University of Montana Foundation Invests in Offshore Tax Havens

By Jitze Couperus [CC BY 2.0], via Wikimedia Commons

May 14, 2018; Montana Kaiman

There is a magnifying glass trained on foundations, and it is not just to see who gets their grants and why; nonprofits and others want to know how its money is invested. If a foundation is following generally accepted accounting principles, investing practices, and risk levels, should they allow the general public to influence them? Who are the foundation’s stakeholders, and how do they weigh in?

The Cayman Islands—the name conjures up a hidden grotto of great piles of money and nefarious fiscal doings in a tropical setting. Having an account in the Cayman Islands is legal. But whether a nonprofit should invest in offshore accounts is a matter for their board to consider, which requires examining both issues of risk, and mission alignment.

This should be understood when analyzing the University of Montana Foundation.

The University of Montana Foundation, with an endowment of over $186 million and net assets of $202 million, is the support foundation for the school. Their form 990 for their fiscal year ending June 30, 2016 states they have $30 million invested in Caribbean and Central America assets.

In 2016, 13.4 million files from two firms were leaked. Those leaked files, now known as the Paradise Papers, have been analyzed by over 100 media organizations, including with the Montana-Kaiman and the International Consortium of Investigative Journalists. The papers revealed how many companies had offshore investments.

Jane Gravelle, a senior specialist in economic policy for the Congressional Research Service at the Library of Congress, said, “It’s just a way to avoid taxes.” She added, “There’s nothing in the Cayman Islands, for example, except a bunch of tourists and a couple of buildings with filing cabinets. Some of these offshore companies are nothing more than a file folder.” The hedge-fund market is a $1.3 trillion industry. Pension funds, endowments, and tax-exempt foundations represent about $250 billion of that industry. The investments are known as “alternatives.”

The media review has revealed that $5 million of the University of Montana Foundation offshore investment was in Coller International Partners V, which supports deep-sea drilling for oil and similar fossil fuel explorations. There were subsequent investments in Gazprom, a Kremlin-tied Russian oil company, and Petrobras, a Brazilian company riddled with enough scandal to bring down two of the country’s presidents. The University of Montana Foundation has also invested in half a dozen other fossil fuel companies and tobacco companies.

Matt Neuman writes in the Montana-Kaiman, “Congressional Research Service examined foundations affiliated with universities and applicable tax policies [and] found that in the 15-year period from 2002 to 2017, universities more than doubled their investments in alternatives, from 20 percent to 52 percent of their portfolios.”

Universities are taking greater risks with their endowments, according to Thomas Gilbert, a finance and economics professor at the University of Washington.

Stocks are risky, but not as risky as these alternatives. But more importantly, these alternatives are illiquid, which means the money is totally locked up. The foundation can’t call up a hedge fund manager and say, “We need the money.” This is a very dangerous game because there is going to be another financial crash at some point and the university will need the cash and it won’t be there.

There are a couple of other issues: the alternative funds are often structured as partnerships and involve borrowed funds, which exposes the foundations to Unrelated Business Income Tax (UBIT), unlike stocks and bonds.

And of course, as the nature of these investments makes clear, in addition to questions about the use of hedge funds, the school is investing heavily in fossil fuels, at a time when, as NPQ has reported,  there is a national “divest/reinvest” movement that is encouraging foundations and universities to shift their investments out of fossil fuels and into renewable energy resources.

The University of Montana Foundation has a history of keeping information tight to the chest, particularly about their donors. It has a contract with the university that permits the foundation to block public records requests while they seek a protective order. That begs the question, what is the foundation hiding? Mike Meloy, attorney and former state legislator, believes that the state transparency rules apply to the foundation, and the effort to protect donors’ privacy creates a cover of secrecy that is unconstitutional. He says,

The foundation bills itself as the development arm of the University of Montana, and because it functions in that capacity, to say its records are not open to public disclosure is not only a bad idea from a policy standpoint, it arguably violates the right-to-know in Montana’s constitution.

The Paradise Papers review has revealed the University of Montana Foundation’s investments to the student body. University of Montana students have worked for the past three years to have input in the foundation. They approached the foundation’s board this past winter, and the president in March, requesting that the board consider divesting from fossil fuel and investing in things such as sustainable product funds. In a letter to the students, the board, in effect, said no, because “the Board’s policy is to invest based on maximized risk-adjusted return, not on social or political impact.”

The students desired a seat on the board, which is independent of the university. After a year of negotiating and threatened lawsuit, a student was appointed as a liaison, but without a true seat or voting rights.

If the mission statement states that the independent support foundation will support the school and the students, is there a necessity to divest itself of tobacco or fossil fuels? The university has made a commitment to the environment and sustainability, but the foundation is a separate organization. The Harvard Corporation and other school fundraising arms have been grappling with this question for several years. The student divestment organization, Reinvest Montana, thinks the foundation should follow the school’s lead, and the school should also be more aggressive in following the commitment.

How much input do all the stakeholders have when it comes to investment policies in a foundation?

The next U of M Foundation board meeting is next week, and the investment policies will be discussed.—Marian Conway