisions made by campus leaders. The separate, secretive status of foundations or affiliated nonprofits can provide a vehicle for public academic officials to make crucial decisions about campus resources, policies, and priorities outside the normal processes that provide for academic and public accountability.

Questionable Priorities

Campus foundations not only receive donations but also may generate substantial income from a variety of campus-related functions, including campus businesses (such as bookstores), tickets and sponsorship sales for athletic and arts events, noncredit educational programs, campus-related intellectual property, student housing and other real-estate ventures, diverse industry-university partnerships, administrative fees charged on all of the above, and even the sale of campus mineral rights. As government funding is squeezed, this revenue becomes more important for sustaining academic goals. But especially when they are undertaken by a separate, nontransparent foundation that is beyond the reach of government ethics provisions, these internal business operations risk becoming the nonacademic end in itself rather than a means to support the academic mission. At times it seems the purposes are at risk of being reversed, so that the academic side of the university supports extensive foundation business operations.

For example, recent news reports revealed that in 2015, just as the state imposed major multiyear funding cuts on the University of Louisville, the president of that public campus loaned $38 million at 1 percent interest from the university’s bank account to a newly created campus real-estate foundation for property purchases and construction projects. The president’s simultaneous role as foundation board chair enabled him to make the loan without oversight by university trustees, faculty, or other public officials; it came to light only when the president sought a tuition increase to make up for the loss of state funds. The president had received $2.8 million in foundation compensation the year before, according to tax filings. Though the loan might be reasonable, it suggests how campus foundations may be structured to reduce accountability and oversight, allowing public officials great discretion to commit public educational resources to ventures that may involve substantial private nonacademic gains at the expense of the academic mission.

Public universities have also turned to foundations to support ambitious intercollegiate athletics programs, using foundation money to enhance stadiums and pay coaches’ salaries or recruitment budgets without public scrutiny of their financial soundness and without consideration of how these expenditures might be weighed against academic purposes, such as increasing adjunct pay, student scholarships, or faculty research support. University leadership may also use foundation funds to outsource strategic planning and other campus governance functions to highly paid consultants in place of faculty, who could do the same work at no extra cost but would be less subservient to the administration.

Although foundations are not the only reason for questionable campus spending, foundation board members often consist of business executives likely to hold different views of spending priorities from faculty and students or the general public. Decisions to spend money on new “showcase” buildings may be especially appealing to foundation board members with business interests related to real estate and construction, even if they recuse themselves from immediate conflicts of interest. Similarly, campus foundation boards made up of business executives are likely to be more comfortable with generous extra compensation, golden parachutes, lavish housing and travel budgets, or other benefits for top administrators, especially if board members stand to gain personally or professionally from cultivating alliances with public university leaders. In contrast, funding for faculty hiring and scholarships, student services, or pay equity and diversity initiatives are likely to bring less tangible gains that may nonetheless pay off in the long term in enhanced academic quality, morale, enrollment, and retention.

Another common but questionable area of campus foundation spending involves politics and lobbying, which can blur into advocacy for nonacademic interests. As Ellen Wexler reported in Inside Higher Ed last year, the University of Rhode Island Foundation was criticized for funding the state governor’s January 2016 trip to Davos, Switzerland, to attend the World Economic Forum (the trip was canceled for weather-related reasons); another college foundation in Rhode Island funded the governor’s new office on innovation. In tapping the state’s campus foundation resources, Rhode Island’s governor followed the example of Connecticut, where a state university foundation paid for travel by that state’s governor in 2012.

Not surprisingly, lack of oversight has created opportunities for foundation activities that arguably go beyond debatable policy to unlawful or at least unethical personal enrichment. After University of Hawaii president Evan Dobelle resigned amid charges that he used foundation expense accounts for lavish personal spending, he was hired to lead a Massachusetts state college, where a state investigation in 2013 found that he had diverted foundation funds for extravagant personal travel and entertainment that brought the foundation to the brink of bankruptcy.

In 2011, a New York State ethics commission found reasonable cause to accuse the president of the statewide SUNY Research Foundation of unlawfully using foundation funds to create a no-show job for the daughter of the state senate majority leader. At my own University at Buffalo campus, as Luke Hammill reported in the Investigative Post, undisclosed public university employees used foundation funds to make unlawful campaign contributions to the reelection campaign of a local government official (these contributions were returned after being revealed in news reports). In September 2016, the Buffalo News reported that state and federal authorities had brought criminal charges against a SUNY campus president, alleging a scheme of bribery, corruption, and fraud involving construction projects channeled through nonprofits affiliated with SUNY-related foundations.

Perhaps the biggest financial risk to campuses from affiliated foundations comes from using foundations to leverage public resources for speculative financial ventures. For example, in the 2000s, East Stroudsburg University in Pennsylvania dipped into restricted foundation scholarship funds to cover $1 million in annual debt payments on a loan incurred after cost overruns threatened plans for a new science building. In 2005, the University of Idaho had to cut faculty and academic programs after that university’s affiliated foundation ran up a $26 million deficit from investing in a failed real-estate development project. And in 2015, North Dakota’s Dickinson State University Foundation was dissolved after debt for real-estate and construction projects led to financial failure.

Climate of Mistrust

Beyond dramatic incidents in the news, academic institutions may also be harmed in subtler ways by mismanaged nontransparent campus foundations. First, the often blurry line and conflicting interests between campus and foundation operations can foster a culture of secrecy, cynicism, and lack of accountability that seeps into general university governance and even into the institution’s academic culture. Efforts to avoid scrutiny of foundation funds are likely to confuse and impede campus oversight of state funds, in part because it can be difficult to know which funding source is implicated in a given transaction or policy. Further, if significant numbers of faculty and administrators receive unidentified amounts of campus foundation compensation through nontransparent processes based on undisclosed criteria, foundation compensation can operate as a shadow reward system that creates at least the appearance of undermining academic merit and collegiality.

Second, as campus foundations have moved beyond managing individual gifts to generating revenue by operating programs, services, and business ventures on and off campuses, they have come to wield substantial influence over priorities and policies both on the campus and in the community in general. Unlike most private charities, campus foundations gain prestige from their exclusive access to public institutions and benefit from assets built over many years through taxpayer investments and through the academic and professional work of faculty, staff, alumni, and students. If this private power is not open to public scrutiny and is exempt from policies for academic and government integrity or democratic representation, then it will likely contribute to a climate of mistrust of public higher education that further erodes higher education resources.

Campus foundations can better support public academic institutions by empowering and engaging faculty as valued participants in openly shaping the priorities, policies, and practices governing campus resources. Maintaining the strong external support and internal excellence vital to thriving public academic institutions requires informed and open discussion of campus foundation decisions and operations. 

Martha T. McCluskey is professor of law and William J. Magavern Faculty Scholar at the University at Buffalo. Her e-mail address is [email protected].