A Review of Allegations Concerning Operations of the Mississippi University for Women Foundation, Inc.
Executive Summary
Introduction
In response to three alumnae’s complaints, the PEER Committee reviewed the Mississippi University for Women Foundation, Inc. (hereinafter referred to as the foundation). PEER conducted the review pursuant to the authority granted by MISS. CODE ANN. Section 5-3-51 et seq. (1972).
While the MUW Foundation is not a state agency or a unit of local government, PEER’s authority extends beyond such entities. MISS. CODE ANN. Section 5-3-57 (b) (1972) provides PEER with authority “to investigate any and all salaries, fees, obligations, loans, contracts, or other agreements or other fiscal function or activity of any official or employee thereof (including independent contractors where necessary).” Because the MUW Foundation is an independent contractor of the Mississippi University for Women, which is a state agency of government, PEER clearly has authority to review the foundation’s operations.
While most universities, including MUW, have development offices for the purpose of raising support funds from the general public, most public universities seek the support of “private” foundations in order to gain greater flexibility and confidentiality in the solicitation and expenditure of funds than that afforded by working within the constraints of the public sector.
The purpose of this review was to analyze the MUW Foundation’s compliance with applicable state and federal laws, rules, regulations, and best practices through an investigation of the following specific allegations that the foundation:
This review focuses on the period of state fiscal years 2004 through 2008 unless otherwise noted.
Questions and Answers Regarding Operations of the MUW Foundation
Why do public universities seek to establish private development foundations and who is responsible for their regulation and oversight?
The primary reason that public universities seek to establish development foundations as separate private legal entities is to achieve greater flexibility and confidentiality in the solicitation and expenditure of donated funds than that afforded by operating within the legal and policy constraints of the public sector.
As 501 (c) (3) tax-exempt non-private foundations, public university development foundations must operate in accordance with governing provisions of the federal Internal Revenue Code. University development foundations operating in Mississippi must also comply with the state’s nonprofit corporation law.
The Board of Trustees of State Institutions of Higher Learning and university presidents are responsible for establishing appropriate contracts, rules, and regulations to ensure that the foundations, like the universities that they support, serve the public interest and operate in compliance with applicable federal and state laws. Foundation boards of directors are responsible for the management, direction, and function of the foundations.
The Mississippi University for Women Foundation was incorporated in 1965 for the sole purpose of securing private endowment funds to be used and applied for educational purposes. The President of MUW has the discretion to decide whether to engage the services of a foundation and to set the terms and conditions of the university’s relationship with such an entity. Under the terms of the operating agreement, the foundation is to coordinate all fundraising for the university and the university is to provide personnel, offices, utilities and other support needed by the foundation.
As of June 30, 2008, the value of the MUW Foundation’s net assets had grown to $33.6 million. The foundation received over $4 million in contributions in both FY 2007 and FY 2008. The foundation’s expenditures totaled approximately $2.2 million in FY 2006 and FY 2007 and increased to $2.7 million in FY 2008.
Has the foundation violated the Internal Revenue Code and IHL bylaws by including university officials as non-voting board members and placing them in leadership positions on the foundation staff?
No. Neither the Internal Revenue Code nor IHL bylaws prohibit these practices. In fact, it is a common practice for the President of a public university to serve on the board of directors of its development foundation and for the Vice President for Institutional Advancement of a public university to serve as the foundation’s chief executive. It is also not uncommon for the University’s Vice President for Institutional Advancement to serve on the foundation’s board of directors.
The Internal Revenue Code does not address the relationship between a public university and its development foundation. While IHL’s bylaws state that the relationship between the state’s institutions of higher learning and their foundations must be based on “a recognition of and respect for the private and independent nature of the foundations,” the bylaws specifically provide for senior administrators of the institutions serving on foundations’ boards in a non-voting capacity.
IHL stresses the “independent nature of foundations” in its bylaws because by doing so it hopes to insulate the foundations from potential threats to their ability to maintain the confidentiality of donor and possibly other records. Despite the efforts of public university development foundations to maintain the confidentiality of their records by asserting their independence, in recent years some state supreme courts have ruled that all public university development foundation records, including donor records, are public.
A survey of public university development foundations conducted in 1995 reported that the majority of respondents include the university’s president on their foundation’s board and designate the Vice President for Institutional Advancement as the foundation’s chief executive officer.
The MUW Foundation is a relatively small foundation whose staff and operational support are provided entirely by the university, making it difficult to distinguish between the staff work of one versus the other.
Does the MUW Foundation operate under a policy of secrecy, resulting in a lack of transparency?
In certain aspects of its operation, the foundation has a legitimate need for “secrecy”--i. e., confidentiality. With respect to transparency of its operations, in recent years the foundation has made improvements by publishing an annual report and developing a website. However, PEER identified several areas in which the foundation’s transparency is weakened by the absence of certain key documents (e.g., a strategic plan, complete minutes) and written policies (e.g., an expenditure policy) and by less than full disclosure of certain public information (e.g., the value of public support provided by the university) and information that should be made public but currently is not (e.g., the university’s operating agreement with the foundation, the foundation’s budget, and report on expenditure of unrestricted funds).
One of the MUW alumnae’s complaints regarding the MUW Foundation was that they questioned the “lack of transparency” within the foundation. They described “an ever-increasing wall of silence” with regard to the foundation’s fundraising, investments, and expenditures. They stated that alumnae could not gather information about the foundation because of “the Foundation’s policy of strict secrecy.”
The MUW Foundation’s operating agreement with the university contains adequate language governing the confidentiality of donor records and the foundation’s confidentiality agreement contains necessary language to inform members of the board of directors and its staff as to their duty to maintain the confidentiality of donor information.
According to the Panel on the Nonprofit Sector, strengthening the public trust, which is essential to the success of any development foundation, depends on the extent to which the organization operates transparently. With the exception of confidential donor records, best practices in the operation of public university development foundations advocate complete openness, including providing the general public with information about the foundation’s operations, governance, finances, programs, and activities.
While the foundation has made recent improvements regarding transparency through publication of an annual report and creation of a website, the foundation is missing certain key internal documents and documentation necessary to ensure transparency and accountability. For example, the foundation has not developed a strategic plan or a written policy governing the general expenditure of its funds or the specific expenditure of its unrestricted funds. Further, the foundation’s minutes, which are the official record of its activities, are incomplete and lacking in supporting documentation. Also, the foundation has obligated itself to fund relatively high-cost service providers for the university without requiring a written contract for the services.
Has the foundation used unrestricted funds to create a “slush fund” for the university’s president?
While the foundation does provide a portion of its unrestricted funds to the university for general assistance, these funds should not be considered a “slush fund” because they are not completely unregulated or used for illicit purposes. However, the foundation has been lax in its exercise of budgetary and other approval controls over the expenditure of these funds and has not developed a written policy governing the expenditure of its unrestricted funds, as recommended by best practices. Further, the foundation used cash from restricted and endowed funds to cover a $1.4 million deficit in unrestricted funds that resulted from allowing unrestricted fund expenditures to exceed unrestricted fund revenues for seven of the past eight fiscal years.
The foundation must use restricted funds (either temporarily restricted or endowed) for the purposes specified by the donor. Unrestricted funds are not restricted as to their use by the foundation--i. e., the foundation may use such funds for any purpose supporting its mission of providing funds for the educational support of the university.
The foundation’s controls over its unrestricted funds include an annual budget and requirements for prior approval of the expenditure of non-budgeted unrestricted funds. Because the foundation has not consistently adhered to these controls, it spent more in unrestricted funds than it collected in seven of the last eight fiscal years. The foundation was able to continue expending more unrestricted funds than it collected year after year by using cash from its restricted and endowed funds to cover the negative cash balance in unrestricted funds that resulted from unrestricted expenditures.
In obtaining a line of credit in 2005 for the benefit of the university, did the MUW Foundation violate federal or state laws prohibiting private benefit and conflict of interest and did the foundation violate its fiduciary responsibilities?
While the circumstantial evidence surrounding the foundation’s approval and execution of the line of credit could create an appearance of impropriety, no evidence exists that the MUW Foundation violated federal or state laws prohibiting private benefit or conflict of interest in obtaining a line of credit from a bank that employed a member of the foundation’s board of directors. With respect to its fiduciary responsibilities, the foundation imperiled restricted and endowed funds and risked breaching its fiduciary duty by pledging these funds as collateral for the line of credit.
The foundation obtained a line of credit for the university in 2005 in order to provide a cash flow to the university for the repair of numerous university buildings damaged by a tornado in 2002. The university asked the foundation to obtain the line of credit because the university’s cash flow needs for the repair project could not be met through the federal and state emergency management agencies’ reimbursement processes.
A foundation board member was an executive officer of the bank at the time that the foundation decided to move its general business from another bank to the bank employing the board member and several months after the move of the foundation’s general banking business, said bank issued the line of credit to the foundation. The foundation did not violate the prohibition against private benefit under the United States Tax Code because the compensation (i. e., interest rate) paid to the bank was not excessive and the bank is presumably not a “disqualified person.” The foundation did not violate the prohibition against conflict of interest transactions under MISS. CODE ANN. Section 79-11-269 (1972) because the foundation’s board of directors was apprised of the material facts of the line of credit transaction, as well as the director’s interest in the bank, before approving the line of credit.
However, the foundation’s board of directors imperiled restricted and endowed funds and risked breaching its fiduciary duty by pledging these funds as collateral for the line of credit obtained by the foundation for the benefit of the university. Further, the foundation paid $437,000 in interest to the financial institution on the line of credit, which reduced the amount of support given directly to the university by the foundation.
Did the MUW Foundation violate the Internal Revenue Code’s restrictions on lobbying by making payments to the university to employ a company to perform marketing services?
The MUW Foundation did not violate restrictions on lobbying contained in the Internal Revenue Code because the work performed by the marketing firm and another firm hired to perform public relations work for the university did not attempt to influence legislation currently under consideration by a legislative body. Further, while the foundation reported lobbying expenses on its Form 990, the amount of these reported expenses did not exceed the limits established in the Internal Revenue Code for a 501(c) (3) organization.
The Internal Revenue Code defines lobbying as a direct or indirect attempt to influence specific legislation currently being considered by a public body. The code places limits on the amount that a 501 (c) (3) organization can expend on such activities, based on the organization’s total expenditures.
The complainants believed that because the marketing firm’s work concerning a name change for MUW would influence possible future legislative action necessary to effect a name change, the activities of this firm could constitute lobbying. Because the firm was not performing work to influence specific legislation or official actions currently being considered by a public body, its activities did not fall within the Internal Revenue Code’s definition of “lobbying.”
Has the foundation violated donor intent in handling restricted funds?
Although no evidence shows that the foundation has used funds from specific restricted or endowed accounts for purposes not compliant with donor intent, the foundation pledged funds in the restricted and endowed accounts as collateral for a line of credit. Further, the foundation used $1.4 million from these accounts to cover the deficit in unrestricted funds for an extended period.
In testing for compliance with donor intent regarding individual restricted and endowed accounts, the foundation’s independent CPA firm tested 86% of contributions (in terms of dollars) for the year ending June 30, 2008, and found no violations of donor intent.
Recommendations
On many campuses, institutional personnel are used to staff the foundation. To preserve the foundation’s independent nature, an arms-length relationship should exist between the foundation and the institution regarding the services the institution provides. Consequently, the foundation either should pay cash for the services provided or recognize these services as payments-in-kind.
Pursuant to recognizing the services provided to the university by the foundation as “payments-in-kind,” the foundation should clearly differentiate between foundation work and university work and require its staff to maintain a daily record (preferably a computer-based record) of the time spent on each.
The value of this time, as well as all other support provided by the university, including the value of space, utilities, equipment, and other materials provided to the foundation, should be reported to the Internal Revenue Service as required on line 21 of the Support Schedule (Part IV-A) on the foundation’s annual Form 990.
Such university foundations and affiliated entities should, at a minimum, make the following information publicly available: