Is it a good idea to permanently remove certain private development from the tax roles?

Voters to decide if privatizing dorms can be win-win-win

By Walter C. JonesMorris News Service April 5, 2014

ATLANTA | Among the decisions on the November ballot will be one to privatize college dormitories that supporters say could be a win-win-win proposition for taxpayers, students and investors.  Voters will be asked to OK an amendment to the state constitution that would guarantee an exemption from local property taxes for companies that develop and operate campus housing.

Not everyone believes it’s a good idea, but those that do say it will have a threefold benefit.  For taxpayers, it will begin the process of reducing nearly $4 billion in debt while freeing up cash flow for the University System of Georgia. Students will have professionally managed housing and access to some new, innovative amenities. And the investors in the companies will have a steady return on their equity.  “We think we can bring a lot of efficiencies to the table,” said Susan Ridley, associate vice chancellor for fiscal affairs.

Last month, the Georgia Senate voted 44-7 for the plan after the state House had given it a similarly lopsided endorsement of 166-5 in February. That put it on the ballot for voters to have the last word.  The actual legislation dealt with the property-tax exemption. Even though the University System will still own the land and the buildings, improvements to those buildings will be owned by the chosen developer, which would not ordinarily be exempt from taxes.

The local governments didn’t put up a fight, notes Amy Henderson, spokeswoman for the Georgia Municipal Association.  “Cities aren’t losing anything since they are not getting property tax from those now,” she said.
Besides, Henderson said, cities understand that campus dorms bring students who become customers for restaurants and stores in downtowns.  Among those opposing it was Sen. Mike Crane, R-Newnan. A Georgia Tech graduate who runs his own general contracting firm, Crane has experience building in two states.

“The proposed wording for the ballot referendum includes wording that I believe would be misleading,” he said. “To insinuate a ‘yes’ vote will ‘keep costs affordable’ is an exaggeration at best and certainly a promise the (Board of Regents) cannot keep.”

He also expressed a bigger, financial worry.  “This may encourage further development of financially questionable projects for an already overbuilt University System,” he said.  Overbuilding is also a concern of the University System chancellor, Hank Huckaby, a former legislator, university administrator and long-time budget director for the state. When he became chancellor in 2011, he was alarmed by the financing arrangements used to build dorms since the 1990s that had ballooned to nearly $4 billion in debt.

Although the University System is part of state government, the debt was structured to avoid being subject to the lending cap that applies to the rest of state government. Instead of funding through the sale of general-obligation bonds, the dorms as well as some parking garages, recreation centers and student centers were funded by foundations created and controlled by the colleges which borrowed through bonds that local governments sold.  The arrangement is called “public-private ventures” even though no private companies or outside entities are involved. Traditionally, Wall Street agencies that rate debt instruments for investors have raised few concerns about the PPV deals, but they have recently begun to take a harder look at them.

The University System argues that taxpayers aren’t on the hook for the $4 billion PPV debt should any of the 187 ventures falter.   But the political reality in such an occurrence may be different.

Besides the heightened scrutiny of the rating agencies, the Board of Regents has become alarmed by the recent downward trend in the system’s total student enrollment. The PPV financing machinery was designed when enrollment set new records every year.  About the time Huckaby came on board and the enrollment trend changed to a downward direction, the University of Kentucky was making headlines in trade magazines by privatizing all of it housing through one company, the real-estate-investment trust EdR based in Memphis, Tenn.

Kentucky had aging dorms and also needed a new science classroom building. It didn’t have enough money to go around.  So, it took bids from competing companies before striking an agreement with EdR in 2011 to eventually build as many as 9,000 beds to replace dorms that will be demolished and expand the housing inventory. Students moved into the first phase last fall with raves, according to Penny Cox, director of the housing project in the University of Kentucky’s Office of Finance & Administration.  “Something we weren’t able to do as a state institution was keep everything in that first-class manner, so I would say that reaction has been positive,” she said.

The company also recommended ideas that would have never occurred to school administrators, like ceiling fans to lower utility consumption, geothermal heating and granite countertops for their durability. Instead of students lugging their own fridges, scarring floors and walls every time they move in or out, the company recommended installing fridges that are tied to microwave ovens so that one pauses while the other is in operation as another energy-saving innovation.

Ridley hopes Georgia’s experience will be as positive.  Later this month, the system will issue a request for qualifications to find three or four companies suitable for the detailed negotiations for such a major bid.

The University System has 63,000 beds, nine times what the University of Kentucky had when it struck its privatization deal.  It plans an initial phase of 9,000 beds, including 6,000 existing and 3,000 to be constructed. That will refinance 11 existing foundation-funded deals of $61 million with a projected annual savings of $3 million.

The package will include the campuses of East Georgia State College, Coastal Georgia State College, Georgia Regents University and Armstrong Atlantic State University, among others, providing a mix of large and small schools spread across the state to make it attractive to the investors behind the private companies.  The colleges will still hire the resident advisors and the campus police, and will collect rent from the students. The companies will provide all the maintenance and repairs.  There will be a limit on how much the room rent can rise in any year, and the University System gets a share of future profits.

“The key is to structure the deal so our interests are aligned, not competing,” Ridley said.  However, the system won’t drive business by requiring students live on campus, although 19 schools already require it of freshmen. And if enrollment drops, the company’s investors will be taking the risk that income could fall, not the taxpayers.

Why the tax exemption when private landlords ordinarily pay taxes?
It would be a new cost, Ridley said, for students living in dorms now.
“Those costs would be passed on to the students, and we would not be able to meet our affordability objective,” she said.

Follow Walter Jones on Twitter @MorrisNews and Facebook or contact him at and (404) 589-8424.

This entry was posted in Commentary, Issues. Bookmark the permalink.