University of Iowa envisions $3 billion cash flow over 50 years from utility partnership

IOWA CITY - A massive public-private partnership the University of Iowa is pursuing for the operation of its $1 billion utility system is expected to support a new endowment capable of creating more than $3 billion over 50 years, administrators disclosed Tuesday.

UI President Bruce Harreld and his staff haven't yet revealed the name of a potential partner or partners that next week they plan to ask the Board of Regents to approve start operating the UI utility system in the 2021 budget year.

The deal - which would secure for the partner decades of income and the ability to capture tax benefits unavailable to the university as a public entity - would require a hefty upfront payment to the UI. Officials also haven't shared that sum.

Whatever it might be, UI officials said during a Tuesday webinar for the regents that they expect it to be large enough to pay off $153 million in utility debt; cover another $13 million in consulting fees accrued over its inquiry into a potential partnership; and then create an endowment supporting nearly $22 million annually in strategic initiatives and utility expenses.

'I think, if the future looks anything like the past - including the 2008 fiscal collapse - we could well see that annual return of this endowment be much higher,” Harreld told the regents.

The proposed arrangement - marking the first of its kind for an Iowa public university - follows a secretive process involving inquiries and bids from dozens of prospective partners; a request for proposals that's not been made public; and administrative travel in pursuit of a qualified concessionaire.

UI spokeswoman Anne Bassett told The Gazette that officials are 'not able to share where they went because it would identify the vendors” involved in the process. She also did not disclose how many administrators traveled for the inquiry and how much the university spent on that travel.

'A small group of senior administrators went to meet face-to-face with leadership of potential operating entities,” Bassett said.

How it will work

The UI began investigating a potential utilities partnership in hopes of reversing its slide in national rankings by, among other things, establishing a new revenue stream after seeing years of declining state support and facing depressed enrollment projections.

Administrators have determined the campus needs $33 million more annually to accomplish its strategic goals - including increasing student retention and graduation rates, supporting faculty research pursuits, upping access to UI Health Care and stimulating Iowa's economy by commercializing technology and bolstering the workforce.

The university committed to find $11 million of that $33 million in efficiencies and savings. Another about $7 million annually will come from a combination of higher state appropriations and tuition increases. The new 'P3 utility endowment,” as officials call it, is expected to cover the other $15 million.

Though the partnership is new to an Iowa public university, it has been used at some of the UI's peers, including Ohio State University.

During Tuesday's webinar, UI officials stressed a public-private partnership would not amount to a sale of the utility system - which produces steam for heating and cooling and 25 percent of the electricity across campus, with MidAmerican Energy delivering the other 75 percent.

The UI water treatment plant additionally generates potable water for the campus' colleges, departments and units - which each pay their share of the university's utility consumption, amounting to about $98 million annually.

Under proposed terms of the deal, the campus still would pay for fuel, worker wages and capital expenses - plus a $35 million fixed fee, which will begin to tick up 1.5 percent annually after the first five years.

That annual total in the 2022 budget year, for example, is expected to top $60 million - plus an additional nearly $46 million for utility-related items the campus intends to keep control over, like environmental compliance costs and sewer, fire and refuse expenses.

That would bring the UI's total utility-related expenses in 2022 to $106.2 million - about $6.7 million more than the $99.5 million that administrators plan to bill campus units for energy use.

Administrators plan to cover that $6.7 million shortfall with endowment dividends.

UI officials chose 2022 as an example year because they don't expect to take as much from the endowment in the partnership's first year.

When calculating those figures once the fixed fee begins to increase after year five, UI expects to pull $28.9 million from the endowment in 2026 and - eventually - $124.1 million in 2069, the last year of the deal.

'We will then have lived through this transaction and could do it all over again,” Harreld said.

The total pulled from the endowment over the duration of the agreement is projected at $3.03 billion, according to details the UI reported.

The only money the partner would pay, per the arrangement, is that upfront lump sum. However, if the operator fails to meet quality and efficiency standards, it could face penalties.

workers could stay

The UI is creating a three-member board to manage the P3 endowment - which will include appointees from the Board of Regents and UI Faculty Senate, along with the university's senior vice president for finance and operations.

The board will meet quarterly to review the fund's operation, determine the yearly allocation and hire investment advisers and managers.

Members of the campus community with ideas for how the UI can use its new endowment revenue to support the institution's strategic plan can apply for one-time grants that may last up to five years.

Harreld said he doesn't envision that involving new facilities or building projects.

Ohio State - in its 2017 partnership with Engie Services, a global energy infrastructure and building services company - garnered an upfront sum of $1.015 billion, plus a $150 million commitment to support academic priorities.

The UI, like Ohio State, has committed to ensuring all 120-some of its utilities workers could keep their jobs under the new operator or find different roles and still be UI employees.

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