Is KU’s construction boom coming back to haunt its budget?
photo by: Nick Krug
Anyone who has walked around the University of Kansas campus for the last three years knows that the university has been on a construction spree.
A new building for the School of Business, new additions to the Engineering School, a new Earth, Energy and Environment Center and new residence halls are all now part of the KU landscape.
And that’s not counting the $326 million Central District project, which features an integrated science building, a parking facility, student apartments, a dining hall and a central power plant.
Much of the initial funding for those buildings came from private donations that KU received during its five-year “Far Above” fundraising campaign, which brought in more than $1.6 billion from 2012 through 2016
In addition to 16 new buildings and major renovations, that money also funded 735 new scholarships and fellowships, and 53 new professorships.
All of that development was part of a ten-year master development plan that the university launched in 2014.
But now it has led to questions about whether KU took on more than it could handle, especially in light of the announcement last month that the university will slash $20 million out of its Lawrence campus budget for the upcoming academic year.
Interim Provost Carl Lejuez highlighted the cost of operating and maintaining new buildings as one of the driving forces behind the budget cut when he hosted a town hall meeting about the cuts June 6.
“A lot of it is the buildings,” Lejuez said at that meeting. “These are wonderful buildings, but they cost quite a bit of money.”
When asked to provide more detail, Lejuez said in an email that whenever the university opens a new building, the operational costs of that building are built into the base budget and carried forward into future years.
“The schools of Pharmacy, Engineering and Business and the College of Liberal Arts and Sciences have all led expansion projects that delivered new spaces,” he said. “Any time we open a new facility, costs associated with the ongoing upkeep of the building must be added to the budget.”
Unfortunately for KU, two long-term trends have weakened its ability to keep up with those rising costs: decreasing financial support from the state of Kansas and relatively flat growth in student enrollment.
According to Kansas Board of Regents data, total state funding for higher education in the upcoming school year will be about $73 million lower than it was in 2009, around the time KU officials first began planning for the “Far Above” capital campaign.
Meanwhile, from the 2012 through 2017 academic years, the most recent data available, total enrollment at KU actually fell 2.2 percent, although officials say it has begun to rebound the last few years.
In an email to KU faculty and staff on Wednesday, June 13, as a follow-up to the town hall meeting, Lejuez said university officials may have been overly optimistic in their planning.
“Individually, each commitment has merit and can be viewed as consistent with our goals as a research-intensive state flagship university,” he wrote. “However, budgeting was done annually based on highly optimistic projections regarding costs and revenue, and it often did not consider long-term impacts of the costs should future revenue decline.”
Going forward, Lejuez said KU will write its budgets on a five-year basis.
The cost of operating new buildings and other facilities is not the only expense pressuring KU’s budget. During the town hall meeting, Lejuez also cited rising costs for employee health insurance and other factors.
Central District project
The one portion of KU’s recent construction boom that KU officials insist is not contributing to the university’s financial pressures is the Central District project, which was financed through an entirely different process that sparked the ire of the Kansas Legislature in 2016.
Those projects, which include a new integrated science building, a residence hall and apartment building, a parking facility, dining hall, and a central power plant, were financed through a “public-private partnership,” or P3, using debt financing that was not approved by the Legislature.
In short, KU formed an outside, nonprofit entity called the KU Campus Development Corporation. KU then leased the land that those buildings stand on to the corporation so the corporation could obtain financing to construct the buildings.
In late 2015, that corporation issued $326 million in bonds through a Wisconsin public financing agency. The corporation now owns the facilities and leases them back to the university for $22 million a year until the bonds are repaid.
Although the project had been reviewed several times by the Kansas Board of Regents and the Legislature’s Joint Committee on State Building Construction prior to issuing the bonds, it had not been reviewed by the full Legislature. And when lawmakers convened in January for the 2016 session, many of them were angry that they had not been consulted.
KU officials told lawmakers at the time that the Central District would be entirely self-sufficient, in part because most of the facilities — the apartments, residence hall and parking facility — would generate their own income, and future enrollment growth would generate tuition dollars and fees to keep up with the payments.
Specifically, Theresa Gordzica, who was KU’s chief financial officer at the time, said that about a quarter of the $22 million lease payments, or about $6.4 million, would come from tuition paid by roughly 300 new out-of-state and international students that KU expected to admit into its freshman class the following year.
Nonresident enrollment did, in fact, grow the following year, according to Board of Regents data. But figures are not yet available to show whether that growth was sustained in the 2017-2018 academic year.
Many Republican lawmakers expressed concern that if KU’s assumptions didn’t pan out, the corporation would either default on the bonds, leaving the state with a large liability that it hadn’t even approved, or KU would be forced to cut other programs and departments in order to keep up with its lease payments.
“That was one of our concerns,” House Speaker Ron Ryckman, R-Olathe, who chaired the House Appropriations Committee at the time, said in an interview Friday. “We were assured that it wouldn’t put a strain on the rest of the organization. It would be self-sufficient and wasn’t going to cause tuition increases. Maintenance was supposed to be scheduled into it.”
But KU spokesman Joe Monaco said in a separate interview Friday that financing for the Central District project remains secure.
“The Central District project is as financially sound as it was two years ago,” Monaco said. “The Central District project is not what Carl (Lejuez) was talking about the other day.”