Fiscal Woes Hit Cal Poly Foundation : Education: Nonprofit auxiliary probably cannot meet a $5.6-million loan due in seven years, accounting firm says. Off-campus bookstore has been a losing venture.

A report commissioned by the Cal Poly Pomona Foundation has found extensive financial problems at the university’s nonprofit auxiliary, saying it probably cannot meet a major loan due in seven years unless it refinances and eliminates money-losing ventures.

That might include shutting down an off-campus bookstore that opened eight months ago with little market research or planning and is now more than $166,000 in debt, a figure that widens each month, according to foundation officials and minutes of foundation board meetings.

The foundation raises money for the university, administers grants and operates the university’s cafeteria and bookstores, as well as student apartments known as University Village, which it built in the late 1980s with more than $8 million in long-term loans. It is the payments due on those loans that set off warning bells about the foundation’s finances.

Foundation leaders declined to release the report, but in a recent interview, campus President Bob H. Suzuki and top officials talked about some of the findings.

The report, completed in May by the Los Angeles office of accounting firm Deloitte and Touche, found that the foundation lacks the money to meet a $5.6-million balloon payment for student housing due in 2000 and needs to look into changing a host of many of its financial dealings to regain fiscal health.

The study of foundation finances was commissioned after an earlier report warned in March of dire financial straits. In that report, Ray Knight, the foundation’s former controller, said the foundation could not meet an earlier balloon payment of $2.5 million due in early 1995.

“The ability of the foundation to make (the 1995 balloon payment) and handle other cash requirements is in doubt,” that report stated.

Knight declined to discuss his report.

The Deloitte and Touche report confirms that the foundation is in trouble.

But Suzuki said the new report is less alarmist than Knight’s. It concluded that, although the foundation faces trouble meeting its $5.6-million payment, it has enough money to make the $2.5-million payment in two years. But Patrick Lattore, the foundation’s new executive director, conceded that will mean “seriously going into our reserves.”

In addition to holding annual fund-raising drives for Cal Poly Pomona and running various student service facilities, the foundation operates a conference center called Kellogg West.

Lattore said the foundation expects to post a surplus of several hundred thousand dollars for fiscal 1992-93, which ended June 30.

According to reports contained in board minutes, many of the foundation operations are posting deficits or barely breaking even, including Kellogg West, the off-campus bookstore called Campus Books, University Village and a snack bar called Sound Stage. But others, such as the on-campus bookstore, are doing well.

The foundation has laid off or lost up to 10 of 200 positions and might have to impose more layoffs this fall, said Lattore, who hopes to present cost-cutting recommendations to the board in September.

Meanwhile, he is talking to financial institutions about refinancing the University Village loans, which were obtained under a complex financing agreement through the Student Loan Marketing Assn., also known as Sallie Mae, a private corporation set up by the federal government two decades ago. The 20-year, amortized loan was constructed to be paid off over 10 years with two large balloon payments.

The money to make the balloon payments was slated to come from revenues generated by University Village, which consists of about 400 apartments in two complexes located near campus. Students pay rent to the foundation, which manages the facilities. Once the loan is paid off, IRS regulations require that the foundation transfer title of the apartments to Cal Poly.

Several former and current board members who did not want their names used complained that imprudent management decisions in the past two years have squandered foundation revenues and made financial problems worse.

They cite the off-campus bookstore that opened Jan. 4 in a small shopping center near Cal Poly Pomona with little market research into whether the venture would ever turn a profit. The store competes directly with the university’s on-campus bookstore and sells textbooks, bestsellers, school supplies and memorabilia such as T-shirts emblazoned with the logos of Cal Poly and nearby Mt. San Antonio College.

It was intended to attract the public as well as serve students from Cal Poly and Mt. SAC. But foundation officials admit that the store has not attracted the business they had hoped.

Suzuki said the bookstore was envisioned as a convenient alternative for local students who did not want to drive onto campus, or cope with the scarce campus parking, to buy their books. But the bookstore is within several blocks of Cal Poly, and parking at the site is limited, which some critics say cuts into sales during peak buying times at the beginning of each academic quarter.

Suzuki said he made the decision to go ahead with the bookstore based on recommendations from his top staff because he thought it would exemplify a directive from the chancellor’s office encouraging universities to operate in more creative and entrepreneurial ways.

The president acted quickly, making his decision within two days late last year, after the university learned that a space in a local mini-mall was about to be leased to another bookstore. Suzuki said the time crunch prevented him from taking the matter for a vote before the board, although it was approved by the foundation’s program committee.

The failure to get full board approval angered some board members, who expressed dismay that they had seen no business plan and had doubts that the venture would be profitable.

“I was concerned,” recalled one former board member. “They didn’t pass around any business plan, they never had one. The only information they provided to the board was that they expected to have a $16,000 surplus by the end of June.”

But financial records obtained by The Times indicate the off-campus bookstore goes further into debt each month and has scaled back its hours for the summer. Foundation records show that within four months, the bookstore had lost $66,000; in addition, the bookstore borrowed $100,000 from the on-campus bookstore, which it still owes. Lattore said he is looking into closing the bookstore or having another retailer take over the foundation’s lease.

Suzuki has declined to release any documents on the foundation’s financial dealings, maintaining that the foundation is a private, nonprofit corporation whose dealings are not open to the public.

But the president said the consultants praised the foundation for catching the problems, saying that “usually these problems are not discovered until far later into the game when you have very little flexibility to find solutions. You found this very early on and that’s certainly going to be to your advantage because you have a lot of different options.”

In addition to refinancing and trimming operating costs, Suzuki said the report urged the foundation to consider using contract workers instead of employees wherever possible, which would cut down on the need to pay benefits. The foundation must also set aside about $200,000 a year in pension health funds for retirees, which all nonprofit firms are required to do under a new accounting law, Lattore said.

Additionally, Lattore said the report recommended that the foundation cut its $1 million-a-year development office by half, saying it no longer has the money to support such extensive fund-raising programs on behalf of the university.

It was overly ambitious of the foundation to think it could pay the housing loan off in 10 years, Suzuki said, adding that the officials who set up the loan--and have since left for other jobs--did not foresee the recession, dwindling state funds and declining student enrollment. Before those factors took hold in the 1990s, Suzuki said, the foundation, established in 1966, thrived financially.

“That was the heyday of the ‘80s, and enrollments were growing, business was good,” Suzuki said. “There was a lot of revenue being generated by the foundation and so they were optimistic.”

But former foundation officials contest that explanation. They say that money was set aside each year to make the balloon payments on the 10-year schedule and that there should be plenty of money in the coffers.

“When I left, in November of last year, we were ahead of the plan,” said Mark McCambridge, the foundation’s former executive director. “University Village was supposed to use its own surplus to pay off the balloon payments.” Minutes of board meetings in the spring indicate that foundation officials were planning to look into why campus housing was not faring as well financially this year.

News of the foundation’s financial problems has surfaced amid a continuing probe by the California State University chancellor’s office into allegations that Suzuki ordered the hiring of a friend who spent thousands of dollars promoting the university in Asia with few tangible returns.

Suzuki has said the hiring of Henry Whang was not his idea, but that of the dean of continuing education. He also said the program did well considering how short a time Whang worked for the university.