KU officials grilled about out-of-state bond issue at back-to-back hearings

Kansas lawmakers grilled officials from the University of Kansas on Tuesday about the $326.9 million it borrowed last month without legislative approval.

The university asked a Wisconsin agency last month to issue bonds to finance the construction of a new science facility, residence hall and other buildings on campus.

That sparked criticism from lawmakers who drafted measures in both the House and Senate budget bills to restrict the university’s spending.

The issue was not the merits of the project, but how the university got the money to pay for it, said Rep. Ron Ryckman, R-Olathe, Appropriations chair, during a hearing held by the House Appropriations Committee.

Other lawmakers echoed this concern. “It’s always bad to get blindsided and surprised,” said Sen. Tom Arpke, R-Salina. “I think that happened here.”

The Kansas Development Finance Authority told KU that it would need legislative approval to issue the bonds. By going out of state, KU was able to avoid that requirement.

KU officials said the decision was motivated by timing. The university would have incurred extra costs for construction delays if it had waited and would not be able to open its new residence hall in the fall of 2017 as planned, said Jeff Gans, an attorney representing KU. He added that the university was concerned that interest rates might increase.

Several lawmakers suggested that KU should have waited a bit longer. The bonds were issued a week before the Legislature convened its 2016 session.

“I don’t buy it,” said Rep. Marc Rhoades, R-Newton. “I feel like they wanted it done. They really didn’t want to come talk to us about it, so this was a way for them to (do that). I know the one gentleman framed it as ‘because oh the rates might change’ and all that, but I just don’t think they wanted to have that conversation.”

‘Who owns KU?’

The project had been approved by the Kansas Board of Regents and lawmakers had been briefed on it earlier.

“We have tried to keep our Regents and lawmakers involved in this project every step of the way,” said KU Chancellor Bernadette Gray-Little.

Lawmakers said they asked for more information before the bonds were approved but never received it.

“We absolutely need to be on the same page,” said Shane Bangerter, chair of the Board of Regents, said of lawmakers. “…We need their support. We need their help. And we need them to be on board with us. I think after they review this project they will be on board and unfortunately it sounds like there was somewhat of a communications gap and we need to fix that.”

Rep. Kyle Hoffman, R-Coldwater, expressed disbelief that the university could not find private donors to help pay for new facilities and that the only option was taking on debt. He said he worried that other universities would try to cut the Legislature out of decisions in the future.

Gans said the state has no liability for the bonds. KU created a nonprofit corporation to borrow the money and then lease the newly constructed buildings back to the university. The corporation has a board made up of university officials, and lease payments of $21.8 million a year are guaranteed.

“Who owns KU?” Rep. Mark Hutton, R-Wichita, asked Gans.

Gans replied that the state of Kansas owns the university. Hutton contended that meant the state is obligated to pay off the debt.

New science labs

Gray-Little said the building project is meant to address crucial and immediate needs at the university.

“Our science facilities, which were built before we put a man on the moon, are out of date at best. And at worst they are obsolete,” Gray Little said. And the truth is that many high schools have better basic science facilities than we have at the University of Kansas."

A Maryland-based design firm, Edgemoor Infrastructure & Real Estate, will handle the design and construction of the campus upgrades. The firm began working on the designs last summer before the bonds were issued, Gans said.

Gans called Edgemoor the university’s private partner, but Ryckman pointed out that Edgemoor brought no equity to the project.

Gans said requiring Edgemoor to bring equity would have driven up the cost of the project.

KU will pay off the bonds at a 3.76 percent interest rate over 30 years. Theresa Gordzica, the university’s chief financial officer, said the total cost including principal and interest would be more than $640 million.

Limiting KU’s spending

Both the House and Senate have added restrictions on KU’s spending to budget bills expected to be debated later this week.

The House bill would prevent KU from spending beyond its approved budget without legislative approval. Now, nothing prevents KU from spending more from its tuition fund and other special revenue funds if costs exceed estimates.

Gordzica said this would take away the university’s flexibility to manage its finances.

She called the Senate bill more serious. It would prevent KU from spending any tuition or state dollars on the construction project. It would allow the university to raise private dollars to pay for the cost.

Gordzica said that would cause the university to go into breach of contract on its guaranteed lease agreement.

Arpke, the lawmaker who drafted that provision, disputed that. He said the university had said it would not rely on state funds for the project and that he was holding it to that promise.

The university plans to use tuition dollars from student enrollment growth to help pay for the cost.

“Don’t they require some funds to educate as well?” Hutton asked her.

She said that the university could handle both the educational costs and the cost of paying off the bonds.

The university will also rely upon a student fee of $18.70 and draw revenue from new housing facilities and a parking garage. Operational savings will also go toward the annual payments.

KU officials have said the project will not cause tuition rates to increase, but several lawmakers questioned this.

Rep. J.R. Claeys, R-Salina, said the project would cause the university’s annual debt service to increase by 50 percent.

This story was originally published February 9, 2016 at 12:19 PM with the headline "KU officials grilled about out-of-state bond issue at back-to-back hearings."