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Railroaded: The OSU Privatization Train Rolls On.............................................Front Page
An Analysis of Administrative Growth at OSU - summary....Governance and Administration Page
An Analysis of Administrative Growth at OSU...............................Administrative Issues Page
Additional commentary on published articles.........................................Editor's Blog Page
Editors Note: The following article is by a guest author, publishing pseudonymously. Supporting (though partially redacted) documents for this article are available for viewing or download here
This folder also contains links for the documents provided to University Senators in advance of their deliberations on Apr. 4th, 2017.
Added 4/20/2017: OSU has now released an update of their Full Concession Agreement. It can be found in the above folder. Alternatively, the direct link is:
Observations by HCA's Child
On April 7, 2017, the OSU Board of Trustees unanimously approved the administration’s latest privatization scheme, the comprehensive energy management privatization plan (CEMP). This article summarizes three issues related to the CEMP agreement: (1) how OSU thwarted public scrutiny of the deal; (2) how we now understand why OSU was so eager to keep the financial details under wraps until it was too late for public review; and (3) how OSU’s public relations campaign to promote CEMP amounts to a heap of … “alternative facts”.
The Deal According to OSU
CEMP is now advertised on OSU’s project web site FAQ as follows, viewed April 9, 2017:
Ohio State has entered into a public-private partnership for comprehensive energy management to strengthen the university’s sustainability while providing new resources for the university’s academic mission. On April 7, 2017, the Board of Trustees approved a 50-year concession agreement and lease with Ohio State Energy Partners, a consortium made up of ENGIE North America and Axium Infrastructure.
There are four components to comprehensive energy management:
Operations: OSEP will operate the systems that power, heat and cool Ohio State’s Columbus campus under a 50-year lease of the university’s energy assets.
Sustainability: OSEP will propose, provide the capital funding for and implement energy conservation measures to improve Ohio State’s sustainability. During the first 10 years of the agreement, OSEP is required to meet the university’s goal of a 25 percent improvement in energy efficiency on the Columbus campus. The university will review each capital project and would approve only those that will provide appropriate environmental and financial benefits.
Supply: OSEP will work to enhance Ohio State’s effectiveness in the procurement process for electricity, natural gas and other energy sources. The university will continue to buy directly from providers, and Ohio State will continue to determine its priorities in terms of sources.
Academic collaboration: In addition to its $1.015 billion upfront payment to the university, OSEP will fund and carry out a $150 million commitment to support academics in specific areas requested by students, faculty and staff during the bidding process. Among these projects are a $50 million research hub and support for scholarships, internships, faculty and students.
The winning bidder—and we do mean winning, as you’ll see below—is a foreign consortium (ENGIE is French, Axium is Canadian) now known as Ohio State Energy Partners (OSEP). There is nothing particularly negative to say about these companies. Their web sites say they’re trying to make money by operating and financing energy infrastructure, and it seems they are good at it. OSU might well end up with a physical plant offering better energy efficiency in a few years. So, some good may come out of this. But at what price?
“Public-private partnership” is a euphemism for privatization of public assets. You may or may not like the idea of privatization of public assets; it’s something of an ideological question when taken in the abstract. One could rail against privatization of public assets on various grounds. But we won’t do that here because we now have another concrete instance that can be directly analyzed for what it is—if the relevant financial details are available.
How OSU Thwarted Public Scrutiny of CEMP
The first obvious question is: Why would any private firm agree to take on all these commitments? According to OSU’s summary, it seems to have nothing but obligations! Who can make money doing that? Read the rest of the FAQ and all other information I’m aware of coming from OSU before April 5 and you’ll find no mention of this question or the faintest hint of an answer, even though this critical piece of missing information was pointed out to OSU as early as October 2015. This glaring omission serves as a gigantic red flag to those of us who opposed OSU’s 50-year lease of parking operations that was approved some five years ago despite being opposed by over 80% of OSU faculty as well as many staff and students. (That’s another story entirely.)
A public records request to OSU seeking information about such details of CEMP was submitted on February 14, 2017. Excuses and delays followed the public records request. Finally, even after the OSU administration had received final bids and had decided which one to accept, OSU still refused to release the concessionaire agreement until a legal action was filed with the Ohio Supreme Court on April 4. On the evening of April 5 OSU responded with a link to the concessionaire agreement (linked here). Though there were still redactions claimed to involve “safety”, as far as one can see no financial details were redacted.
The provided document is 2,268 pages long. It deserves more study. However, some very disturbing financial issues were discovered quickly. These were outlined in an e-mail sent to the Secretary of the OSU Board of Trustees at 8:30 AM on April 7, the day of the vote. There is no indication that any Board members read this e-mail or, if they did, that they cared one whit about what's actually in the agreement they hastily and unanimously approved.
The failure of OSU to release the concessionaire agreement before it did, and the failure of the Secretary even to acknowledge receipt of this e-mail from a concerned citizen, speak loudly. The Board of Trustees was in no mood for any sort of public scrutiny of this proposal. Why?
No Wonder OSU Wanted to Keep the Financial Details Secret
Here are some of those disturbing financial issues.
Contrary to OSU’s past claims about leasing but not selling state-owned assets, the CEMP concessionaire agreement explicitly states that OSU is selling public assets to OSEP; at least, this is what federal, state, and local tax agencies are to be told. The sale is said to be in return for the up-front payment called the “Closing Consideration”. The actual dollar amount of the Closing Consideration is not shown in the concessionaire agreement that OSU finally released as a public record. Later public announcements from OSU did not make clear whether it was $1.015B or $1.165B, the latter figure including some $150M that OSEP is said to be committing to a joint energy research center and related programs. For purposes of the rest of this article, we use $1.015B.
Unsurprisingly, OSU actually is paying OSEP for its services and its money. The agreement involves three separate streams of annual payments from OSU to OSEP, together called the “Utility Fee”. A preliminary analysis of each stream shows that this is a terrible financial deal (for OSU, not for OSEP) in which OSU is borrowing massive amounts of money from OSEP rather than borrowing via the usual credit markets. Moreover, about 80% of the borrowed money is destined for an account in the OSU endowment, from which account distributions are promised to fund OSU operating expenses such as scholarships and faculty/staff compensation rather than capital projects—a dubious practice at best. And the lending arrangement itself can only be characterized as predatory.
OSEP does not appear to be taking any financial risk on this deal at all, but is guaranteed a tremendous, well-above-market return on its investment.
There is some indication in OSU statements beginning last week that OSU may believe suffering through this arrangement will somehow protect its credit rating so it can borrow even more millions or billions for other projects in the near future. But are the bond-rating agencies really so clueless that they will (all) fail to notice that OSU is incurring a 50-year obligation here to pay off over $1.25 billion in loans that just happen to fall outside the usual credit markets?
The Shell Game in OSU's PR Campaign
So far we’ve focused on OSU’s outflows, i.e., payments to OSEP. We know what they are for and we know—with surprising precision because the core of the “operating fee” for actually running OSU’s energy infrastructure is only about 20% of the “fixed fee”—how much money changes hands. It’s not pretty for OSU.
But wait, supporters of the plan will say. OSU gets an extra $1B to put into its endowment fund, and the returns on that $1B will be substantial if the stock market keeps going up. Even if OSU is paying 6% interest on the $1B, if the markets go up more than 6% annually over 50 years it will all have been a huge win!
Are they right? First, here’s what the project FAQ says OSU promises to do with the distributions it receives from the extra $1B in endowment funds:
Initially the proceeds of the upfront payment will be invested in Ohio State's endowment, dedicated to priorities being finalized in the university's strategic plan. These areas of investment include the following:
• Student financial aid to support access, affordability and excellence
• Compensation enhancements for faculty and staff to support competitiveness with academic peers; a portion of this will be tied to improvements in teaching effectiveness
• Classrooms, research labs and performance and arts spaces across disciplines (in combination with other sources of funding)
• A fund to enhance sustainability efforts
• Other strategic initiatives
The claim that there will be any “proceeds of the upfront payment” is an insidiously bogus ”alternative fact”. At least for the next many years, even a sustained bull market (and how likely is that when the bulls already have been running for almost eight years?) will leave OSU seriously in the red each year. Sure, 50 years from now, the endowment fund principal probably will be larger with this agreement than without it. But for most or maybe all of those 50 years OSU will be hemorrhaging money as a result of this deal because distributions from the project’s endowment account will be inadequate even to cover the “fixed fee” paid to OSEP.
Here’s why. The Board of Trustees has adopted a formula for the amount to be distributed from an endowment account each year. Let’s say, for example, that $1B buys 150,000 shares of the OSU endowment fund at $6666.67 per share. (Yes, this is really how it works, and the actual numbers are about right.) The Board’s distribution formula dictates that the annual distribution is 4.5% of the average value of those 150,000 shares over the previous seven years. The market basically has been going up for those seven years so the average share price over that period of time is lower than it is now, probably around $5600. This means the first annual distribution is to be about 4.5% of 150,000 shares times $5600 per share, or under $38M.
The “fixed fee” alone starts at $45M. The net loss is over $7M in the first year. Instead of massive amounts of money going into scholarships, faculty/staff “compensation enhancement”, etc., $7M has to come out of other OSU programs just to cover the shortfall.
In the future, if the markets go up fast enough, eventually the distribution will be sufficient to cover the “fixed fee”, which grows at “only” 1.5% per year. But by then OSU will certainly have borrowed much of the $250M from OSEP for those required infrastructure improvements, and the debt service on those funds will add to OSU’s outflow. There’s no specific schedule for when these improvements are to be made so it’s hard to analyze this more precisely. Yet if OSU is going to meet its 25% energy efficiency improvement goal within 10 years, much of this money will need to be committed in the very near future and substantial debt payments will certainly commence within the next few years at most.
If the endowment fund seven-year average share price goes down, of course, things will be considerably worse. The distribution formula damps out swings in the markets but it doesn’t ultimately guarantee anything.
The Board of Trustees could try to cover for its own mistake in approving the CEMP by changing its currently prudent distribution formula to something far more aggressive. It could take 5.5–6% of the last-seven-year average value to approximately cover the entire $45M “fixed fee” in the first year. Or it could take, say, 9% to cover the $45M plus provide some $30M of new money for scholarships and faculty/staff “compensation enhancements”. The problem is that such an aggressive formula can’t apply for long because it would soon leave too little in the endowment account to protect the principal in perpetuity (as it should for endowment funds).
What if the Board authorized the administration to use a ridiculously aggressive 9% distribution formula for the first year, just to get off on the right foot? Then there would be maybe $30M in the first year to be split among all those nice programs. How much of a faculty/staff raise would be possible? Oops, sorry, not a raise; what’s promised is a “compensation enhancement”. In other words, something like a bonus, because this would have to be a one-time payment. A salary increase would need to be taken out of the endowment distribution every year in perpetuity and that’s just impossible if you’re taking out something like 9% each year.
So, how much of a bonus could it be? OSU has about 30,000 faculty and staff, so if none of the $30M were allocated to increased student financial aid and none were allocated to any of the other nice things that are promised, the one-time bonus would average about $1,000 per employee. Better than nothing? Notwithstanding the improbability of these assumptions that could make even a modest $1,000 per person bonus possible, compare it to the $1,219,139 bonus received by OSU CFO Geoff Chatas in 2015 for arranging fabulous financial deals like this for OSU (http://www.bizjournals.com/columbus/blog/2016/03/osu-salary-database-updated-for-2016-plus-the.html), and a $1,000 bonus just doesn't seem all that impressive.
Who’s minding the store? The Board of Trustees may simply be willing to believe that the financial geniuses in OSU’s administration are telling the whole truth and nothing but the truth in OSU’s all-positive public relations releases about these privatization fiascos. Maybe they’re buying it all hook, line, and sinker, just like the legislature, governor, et al. Or maybe they’re complicit in hiding that truth from the public. Either way there’s a big problem, and little or nothing the public can do except try to bring it to light in the hope of preventing the privatization train from rolling smoothly into the next station.