Pressure on U of I Phoenix deal builds: Raúl Labrador, attorneys challenge legality

Two more legal opinions — one from Idaho Attorney General Raúl Labrador and a second from an outside law firm — have cast more doubt on the University of Idaho’s planned purchase of the University of Phoenix, kindling calls from lawmakers to review or nix the $550 million deal.

The university’s Board of Regents, which is also the State Board of Education, approved the deal to create a nonprofit entity, Four Three Education, to purchase the assets of the University of Phoenix. That decision has drawn in legal opinions from some of the state’s most prominent law firms on the board’s legal authority granted by the Idaho Constitution.

The dispute has also pitted lawmakers and Labrador against Gov. Brad Little, who has supported the deal and controls most of the membership on the state board.

Labrador argued in a Monday letter to House Speaker Mike Moyle, R-Star, that the university’s creation of the nonprofit entity surpassed its legal authority and was therefore illegitimate. He also argued that he has legal authority to sue the board over the deal.

Labrador and attorneys with Givens Pursley, who were hired by the Legislature and submitted a Monday memorandum to Moyle and Senate Pro Tem Chuck Winder, R-Boise, argued that the university’s board has broad authority to govern and supervise the university — but not to acquire or create other entities.

The findings follow a legal opinion from the Legislature’s attorney that found the deal is void and recommended court action. University President Scott Green responded to that assessment by telling lawmakers they should seek other opinions.

“Neither existing caselaw nor the relevant constitutional or statutory provisions provide the board with authority to create a private corporation to acquire the assets of another university and operate those assets separately from the University of Idaho,” the Givens Pursley attorneys wrote.

The University of Idaho in an emailed statement said “there are conflicting legal opinions, all from respected law firms.”

“We believe there is a legal path forward and are working toward a solution,” spokesperson Jodi Walker said.

U of I attorneys say board had authority

Attorneys hired by the university with Boise law firm Hawley Troxell have taken the opposite view — that the board’s decision to create a nonprofit was within the scope of its authority as a separate entity of the government.

Lawyers and administrators for the university have maintained that the university’s creation of a nonprofit was legal, and that the “world-class” online platforms associated with the online school will boost the land grant university’s ability to offer adult education degrees as universities across the country face looming enrollment cliffs. The school also expects to earn tens of millions from the purchase.

“We believe the biggest risk to this state is not taking advantage of this opportunity,” Green told lawmakers earlier this month.

Aside from its legal challenges, the high-profile acquisition has drawn criticism from lawmakers and others that the deal to purchase a university with a dubious reputation could endanger the state’s credit rating, and put taxpayers on the hook if the university were to default on the $685 million in bonds needed to finance the purchase.

Moody’s, the credit rating agency, issued a report this month noting that the deal could pose “significant operating risk” to the state. The University of Phoenix has about 85,000 students and would remain a separate institution.

“The $700 million proposed debt issuance, should the acquisition proceed, would not be a direct obligation of the state and would in any case be modest relative to the state’s revenue base and economy,” the report said. “However, any increased operating stress at the University of Idaho could result in greater fiscal support from the state given the close relationship between the two.”

The university expects the annual costs of the debt to be $60 million, and for Phoenix’s net revenues to be $150 million — more than enough to cover the debt. If Phoenix’s revenues were to plummet quickly, the university asserts it will be on the hook for no more than $10 million annually, which it would cover with its own funds. The purchase includes $200 million in cash to cover any “unforeseen obstacles.”

“The fact is, there are no state dollars at risk,” Green told lawmakers this month.

Idaho lawmakers could sue over deal

Several lawmakers have been irked that they were left out of the Phoenix deal and not consulted about it. At a tense hearing this month, lawmakers questioned university officials and attorneys about the merits of the purchase, and they have threatened to sue over it.

House Concurrent Resolution 26 would give the Legislature authority to challenge the state board’s purchase. The resolution passed the House this month and has been sent to the Senate.

Labrador separately sued the state board over the public hearing it held to approve the purchase, arguing it violated public meeting laws. A judge ruled against the attorney general in January, but the Idaho Supreme Court agreed to hear the case on appeal this month. Oral arguments are scheduled for June.

The deadline for the deal is May 31, and the university has so far spent $12 million vetting the agreement. Legal challenges from the state or delays in issuing bonds could jeopardize the sale.

“If the Legislature were to decide to file a lawsuit challenging the constitutionality of us setting up Four Three Education, I think that would be inserting yourselves in a way that would be very difficult for us to place bonds with a legal threat like that out there,” Kurt Liebich, a member of the state board, told lawmakers this month. “It would put the transaction at grave risk.”