The Board of Regents neglected its duty to Iowans

With virtually no public discussion and no opportunity for independent analysis of the complicated financials, the Iowa Board of Regents on December 10 approved a plan to lease the University of Iowa's utilities for 50 years in exchange for an up-front payment of $1.165 billion.

Governor Kim Reynolds hailed the "historic day for higher education in Iowa." In an official news release, Regents President Michael Richards praised what he called an "open, inclusive process leading to this agreement."

Orwellian spin won't fool anyone. A government board charged with managing public institutions should not have committed the university to such a far-reaching and costly deal without a full airing of the risks and benefits.

The university and Board of Regents hid the identity of the private equity partners (the French companies ENGIE and Meridiam) until the morning of December 10. Regents put the 1,800-page contract online as the board convened to rubber-stamp the plan. Why were they afraid to let outsiders review the contract ahead of time?

The presumption must be that the public-private partnership arrangement could not withstand scrutiny. Otherwise there would have been no reason to leave so many questions unanswered before yesterday.

The university and Board of Regents also violated the letter and spirit of Iowa's open records law by refusing to release key documents such as the request for proposals and the bids submitted by various entities, Iowa Freedom of Information Council executive director Randy Evans explained here.

A redacted document selling the concept of the utilities deal boasted that "21.5% of the Hawkeye Energy Collaborative’s committed private placement financing comes from Iowa-based investors." University of Iowa President Bruce Harreld played up that point in his presentation to the Regents on December 10. Ryan Foley of the Associated Press sought more information about those Iowa investors and was told the university considers their identities "trade secrets."

According to the news release, the university will "use $166 million of the lump sum to pay off existing utility bonds and consulting fees" and put the remainder (about $1 billion) into an endowment. The idea is that endowment income will provide $15 million annually for the university's strategic plan, along with subsidies to protect university entities from paying higher utility costs.

This page from a webinar released on December 3 shows a few projections: over the 50-year period, the endowment is supposed to produce $735 million in supplementary income to spend on the strategic plan, and just under $2.3 billion in subsidies to help cover utility costs.

The concept rests on some big assumptions: mainly that the endowment will spin off $3 billion in income over 50 years by averaging a 4 percent annual return. If the stock market tanks or the funds are managed poorly for some other reason, University of Iowa subdivisions will either pay higher utility bills, or (more likely) Iowa taxpayers will cover the losses.

Foley reported on the December 3 informational meeting at which Harreld presented the concept to the Board of Regents.

Key to the success of the plan will be not overspending the endowment based on unrealistic expectations, Harreld said.

“If we get through the first seven or eight years of this thing, we’re going to be in really good shape,” he said. “If we don’t, we won’t be.”

It's not surprising Harreld was keen to close this deal. He's close to retirement age, so only needs to paper over the university budget for a few more years. He won't be around to pick up the pieces if the endowment doesn't grow enough to shield the university hospital and other buildings from higher heat, water, and electricity costs.

Reynolds also has no reason to care about the long-term impact. The cash windfall during the early years of the utility deal will be a talking point for her re-election campaign, when opponents criticize her administration's chronic under-funding of higher education.

When Reynolds briefly addressed the Regents on December 10, the hypocrisy on display was stunning. She and Republican state legislators have repeatedly faulted Democrats for using "one-time money" to cover ongoing expenses. She and her mentor Terry Branstad endlessly bashed the Culver administration's I-JOBS government bonding initiative, which borrowed to support infrastructure projects across the state. Now she is on board with the University of Iowa borrowing $1 billion against current assets.

As Democratic State Senator Joe Bolkcom warned,

Like a hedge fund, the University of Iowa will invest this borrowed money in the markets, in hopes of realizing large capital gains to both payback the borrowed money to the investors and realize a financial gain to fund the university.

Like a home mortgage, every dollar that the university receives in an upfront payment will have to be paid back with interest over the next 50 years.

Regents are supposed to focus on the long-term health of the state universities. But none of the nine board members--all Branstad or Reynolds appointees--demanded more time to consider the plan or sought outside opinions on its merits. Most of the board (aside from the student regent) are statistically unlikely to live to see whether the gamble will pay off for the University of Iowa.

It's a sad reminder of what passes for accountable governance in Iowa today.

Webinar released on December 3 to make the case for the utilities deal:

December 10 news release from the Iowa Board of Regents:

Regents Approve Public-Private Partnership for University of Iowa Utility System

Urbandale, Iowa -- The Board of Regents, State of Iowa today approved the establishment of a $1.165 billion public-private partnership (P3) with the University of Iowa utility system and ENGIE North America and Meridiam. The P3 agreement will help provide the UI with the resources it needs to support its core missions of teaching, research and scholarship.

“This agreement is an excellent step forward for the University of Iowa,” said Board of Regents President Dr. Michael Richards. “We must continue to be creative in leveraging our assets to find ways to provide the funding that Iowa’s public universities need to be their best.”

Under the agreement, ENGIE and Meridiam will pay $1.165 billion to the University of Iowa for a 50-year operating agreement for its utility system. Most of this upfront payment will be placed into an endowment. Annual proceeds from this endowment, projected at $15 million, will help provide the predictable, sustainable funding necessary for the UI to carry out its strategic plan. The UI retains ownership of the utility system and operation of the utility system will return to the university following the 50-year deal. No university staff positions will be eliminated under this agreement.

The University of Iowa will pay ENGIE and Meridiam a $35 million annual fee in years one-through-five of the deal, with the fee increasing by 1.5 percent annually thereafter. The UI will use $166 million of the lump sum to pay off existing utility bonds and consulting fees.

As part of the P3, ENGIE and Meridiam will adopt the UI’s existing goal of operating coal-free by 2025 or sooner and continue campus-wide sustainability efforts. In addition, ENGIE and Meridiam will continue to explore new sources of bio-fuels to create sustainable, lower-cost energy options.

The university began soliciting feedback from the UI Faculty Senate, Staff Council and Student Government in February and submitted a request for qualifications using that feedback in April. Informational sessions were held in both March and May prior to requests for qualifications and requests for proposals, respectively. This timeline provided significant opportunity for campus feedback. Additionally, the three-member 501c3 board in charge of operating the P3 fund will include a representative from the UI Faculty Senate.

“I applaud the university for its open, inclusive process leading to this agreement,” President Richards said. “Iowa’s public universities believe in shared governance and value input from all stakeholders.”

Governor Kim Reynolds encouraged the Board of Regents and the universities to “think outside the box” when it came to finding new sources of funding. President Richards charged the Regents and university leaders with maximizing existing resources and finding creative new funding sources during a discussion on resource management at the April 2018 Board meeting. Today’s agreement is a prime example of generating much-needed resources from existing university assets.

“University of Iowa leadership, particularly President Harreld, are to be commended for this tremendous deal,” Richards said. “Without their guidance and efforts, as well as that of previous Boards, none of this would have happened.”

Top image: Iowa Board of Regents photo from the board's Twitter feed. From left: David Barker, Nancy Dunkel, Zack Leist (student member), Nancy Boettger, Milt Dakovich, Patty Cownie (president pro-tem), Jim Lindenmayer, Sherry Bates, Michael Richards (president).

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