No taxpayer dollars will be used to bail out UW-Oshkosh Foundation, regents announce

No state dollars will be used to bail out the beleaguered University of Wisconsin-Oshkosh Foundation, the UW System announced in a statement released Tuesday afternoon.

UW Board of Regents Audit Committee Chair Michael M. Grebe confirmed the regents do not intend to use state dollars to make debt payments on behalf of the UW-Oshkosh Foundation for "inappropriately made real estate related financial commitments" during a former chancellor's administration.

"To do so would be inappropriate,” Grebe said in a news release.

That leaves open the possibility that the private fundraising foundation which exists to support the university could be forced into bankruptcy, something that could put scholarship money in jeopardy if the foundation cannot remain solvent. It also could cripple future fundraising efforts on behalf of the university.

“University officials will continue to work with the Foundation’s leadership as it attempts to work through the financial realities the Foundation faces," Grebe said. "A core mission of the foundation is providing financial assistance to UW-Oshkosh students, and we have a particular sensitivity to that ongoing role."

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A settlement involving state taxpayer dollars was being discussed with the foundation's creditors to protect its assets. UW System leaders were worried student scholarships and other support for the university could be at risk if the foundation filed for bankruptcy protection because it doesn't have enough cash to cover $14.5 million in debt for several real estate projects under investigation by the state Department of Justice.

State Sen. Steve Nass (R-Whitewater) got wind of the discussions and warned such a bailout could have implications for UW System's entire biennial budget, which still has not been decided by state lawmakers.

Nass made it clear in a letter to UW System President Ray Cross that any attempt to use state money to bail out a private fundraising foundation also would set back efforts to rebuild trust between the UW and state lawmakers. He urged Cross to "keep your commitment that the public won’t be forced to fund the inappropriate decisions of two campus administrators and the failed oversight of the System."

Tuesday, a spokesman for Nass said the senator was "thrilled" by the UW System's announcement, but was concerned the statement did not specify whether tuition dollars could be tapped.

Nass spokesman Mike Mikalsen said Nass was glad the regents realized they can't make "everyone whole," referring to banks that may not get paid in full. But Mikalsen said the UW-Oshkosh Foundation has assets that could be used to make "a big chunk" of the debt payments.

The Regents no longer are discussing a potential settlement with foundation creditors, and the Regents will not pay the debt the foundation owes for real estate projects, as the foundation had requested, he said.

"We do not know what the foundation may do next financially, but a top priority of the board has been to safeguard university assets, with a particular emphasis on preserving funds used to provide scholarships to UW-Oshkosh students.  We are still discerning the best path to help protect our students," Grebe said.

The foundation at the end of 2014 had $30.22 million in total assets and liabilities of $11.11 million, with net assets of $19.1 million, according to its most recent available annual report filed with the Internal Revenue Service. Those assets include money from donors earmarked for specific purposes that cannot be diverted.

'Disappointing development'

Contacted after Grebe's announcement, Paul Swanson, an Oshkosh attorney co-representing the UW-Oshkosh Foundation, said the news was a "very disappointing" development.

"We had pretty much agreed on a settlement and it was taken off the table. Politics got involved," Swanson said. "We're looking at our options."

There are ways to restructure the foundation that would help ensure student scholarships and other support could continue for UW-Oshkosh, Mikalsen said. He suggested the UW System could directly manage and distribute private funds on behalf of the campus until the foundation could be restructured through bankruptcy, or another foundation could form after bankruptcy.

The state Department of Justice in January filed a  lawsuit against former UW-Oshkosh Chancellor Richard Wells and former Vice Chancellor of Administrative Services and Chief Business Officer Thomas Sonnleitner over financial transactions that occurred between 2010 and 2014 related to five real estate projects. 

The lawsuit, filed on behalf of the UW System, seeks unspecified damages.

The projects included a $12.5 million Alumni and Conference Center, a sports complex, backing for a private investor-led waterfront hotel renovation in town, and two biodigesters to turn waste into energy — one of them on the state's largest dairy farm. The university's affiliated, private foundation was expected to do significant fundraising for all five projects. 

Legally, funding could only flow from the foundation to the university because the state constitution and UW System policies do not allow a private entity to be supported by a public entity. University executives also are prohibited by the UW System from making decisions on behalf of university-affiliated foundations.

Wells and Sonnleitner are accused of making improper deals to boost the projects and illegally promising state money to back the foundation's bank loans if the foundation couldn't make its debt payments.

The UW System contends it cannot be held liable for foundation debts on the building projects because guarantees made by Wells and Sonnleitner that the university would back the loans were illegal. But the bank potentially could claim it was the victim of fraud and argue the state is liable for the actions of its employees.

The foundation still owes money to banks for three of the five projects under state investigation: the conference center and the two "green" energy biodigesters.

In addition to owing money to banks, the foundation has not repaid the university nearly $5 million of the $11 million that Sonnleitner and Wells are accused of illegally transferring to help finance the projects.

About $344,000 of the $11 million was not linked to the building projects in the civil lawsuit.

Sonnleitner allegedly continued to make transfers until he was suspended in 2016; he retired three weeks later.

The arrangement reportedly came to light in April 2016 when current Chancellor Leavitt was approached on behalf of the foundation and told the foundation might need help it was promised with a debt payment on the conference center.

Leavitt questioned the legality and took the matter to UW System Cross. The matter initially was investigated by UW System officials, then a retired Dane County judge. At that point, the UW System decided to turn the investigation over to the state Department of Justice.

Leavitt issued a statement Tuesday, stating the top priority is to safeguard university assets, preserve foundation funds used to provide scholarships for students and funds to support university programs.

"I wish I could provide more clarity on where we go from here, but know that it is important to me that I keep you informed," Leavitt said."We will continue to work with UW System and the Board of Regents to find a way forward, and I will share more details with you as they become available."

Leavitt's predecessor desperately wanted the five donor-backed real estate projects to happen to seal his legacy before he retired in 2014.

Milwaukee Journal Sentinel Interviews with current and former employees, plus others in the community, revealed a campus leadership pushing relentlessly to make the UW System's third-largest campus a showpiece. They also suggested that anyone raising questions about how things were getting done was quickly shut down. (Current employees said they could not be identified for fear of reprisal, particularly with a lawsuit pending.)

Nathan Beck of the USA Today-Wisconsin Network contributed to this report.