FAYETTEVILLE -- A promise by the University of Arkansas to repay annual debt service is backed up with a contingency plan to impose a student athletic fee at the Fayetteville campus, according to a statement released in October with the issuance of about $115 million in bonds for the school's stadium expansion project.
But earlier bonds for athletic facilities included the same statement. The university has not implemented such a fee, nor does it have any plans to do so, a university spokesman said.
University of Arkansas System trustees in September approved the bond issue to help finance the estimated $160 million cost to expand and renovate Donald W. Reynolds Razorback Stadium, a project described by UA-Fayetteville as the most expensive ever for the campus.
Without taking into account inflation, the bond issue is the largest ever for the Fayetteville campus, based on official statements published online by the Municipal Securities Rulemaking Board. The bond issue is the second-largest ever for the UA System, as trustees in 2004 approved about $150 million in bonds for a new hospital and capital improvements at the University of Arkansas for Medical Sciences in Little Rock.
For the stadium bonds, a total debt service requirement of $166.9 million must be paid over 20 years, according to a bond statement written on behalf of the UA System trustees board.
Fee if necessary
The document states that "pledged revenues" from UA-Fayetteville athletics will be maintained at a level equal to or exceeding 115 percent of annual debt service related to athletic facilities bonds, which include earlier bond issues as well as the stadium bonds.
The board "has further covenated that it will, to the extent necessary to maintain Pledged Revenues at the 115% coverage described in the preceding sentence, impose a Student Athletic Fee on students attending the University of Arkansas, Fayetteville," the document states.
The statement defines "pledged revenues" as money from men's intercollegiate athletic events as well as other funds, such as athletic conference distributions and Razorback Foundation "priority seating requirement proceeds."
The foundation is a public charity supporting UA-Fayetteville athletics, and UA-Fayetteville Athletic Director Jeff Long has emphasized that revenue from new premium seating will help pay for the project.
Athletic department money and possibly more Razorback Foundation money are expected to cover the approximately $40 million in additional costs not financed by the bonds, Long has said.
The stadium expansion and renovation will increase capacity to about 76,000 from 72,000, including the addition of some 300 seats in new "Founders Suites" described by Long in UA documents as having "the highest level finishes."
New semi-private outdoor loge boxes, as well as additional numbers of club seats, also will be part of the stadium expansion. Construction is expected to begin in December and finish by fall 2018, according to the bond statement.
The document lists $90.2 million in gross "pledged revenues" for the 2016 fiscal year, a total that includes $42.9 million from Southeastern Conference and NCAA distributions, the member-based athletic organizations that include UA-Fayetteville.
Listed annual obligations -- debt from the stadium bonds and earlier athletics bonds -- reach a maximum of about $14.5 million, according to the statement, which notes that revenue "equaled or exceeded 6.23 times the combined maximum annual debt service."
In September, before voting on the bonds, trustees asked about wording that referenced the bonds being secured by "any student athletic fees." At the meeting, Long assured them there were no plans for such a fee.
Student athletic fees exist at many universities, large and small, and vary widely. The University of Florida, which competes in the SEC, requires students to pay an athletic fee of $1.90 per credit hour. University of Central Arkansas students pay $18 per credit hour.
Also at the September meeting, an attorney for the UA System said a reference to the fee was required by state law.
A UA System spokesman, in response to a question from the Arkansas Democrat-Gazette, cited Arkansas Code 6-62-804, which states: "Any athletic deficit of an institution shall be funded by a student athletic fee authorized by the board of trustees for each institution."
Nate Hinkel, UA System spokesman, wrote in an email that lawyers helping with bonds have said the law "is a very positive factor" with investors.
Also, because earlier bonds and the stadium bonds are "on parity," the same student athletic fee pledge must be included, Hinkel said. Parity bonds are issues of bonds with "the same priority of claim or lien against pledged revenues," according to the Municipal Securities Rulemaking Board.
Jonathan Justice, a public policy professor at the University of Delaware, said it is not unusual for entities to set forth more than one source of revenue to repay bond-related debt.
"If everything works exactly the way you hope it's going to work, the covenant doesn't get triggered. But you save a little bit of money on interest, because investors know they have this additional backstop in case this pledged revenue falls short," Justice said.
Issuance costs
Two trustees, former U.S. Sen. David Pryor and attorney Cliff Gibson, voted against the bond issuance. The bond statement noted that four of the other eight UA System trustees had ties to companies that helped with the bonds.
Issuance costs, including underwriting fees and expenses, totaled about $568,545, according to the bond statement.
Reynie Rutledge, a banker and chairman of the UA System trustees board, abstained from a vote on the bonds, said Hinkel, citing a draft of minutes from the September meeting of trustees.
Rutledge is chairman of Crews & Associates Inc., one of the underwriting firms for the bonds. The firm is owned by First Security Bancorp, where Rutledge is also chairman and serves as the bank's chief executive officer.
Underwriters charge a fee for their services and may also make money from the sale of bonds to investors.
"What happens is, the underwriter buys the bonds from the issuing entity, in this case the university," said Justin Marlowe, a professor of public finance at the University of Washington.
Underwriters then "turn around and sell those bonds to their investors, sometimes directly to investors, sometimes to intermediaries," Marlowe said.
In the case of the stadium bonds, underwriters paid a premium of about $5.15 million on top of the principal amount, according to the bond statement. This money helps the university pay for the expansion project.
Mark Rushing, a UA-Fayetteville spokesman, wrote in an email that the stadium bond issue resulted in a total underwriting fee of $239,545.62 paid to four firms.
Rushing said about 70 percent of the underwriting fee went to two firms: Crews & Associates Inc. and Stephens Inc., with each receiving the same amount. Crews & Associates Inc. received a fee of approximately $83,840, based on information provided by UA-Fayetteville.
Morril Harriman, an attorney and secretary of the UA System trustees board, also abstained from a vote on the bond issue, Hinkel said.
Harriman is a lawyer with the Mitchell Williams law firm. The Little Rock-based firm was paid $107,500 for work on the bond issue, Rushing wrote in an email.
A draft of meeting minutes did not provide any information about other trustees abstaining or recusing from the September vote, Hinkel said.
As noted in the bond statement, Trustee Kelly Eichler is the spouse of Brad Eichler, an executive vice president at Stephens Inc., one of the underwriters. Based on details provided by Rushing, Stephens Inc. would have been paid approximately $83,840 in fees.
Also noted in the bond statement, Trustee Ben Hyneman is the father-in-law of Landon Myers, an employee of Raymond James & Associates, which served as one of the underwriters. The firm received about 15 percent of the total underwriting fee, according to Rushing, or about $35,930.
The other underwriter was J.P. Morgan, according to the bond statement.
Hyneman is also father-in-law of Ginger Hyneman, at attorney with the Mitchell Williams law firm.
Marlowe said the bonds are revenue bonds, but they are also described in the bond statement as "general obligations" of the UA System trustees board. "It's not uncommon to see this," Marlowe said, adding that it means that, if necessary, the trustees would have to dip into other revenue sources.
A Section on 11/02/2016