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UW System officials are considering a settlement with the creditors of the UW-Oshkosh Foundation.

State officials are considering a settlement with the creditors of the troubled UW-Oshkosh Foundation, in what one lawmaker described as a “bailout” that could use millions of taxpayer dollars to cover the private nonprofit’s debts.

University of Wisconsin System officials confirmed Thursday that they and the Department of Justice are in “preliminary discussions” on a settlement that Regent Michael Grebe said would protect the System’s assets if the UW-Oshkosh Foundation was not able to pay back its loans.

A System spokeswoman declined to say how much such a settlement might cost or where the money would come from, and Grebe stressed that an agreement has not been reached.

But Mike Mikalsen, a spokesman for state Sen. Steve Nass, R-Whitewater, said it could require $5 million to $10 million from the state or UW System, citing sources he said are involved in the discussions. He declined to name them.

The UW System sued two former top officials at UW-Oshkosh in January, saying they improperly transferred millions of dollars of university funding to support several of the private foundation’s development projects. Former chancellor Richard Wells and vice chancellor of administration services Thomas Sonnleitner also signed guarantees to banks pledging the university’s credit to back up millions of dollars of foundation loans, violating state law and UW policies, according to the System’s lawsuit.

UW leaders were adamant when the lawsuit was filed that the guarantees were unconstitutional, and thus could not be used to hold the university liable if the foundation defaulted.

In his statement Wednesday, however, Grebe said Justice Department officials have told UW that if the foundation does not pay its creditors, banks will likely seek that money from the System.

“(The Department of Justice) and the UW System will continue to act responsibly to protect our taxpayers, students and families, and our campuses,” Grebe wrote. “Namely, we are aiming to safeguard state assets, as well as foundation funds which are used to provide scholarships for UW-Oshkosh students and support university programs.”

The Milwaukee Journal Sentinel reported in January that the UW-Oshkosh Foundation had $14.5 million in debt on its real estate projects and was considering bankruptcy.

A phone message left with the foundation by the State Journal Thursday was not returned.

The potential settlement came to light when Nass sent an email to UW System President Ray Cross on Thursday saying he would oppose providing state funding to pay back the Oshkosh foundation’s debts.

“You and others involved in that process provided immediate reassurances that the taxpayers and students would not be on the hook” for the loans, Nass wrote in a message he also sent to reporters. “You need to keep your commitment that the public won’t be forced to fund the inappropriate decisions of two campus administrators and the failed oversight of the System.”

The UW-Oshkosh controversy has led to questions about the relationships between UW campuses and the private foundations that support them, and threatens to undermine the System’s efforts to repair relationships with legislators who are now considering the 2017-19 state budget. Lawmakers ordered an audit in March of UW institutions and foundations to investigate whether the improper deals at Oshkosh were more widespread.

A settlement with the UW-Oshkosh Foundation’s creditors would not affect the System’s lawsuit against Wells and Sonnleitner, UW spokeswoman Stephanie Marquis said.

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Nico Savidge is the higher education reporter for the Wisconsin State Journal.