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All seven Iowa Supreme Court justices have agreed the University of Iowa and Board of Regents must hand over extensive financial details and documents about their $1.165 billion public-private partnership with a Paris-based collaborative to operate the UI utilities system for the next 50 years.
Specifically, the board must disclose the names of investors — including the 21.5 percent of Iowa investors it reported chipped in financing to make the deal happen, according to a Supreme Court opinion released Friday.
“Taxpayers of Iowa, who bear the ultimate financial risk for this transaction, are entitled to know if the (regents) got the best deal available and if anyone had a conflict of interest,” according to the Supreme Court ruling.
In addition to investor names, the board must produce 13 categories of records that state Auditor Rob Sand requested related to the UI’s deal with global energy provider Engie and investment firm Meridiam — which closed in March and which Sand called among the “largest financial transactions in Iowa history.”
Records the board so far has refused to hand over include bids and other proposals; details on the UI entity set up to handle the payment and investing; university requests for proposals for independent investment managers; and any other contracts or agreements tied to the blockbuster deal.
Despite court orders enforcing a subpoena to turn over the records, the board refused and gave several justifications: Sand was not engaged in an “authorized” audit; he subpoenaed the wrong entity by seeking records from UI’s governing board and not the UI itself; and the ask was “unduly burdensome.”
The board and the UI in February 2020 — a month before the deal’s official close — also told the district court it was worried Sand would “jeopardize the transaction by publicizing the confidential information,” according to Supreme Court documents.
But the district court sided with Sand and ordered the documents be produced. The Board of Regents appealed the ruling, arguing Sand wasn’t engaged in an official audit.
To date, neither the board nor the UI have produced the documents Sand initially requested Dec. 12, 2019, according to Sand and the Supreme Court, which affirmed state law demands the disclosure.
“The agency made no effort to challenge specific subpoena items,” according to Justice Edward Mansfield’s concurring opinion. “Instead, it asked the district court for an all-or-nothing ruling.”
The UI and Board of Regents must comply — despite their worries about whether Sand will make details public — because state law allows him to audit annually “and more often if deemed necessary” the state and all state officers and departments receiving state money.
“The Iowa Code grants the auditor of state broad access to all information when conducting an audit,” according to the high court order.
Although the utilities deal is closed, making moot the UI point that Sand could foil the transaction, the Supreme Court said it would side with the subpoena enforcement even if it weren’t.
“The (Board of Regents) claims Auditor Sand’s request threatened to upend the transaction at the final hour,” according to the high court ruling. “However, accountants have been chastised for failing to ensure the legality of transactions, and the public tends to blame the auditor of state for negative consequences resulting from a business failure.”
Related to the university’s massive P3 deal, specifically, Sand argued before the court “that the transaction creates a huge financial liability for (the UI) and taxpayers makes it worthy of scrutiny prior to financial close.
“Although the auditor of state’s office has staff working in the institution’s city on the institution year-round, Auditor Sand claims a lack of scrutiny of the institution’s transaction could be perceived as a failure to do his job,” according to the Supreme Court.
To the UI argument it hadn’t yet finalized its list of investors, the high court pointed to its boast before this dispute that “21.5 percent of the investors in the transaction were Iowa-based.”
That, according to the court, reasonably infers “investors had been chosen and conflict-of-interest testing was appropriate.”
The court further found Sand can legally disclose the information he uncovers in his audit.
“It is clear that Auditor Sand had determined an audit was necessary, and any confidentiality concerns of the (board) would have been misplaced,” according to the high court. “Despite the (board)’s concern that Auditor Sand could have jeopardized the transaction by publicizing confidential information, (Iowa Code) permits him to put confidential information in his postaudit public report.”
‘Win for taxpayers’
In a statement from Sand’s office, the state auditor said he appreciates the unanimous decision and called it “a massive win for taxpayers.”
“It protects their ability to know what state government is doing with their money,” he said.
The Board of Regents in a statement following Friday’s decision said, “We appreciate the Supreme Court hearing the case and providing clarification.”
The University of Iowa in December — after a nearly yearlong inquiry and search process — agreed to partner with Paris-based global energy provider Engie and infrastructure investment firm Meridiam for 50 years of private operation of its $1 billion utility system.
In exchange for their upfront lump sum payment of $1.165 billion, the partners landed five decades of guaranteed revenue — as the UI must pay its new partner a $35 million annual fixed fee while also covering all utility expenses, employee costs, maintenance and upgrades, fuel and other items.
That fee will increase at an annual rate of 1.5 percent.
Over the deal's life, the UI expects to pay its new private provider $2.4 million in the fixed fee plus spending on utilities and other costs.
Per the original plan, the UI would use $154 million of its partner's $1.165 billion upfront lump sum to pay off utility debts. It would use another $12 million to pay consultants hired to negotiate the deal. And it would invest the remaining $999 million in an endowment.
The UI was then to pull $15 million annually from the endowment for campus-generated strategic initiatives — grants people can soon apply for. In this first year, however, officials expect to approve half that — $7.5 million — for strategic initiatives.
For just the initiatives, the UI expects to allocate up to $735 million from the endowment over the duration of the deal. Including what it will take from the endowment to pay its partners' fixed fee and other costs, UI officials have projected pulling more than $3 billion over the contract's life.
Although UI officials expected to invest nearly $1 billion of that upfront lump sum into an endowment, estimates changed between September 2019 and March 2020 because of interest rates, according to Rod Lehnertz, UI senior vice president of finance and operations.
And so instead of paying $154 million to pay off the utility bond debt, the UI spent $158.4 million. The UI also spent slightly more on consultant fees — about $12.2 million instead of $12 million.
In total, the UI spent $8.1 million more on the P3 transition than expected. It also “parked” another $5.044 million in a university account to be used for “ongoing employee transition costs,” according to Lehnertz. Or the money could go toward strategic initiative projects, he said.
In the end, the UI invested $985.9 million into its endowment, about $13 million less than originally expected.