In an Aug. 20 e-mail to the finance chief of the University of Arkansas at Fayetteville, the university’s head fundraiser expressed alarm that confidential information about financial problems in his division had leaked.
In the e-mail, Brad Choate, vice chancellor for advancement, told Don Pederson, vice chancellor for Finance and Administration, that an assistant dean in the engineering school had approached the director of development of engineering “and asked her if she knew ‘Development was broke’ and mentioned the loan.”
The remark was a reference to the discovery at the end of June that Choate’s division had a serious budget shortfall and that the university’s fundraising might need to seek a loan from another part of the university to cover the deficit.
“I’m not sure where the breakdown in confidentiality occurred but this is not good,” Choate said in his email to Pederson.
The e-mail, a follow-up that Pederson had sent to the head of the College of Engineering and phone calls made by Pederson and UA Chancellor G. David Gearhart to the engineering dean show that campus officials were concerned about maintaining secrecy as they tried to figure out how much overspending occurred.
Last week, five months after the discovery of the budget shortfall in Choate’s division, Gearhart announced that he had reassigned Choate and Choate’s budget officer after a review found that the Division of Advancement, which handles fundraising, overspent its $10 million budget by $3.1 million for the fiscal year ending June 30.
Neither Choate nor budget officer Joy Sharp were fired, but Gearhart demoted both and said he will not renew their appointments at the end of this fiscal year, June 30, 2013.
The August e-mail is among many obtained by the Arkansas Democrat-Gazette that details some of what happened behind the scenes over the summer and fall as campus leaders sought to untangle a maze of fund transfers and spending of public and private funds to determine the extent of the financial crisis in the university’s money-generating Division of Advancement.
The division runs the university’s development activities, alumni office and media relations office, among other functions. Its two primary revenue streams are from the campus’s public funds, consisting primarily of state appropriations and students’ tuition and fees, and a private supplement from the University of Arkansas Foundation.
On Aug. 20, Pederson forwarded Choate’s e-mail to Terry Martin, the interim dean of the College of Engineering and added his own note, which echoed Choate’s concern about keeping confidential the need for a loan and emphasized that a budget shortfall didn’t mean that the fundraising program had gone broke.
“There is considerable difference between liquidity in part of a unit’s revenue (Foundation) and net assets (over all sources), Pederson said in his note.
The e-mail also prompted Gearhart and Choate to phone Martin to “request confidentiality by the college,” according to a timeline of events compiled by the chancellor’s executive assistant Gloria Sutherland
The chronology details communications between Choate and Pederson, Pederson’s July 13 notification to Gearhart that the Division of Advancement budget was a half-million dollars in arrears on its privately funded side and three Nov. 19 meetings that Gearhart had with deans and various administrators about the overspending.
Pederson said last week that although the deficit for fiscal 2012 was corrected in October, officials are still working to correct issues that have cropped up since so that those problems don’t roll over into the next fiscal year, for which a budget is still not finished.
Choate — reassigned within Advancement to work on planning and prospects for a forthcoming capital campaign — retains his title and $348,175 salary, but Gearhart has taken over his administrative duties. Sharp was reassigned twice and now works in Human Resources in a nonbudgeting job, and her salary was cut from $91,086 to $68,314.
Sharp has so far declined to comment to the Democrat-Gazette. Choate released a brief statement Monday, saying he was disappointed that his appointment will not be renewed after June 30.
FOUNDATION ACCOUNT
On July 16, three days after Gearhart learned of the budget problem in the Division of Advancement, he met with Choate and Pederson.
In her timeline of events, Sutherland made this note: “DOP [Pederson] will seek cash flow management loan from TM [Martin] in Engr.”
In a July 17 e-mail exchange, Gearhart told Pederson to put some one-time budget requests for fiscal 2013 on hold after Choate emailed Pederson earlier in the day that he needed to know soon if he could tap some one-time funds to buy a TV commercial.
“Given brad’s [Choate’s] budget issues I think we need to wait and see how it turns out,” the chancellor wrote.
By July 20, Pederson advised Gearhart that the Advancement Division was overbudget by roughly $2 million in its publicly funded accounts.
A week later, on July 27, Gearhart sent Pederson a brief message: “Anything new? I’m particularly curious about income from foundation.”
Pederson replied that he hoped to work on the budget problem over the weekend.
“Trying to sort out transfers to UA versus direct payments,” Pederson wrote. “Budgets looked generally ok but may have been missed by one-time expenditures.”
HUNTING ANSWERS
On July 30, a Gearhart e-mail to Choate took on a sense of urgency.
Gearhart told him that reconciling the budget of the previous fiscal year, which ended a month earlier, was key in preventing a repeat in the current fiscal year.
“It would appear you will need a rather drastic reduction in expenditures,” Gearhart wrote Choate. “Not sure that can wait until you figure out what happened. Making up that kind of deficit, if accurate, will require major adjustments.”
Gearhart added that he assumed Choate and Sharp were scrutinizing every expenditure and comparing it with the previous year’s.
“We really need to get a handle on this and quickly,” Gearhart said. “A $3 million deficit is a serious matter and surely there is an explanation.”
Choate replied less than an hour later: “I am as concerned and worried as anyone. I have never had a budget deficit in my life and frankly I am very upset about this situation.
“I trusted the numbers I was given and what I was told. I don’t like this happening on my watch and I don’t like feeling guilty for something that is as much a surprise to me as it is you and Don.”
Choate added that Pederson’s review to that point showed that forecasts and expenditures didn’t appear to be out of line, but there were “oddities in the income from the Foundation that are not understood yet.”
“At this point we don’t even know if the $3M number is accurate,” Choate said.
“Don is on it and we hope to have answers soon.”
‘COMMINGLED’ ACCOUNTS
Between late July and Aug. 3, a series of meetings took place between campus leaders and UA Foundation officials to try to solve a puzzle involving “chancellor-directed accounts,” according to Sutherland’s timeline.
University spokesman John Diamond said last week that officials were trying to determine why an Advancement Division account had been “commingled” with a chancellor’s account in a way that gave the appearance of a balanced budget. A chancellor’s account is used by the Fayetteville campus chancellor to fund onetime special projects of strategic importance, a practice that leaders at most other universities also do.
Late in the afternoon of Aug. 8, Choate wrote Gearhart thanking him, Pederson and others for help in trying to untangle the budget questions, adding that the “situation is correctable.”
He said his division had identified “$300K” from the previous year in one-time expenses, such as for skybox chairs, that the division would not request again for the current year and that the division was considering whether open positions could go unfilled. He added that a recent “cost-containment” effort had yielded $257,000 that he had planned to “reinvest” but would instead “use those funds to help.”
“When I arrived, I told my reports that rule #1 was never go over budget,” Choate wrote.
He also weighed in on an apparent checklist of seven items that he and Pederson had discussed earlier that morning, providing responses to five of them, including one that read: “Done. My reports are personally approving all requests, those they approve come to me.”
WAITING ON ANSWERS
On Sept. 13, two months after he first learned of the shortfall in Choate’s division, Gearhart e-mailed two sentences to Pederson:
“Have you heard anything from Brad about why his budget went so far over. I have not.”
On Sept. 29, Pederson emailed Choate a document outlining “some specific actions you must take to move us down the road in the right direction.”
By Oct. 8, Choate pitched Pederson an idea for a tax assessment on donor gifts and attached a list of other universities that he said have such “gift taxes,” which set aside a portion of gift money to cover overhead expenses, as private nonprofits typically do.
UA is still considering this idea, Pederson said last week.
On Oct. 27, in an e-mail exchange between Choate and Pederson, Choate said that Gearhart had directed Choate to create a comprehensive plan for dealing with the budget deficit to present to Gearhart before pitching it to Provost Sharon Gaber and the deans.
“Don, we need to get busy creating a plan to address our financial issues,” Choate tells Pederson, saying he will handle the “gift-fee plan and revenue, but need you to address the one-time resources you mention.”
Pederson replied: “I have a legislative budget hearing next Wednesday, a preparation meeting for that on Monday, last minute preparations on Tuesday, and then the Board of Trustees meeting on Thursday and Friday so will not have sufficient time to focus on any plan.”
Front Section, Pages 1 on 12/09/2012