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State auditor questions taxpayer implications of University of Iowa $1.2B utilities deal
Rob Sand calls it the ‘largest financial obligation ever held by Iowa taxpayers’
IOWA CITY — A $1.2 billion deal the University of Iowa cemented in March 2020 for the private operation of its utilities system over the next 50 years amounts to the “largest financial obligation ever held by Iowa taxpayers,” State Auditor Rob Sand found in his four-year review of the blockbuster agreement.
“While the Legislature long ago delegated the authority to issue debt to the (Board of Regents), it is uncertain they anticipated debt or long-term obligations of this magnitude,” Sand wrote among his audit findings, released Wednesday. “It seems inappropriate for a government department or agency to take on the largest financial obligation ever held by Iowa taxpayers at the governor’s general suggestion. Such practices lead to a lack of accountability and transparency.”
In reviewing the deal’s genesis, potential benefits, relevant policies, contracts and financial donors, Sand report didn’t identify any conflicts of interest or regulatory violations — at least as far as the actual deal goes. But he did raise concerns about oversight of the agreement; documentation and transparency; and potential fallout should UI’s projected return on investment fail to materialize.
“In the event the university’s investment of the proceeds does not meet the return on investment needed to pay the amounts due to the concessionaire, Iowa taxpayers may be responsible for making up any shortfall,” according to Sand, who offered a list of recommendations — including one at the heart of the UI decision to pursue such a deal: a need for a more reliable stream of income.
‘Think outside the box’
In August 2018, Gov. Kim Reynolds ignited the spark that fanned the massive UI deal by sending a letter to Board of Regents President Michael Richards urging his public universities get creative in financing their pursuits.
“Please encourage everyone to think outside the box,” Reynolds wrote, extolling “robust public funding” alongside the need to do more. “I encourage you and your colleagues on the Board of Regents to survey what other universities around the nation are doing to leverage their assets.”
That landed UI’s gaze on Ohio State University — which a year before had entered into a public-private partnership for the management and operation of its utility system.
The UI, up to that point, operated its own utility system supporting campuswide operations in Iowa City and Coralville — requiring the same amount of energy as a town of 30,000 homes, according to the audit. The UI was responsible for its system of steam, power, water and chilled water plants — plus upgrades, fuel and staffing.
But the governor’s letter and Ohio State’s deal motivated the UI in April 2019 to disseminate a “teaser” document called “project Hercules” to gauge interest.
The tease netted 155 potential investors, 72 of which signed nondisclosure agreements to continue in the process. Of those, 14 formally responded to UI’s request for qualifications — including MidAmerican Energy Company; a collaboration that included Shive Hattery, with locations in Iowa City and Cedar Rapids; and Paris-based Engie and Meridiam, which landed the contract in the end.
Of four finalists for the project, Engie and Meridiam offered to pay the UI the largest upfront sum of $1.165 billion — compared with the others who all offered under $1 billion. And on Dec. 10, 2019, the regents — flanked by Reynolds in a signing event — authorized the UI to enter into a 50-year lease agreement for the operation and management of its utilities.
How it worked
In exchange for the massive upfront payment, the new private operator would have exclusive rights to operate the UI utility system for the next five decades — receiving an annual $35 million fixed fee and compensation for general utility expenses and fuel.
The UI also would pay the salary and benefits of utilities employees; maintenance costs; and necessary construction and improvements.
After retiring outstanding debt and paying consulting fees, the UI invested $986 million of its upfront income into an endowment it plans to pull from annually to both pay utility expenses and invest into strategic needs across campus. Over the life of the project, the UI expects to generate $2.3 billion to subsidize utility costs and $735 million for campus strategic initiatives.
“This level of strategic investment would not be achievable in the current budget environment if the P3 transaction had not been undertaken unless other significant factors changed, such as public investment from the legislature,” Sand reported. “However, if the $986 million invested … does not generate the expected 5 percent rate of return, the university will have to make up the shortfall.”
Were that to happen, Sand reported, UI officials said they first would stop tapping the endowment for strategic initiatives.
“If this was not sufficient, the university could also bill each department for the additional cost, use other resources, increase tuition, or issue debt,” according to Sand. “Ultimately, taxpayers would be responsible for payments.”
In auditing the deal, Sand at times struggled to get UI cooperation — especially when seeking information about financial investors who helped with the $1.2 billion upfront payment. Although regent documents indicated 22 percent of the new operator’s private financing came from Iowa-based investors, the UI declined to disclose the names — forcing Sand’s request to the Iowa Supreme Court, which sided with the auditor.
As a result, the UI shared the names of investors — including those from Iowa:
- Transamerica, headquartered in Cedar Rapids;
- Principal Global Investors, based in Des Moines;
- Athene, which was headquartered in Des Moines but since has merged with Apollo Global Management based in New York City.
“We were able to calculate approximately 23 percent of the initial purchase commitments were provided by the three firms listed,” Sand reported. “At the time the agreement was closed, all three firms were headquartered in Iowa.”
In reviewing conflict of interest policies and then investors, Sand found no concerns.
He did raise transparency issues with a three-member board that manages the endowment. While UI officials said the fund is subject to open records laws, they said it’s not subject to open meetings rules.
Given the UI deal has another 48 years until expiration — and it likely won’t be the last of its kind for UI or Iowa’s other public universities — Sand offered suggestions aimed at addressing transparency, oversight and the need for such public-private arrangements.
“It very well may be that this works out well for taxpayers, but there's still the question of accountability,” Sand told The Gazette in an interview. “Where's the say of taxpayers? Where's the say of Iowa voters?”
“It should be something that goes through, I would say, the typical democratic process,” he said. “I think that most people, if you tell them a piece of state government — without a vote from the Legislature — just put $2.5 billion in debt onto Iowans, they would say that doesn't sound right.”
Among Sand’s suggestions, he urged future public-private partnerships be precipitated by a cost-benefit analysis — which didn’t happen with the UI deal — performed by an entity without “any financial interest in the advancement of the P3 considered.”
Future public-private partnerships also should be required to honor Iowa bidding laws, compelling use of the lowest responsible bidder, “to prevent abuse of taxpayer funds.”
The Legislature should consider codifying prerequisites for public-private partnerships to include mandatory transparency and legislative oversight.
“It is unacceptable for public endowments, especially those as large as $1 billion, to be managed free from public meetings and public records laws,” he said.
Citing the genesis of the UI arrangement and an administrative push to make it happen, Sand suggested lawmakers accept oversight “as a natural, necessary, and helpful part of the decision-making process, rather than as a risk that could upend a hoped-for deal; or at the very least, follow legal obligations allowing oversight.”
He also urged the UI take steps now to proactively provide more information about its utilities arrangement online, including the deal’s current return on investment; annual financial reports; and minutes from any board meetings.
And, to the bigger picture of lagging state support that compelled the governor to push Iowa’s public universities to find other funding sources, Sand suggested re-prioritizing its resources and upping appropriations for the institutions.
“We've seen appropriations for higher education go further and further and further down,” Sand said. “So now they're effectively encouraging them or instructing them to go into debt.”
Vanessa Miller covers higher education for The Gazette.
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