Gov. Dannel P. Malloy’s administration approved the financing method for a University of Connecticut Health Center project that auditors say cost the state $77 million in “unnecessary” interest.
And while the governor’s budget chief, Benjamin Barnes, said Thursday that UConn selected that financing option when an originally planned private-public partnership never materialized, records show university officials discussed going back to the legislature and pursuing less costly financing.
Also Thursday, the Senate’s top Republican said he believed the financing plan was employed – regardless of the cost – to spare the Democratic governor political embarrassment tied to his new bioscience initiative on the health center’s Farmington campus.
“This letter confirms my approval of the implementation plan for the ambulatory care center,” Barnes wrote on Oct. 2, 2012, to then-health center Executive Director Richard D. Gray.
That outpatient center was one component of the 2011 bioscience initiative that became one of the hallmarks of Malloy’s first year in office.
Other components of the governor’s initiative 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.
The developer would bear the financing risk and construct the facility. UConn would lease and operate it. The university also would effectively face a market interest rate, which would be reflected in the lease payments it made.
But when the public-private partnership never materialized, UConn turned to a quasi-public entity the legislature created in 1987 to help the health center purchase equipment and finance other capital projects with greater efficiency. The entity, the University of Connecticut Health Center Finance Corporation, is overseen by a five-member board that includes UConn trustrees, other university officials and Barnes.
The finance corporation ultimately secured 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.
State Auditors Robert M. Ward and John C. Geragosian asked why UConn – once it determined a public-private partnership wasn’t feasible – hadn’t gone back to the legislature to authorize a more traditional financing approach that would have saved a huge sum?
The auditors noted that state revenue bonds issued for an unrelated UConn project at the same time enjoyed a 2.4 percent rate – half that of the TIAA-CREF loan.
Barnes said UConn proposed using the 38-year-old quasi-public entity.
UConn has not addressed the origin of the proposal in its brief written statements, though a spokeswoman has said the university would work with legislators if they want to refinance the deal and reduce costs.
But records show UConn officials did discuss returning to the legislature as early as November 2011, 13 months before the loan was obtained.
The UConn Health Center’s finance subcommittee noted that “tax-exempt bond financing proves to be an attractive alternative,” because of the lower interest rates the state might receive, according to the minutes of its Nov. 7, 2011, meeting. They also noted that this was discussed with Barnes.
Senate Minority Leader Len Fasano, R-North Haven, said Thursday it didn’t make sense to think UConn would be opposed to appealing to lawmakers.
Regardless of whether the university used the quasi-public finance corporation or the legislature issued revenue bonds, outpatient facility receipts would be used to repay the debt. If borrowing costs were less, the burden on the UConn Health Center’s budget would be less.
And the UConn Health Center ran operating deficits of about $22 million in each of the 2007, 2008 and 2009 fiscal years, needing special appropriations from the legislature all three years to balance its books.
But Fasano said headlines disclosing a lack of private interest in any component of the bioscience initiative, or the prospect of the state’s having to borrow more dollars, might be perceived as a political setback for Malloy.
Administration officials “didn’t want this to come back before the legislature because they were afraid the criticism would start up all over again,” Fasano said, noting Republicans already had attacked the aid to The Jackson Laboratory as too generous.
But Barnes rejected that argument, noting that the legislature never intended the state to finance the outpatient center with bonding.
“There was never any expectation that the private financing of that facility would be done with tax-exempt public financing,” Barnes said.
But is there much difference between financing an outpatient center by selling legislatively authorized bonds on Wall Street or by having a quasi-public entity – created by the legislature – take out a loan?
Opinions vary.
Barnes noted that a bond carries a pledge that it is backed by the “full faith and credit” of the state, which offers “much stronger” security than a simple loan.
But, according to Attorney General George C. Jepsen, should the UConn Health Center fail to repay the loan with outpatient facility receipts, the burden would fall on Connecticut.
“These obligations would become general, unrestricted legal obligations of the state of Connecticut,” Jepsen wrote on Sept. 11, 2012, to UConn President Susan Herbst, who had asked in earlier correspondence what security lenders working with the quasi-public corporation could expect.
And when asked whether it was likely the administration would risk Connecticut’s reputation among investors by trying not to pay the debt, should UConn default, Barnes said: “Do I think we should walk away from that? No, of course not. We should pay our debts.”
But he insisted that the loan still gives Connecticut greater flexibility.
Still, was it worth the extra interest expense to secure legal flexibility that probably wouldn’t be exercised and would damage Connecticut’s reputation among investors?
Sen. L. Scott Frantz, R-Greenwich, who has been Malloy’s chief sparring partner over the state’s credit card this year, said this demonstrates why the entire issue should have been brought back to the General Assembly.
Is the (UConn Health Center) Finance Corporation really a legitimate private developer?” Frantz said. “I don’t think that was the legislature’s intent.”
The legislature immediately should investigate any options to refinance the bonds and reduce interest charges, he said.
Frantz, the ranking Republican senator on the Finance, Revenue and Bonding Committee, objected earlier this week when the State Bond Commission – which Malloy chairs – approved borrowing that brought Connecticut within 5 percent of its $2.5 billion, self-imposed cap for the year, with five months still to go.
While Frantz argued Connecticut is amassing debt that will overburden generations to come, the governor’s counter was twofold: the money is being invested in education, transportation and other vital priorities; and is being borrowed at cheap rates.
But Frantz said Thursday that 4.8 percent is nowhere close to cheap.
“This is costing the taxpayers a tremendous amount of money,” the Greenwich lawmaker said. “It shows very poor judgment on somebody’s part.”