The controversial financing of a $200 million outpatient facility at the University of Connecticut Health Center is the center of a dispute between the state auditors and the university.
And UConn records also show the university paid a New York investment banker $1.3 million for securing the nearly 5 percent loan that Auditors John C. Geragosian and Robert M. Ward estimate also cost the state $77 million in unnecessary interest costs.
The auditors objected this week to UConn officials’ recent assertion that the bipartisan watchdog office failed to voice objections to the financing – secured in December 2012 – during two earlier meetings with university staff.
Geragosian and Ward told The Mirror that the auditors never were apprised of the full details of the financing plan and, regardless, are prohibited from giving management advice.
They also noted that the university never made its claim about a lack of guidance in its written comments included in the audit – or in initial public statements after its publication on July 29.
A revised statement responding to the audit was issued in early August after various media reports on the financing and one legislative leader wrote to the university requesting more information on the deal.
UConn’s attempt to shift some of the responsibility for its management decision to pursue this financing plan “is misguided,” Ward said, adding that the auditors are prohibited from acting as a management consultant to any agency or higher education institution, given that it periodically must audit them all. “The simplest way to say that is you can’t audit your own work.”
Agencies and institutions occasionally request meetings with the auditors or their staff, Geragosian said, but the latter only provide guidance on which statutes, regulations or other rules govern a particular topic. “We would not provide approval, in any way,” for a financing plan or any other management decision.
The outpatient center was just one component of a major bioscience initiative Gov. Dannel P. Malloy and the legislature approved for the health center’s Farmington campus in 2011.
Other components included:
- Constructing a new tower and expanding research, clinical and teaching space at the health center’s John Dempsey Hospital.
- Making other improvements to the Farmington campus.
- And dedicating $291 million to help The Jackson Laboratory develop a genomic research facility on the campus.
Though lawmakers and Malloy authorized more than $800 million in financing – and dedicated at least $69 million in health center resources – to the bioscience initiative, they directed UConn to find private developers to finance construction of the outpatient facility.
UConn determined that going this route would be too costly, and that $120 million could be saved by turning to a quasi-public entity the legislature created in 1987 to help the health center purchase equipment and finance other capital projects.
The entity, the University of Connecticut Health Center Finance Corporation, ultimately obtained a $203 million loan in December 2012 – at an annual interest rate of 4.81 percent – from the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), a financial services organization that manages retirement benefits for almost four million academic, research and medical professionals.
And university records show Cain Brothers & Co. LLC of New York City, originally hired for $320,000 to help UConn find a private developer for the outpatient facility, received an additional $1.3 million for finding the 4.81 percent loan financing.
UConn spokeswoman Stephanie Reitz said Cain Brothers solicited 21 sources of financing and that the $1.3 million placement fee “is standard industry practice.” It represents 0.62 percent of the amount borrowed and “is well within the normal range of fee paid for this service for a transaction of this size,” she said.
Geragosian and Ward concluded in their late July audit that – once UConn had chosen not to utilize a private developer – the project still could have been financed at about half of the 4.81 interest rate. To achieve that, the university would have had to ask the legislature to approve public financing, specifically tax-exempt bonds.
The auditors estimated this would have saved $77 million. “This transaction will burden the state with significant unnecessary interest costs,” they wrote in their report.
UConn did not make any claims that the auditors’ failed to provide guidance in their written comments included in the audit report. University officials had been shown a draft of that document seven months before it was published, Ward and Geragosian said.
UConn’s initial response after publication also never addressed the guidance issue.
Rather, a UConn statement read, it “is not a realistic assumption” that the governor and legislators would approve state bonding for a project they wanted a private developer to finance. “Had the state intended to fund the project with state bond funds, it would have done so, and it did not,” the statement added.
But within a week after the auditors’ report, Senate Minority Leader Len Fasano, R-North Haven, had written to UConn President Susan Herbst seeking more information on the financing.
In Herbst’s response to Fasano – and in other university public statements around that time – came a new assertion: the auditors could have prevented this financing.
“The auditors of public accounts did not express an objection to, reservation about, or concern over these matters in those discussions,” a university statement read, referring to two meetings UConn officials had with the auditors and their staff in January 2012, as well as subsequent emails.
“Therefore we were surprised and puzzled to find this matter to be the subject of an audit finding more than 24 months later,” it continued.
John A. Rasimas, who oversees audits of higher education institutions in the auditors’ office, said neither those meetings nor any emails outlined specific details, such as financing rates.
Thomas Q. Callahan, the university’s associate vice president who was vice president of the bioscience initiative at the health center in 2012, said UConn did indicate it planned to use the quasi-public health center corporation to finance the outpatient facility – an option that the auditors should have known couldn’t match the low interest rate of tax-exempt state revenue bonds.
“I have nothing but the highest respect and regard for the work and leadership they (the auditors and their staff) provide to the state,” Callahan said. “I attribute bad motives to nobody. But if they could have at least said, ‘That approach sounds funny to us,’ that would have raised a red flag with us.”