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Dealing With Fine Print

Dealing With Fine Print
September 8, 2011

Two universities came under fire this month for deals struck with auxiliary service providers in which it appeared that the institutions agreed to contracts in exchange for the contractor's paying for facilities improvements.

At the University of Central Arkansas, administrators tied a contract renewal to the renovation of the president's house. At Northwest Missouri State University, administrators renewed several contracts in violation of a state law requiring competitive bidding after receiving $1.5 million for stadium renovations from vendors. In both cases, the university would owe the contractor a significant amount of money if the institution signed with a different vendor down the road.

While both universities struck deals with Aramark, officials said these issues are not unique to the food service provider. University and vendor representatives say auxiliary service providers regularly strike deals with colleges and universities to provide capital for projects such as stadium or dining hall renovations and amortize the investment over several years, often extending beyond the expiration of the university’s contract with the company. If the university ends its business with the company before an agreed-upon time – whether by breaking the contract or awarding business to a new company once the contract runs out – the university is on the hook for a prorated portion of that investment, sometimes millions of dollars.

The arrangement helps universities finance large capital projects, and it gives the universities incentive to renew contracts with service providers, which is good for contractors. But some officials and observers worry that these arrangements can lock administrators into renewing contracts instead of seeking competitive bids, potentially sticking students with higher costs for food or other auxiliary services. The stories out of Missouri and Arkansas show how these contracts, regardless of whether they violate the law, can blow up on an institution, leaving it facing charges of conflict of interest.

A spokeswoman for Aramark said the arrangements are "common business practices" that are clearly outlined in contracts, not gifts, as they are sometimes portrayed in the news media.

"These types of deals are not at all uncommon," said Bill Dillon, executive vice president of the National Association of College and University Business Officers and a former executive at Aramark. Dillon said most tend to be standard investments in projects that enhance functions related to that service provider, such as improvements to a dining hall or campus bookstore. But observers point to officials at universities not currently in the news who exploited the dynamic, receiving kickbacks for agreements with certain companies. They worry that auxiliary services could be beset by the same conflicts of interest that were common in the student loan industry.

In 2004, the chief financial officer of Central Connecticut State University was fired after a state investigation found he had negotiated a $40 million contract with Chartwells, a food service provider, without accepting bids from other vendors, a move that violated state law. He also accepted free golf outings from the company. The cases in Missouri and Arkansas are not as clear-cut.

The Missouri case came to light after the state auditor's office reviewed the university's finances. After a competitive bidding process in 1997, Northwest Missouri State signed a contract with Aramark that could be renewed every year for nine years, according to the state auditor's report. “In November 2001, the university amended the contract to require the contractor to contribute $500,000 in two installments (in May 2002 and May 2003) to the Northwest Foundation Stadium Campaign Fund,” the audit stated. “This contract amendment requires the university to repay a prorated portion of the donation if the contract is not renewed during the period June 2002 through May 2017 (well after all renewal options of the original contract expired).”

The contract came up for renewal in 2007, when state law mandated that the university undergo another competitive bidding process. But administrators decided to renew Aramark’s contract without extending bids, the audit report states.

The university made similar arrangements with the facilities management company and the campus bookstore, renegotiating contracts between 2001 and 2003 to require contributions to the Stadium Campaign Fund and then renewing contracts without going through the competitive bidding process. In total, the university brought in $1.5 million for stadium renovations. In all instances, the university would have faced financial penalties if it had not renewed the contracts.

In the wake of the auditor's report, the university is now working on developing requests for proposals for the auxiliary services outlined in the audit. "We have developed a plan of action that will set the course for considering and addressing the audit recommendations as appropriate,” said John Jasinski, the university's president, in a prepared statement.

At the University of Central Arkansas, administrators approached Aramark, which has been the university’s food service provider since 1976, and asked the company to provide money to renovate the president’s house. Aramark had previously supplied capital to renovate other university buildings, most recently $1.9 million for a student center.

The deal would be part of Aramark's renewed contract, which was due to expire in May 2012. The university’s president, in discussing the deal with the Board of Trustees, framed the $700,000 as a gift, omitting that the money was tied to the renewal of Aramark’s contract. When that came to light, the trustees decided to investigate. On Friday, the board bought out the president’s contract. "No money was exchanged, no contracts were renewed," said Jeff Pitchford, vice president of university and government relations at Central Arkansas. "It was just not presented in the way it needed to be presented."

Unlike Missouri, Arkansas state law does not require state institutions to undergo a competitive bidding process for auxiliary services. Central Arkansas was allowed to renegotiate its contract without soliciting other offers. Pitchford said in the wake of the controversy that the university will likely open up the process for competitive bidding.

Competitive bidding on a food service proposal is not cheap. Providers often spend $30,000 to $60,000 developing proposals to meet a university's demands, Dillon said. If they don’t secure the university’s business, they don’t recover that expenditure. In most cases, it is in the business's best interest not to have to make a competitive bid but rather to continue its existing arrangement.

But if a university doesn't go through the competitive bidding process, it could end up sticking students with higher food prices than necessary, a point that John Brummett, a columnist for ArkansasNews.com, pointed out after the news broke. “This was not charity, but amortizing,” he wrote. “It was a food service vendor seeking to escape a new round of competitive bidding by going into the home improvement lending business on the side. It was an advance on marked-up grub the kids would eat later in their hostage environment. I’m advised that this kind of arrangement is not uncommon. But it ought to be.”

Jane Robbins, a senior lecturer of innovation, entrepreneurship, and institutional leadership at the University of Arizona, said that details of the cases are sparse, but both situations seem to be institutional failures. "It appears that there was quite a large lack of command and control, which gives rise to both intentional and unintentional abuses," she said. "Universities have become decentralized institutions, and decentralized institutions are open to all sorts of abuses." She noted in the Northwest Missouri case, not only did administrators strike the deal, but they also failed to provide oversight of the contractors.

University administrators argue that critics exaggerate the ability of such arrangements to lock universities into continuing with a service provider. “As part of our negotiations with the next company, we could say we still owe the old company $2 million, and the new company has to cover that,” Pitchford said. "That's just kind of how this business is."

 

 

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