Chronicle XV: An Incredible Response from the SSUAF Executive Committee
December 10, 2009
The SSU Academic Foundation came under intense scrutiny recently regarding $9.6 million in
loans to now bankrupt local real-estate magnate Clem Carinalli. Between 1994 and 2007, the
Foundation entered into numerous loan agreements with Mr. Carinalli, the first finalized just two
days after he resigned from the Foundation Board of Directors.
When Carinalli stopped making payments to creditors on his $200 million debt this June, he had
two outstanding obligations to the Foundation: a $1.25 million loan on 10-acres of vacant rural
land near Windsor and an unsecured $232,500 loan. The present controversy centers on the
smaller loan that Carinalli paid within 90 days of filing bankruptcy and that will probably need to
be repaid. Foundation executives stated on numerous occasions that the loans were secured,
although legal documents showed that one was not. Established chronologies make it clear
SSU’s President and CFO made potentially misleading statements to the press (Press Democrat
11-13-09).
Calling Foundation officials “sloppy and unprofessional at best,” the Press Democrat (11-16-09)
challenged the University to “offer a complete public accounting of what transpired” regarding
all of the $9.6 million in Carinalli loans. Faculty members demanded clarity, some called for
resignations, others for a second vote of no confidence in the President and CFO. President
Arminana and CFO Furukawa-Schlereth declined all requests for comment, eliciting a response
of “absolutely outrageous” from State Senator Leland Yee.
The Foundation Board questioned its own ability to manage First Trust Deeds around the time of
the Carinalli problem. In March 2005, the SSU CFO and Foundation Finance Committee brought
up phasing out First Deeds of Trust because “it was determined that the SSUAF needed
additional staff with said expertise,” recommending that these loans be replaced with other types
of investments. Several Board members spoke to the contrary and “President Arminana
requested that the Finance Committee review the policy again with consideration given to the
comments made by the Board Members.” At the next meeting, SSU’s CFO stated: “the Finance
Committee discussed the matter at length, and they plan to continue the investments in 1st Trust
deeds.”
The SSU Foundation Executive Committee recently (11-20-09) issued a statement regarding the
Carnialli loans that generates more questions than it answers and makes it perfectly clear that
there will be no further responses to media requests on this matter.
1. Foundation executives provided their chronology for the $232,500 loan, which began as a
secured $732,500 agreement in 1997. Carinalli repaid $500,000 in January 2005, requested and
received a lower interest rate and extended term in 2007. In June 2009, Carinalli stopped
making payments to creditors and the Foundation commissioned a title search that found the
loan unsecured. When contacted by the Foundation with this information on July 8, 2009,
Carinalli responded that it must be an error in County records and fully repaid the loan the next
day. Foundation officials “believed” Mr. Carinalli since they had been “unable to locate any
documents indicating that it had authorized the release of all parcels securing the loan.”
Let's see if we understand this. Apparently, Foundation executives believed Mr. Carinalli rather
than Official County Records and didn’t think this wrinkle worth mentioning in their official
remarks or in the 3-hour interview with the Press Democrat. They chose to service all
Foundation mortgages through Sonoma Mortgage & Investment Company, a company owned by
Carinalli, and didn’t see a potential problem. They allowed Carinalli to pick his own appraiser
for the $1.25 million Windsor loan; the co-author of this appraisal lost her license for forging
documents. They didn’t notice that the appraisal used figures for land within the Windsor town
limits zoned commercial and urban residential, while the subject property was unincorporated
and zoned rural residential and agricultural (Press Democrat 11-3-09).
2. In their response, Foundation executives stressed that the Carinalli loans provided good
investments until the recent “unprecedented economic downturn” and have “reflected unfairly
and negatively on the Foundation.”
This raises some very important questions. Isn’t the goal of an endowment to make safe and
secure investments that provide stable income to programs in good and bad years? Now the
Foundation has nearly $1.5 million in donated funds that at best will provide zero return for the
next few years and at worst are lost forever. How will the Foundation pay the Charitable
Remainder Trust recipients whose income depends upon this money? The executives state that
the Foundation may need to take a loan to repay the $232,500 to the Bankruptcy Court. What has
happened to the money? Has it been spent? Didn’t they realize that it was a gift that would
probably need to be returned? And what about the Foundation losses in the stock market? Did
they really think an allocation planning model called the “Monte Carlo Simulation” was a good
idea? That they weren’t just gambling with other people’s money? The $1.5 million in bad
Carinalli loans pales in relation to the Foundation's $8.2 million investment loss for 08-09.
3. Foundation executives continue in their response: “The Foundation has not and is not able to
respond to media requests for further information in this matter because it is the subject of
bankruptcy litigation and because the Foundation cannot engage in speculation.”
As their lawyer must surely have told them, bankruptcy has no confidentiality requirements;
everything is public unless a judge determines otherwise. Are the executives actually concerned
that some of what may become public will not reflect well on the Foundation? So far, that
appears to be the case. While SSU’s legal counsel may have told them not to comment to avoid
future legal proceedings against the Foundation, there is nothing in the law to prevent them from
discussing the matter. The executives are generally happy to speculate when things are going
well.
4. Foundation executives are honest and ethical: “We are committed to being as transparent as
we are legally able,” they write.
The law, in fact, allows the Foundation to maintain secrecy. While public universities are
required to be open with the public, foundations as privately funded organizations are not. This
apparently is why Foundation executives, who are SSU employees, are “technically volunteering
their time when they run the Foundation. ” How does this work? Do they each take part of the
nearly $900,000 in their total salaries as a tax deduction working nights and weekends? Isn’t it
the University that is donating their time to the Foundation—time which is paid for by
taxpayers? As Foundation has no employees, taxpayers also pay SSU’s Development department
to undertake fundraising, accountants to count and managers to spend the money in ways that
have less and less to do with student learning—like fine art and lawn for the GMC. Aren’t they
really saying that they will be transparent only when they can’t avoid it?
5. Foundation executives pledge to be “ethical stewards of funds donated to our academic and
student programs.”
Haven’t the Foundation executives suspended endowment distributions because of the $10
million in losses, including the Carinalli loans? While Foundation investments may have had
their good years, their payouts to non-GMC endowment funds have been miserable. In good and
bad years, the most money goes to discretionary use by the President (who is also the Foundation
Chairman), to debt service, and to fundraising for the GMC. Isn’t the Foundation just a veiled
savings and checking account for expensive ambitions like the GMC that detract from SSU’s
educational mission and sour our relationship to the community? Really, isn’t it time for a
change?
Questions:
The aftermath of the stock-market downturn of 2008 and the Carinalli loans will not be felt by
scholarships until Fall 2010. What is the projection for the distribution in September 2010?
Within days of the Press Democrat report that Carinalli had stopped making payments on his
real estate loans, the Foundation revised its Investment Policy. The revisions provided greater
leeway in how the funds can be invested and made the Foundation Board “ultimately responsible
for the investments.” They also added a new section titled “other factors on spending” to permit
the Foundation “to spend as much of the Pooled Endowment—including principal or income, …-as the institution deems prudent.” Does SSU intend to spend Endowment principal during the
current financial crisis? What personal risks do individual Board members face related to
Foundation investment losses?
Charitable Remainder Trusts allow donors “to transfer assets…into a trust that provides … a
fixed percentage income. When the trust terminates, the remaining principal reverts to Sonoma
State University.” When the Foundation rewrote its Investment Policy in June, they changed
their responsibility related to these trusts, deleting the phrase “for the sole benefit of
beneficiaries.” In light of this and the publicized Foundation losses, it is unlikely that new donors
will select this option. However, in the meantime, the Trust’s liability in 07-08 was over
$600,000. Given the loss of $1.25M in principal and over $100,000 in interest, how will the
Foundation make the promised payments to CRT beneficiaries?
What are the impacts of the lost revenue to the Foundation from investments of over $9M and
from the Carinalli’s loan default in terms of (1) student scholarships and programs and (2)
charitable remainder trust payouts?
Since one of the explicit purposes of the Foundation is to manage funds earmarked for the GMC,
will the university provide a detailed accounting of all expenditures made thus far on the GMC
including staff time and the sources of revenue that funded these expenditures?
Why are the pre-2002 Foundation Board minutes not posted on the A & F Website while the
PBAC and Campus Reengineering Minutes go back to 1990?