Foundations of Secrecy

Under pressure from alumni and ad-ministrators, head football coach Jim Walden resigned from Iowa State University in 1994. During Walden’s eight-year career at ISU, his teams won 33.5 percent of their games and Walden was payed $111,197 per year.

But seven years after his resignation, Walden continues to receive $529,400 from a deferred compensation contract payable over 20 years by the Iowa State University Foundation.  

The public and press only learned of Walden’s deferred kickbacks in 1999 after an independent audit of the foundation cited the $529,400 as a long-term liability titled “other.”

The audit detailed some foundation expenses from its $470.7 million in assets, but Walden’s compensation package was not listed. The foundation released the identity of the recipient of the $529,400 only after the public rallied for greater disclosure.

Like most university foundations that raise money for pubic universities, the ISU foundation claims exemption from state open-records laws because it operates as a private, nonprofit branch of the university.

But as more scandals crop up involving secret supplements to university administrative and athletic salaries and donors seeking to influence university decisions, the media and the public are fighting back against foundations’ secrecy policies.

Several lawsuits were filed against university foundations this year demanding greater public scrutiny.  The ISU Foundation is just one of the foundations in the hot seat.

What are university foundations?

University foundations are often the fund-raising arms of public universities. Typically, they raise money for the university through donations from alumni and others or by managing university investment portfolios. They do not raise funds for other agencies. They live and breathe through the university umbilical cord.  

Approximately 80 percent of foundations that raise funds for public universities claim to be private, nonprofit corporations.  As long as foundations can prove they are indeed private, they argue they do not have to disclose records revealing donor identities, the financial performance of investments or how and where they are going to spend donations.  In most states, records of a public university would be covered by a state freedom-of-information law and open to the public.

For journalists who have sought access to foundation records, foundation secrecy claims lead to the suspicion of deceit, or at best, poor financial performance that universities would rather keep out of the public light. 

“As long as you’re operating in the dark, people are going to be suspicious,” said Scott Armstrong, founder of the Freedom of Information Trust, a group that seeks access to government records.  “Without media access to financial records, there’s no telling what universities are doing with their endowment.”

But foundations and universities say that it is necessary that they operate separately.

The Indiana University Foundation, for example, which is in the top two percent of all public university foundations for overall endowment, cites several reasons why it should be permitted to operate in secret. Among them, the foundation says that to attract donations, it has to offer donor anonymity to those who do not want their gifts publicized. If the foundation’s records were not private, the foundation argues that anyone could submit a freedom of information request to obtain the names of donors, which officials say would scare away donations.

Courts step in

A foundation’s reasons for operating in secret can be convincing.  The question has become, can foundations legitimately claim they are private entities, while working so closely with a public university?  In court, the answer to this question has hinged on how closely the two institutions work.  Deciding factors have been: 

• Whether the foundation receives support from a state university through the use of personnel, equipment or facilities; 

• Whether a majority of the foundation’s board of trustees is comprised of membership for the university board; 

• Whether the foundation receives and spends public funds; 

• Whether the foundation performs governmental functions; 

• And whether the foundation is formed by legislative mandate or by resolution of a public body such as the university board of trustees. 

Though lawsuits against foundations have differed, the basic complaint has been the same. Open-records advocates and the media say university foundations should be subject to the same state open-records and open-meetings laws as public the universities they serve.

The case that best illustrates the debate resulted in a 1991 South Carlolina Supreme Court decision. In that case, the state high court determined that the University of South Carolina Foundation was subject to the state’s open-records laws because it was inseparable from the university.

The case reached a wide audience because of its supreme court status and the scandalous aftermath. Foundation records, released after the hearing, revealed that USC president James Holderman spent $533,000 in donor contributions without the university’s approval.  Part of the money was used to remodel his home.  

Holderman was later sentenced to five years probation and 500 hours of community service after pleading guilty to receiving extra compensation and pleading no contest to income-tax evasion. The foundation said that most of the foundation records prior to 1991 were destroyed.

The ISU Foundation

The foundation court cases this year were not at the state supreme court level, but at least one case appears to be headed in that direction.

In September, a state district court judge ruled that the Iowa State University Foundation did not have to disclose its financial records because the foundation had private, nonprofit status. 

Arlen Nichols, a retired Des Moines businessman, and Mark Gannon, ISU’s former land manager, sued the foundation two years ago for access to meetings, a list of corporate donors of more than $25,000 and a list of foundation expenses. 

Gannon and Nichols appealed the district ruling immediately and expect to be back in court around January.

“We’ll take this all the way to the supreme court if we have to,” Nichols said.  

Secret dealings such as football coach Jim Walden’s deferred compensation have convinced Gannon and Nichols that the foundation has mishandled the university endowment in other ways.

The ISU Foundation was pleased with the district court’s ruling and said it would protect its ability to attract donations.  The foundation holds approximately $234 million in assets, according to court documents.

Barbara Mack, a media law professor at ISU who has followed the case, acknowledged the foundation’s desires to maintain confidentiality but said the foundation is using the “donor confidentiality claim” to avoid disclosing the records.  The main issue, Mack said, is not who is donating, but how the money is being spent.

Public scrutiny of the ISU Foundation increased two years ago when Gannon blew the whistle on the foundation for selling a farm donated to the university’s Agronomy Department for research purposes. The university acknowledged its mistake in selling the $1.2 million farm but never corrected it.  Gannon resigned following the mix-up, claiming the ISU Foundation tried to sell the farm to bail out a financially strapped construction project. Iowa State denied Gannon’s claim. 

The U of L Foundation

Donor anonymity was the key issue in another court decision in September concerning the University of Louisville Foundation.

The Kentucky district court gave a more promising ruling for the media than the Iowa district court, allowing the Louisville Courier-Journal, which sued the foundation for violating Kentucky open-records law, access to the names of almost all 45,000 donors. Judge Steve Mershon ruled, however, that 62 of the donors who had previously requested anonymity had a right to privacy that outweighed the public’s right to know under state law. 

In a November appeal, a three-judge panel modified the trial court’s decision and required a case-by-case review of gifts from corporations and private foundations. That review will attempt to determine whether disclosing the organizations’ names would violate their “personal privacy” rights. The ruling still favors openness, however, by putting the burden on the University of Louisville Foundation to show which names should not be released. 

The case has been remanded for further proceedings. 

According to the foundation’s lawyer, Michael D. Risley, the courts’ rulings could jeopardize the foundation’s ability to raise funds for the school. The foundation held $543 million in assets as of June 2000, according to court documents.

“Any charity or nonprofit organization will tell you that it’s very important to keep donor identities private in fund-raising endeavors,” Risley said. “Donors will often opt not to give if their names are disclosed.” 

Part of the appellate court’s rationale in protecting the privacy rights of certain organizations was that some of the gifts may have been conditioned on confidentiality, and disclosure would revoke the gift. That decision seems to mirror the trial court’s protection of the individual donors who requested anonymity.

Prior to the appellate decision, Jon Fleischaker, the attorney for the Courier-Journal, objected to the part of the ruling that allowed the foundation to withhold the 62 names. 

“The foundation’s claims are bogus,” Fleischaker said. “They have absolutely no proof that disclosing those names will create fund-raising problems.” 

The UGA Foundation

The most recent and perhaps most publicized scandal involving a university foundation is currently unraveling at the University of Georgia.

It all started when university President Michael Adams did not renew legendary UGA athletics director Vince Dooley’s contract. With suspicion of mismanagement as their weapon, Dooley supporters retaliated by gathering 60,000 signatures for Adams’ resignation and also got the foundation’s board to commission an audit of the president’s compensation and spending from foundation funds. The audit revealed, among other purchases, a $9,042 luncheon for Adams’ son’s graduation from the UGA law school, but also found fault in the foundation’s disclosure policies, mainly that there is not enough public scrutiny.

After the foundation commissioned the audit, the foundation still claimed impunity from state open-records laws.  

Georgia Attorney General Thurbert E. Baker wrote a letter to the foundation in November suggesting it open its records to the public but full compliance still remains in doubt.

“The foundation’s existence, its operation and its direction … with apparent overlapping management, staff and office resources, strongly suggests that it might be subject to the requirements of the open-records and meetings acts,” Baker wrote.

Since the audit was released, the Atlanta Journal-Constitution reported that half the university trustees have ties to companies that earn money from the foundation’s investments.

“There may be nothing amiss in $30 million paid to companies linked to foundation trustees over the past three years,” an editorial in the Atlanta Journal-Constitution said.  “Unfortunately, Georgians can’t judge for themselves because the foundation won’t step into the light and conduct its business in public, as required by state sunshine laws.”

A scholar’s opinion

The UGA Foundation story has been widely publicized, but in general, foundation disclosure policies have received little attention. 

One of the few scholars and journalists who has looked at foundation secrecy in depth is Charles N. Davis, executive director of the Freedom of Information Center at the University of Missouri School of Journalism.

Davis’ research outlines the major court decisions regarding university foundations and the reasons why foundations need greater transparency.

After researching nearly every university foundation court case in the last 30 years, Davis concluded that the reasons for foundation transparency far outweigh the reasons for privacy.  Davis reached his conclusion primarily because he found that many foundations’ main privacy claim, donor anonymity, simply does not stand up.

“It’s a great claim because it’s near impossible to test,” Davis said.  “But foundations who have disclosed donor names have not fallen off into the sea.  It may have caused some heartache, but donations, as far as I’ve seen, are not being affected.”

Davis’ paper gives examples of foundations that have increased donations after making their records public. In 1998, for example, a year after Eastern Michigan University was forced to disclose donor names, the foundation reported its assets increased more than $5 million.  Similar results were found at the University of Louisville and the University of Toledo foundations, Davis found.

The Future

With courts ruling on all sides of the issue, it’s anybody’s guess where the issue of foundation openness is headed.

Davis said he is unsure if there is a trend toward disclosure, but he is optimistic that courts will side with more openness.

“The debate over opening foundation to public records scrutiny will continue to be carried out in the attorneys general offices, the courtrooms and the legislatures,” Davis said.  “If the only argument for confidentiality is donor privacy, eventually many foundations might find themselves opening their records for all to see.” 

CASES: Mark Gannon and Arlen Nichols v. Iowa State Bd. of Regents, et al., Case ID 02851 CVCV040563 (Dist. Ct. Story County Sept. 11, 2003), notice of appeal filed Oct. 6, 2003

Cape Publications, Inc. v. The University of Louisville Foundation, Inc., Action No. 01-CI-003349 (Jefferson Cir. Ct. Div. 9 filed Sept. 18, 2003), aff’d in part, rev’d in part, and remanded, 2003 WL 22748265, No. 2002-CA-001590-MR (Ky. Ct. App. November 21, 2003).