No Accountability: UNC System Foundations Operate in Secrecy

The UNC System is flush with foundations that raise money for their associated universities, and researchers who have looked at these types of organizations on a national level have called them “slush funds” and “shadow corporations” that too often operate in secrecy, despite spending taxpayers’ money.

The unusual practice in North Carolina in which foundations buy property, then lease space back to their universities, raised eyebrows among some of those experts. UNC Board of Governors member Marty Kotis said he has raised many questions about those financial relationships.

The UNC-Chapel Hill Foundation bought the old University Square property on Franklin Street, then ground-leased it to a third party developer who turned it into a mixed-use development, Kotis said.

“They are in turn leasing space to the university, and some of the centers and institutes, and some of the departments, which is just a little incestuous,” Kotis said. “You wonder in that scenario why does the foundation do that, and what happens with the money that flows into the foundation, or out of it, and what’s the oversight on that?”

The university will pay a net increase of about $15 million over a 10-year period for leased space in the new building compared to the former space it leased, he said.

“I have a lot of questions about real estate deals on these things,”, said Kotis, owner of a commercial real estate development corporation doing business in North Carolina and South Carolina. He has previously raised issues about East Carolina University’s Medical Foundation lease of a significant amount of space back to the university, and also about North Carolina’s Centennial Campus.

The normal approach nationally is for foundations to lease space from the university, not to it, said Alexa Capeloto, a CUNY journalism professor who has done groundbreaking work on how university foundations are shielded from normal public disclosure laws.

Because the UNC System does not compile a comprehensive list of all campus foundations and their activities, Kotis had employees at his company put together a financial thumbnail of the primary foundations on campuses.

As of June 2012, 17 foundations on 11 campuses possessed nearly $1.66 billion in assets. Those foundations are at Appalachian State University, East Carolina University, Fayetteville State University, North Carolina A&T, North Carolina Central University, North Carolina School of Science and Math, North Carolina State University, UNC Asheville, UNC Charlotte, UNC Chapel Hill, and UNC Pembroke.

“I have a database of every state to see what’s been done not only on the issue of universities and foundations, but privatization in general, and public records access,” Capeloto said. “I think that North Carolina actually is ripe for a challenge … because really it’s not decided yet whether these entities should be subject to public records laws.”

The North Carolina Attorney General’s Office issued an opinion in 2000 that said foundation employees are not state employees, according to Capeloto, which she said isn’t a huge surprise because there’s only one state that even considers foundations actual government: Nevada.

“There does seem to be kind of an inclination to consider foundations off limits in [North Carolina],” Capeloto said. “It’s a weak public records law, and by implication it’s harder to get things there than in some other states.”

Frank LoMonte, executive director of the national Student Press Law Center, said in instances where scandals have erupted over questionable, ethical, or illegal university foundation practices, they generally were exposed due to a court ruling or attorney general’s opinion that created an avenue for access.

“We don’t have any record of either a lawsuit or a piece of legislation directly addressing itself to the status of these quasi-public foundations and auxiliary organizations in North Carolina,” said LoMonte, who has led numerous projects to obtain records from university foundations.

Experts say increased transparency usually requires the revelation of a previously unknown problem via other means.

“It sometimes takes a high-profile gaffe to get the legislature to move, and pass a law saying foundations are subject to the public records laws,” said David Cuillier, director of the University of Arizona School of Journalism. He co-authored the book, The Art of Access: Strategies for Acquiring Public Records with Charles N. Davis, dean of the Henry W. Grady College of Journalism and Mass Communication at the University of Georgia.

“There’s like a handful of states that are now subject to public record laws because of the shenanigans” at university foundations, Cuillier added. “I think there are a ton of flags that need to be raised when it comes to university foundations. I think it’s one of the most underreported scams in America. It’s total slush fund … What a great way to hide money for a university.”

He said foundations have allowed universities to hide “wrongdoing, and questionable expenditures” because foundations usually aren’t subject to public records laws, and may not comply with them in states where they are.

“Why do universities have foundations? Why don’t cities, and counties, and mosquito control districts?” Cuillier asked. Imagine the public reaction, he said, if the City of Raleigh created a foundation to raise money for a mayoral mansion, and provided other compensation for the mayor in secret.

A request for comment from the UNC System on why universities believe private foundations are essential to handle university-related functions, and what system policies exist on access to foundation records was not answered.

“We’ve seen cases where foundations are buying gifts for university administrators, or paying for their housing” or other perks for people at the universities, as well as exorbitant speaker payments to Sarah Palin and Hillary Clinton, Capeloto said. “It does seem almost like a shadow corporation.”

“One foundation was paying for prostitutes for the football team,” Cuillier said, and another “was taking bribes from rich people who wanted to get their slacker kids into this competitive orthodontics program.”

Despite his concerns about foundation openness on UNC campuses, and the examples of hijinks elsewhere, Kotis said he doesn’t think there’s anything nefarious going on here.

However, he said, “The foundations are clearly a tool that’s being used to avoid having to go through the red tape of the general administration, the Board of Governors, the state oversight in a lot of cases, and bypass us.”

In the best possible light they are being used to accomplish goals that would have been delayed but still approved by governing bodies, Kotis said.

There are “a lot of different colors of money” in university operations, Kotis said, from tuition and state appropriations, to overhead receipts and enterprise fees for items such as housing or printing services. Foundations intermingle money from different sources, “and then once they flow through the foundation any money coming out of the foundation can be used for anything,” including the $10 million used to pay for legal fees and public relations on the UNC Chapel Hill athletic academic scandal, Kotis said.

“I don’t feel like we have a very good picture of how that works.”