The Iowa Board of Regents and Affiliated Foundations

This post is part of an extended Open Letter to the Iowa State Auditor.

The Iowa Board of Regents oversees three public institutions of higher learning: the University of Iowa (UI), Iowa State University (ISU), and the University of Northern Iowa (UNI). Like most colleges and universities in the U.S, each of the state schools is abetted in fundraising by a closely affiliated but legally separate foundation, which is solely dedicated to generating and managing charitable donations for its school. Importantly, these foundations are not simply separate non-profits which are owned and controlled by the state, but are entirely separate legal entities. Confusion about that status, however, is actively perpetuated by the schools and foundations because doing so aids in generating revenue, and inherently promoted by varying degrees of conspicuous administrative overlap between each symbiotic pair.  

For example, the University of Northern Iowa Foundation is governed by a 39-member Board of Trustees. Of those 39 members, 4 are ex officio, and all of the ex officio members work for UNI, meaning they are state employees. Included among the other 35 trustees, however, are both UNI President Mark Nook and UNI SVP for Finance and Operations Michael Hager, who are also employed by the state, but are full members of the UNI Foundation board.

At the Iowa State Foundation the governance structure includes 4 officers and only 13 directors, even though ISU is the largest of the state schools, and more than three times the size of UNI. While there are no explanatory notes listed for any of the directors, last on the alphabetical list is Wendy Wintersteen, who also happens to be the current president of Iowa State — and is thus also a state employee. (The ISU Foundation is aided by a long list of more than 275 foundation governors, some of whom serve on nine foundation committees.)

At the University of Iowa, the UI Foundation recently changed its “operational name” to the UI Center for Advancement, but it is still the same organization. The center is governed by a 31-member Board of Directors, of which only 1 member — current UI President J. Bruce Harreld — is listed as ex officio. (This is a notable difference from the other two state schools, where the presidents are full members.)

Underscoring the administrative confusion between institutions of higher learning and their foundations, however, 11 of the UI Center’s 31 directors, including Harreld, are also listed as “board officers and Executive Committee members”. Specifically, two of the directors are board officers (chair and vice chair), while the president/CEO and EVP/COO of the center, who are not on the board, also serve, respectively, as president and EVP/secretary of the Executive Committee. As to what the executive committee does, or what Harreld does on the executive committee — and whether he has full voting status, or even de facto control — there is no other mention of the executive committee on the Center’s website.

The nationwide segregation of charitable giving from the schools to which gifts are made has multiple motivations, including conforming with and taking advantage of tax laws, ensuring confidentiality (a particular concern at public schools), and limiting conflicts of interest. If the organization that takes a check is different from the school to which that check is destined, there is a presumption that the donation is an arms-length transaction, even as overlap between the administration of both organizations calls that presumption into question. In reality, of course, not only is money often given with strings attached, but money may be given in exchange for a desired benefit — as often happens when a particularly wealthy donor is purportedly ‘thanked’ with the naming of a facility in their ‘honor’, when that transaction was in fact negotiated.

Given that all three presidents of Iowa’s public universities sit on the boards of their affiliated foundations, and that such nod-and-a-wink deals are commonplace in higher-ed, there are not only obvious opportunities for crony corruption in such transactions, but the separate legal status of the foundations allows such transactions to be obscured from public view. Despite the intimate and exclusive financial allegiance between each state school and its foundation, even the state itself cannot compel disclosure of the sourcing and context of a considerable amount of revenue which flows to the state schools on an annual basis. And yet, because the university presidents — who are state employees — also serve on the foundation boards, they can and do provide direct communication between the two organizations, which is nonetheless deemed privileged because the foundations are legally separate private entities.

Not only is it thus possible for Iowa’s university presidents to broker state assets in secret — usually in exchange for large-dollar donations — but official state communication about the result of such deals is often tortured as a result. For example, Iowa State recently broke with longstanding tradition and began ‘granting’ naming rights to corporations and businesses. Even when the details of the first such deals were released, however, ISU could not simply admit that it had sold the naming rights to two facilities. From the Gazette’s Vanessa Miller, on 04/05/18:

The university wants to name the new farm’s layer building the “Iowa Egg Council Layer Research Facility,” in honor of the Iowa Egg Council’s $1.5 million contribution to the project, and its new genetics building the “Hy-Line Genetics Research Building,” in honor of a $500,000 gift from Hy-Line International and its United States division, Hy-Line North America.

…

The Egg Council and Hy-Line gifts at Iowa State are not contingent on the name recognition.

The idea that Iowa State did not sell the naming rights to those facilities in exchange for the announced ‘donations’ is laughable, but because the public has no right to any records about those negotiations, the state can lie to the public. Perhaps not surprisingly, the ISU Foundation has a particularly dubious history in terms of shielding questionable transactions and obscuring state business from public view. From a Des Moines CityView column on 10/21/16:

University foundations are big business — the ISU Foundation employs more than 125 people and had assets of more than $900 million as of June 30 — and most are legally independent from their universities. But most are, in fact, simply arms of the office of the universities’ presidents, who usually sit on the foundations’ boards. What the president wants, he gets — and foundation boards, often sprinkled with loyal alums, usually just go through the motions of approving requests from a president. Sometimes, they don’t even do that.

Indeed, no one can remember a time when the ISU Foundation ever turned down a request from an ISU president.

But [ISU President] Leath, unlike [former ISU President] Geoffroy, had several unusual requests. One was to buy an airplane for $3 million to $4 million, which would have allowed him to avoid disclosing that to the Board of Regents or the public. The plane then would be given to the university. It’s unclear how Leath accomplished this — one board member says the foundation never voted on the issue — but a person familiar with how foundations work said there often are back-doors into and out of foundations. At any rate, in February of 2014 the foundation bought a Beechcraft King Air 350 for $2,875,000 and spent another $600,000 on upgrades and furnishings. The foundation then gave the plane to the university.

The contract was signed not by [Foundation president] Neuhaus but by Lisa Eslinger, the foundation’s senior vice president for finance and operations.

(The July 2014 contract to buy a single-engine, four-seat plane for $470,000 was directly with the university, perhaps because the price was below the threshold that required notification to the Board of Regents. It is this plane that pilot Leath damaged a year ago, an accident he didn’t report to the Board of Regents.)

These events comprised part of the ‘planegate‘ saga at Iowa State, yet despite months of reporting and a subsequent board audit, there was never any disclosure about where the millions came from to buy the King Air, let alone whether those millions conferred any benefit to the donor(s). One or more individuals deposited money in the ISU Foundation — either for that express purpose, or to be used at the administrative discretion of the ISU president — but there was never any obligation on the part of the foundation to disclose that information. (The ISU Foundation knows the answer, and if it did anything illegal it could get in trouble with the IRS, but from the point of view of the public and state there was no inherent right to know the sourcing and context of the underlying ‘donations’, even after the state took ownership of the plane.)

The problem with such opacity should be obvious. If someone wants something from one of the state schools — a service contract, say, or to make a lucrative sale, or to have a building named after them — they can go to the affiliated foundation, hold negotiations in secret, then pass money through the foundation with no one the wiser. And of course university presidents or a member of the foundation can approach donors, vendors or businesses on that same basis. Even if all of the pieces of a transaction are ultimately disclosed, that doesn’t necessarily mean the school got good value. Drop off $5M in cash at a university foundation, to be used at the discretion of the university president, and you just might find yourself with a $10M contract paid out of the state treasury, or through tuition revenue. (And of course if you’re approached by a president and refuse to play ball, you may find yourself blackballed from doing business with that school for the foreseeable future.)

Precisely because college and university presidents sit at the nexus of such transactions, the potential abuses are almost endless. Without being able to follow money into and through a foundation, to see where donations actually end up, and without seeing the contracts involved — and there are always contracts involved — we can’t even confirm that publicly disclosed details are accurate. For example, in a recent post it was noted that UI megadonor Jerre Stead reportedly gave $5M for construction of the UI children’s hospital, but we have no proof that any donated money was used as specified.

In fact, when we look at the timeline of that donation, relative to the shocking hire of Stead’s former business mentee and good friend, J. Bruce Harreld, that $5M seems to have a lot more in common with Harreld’s pay package than it does with the massive cost overruns during construction of the children’s hospital. Specifically, Stead’s $5M donation was reportedly secured on August 25th, 2015, after interim UI president Jean Robillard and a Foundation staffer flew to Colorado — on a chartered private jet, at Foundation expense — for a face to face meeting with Stead. Exactly one week later, on September 1st, Harreld appeared in his candidate forum, then a mere two days later, on September 3rd, the Board of Regents shocked the higher-ed world by appointing Harreld as the new UI president. Despite the fact that the regents were purportedly unsure about who would be hired until the final vote was taken on September 3rd, not only was Harreld announced as the new UI president on that day, but by that evening the terms of Harreld’s contract were announced as well:

While every campus administrator across the country knows that the separation between their school and their wholly committed foundation is a legal farce, that separation is consequently fragile and can be breached. For example, in 2005 a core presumption of governmental separation between the regent universities and their foundations was gutted by an Iowa Supreme Court ruling, in Gannon vs. Board of Regents:

In sum, we conclude a government body, ISU, with the approval of another government body, the Board of Regents, has contracted with what we assume in this appeal is a nongovernment body, the Foundation, to perform a government function for and on behalf of ISU. Iowa Code section 22.2(2) therefore mandates disclosure, without regard to the government body’s intent in so contracting.

IV. Conclusion
Summary judgment was not proper. The Foundation performs a government function by virtue of its contract with ISU. Therefore, its records are “public records” subject to examination.

As a practical matter, the university foundations quickly compensated by asserting that all donors requested confidentiality as part of their charitable giving. That blanket contention allowed the same backroom deals to be cut, while effectively exempting the foundations from the state’s obligation to report publicly requested information. Even today, however, you can see an artifact of that ruling on the ISU Foundation website, which directs inquiries for information “under the Iowa Code” not to a specific contact at the legally separate foundation, but generically to Iowa State.

The one thing that keeps this industry-wide administrative sham from collapsing in the eyes of the law is the flow of funds. As long as money and other resources only flow in one direction, from a foundation to its affiliated institution of higher learning, then legal separation between the two is preserved. Were money or resources to slosh back and forth, however, it would be clear that the foundation was simply another department on that campus — and on a public campus subject to Freedom of Information Act requests and other disclosures, that could be a real problem.

Amazingly, despite all of the corrupt acts that were revealed during the planegate saga at Iowa State, this rule still held. The former president of ISU repeatedly broke school policy, board policy and state law by using both of ISU’s planes for personal travel, and he used just under $500K in state funds to effectively buy himself a single-seat aircraft, and he used millions of ISU Foundation dollars to purchase a pressurized, twin-engine beast without board approval — yet for all of that, no money flowed from ISU back to the ISU Foundation. (The former ISU president even used $1M to buy the silence of two former ISU Foundation presidents, but that money was donated to the ISU Foundation.)

It may seem nonsensical that money or resources might flow from a school to its affiliated foundation, but there are considerable fundraising advantages in subsidizing a foundation’s operating costs. Because that might collapse the legal protections afforded to the latter, however, schools usually take pains to make sure they are not directly or even indirectly facilitating the work of their foundations. For example, several years ago the University of Wisconsin System had the following text on a web page for the Office of the General Counsel:

Office space. To best maintain its independent status, the foundation should enter into an arm’s-length lease agreement with the university and pay a fair rental rate for the space it occupies. Receiving rent-free office space from the institution makes the foundation appear to be an agent of the state.

Other concerns on the UW ‘independence checklist’ included “staffing” and “logistical support”, and it’s also easy to see how those might benefit a foundation. If you have people on the school payroll, who are effectively functioning as private-sector operatives for the school’s foundation, then the costs to that foundation decrease, meaning more money and resources can be funneled to the school. It’s risky because the organizations are acting as one, but in administrative terms it’s a boon because the foundation itself does not have to be self-supporting.

Unfortunately, the presumption of legal separation between educational institutions and their foundations abets the obscuring of illicit support, but with a but of insight it is often possible to detect situations which deserve additional investigation. Indeed, once you understand what is and is not allowed, it becomes much easier to spot situations where a school may be providing improper support to its foundation, despite claims of separation or confidentiality. Among Iowa’s regent universities, here are three such examples from the University of Iowa alone:

1) The UI Center for Advancement is primarily housed in the Levitt Center for University Advancement, which sits on the campus of, and is owned by, the University of Iowa. The normal symbiotic relationship between the school and its foundation is not only confused by the recent rebranding — because the foundation as a ‘center’ is now all but indistinguishable from the ‘center’ as a physical building — but that relationship dates back more than twenty years, to when the Levitt Center was purpose-built by the Board of Regents, to facilitate the operation of both the UI Foundation and the UI Alumni Association.

From a regent meeting memo dated 06/07/04:

At its May 2004 meeting, the Board authorized the Executive Director to fix the date(s) for the sale of the bonds, which would be sold to refund the 2005 – 2012 maturities of the 1995 Center for University Advancement Revenue Bonds which were issued to partially finance construction of the University of Iowa Levitt Center for University Advancement. The University of Iowa Foundation and University of Iowa Alumni Association, both affiliated organizations of the University, have offices located within the Levitt Center.

The debt service on the 1995 bonds is backed by a lease with the University of Iowa Foundation; the Foundation’s basic rental rate is equal to the required annual debt service payment.

While the the UI Foundation and Alumni Association were to be housed in the Levitt Center, and both were indeed “affiliated” with the university, those two organization operated under different legal frameworks, as obliquely referenced later in the same memo:

Since the Levitt Center is being used by the University of Iowa Foundation in the private business of a 501(c)(3) entity, it is necessary, according to bond counsel, to conduct a public hearing on the matter of the issuance of the refunding bonds pursuant to Federal tax laws.

Although the UI Foundation and Alumni Association were legally separate entities operating as non-profits, there were two critical differences between them. First, the Foundation was roughly ten times the size of the Alumni Association, meaning most of the space in the Levitt Center would be occupied by the Foundation. Second, the Alumni Association was owned by the university, and thus the state, much as the current UI Research Foundation is legally separate but owned by the school. As such, all of the employees of the Alumni Association were employed by the state, while none of the Foundation employees were state employees — thus prompting the “private business” distinction above.

Whether it was ever proper to only charge the Foundation a rental rate which subsidized the cost of the bond offering, the question today is what the (now) Center for Advancement will be charged once those bonds are paid off — which, per the same memo, seems to be this year:

The proposed refunding includes a restructuring of the maturity schedule, extending the maturity from 2012 to 2019.

As to the terms of the lease whenever the bonds are paid off, we also have that:

Period

The Lease begins on the date it is executed and runs until June 30, 2046.

Rental Rate

… After the principal and interest due on all Bonds have been paid in full, the Basic Rental will be $1,000 per year payable in advance on July 1 of each year for the remaining Lease term.

While there are other typical costs and conditions in the lease — paying for utilities; keeping the property in good condition — the problem with the Basic Rental rate should be obvious. To understand how incredible that deal truly is, however, note that the Levitt Center has more than 110,000 square feet of office space, meaning the Center for Advancement will pay a rental rate of less than one penny per square foot. Assuming that the lease terms have not been altered by a superseding document, the board and university are giving away the market value of a state asset for nothing, precisely to subsidize costs for the lessee, which means money between the two will be flowing in the wrong direction.

2) Although the UI Center for Advancement currently occupies an entire purpose-built building on the Iowa campus, in early 2017 the university requested permission from the Board of Regents to remodel a small recital hall, to provide even more office space for the Center. As to the specifics of the proposed project, we find the total projected cost of $5.4M in an extensive memo presented to the board’s Property and Facilities Committee in late February of 2017, and in a separate, smaller document we find details of the lease:

The University of Iowa requests Board approval to enter into a lease with the University of Iowa Foundation to lease 14,637 square feet of office space at 405 N. Riverside Drive in Iowa City (see Attachment A) to provide office space for the Foundation.

…

Upon completion of the remodeling, the lease term would be ten years with three additional five-year renewal options.

The monthly rental rate is $18,225 ($14.94 per square foot per year) for the first five years with a 2% increase at each five-year interval. The Foundation would be responsible for all utilities, janitorial, ground care, snow removal, and maintenance.

Again, relative to concerns about UI subsidizing the operating costs of the legally separate UI Center for Advancement, the problems should be obvious. First, the university, with the board’s consent, is fronting $5.4M in state remodeling costs for updates requested by the lessee. Second, because the Center is only committing to a ten year lease, followed by three five year options, the lessee can walk away from that commitment long before those costs are recouped by the state. (After ten years, the project will have recovered only about $2.2M of the remodeling costs. Details here.) Third, and most glaringly, if the 14,637 square foot recital hall is worth $14.94 per square foot per year — or $18,225 per month — why is the entire Levitt Center only worth $1,000 per year according to the 2004 memorandum cited above? (Put another way, at the proposed lease rate for the recital hall, the Levitt Center should cost the Center for Advancement roughly $137,000 per month — though it should be noted that in neither case were those rates determined by studying the comparable market rate for office space in Iowa City/Johnson County.)

3) In March of 2017, after asking the Center for Advancement and Alumni Association (UIAA) to improve coordination between those two legally independent organizations, president Harreld suddenly announced that he would merge the 150-year-old UIAA into the Center. While that news came as a shock to the state employees who worked at the UIAA, one notable detail in that shotgun merger was that the UIAA had built up its own $6M endowment to fund operations.

In the aftermath of the merger it was confirmed by a member of the UIAA board that the $6M endowment had been moved to the Foundation/Center (tweet here), which would again mean money flowed in the wrong direction. In fact, according to the UIAA bylaws (now scrubbed), if the UIAA ever ceased to exist, then “all resources of the Association automatically shall become the property of the State University of Iowa”. If the endowment devolved to the university — which is part of the state — then how did it get to the Foundation/Center?

Whether the Iowa State Auditor has any right to look at the books of the foundations which are affiliated with the state schools, from this and the other examples above it would seem prudent to ask the following question:

How much state money and resources are flowing from the regent universities to their affiliated foundations?

As a legal matter, the courts would have to decide whether a retrograde flow of money, or the subsidizing of operating costs, would be enough to dissolve the legal separation between a schools and its foundation, thus providing the state and public with access to information currently held in confidence. Then again, in order to avoid such proceedings, the key players in any suspect transaction might prefer to simply answer questions voluntarily, while providing any necessary documentary evidence to support their claims. In any event, it should be possible for the state auditor to investigate and answer some questions even if the foundation refuses to cooperate. For example, what is the current lease agreement for the Levitt Center at the University of Iowa, and how does the rental rate compare to the local market value for office space?

Mark Barrett