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UNC Foundations Operate Outside Transparency Rules

Foundations not subject to public oversight even though they receive and spend tax dollars

The UNC system operates several foundations that raise money for their associated universities, and national researchers who have looked at these types of organizations have called them “slush funds” and “shadow corporations” that too often operate in secrecy, even though they spend taxpayers’ money.

In North Carolina, these foundations buy property and then lease space back to their universities, highlighting concerns from 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?”

Over the 10-year lease in the new building, the university will pay about $15 million more than it would have in the space it previously 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 and South Carolina. Earlier, he 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 City University of New York journalism professor who has researched 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 sketch 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 State University, 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 state Attorney General’s Office in 2000 issued an opinion saying foundation workers are not state employees, according to Capeloto, which she said isn’t a huge surprise because only one state even considers foundations a part of 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 [here] 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, unethical, or illegal university foundation practices, they generally were exposed as the result of 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 Davis, dean of the 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.

UNC system representatives did not respond to a request for comment on this story.

“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, such 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 does not suspect any wrongdoing here.

Even so, 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 responding to the academic and athletics scandal at UNC-Chapel Hill, Kotis said.