Wednesday, June 28, 2006 | 7:23 a.m.
The offer was just too good for UNLV officials to pass up, even with the strings attached.
A private company that operates dental clinics would give $3.5 million to UNLV to help launch Nevada's first training program for orthodontists. It would also pay UNLV more than $60,000 a year to train students to work for its private clinics.
In exchange, UNLV would earmark half of each 16-person class to students who would promise to work for the private clinics.
Estimated revenue to UNLV's School of Dental Medicine over the 30-year contract: $40 million.
The company had struck similar pacts with dental schools in Colorado and Florida.
When the deal was approved in May 2004, the quid pro quo arrangement was exactly the kind of creative financing and private-public dealing university regents had been pushing. This was a way to expand the university's graduate education offerings without tapping dwindling state resources.
But just two years later, the partnership seems to be crumbling. The company has warned UNLV that it would not be able to make promised payments for the next two years - even as UNLV officials have committed to expanding the dental program on the expectation of that money.
UNLV is now scrambling to reduce the program's expenses and find additional revenue sources to cover the costs of a new dental training building and the expansion of the other specialty programs, built on the promise of the hailed private-public partnership. They promise to keep the fledgling orthodontics program alive, even if they have to foot the entire bill.
And now, some regents are wishing the deal had been a little less creative and a little more stable.
Regents are now questioning whether UNLV properly vetted Orthodontics Education Co. when it accepted the company's partnership proposal two years ago, and whether UNLV moved too fast in developing the program before the checks cleared.
The fallout has also cast a black cloud on future private-public partnerships, regents say. Chancellor Jim Rogers has championed them as crucial to improving the Nevada System of Higher Education.
The partnership was proposed by Gaspar Lazarra, owner of OEC of Jacksonville, Fla.
Within hours of being named chancellor of the Nevada System of Higher Education, Rogers urged adoption of the contract as his first order of business.
Skeptical regents thought they had asked the tough questions before approving the partnership.
In three marathon sessions, regents asked what happened if OEC pulled out or went bankrupt.
They pored over the dental school's 30-year financial plan, which showed profits of more than $700,000 year.
They asked for repeated corrections to the contract to make it more favorable to UNLV.
They harped on the admissions process to be sure that OEC and non-OEC students were treated equally, and raised multiple concerns that the contract OEC offered students was "indentured servitude" because of the demand that, after graduating from the program on OEC scholarships, they would work for the company.
By an 8-3 vote, regents approved the partnership.
Regent Steve Sisolak now believes university officials were "blinded by greed."
Promises that were made to regents about how the program would work - promises made by President Carol Harter, Provost Ray Alden and dental school Dean Pat Ferillo - don't appear to have been kept. (The three have left or will be leaving the university in the next week.)
For instance, at the October 2003 regents meeting, Ferillo, who left UNLV to become dean of the University of the Pacific School of Dental Medicine, said the orthodontics program would not be launched until the $3.5 million initial gift was in hand. One year into the program, the second half of that gift had not been delivered.
Regents were told by Alden that the $3.5 million gift would be an endowment, in order to protect the base gift and generate interest that would pay operating costs and ensure program sustainability.
UNLV officials later realized the gift was contractually earmarked for the building, said Gerry Bomotti, UNLV vice president for finance. There were no allowances in the contract to create an endowment to fund the program's operating costs.
Regents also were told that the OEC money would be used to expand the School of Dental Medicine into other specialty areas, so if OEC pulled out, that second phase could be postponed or scratched.
But UNLV officials expanded the program without waiting to make sure the initial program was financially stable, and both Bomotti and Lynn Hurst, associate dean of advanced dental education and director of the orthodontics program, said it would probably be more expensive to halt those plans. The $400,000 loss of expected revenue that UNLV is facing equals the start-up costs for those programs.
In response to questions, Harter told regents that John Gallagher, vice president for fundraising, reviewed OEC and Lazarra's past companies and found them financially solid. When reached last week, Gallagher said he had no memory of such an audit and said the person who did donor reviews at the time no longer worked for the university.
Lazarra could not be reached despite multiple attempts, and no one else from his staff was available for comment.
Harter characterized the financial troubles as a "bump in the road." UNLV officials referred questions to Bomotti.
According to Bomotti, OEC has experienced "cash-flow problems" because of difficulty raising capital for its clinical operations.
Lazarra said OEC needed a "two-year timeout" from its partnership with UNLV, Bomotti said.
OEC will not be making the second $1.75 million installment of its initial $3.5 million gift, scheduled for September, Lazarra told Bomotti. Nor will it be underwriting another eight scholarships as expected, nor add another four scholarships in 2008. It is even unclear whether OEC will cover the costs of the eight students entering their second year of the graduate orthodontist program at UNLV.
UNLV could be out $240,000 to $480,000 next year in operating revenue in addition to the $1.75 million shortfall, Bomotti said. It is money that officials banked on to help finance a new $16 million advanced dental education building, for which ground has been broken, as well as to add more dental specialties in general practice residency, endodontics, oral and maxillofacial surgery, pediatric dentistry and periodontics. UNLV has already begun hiring directors to develop those programs by fall 2007.
Officials are now weighing, as a worst-case scenario, whether to raise tuition for orthodontist students from $30,000 to $45,000 a year .
Or they may reallocate money from a recent property sale, a move which some regents called a "shell game" or "robbing Peter to pay Paul." There's a chance they'll have to postpone developing the additional specialties, officials said.
The issue confronting regents is whether OEC's pullout is a financial hiccup, as UNLV officials are hoping, or whether it's the first of many cracks in a flawed business plan.
Regents say they are not ready to pull the plug on such arrangements, but will bring greater scrutiny to such partnerships in the future. They've asked system staff for a special meeting to address the orthodontics program and other issues at UNLV.
"You can't take a swamp and put sod on it and say it's not a swamp. When you walk in you'll still sink," Sisolak said. "I think sometimes people don't want to see the forest through the trees. They get so excited about the big dollar amount that they put blinders on."
OEC is a private company that makes its money based on revenue from orthodontic patients, Bomotti said.
It operates 12 Imagine Orthodontics practices in five states, including two in Las Vegas and one in Reno. The clinic's orthodontists are from Jacksonville University, the only OEC program to have produced graduates.
Under the arrangement with students, OEC pays for their training and living expenses and sets up their practices, based on template business plans, right down to identical Web sites. Students must agree to work in an OEC practice for seven years, with a guaranteed salary of $150,000 plus profit sharing based on revenue.
OEC has an arrangement similar to UNLV's with the University of Colorado Health Science Center and Jacksonville University. Each program is operating smoothly.
UNLV's contract with OEC allows the company to opt out of providing scholarships, Hurst said. It only says that UNLV must initially reserve half of its 16 slots for OEC students.
UNLV had 205 students apply for this fall, so there is no shortage of people to fill OEC's seats, Hurst said. All students, however, will have to pay their own way and UNLV will not get the extra $30,000-per-student it was expecting for the OEC students.
Hurst and Bomotti said the possibility of OEC not sustaining its scholarships was not considered a real possibility by UNLV, so the funds were counted on as a revenue stream to help offset the program's operating costs.
Officials also counted on the $3.5 million gift to offset the financing cost on a 44,000-square-foot, $16 million office building and clinic on UNLV's Shadow Lane Campus, Bomotti said.
Each of nine regents interviewed by the Sun said they opposed raising student tuition to cover some of the revenue loss from OEC.
Private-public partnerships can backfire, officials warn. Private benefactors don't have to answer to the public if something goes wrong, said Richard Linstrom, UNLV's chief lawyer.
"You think you have a sure thing, and you trust people, and you don't know some of these things that might happen," Regent Thalia Dondero said.
Rogers said the fallout shows the need to move more carefully on future partnerships, but that is shouldn't stop future deals because this one "soured on a few bucks."
"That company X may have financial problems shouldn't prejudice us from dealing with company Y and Z. I think every time we do these things we get more sophisticated and demand more financial statements.
"We are at the bottom of a learning curve, and we have a lot to learn."
