UPDATED and CORRECTED: UCA Moves to Correct Illegal Borrowing

by Mark Hengel and Gwen Moritz  on Friday, Oct. 10, 2008 11:04 am  

Jim Purcell, director of the state Department of Higher Education, says he informed UCA that state law required any line of credit had to have prior approval from both DHE and the state Department of Finance & Administration.

The University of Central Arkansas has borrowed money for the past two years in violation of state law. On Friday, its board of trustees brought the institution's cash-flow problems into compliance by requesting an advance of $3.6 million from the state Department of Finance & Administration and requesting formal approval for an existing $6 million bank line of credit.

An earlier version of this story said the line of credit was secret, but Former UCA President Lu Hardin said the line of credit was voted on in public and was reported in newspapers. An earlier version also said that UCA would seek a line of credit of $5.5 million from the Arkansas Department of Higher Education; however, DHE would only approve the private line of credit, which is actually $6 million.

Jim Purcell, director of the Department of Higher Education, told ArkansasBusiness.com that UCA officials - specifically disgraced former President Lu Hardin and his executive assistant, Vice President Barbara Anderson - told him during the summer that UCA had a line of credit with a bank but had not used it.

At that point, Purcell said, DHE informed UCA that state law required any line of credit had to have prior approval from both DHE and DF&A. Only within the past two weeks did DHE become aware that UCA had in fact been using the line of credit for two years.

"I think they definitely weren't wanting to tell anyone," Purcell said of UCA's borrowing. A report that will be released at Tuesday's regular meeting of the Arkansas Higher Education Coordinating Board will show that UCA's negative expendable reserve as of June 30 was $5.43 million.

Hardin, though, said Purcell was "absolutely, 100 percent incorrect" in his recollection of the conversations. He said he, Anderson and Paul McLendon, who announced this week his retirement as vice president for financial services, told Purcell that nothing was owed on the line of credit. But he said it would have been "ludicrous" for UCA to deny using the credit.

UCA's line of credit is with National Bank of Arkansas of North Little Rock and still has a zero balance. It carries an interest rate of about 4.5 percent.

The UCA trustees met in a special session Friday and voted to seek $3.6 million from DF&A, an advance on state funding that would otherwise be transferred to the school at the end of the current fiscal year in June. That amount, $3.6 million, is the most a university can borrow from the state, by law.

The university will receive $54 million from the state this fiscal year, McLendon said, and the biggest portions - about 20 percent - come in May and June. Of that total, $44.5 million are classified as Class A funds, or funds that are guaranteed by the state to cover necessary expenses such as salaries. The remainder - $9.5 million - are Class B funds, which is classified as growth money. The $9.5 million is only a little over half what the university originally believed it would receive, McLendon said.

Rush Harding III, vice chairman of the UCA trustees, told ArkansasBusiness.com on Thursday evening that external forces, including a freeze on assets held in a common fund by Wachovia Corp., had depleted UCA's reserves. The university currently has about $3.6 million in The Common Fund, which is administered by Wachovia. The Common Fund handles money for more than 1,000 institutions of higher learning in the nation. UCA had $5.9 million in The Common Fund, which has refunded 40 percent.

Other factors included $1.5 million paid for a court verdict that was above the school's insurance limit and the purchase of property near campus, Harding said. And Purcell added to it the budget cuts for fiscal 2009 that were ordered by Gov. Mike Beebe in anticipation of a dropoff in state revenue that hasn't happened.

But none of those factors should have left UCA in the hole, Purcell said.

"UCA got a pretty good cut when we did the budget cuts this year, so that will have some impact. But, again, that's why you want to have a fund balance of 10 to 15 percent, so that when the state does a slight budget cut, you can handle that," Purcell said.

On UCA's $123 million annual budget, an ideal fund balance would be $12 million to $18 million, Purcell said, although such a large institution could be comfortable with reserves on the low end of that range. And that balance need not be liquid; it can include receivables.

UCA grew rapidly during the six years that Hardin was its president before resigning last month after a scandal involving behind-closed-doors bonuses and misleading documents to support the payments. Hardin was granted a severance package of more than $700,000, but Rush Harding said that did not contribute UCA's cash-flow problems.

"This situation has not been impacted - not one penny - by President Hardin's situation," Harding said.

On Friday, Harding continued to praise Hardin's skill in raising the profile of UCA, but he conceded that his permanent replacement needs to do things differently.

"Lu could shake and bake and make things happen, and a rainmaker like Lu wasn't as focused on the minutiae as he should have been," said Harding, who said the trustees didn't realize that lines of credit had to first get state approval.



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