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Saturday, July 30, 2016

The UofL Foundation President

University of Louisville President James Ramsey resigned this past week, though he offered to continue serving in that capacity through the end of the academic year (at the same generous level of compensation he had been receiving). The Board of Trustees declined to accept that offer and he was immediately replaced by an interim President, Interim Provost Neville Pinto -- a choice apparently mandated by the University's "Redbook".

The day after this occurred, Ramsey reported to work at Grawemeyer Hall as President of the University of Louisville Foundation. For those not paying close attention, it has largely been the UofL Foundation that has paid Ramsey millions of dollars annually over the past few years.

The Foundation's bylaws make clear how every member and officer of its Board of Directors is appointed. The University President is automatically a Director; thus, Pinto presumably replaces Ramsey as a voting member of the Foundation Board when it next meets in September. Some Foundation Board members serve because they are UofL Board members. The Foundation bylaws make clear that once a person is no longer serving UofL in these capacities, the person is no longer a voting director on the Foundation Board.

The President of the Foundation is a Board-elected one-year position that does not have to be filled by a director. The Foundation Board could end the relationship with Ramsey almost immediately, as reported by WDRB reporter Chris Otts:
Ramsey acknowledged Thursday that because he resigned from the university, the foundation board can terminate his employment with no financial consequences.  But he said he hopes to convince the foundation directors to keep him on.
Note going forward that it is very unusual for any American Foundation leaders to earn more than about $130,000 annually. Indeed, Foundation leaders who are paid even $190,000 are in the 90th percentile for the position. Also, the IRS looks askance at very high payments to salaries for non-profit leaders. From section 4 of that linked IRS publication on Governance:
A. Executive compensation. A charity may not pay more than reasonable compensation for services rendered. Although the Internal Revenue Code does not require charities to follow a particular process in determining the amount of compensation to pay, the compensation of officers, directors, trustees, key employees, and others in a position to exercise substantial influence over the affairs of the charity should be determined by persons who are knowledgeable in compensation matters and who have no financial interest in the determination. Organizations that file Form 990 will find that Part VI, Section B, Line 15 asks whether the process used to determine the compensation of an organization’s top management official and other officers and key employees included a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision. 
James Ramsey was very well compensated as a University President, but it is hard to see a case for continued generous compensation as a mere Foundation President.

Leadership Disarray

All of the administrative changes mentioned above are somewhat clouded by a Kentucky court-imposed injunction yesterday ruling that Governor Matt Bevin's newly constituted UofL Board (the one that accepted Ramsey's resignation earlier in the week) is NOT the University's Board any more. The Board that Bevin claims to have dissolved (as opposed to firing, which would have been illegal without a hearing for each trustee) is again THE UofL Board. Of course, it is short several members as it has been since late March when the Governor argued (persuasively) that the Board in place at the time violated state law because it had too little minority representation. The University apparently again has a Board in place that has refused to act on personnel issues (tenure and promotion cases, new tenure track hires) since late March because of its lack of minority representation.

Some members of the now reconstituted UofL Board served also on the Foundation, by the bylaws of that institution. They had already been dismissed, so the operational status of both entities is in disarray. The judge issuing the injunction did state that the ruling would not change actions Bevin's Board had taken, such as accepting Ramsey's resignation. However, Bevin's Board had not approved a proposed 5% tuition increase and the old Board had explicitly rejected that proposed increase back in early June.

The University is in the new fiscal year without a firm budget and clear notion of the cost of tuition. Classes start in four weeks. Without a tuition increase, planned faculty and staff pay raises could only be funded by deeper cuts in other University budgets -- or perhaps Foundation contributions. Many jobs will likely be eliminated if additional cuts are needed. The inability to operate is a disaster and Government Bevin could prolong this disaster indefinitely by failing to add members to the old Board. Based on his immediate reaction to the injunction ruling, Bevin's office plans to appeal the ruling.

Foundation Leadership and Accountability

The University of Louisville Foundation is an important supplemental source of University funding, particularly vital in a time of crisis. Should the Foundation retain James Ramsey as President in this time of need?

I blogged several months ago about the poor performance of the University's endowments . My spouse told me that my posting had been linked by friends and colleagues on Facebook -- and that some commenters there criticized elements of my argument. Some of the criticisms were certainly valid. After all, I compared University endowment performance to my personal investment performance, which has hinged on a "buy and hold" (and reinvest dividends) strategy that did not include withdrawals for spending.

The University needs asset growth in order to spend, but the overall endowment doesn't really need to grow as long as the investments are generating sufficient revenue to fund spending needs. The University needs to average 5.5% annual growth in order to fund endowed spending -- and then more than that to pay Foundation operating costs (including apparently millions of dollars in payments to top University leaders).

Note that President Ramsey and his supporters have often defended his performance as a fundraiser for the University, so a lack of growth in the overall size of the endowment either indicates that he has not really raised lots of new money or that the older investments have performed poorly.

As President, arguably, Ramsey had a leadership role for both tasks. Indeed, this is probably where I should have directed my criticism several months ago. The Foundation President seems like an appropriate person to hold accountable. According to the Foundation bylaws, the President:
...shall be the Chief Administrative Officer and General Manager of the Corporation.  He shall, in addition, perform such other and further duties and have such powers as are usually performed and possessed by similar officers of like corporations, whether stock or nonstock. The President is authorized to execute any instrument of writing for the Corporation and to act for it under any agency contract or agreement it may have with any corporate agent which at any time may be holding or administering any of its assets or endowment or trust funds; any such agent may assume that the President has authority to bind and act for this Corporation.
How has the Foundation/President performed managing its money -- or hiring the right managers to oversee Foundation funds?

I'll answer that question with an anecdote, but the story involves an endowment that is one of the largest in the College of Arts and Sciences. The Department of Political Science, which I have chaired since January 2012, includes the Center for Asian Democracy and an Aung Sun Suu Kyi endowed chair in Asian Democracy. The CAD and the chair are actually funded by two endowment accounts. One account was a late 1990s "bucks for brains" state-funded personnel line that was originally funded at $1 million or more. The other is a $5 million grant from the U.S. Department of State.

Those grants and endowments date back to at least 2006. This is ambiguous because the "bucks for brains" account is older and may have previously been tied to a different endowed chair. As a result, when Political Science inherited the account in 2006, the endowment was worth about $1.5 million. The State Department monies arrived at Louisville in 2006 and were vested for a spending policy one year later.

The $5 million 2006 grant from the Department of State was worth only $4.113 million as of December 31, 2015. That's a key date because the University uses it to decide a spending policy for the following academic year. After a decade managing $5 million, the Foundation managed to lose (or spend) over 15% of its value.

Oh, and this wasn't simply because the endowment was created just before the Great Recession. As recently as December 31, 2013, the endowment was worth $5.066 million.

The DJIA closed at  16576.66 on December 31, 2013. On the same date in 2015, it closed at 17425.03. The stock market grew a bit more than 5% in that period, which is somewhat disappointing and obviously below the 5.5% annual return threshold needed to allow a full spending policy and preserve principal. However, the CAD endowment lost a substantial portion of its original principal, well beyond the spending policy.  Incidentally, the DJIA closed at 12463.15 in 2006, meaning the DJIA is up about 40% during the entire period of the CAD's existence. A well-managed account likely could have preserved almost all of the principal and achieved a sizeable chunk of a 5.5% annual spending policy. A well-performing investment might have managed to increase the size of the account and the annual spending policy.

Clearly, University of Louisville Foundation investments have not been especially well-managed over the decade in question. Is the President of that entity going to be held to account?

What are people tied to endowed personnel lines supposed to do going forward?

The CAD endowment returned insufficient funds this year to pay even the endowed chair salary. Last year, CAD additionally employed a staff member to manage programming, two postdoc researchers, and a graduate research assistant.

Again, who should be held responsible for a decade of poor performance?

Given that endowments were down in 2015, James Ramsey personal assets grew substantially more than the Foundation's assets. And that's just based on his payments from the Foundation.

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