Here's What Legislators Are Investigating With Regard To UND's REAC Building

Yesterday news broke that the legislature would be investigating the sale of the REAC building from the UND Research Foundation to the University of North Dakota. I spent some time yesterday talking with legislative friends, including some member of the legislature’s interim Government Finance Committee, chaired by Rep. Jeff Delzer, to find out what it’s all about.

Here’s what I found out, in addition to the fact that state Senator Ray Holmberg (R-Grand Forks), who is heading up Legislative Management in the interim and asked for the investigation, is “livid.”

Board of Higher Education Didn’t Follow Legislative Intent

Many legislators don’t feel like the State Board of Higher Education followed legislative intent when the REAC building was sold from the UND Research Foundation to the University of North Dakota. The legislature authorized the purchase with the deal to be negotiated by the State Board of Higher Education. Since the UND Research Foundation is managed by UND employees (including UND President Robert Kelly) the legislature thought a sale from the foundation to UND would be a bit too much like UND negotiating with itself. While Chancellor Larry Skogen signed off on the deal, legislators say they don’t see where the SBHE was involved in the transaction in any meaningful way.

“They [UND] now have a…’bailout’ which the board [of higher education] had nothing to do with,” one legislator told me.

UND Controls Research Foundation

The “UND Research Foundation has been under the 60%  control of UND administrators since 2010 when they asked the non-UND members to resign,” a UND source writes. “The five-member board from 2010 to 2013 has been Phyllis Johnson, chair, Robert Kelley, vice chair, and Alice Brekke, treasurer, plus two outside members,  one who was a paid consultant to Phyllis Johnson.  In 2013 Michael Moore, who works for Phyllis, replaced Alice Brekke, and they added another director, Dave Molmen for a total of six board members.”

Many people tell me, though I haven’t confirmed this, that UND’s control of the UND foundation is problematic under IRS rules which require that a grant-making non-profit not be controlled by the same people receiving grants. If that’s not specifically verboten under the law, it certainly seems unethical.

Bailout

Because legislators view the deal as the University of North Dakota negotiating with a UND-controlled foundation, there’s a feeling that this was a bailout of the foundation. The UND Research Foundation was left with zero debt after the deal, but the taxpayers (through UND) “now owe more than before on a half-empty building,” one legislator said.

UND “chose to write checks on the backs of taxpayers,” said another legislator.

Here’s an estimate of the debt UND took on when it purchased the building:

• $2.5 million in county bonds
• $1 million from the North Dakota Development Fund
• $6.25 million loan from Bremer Bank
• $300,000 in office equipment leases

Total is a little over $10 million in debt.

UND Subsidizing The Building

Some of the financials of the building being reported are a little distorted by UND’s de facto subsidies for the building and the foundation.

“Occupancy has been low, but occupancy is reported higher since UND has subsidized REAC/UNDRF at over $1 million a year from 2009-13,” a source at UND tells me. “Those payments were credited as rent since UND gave a warranty on renting space to make sure bank and bond debt could be paid when it was built.  However, the building and parking lot have been mostly empty for 5 years, with declining occupancy as the Dorgan earmarks ran out, and tenants moved out.”

Big Taxpayer Dollars Involved

“The Research Enterprise and Commercialization (REAC) building was originally to be a $12 million building, but it went over budget until it became a $18 M building with equipment,” a source at UND wrote to me. “There is still 5,000 square feet of 50,000 unfinished in the northwest corner [of the building]. ”

The REAC building has received a lot of grants from taxpayer coffers:

• $3.5 million from the Centers of Excellence program
• $1.5 million EDA grant
• $500,000 Growth Fund grant from the City of Grand Forks
• $550,000 from Knight Foundation
• $2.65 million from second Centers of Excellence grant

Summary

It looks like the REAC building was slowing moving toward another one of those economic development boondoggles that so often litter the political landscape, but the folks at UND decided to try and save the UND Foundation’s bacon at the expense of the North Dakota taxpayers. Just another shady deal between two branches of the incestuous octopus that is the maze of foundations and public institutions in North Dakota’s university system.

That the State Board of Higher Education, and Chancellor Larry Skogen, signed off on this deal is yet another example of why the status quo in higher ed governance isn’t working. The Board of Higher Education has been cowed by the university presidents who, frankly, wield more political clout than the board does. The chancellor is a former university president who seems to determined to be a rubber stamp for his colleagues.

The taxpayers and students of North Dakota deserve better.