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UI digging in to recover from University Place

MOSCOW, Idaho – University Place was supposed to change the face of the University of Idaho.

Just not the way it has.

It was meant to expand and solidify the UI’s statewide reach, to fly a victorious Vandal flag in the midst of Boise State country. The ambitious plans initially called for a four-building campus in downtown Boise, a creative mix of university programs, government offices and businesses.

Instead, as a new school year opens, the university is retrenching, trimming programs and merging colleges – in an attempt to overcome financial problems related to the project, as well as unrelated long-term debt. In the last few years, more than 250 teaching and staff positions have been lost, and the Boise project has been scaled back to a single building.

The school’s fund-raising foundation is working its way out of a $25 million hole that it blames former university officials for digging. And donations from alumni, corporations and others have taken a huge hit – dropping from a record $32.7 million in 2002 to $7.2 million last year, according to annual reports filed by the University of Idaho Foundation.

“This was a gigantic mistake,” said Jack Lemley, a prominent UI alumnus whose engineering and construction firm, Lemley & Associates/3DI, took over as project manager when things began unraveling. “And I think the lawsuits are simply dividing the alumni and diverting the university’s attention from the primary business of educating students.”

Federal and state prosecutors are investigating the deal, and a grand jury is empanelled in Boise in the case. The university and foundation – whose complicated relationship lies at the heart of many of the project’s problems – are suing their attorneys, the former project developer and their insurance company in a series of claims that are being combined into one huge, complex lawsuit.

The university has spent almost $200,000 in legal fees related to University Place in the last two fiscal years, and the bill has the potential to get much higher. The lawsuit is set for a January 2007 trial.

Meanwhile, the UI is implementing its “Plan for Renewal,” eliminating and merging some lesser-used programs, saving about $4.75 million in the current budget. President Tim White, who just opened his second academic year at UI, said the university has worked through its toughest problems, balanced its budget and is focused on developing new, creative ways to address its main goals.

“I would like the litigation to end yesterday instead of tomorrow,” White said in an interview the day after classes began last month. “We need to get this event fully behind us.”

The details surrounding the University Place project are enormously complicated. A state investigation took 430 pages to explain it. Hundreds of legal documents are piling up in the litigation.

And yet, in some ways, the story has a limited cast of main characters and events – three main players and four transactions explain a lot.The transactions occurred between the UI and its fund-raising foundation – a separate nonprofit entity charged with collecting and managing private donations for the benefit of the UI. State officials charged with oversight of the university had little or no information about the transactions.

Between January 2000 and December 2002, the UI and foundation pursued the Boise development with what one former administrator described as “evangelistic zeal,” pushing ahead in the face of warnings and uncertain financing. Repeatedly, foundation assets were used to finance the pre-development costs, while university officials reassured the foundation that the money would eventually be repaid when the state sold bonds to finance the project.

It wasn’t.

In the report commissioned by the state Attorney General’s Office, known as the Prince report, scores of people were interviewed about the events surrounding the project planning. Three names consistently wound up being assigned the most direct involvement in the decisions:

“ Former UI President Robert Hoover, a charismatic, popular leader who pushed to get things done big and fast.

“ Former UI financial Vice President Jerry Wallace, who was “driving the train,” one official said, by approving each of the key deals, either for the university or the foundation.

“ Roy Eiguren, a foundation board member who played a variety of roles, including attorney for several parties in the project and lobbyist for the university.

In court records, the university and foundation say that all three men “engaged in various dishonest acts and/or omissions during the course of the project.” Wallace and Eiguren declined requests for interviews, and Hoover did not return messages seeking comment.

Eiguren’s attorney, Tim Hopkins of Idaho Falls, said Eiguren “proceeded in good faith in every respect” in the best interests of the UI and the foundation, and that the foundation’s decisions were all approved by the board.

The Prince report – named for Boise attorney Larry Prince – describes a series of warnings raised, and then ignored, throughout the planning of University Place.

At one point, in April 2001, the university learned that its expected state funding had fallen through, at least for a year or so. Hoover urged Wallace to push ahead. Soon, through a move that investigators suggest was improper, the foundation expanded its obligation to the project from $1.9 million to $13.9 million.

That decision, Wallace told investigators, was when the school and the foundation became inextricably committed to the project.

It was, he said, when they “jumped off the cliff.”

“ “ “

The UI Foundation loans the university $1.9 million to buy land in downtown Boise.

In the late 1990s, Boise and the Treasure Valley were booming, and UI officials wanted in on it. Talks about possible expansion and consolidation of programs already in Boise resulted in a “visioning document” that foresaw a UI presence there that combined university programs and research, state offices, and private firms.

It was a tense time between the UI and state education officials. The university, the longtime home of engineering programs in the state, had recently seen Boise State enter that field, as well. The UI was no longer the state’s largest university. And there was apparently a desire among UI leaders to find a way to do the University Place project with a minimum of involvement from the state, according to records and interviews.

Hoover brought a lot of pressure for the project to succeed, but there was never a business plan. In early discussions about the project, officials talked about wanting the buildings to “be as tall and as large as they can be,” the Prince report said.

“Universities aren’t developers,” Lemley said. “They got in over their heads the minute they decided to be a developer.”

It would be a pattern throughout the project – more optimism than business acumen.

“The University Place was really a marvelous idea and could’ve been, if realized, a real gem for the state and Boise,” said Brian Pitcher, who was provost at the UI during the project and served as interim president after Hoover resigned. “But it became a colossal failure because the business plan was not developed.”

According to lawsuits filed by the foundation, Hoover and Eiguren first discussed trying to use foundation money to finance the project in fall 1999, hoping that strategy wouldn’t require the approval of the Board of Education. In December of that year, Wallace took the idea to the foundation board, which OK’d the $1.9 million loan.

Wallace signed the promissory note on behalf of the foundation – without proper approval from the state Board of Education, investigators say.Throughout the deal, Wallace would sign documents on behalf of both the foundation and the university, as foundation treasurer and university vice president. The shared position had been mandated by the foundation’s bylaws, though the state board has since outlawed such arrangements.

In any case, the purchase of the so-called Rite-Aid land in downtown Boise was the launch of University Place. The plan was for four buildings on eight acres. Pre-development costs such as architectural design started flowing in, and UI officials began assigning those costs to the foundation – though the foundation board had never approved them.By the end of July 2000, costs had reached $10,000, and Wallace asked Laura Hubbard, then director of capital planning for the university, to open an “agency account” for the expenses. Agency accounts are intended to be like debit accounts – groups such as the student body government deposit money with the university and then draw on it.

In this case, though, there was no deposit – the account would operate essentially as a charge card.

Hubbard, who is now vice president for finance, refused to establish the account, the Prince report said.

“ “ “

UI Vice President Jerry Wallace orders the establishment of an account at the university and spends $8 million out of it, though no money was ever deposited.

Six months after Hubbard refused to open an agency account, Wallace persuaded another subordinate to do so in November 2000.Over the next 14 months, more than $8 million was charged to the agency account at the university. Almost no one knew about it – the Prince report said only Wallace and then-Assistant Vice President Ken Harris knew the full details. The state Board of Education wasn’t notified.

“Wallace and the UI … treated the agency account as a charge card,” the report said.

But the UI wasn’t getting the bill. The foundation, in a roundabout way, was.

Foundation board members told investigators that they didn’t realize this until January 2003, when the account spending had already reached $8 million. There was a lot of confusion over the spending and who would repay it, and how to characterize it for bookkeeping purposes.

But whatever it was called, the university expected the foundation to repay it. Wallace approved the account as a university official and later signed the document indebting the foundation for the expenses.

In the Prince report, investigators say the account spending was an unauthorized use of UI funds, a violation of state policies and possibly illegal.

The circumstances surrounding the account illustrate several problems investigators identified with the project planning: It was a highly fluid and mysterious series of transactions, and there was no clarity among most parties about just exactly what was happening.

Wallace, who was faulted for a temper that discouraged subordinates from questioning him, wrote in an e-mail at one point, “How come so many people are involved in this?”

“ “ “

The Foundation loans $12 million to the university to finance pre-development costs.

By March 2001, a lot had changed with the University Place project.

It was no longer going to be located on the Rite-Aid land – it had moved across the street. The UI joined forces with Civic Partners, a California real estate development company already working on a downtown Boise proposal, after a meeting between Jerry Wallace and company owner Steve Semingson. The meeting was arranged by Ed Miller, an attorney with Eiguren’s firm, Givens Pursley, which represented both the university and Civic Partners, according to court records.

“After this contact, the UI apparently never considered other options,” the Prince report said.

The relationship with Civic Partners would be one of the key problems later in the project. Bonding officials eventually disallowed many of the company’s charges, and the foundation has sued the firm to retrieve payments of some $7 million.

In just a little more than a year of project planning, the size of the proposal had quadrupled in square footage, the budget had grown to $136 million, and the expected annual cost to the UI had tripled. Meanwhile, no money was forthcoming from the state – the Legislature denied an initial request to issue bonds for University Place.

Designers and administrators met to discuss those problems in March 2001.

“It was reported to us that Hoover, with little hesitation, decided that they would have to make it work,” the report said. “During our interview, Hoover analogized it to a young couple buying their first house. It might be a stretch at first, but over time it becomes more affordable.”

The way University Place became affordable, at that point, was for university officials to again turn to the foundation as a source of funds.Wallace proposed, and the foundation approved, changing its bylaws to raise the amount of trust-fund money it could invest in development projects. The idea was that the foundation would loan up to $13.9 million to the university, and achieve tax-free status on the financing, “a concept that ultimately proved to be legally impossible under the applicable tax laws,” the Prince report said.

Legally impossible, perhaps, but not practically so. The foundation approved the loan, with the hope – university assurances, some say – that future state bond funding would repay it. Shortly thereafter, an attorney advised foundation and university officials that the “conduit financing” would not be legal. That advice does not appear to have gone anywhere.

At a meeting of the state Board of Education in June, Hoover made a presentation on the project. He did not disclose the loans from the foundation. Neither did he or anyone else disclose “that the (foundation) could not realistically finance the building based on IRS regulations.”

But the project rolled on. Spending continued.

And in the fall of 2001, university officials discovered they had a huge hole in the school’s overall budget. Growing debts and long-ignored financial problems combined to give the university a $30 million deficit.

In February 2002, UI budget director Wayland Winstead – who had been trying without success for months to get specifics about the deal from Wallace, according to records and interviews – finally got a sense of the project’s financing.

He immediately sent an e-mail to top administrators warning of a potential “Enron-like implosion” of university finances. It was, he told investigators, his attempt to “blow the whistle softly.”

Hoover met with Wallace, then Eiguren. Hoover decided to proceed with the project, with one concession – it would be done in phases, not all at once.

Soon, Hoover, Eiguren and others were pitching the Legislature again, trying to get bonding for the project.

In a presentation to a legislative committee, Hoover and UI officials underestimated project costs and oversold the commitment of potential tenants, making numerous “misleading or inaccurate statements” in a slide presentation to lawmakers, according to the Prince report.

“We did not find that there was false testimony before the Legislature concerning the project,” the report said. “We, however, believe that relevant, material information was omitted from testimony.”

In March 2002, the Legislature approved the sale of $54 million in bonds to finance one piece of the project – the Idaho Water Center, a mixture of university programs, government offices and private firms dealing with water research issues.

“ “ “

The state bonding agency refuses to cover the foundation’s pre-development costs.

Within two months, the first hint of a huge problem arose. The foundation by this point had sunk $28 million into pre-development costs or obligations. A lot of the payments went to Civic Partners.Already, Lemley’s firm, which had been brought in to review costs for the Idaho State Building Authority, the agency overseeing the bond sale, was suggesting that Civic Partners’ expenses might be millions too high, and might not qualify for reimbursement out of bond funding.

“There wasn’t what we would consider the proper financial controls in place,” said Lemley, a 1960 UI graduate from Coeur d’Alene whose experience includes leading the construction of the “Chunnel” undersea tunnel between England and France.Meanwhile, “(Foundation) board members asked Wallace whether all this spending would be reimbursed by the bonds,” the Prince report says. “Wallace’s consistent answer was yes.”

The relationship between Civic Partners and university officials deteriorated into arguments and blame – one of the key allegations in the lawsuits against the attorneys is that Eiguren’s firm, Givens Pursley, continued to represent both parties though their relationship had become “hostile.”Soon, the ISBA revealed that it would no longer continue with Civic Partners as the project manager. In August, the foundation terminated the relationship. Meanwhile, the amount of the ISBA reimbursement became an increasing concern. As 2002 wore on, it became clear that the authority would not be repaying all – or even most – of the money the foundation had spent on the project.

“That gap kept getting bigger and bigger and bigger,” Pitcher said. On Dec. 13, 2002, the ISBA released its final decision on reimbursing development costs. It wouldn’t repay a penny.

“From there,” Pitcher said, “it all imploded.”

The officials pushing the project once again turned to foundation assets to cover costs, borrowing $6 million against its restricted trust assets to cover immediate debts.

As with other transactions involving the foundation assets, the Prince report said it appears the foundation breached its civil responsibilities to donors.

“ “ “

Hoover resigned, saying he’d failed to watch over the project closely enough. Wallace left shortly thereafter, and other key administrators soon left, as well. The school convened its Fiscal Emergency Committee.

The UI brought in retired Albertson’s CEO Gary Michael as interim president, and he and Pitcher worked to uncover the scope of the problem and try to fix it. Much of the university’s $30 million deficit was unrelated to University Place, but the project saddled UI with ongoing maintenance and operations costs, and it cut into the money the foundation provided the university as that organization struggled to get out of debt.

The state opened its investigation, culling an exhaustive amount of records and interviewing scores of participants. The final Prince report relies, in part, on e-mails between administrators, but that record is not complete – Wallace deleted all e-mail on his two university computers, investigators said, and not all could be retrieved. The report also said the foundation had turned over “some, but significantly less than all, of the documents we requested.”Like some others associated with the university, Pitcher said he’s proud of the hard work and dedication that went into turning things around. A longtime southern Idaho booster and alum, Gary Garnand of Twin Falls, said that the damage to the school served as a call to arms for some.

“I think in the long run, even though it was a very painful exercise and things had to be done to stabilize things, it turned out to be a rallying point for many alumni and the university is a stronger place,” he said.

Others say that the fallout has cost the university donations and good will among some alumni, as well as faculty and staff.

“My view is it’s been devastating,” Lemley said. “I think it’s had a very negative effect. I think the lawsuits have compounded that.”

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