U of I Foundation weighs long-shot options to pay back $26 million — including bankruptcy

While the foundation is tangled in debt, it can’t do its job of giving money to the U of I for scholarships and programs.

Dan Popkey
The Idaho Statesman

The University of Idaho´s non-profit foundation has been exploring drastic options to get out from under $26 million in debt it took on to develop the University Place campus in Boise.

One alternative is bankruptcy, though they don´t want to talk about it.

Other ideas include asking the Legislature for more money, convincing the State Board of Education to forgive some of the debt, and suing the foundation board for investing imprudently in the project.

But prospects are dim. Even big donors who have the means to bail out the foundation are skeptical.

The foundation cannot fulfill its sole mission — to funnel private money to the U of I to support scholarships and programs — because it is incapacitated by debt. The university has lost $2.6 million a year it used to count on from the foundation. In fact, the U of I is now giving $100,000 in state money to the foundation to cover its annual operating expenses.

The trouble couldn´t have come at a worse time.

Students and faculty have already felt the impact. The tight state budget has already forced the U of I to cut $14 million for the 2003-04 year, partly by slicing programs across campus. It still needs to come up with millions more in cuts.

With more than 12,000 students and 68,000 alumni, the U of I has produced Idaho´s elite since its founding in Moscow in 1889, graduating politicians like Gov. Dirk Kempthorne and Sen. Larry Craig, lawyers, engineers, farmers and more.

The motive for building University Place was to protect the power of the U of I by building a campus in downtown Boise, 300 miles from home.

Instead, foundation officials are scrambling to repair the damage. Foundation President Pat McMurray and Executive Director Joanne Carr declined to discuss specifics, but said they are pursuing many avenues, including fund-raising.

“I suppose we should have put ´Buy a lottery ticket´ on the list, too,” Carr said. “You think as big as you can and you look as hard as you can at what your possibilities are.”

Since spring, the foundation has renegotiated $26 million in loans, reducing interest costs from $1.23 million to about $1.04 million every year.

But that leaves only about $750,000 a year from the foundation´s projected cash flow to pay down the principal between now and fiscal 2007, according to the most recent records available from U of I, an April 21 report. The foundation refused to give The Idaho Statesman an updated account.

After 2007, a five-year $800,000 annual gift from rancher Harry Bettis expires. Absent other resources, that would leave nothing for paying down principal.

“That´s looking at it through a very narrow lens, because that is not our intention to look only to that near-term source,” McMurray said. “We´ve got a track record of substantial fund-raising and support and we have alternatives that we´re pursuing — actively.”

Option A: Bankruptcy

McMurray said bankruptcy was “never given any serious consideration.” But the university´s top budget official and three of the four members of the foundation´s Board Working Group, a committee working to solve the problem, said bankruptcy was possible, according to documents obtained under the Idaho public records law.

The documents show that on March 14, U of I budget chief Wayland Winstead, wrote an e-mail to Carr, the foundation executive director. He told her he agreed with Jody Olson, a member of the Board Working Group, about the risk of bankruptcy.

“Fundamentally, I agree with Jody that the foundation is at significant risk of a Chapter 11 filing,” Winstead wrote. Winstead was the U of I official who attempted to convince former university President Bob Hoover in February 2002 — two weeks before Hoover told lawmakers all was well with University Place — that the project ought to be scaled back to a single building. Winstead´s Feb. 18, 2002, memo called the project a “speculative real estate development” that threatened “an Enron-like implosion of our finances.”

Chapter 11 is the most common form of bankruptcy, which frees a corporation from the threat of creditors´ lawsuits while it reorganizes its finances. The debtor´s reorganization plan must be accepted by a majority of its creditors. Unless the court rules otherwise, the debtor remains in control of the business and its assets.

Twelve days after Winstead discussed bankruptcy, another U of I document raised the prospect. A March 26 memo with no named author says there was “little or no immediate prospect for reimbursement” of the $28 million spent on the University Place project.

“These sunk costs brought to light questionable loans between the University and the UI Foundation and charges of possible malfeasance on the part of project leadership,” the document says. “As a result, the once proud UI Foundation is on the verge of bankruptcy, the university´s budget challenge deepens, and UI President Bob Hoover´s future is uncertain. …

“Possible impact: The UI´s statewide role is diminished as a competitive rift among the universities results in a new regionalism, reducing UI to northern Idaho´s university,” the document adds.

The document, “The Convergence of Crises at the U of I: A Framework for Aftermath Public Relations Planning,” also explores the impact of the arrest of Sami Omar Al-Hussayen, the U of I graduate student whom government lawyers say had supported terrorist activities.

On April 23, Richard Rock, the former eBay developer who leads the Board Working Group, e-mailed McMurray, saying both he and another member, former state Department of Commerce Director Jim Hawkins, were concerned.

“Jim and I should stress that bankruptcy is a possibility and that we do not as yet have a long term solution to avoid this possibility,” Rock wrote.

Rock said avoiding bankruptcy “is critical for many reasons,” including attracting candidates to replace Hoover, who resigned April 16, citing his inadequate oversight of University Place.

Rock wrote that bankruptcy would threaten fund-raising, jeopardize donor confidence and make it more difficult to repay the $12 million borrowed from the U of I´s Consolidated Investment Trust for University Place. The trust invests gifts to the university in stocks, bonds, real estate and other investments. It provides about $5 million a year to U of I students and programs, most of it for scholarships and research.

McMurray, president of Wells Fargo Bank in Idaho, reacted quickly to Rock´s raising the issue of bankruptcy, urging him in an e-mail not to “bring up the ´B´ reference” in an upcoming meeting with a State Board of Education subcommittee working with the foundation on a repayment plan:

“You know I am a banker so be advised that I personally deplore the use of the terminology and reference to ´bankruptcy´ at a point that I personally believe is not necessary or prudent. We have not made a decision with our auditors or board that such approach is the most likely outcome. It is particularly risky because in the meeting with the SBOE such reference is very likely to get into a public forum, that is the media, notwithstanding whatever confidentiality is supposed to exist in such ´committee´ of the board of ed. That is potentially going to set off a ´firestorm´ in the press that will not serve us well in the next few critical weeks with any of our constituents.”

Rock replied that he would not use the “B word” at the meeting but said “the scenario is not so far out of the realm of possibly that we should ignore it.”

To which McMurray responded: “We all accept that risk as fact. It is not the only option at this point in time, as we have discussed these issues. I also accept the fact that there are board members who might feel otherwise.”

In an interview Wednesday, McMurray discounted the likelihood of bankruptcy, saying, “It´s like you and I talking and people thinking out loud. You do a what-if scenario, so you can address the issues and be prepared as best you can.”

Option B: Construction savings

The only strategy that´s worked since the foundation began confronting the problem in December has been saving on construction costs. On Thursday, the Idaho State Building Authority paid the foundation $1 million from savings on the Idaho Water Center.

The Water Center is being built at Broadway and Front by the Building Authority, a state agency that borrows money to build state buildings. The Water Center will house some U of I programs, the Idaho Department of Water Resources and a U.S. Forest Service research station. It is financed by $54.7 million in bonds and was to have been the first phase of University Place.

In March 2002, the Legislature approved $136 million in debt for the Water Center and two large buildings for classrooms, office space and a residential suite for the U of I president across Front Street. But in June, U of I interim President Gary Michael canceled all but the Water Center.

The Building Authority estimates that as much as $4 million more in savings may come from the Water Center because of lower-than-expected bids and few construction problems. That money could be available to pay the foundation for design and development costs. If a total of $5 million is recovered, the foundation would owe $21 million.

Option C: More money from the Legislature

Another option is asking the Legislature for more money.

On Feb. 19, a foundation analysis proposed asking lawmakers for a supplemental bond issue by the Building Authority for the Water Center. That would raise $5 million , but the plan has a downside: The U of I would have to pay $300,000 a year for 30 years.

The analysis said approval from the Legislature and Board of Education “may be difficult to obtain.”

On April 21, Rock, chairman of the Board Working Group, again raised the idea of asking the Legislature for $5 million. But on Thursday, House Speaker Bruce Newcomb said that is unlikely until questions are resolved. “Right now, with the cloud that´s hanging over it, it would be extremely difficult,” Newcomb said.

Option D: Suing the foundation board

Another prospect is that someone could sue the foundation board of directors for making imprudent investment decisions. Board members have insurance to cover them if they get sued for bad business decisions.

Board of Education President Blake Hall said Wednesday he has no plans to sue the foundation. A director of the foundation or 5 percent of the foundation membership also could sue.

But Carr, the foundation executive director, said there has been no “formal” discussion of such a claim. “I´m not discounting that there may be people on the street talking about things,” Carr said.

Duane Rimel, a member of the Silver Circle of large U of I donors, said he doesn´t know enough to say whether a lawsuit might be worth pursuing. In March, Rimel wrote Carr and Hoover an e-mail criticizing the decision to invest so much in University Place. Last week, he said, “Putting that much money into one, single investment was not prudent, and No. 2, putting that much money into real estate was not prudent.”

Carr disagreed. She said the board´s April 2001 decision to change its rules and double the amount it could invest in real estate was prudent. Increasing that proportion to 10 percent, the board transferred $12 million from the Consolidated Investment Trust to spending on development of University Place. The money was to be repaid by June 2002, but the debt to the trust remains.

“Sometimes the investments don´t turn out right,” Carr said, “but I have no qualms at all with stating that the foundation´s Investment Committee and the board acted prudently at the time given what they knew and given what they expected were the terms of the investment.”

But Carr said the foundation may have to write some of the $12 million off, which would reduce the trust´s value and income.

U of I interim President Michael, a non-voting ex-officio member of the foundation board, declined comment on whether he or the university might sue the foundation board.

Another idea is convincing the Board of Education to forgive the $8 million in state money the foundation borrowed from the university. Feb. 15 and April 4 documents suggest the U of I forgive the debt.

In exchange, the foundation would turn over any value in “construction-in-progress” at the Water Center. That “value” is based on the projection that the Water Center will cost $61.5 million, $13.5 million more than lawmakers expected when they approved the building.

“That´s potentially one of the alternatives,” McMurray said. “(But) the State Board of Education, at least at this time, doesn´t see that as probably a publicly viable alternative.”

Hall flatly rejected the proposal, even though the university is essentially paying itself by giving up the $2.7 million a year it would otherwise receive from the foundation.

“In my view, this is a legal obligation,” Hall said. “I don´t think under the government budget process you can say, ´Well, it´s all in the same pot, let´s forgive the debt.´”

Option E: Money back from contractors

The foundation also has explored recovering some of the $12 million it paid to architects and $10.3 million paid to Civic Partners, a California developer that worked on the project for a year.

On June 21, 2002, the Building Authority´s construction manager, Jack Lemley, advised the Building Authority board not to reimburse $4.3 million the U of I Foundation spent on the project. Lemley is a world-famous engineer who orchestrated the completion of the “Chunnel” between England and France.

He recommended rejecting $2.7 million in development costs charged by Civic Partners for the Water Center and $1.2 million charged for the rest of University Place.

He also recommended against paying $225,000 in pre-construction and infrastructure costs on the Water Center and $211,000 in pre-construction costs on the rest of project.

Despite Lemley´s recommendation, when the foundation severed its relationship with Civic Partners in October 2002, it paid $6.2 million to the developer. A loan to cover the payment is held by UBS, an investment bank.

Gary Mahn, the fourth Board Working Group member and former director of the state Department of Commerce, said at the January foundation board meeting that architecture and engineering fees “were high,” and the Audit-Finance Committee he chaired “had significant questions regarding the value received for the $10 million in pre-development costs,” according to minutes.

This spring, a foundation task force explored recovery options, according to documents. “Jody Olson to chair special task force to evaluate payments made to Civic,” wrote foundation Treasurer Laura Hubbard on April 8.

Olson, a lawyer and longtime chairman of the Public Employee Retirement System of Idaho, also declined comment. So did the other three members of the Board Working Group, Rock, Hawkins and Mahn. Carr also declined to comment on prospects of recovering any money paid to the developer or architects.

Civic Partners oversaw the project´s development and design between April 2001 and March 2002. Steve Semingson, president of the company, said, “They absolutely got good value for everything that we were paid,” he said.

Civic Partners Vice President Jeff Pomeroy, who oversaw work by architects, said those costs also were in line. “I believe the design process was very competitive in terms of industry standards,” Pomeroy said.

Option F: Making a deal with ISU

Another idea being explored by the foundation is getting Idaho State University to revive one of the two buildings that were canceled. The foundation has a 2.5-acre parcel bought in 2000 for $2 million and plans for construction of an ISU Health Professions Center on that site. The foundation hopes to sell those to ISU for about $6 million, according to records.

But ISU is in no position to commit cash to building in Boise, said Ken Prolo, ISU´s financial vice president.

“We´re biding our time,” Prolo said. “We´re not going to buy the land from them. We would be willing to lease the building as we planned.”

Option G: Pitching to big donors

Finally, the foundation is considering fund-raising to pay the debt, including courting the U of I´s largest donors.

Among those is Harry Bettis, the Donnelly rancher who has already directed $4 million to University Place over five years from the Laura Moore Cunningham Foundation, which he controls. (Cunningham, Bettis´ great- aunt, was the daughter of Idaho First National Bank founder C.W. Moore).

On March 26, as Hoover was preparing to meet with Bettis, Carr wrote an e-mail saying, “…we would certainly want to talk to him about how he can help further with University Place.”

Carr suggested a larger gift in exchange for Bettis choosing a name for the U of I quarters in the Water Center. “Failing that,” Carr wrote, “we would like to have him participate with others in providing the private security” for the foundation´s $6 million loan from the investment bank UBS.

Bettis told The Statesman on Friday he had Hoover to lunch at the ranch after he was grilled by lawmakers over University Place in February.

“He looked like he´d been run over by a Caterpillar,” said Bettis, who still supports the project. “Bob Hoover´s a good guy, and anybody that´s a born optimist will get themselves into a jam.”

But Bettis said the Cunningham Foundation can´t help any more, in part because it is obligated to give away 5 percent of its assets a year but is earning less than that, eating into its principal. “We don´t have it,” he said.

To offer story ideas or comments, contact Dan Popkey
[email protected] or 377-6438

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