State System left to cover Cal U's debt
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When universities in the State System of Higher Education set out to construct something as basic as a classroom hall or as splashy as an arena, they routinely pledge campus funds or private donations to offset part of the cost.
But there is no system in place to verify that the universities actually fulfill those fundraising promises, and even if they do, that the money won't be siphoned away for some other use once the project breaks ground.
It potentially leaves the State System on the hook to make up the difference by issuing more debt.
That blind spot in the State System's oversight of its 14 universities surfaced in its response to claims by California University of Pennsylvania that it would give $12.3 million toward a new $59 million convocation center, including almost $7 million the school initially said it had.
Information about the project, some obtained by the Pittsburgh Post-Gazette through the state Right-to-Know law, shows little if any effort by State System officials to verify upfront that the money was committed by Cal U.
The university's president, Angelo Armenti Jr., was fired last month, though system officials have not linked their decision to the center or explained why he was terminated with cause.
Responses by the State System and by Cal U also leave unanswered questions on exactly how several million dollars apparently diverted from the project ultimately was spent.
In August 2008, one year before breaking ground, Cal U submitted a funding statement to the system's Harrisburg headquarters saying the school would use $6.8 million in cash on hand and another $5.5 million in donations for the project. Those assertions helped Cal U win approval from the State System's board of governors for $23 million in project financing.
But three years later, with costs rising and with Cal U in need of more money, the school submitted a revised funding statement to the State System saying it had no cash on hand to build the center.
Instead of $5.5 million in donations, Cal U's statement filed in March 2011 listed zero. The school in fact raised only $4,000 in donations but says it is still trying.
Faced with a mostly built project millions of dollars in the hole, the board of governors in April 2011 approved an additional $15 million in bond debt for the center, mostly to fill the school's funding shortfall.
In the months since the center that houses an arena for 6,000 people opened in December, Cal U continues to say it met $2 million of its $12.3 million target. It cites two grants, including a $1.5 million state Redevelopment Assistance Capital Program grant for the project.
But there was disagreement and confusion last week between the state and Cal U about the existence of that award.
Eric Shirk, a spokesman in the governor's office, initially said no such grant was awarded, nor was an application received.
Asked about the grant, Cal U spokeswoman Christine Kindl said the appropriate administrator to address that and other convocation center questions was unavailable because of a personal matter. But she provided a copy of a 2010 "cooperation agreement" signed by officials with Cal U, Washington County and a hotel developer indicating Cal U was a "sub-recipient" of a $5 million RACP grant awarded to the county for hotel construction in California Borough.
Ms. Kindl also released several pages of the grant contract between the state and county that do not mention the center.
Mr. Shirk Friday was unaware of the cooperation agreement but later said it appears those involved in the grant intend to use $1.5 million of it for the center.
The State System said it was told by Cal U, as the school sought a second round of financing in 2011, that the $6.8 million initially identified as being on hand for the work was diverted for "other university operational requirements."
What those requirements were is unclear.
Cal U said this month in response to a Right-to-Know request that it had no records showing where the $6.8 million initially pledged for the project came from or on what it was ultimately spent. A Right-to-Know request submitted to the State System yielded the same response.
"We would have no way of knowing how the money was spent," said Karen Ball, a State System spokeswoman. "That has to come from the university."
Ms. Ball said the State System has never seen a case like Cal U and is not in the habit of giving schools additional bond financing to cover fundraising shortfalls.
"We've never had a situation where the documentation turned out to be not totally accurate," she said.
Nevertheless, she acknowledged concern about the prospect of campuses going deeper into debt for construction at a time they already have absorbed deep state appropriation cuts for the 2011-12 academic year.
The State System backs the bond debt it issues. However, universities are expected to pay off debt service.
Cal U, with a $120 million operating budget, has seen a fivefold increase in those debt obligations in 10 years. Annual debt service in those years grew from $1.5 million to $7 million, with the convocation center accounting for $2.5 million of that total.
That mounting debt sparked controversy at Cal U, which was rattled this spring by Mr. Armenti's ouster and by faculty accusations that the school spent lavishly on the center and other nonacademic initiatives even as the school cut classes and staff.
As the head of one government watchdog group sees it, the State System's handling of the convocation project suggests a problem much wider than Cal U.
"It seems pretty clear that there has been a breakdown of the accountability process within the State System," said Barry Kauffman, executive director of Common Cause Pennsylvania.
He was not swayed by the explanation that there had apparently been no prior problems, saying, "They can use that excuse once, but now it's up to them to take remedial action."
It could be that there were no other problems, "or else other things have slipped by and they just didn't catch them," he said.
State Rep. Joseph Markosek, D-Monroeville, Democratic chair of the House Appropriations Committee, said he intends to inquire with the State System regarding the project's oversight. "It's surprising, and it's disturbing," he said.
Mr. Armenti, who says he was wrongly fired, said Cal U fronted $3 million for the center's design during three years prior to the 2008 bond financing and assumed that would count toward the school's contribution. But he said unknown to him, a subordinate reimbursed the university from that bond financing.
Mr. Armenti said his understanding was that "cash on hand" means when the bill is due, so in the meantime, the remainder of the $6.8 million would likely have been spent on small campus projects. He said the recession took a heavy toll on the $5.5 million fundraising plan.
"We put out a projection that turns out to be not so, that means there was some deception? Baloney," he said.
In addition to the bond debt, the convocation center received $19 million in capital funds from the commonwealth.
The State System's board of governors meets Thursday in Harrisburg, but Ms. Ball would not speculate on whether it will discuss Cal U or oversight of the convocation center project. "I don't want to get ahead of the board," she said.
State System auditors who examined the project in March are recommending that use of promised cash and anticipated donations in evaluating construction be discontinued. Instead, they said, the State System should require that "cash be designated and fundraising monies be raised" before State System bond financing is approved.
That recommendation was part of a financial review of Cal U that raised questions about certain financial practices and movement of funds. It was released the day after the State System fired Mr. Armenti, though State System leaders have not tied his dismissal to the report.
Cal U's convocation center is not the only events facility to get an infusion of State System financing after project funding fell short.
In 2010, the State System approved $34 million in debt to finish the Kovalchick Convention and Athletic Complex at Indiana University of Pennsylvania.
The State System says that case differs from Cal U because IUP sought only one round of financing, and the only funding statement the school filed with the State System anticipated the debt. However, that document was submitted well after ground was broken on a project whose planning dates to the mid-1990s.
State Rep. Dave Reed, R-Indiana, told the Post-Gazette in 2010 after the Kovalchick debt was approved, that there never was an intention early on to borrow money for the project. He said IUP's foundation overestimated what it could raise for the Kovalchick, and the borrowing became necessary.
He made an observation similar to what State System officials now say in explaining their decision to give Cal U more financing. "The building is three-quarters of the way built," he said of the Kovalchick complex in the 2010 interview. "I don't think you can just leave it there."
First Published June 24, 2012 12:00 am