Louisville's Foundation Mess

State audit finds fault with management structure and decisions under former president, who responds that auditors failed to consider Louisville's "amazing academic trajectory."

December 15, 2016
 
University of Louisville Foundation
A new governance audit finds fault with the University of Louisville and its foundation.

When the former University of Louisville President James Ramsey was up for a raise in 2014, he got more than he’d bargained for in his contract.

Louisville’s compensation committee that year recommended a merit-based raise of 2 percent for Ramsey, who at the time was the president of both the university and the legally separate University of Louisville Foundation. The recommendation for a raise was then reviewed by the foundation.

But the foundation’s board decided to give Ramsey more money. It approved a 4 percent merit increase for his work as foundation president and an additional 2 percent increase on his university salary. The raises were to be paid for by foundation funds.

The additional money came even though the foundation’s contract with Ramsey specifically said raises he received were to be equal to raises approved by the university board, according to a report released Wednesday by the office of Kentucky Auditor of Public Accounts Mike Harmon. That report looked at a three-year period starting in July 2012, examining the University of Louisville Foundation’s governance and its relationship to the university, which have long been sources of concern and controversy.

Details of Ramsey’s raises were the basis for one of eight report findings -- that the foundation board compensated Ramsey beyond the amount approved by the university board and beyond the amount allowed under the terms of his contract. Louisville’s current acting president responded to the report by saying the university is committed to addressing the concerns raised. The foundation’s chair said corrective actions are already taking place.

But Ramsey disputed many of the findings, including the one on his 2014 raises.

“You are simply wrong,” he wrote in a six-page response attached to the end of the auditor’s report. “This is a provision in an employment contract between the ULF and me. The parties are free to alter the terms if they choose.”

Ramsey's university salary was approximately $350,000 in 2014, according to the Louisville Courier-Journal. His total compensation from the foundation that year was almost $2.8 million, although that would include forms of compensation other than his foundation salary.

Ramsey stepped down from the foundation presidency in September, less than two months after also resigning from the university presidency in a move controversially brokered by Kentucky Governor Matt Bevin. Bevin secured Ramsey’s resignation as he attempted to put in place an overhaul of the university’s Board of Trustees -- an overhaul that captured the attention of accreditors and was later blocked by a judge. Nonetheless, Ramsey is no longer president of the foundation, which manages an endowment of nearly $685 million, or the university, which enrolls about 22,000.

The audit report sheds some light on long-simmering issues between Ramsey, the university and its foundation as the president sought to grow the institution over a 14-year period in which state funding shrank. Some faculty members said Wednesday that the report proves Ramsey worked to expand Louisville’s reach and influence by any means necessary. Meanwhile, university and foundation officials appear to be trying to repair damage from the controversies.

And Ramsey is defending his legacy.

“Your examination rightly notes ULF’s incredible growth in recent years, and notes the increased centrality of its role in supporting UL,” Ramsey wrote at the start of his response to the report. “The examination fails, however, to adequately acknowledge how UL and ULF’s relationship -- and the procedures governing that relationship -- allowed for and facilitated that growth, and thus allowed for the amazing academic trajectory that the university has achieved since 2002, despite repeated state budget cuts.”

The Findings

The report’s findings come after the auditor’s examination into governance issues was first announced in June 2015. However, the audit was not a dive into the foundation’s finances. A full list of its eight findings reads as follows:

  • Auditors’ requests for documentation and other information were met with continued delays, unclear responses and inconsistent responses.
  • University and foundation administrative operations were at times indistinguishable, leading to ineffective governance.
  • Conflict among University of Louisville board members and the administration created an environment of distrust, which resulted in a dysfunctional governing climate affecting both the university and the foundation.
  • Endowment funds budgeted for university use totaling $67 million were loaned to the foundation and an affiliate organization without prior notification to or approval by the university’s board, a move Ramsey had authority to make but which caused concern.
  • Ramsey appointed a former university chief of staff to the position of acting foundation chief administrative officer in an apparent violation of foundation bylaws.
  • The foundation board compensated Ramsey beyond the amount approved by the university board and beyond the amount provided for under his contract.
  • The university’s CFO was not included in foundation board finance committee meetings, violating bylaws and conflicting with his foundation contract.
  • Foundation board members do not receive an orientation even though foundation operations are increasingly complex.

Recommendations for correcting each finding were included in the report. But the auditor’s office emphasized its top finding Wednesday.

“The biggest obstacle we had to overcome, which is a big reason why it took my office so long to complete, was the lack of cooperation by the prior administration to provide the documentation and information we requested as part of our exam,” Harmon, the Kentucky auditor, said in a statement. “That is why finding 1 of our report cites the delays and inconsistencies in obtaining information, which we believe also contributed to the high level of dysfunction and mistrust among both the U of L and the foundation boards that has eroded the public’s confidence in the university.”

The report details several circumstances in which auditors dealt with delays, inconsistent information and other difficulties obtaining information. It notes that difficulties started in the earliest stages of the investigation, when auditors suggested that they receive read-only access to computer systems so that they could view information directly instead of having to receive processed reports or printed hard copies. They were told much of the information was only available via hard copy and that financial reports would need to be compiled manually. Foundation administrators also questioned auditors about whether information on foundation expenditures was relevant in a governance examination.

The report notes that “the flow of information did not become consistent until after a new interim U of L president and new ULF board chair were named, at which time action was taken to address the majority of outstanding requests.”

Also of particular note is the finding on administrative operations between the university and foundation, where the president’s role overseeing both organizations has been a point of debate. The report found that one person acting as president of both organizations combined with other commingled administrative functions and increasingly complex foundation operations to create confusion and transparency questions. The foundation is made up of 14 affiliates whose operations include real estate holdings and development, endowment management, and deferred compensation management.

“This confusion and the concentration of authority led to ineffective governance practices that resulted in management having too much influence and a lack of checks and balances,” the report said. “During the examination period, the administrative authority of the foundation rested primarily with three individuals: the former university and foundation president, the former president’s chief of staff, and the foundation CFO.”

In his response, Ramsey wrote that the real issue at stake was the foundation board’s independence from political influence. He did not explain that argument in depth but said some of the report’s suggestions merited consideration. Still, he specifically rebutted seven of the report’s findings.

Auditors who cited difficulties obtaining information in their work did not take into account the fact that the foundation had a small staff, Ramsey wrote. There is no inherent conflict in having a single person act as president of both the university and its foundation, as the university president is best qualified to determine academic priorities and direct foundation funding, he argued. If the administration was responsible for the university’s dysfunctional board situation, it was only a byproduct of its focus on students instead of the governing climate, Ramsey wrote.

The former president went on to say that the $67 million in loans were “transparent, aboveboard and did not conflict with state law or internal UL or ULF policies,” and that he was assured such cash-management practices have been in place since 1970. Ramsey moved the University of Louisville’s chief of staff from the university to the foundation, a move that was prudent from a budgetary standpoint and only failed to be approved by the foundation board because the board lacked a quorum, he wrote. The university’s CFO was new during the time being examined and could better spend time on operational issues, according to Ramsey, who added that all foundation board meetings are public.

‘A Culture of Cutting Corners’

Wednesday’s report reflects Ramsey’s tenure and broader trends in higher education, according to the president of the University of Louisville chapter of the American Association of University Professors, Avery Kolers, a professor of philosophy.

“The audit lays bare what we all knew: that President Ramsey created and embodied a culture of cutting corners and fudging numbers in order to create an illusion of monumental success in all areas; and that that illusion eventually exploded,” Kolers wrote in an email.

Kolers does not want to be too personal, he continued. He doesn’t doubt that Ramsey’s actions flowed from good intentions. The president prioritized efforts that could bring in large amounts of money, like the university medical center, athletics program and relationships with the corporate elite. He brought a conviction to the job that the ends justify the means, Kolers wrote.

“U of L faced, and continues to face, two inexorable destructive forces: state disinvestment in public higher education, and the ongoing stratification of higher education into a top tier of opulent, high-prestige corporate enterprises, and a bottom tier of cash-strapped glorified community colleges,” Kolers wrote. “These forces are the same for all our peers, nationwide. Inasmuch as U of L is a middling, not-quite-flagship public school in a poor state, our basic existential challenge is: How, in the face of disinvestment and stratification, do we avoid being dragged down into the bottom tier?”

The university’s acting president, Neville Pinto, said he and the foundation’s chair are committed to addressing concerns.

“Considerable time and energy have been and will continue to be spent addressing the issues that have been identified by the state auditor,” Pinto said in a statement. “It is truly a new day for the University of Louisville and the University of Louisville Foundation."

The foundation’s chair, Brucie Moore, said the organization has taken actions including hiring a lawyer to help it comply with Kentucky’s open records law, creating a new committee to oversee and modify the foundation’s governance structure, and deciding that Pinto would not serve as foundation president. The foundation has also hired an interim executive director, joined the Association of Governing Boards of Universities and Colleges and made sure Louisville’s chief operating officer will serve on the foundation’s finance committee. In addition, it is establishing a foundation board orientation program.

“This audit provides a road map for further improvements in the oversight and daily operations of the foundation, and we look forward to continuing the work necessary to ensure that public confidence and trust is fully restored,” Moore said in a statement. “As a follow-up to this audit, we will be providing a detailed corrective action plan to the state auditor within 60 days.”

An additional forensic audit is under way that will investigate the foundation’s spending and relationships with donors and vendors. Louisville on Wednesday also found itself under fire after word broke that its football team received information on Wake Forest University plays before a matchup between the two programs this season -- another athletic dispute at a school already plagued by serious allegations of prostitution tied to its basketball program. Louisville additionally agreed to pay a former vice president of health affairs $1.15 million to leave after a federal investigation examined whether he and others misused federal grant money.

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