Bruce Murphy, the editor of Milwaukee Magazine, always has some good tidbits in his weekly Murphy’s Law column. This week, Murphy really delivered the goods. See, Bruce Murphy, A Smelly Project Benefits UWM and Jim Doyle, Milwaukee Magazine Web site, Oct. 24, 2006. Murphy reports that the University of Wisconsin Milwaukee (UWM) formed a separate entity to construct off-campus housing for freshman students. By using this separate entity, UWM, a state school, is apparently able to avoid...
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competitive bidding requirements that would be applicable if the facility were built directly by the University of Wisconsin Milwaukee (UWM). Murphy further reports that several business organizations involved in the construction of the new dorm project contributed to Governor Doyle’s campaign (we assume Murphy means people employed by or associated with these business organizations made the contributions).
Allegations that contributors to Governor Doyle’s campaign were rewarded with a contract are nothing new. The Milwaukee Journal-Sentinel has previously reported on an incident involving UWM’s Kenilworth building project, according to Murphy. See, Patrick Marley, Lawsuit Over UWM Building Tossed Out: Developer Says Doyle Aide Acted Improperly, Milwaukee Journal-Sentinel, Sept. 21, 2006; Cary Spivak and Dan Bice, In Bid Battle, Players Sought Out Marotta, Milwaukee Journal-Sentinel, July 2, 2006; and Cary Spivak and Dan Bice, Marotta Intervened in UWM Project Bidding Process, Lawsuit Contends, Milwaukee Journal-Sentinel, June 25, 2006.
Murphy is not the only one who is concerned about what appear to us to be the typical incestuous relationships that are often the hallmark of state and local politics. On June 8, 2006, UW System News posted an article discussing the University of Wisconsin System Board of Regents June Meeting on its Web site. Toward the bottom of that summary is a discussion of the legal structure behind the freshman dorm project. The summary indicates that a member of the UW System Board of Regents is also troubled, reporting:
This method of financing operates outside the jurisdiction of the UW System Board of Regents, and Regent Gerard Randall of Milwaukee voiced concerns regarding the integrity of the UWM Foundation, transparency of contractor selection, and accountability.
"Since this is under the purview of the chancellor, it's critical that the chancellor is ultimately held accountable," Randall said.
It turns out the entity that will own the residence hall is the “UWM Real Estate Foundation, an independent 501(c)3 of the UWM Foundation.” This statement muddies the waters as to who actually formed the UWM Real Estate Foundation. Was it UWM, the UWM Foundation, or persons affiliated with those entities? It seems relatively clear that there is a close connection.
UWM, through the Auxiliary Services' department of university housing, will manage the dorm, accordiing to UW System News. We had half expected to see a Section 501(c)(2) title holding company as the entity, but the (c)(3) status of the entity makes for far more interesting speculation and comes as no surprise once you realize the project is to be financed with tax-exempt bonds. The UWM Real Estate Foundation appears to be of relatively recent vintage because no Form 990s are available for it on GuideStar. The IRS does list it as a public charity in Publication 78.
Connecting the dots is always difficult in these situations because only the truly dumb ever say “I’ll give you campaign money if you get me lucrative contracts” But there is another dot in what could turn out to be a circle. According to the University of Wisconsin System Web site:
The University of Wisconsin System is governed by the Board of Regents, an 18-member board, as established under Chapter 36 of the Wisconsin State Statutes. The Governor of Wisconsin appoints Board members to seven-year terms, except the two student regents who are appointed to two-year terms.
We have to give credit to everyone involved, this is a clever arrangement. That is not just our assessment. The June 8, 2006 article on the UW System Web site describes it as follows:
A "creative solution" is on track to provide a new residence hall for the University of Wisconsin-Milwaukee in ten months, according to a presentation to the Business, Finance and Audit Committee and the Physical Planning and Funding Committee.
Sherwood Wilson, UWM vice chancellor of administrative affairs, said the construction timeline for North Avenue Freshmen Housing, to be located at the intersection of E. North Ave. and N. Commerce St., was compared to the traditional model for new construction at the university, which takes several years.
The key is a partnership between the UWM Real Estate Foundation, a private, non-profit entity and the university.
Whether Governor Doyle has found an indirect way to reward campaign contributors is something we leave to the voters of Wisconsin and those charged with enforcing Wisconsin laws. There is no direct evidence of any wrongdoing, just a very creative solution that centers on the use of a tax-exempt entity to avoid various state procurement and other administrative requirements that would be applicable were this a public project.
As our very own Jack B. Siegel so adeptly demonstrates in his article, The Wild, the Innocent, and the K Street Shuffle: The Tax System’s Role in Policing Interactions Between Charities and Politicians, 54 Exempt Organization Tax Review__(November 2006), scheduled for publication during the first week of November, the Federal tax system has something to say about how tax-exempt entities are used by politicians, their supporters, and others close to the political process. Siegel identifies three categories of abuse: (i) buying access; (ii) new patronage; and (iii) soft landings. The pattern exhibited by the use of the UWM Real Estate Foundation makes it a potential candidate for Category II classification. As Siegel points out, Category II abuses are the hardest for the tax system to police because there is rarely clear linkage between the parties.
Nevertheless, our friends at the IRS might want to take a close look at the UWM Real Estate Foundation to determine whether its operation violates the requirement in Treasury Regulation Section 1.501(c)(3)-1(d)(1)(ii) that a Section 501(c)(3) entity must be organized and operated for “public rather than private interests.” This project apparently could have been undertaken directly by the UW System, but a tax-exempt entity was used to “eliminate[] cumbersome and costly state processes, accelerate[] procurement, and utlize[] double tax-exempt financing.” If one of the reasons that this was done was to permit Governor Doyle (or those friendly to him) to reward campaign contributors, there may be more than incidental private benefit. If that were the case, the tax-exempt bonds might lose their status as such. Moreover, depending on the structure of property tax exemptions under Wisconsin law, the project might lose the benefit of any property tax exemption predicated on Section 501(c)(3) status. We would like to know whether the UWM Real Estate Foundation took bids, and if so, how that process differed from what was required by state law.
Siegel's article notes that there are a number of creative ways that politicians are using tax-exempt organizations to their advantage. Siegel believes federal tax law has a role to play in addressing what he views as misuses of exempt entities by those operating in the political realm, but ultimately, these misuses are best addressed by politicians who are willing to adopt stringent laws addressing disclosure, procurement, and conflicts of interest. He notes, however, that this is equivalent to asking the fox to electrify the fences surrounding the hen house.
Murphy's article holds one other tidbit for you corporate governance fanatics out there. Murphy reports that construction has begun on the project despite the fact that certain approvals have not yet been obtained from the Federal government and apparently from the Wisconsin Department of Natural Resources. When Murphy asked Tim Blotz, who handled the issue for the DNR, Blotz told Murphy that he warned project officials that without the needed approval, the UW Real Estate Foundation might have to tear down the building. "That was the risk they took," Blotz told Murphy. So did the directors of the UW Real Estate Foundation discharge their duty of care (assuming Wisconsin law imposes a duty of care) by knowingly starting construciton without the necessary approvals? "No harm, no foul," if they get the approvals. If they don't, well the Wisconsin attorney general doesn't believe she has authority to investigate or sanction directors of Wisconsin nonprofit corporations for breaching their duties, or so we have been told.
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