Tuesday, April 23, 2013

A Scammy Orange Rose in Texas: Foundations and Forgivable Loans

Perhaps the best article I've seen on the witch hunt being conducted against the University of Texas Law School can be found at the Austin Statesman from yesterday. As it explains:

Central to the investigation by [the Attorney General]’s office is a program under which the foundation provided forgivable personal loans to some professors on the law dean’s recommendation. The program, which began when UT President Bill Powers was dean of the School of Law, was deemed inappropriate for a public university by a UT System report released last year after a $500,000 forgivable loan to Powers’ successor as dean, Larry Sager, came to light. Sager received the loan at a time when salaries for deans and vice presidents were frozen.

Emphasis added. As the article explains, a "forgivable loan" is a " “golden handcuff" (Dean Farnsworth's words) where the recipient is induced to stay at the university because they get a large amount of cash up front as a loan and for each year the person stays at the university, part of the loan is forgiven and/or they are paid deferable compensation that can be used to pay the loan (options for your tax needs! nice!). 

Because - as every good lawprof knows - a six-figure salary, tenure, and one the world's cushiest jobs in one of the country's trendiest mid-sized cities simply isn't enough to keep law professors from jumping to lucrative partnerships at Baker Botts doing oil law. 

Now, law foundations have been around for decades to help support needy law schools, but Texas took it to whole new heights of near-secret compensation. As the article quotes Dean Farnsworth, "'It’s a common recruiting tool.'"

What the good dean isn't telling you is that Texas did it bigger and better than almost everyone else.

Reviewing Guidestar reports, one learns the following:

-That in 2010, William & Mary, the nation''s oldest law school, had a foundation with 35M in assets, 2-3M in annual income, and expenses of a whopping 55k that went to help law professors do their thing while the majority of expenses went towards direct support of the school itself.

-That in 2010, Virginia's law foundation, possibly the nation's largest, had revenue of 22M with expenditures around 13M. But, while being large enough to pay five six-figure salaries to its own staff to manage 357M in assets (50+M investment income in 2010), they did not list a single dime in Part IX as a grant to an individual.

-That no other public law school that I reviewed (incld. Washington, Iowa, and Alabama) even came close to matching the almost $867k Texas' foundation spent on its "faculty retention program" and the $859k it spent on "faculty salaries support." The difference is your guess as good as mine. That's over 1.7M that I'm pretty sure when straight into LawPockets directly from the foundation. (How do you "support" a salary, anyway? Give it a cot and some coffee? Tell it you love it no matter where it's spent?) Note also that they list these as programs under "other expenses" instead of in line 2 - "grants and assistance to individuals." That's some very subtle - and impressive - work. As a 501(c)(3) organization, the foundation can't be distributing its earnings for the inurement of private individuals. See, e.g., John Marshall Law School v. U.S., 228 Ct. Cl. 902 (1981)(interest-free, unsecured loans to founder of unaccredited law school a no-no). You list it as a "program" so that it's not even an issue where someone can claim Sager is a relevant "private individual." Brilliant!

At this point, I'd like to reiterate something else in the article:

The report by Barry Burgdorf, the system’s vice chancellor and general counsel, recommended that no compensation flow directly from the foundation to faculty members, even though that practice broke no laws.

Emphasis added. I agree, and nothing herein should be construed as alleging that the law school foundation violated any law, treaty, regulation, ordinance, etc. I mean, sure, according to the Foundation's IRS form, Larry Sager was directly compensated $106k in 2010 as an "independent contractor" of the Foundation who advised them where money should be spent. Sure, paying excessive compensation to an individual - like 100k to an independent contractor for doing the same thing he does in his ordinary day job - is also a no-no under 501(c)(3) rules. 

But the trustees, all prestigious men and women of superior life achievement and rank and wealth, clearly thought it necessary to compensate Mr. Sager with a little "bump" over his meager salary from the school. And who are we - or the IRS - to judge them? There's nothing to see here, friends, but the law business in all of its ethical, law-abiding, society-enriching glory.

I say "GO TEXAS." While others placed their overpayments to deans and lawprofs on the books in public tax filings or in other public records maintained by state systems, Texas used its law foundation to put a little somethin' somethin' more into the academians' pockets all while the pesky state legislature froze salaries and wanted the law school to cut back. That's praise-worthy, and all the other law deans are jealous that they couldn't get their foundations to pull that off, too.


I am, however, saddened at how this all came to light in the first place:

[N]o interviews [by the AG's office] were conducted with faculty members, whose open-records request brought Sager’s loan to light in December 2011. Some faculty members were upset to learn not only about his loan but also that some of their colleagues had received six-figure loans.

Tsk tsk tsk, JealousProfs. Don't kill the golden goose just because you didn't wake up in time for Sunday morning eggs! Wake up and get yourself a seat at the table! Did no one on the faculty step up to enforce the RULE of LAW after prior faculty departures?!

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