Three days before the State Board of Education voted on whether the University of Idaho should move ahead with a plan to form a nonprofit to acquire the University of Phoenix for $550 million, the school officially filed paperwork with the Secretary of State’s office to do just that. The paperwork created NewU, Inc., a 501(c)3 to be run by the University of Idaho and populated with university employees as its first directors. The action opens up a whole host of questions about the school’s audacious, unlimited, and possibly unconstitutional deal.
The State Board of Education voted unanimously on Thursday in favor of the deal, just 24 hours after it was announced. But before the plan was made public, and three days before the board’s vote, the university was already moving forward with its plan, filing NewU’s articles of incorporation with the Secretary of State and listing Kent Nelson, Brian Foisy, and Torrey Lawrence — the university’s attorney, vice president for finance and administration, and executive vice president, respectively — as its officers.
So, how much of the State Board of Education’s action was preordained — mere theater — hatched out and authorized before the public was even made aware of it? What else might the school do with its newly created nonprofit? Documents presented to the state board on Thursday noted that the university had already filed NewU’s articles of incorporation with the state. The paperwork creating NewU authorizes the nonprofit to “operate, conduct, and administer a degree granting and credit bearing institution of higher education affiliated with the Regents of the University of Idaho.” In other words, while NewU is being sold as being formed solely to make the acquisition of the University of Phoenix possible, nothing in the document’s text limits the organization to that.
The plan also raises significant constitutional concerns. The money to make the purchase would be generated through the sale of bonds, and, according to university officials, the school would be on the hook for up to $10 million a year if the University of Phoenix (now doing business as NewU) doesn’t generate the necessary revenue to pay its bills.
When discussing the potential liabilities and risks associated with the purchase, U of I staff conceded in Thursday’s board meeting that the purchase would result in a downgrade to the University’s credit rating. The reason, the staff stated, was because Moody’s, which is the organization that assigns credit ratings to institutions like the U of I, would consider the debt to be owned by the U of I, not NewU.
This presents a constitutional problem. Article VIII, Section 2 of the state’s constitution forbids lending out the state’s credit. The language in the constitution is unambiguous on this point: “The credit of the state shall not, in any manner, be given, or loaned to, or in aid of any individual, association, municipality or corporation;” The constitution goes on to say, “nor shall the state directly or indirectly, become a stockholder in any association or corporation, provided, that the state itself may control and promote the development of the unused water power within this state.”
The subsequent section of the constitution prohibits state entities, including any “county, city, board of education, or school district, or other subdivision of the state, shall incur any indebtedness, or liability, in any manner, or for any purpose, exceeding in that year, the income and revenue provided for it for such year, without the assent of two-thirds of the qualified electors thereof voting at an election to be held for that purpose.”
These prohibitions exist for good reason: to protect taxpayers. Yet the University of Idaho, and now the State Board of Education, are trying to be “too cute by half,” wrapping themselves into a pretzel in order to evade the constitution’s constraints.
Twenty years ago, the University of Idaho began a downward financial spiral that reached a crescendo with the University Place downtown Boise building project. It was a $136 million complex that had to be scaled down from several buildings to one (seen today on the corner of Broadway and Front Streets) because the people overseeing the plan failed to ask tough enough accounting questions. It took the University of Idaho years to extricate itself from its money problems.
Whether the purchase of the University of Phoenix will prove to be a similar vexing issue for the state’s land grant university is a legitimate question, especially as it appears the school clearly acted ahead of its own regulator, the State Board of Education, whose members are not asking substantive constitutional and contractual questions about the deal.