July 16, 2003
On the Foundation
Richmond Brown, Faculty Senate Chair

About three weeks ago I was blithely sitting in my new study in New Orleans, immersing myself in Guatemala’s eighteenth century, when I got an email message from the Mobile Register’s Jeff Amy. He told me that President Moulton had issued a letter blasting the USA Foundation and asked if I had any comment? I said I had not seen the letter, could not comment, but expressed the hope that, despite the lingering hard feelings on both sides, both the Foundation directors and the University administration look to the long term interests of the University. (My unsensational response did not make it into the paper).

I eventually did see the June 25 letter, the Foundation’s response of June 27 (sent by Aubrey Green), and a fax of a July 7 letter to Register editor Michael Marshall from Steve Tondera and two other Foundation directors (which basically reiterated Mr. Green’s letter with a few personal digs at President Moulton thrown in for good measure).

Despite my best efforts to avoid doing so, and to enjoy what’s left of the summer, I eventually met with President Moulton, Joe Busta, and Bob Shearer about the Foundation situation on the morning of July 7. Based on the information they provided, and the July 1999 senate resolution condemning the Foundation’s direction under Fred Whiddon and Aubrey Green, I began working on a senate resolution about the Foundation (which I circulated to the Executive Committee and some others knowledgeable about the history of the Foundation and its sometimes turbulent relationship with the University). After a great deal of back and forth, and more than half a dozen versions, we arrived at what I believe was a measured and focused statement of faculty concerns.

During this process of drafting and revising the proposed resolution, I called Maxey Roberts, acting director of the Foundation, to see if they wanted to send someone to the next senate meeting (July 16) or else to meet with the senate’s Executive Committee before we considered a resolution. She consulted with her members and invited the Executive Committee (along with Allan Tucker, Faculty Representative to the Foundation) to a lunch meeting with her and several Foundation directors for Friday, July 11.

We met for nearly two hours over lunch at the Foundation’s new offices in downtown Mobile. Although it was not a particularly pressing concern for me, Aubrey Green volunteered that the new offices represented a sound investment, one that will only become more valuable with the completion of the RSA Tower and the Battle House Hotel nearby. The offices are comfortable and spacious and, absent other considerations, seem to me an appropriate setting for an organization with assets of more than $220 million. The office is about two blocks from Water Street and less than a half-mile from I-65 and I-165, and thus easily accessible from anywhere in the city. Given the decision to sell the Wright Campus (Roberts reported that the property was offered to the University and refused) obviously the Foundation needed new offices. Whether it would have been better to explore the possibility of existing university space, I’ll leave others to decide. The apparent secrecy surrounding the purchase is also perhaps open to question, but $700,000 in the context of more than $220 million is perhaps not worth the heat the issue has generated.

On a related note, the Foundation board’s explanation of its personnel situation seems a reasonable one. They now employ some 13 employees, as follows:

2 Full-time Foresters

1 Full-time General Counsel/Senior Staff (Roberts)

1 Full-time Investment Manager (Gambill)

1 Full-time Accounting Manager

2 Full-time Secretaries

1 Full-time Accountant

1 Part-time Accountant

2 Part-time Administrative Staff

1 Full-time Maintenance Staff

1 Part-time Maintenance Staff

Administrative costs were reported to be about 0.8 % of assets. The legal expenses related to the lawsuit of 1999-2001 are a matter of some concern, however, given that the Foundation has paid its attorneys more than $5 million since 1999.

At the meeting the Senate was represented by myself, Vicki Tate, Roma Hanks, Doug Haywick, Joe Olsen and Allan Tucker. Present for the Foundation were Maxey Roberts, Jim Gambill, Aubrey Green, Lowell Bonds, John McMillan, Steve Tondera, and Margaret Young. I stated that our three main concerns were as follows: 1) relations between the Foundation and the University; 2) Foundation support for the University; and 3) declining Foundation assets. A fruitful discussion followed on these and a few other points, and the Foundation directors also provided several useful documents.

According to its annual statements, Foundation assets declined from $313 million in 1997, to $221 million as of March 31, 2003, but Jim Gambill estimated that assets have risen to about $235 million at present. Foundation contributions to the University declined from $9.9 million in 2001-2002 (3.6% of assets) to $5.6 million for 2002-2003 (2.3% of assets). A good deal of discussion focused on the reasons for the decline. The dramatic drop in equity markets over the last three years affected the USA Foundation as it has similar organizations throughout the country. I raised the issue of Prime Health losses, and Gambill and Roberts agreed that they were a substantial reason for the decline, but they did not know offhand exactly what percentage of the decline they represented. (They promised to provide this information to us when they tracked it down. USA officials estimate these losses at roughly $42 million). These two factors, along with the reported transfer of some $57 million to the University since 1997, account for the rather large decline. The recent recovery is a hopeful sign, as is the fact that the Foundation is out of the Prime Health business.

It was reported that about 43% of Foundation assets are represented by timberland. Although this is an extraordinarily high percentage, the Foundation representatives informed us that the timber investments (along with some additional purchases) have held their value, while the equity component of Foundation assets fell dramatically. The directors explained that the loans used to purchase additional timberland will be paid off "shortly," and that within "a few years" (how long was not clear) the lands will allow them to harvest 3000 to 4000 acres of timber per year, with substantial profits to the Foundation, ostensibly "forever." Of course all this bears further inquiry.

In the subsequent discussion, Doug Haywick raised the issue of graduate stipends. He explained that many USA awards are very low compared to competing universities making it difficult to attract students into some programs.

Allan Tucker commented on the fundamental communication problem between the University and the Foundation, and stressed that he believed that everyone, both at the Foundation and at the University, believed that they were acting in the best interests of the University. Maxey Roberts and the others thanked him for his statement.

Vicki Tate observed that the fact that the Foundation does not appear to be active in acquiring new assets leads to perception problems; she also noted that the fact that there were now two endowments also complicated perceptions of the Foundation and the University, and hindered asset growth.

Joe Olsen explained that the recent cutoff of funds for the supplemental instruction program would adversely affect several students and end a program that has been dramatically successful in improving student performance in engineering, math and hard science courses.

I should note that Foundation documents explain that the supplemental instruction and undergraduate research programs were initially funded until June 2002, and extended for six months. The Foundation directors report that the University’s request to renew funding was received at the meeting of June 18, 2003 and referred to the Investments Committee.

In the most passionate exchange in a friendly meeting, Allan Tucker repeated his argument that the College of Medicine’s quasi-endowment funds should be returned to the generating departments. Green and others relied on the advice of their attorney (Ron Snider) to say that the Foundation was limited in its ability to "return" funds that had since become part of the corpus of the Foundation. Green and McMillan expressed concerns that such an act could lead donors to demand their money back. Tucker stressed that these funds were not a donation, but a unique (and unauthorized) transfer of COM monies and thus their return would not set a precedent for donors and donations. A complicating factor is the 1993 settlement agreement, which recognized Foundation control over, and responsibility for, its corpus of assets. Roberts concluded the discussion by saying that the other Foundation directors and Dr. Tucker would have "to agree to disagree" over this particular issue.

The COM funds do seem to me to fall into something of a legal (not to say moral) gray area. And while Allan Tucker (and Len Aldes and other medical faculty) are quite right to say that the PR and goodwill costs to the Foundation are not worth the $3 million or so that is in dispute, perhaps the same may be said for us. While we may be justified in demanding the return of the quasi-endowment monies, the big issue is not $3 million but $235 million, and facilitating continuing Foundation support for the College of Medicine and the University as a whole. The Foundation did agree in its June meeting to take steps to accelerate re-payments on the quasi-endowment up to $1.5 million.

I did not receive a satisfactory response to my question about what the Foundation directors believe to be the ideal (or even how to establish a functional) relationship between the Foundation and Vice-President for Development Busta (or the new university endowment managed by the Board of Trustees). Obviously both sides must agree to cooperate. Mr. McMillan suggested that the hiring of a permanent managing director will begin to clarify these things.

Nor did Allan Tucker receive an adequate reply to his recommendation that the Foundation, as a general rule, and as is the case with almost all university foundations, defer to the University in determining the use of the monies made available to the University from the Foundation (while retaining a veto).

At the meeting’s close, I offered the senate’s good offices in mediating the differences between the Foundation and the University.

It appears that in many ways the meeting was a successful one, and offers perhaps the hope of beginning a process of opening communications between the Foundation and the University. It was helpful for us to hear the Foundation’s explanation of their management philosophy, and for them to learn from us that there is a real human cost to cuts in Foundation-supported programs such as the undergraduate research program and the supplemental instruction program.

A follow-up letter from Aubrey Green and a communication from Maxey Roberts expressed their appreciation for the opportunity to meet with the Executive Committee and their view of the meeting’s helpfulness.

Yesterday afternoon (July 15) members of the Executive Committee (Brown, Hanks, Olsen, and Haywick) and Allan Tucker met with President Moulton and many of his senior advisors (Yeager, Davis, Weldon, Ayers, Busta, and Shearer). The meeting lasted for more than two hours, and was dominated by the Foundation issue. Indeed, a scheduled discussion of the Alabama tax reform vote had to be postponed. President Moulton spoke eloquently, passionately and at great length. He repeated the troubled history of the Foundation, noting that more than 90% of Foundation assets were transferred from the University, and that historically the Foundation has done almost no fund raising. He referred to the steep decline in Foundation assets, mentioned the losses associated with Prime Health, warned of the dangers of having close to 50% of those assets invested in timber ("a declining industry"), lamented the historically poor rate of dispensing funds to the University (our own money, he constantly reminded his listeners), and commented on the Foundation’s apparent cash flow problems, its exorbitant legal and administrative costs, and the fundamental problems of management which he is not optimistic will be resolved by the upcoming choice of a Managing Director. He also mentioned that Joe Busta has written a lengthy letter to the Foundation Directors explaining proper organizational practices sanctioned by the American Bar Association and the National Association of College and University Business Officers. Copies of the letter were distributed to the Executive Committee. Several aides expressed concern that members of the Executive Committee ran the risk of being "used" if they continued to meet with Foundation representatives.

I’m not sure where we should go from here. If we adopt a resolution criticizing the Foundation, we may close the potentially valuable window we have cracked ever so slightly. But we should not ignore legitimate faculty concerns about the management of Foundation assets and their availability for supporting the University.

It’s clear, moreover, that some of the members of the Foundation board reciprocate Mr. Moulton’s unflattering views of one another, and it appears that both sides seem to hold out hope that the other will somehow go away. In the short term, however, this will not happen.

Both the Foundation directors and the University administration must accept the reality and assume the legitimacy of their counterparts, regardless of past history. Legal settlements of 1993 and 2001 (the most recent of which was purchased at a price of more than $4 million in legal fees -- perhaps much more) have made it clear that the Foundation has the authority and autonomy to manage its assets in the best interests of the university as it sees fit, regardless of the provenance of those funds. While we are certainly concerned about the recent decline in Foundation assets, and the conscious decision to de-emphasize the fund raising component of their mission, our immediate goal has been to try to seek out a remedy for the dysfunctional relationship between the Foundation and the University. Given the continuing hostility that exists, however, and the administration’s apparent reluctance to support Senate efforts at peacemaking, I am not optimistic that the Senate has much of an opportunity to play an effective role in resolving the broader Foundation dispute.

That said, we can perhaps do some things. The Executive Committee remains committed to the "USA Faculty Senate Suggestions for Consideration by and Discussion with the USA Foundation," otherwise known as the "Talking Points," developed by Allan Tucker in consultation with the Senate last year. We are especially desirous to see that Points 6 and 7 be advanced. To remind you, they are as follows:

6. Any remaining interest [gained on Foundation assets] should generally be available to the university for expenditures in support of the university’s academic mission (or for reinvesting in the foundation; see item 7). The university administration is in a better position to judge whether such interest should be spent on recruitment, books, buildings, research, or other areas. The foundations’s board should determine the amount of money available (possibly using a technique such as a rolling four-year average), then should request a budget proposal from the university president for these funds. The USA Foundation Board has final line-item authority over such a budget, though in general the university administration’s recommendations should be followed.

7. Whether interest [gained on foundation assets] should be used to enlarge the corpus or used to meet current needs falls under the authority of the foundation’s board, but again the position of the university administration should generally be followed.

The Executive Committee is willing to meet again with the Foundation Board (particularly a larger contingent than we met last Friday) to advance this particular goal.

In addition, we would encourage the Foundation board to approve last year’s Executive Committee nomination of former Senate Chair Elise Labbé Coldsmith for the current vacancy on the Foundation Board.

We hope that the search for a Managing Director will be conducted in the most open and forthright manner possible, with full participation by the entire Foundation board, and with due consideration given to the necessary qualifications for the position, including relevant experience in asset development and management. We hope the Foundation Board will see in the forthcoming appointment of a Managing Director an opportunity to begin healing old wounds.

We also second President Moulton’s offer to host a meeting of the USA Foundation on the USA campus this year.

The Executive Committee awaits direction from the Faculty Senate as to how best to proceed from here.

Respectfully reported,

Richmond F. Brown, Chair

USA Faculty Senate

Mounted 15 Sept., 2003 js
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