The University of Oklahoma’s decision not to go forward with rental agreements on a privately built high-end dormitory in the middle of its campus raises troubling questions.
Is the decision legal? Is the school’s bond rating at risk? What about the state’s credit?
OU says it’s all perfectly legal and no one needs to worry about credit ratings. The people left with a nearly empty dorm and few hopes of paying for it see things differently.
An enormous amount of money is involved, and the whole mess seems headed to court for a long time.
Only time and litigation will determine the answer to those questions, but it’s not too soon to make two conclusions:
1. The dorm was a bad deal.
Under the direction of former President David Boren, OU agreed to a $250 million bond plan to be issued by the Oklahoma Development Finance Authority. The 1,200-bed Cross Village, would feature top-shelf units and high rent. OU also got $20 million up front.
In exchange, the school planned to pay rent to the Louisiana-based builder/owner for 40 years. Currently, the rent is $6.5 million, but the amount was due to escalate to $15.7 million by 2029. If rent-paying students filled the dorm, there’d be no problem. They didn’t.
The dorm opened in 2018, but the students didn’t show up. Boren’s successor, former President James Gallogly, warned the project was upside down. He resigned in May, and in July, the school decided not to renew its leases, putting the bonds (currently rated CC negative by S&P) in peril of default.
It was a bad deal, and OU shouldn’t have gotten into it.
2. Bonds that aren’t pledged by real money are inherently risky.
If this project doesn’t get the state’s credit in trouble, the practice of moral obligation borrowing — guaranteeing debt with nothing more than one year’s payments a promise for the future — is still bad government.
The state Constitution requires general obligation bonds be approved by a vote of the people, but the state Supreme Court signed off on no-vote moral obligation borrowing years ago. That opened the doors to a lot of projects and a lot of debt backed by promises.
That practice deserves reconsideration. Every time the state borrows money — whether it’s done by the Legislature, a university or some obscure trust — the people’s credit is on the line. That’s why the Constitution says what it does. We’d be a lot smarter state if we started paying attention to it.