These minutes reflect
discussion and debate at a meeting of a committee of the
Minutes
Senate Committee on
Finance and Planning
238A Morrill Hall
Present:
Charles Speaks (chair),
Prince Amattoe, Brittny McCarthy Barnes, Stanley Bonnema, Bruce Brorson,
Charles Campbell, Tom Gilson, Gary Jahn, Abu Jalal, Cynthia Jara, Joseph
Konstan, Michael Korth, Richard Pfutzenreuter, Thomas Stinson, Terry Roe, Sue
Van Voorhis, Warren Warwick, Susan Carlson Weinberg
Absent:
Jean Bauer, David
Chapman, Tim Church, Robert Cudeck, Thomas Klein, Marvin Marshak, Timothy
Nantell, Daniel O’Connor, Laurie Scheich, Michael Volna
Guests:
Senior Vice President
Frank Cerra (
[In these minutes: (1)
new facilities for the University of Minnesota Physicians private practice
clinics; (2) report on the endowment; (3) University construction practices;
(4) stadium update]
1. Private
Practice Clinics
Professor Speaks convened the meeting at
Dr. Cerra began by saying that University of Minnesota
Physicians (UMP) needs new clinics for several reasons. First, UMP has over 600,000 patient visits
per year, up from 400,000 two to three years ago. The number of patient visits
has increased 8-10% per year, which is a positive increase. Second, the facilities in
Phillips-Wangensteen and Moos are now quite old and were not designed for the
volume of patients now visiting the facility. Access to the facility by patients
is also a source of complaints. This
results in negative experiences for both patients and physicians.
They are
also hospital-based clinics, which means they are connected to hospitals and
owned and operated by hospitals; the significance of this is who actually
controls the clinic and what happens in it.
The reimbursement rate (the amount of money they receive for seeing a
patient or performing a test) is higher for hospital-based clinics. In addition, in terms of services (x-rays,
labs, and so on) the physicians are working in clinics where they cannot
control scheduling, function of personnel and space. The ancillary services, particularly
radiology, are mismatched to the equipment.
The result is that the in-hospital services are overloaded with
outpatients while the outpatient clinics are under-utilized. All of this makes it very difficult to meet
the mission of health professional experiential learning and to provide the
service environment that is essential in the marketplace of health care that
exists in the state. The physicians
compete for provider contracts with all the other providers in the state and
region and receive no special attention or treatment as the principle teaching
and research facility. The premium for
health care services does not contain a component for education and research.
Third,
each of the health professional school faculty is now developing a private
practice plan (Veterinary Medicine, Nursing, Dentistry, etc.). Nursing, for instance, will assume an
increasingly prominent role as the primary providers in situations of chronic
disease management. The evolving
paradigm of health professional education, a component of the accreditation
process, is to move from hospital to non-hospital settings and more into community
settings. The AHC cannot educate and
train all its health professional students in settings where regular faculty
practice. It is highly dependent on
community practitioners--and will become increasingly so as the community
partnerships develop.
UMP
cannot practice modern healthcare effectively, and cannot effectively compete
in the marketplace, without efficient and effective facilities over which they
have sufficient control to manage personnel, space, and services. The practice plan continues to finance a
significant part of the education of students and the performance of research
in the
There has been a phased change in that UMP is moving in a
series of steps toward owning and operating their own clinics. The clinics UMP works in have always been
part of the hospital--first
Also part of the discussion in moving toward a new clinic
facility is the participation of nursing, pharmacy, and perhaps dentistry. Interdisciplinary activity to promote health
and to prevent and treat disease requires that the provider disciplines have
proximity to each other. This outpatient
facility would also support chronic disease management and clinical
research. In effect, it would become the
physical location for clinical research and education for the health
professions. This emphasis is critical
for the future of the health enterprise of the
How do you finance the new clinic building? UMP can have a certain amount of
responsibility in financing but will have a very limited capacity to issue
debt. UMP can also borrow but will be
limited in the amount, and will not be able to support the cost of the facility
on its own. When President Yudof was
here, the question was asked if there was a way for the University to
participate in the financing of this mission.
UMP has cash flow but it does not have a balance sheet with assets to
support debt.
UMP, by
Regents' policy, is a legal entity outside the University and exists for the sole
support of the mission of the
Dr. Cerra
at this point turned the conversation over to Mr. Pfutzenreuter.
They have had discussions with a consultant, Mr. John
Augustine, who has assisted in developing financing for academic clinics around
the country that have similar problems.
The models have run the gamut of physicians pledging salary dollars if
there was a default on the payment to the University backing it 100%. For this to happen, and it is important from
the standpoint of the money from the private practice, how can the financing
package be structured so the University is not at total risk for a possible
loss but shares the risk with the Medical School or Medical Foundation or
physicians. The University would not be first in line
but rather second or third in the event of non-payments.
What kind
of assessment of risk potential do they have at this point, Professor Speaks
asked? Dr. Cerra responded that they
basically have not figured that out yet. The project is still in the formative
stage; it is pre-pre-design, he said.
Professor Konstan suggested that if this venture is seen
as income-producing, which is the plan, one opportunity might see this as an
investment process. Own the clinic itself and allow it to be built as
investment. Have those scenarios played out as they are talking about that
financing? Dr. Cerra replied that there
are real estate trusts that are on the table. The Medical Foundation Board has
begun to entertain the possibility of being an investor in the building, but has
not gotten to the point where it is willing to issue debt.
Mr. Pfutzenreuter said that Medical Foundation debt
affects University debt. New accounting
rules are going to bring the affiliated organizations onto the University's
financial statements. Those debts are
consolidated (the medical foundation, the arboretum) and even if they were not,
the debt issued by affiliated organizations is counted in debt ratios. It is
thus difficult to insulate the University from implications of possible debt.
Dr. Cerra
said that the board deliberations have included the model where they are
willing to make an investment but they have not gotten to the point where they
are willing to invest in the whole building, using themselves as banker. Their concern is that they are afraid their
fiduciary responsibilities would be violated.
Mr. Pfutzenreuter said that if this does happen, the risk has to be
shared among all parties and the last risk should be on the entire University
as a whole. Dr. Cerra said he thinks
everyone agrees with that.
Mr.
Pfutzenreuter added that they can help with credit and a strong balance sheet,
which will help get a better interest rate.
They could help lower how much money has to be borrowed.
Dr. Cerra said the first debt payer would have to be the
physicians. Probably the foundation would be second. The University, or some
piece of it, would be the third. Dr.
Speaks added that there is a provision for some form of partnership with the
Foundation and the University. Dr. Cerra agreed. He added that another player,
an unexplored avenue, is
Dr. Cerra said that this brings up an important point,
which is two-fold. The first is that
because of the Regents' policy, the practice plans have not been able to accrue
assets; they can only have cash on hand in a reasonable amount. The second
point is that the practice plan supports a very large percentage of the
compensation of the faculty who practice medicine and teach. They receive only about 10% state money for
their education activities but they are teaching about 35% time. There is also a substantial amount of money,
in the range of $20-25 million dollars, that goes to the education of medical
students. The
Dr Cerra
mentioned briefly that there is potential for a fifth investor, a private one
or two, but it has not been explored. There has been some interest. It would
lower the risk for the others.
Revenues
would be earmarked for costs, salaries, and then the debt, Professor Roe
asked? Dr. Cerra replied in the
affirmative, adding that some of the money will be for support of
Professor
Korth wondered about authority and fiscal responsibility. UMP is legally distinct from the University
but subject to Regents' Policies. How is
that distinct? Dr. Cerra said they are
two different entities. By Regents'
policy the tenured faculty of the Medical School receive state money to
teach--but they are also full-fledged members of a 501(c)(3) non-profit, tax
exempt foundation called UMP, that exists for the sole support of the Medical
School but delivers clinical care by faculty.
The budget is set like a funnel:
dollars come in the top and out the bottom. Those that are taken off the
top include the Dean’s tax, then University taxes, then overhead and salaries
of the physicians. What comes out the
bottom goes back into departments; use of that money has to meet the mission of
the school. This is codified in the
yearly compact.
If this
moves forward, how do physicians become convinced that it is a good idea to
have one more outlet in this funnel that will be paying off debt, and who
decides how big that outlet is relative to the others? The first example is the push-pull. The push is the doctors and patients don’t
like the clinic but like each other. The
pull is having a new clinic that has the doctors, nurses, pharmacists, and
clinical research associated with it.
Their mission is to educate the next generation in the best way
possible. Ultimately, if they are responsible for the debt, it will come off
high in the funnel.
Professor
Konstan asked about Nursing and Pharmacy--they don’t report to the Dean of the
If the
clinic is built, is there space in Moos and Phillips-Wangensteen that can be
reclaimed for other University academic purposes, Professor Konstan asked? There is, Dr. Cerra said, and they have a
task force working on that issue. They
have an architect and an engineering crew looking at possible uses for the two
facilities.
Mr. Jalal
asked what happens if the clinic is built and there is not money at the bottom
of the funnel after debt is paid. Who
kicks in the money for the
Ms. Van
Voorhis asked if these facilities are anticipating making classes smaller. Dr. Cerra said they are; that is built into
the design.
Professor
Campbell expressed interest in the
Mr. Pfutzenreuter underscored one of the discussions with
President Yudof before he left for
Professor Speaks thanked Dr. Cerra for his report.
2. Report on the Endowment
Professor
Speaks then turned the discussion over to Gerald Fischer from the University
Foundation. Mr. Fischer was accompanied
by Doug Gorence, who oversees the daily management of
the endowment.
The
first slide showed the combined endowments that benefit the University, located
in three different legal entities: the
Minnesota Medical Foundation, the
Where
does the drop of about 16 percent over the last two years put us in relation to
comparable universities, Professor Konstan asked? The University lost one ranking point. It is not that schools raised that much more
money, but more likely the investment performance. The University is also in the middle of a
capital campaign.
The
total endowment was declining but there was a slight increase in the
Foundation; they have been roughly able to hold stable. Mr. Gorence said
that the gift flow that they have been receiving is a result of past pledges
and new gifts; it has just about offset the payout and spending to the
University. This is more the effect of investment return.
Mr.
Fischer then discussed total return on the foundation’s endowment of the last
1, 3, 5, and 10 years, ranked at the 6th, 9th, 30th,
and 39th percentiles, respectively,
among the top 400 endowments in the country. The Foundation tries to earn 6
points over inflation to maintain long-term permanent value of the
endowment. At ten years, the 10.9%
performance compared favorably to a market benchmark with asset allocation that
matched what the Foundation was doing in its portfolio. When the 6 points are added to 2.5%
inflation, the result is 8.5%, so the University is well ahead of the
benchmark. This is important because the
Foundation is trying to maintain highest levels of payout possible to the
University. Exceeding the goal during
periods of excellent performance and positive market conditions during the
1990’s, for example, provided the Foundation a reserve so there aren’t radical
drops in payout because of the negative performance in the market in the past
few years.
At five years, 7.8% was well ahead of
the benchmark and slightly short of the goal.
The last three years the Foundation has been proud to have had a
positive return in extremely difficult markets.
Last year was an extraordinarily positive performance in that they had a
positive return when so many other foundations around the country were
experiencing negative returns of 10-15%, some as low as -17%. The rankings are of 400-500 universities and
major non-profits. The 6th
percentile rank last year was strong performance. The sample is a broad one that includes large
funds like Harvard and smaller funds which are not run the same way. There are always issues with data. The fairer benchmark is investing in the
market, but everyone likes to see how they did versus other schools.
Professor
Konstan asked about the policy benchmark—is that a dynamically changing thing
as asset allocation is adjusted? Is this basically saying how well they are executing
the policy as compared to others? It
is.
Why does the Foundation have so little
invested in real estate? It is more
where we are in the investment cycle, Mr. Gorence
said. He arrived in 1999 and started
building the real estate and other alternative investment programs from
zero. The Foundation uses limited
partnership structures. Mr. Gorence puts money with outside managers, but there are not
always opportunities to invest it productively.
The target allocation for real estate is 5% and it will take several
years to get there.
The
Foundation created the subsidiary, University of Minnesota Foundation
Investment Advisors (UMFIA) with a board made up of experienced
professionals. The UMFIA Board hired Mr.
Gorence as CIO who reports to the same board. The UMFIA Board of Directors includes people
such Fred Friswold, former head of Dain Bosworth; Mr. Winton, an experienced venture
capitalist; and Dale Olseth, the CEO of Surmodics. Mr.
Fischer came from Ford and US Bank, which gave him a lot of investment
experience.
There
is a clear understanding of roles and responsibilities. Mr. Gorence keeps
the UMFIA Board focused on asset allocation strategy. The Board decides the
Foundation's risk tolerance and modifies policy accordingly. It looks at likely
returns for the long-term. Mr. Gorence then focuses on manager selection and monitors
those managers.
Do
your results include all of the costs of the Foundation as well as the costs of
the external management, Professor Konstan asked? The returns are net of all investment
expenses, Mr. Gorence said, including custodian and
consulting fees. They do not include the
three-quarter percent charge that the Foundation uses to support its
business.
If there is a donor who wants to give
money to the endowment, does the donor's preference for how the money is
invested control the investment? A key
underlying principle is that when donors make a gift they release control of
that asset to the Foundation. The donor
can specify how the money is used but not how it is invested, said Mr. Gorence.
Is
the Foundation entering into partnerships with real estate? Real estate in the Foundation’s portfolio is
not consciously aligned with the University’s mission; the Foundation has not
developed student housing, for example, Mr. Gorence
said. They hire expert managers who
invest in several projects—the Foundation does not make these decisions
directly. UMFIA hires managers and then
manage the managers. UMFIA may invest in
a project to build multi-family complex that would be leased out or sold to
another for profit, Mr. Gorence said.
The policy is that assets the
Foundation receives, if they are in the form of securities, are sold as soon as
practicable and turned into cash. There is enormous wealth in private equity
and commercial real estate but the Foundation does not accept gifts that have
ongoing liability.
With respect to real estate, should
there be a provision in the policy such that if a unit of the University needs
a facility and the facility would have a strong revenue stream, the Foundation
could consider whether or not it would be worth investing in it so that instead
of the University issuing bonds the Foundation makes an investment with the
expectation of decent return, Professor Konstan asked? Mr. Gorence said he
thought the Foundation would be open to such a proposal if it were to meet
investment standards and criterion. The
participants discussed ties and conflicts.
Mr. Fischer said that any such investment must meet return objectives. When there are opportunities to invest in
University and commercialized discovery it is very inviting because it could
hit two mission goals, but the project would have to meet the investment return
and risk requirements of the Foundation.
Would
there be any instance where the Foundation and the Minnesota Medical Foundation
would become partners in a venture? Mr. Gorence and Mr. Fischer indicated that anything is
possible. They did work together on the
Professor
Konstan noted that the
From
what they have seen, have the investment objectives differed during the
coordinating meetings, or are they the same but different views on how to
accomplish them, Professor Konstan asked?
There is a little of both, Mr. Gorence
said. The medical foundation, given that
it is smaller, is a more conventional investor.
They have a different board with different opinions. The University has a larger staff and it has
a different governance structure.
Ultimately, all decisions go to the Regents but there are different
processes and different outcomes. These
different approaches have likely benefited the University, he said.
Mr.
Fischer commented on payout. Given the markets the Foundation has had and the
outlook of the Board, it is far more likely the returns will be positive but in
the single digits in the next ten years, rather than the double-digit returns
the Foundation got used to. A year ago
the UMFIA gave the Foundation a strong message:
They felt that to maintain the 5.5% payout rate would force them into a
level of risk with which they were uncomfortable. The Foundation analyzed different strategies
to lower the payout rate and did lower the payout rate from 5.5% to 5% but the
Foundation is migrating over a five year period to reduce the pain on the
University beneficiaries. They have
built up the reserve to smooth it over years, but there is still a concern that
the payout may be too high. Goldman Sachs did a study suggesting the payout
should be well below five percent.
Beyond the 5% payout, the Foundation
takes three-quarters of a percent administrative fee for support of the
Foundation’s operations, including the stewardship it provides to donors. It
was noted that the 5% rate is still more generous than most Universities
according to a third party analysis. In
addition, the payout rate is high in relation to the long term results outlook.
For the
long-term sake of the endowment, UMFIA would still like the Foundation to
consider further reductions in the rate.
Professor
Konstan asked if one of the things that might cause a further fee reduction was
the anticipation that the endowment would grow to over a billion dollars. Has the Foundation been looking at the
question of whether this three-quarter percent needs to remain as high as it
gains some economy of scale from having a larger amount? The long-term hope is that the endowment
would grow faster than the operating budget and therefore permit a reduction in
that fee, Mr. Fischer said. They are,
however, ending the capital campaign (there are actually nine months left), but
they have more identified potential than they did at the beginning, even though
they have raised $1.457 billion so far.
The Foundation cost to raise a dollar is 10 to 12 cents but they are
getting a return $8-$10 for every dollar it is spending. The Foundation Trustees are asking how to
invest more to seize more potential and get a 10 to 1 return on
investment. Community foundations are at
about 1%; many banks are over 1%. The
Foundation does not want donors to go somewhere else because they view the
Foundation as inefficient, Mr. Fischer said.
The
present capital campaign is taking three-quarters percent from University
funds. When the capital campaign is finished does that go away, a committee
member asked? He is recommending it
continue, Mr. Fischer said. They provide
stewardship; it is a legitimate fee. In
the spirit of figuring out how to raise more money it is a source that helps
them.
Professor
Speaks thanked Mr. Fischer and Mr. Gorence for
joining the meeting.
3. Construction
Practices
Professor Speaks now introduced Gail Klatt, Director of
Audits, Mark Rotenberg, General Counsel, and Vice President Kathleen O'Brien
from University Services.
Ms. Klatt
explained that when they audit construction they do not audit specific
projects; for example, auditing all of the costs associated with Riverbend
Commons. That function is housed in
Facilities Management's Construction and Design Services unit. The Department of Audits' charge is to audit
the control processes established over construction activities (such as whether
change orders are being properly controlled) using a sample of construction
projects.
In December of 2000 they issued an audit for which most
of the projects sampled followed the design-bid-build methodology. This was not intentional but simply reflected
the fact that this method was the one most used at that time. The audit reported in April, 2002 involved
mostly projects using the design-build method, which again reflected the method
most in use at that time. They offered
no opinion about which was better. The
controls that need to be in place are similar but vary in how they are
accomplished.
The primary difference between design-bid-build and
design-build is the role of the architect. In the design-bid-build process the University
would contract directly with an architect. The architect would draw the plans
and the University would then ensure that the plans met requirements. The University would put the project out on
bid to construction firms. The
architects are contractually obligated to the University as its representative;
they serve as its agent. In the
design-build process, the construction firm will usually use an architect as a
partner to develop a proposal to design and build. In that case, the University contracts with
the construction management company, which is partnered with the architect--the
architect's relationship is with the contractor, not the University. The design-build process shifts
responsibility for guarding the University's interests and seems to require
more oversight on the University's part.
Ms. O'Brien added that design-build is a competitive process;
design-build also has a guaranteed maximum price whereas design-bid-build does
not.
Committee members were curious to know if there was any
difference in the risk to the University between these two processes. The response was that the risk is limited by
how good the contracts are as well as the quality of contract management. Design-build generally proceeds faster
because they can go in parallel with design and build where design-bid-build is
more serial. Design-build expedites the construction process.
Professor Campbell noted that it seems that with
design-bid-build the University knows what it is getting but with design-build
it has to make compromises and raise prices.
People who advocate for design-build say that when unforeseen
circumstances arise they can be remedied more quickly because the contractor and
architect are working together and it is to their benefit to finish
quickly. But does one trade timeliness
for price, he asked? Both Ms. Klatt and
Ms. O'Brien agreed. Vice President
O'Brien added that the University will end up with a better product if it has a
clear definition of what it wants; change orders cause the same problems in
either process. The project delivery
method is not really the cause; it is the way the process is used, she said.
Professor Konstan noted that if a project is under-funded
compared to the program's ambition, it will save time, effort, and money by
discovering that gap in a separate design process before going into bidding or
building. Design-build seems to work best if the amount of funding matches
ambitions.
Vice President O'Brien observed that the guaranteed price
in design-build puts a limit on the project.
But if the University changes its expectations, when the occupants
decide they want to modify something, the change will be expensive with either
process. That is part of the control
mechanism: Who provides direction to
contractor in terms of subsequent changes.
Professor Roe inquired which of the two methods are most
common. Design-bid-build is the
traditional; design-build is relatively new but gaining popularity, Ms. Klatt
said; Vice President O'Brien agreed.
There is no rule about which is best.
Mr. Rotenberg next informed the Committee that the
General Counsel did two things in order to inform the Board of Regents and
President about these projects. The
General Counsel's office does not typically conduct a review or audit of a
whole area of University concern, but because there was over a billion dollars
involved and there were concerns about contracting and delivery method, the
General Counsel's office decided to conduct a review of the contracting in
response to the issues raised in the December, 2002,
audit. The public document that was
discussed at the Regents' meeting in June produced 13 recommendations which
address how the University contracts for construction services and manages the
projects once they are delivered, because it can receive all kinds of
guarantees with design-bid-build and the same with design-build. They do have inherent differences;
design-build is generally speedier and
problems that arise incidentally can be worked out more quickly and with less
conflict--the architect and construction company have no economic interest in
blaming each other (as they may in the design-bid-build process). One design-bid-build advantage is that
architects may be more zealous in defending the University's interests because
they have no economic connection with the contractor. Mr. Rotenberg emphasized that how these
things play out depends a great deal on the project "owner" (unit or
department) and project.
Mr. Rotenberg then offered two recommendations. One was in the area of design
supervision. Irrespective of which
delivery method is used, he said, the best way for an owner to ascertain design
quality is peer review. In current and
prior situations, when specifications were defective the primary recourse was
litigation or arbitration. But, he said, even an excellently-litigated result
will not deliver a better project. In
the future, Facilities Management will obtain independent peer review of the
plans and specifications in those cases when projects costs exceed $1 million.
The University, in order to be economical, has not had inspections of projects
in a way that would determine good workmanship and conformity to plans and
specifications. Although it does employ independent testing firms to test soil
and building codes, it usually does not have comprehensive inspection processes
on major construction processes.
Facilities
Management should provide for construction project inspections on projects over
$1 million in value. The General Counsel's office does not have an opinion on
the delivery method; neither is necessarily disadvantageous from a legal
liability standpoint or risk exposure standpoint. They have been reviewing and revising
contract forms for Facilities Management so that the contracts will better
address the University's interests. The
recommendations were directed at improving the overall project delivery so that
the University's legal interests are best protected.
Professor Konstan mentioned that the Committee had just
heard from the Foundation that in portfolios approaching a billion dollars, it
was seen as prudent to farm things out to outside managers. Is that the scale that the University is in
with respect to construction? Should it
have a set of outside construction experts as opposed to trying to supervise
with staff from inside the University?
Vice President O'Brien said there are two or three answers to that
question. First is that the volume of work in the last four to five years was
extraordinary in the University’s history; that volume is declining and will
not likely return in the near future. The second answer is that yes, when the
University has an extraordinary volume of work it is not prudent to increase
staff to the level of that extraordinary volume. For example, she said that when she oversaw
the doubling of the size of the
The
questions the University really needs to ask are these: Are we getting what we designed? Is it safe?
Are we getting what we paid for?
Audits raise those issues.
University Services plan to improve construction oversight and
management services.
Ms. Klatt said this gets back to the view that neither of
the methods is inherently better or worse; the issue is how they are
managed. One of the things they
determined from the audit was that the University's contracts with the external
owner's (the University's) representatives were identical whether it was
design-bid-build or design-build arrangement.
Theoretically, the external University representative should have had
additional responsibilities under design-build, which raises the question about
the expectation of the oversight they would provide. In terms of the use of internal or external
owner's representative, one is not necessarily better than the other.
Professor Konstan inquired about the two reports, one of
which was a public report delivered to the Regents. What, if anything, could
Mr. Rotenberg tell the committee about the other report which was not publicly
presented? Mr. Rotenberg said there was
a nonpublic report which is protected by attorney-client privilege with respect
to certain allegations of wrongdoing related to some of the construction
activities of the University. The only
thing he could disclose was what he disclosed in the public meeting in
December: There was no evidence found to
warrant discipline of a University employee.
The General Counsel's office did not refer any issues to the county
attorney.
Professor Jahn asked if the visitors could comment on the
current status of Andersen Library. Mr.
Rotenberg said that they have studies with respect to environmental issues at
or near the library. They believe that
the environmental issues from a legal standpoint (OSHA and protection of the
workforce) have been successfully addressed.
With respect to the cause of certain leaking and pollution in the area,
the General Counsel’s office had a long dialogue with Minnegasco. It is the University's position that
Minnegasco is responsible for a lot of issues related to groundwater and
subsurface pollution on that side of the campus.
Professor Jahn followed up by asking if they had any
inspections from outside inspectors during the construction of Andersen
Library. Ms. Klatt said that Andersen
was mostly done when they began their audit effort but she believed it would
have followed the same process--the University did not do inspections
themselves. It does not have an
inspections staff.
Ms. Van Voorhis said that what happens usually is that
the architect designs a wonderful building but forgets about the classroom
technology and equipment and furniture needed--and then change orders
occur. By the time it gets to her to
purchase the furniture and technology there is no money left. Is there any way to can avoid this problem? Vice President O'Brien replied that she is
aware that one of her major tasks as Vice President for University Services is
restoring trust and confidence in the design and construction processes. The issue that has been raised is not one
where the University can change one part of its process to make it better. As a new person in this position, she is
conducting a systematic review of how they develop the building programs and
who makes decisions. The University will
end up with the right product if it spends time at the front end, she said; her
job is continuously to improve the process.
The University can do a better job than it has. She noted that she would be happy to report
back to the Committee in the future.
Professor Speaks said he believed Ms. Van Voorhis raised
an important point. As there are new
classroom facilities being built on campus, how frequently are Ms. Van Voorhis
or Mr. Fitzgerald, Director of Classroom Management, consulted? Normally, not until later, Ms. VanVoorhis
said. The technical people need to be
involved from the beginning to address issues related to acoustics, lighting,
and classroom technology.
Professor Speaks thanked Ms. Klatt and Mr. Rotenberg for
their report.
4. Stadium
Update
Professor
Speaks then turned the subject to the update on the stadium. It will go before the Board of Regents for discussion
in November and for action in December.
Professor Speaks noted that one of the metropolitan newspapers reported
that things are moving well on the Vikings side but are very complex and slow
at the University. The Committee would like to know where the University is
with respect to the predesign and the Memorandum of Understanding (MOU).
Mr.
Rotenberg said that design elements have been worked on intensively by Ms.
O'Brien's and Mr. Pfutzenreuter’s people.
An enormous amount of work has been done. The legislation provides that all material
aspects will be worked out in a bargain between the University and the Vikings
franchise.
There are
several ways to achieve the objectives that the Regents have set out; nothing
is going to satisfy everyone. For
example, the campus look and feel is obtained from something standing on the
ground. With the respect to the
objective that we obtain a substantial financial benefit from the project, is
that a contribution of one professorship a year from Red McCombs, is it
balancing the athletics budget, is it $1 million in cash for rent
payments? To reasonable people, these
are all things that could be considered substantial benefits. These things have
to be compartmentalized in a document and they must figure out what can be
achieved.
The
macro-negotiation posture can be envisioned as a three-legged stool. One is the requirements of the
It is not
clear that all these objectives will be realized. It may happen, and if it does the MOU draft
and pre-design materials will be forwarded to the Board of Regents by the
President, presumably with the recommendation that the Regents approve it,
recommend it, and forward it on to the legislature. If the agreement and the
understandings cannot be reached in time, then there might be another
resolution that will be appropriate for the Board to vote on. The instructions
from the President and Board of Regents are to achieve as best they can
implementation of the principles adopted by the Board. If that goal cannot be achieved, the
University is not necessarily under pressure to deliver a document that the
Vikings will find acceptable.
Professor
Speaks asked if Mr. Rotenberg anticipated having a draft of the MOU for the
November Board meeting? He did not, Mr. Rotenberg replied. The Regents will be updated at the November
meeting. Materials are to be distributed
late in November, presumably including a draft MOU draft so people could see
some of the operational, governance, financial, and other parameters. There will be a series of public discussions
with various constituent groups, including and especially the faculty and
students on campus. The Regents would
have an opportunity at their December meeting to vote and decide how the
University is going to transmit it to the legislature.
The last
one or two presentations the Committee heard included a parking facility that
the University would pay for at a cost of about $60 million, Professor Speaks
recalled. At one point that ramp was
projected to lose about $3 million annually.
It has now been said that the size of the parking facility has been
scaled back. Is that correct, and if so,
how much was the cost reduced and does the reduction have any effect on the
projected annual deficit? Mr. Rotenberg
and Mr. Pfutzenreuter said that is still under discussion.
Professor
If in
fact the MOU is successfully executed, is it possible that everything in there
would be agreed to, and in that sense, it could be a go based upon the Regents
accepting or executing this MOU, Committee members asked? Mr. Rotenberg said it could be but the devil
will be in the details
Professor
Campbell asked where Mr. Rotenberg saw a role for the constituents--the
faculty, students and staff--in having an impact on the decision? Is it just a matter of getting the conditions
right in order to get the stadium here and paid for or is there a place in this
decision-making process for the attitudes and opinions of the University
community? Mr. Rotenberg said he was
under the impression there was a lot of consultation occurring. The faculty has articulated in writing its
concerns through the Faculty Consultative Committee. And consultation is virtually a nonstop
activity around the University.
Professor
Speaks agreed that there has been a lot of consultation but if everything is
right in the MOU, if University decision-makers are happy with it, and if the
Vikings are happy, but the faculty, staff, and student say they do not like the
concept and want it stopped, can it be?
Mr. Rotenberg said that faculty, student, and staff views should be
expressed as forcefully as possible to the Board of Regents and President. It
is not improper to say "we don’t really care about the principles being implemented, we don't want to have a building like
this." It is absolutely appropriate
to make your case, Mr. Rotenberg told the Committee. Additionally, the President has not publicly
said that he will favor the project.
Professor
Speaks said that individually Committee members all have opinions, even if it
is one of uncertainty. Collectively the Committee has never tried to decide how
it weighs in on the issue. Partly this is because it wants to be able to do so
at an appropriate time--if or when it decides is has an opinion. The Committee
also wants to avoid taking a position at a point that might adversely affect
the negotiations. At the last meeting,
the Committee decided it wanted to continue to be informed and to express its
concerns--rather than a final opinion--and defer to FCC and SCC. At some point, the Committee needs to make
its opinion known, if it knows what it is.
Professor
Warwick noted that the question that comes to mind is the marriage between two
unequal groups. On the one hand, there
is an institution 150 years old; on the other is an individually-owned,
commercial company that could take the team away. If the University owned the team, he said he
would feel very differently. But the
University has unanswered questions and it must have answers in the MOU between
this volatile, uncertain group and the University, which has a different
charter.
Mr.
Rotenberg said that this is a foundational problem: the University not moving
any place and can't be sold. Nothing the
University can do in a document can prevent the Vikings from being sold. On the other hand, the University can make it
all but legally impossible for the owners to remove the team from this facility
for a period of years. The University
could also seek to have the NFL bound by that obligation. He said he thought it would be impossible to
imagine the legislature would fund a stadium in the absence of such a
guarantee. At the same time, the
volatility of the industry cannot be contractually or legally be whisked
away. But certain things can be assured;
that includes keeping the team here and playing football in the stadium.
Ms.
McCarthy Barnes noted that the University has a set of criteria identifying
what it wants and it will negotiate those criteria with the Vikings. Will the University move forward if the
Vikings cross off any of the criteria?
Mr. Rotenberg said they are not authorized to move off the principles
adopted by the Board of Regents. But
there are lots of ways to skin the cat, so to speak: There are many ways to implement the
principles, and that is the content of the discussions.
Ms.
McCarthy Barnes next asked if the MOU could go back to the Board of Regents with
some adjustments to the criteria, which the Board could approve? Mr. Rotenberg said that has not been offered
as an option to the Vikings; none of them would be comfortable going to the
Board with such a proposal. The MOU and
pre-design are going to have to comply with the principles the Regents sent
them to implement, Mr. Rotenberg said.
Ms.
McCarthy Barnes asked if the Vikings were coming to the table with the same
idea that they will not make any adjustments.
Mr. Rotenberg said the Vikings have a very different set of
objectives. They are at the table to get
a stadium that will make them a lot more money on an annual basis and which
will presumably put them in the top quartile of NFL in terms of annual revenue. The current owner also wants the value of the
asset to appreciate and they believe that will not occur without a new stadium.
Ms.
McCarthy Barnes said that students may have something to say above and beyond
the criteria adopted by the Board of Regents.
But conversation seems to be lacking about what would make it acceptable
or not acceptable to have a Gopher/Vikings partnership on campus.
Professor
Konstan asked what would happen if in December there is no agreement with the
Vikings--would Mr. Rotenberg ask the Board of Regents to consider a statement
releasing the University's last offer in the negotiations so the University can
make the case with the public and the
legislature that it made a reasonable attempt to come to terms with the
Vikings? Mr. Rotenberg said he did not know the answer; he has not
discussed the option with the Board or the President.
Has the
fact that there is no resounding outcry for the stadium from the University
helped the University in negotiation with the Vikings, Professor Konstan
inquired? It has, Mr. Rotenberg said.
Professor
Konstan asked how far from a contract the MOU would be--if legislature went
along with everything, does the University have a chance of being burned in the
contract details?
There would be a lot of work to implement the MOU, Mr. Rotenberg
said. Because of the compressed time
frame the MOU will not contain enough detail to implement it as a legally
effective instrument. A stadium project of this magnitude will take well in
excess of 40 different contracts to be drafted, negotiated, and executed.
That’s a lot of lawyer and negotiation time, Mr. Rotenberg said.
Professor
Jahn agreed with Professor Campbell and Ms. McCarthy Barnes about the
appropriate time and place for faculty, staff, and student views. The basis of the problem is that there has
been no invitation for such participation; there is the impression that the
decision has already been made so people feel that they can only whine from the
sidelines. There are things that are virtually
agreed upon and some that are very contentious, Mr. Rotenberg said. Money is an issue in these kinds of
deals. Who is going to establish the
firewall to protect the University from financial exposure to the operation? The cash flows and liability are very
important issues.
Professor
Korth said that part of the difficulty is that everything the University is
doing is defensive. If the University is
trying to minimize the negative impact of something that is apparently being
pushed on it, it is not a positive situation to which people can contribute; it
is all negative and it is unclear how the Committee can make its voice
heard. He was puzzled at the apparent
reluctance to come out and say that this is not in the best interests of the
University.
Professor
Speaks noted that he will, at any time between now and when the issue goes to
the Board of Regents in December, entertain a motion of any form for this
committee. He sensed last time the
Committee met that it was not prepared to make a statement and that it wanted
to let the FCC be the point committee.
At the
FCC retreat in August, there was a conversation with the Provost and a chair of
the Board of Regents; it was said that one reason why the University must
continue to be a player in a joint stadium is that if there is no joint
stadium, there is not likely to be a Vikings stadium; if there is not a Vikings
stadium, the Vikings will leave town--and the University doesn’t want to be
blamed for it. Ergo, the University
should continue to participate.
Professor Speaks said he did not agree with that reasoning.
If
everything gets approved by everybody, including the legislature, by some date
in March, then the NFL makes a contribution to the project of $51 million. Is that a real deadline that is helping set
the University's timeline or is that something that can be negotiated with the
NFL? Is that a real gift or is it a loan?
Finally, for six Gopher games and 10-11 Viking games why are we talking
about a retractable roof, Professor Speaks asked?
Mr.
Rotenberg said that it was his understanding the NFL contribution is phrased in
terms of a loan to the franchise. It is up to the franchise to pay it back but
even the owners describe it as a gift. Everything they do is to make
money. They will invest in a new stadium
if they think it will make them more money.
The NFL loan program is supposed to expire this spring; the owners will
meet and make new decisions. There could
be a new plan after March, or there may not be.
Some revenues go to franchises, some go to the owners. By having a stadium that generates tens of
millions of dollars more in revenue, both the franchise owner and other owners
can reap big financial benefits. As for
the retractable roof, the Vikings will not consider any other option than a
roof because the Super Bowl and other events cannot be played out-of-doors in
this market.
Professor
Speaks asked if there is $151 million on the table, $51 loaned to the franchise
from the NFL and $100 contributed by the franchise to the project. When revenue starts flowing to the University
and the franchise, the franchise does not start making money until they recoup
the $151? Technically speaking, the $51
million is a loan from the league to be paid back by visiting team television
receipts, Mr. Rotenberg said.
According
to what he read in the newspaper, Professor Campbell said, the value of the
Vikings increases $300 million dollars if they have a new stadium--so they put
in $100 million and their value goes up $300 million? If the total cost is $500 million, $151
million of that is in effect a loan that gets paid back, should the legislature
fund the other part, a contribution that does not paid back? That is not accurate, Mr. Rotenberg said; the
bonds would be paid off over a period of time.
The University would have some legal assurance that the team would stay
in the stadium until the bonds are paid off.
Professor Konstan said that
there are good reasons people are not speaking publicly about how wonderful
this is. The Committee must exercise
caution in making statements representing faculty and students.