Kansas House Speaker Ray Merrick said the University of Kansas should have used a state-authorized issuer for its $327 million of bonds.

DALLAS – Some state lawmakers say the University of Kansas improperly bypassed legislative scrutiny when it used an out-of-state conduit to issue $327 million of revenue bonds.

By using the Wisconsin-based Public Finance Authority, KU was "circumventing legislative oversight and escaping the public view," according to Kansas House Speaker Ray Merrick.

"Kansas taxpayers deserve for their elected representatives to be involved in substantial financial deals to make certain there is transparency and accountability wherever state assets are involved," Merrick said in a prepared statement.

The deal was designed as a public-private partnership to add classroom and housing to the university's Lawrence, Kan., campus. The bond proceeds will fund a new science center, student union, student housing facilities, student dining center, parking, utility plant, and necessary infrastructure improvements.

To finance the expansion, KU created a special purpose entity called the Kansas University Campus Development Corp.

Ordinarily, KU would issue such bonds through the Kansas Development Finance Authority. However, university officials said that legislative approvals would have been needed to use the KDFA.

The legislature was not in session when the bonds were priced Jan. 7. However, lawmakers were meeting in Topeka, Kan., when the deal closed Jan. 21.

Rep. Mark Hutton, R-Wichita, told the Wichita Eagle he and other lawmakers had raised concerns about the project in recent months. Other lawmakers said they were drafting legislation to prevent similar deals in the future.

The Wisconsin authority used Orrick, Herrington & Sutcliffe as its bond counsel. The university and the KU Campus Development Corp. used six law firms to scrutinize the deal, including enforceability of the lease arrangements.

The unusual bond structure shields the state from any liability for the debt, according to Tim Caboni, KU's vice chancellor for public affairs.

The premium bonds are repayable over 30 years at a 3.76% interest rate. Debt service comes from KU's lease payments of $21.85 million a year.

The Public Finance Authority has closed more than 100 bond issuances representing more than $2.65 billion in financings throughout 36 states since inception in 2010. Several universities from other states were included in those issues. The conduit was created specifically to issue bonds from out-of-state borrowers.

The controversy comes as KU is preparing to issue $47 million of revenue bonds, through the Kansas Development Finance Authority, for a parking garage at the KU Medical Center.

The Public Finance Authority deal included current interest serial bonds maturing from 2018 through 2036, and term bonds with sinking fund payments due in 2041, 2046 and 2051. The bonds are callable in 2026.

Officials said they had originally planned to issue the bonds in December, but documentation demands pushed the deal into 2016.

The project is expected to generate about $9.2 million in annual net revenue from housing, parking and student fees, according to Shannan Nelson, head of campus operations for the KUCDC.

The project was developed as part of KU's Bold Aspirations strategic plan meant to keep the university competitive. Originally scheduled to be developed over a longer period of time, the project's timing was stepped up in hopes of attracting more out-of-state students.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.