The financial reporting submitted to the Kentucky State University Board of Regents and the state Council on Postsecondary Education (CPE) was inaccurate and inadequate, according to a report from the CPE presented at the board’s meeting on Tuesday.
$23 million is the number that the board approved the university to ask for from the state in order to make up for a projected budget shortfall of the same amount. That number adds up a $15.7 million shortfall in this fiscal year due to prior year deficits and adds a projected additional $7 million this year due to a cashflow imbalance. The school will also request another $1 million per year from 2022-24 for strategic initiatives.
The amounts will be added to KSU’s regular state allocation, which is slated to be $27,186,100 this fiscal year. The school's operating budget for the fiscal year is just under $50 million.
Half of the six-hour meeting was spent in closed session.
Items discussed in closed session included personnel matters, Request for Proposals (RFP) selection and pending litigation.
Coming out of closed session, the board swiftly voted to “authorize the KSU staff to complete the process that was outlined in the RFP for the executive search firm and to give KSU staff the opportunity and authorization to make the contract award.”
According to documents received from a KSU spokesperson, the RFP was issued on Sep. 9 and bids were received on Sep. 30.
Further, the board approved the basic composition structure of the search committee for the school’s new president. The chair will be CPE Vice President and General Counsel Travis Powell; the committee is rounded out by two KSU students, two KSU faculty members, two KSU staff members, two alumni and two community members from Frankfort — one will be an area K-12 educator and another is an “at-large” community member.
Inadequate and inaccurate
A majority of the board’s open session was taken up by a presentation from Powell, during which he detailed the school’s already well-documented poor financial situation. However, Powell also added insight into what rosier financial figures were reported by the administration versus what figures represented the reality.
Staffers were also directed not to talk about financial issues, he said.
Central to representation versus reality was the school’s reported Composite Financial Index (CFI). The figure, which takes into account several financial markers, presented has varied significantly from what the score actually was according to CPE calculations.
“The scores were very different and painted a much better picture than what we’re seeing now,” Thompson said.
Regent Paul Harnice emphasized that he believed former president M. Christopher Brown II and former chief financial officer Doug Allen had prepared the CFI numbers and submitted them to the board and CPE.
Allen did not comment by press time, but Brown said that all financial reports originally came from the school’s finance division.
“A president, board, and campus stakeholders rely on the reports received for accuracy and sufficiency,” Brown wrote in an email to the State Journal following the meeting. “Additionally, campus finances are reviewed annually by an independent external audit firm whose written report is approved by the governing audit committee and the full board.
“As president, I never submitted financial documents to the Board office. In my role as secretary to the Board, I only assembled the documents submitted to (the regents) for their review and action.”
The former president also said that he was “not familiar” with CPE staff requesting information that backed up the school’s CFI at the time. He indicated that the request likely would have been made to Allen.
Allen is now CFO of Tennessee State University, a much larger historically Black institution in Nashville.
Brown emphasized that an external audit — for all of his tenure, KSU used Crowe LLP — took place, which is meant to review the financial health of the school. None of the annual audits performed under Brown explicitly reported major red flags in the school’s finances, and the university heralded the latest audit as “positive.”
Powell said that by then, starting in 2019, the school’s “liquidity crisis” was underway.
A major conclusion at the meeting, with which Brown had previously agreed in response to questions about $73,000 of expenses billed to his credit card over two years, was that more financial controls need to be in place. That includes CPE’s oversight of KSU’s reported financial numbers and KSU being able to check itself.
Powell called the school’s internal auditing function “non-existent,” with only one full-time employee.
“Inadequate budgetary control, inadequate internal and external financial reporting, inadequate internal audit function, not following policies, picking and choosing which vendors to pay and waiting until the next period to make payments, using lines of credits to cover things — eventually, that's going to catch up with you,” Powell said. “And that's just quite simply poor leadership in that area.”
Staffers were barred from speaking on issues regarding the budget and attending board meetings, Powell added.
“From the current staff’s perspective, there were issues and the policies were in place were in many incidents just not followed,” he said. “Staff were told not to talk about budget issues and were told not to attend the public board meetings.”
When asked who directed staff not to talk about budget issues or attend meetings, CPE spokesperson Sue Patrick said that the final report with more information is to come on Nov. 5.
“There will be more detail in the report that might answer your question,” Patrick said.
Most of KSU’s financial issues mentioned in Powell’s presentation had been reported either by Thompson, KSU staff or media heretofore, but the presentation was the most comprehensive overview of the problem thus far.
It included an overview of the school’s dramatically depleted cash on hand, its ratio of reserves to expenses, how instruction spending lagged while administrative spending ballooned and how the school’s improving pension obligation “masked” some of these issues.
The “key takeaways” from the presentation were that KSU’s “current structural deficit is unsustainable,” that poor leadership caused inadequate controls and reporting and that KSU compares “favorably” to its peer institutions in revenue from outside sources.
Regents, Thompson sound off
The board of regents struck a familiar tone on Tuesday in reasserting their lack of knowledge about the true nature of the school’s finances. This time, however, they went harder on the school’s former “leadership,” with some particularly referencing Brown and Allen.
The board’s knowledge of those issues was central to the testimony of former administrative assistant and staff regent Chandee Felder, who was fired shortly after talking to both The State Journal and members of the campus about it. Felder is now suing the school for wrongful termination claiming that she was protected by the state whistleblower law.
Board Chair Elaine Farris said that the problem was that the board, CPE and others were given “misrepresentative, inadequate” information that hid the true financial health of the school.
“When you have leadership that (does) not comply, it doesn't matter how many policies you have in place, or how many times you have them revised, adopted or modified,” Farris said. “The disappointment from this board is that we had leadership in place that chose to not follow and to give the board misrepresentative, inadequate financial information.”
She also stressed that she believes that the characterization of “poor leadership” leading to the school’s financial position does not include the board of which she has been chair since 2017.
“The one comment that Travis (Powell) made in his takeaway is ‘poor leadership over financial management,’” Farris said. “And when we think ‘poor leadership,’ I'm sure Travis does not mean that it’s the board of regents. It’s the staff and the finance office.”
Powell said that yes, he was primarily referring to staff leadership over the finances.
Thompson also reiterated the variance between what was reported and what was the reality.
“In 2018-19, 2019-20 it was a precipitous drop off, which is hugely problematic,” Thompson said. “But it was reported to us that you all were in financially healthy shape. You were not only not in financially healthy shape, you were exactly the opposite of that.”
Near the end, he also lauded increases made in the area of student success under Brown and forwarded ideas for future growth at KSU, including adult education, teaching education and more robust government affairs education.