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Cal U under fire on housing profits
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HARRISBURG -- It's a modest sum of money when measured against the billion-dollar-plus resources of a state university system.
Even so, the nearly $6 million sent to a foundation account at California University of Pennsylvania has added to the friction between the State System of Higher Education -- which last week pledged greater fiscal oversight -- and one of its member schools.
In a report released in May, State System auditors who were sent to Cal U to conduct a financial review questioned the transfer since 2003 of $5.9 million in net profits from student housing into a foundation fund for scholarships.
The auditors characterized the housing income as public money, part of Cal U's education and general operating revenue. They said "case law and numerous legal opinions" prohibit transfer of public money to a private organization.
PDF"Therefore, transfer to the foundation is considered unlawful," the auditors concluded.
They suggested an analysis be done to see "if current housing fees charged to students are unnecessarily inflated" because the money went to scholarships instead of keeping housing costs down.
Officials at Cal U, though, had a different view.
Robert Irey, chairman of the school's council of trustees, said after his panel met last month that Cal U has a different legal interpretation regarding the transfers. He said the State System was informed of those transfers years ago.
Mr. Irey could not be reached Thursday for additional comment.
School spokeswoman Christine Kindl has balked at suggestions that students might be paying artificially high rates.
She said room rates are influenced by operating costs and by payment requirements of the state bonds that built Cal U's new campus residences.
"Housing profits have never been inflated," she said. "Cal U has simply been fortunate to exceed its operating budget by planning for the worst but achieving the best."
Ms. Kindl said last week that a State System clarification from its legal counsel "reveals that we are following board policy in regard to the handling of net housing proceeds."
But Karen Ball, a State System spokeswoman, said that statement is correct only to the extent that Cal U and its foundation now are modifying the fund to conform to system rules. She said the foundation can manage the money but it must be in a custodial or fiduciary account clearly controlled by Cal U.
Complicating matters were observations in a May 9 internal memo by Dean Weber, director of the State System office for internal audit and risk assessment.
The document, obtained by the Pittsburgh Post-Gazette through a Right-to-Know request, said the $5.9 million in net housing profits transferred into the foundation scholarship fund remained under the control of then-Cal U president Angelo Armenti Jr. and was "available for discretionary spending."
Of the $832,511 spent since 2003 by the account, known as "the President's Quasi-Endowment" fund, more than half went to non-scholarship endeavors, the memo indicated.
Those expenditures included:
• A $352,444 payment to Grenzebach Glier & Associates Inc., an international consultant in philanthropic management for nonprofits, which had a 20-month contract starting in 2008 with the foundation on behalf of Cal U.
• A $100,000 payment to FranklinCovey Co. in August 2007 and 2008 for speaking engagements with Stephen R. Covey, author of "The 7 Habits of Highly Effective People."
• A $6,375 payment to the Redevelopment Authority of the County of Washington to support a feasibility study related to construction of a hotel.
Ms. Ball said Thursday that Cal U is allowed to use the scholarship fund for legitimate campus expenses other than making financial aid awards.
But Ms. Kindl, the Cal U spokeswoman, said that in the future, the school intends to use the fund for its primary purpose, scholarships.
Still, the fact that those housing profits are not being used to mitigate future price increases charged to students raises potentially awkward questions for a State System whose leaders say they are committed to keeping their campuses affordable.
"The total cost of attendance including tuition, fees and housing is something we watch very closely," Ms. Ball said. "And the board [of governors] is looking at all of that right now."
Housing prices, however, are set at the campus level, she said. State System rules say campus housing must be self-supporting, but no cap is placed on how much schools can charge above expenses, she said.
How much in net profits accrue to Cal U annually was not available from the school Thursday.
According to State System data, the $6,592 that Cal U charged in 2011-12 for its most common type of room is the second-highest rate among the 14 State System universities after Indiana University of Pennsylvania. Cal U's overall cost of attendance -- $19,196 for tuition, fees, room and board -- is the highest of the 14 system schools and above the $16,518 system average.
Last week, as the board of governors met and unveiled plans to bolster financial oversight, there was no mention of the scholarship fund or the auditors' calls for a study of Cal U housing charges.
Board chairman Guido Pichini declined to comment on Cal U, citing potential litigation by Mr. Armenti, who was fired in May for reasons the State System has yet to explain.
In the aftermath of the firing, the State System and its board have faced questions about the quality of their oversight.
Officials have acknowledged they lack a process to verify that the 14 universities actually have the money they pledge toward construction projects, and if they do, that it won't be siphoned away for other uses. The board of governors is now taking steps to create a process.
The lack of such a safeguard left the State System to issue millions of dollars in additional public debt last year to finish a $59 million convocation center at Cal U after the school was unable to come up with most of what it pledged three years earlier.
The transfer of housing profits at Cal U is part of an intricate public-private partnership used by the state-owned university to replace its aging housing stock the previous decade.
According to the State System, a ground lease between Cal U and its Student Association Inc., a nonprofit student-run group that owns the housing, divides housing profits as follows: 30 percent to SAI and 70 percent to Cal U for on-campus housing and a 50 percent split between the parties for Vulcan Village, built on land just off the 9,500-student campus.
SAI writes checks each year for the university's net profits and makes them payable to the Foundation for California University of Pennsylvania, State System officials said.
For his part, Mr. Armenti said the auditors' observations about housing profits are among the seriously flawed conclusions in a report questioning certain Cal U financial decisions that he says was used as a justification to oust him. He also says the State System was informed of the transfers long ago.
He said the money in question was not public because it was not from the state treasury and was not deposited into any university account. For convenience, he said, Cal U collects the housing payments, but they are then directed to SAI, owner of the campus housing, which then writes checks to the foundation.
"They remain private funds until they come into the university coffers at a later date as private scholarship dollars leveraging other tuition dollars from students," he wrote.
Mr. Armenti said using the foundation scholarship fund for other expenses still benefited Cal U and its students. He cited the fundraising consultant hired as Cal U prepared for a capital campaign with the stated purpose of raising scholarships. "It was taking scholarship money and investing it to get more scholarships," he said.
The State System declined comment on Mr. Armenti's assertions
First Published July 6, 2012 12:35 am
