MacIver News Service
By M.D. Kittle
MADISON, Wis. – While last month’s legislative audit raised serious questions about the financial relationships between University of Wisconsin System schools and their private affiliate organizations, the system’s transparency troubles may be a bigger concern.
The difficulty state auditors had in obtaining financial statements only drives home the importance of an external audit, approved in the most recent state budget, one lawmaker tells MacIver News Service.
“There’s still more work to do,” said state Rep. Dale Kooyenga (R-Brookfield). “The University of Wisconsin is the largest employer in the state, bigger than Walmart … This (the UW System) is a multi-billion dollar company. You really need to have people focused on the details of this financial system.”
Kooyenga was a member of the Legislature’s CPA Caucus, the accountant-legislators that five years ago discovered the UW System held some $650 million in cash reserves (a slush fund, as critics have described it), even as system officials cried poverty.
The Legislative Audit Bureau’s 112-page audit, released in March, notes foundations and other affiliated organizations playing an increasingly prominent role in the operations of Wisconsin’s 13 public universities and 13 two-year colleges. As of last year, there were 90 such assisting organizations, ostensibly established to lessen the taxpayer burden. Two-thirds of those, however, were not primary fundraising foundations, the audit found.
Over a 10-year span, from Fiscal Year 2007-08 through 2016-17, UW institutions paid $258 million to the entities, $168 million of that to affiliated organizations that were not primary fundraising foundations or real estate foundations.
The legislative audit was conducted in the wake of last year’s UW-Oshkosh Foundation scandal, in which the system ultimately sued UW-Oshkosh’s former chancellor and business officer on allegations that the men improperly transferred $11.3 million to help bail out the troubled nonprofit foundation. At $14.5 billion in debt, the foundation led questionable investments, including two bio-digesters, a hotel, and a sports complex.
Auditors found the blurring of operational lines between many of the UW institutions and the foundations examined, with university resources – staff, office space, materials – committed to foundations.
“We found that UW employees also worked as the executive directors of 10 foundations associated with four-year universities as of June 30, 2017. UW institutions indicated that 6 of these 10 foundations did not reimburse them for any salary and fringe benefits costs of these UW employees,” the audit report states.
The audit shows incestuous public-private relationships between some of the affiliate groups and the universities, with little separation in operations.
Five of 11 cross-over employees, including those at UW-Eau Claire, UW-Milwaukee, UW-Oshkosh, UW-Platteville, and UW-River Falls, did not have statutorily specified position titles that required them to file statements of economic interests in 2017,” the audit states.
Statements of economic interest give the public critical information on financial connections of state employees that could potentially place them in positions of conflict. Auditors suggest the Legislature could pass laws requiring these employees to annually file the statements.
The commingling of resources is where many of the transparency problems show up.
Policy indicates any foundation allocated UW office space must pay rent or provide in-kind payments at a fair-market rate, according to the audit. As of June 30, 2017, foundations used office space at 23 UW institutions, 21 of which did not provide auditors with information indicating that the foundations paid rent or provided in-kind payments.
Auditors identified $81.6 million in payments, or $45.1 million more than the $36.5 million UW System administration included in their October 2017 review. Almost all of the additional payments involved $44.9 million that UW-Milwaukee paid to its foundation – student rent and fees associated with two residence halls.
Trouble With Transparency
Auditors noted that while UW System employees responded to many of their requests for information, the government officials indicated that some information “did not exist or could not be easily located.” When considering the $258 million taxpayer-funded institutions paid to their affiliate organization over the decade examined, such responses are troubling.
“In some instances, UW employees took extended periods of time to fully respond to our repeated requests for specific information,” the audit states. “In other instances, UW employees did not provide us with all requested information related to our audit that they possessed, and to which statutes grant us access.”
Auditors encountered administrative resistance from the foundations, the benefactors of so much taxpayer-funded support. Some UW employees told auditors that governing boards of foundations directed them not to provide certain information.
“However, there is no exception to our statutory authority that allows an outside governing board to restrict a UW employee’s responsibility to comply with our requests for access to audit-related information that they possess,” the report states.
Something To Hide?
Faced with continual challenges in obtaining the requested information, auditors met with UW System President Ray Cross and followed up with a request in writing on Nov. 6. They were subsequently provided access to much of the information, including documents that system employees had previously declined to share.
“However, we were not provided all requested information,” the audit states. Specifically, officials failed to turn over documentation on funds that UW-River Falls had submitted to its foundation in fiscal year 2016-17.
“In addition, six months after we had requested the minutes of all meetings held by the board of directors of UW-Platteville Foundation over a 10-year period, UW-Platteville provided us minutes of meetings that took place in less than 2 years of this 10-year period,” the report states. There were other cases where universities failed to fulfill the Legislative Audit Bureau’s information requests.
Beyond its failure to provide state auditors with records, system administration’s accounting system proved problematic. It was set up “in such a way” that prevented auditors from accurately determining the total amount of payments that UW institutions made to affiliated organizations.
“We also found that UW System Administration’s October 2017 review of payments from UW institutions to their foundations did not include $45.1 million in payments that UW System Administration should have included,” the report states.
Transparency problems appear to be built into the contracts between UW institutions and affiliate organizations. Five operational agreements executed in 2017 “did not consistently comply with (UW Board of Regents) policy,” the audit states.
“The agreements did not consistently indicate the specific services and payments that foundations were required to provide for the time that UW employees worked for them, require foundations that use UW office space to pay rent or make in-kind payments at fair-market rates, or indicate the specific services and payments that foundations were required to provide for UW assets,” the report states.
The audit found several curious expenditures, such as an estimated $11.3 million paid to UW Medical Foundation that included payments for “medical staff to support UW-Madison athletics…”
The UW System offered a sanguine response to the Audit Bureau report. A press release declared that the audit found financial transactions between UW institutions and foundations to be “appropriate, consistent with the UW System’s review issued in October 2017.”
“The proactive steps we announced last spring are a step in the right direction in providing additional accountability and transparency in the UW System’s relationships with its fundraising and real estate foundations,” Cross said in the statement. “While we have made significant progress, we appreciate the feedback from LAB in assisting us in those efforts. We continually strive to ensure the ongoing integrity, efficiency, and transparency of these organizations.”
But the response doesn’t really address the transparency concerns, or a number of questions apparently unanswered in system financial statements. For instance, what did the UW System do with the reported “foundation funds” not reported on the UW balance sheet or public financial statements? In one case, the audit references that the University of Wisconsin gave football TV revenue to the UW Foundation. But there doesn’t appear to be a disclosure of what the foundation did with that money.
And the Audit Bureau made several recommendations, from establishing unique vendor identification numbers to drafting specific accountability measures. In short, the agency recommends the institutions come up with new agreements and figure out if the partners are following the rules. What is the UW System doing to address those recommendations?
The audit gives system administrators until June 29 to report on the recommendations.
System spokeswoman Stephanie Marquis noted that the Board of Regents last year outlined new requirements and standards governing foundation relationships, as the audit was being completed.
“We appreciate the work LAB did to help us focus and improve our processes and we believe this audit will help make institutional relationships with foundations more transparent,” she said in an email. “We look forward to updating the Audit Committee soon on our efforts to address the recommendations.”
Marquis did not comment on MacIver News Service’s questions on foundation funds in the audit that apparently were not reported on the UW balance sheet or financial statements.
State Rep. Samantha Kerkman (R-Salem Lakes), who serves as co-chairwoman of the Legislative Audit Committee, told the Wisconsin State Journal last month that strong policies are clearly warranted to “ensure taxpayers and students are protected.”
“In a snapshot, these relationships are historically clouded by smoke when what students, taxpayers and the Legislature want and deserve is absolute transparency,” she said.
In many states, the relationships between foundations and the public institutions of higher education they were created to assist are “opaque and unaccountable,” according to Jenna Robinson, president of the James G. Martin Center for Academic Renewal, a conservative higher ed tracker based in Raleigh, N.C.
In a piece last month headlined, “University Foundations Enable Waste, Fraud, and Abuse,” Robinson notes the sheer size of the larger foundations leads to transparency and accountability problems. At least 170 universities have endowments worth over $500 million, she notes. UW Foundation net assets topped $3.5 billion last year, according to the state audit.
Robinson points to several universities where a lack of transparency and accountability created an environment of fraudulent activity.
And that’s why advocates of the external audit of the UW System say the outside examination is so important. Failing to dig deep into the records of this massive state employer could be costly to taxpayers.
“I think it will raise more concerns, new issues that have not previously been disclosed,” Kooyenga said.