Politics & Government

UNC board's new approach is all business, and that can create an uneasy mix at universities

UNC Board of Governors Chairman Harry Smith, a Greenville businessman.
UNC Board of Governors Chairman Harry Smith, a Greenville businessman. jwall@newsobserver.com

UNC Board of Governors members have brought their business backgrounds to the negotiating table at UNC campuses — advocating for new financial mechanisms, real estate deals and partnerships with private companies.

The close involvement by several board members has produced some wins, but it also has blurred the lines between management and oversight and raised questions about potential conflicts of interest. It's a departure from past UNC boards that largely left such details to UNC presidents, chancellors and their administrators.

At the center is Harry Smith, a successful Greenville businessman and East Carolina University graduate who is expected to be elected the board's new chairman next week.

Smith, 48, made a fortune with an air filter company that was sold four years ago. He holds stakes in several other companies and co-owns two apartment complexes that cater to college students in Georgia and Greensboro.

Smith has said he wants to make the university system "quicker, smarter, faster and better." He plans to unveil more detailed goals next week, he said, around the themes of efficiency, renovation and collaboration with community colleges. Smith has emphasized keeping student costs down in a state where the median income is about $50,000.

"It's going to be totally different than anything you've seen in how the UNC system operates," he said in a recent interview, adding, "I just want to do some really good work."

Smith joined the board in 2013. In the past couple of years, he has been involved in a merger between ECU's physician practice plan and Vidant, in a financial turnaround at Elizabeth City State University, in discussions on parking, housing and dining at N.C. Central University and in a proposal for an apartment deal near ECU.

Resolutions were passed at the Board of Governors meeting on Sept. 7, 2017 to lower tuition and fees, reorganize the staff of UNC President Margaret Spellings and the board's meetings.

Smith said he was asked to lend expertise and help at ECSU and NCCU and that much of his work in recent years has been focused on the system's historically black campuses.

But a lawsuit last month by a fired finance chief at NCCU accused Smith and another UNC board member, Darrell Allison, of trying to steer NCCU to a specific firm, The Preiss Company of Raleigh, for a public private partnership to build and operate a 1,240-bed housing project on campus.

'Bid, bid, bid'

Smith, who has had prior deals for private apartment complexes with Preiss, flatly denied the allegation. He said he never communicated with anyone at the company about NCCU's process and never made any recommendation to NCCU about Preiss. NCCU officials knew about his relationship with Preiss, he added, because he disclosed that up front.

"What I did say about 150 times is, bid, bid, bid," Smith said. "Get as many bidders as you can, get the best deal that you can."

Smith said he was confident the truth would come out, and contended the former employee, Benjamin Durant, made the claims in order to "create a whistleblower" lawsuit.

Smith said he was asked to help NCCU look at its parking, housing and dining operations by Allison, an NCCU alumnus, donor and former trustee. Smith said the operations were in bad shape, with dining contracts that hadn't been bid in eight years and "housing pricings were all screwed up."

Allison has also denied the claims in the lawsuit, saying he only made introductions between NCCU and Preiss and other companies so the university could consider options. Records show that in October, Allison emailed NCCU Chancellor Johnson Akinleye a PowerPoint presentation from Preiss, the largest owner-operator of off-campus student housing in North Carolina, with more than 10,000 beds serving seven campuses. Allison has said he has no relationship to the company.

The Preiss Company was not among those that made NCCU's shortlist for the deal. Company officials did not respond to a request for comment. NCCU could select a business partner by the end of this month.

Unhappy in Charlotte

Public-private partnerships, or so-called P3s, are becoming more common, and several UNC campuses have explored them for student housing facilities. The deals vary, but generally, a private developer builds a complex, and sometimes operates it, under a lease arrangement to the university. Private developers, without the constraints of state construction standards, can build a project faster and cheaper than the university. In the past, university foundations have formed tax-exempt nonprofits to build housing — a method that maintains more control for the university.

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UNC Charlotte Chancellor Philip L. Dubois. Benjamin Robson

Email records provided through a public records request showed that one chancellor, UNC Charlotte leader Phil Dubois, expressed skepticism to Smith about the private partnerships. He cited a Greek village project at UNCC. "The project certainly did not turn out to be of higher quality delivered faster and at less cost, the usual arguments made in favor of PPPs," Dubois wrote. "And, in fact, we ended up in litigation with our private partners."

Dubois said it wasn't that the university was "out-negotiated" by the private business. "To be frank, private partners are not necessarily looking to do what's in the best, long-term interest of the university," Dubois said.

Smith responded in an email to Dubois that he saw "little to no risk" in P3s and that they should be considered because rising student costs are unsustainable. "That's the reason we are studying P3's as well as other avenues to try and unlock where we can work towards sustainable approaches(.) what I have found in the education field is a big resistance to change and what I have witnessed in the private sector is change normally driven by a breaking point in sustainability of a business where as in Education everyone screams about funding."

Smith has never been financially involved in a P3 deal, he said, and has only invested in off-campus private apartments, which have been lucrative for him. But he said the partnerships have advantages for UNC campuses if negotiated correctly. "It has some potential," he said. "It is not the answer that everyone thinks it is."

Two years ago, Smith was in discussions with ECU about a potential acquisition of an apartment complex then known as North Campus Crossing, according to documents released under a public records request. The proposal, first reported by WRAL, was debated over six months but it was never executed.

Smith wrote to UNC board Chair Lou Bissette, to an ECU administrator and to another board member to say he'd been offered a large apartment complex in Greenville at a deeply reduced price because the property was in foreclosure. He was considering several options, including getting ECU to buy the property or leasing part of the complex to ECU if enough beds could be filled. One of two ECU trustees involved in the talks suggested using the property as a village for fraternities and sororities.

ECU
Harry Smith was in discussions with East Carolina University in Greenville about a potential acquisition of an apartment complex. File photo Chris Seward

ECU's then-finance Vice Chancellor, Rick Niswander, said the only way to make it work was to require residency for ECU sophomores, but that would anger parents because the complex was three miles away from campus.

Niswander emailed Chancellor Cecil Staton in September of 2016 about the proposal, calling it "a colossally bad business deal that makes no sense for us." He pointed out that campus housing in Greenville was overbuilt and demand was low.

"Harry first told me about this four to six months ago," Niswander wrote. "He was thinking that if he could get it at a steal and have a contract with ECU to fill the beds, he would split the profits with us."

The talks prompted UNC system attorney Tom Shanahan to ask for a face-to-face meeting with Smith to talk it over. "The BOG has a policy on 'Dual Memberships and Conflicts of Interest' that is implicated in transactions where a member might have an interest, so there are important procedural steps to follow," Shanahan wrote.

Smith responded that he was out of the deal. "I walked on it this morning. ... I offered it to ECU from day one if they wanted it and left that offer on the table for them."

'The optics are terrible'

In an interview, Smith said that he had gone back and forth on the deal all along because the price appeared to be dropping and he thought it was a great investment for ECU for future enrollment growth. The university already owned intramural fields that were connected to the complex. Smith added that he thinks public universities ought to require more students to live on campus; private universities are doing it, he said, because it tends to help students stay engaged in academics.

However, Smith said that while the proposal was merely talk, the "optics are terrible."

"In hindsight, it wasn't even a good idea to have the conversation. That was a regrettable mistake by me," he said, adding, "I learned a valuable lesson from it, but I didn't do anything malicious ... everything was good intent."

The complex was purchased by a company called FM Capital and is now managed by The Preiss Company.

Smith and ECU Trustee Chair Kieran Shanahan had a testy email exchange last month about whether the 2016 apartment proposal was proper and what the UNC attorney, no relation to Shanahan, had said about it.

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ECU Trustees Chair Kieran Shanahan. File photo

Smith has been at odds with ECU's administration on several issues recently, including the purchase of a $1.3 million home for the chancellor and a contract extension for Jeff Compher, the athletic director who has since left the university. Smith was outspoken on the issues on a local radio talk show.

During negotiations on the Vidant merger, Smith pushed for ECU to get more money out of the deal. That, he said, resulted in an $80 million advantage for ECU following an original valuation that was too low.

"We changed the whole landscape of the deal," he said. "The whole deal changed because I said no and I wouldn't let go."

In the final agreement, Vidant agreed to an initial payment of $35 million to ECU, plus annual payments of $14.25 million to ECU's Brody School of Medicine for 30 years.

During the process, Smith repeatedly requested financial information over several months to evaluate the deal, according to documents obtained by The News & Observer through a public records request. On July 28 of 2016, Smith emailed Staton and Mike Waldrum, CEO of Vidant, saying: "I will work tirelessly to defeat this in Raleigh and the BOG. Mike I've made two requests for financials so I can get comfortable."

Later, Smith would write that he wanted to be their advocate on the deal. "I handled my response poorly this morning," he wrote, "I'm a recovering CEO that's use to pushing but that's no excuse."

By September, Smith inquired why he wasn't invited to a meeting in Raleigh to update stakeholders, including some trustees and UNC board members. He still had not received the information he requested. "I'm going to sleep on it but pretty offended," Smith wrote to Staton, "if I don't change my mind in the morning Tammy and I will be pulling our 1 million dollar gift we just committed to."

Smith later wrote to Staton, "the message is if you ask questions, push and dig we will exclude you and that's what happened."

Like Bill O'Reilly

Staton said that Smith had had direct access to ECU and Vidant leaders and that the meeting was meant as a general overview for people in Raleigh. He invited Smith to join the gathering.

"Candidly, some people do think you suck the oxygen out of the room — lol," Staton wrote. "But as I've told you before, I think you ask good questions."

The same day, Smith likened himself to Bill O'Reilly. "I'm a no spin zone guy a lot of people appreciate that about me."

Smith has been a big donor to ECU. In 2011, he and his wife donated $1 million for a basketball practice facility at ECU that bears their name, as well as another donor's.

But Smith later withdrew a gift for a football stadium expansion, and though he ultimately voted for the project, he raised questions about its timing and cost. In emails to a former board member and Staton, he wrote, "It's easy for bureaucrats to push these projects but the concerns are real and the financial impact could also be very real," adding, "Plenty of case studies on Stadium expansions failing ..."

In an interview, Smith called the football expansion "a big mistake," citing declining ticket sales after ECU's recent losing seasons.

ECU
Harry Smith withdrew a gift for an expansion of East Carolina University's football stadium and raising questions about its timing and cost. rotest and football intersected at an East Carolina University football game last Saturday. Ethan Hyman File photo

Kieran Shanahan, the ECU trustee chairman, was critical of Smith's approach in an interview. He said Smith has weighed in on every significant issue at ECU. "Maybe he's doing it for good purpose, but I think it reflects either a lack of appreciation for designated roles or some desire or need to micromanage East Carolina," Shanahan said.

"We've spent an inordinate amount of resources trying to respond to his inquiries," Shanahan added. "It's hard to say no to a guy who's on the board that has a lot of control over you."

Smith will lead a Republican dominated board that has focused on low tuition and tough questioning about university spending, while also raising university leaders' salaries. The board has had internal strife for the past couple of years, with some members demanding more change than others.

Smith said he wants to end the "circus" aspect of some of the meetings. Nominated by state Senate leader Phil Berger, Smith, a Republican, has donated about $180,000 to mostly Republican legislative candidates since 2000, including Berger, and a $50,000 contribution to the N.C. Republican Party in 2012.

Berger said Smith's business background and interest in public education make him a good fit for the board.

“If I were to meet another Harry Smith today, I would do my best to get that person involved in public service and put his talents and background to good use for the state of North Carolina,” Berger said.

Smith has the support of his fellow board members. Although one considered challenging him months ago, Smith is now running unopposed for chairman.

Steve Long, a Raleigh lawyer and chairman of the board's governance committee, said members would probably discuss the UNC policy that requires that board members respect executive leadership when communicating with campuses and refrain from directing matters of administration except through chief executives. The policy states that members' authority is collective, not individual, and members should avoid personal and business interests that conflict with responsibilities to the university.

But Long said those policies are subject to interpretation. "Board members all the time, they try to help the university given their unique experiences, so we don't want to shut that off because it does benefit the universities," he said. "But it's something to remember."

Long served with Smith on a working group formed by UNC President Margaret Spellings to look for solutions to Elizabeth City State's longstanding financial and enrollment troubles. He said Smith was instrumental in helping the university restructure its debt, saving millions with lower interest rates that can now be used to help refurbish the campus.

"In the meetings, he came in and didn't talk like an academic," Long said of Smith. "He basically talked like a businessman and said, 'You're going broke and you need to change, do this, this and this,' and put a jolt through everybody in the room. ... It was exactly what we needed."

Long called it Smith's "finest hour," adding, "we needed a kick in the butt there."

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UNC Board of Governors member Steve Long. File photo

Rick Legon, president of the Association of Governing Boards, a national higher education group, said university board members are called upon for more than oversight at a time when college affordability is a concern and public skepticism is increasing.

"Boards really do need to be more engaged in addressing the critical issues, the essential issues, confronting the system and its campuses," Legon said. "Now, how you do that matters. Being engaged does not serve as a synonym as being a manager."

He called university board service a team sport, acting as a collective body, not as individuals pursuing individual agendas. "So it's a real balancing act," he said. When board members communicate directly with campus employees, it can be "dicey" and "unnerving," Legon said, resulting in administrators who "don't know what to expect or who they report to."

'Learning as I go'

Smith agreed that it's a delicate balance. "I'm learning as I go on some of this stuff," Smith said. "I can tell you that I will not breach the doors of a campus on operational issues unless there's an absolute, everybody signs off on it, 'we need you to go do it.'"

In some cases, campuses have wanted and needed help, and they don't all have financial engineers on campus. "I'm pretty good at it, and I'm free," he said.

Smith describes himself as a fixer.

"My whole life I fixed stuff," he said. "Sometimes I have to walk across a college just to understand what we do because I get so engrossed in the numbers and the metrics and the model that all I see is the bad stuff."

Smith said his goal is to run campuses efficiently — control costs and enhance income without making them businesses.

"We’ve got to do the right thing for the students," he said. "My heart's in the right place."

Database editor David Raynor contributed to this report.

Jane Stancill: 919-829-4559, @janestancill

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