These minutes reflect
discussion and debate at a meeting of a committee of the
Minutes
Senate Committee on Finance and Planning
Tuesday, February 8, 2005
2:30 – 4:15
238A Morrill Hall
Present:
Charles Campbell (chair), Kendal Beer, Rose Blixt, David
Chapman, Arthur Erdman, Steve Fitzgerald, Thomas Klein, Joseph Konstan, Michael
Korth, Ian McMillan, Cleon Melsa, Kathleen O'Brien, Diane Parker, Charles
Speaks, Kate VandenBosch, Michael Volna, Warren Warwick
Absent:
Calvin Alexander, Daniel Feeney, Scott Fine, Seth
Haskell, Joshua Jacobsen, Lincoln Kallsen, Richard Pfutzenreuter, Terry Roe,
Thomas Stinson, Alfred Sullivan, Susan Van Voorhis
Guests:
Karen Triplett (Director of Purchasing); Chris
Suedbeck (Office of Asset Management); Associate Vice President Scheich
(Auxiliary Services), Bob Baker (Parking and Transportation)
[In these minutes: (1) purchasing; (2) annual asset management
report; (3) maintaining the endowment fund; (4) Parking and Transportation]
Professor
Campbell convened the meeting at 2:30 and began with an announcement that there
will likely be a special meeting of the Committee on February 18 to meet John
Curry, co-author of a book on Responsibility Center Management, who is coming
to the University as a consultant to the internal budget model committee. Details will follow.
1. Purchasing
Professor
Campbell welcomed Mr. Volna and Ms. Triplett to the meeting to discuss
purchasing issues. Mr. Volna noted that
the Committee had expressed an interest in current initiatives in purchasing;
they are working on several.
Ms.
Triplett recalled that the original invitation from the Committee asked whether
the University is getting the best prices when it makes purchases. Part of their responsibility in Purchasing,
she said, is to leverage the University's purchasing power to get the maximum
value for the dollar. One way they save
money is to use minimum-cost processes; another is to get the best prices on
what they buy. She explained how they
leverage purchasing power (such as U-wide contracts for repetitively-purchased
items and use of State contracts and consortium contracts). She said the prices the University gets are
the best possible, compared with the consortia in which it participates;
individuals may occasionally find a better price for a single item, but on an
overall basis they are certain they are getting the best prices. Sometimes the University obtains a better
price than the consortia.
Professor
Konstan observed that in some areas it is more difficult to get a contract
(e.g., cell phones and airline tickets).
Is there still nothing the University can do in those areas? There is, Ms. Triplett said. They have tried repeatedly to negotiate with
NWA, since 80% of the University's travel is on Northwest, but they will not
negotiate. They thought the University
did a lot of business with Northwest (about $8 million per year), but 3M does
about $80 million. With cell phones,
they had a contract but other providers kept undercutting it in sales to
departments. Cell phone prices are also
a moving target, since the plans change so often, that they decided it was
better to let people simply find their own deals.
What
triggers writing a contract, Professor Konstan asked? The point at which Purchasing notices that
there is a lot of purchases of something and decides there should be a
contract? Or do they expect departments
to request a contract? Buyers watch by
area, Ms. Triplett said, and keep track of the number of transactions by
vendor. They do not wait for departments
and are sensitive to purchasing patterns.
Departments may also have their own contracts if they are the only one
that buys large quantities of something.
Are
the
Ms.
Triplett reviewed various steps that could be taken to improve the process,
such as mandating use of University-wide contracts to stop "maverick
purchasing," standardization on some items, more University-wide contracts
on-line with electronic ordering capability (which cuts costs for vendors and
results in lower prices).
They
are also undertaking a set of initiatives, Ms. Triplett related. (The Committee only had time to hear about
the first, but the following memo outlines all four of them.)
Equipment Maintenance Program
Purchasing
proposes to utilize the CIC Purchasing Consortium contract for consolidated
equipment maintenance. The CICPC used an RFP process to identify Specialty
Underwriters to provide this service.
This
contract guarantees an average of 20% savings off our current manufacturer
maintenance contracts for equipment the University owns with no decrease in
current service response time. According
to CUFS reports, the University spent about $9 million on equipment maintenance
in FY 2004. If this equipment is all
eligible for the program, the savings,
at the guaranteed 20%, would amount to $2.4 million.
University
departments will find the savings an incentive to use the contract to purchase
their equipment maintenance, and vendor
performance measurement will also ensure that they get the same service
response time. Rollout is expected to be
as a U-Wide contract, with the vendor and purchasing partnering to “sell” the
contract to the University community one dept or college at a time. Support from the University’s top management
will help this effort. Rollout will begin in Spring, 2005 and continue until
there is University – wide participation.
Archimedian
Purchasing
Services proposes to utilize the State of
This
system will replace Purchasing’s current Bid Information System (BIS). Both
vendors and University departments will enjoy the increased functionality of
the new system. Vendors will appreciate the ability to fill out an
electronically formatted Response to a Request for Bid/Proposal and return it
electronically.
The
system will electronically create a spreadsheet of responses for review by the
Purchasing Services Buyer and the department.
For departments, this is a dramatic improvement over the previous method
of reviewing proposals, which involved evaluation team members searching
voluminous paper proposals for key information needed for the evaluation.
While
it is not possible to attach a specific dollar savings to this initiative, the
e auction feature is expected to save money on the commodity-type purchases for
which it will be used. The State of
The
cost to implement Archimedian system is $70,000/ year for unlimited use.
When
Purchasing receives approval to sign a contract for this system, the contract
can be signed and implementation can begin.
If the contract can be signed in December, 04, implementation can begin
in January, 05, with a live system in Spring, 05.
On Line Booking of Airfares
Purchasing
Services will do an RFP in Summer, 05 for Travel Agency Services. We will include a specific requirement that
the vendor offer a low cost on line booking option for University
travelers. The RFP is likely to invite
proposals from: (1) traditional travel
agencies (for travelers who need traditional agent-assisted reservations
services), (2) federally certified small travel agencies (for travelers who
have a federal contract that requires use of a federal small business), and (3)
third party on-line distributors, like Travelocity, Orbitz, and Expedia (for travelers who are comfortable
checking comparative airfares and booking on line without agent
assistance). Purchasing expects to make
awards in each of the 3 categories, in order to meet the needs of all
University travelers.
Since
on line booking fees are much lower than agent assisted fees, Purchasing
estimates that the user adoption rate for #3 will be high, especially for
frequent travelers, who may already be comfortable using an on line service for
their personal travel. It is estimated that, at a 100% adoption rate, the
University could save as much as $100,000 in the first year of
implementation.
The
cost to implement is expected to be negligible.
The
new contracts will be available Jan 1, 2005.
Rewrite and Expansion of ANTS
Purchasing
proposes to rewrite and expand the use of ANTS, the system that enables tracking of time-period contracts with
vendors.
Examples
of time period contracts include the Oracle contract to provide the University
with software licensing and maintenance support from the period of November 24,
2004 through November 23, 2005, and the contract with Orius Telecommunications
Systems to provide Outside Cable Placement services for the period of December
1, 2004 through June 30, 2006 for the
department of Networking and Telecommunications.
The
ANTS system notifies the Purchasing Buyer that a specific contract is 30 days
from
expiration (or 60 days or whatever the buyer has specified in the ANTS system),
so Purchasing can notify the department that a decision needs to be made on
whether they wish to renew, non-renew (contract no longer needed), or
rebid. Purchasing also notifies the
vendor holding the contract that they, as well as the department, have an
option to renew or not renew the contract.
Tracking
contracts through the ANTS system prevents departments from spending more than
the contract total or continuing to spend after the contract has expired. It also ensures that contracts are bid on a
regular basis, which is an expectation of taxpayers and other stakeholders.
The
ANTS system has many bugs, and there may well be software available that
performs this function. It would also be
a service improvement to University departments to allow them to access ANTS to
see a listing of their contracts. Any
enhanced functionality would include the departments being automatically and electronically notified of expiring contracts
without Purchasing intervention.
A
study should also be made of the new PeopleSoft financial system functionality
to determine if an adequate time-period contract tracking feature is available
in our recent software purchase or if it is advisable to make the
purchase.
All
options to provide this functionality should be explored.
It
is unknown at this time what option should be selected, how the functionality
might be enhanced and what the cost might be.
This
project is on the “back burner” until completion of projects 1, 2 and 3 above.
Does the equipment service contract include a volume
guarantee, Professor Campbell asked? It
does not, Ms. Triplett said, and she added that she hoped this would be a
"no brainer" for departments.
Ms. Triplett explained that they also like to use reverse
auctions. There is a specified start
time with set terms and conditions; vendors bid (by undercutting each
other). The University will save about
15% using these auctions. The State of
When there is a new initiative that saves money, is there
a tracking mechanism to see where the money is saved, Professor Speaks
asked? When the savings are in
repetitive purchases, the savings go across the University, Ms. Triplett
said. Mr. Volna said he recognized there
have been discussions about service and productivity initiatives, and savings,
and who gets the money. In purchasing,
it is the departments that save money.
Professor Speaks recalled that Vice President Muscoplat chaired a
committee a few years ago that identified millions of dollars to be saved. It would be better if there were incentives
so that departments could see the savings, rather than just having them happen
across the University. To do that, Mr.
Volna said, sounds like sweeping balances, which they cannot do and is a
philosophical issue.
Professor Konstan said that if departments saved enough,
it could change the basket of things that they buy. But there is a trade-off on standardization;
some costs for units could increase.
What consultation is there with end users in decisions like that? He said it was his hunch that many
departments would agree to change if there were incentives but not
mandates. Mr. Volna agreed. It is a philosophical issue, he said. They make purchasing options available and
departments can opt in. If there is to
be an opt-out system, that would require more discussion, and it is also
related to the budget model discussions that are going on. Who gets the savings? They cannot alone make those decisions about
incentives and disincentives.
Mr.
Klein said that people often are not aware of the benefits to their unit or
department of these different ways of purchasing. There needs to be good communication about
the benefits in order for more people to participate. Mr. Volna agreed that what they are doing for
departments is "pretty invisible"—they don't know that they are
saving 10%.
Professor Konstan asked if the University floats bills,
and earns interest on the money, or pays bills right away. Mr. Volna said standard terms are 30 days and
they only vary from that if payment is required earlier (e.g., a department
contract with small vendors, which usually have shorter terms). When the University pays in 30 days, the
money is in the TIP fund and invested; the University receives the money. Where does the money go, Professor Konstan
asked? Except for sponsored projects, it
is Business Office policy not to pay interest on TIP balances, Mr. Volna said,
as part of the University's budget reductions.
The earnings go into centrally-allocated funds that are then used as the
administration determines.
Are all University-wide contracts annual, Mr. Fitzgerald
asked? In some areas, the market may go
below the contract. Ms. Triplett said
she was not aware that that had happened and she expects buyers to keep track
of prices. Contracts are typically one
year with two renewal options. Some can
be longer. Mr. Fitzgerald suggested that
in some areas six months might be more appropriate.
Professor Campbell thanked Ms. Triplett and Mr. Volna for
the information.
2. Annual
Asset Management Report
Professor Campbell now welcomed Chris Suedbeck to the
meeting to discuss the annual report from Asset Management and to report on
maintaining the long-term value of the endowment. Mr. Suedbeck distributed copies of a
handout. [Mr. Suedbeck was reporting on
the University endowment, not the funds managed by the
Mr. Suedbeck said that the last ten years have been
interesting times with respect to returns on endowments. They were way up and
then down. That oscillation caused
foundations and non-profits to step back and look at how they were managing
their money. With high returns in the
1990s, many moved to higher payouts, but then found they could not sustain
those payout rates in the 2000s. The
University was not alone in this regard; it was true industry-wide. At the end of 2003 they completed an
asset-allocation study that led to changes to decrease the volatility of the
University's portfolio. (In 2000, the
endowment was among the top 5% in performance; in 2002, it was in bottom 5%.) In late 2002 the University hired a new
manager for the endowment, Stuart Mason, who began the study of what the
endowment should invest in. One result
of the study is that they have a better monitoring system. They have hired 21 new managers for different
asset classes with a goal of becoming more diversified and stable (and back in
the top 5%). They now also have
investment performance benchmarks, which the endowment has been meeting.
Mr. Suedbeck explained that they have changed asset
classes so that smart managers could manage funds, moderate volatility, and not
prevent defensive investments. He
reviewed the asset classes and noted that of the $627 million in the endowment
that is invested, the targets are to have 35% in domestic equity, 15% in
international equity, 30% in alternative investments (including private debt,
real estate, etc.), and 20% in fixed income.
Do these targets relate to the size of the endowment or would they be
standard no matter the size, Professor Konstan asked. It should not matter, Mr. Suedbeck said, but
it does. At $730 million (including
cash), it is a mid-sized endowment and the University can do as it wishes. The targets would not be different if the
size of the endowment were tripled.
Professor Speaks asked if the targets were based on risk analysis
and how the decisions were made. Mr.
Suedbeck said that they are and explained the analysis they use. They look at what long-term returns can be
expected from different asset classes and try to optimize the return through
the model they use. The target return is
9.25%: 5% payout, 3% inflation (which
keeps the intergenerational equity in the endowment), and .25% custodial
fees.
Professor Konstan said the University seems not to do as
well in international equity. It could
be five years of bad luck or picking bad international equity managers. The model has benchmark returns and their
goal is to beat the benchmarks, Mr. Suedbeck said. International equity has not done well, he
agreed, and said they fired one manager.
They are trying to get away from active management; managers need to
demonstrate the ability to beat the benchmark over the entire cycle of ups and
downs in the market.
Mr. Klein inquired about the cost of each group they work
with; how are management fees and operating expenses factored into the
evaluation? They are, Mr. Suedbeck
said. Each manager is paid a management
fee (0.75% to 1% of assets under management); they judge the managers net of
all fees.
Mr. Suedbeck reviewed the performance of the endowment
and noted that at year end it had performed above the benchmark. It earned 19.47%, much higher than the
benchmark, which suggests that the new managers and strategies are paying
off.
3. Maintaining
the Endowment Fund
Mr. Suedbeck next turned to maintaining the endowment
fund. There are four levers they can use
to maintain the fund: asset allocation,
spending policy, payout rate, and gift flow.
The last one is minimal because all new gifts flow to the
Does the number of managers scale with size, Professor
Campbell asked? It does not, Mr.
Suedbeck said; it is about 1% and his office would still need to manage the
float.
Does the University Foundation follow similar allocation
strategies and work with financial managers in a similar manner, Mr. Klein
asked? It does, Mr. Suedbeck said.
Mr. Suedbeck explained the different results expected
from different asset allocation policies; the newer policy is expected to
increase the value of endowment more than the previous policy would, and the
probability of maintaining intergeneration equity increased. Professor Konstan asked if this is a one-way
or two-way measure of equity. Is this
only asking whether there will at least the same amount of money (inflation-adjusted)
to spend in 20 years as today? Or is it also asking whether the endowment
is saving too much money for the future and therefore not meeting its
obligation to provide current value? Is there a measure to determine if
the spending policy is too conservative? Mr. Suedbeck said they review industry surveys
and the practices at other institutions.
The industry finding is that with a 5% payout rate, there is only a 50%
chance of retaining intergenerational equity, a figure they are not comfortable
with. The Foundation conducted the same
study and reached the same conclusion; it is also thinking about changing the
payout.
If instead of looking at the probability of retaining
intergenerational equity for 20 years (which is what the study did), they
looked at 100 years instead, Professor Konstan asked. Mr. Suedbeck asked if the results would be
relevant. Twenty years ago the number of
asset classes available was much smaller than it is now; that could also be
true in the future. Twenty years may be
too long or too short but it is the standard used. The extended time period would probably
smooth out market fluctuations and that might allow the payout to be increased,
Mr. Klein said. If one knew that there
was a 90% chance of maintaining intergenerational equity in 100 years, Professor
Konstan added, there would be less concern about a dip in the value in 20
years.
Mr. Suedbeck reviewed spending policy alternatives and
their impact on the value of the endowment.
They concluded that a 4.5% payout rate, stepped down over five years,
would increase the probability of maintaining the intergenerational equity of
the endowment. He said they are
sensitive to the needs of endowment participants so are making the change over
five years beginning in 2005-06.
Professor Konstan said he thought the change was prudent and made
sense. He noted that the payouts would
actually increase in the future, at 4.5%, because the endowment will have
grown, and will be larger than if the payout were kept at 5%. Mr. Suedbeck agreed.
Professor Konstan asked what the role of the Committee
was in the matter—informational?
Consultative? Comments? Does anyone care? Mr. Suedbeck said they wanted to hear
comments. Professor Konstan moved that
the Committee endorse the changes Mr. Suedbeck presented as a prudent way to
look after the long-term maintenance of the endowment. The Committee voted unanimously in favor of
the motion. Professor Speaks asked that
it be communicated to the Regents. Mr.
Suedbeck said he would inform Vice Presidents O'Brien and Pfutzenreuter.
Professor Campbell thanked Mr. Suedbeck for his
presentations.
4. Parking
and Transportation
Professor Campbell turned now to Vice President O'Brien,
Associate Vice President Scheich and Mr. Baker to lead a discussion of the
Parking and Transportation budget.
Mr.
Baker distributed handouts and walked the Committee through them. He reviewed the anticipated cost drivers for
2005-06 (salaries and fringe, MetroTransit contract, utilities, and
depreciation). With respect to the last,
he observed that they need to fund it at some level because the campus has over
$100 million in parking facilities that will ultimately need to be replaced.
He
then reviewed program options and associated savings and costs. They include further staff reductions,
elimination of free night/weekend parking, elimination of the
In
terms of rates, some
Mr.
Baker reviewed two pie charts illustrating the uses of funds and revenue
sources for Parking and Transportation.
Professor Konstan asked if the circulator bus services are free (they
are). He noted that perhaps there could
be charges for the service, which some campuses do impose. Mr. Baker pointed out that some of the
student transportation fee goes to support the circulators. He recalled that in the late 1970s there was
a ten-cent fee for a period; it lasted a week before one of the University's
senior officers ordered it stopped because there was such outrage. Mr. Fitzgerald said, apropos eliminating the
circulators, that as they try to get better use of classrooms, they fight the
perception of faculty and students that it is too time-consuming to get between
campuses. They have issues that would be
addressed if there were BETTER circulation.
Professor Konstan observed that it takes longer to get to the West Bank
from the East Bank by bus than it does by walking—and if more people walked,
perhaps there would be savings in health care costs. Mr. Baker agreed; their studies suggest it
takes 8 minutes to walk and 12 minutes to take the bus.
Vice President O'Brien said she wanted the Committee to
be aware that they have had discussions with the Metropolitan Council about the
bus service and passes. The Council
originally sought much larger increases in charges than what Mr. Baker has
reported will be necessary; Mr. Baker negotiated a longer-term contract and
kept rates lower. Professor Marshak
asked about the cost of a late-night bus service so it is included in this
discussion. The question is whether it
is seen to have enough value to justify fee increases. Mr. Baker reported that they based their cost
estimate of the late-night service ($195,000) on a pilot project run earlier. It is their position that there is a much
higher demand for East Bank/West Bank/St. Paul service, during the day, and
they believe they should spend their money on that service. If they must increase fees, they would prefer
to add service to places like WBOB and other campus locations. He said he understood the motives and desires
of students for the late-night service but it is difficult to justify on a cost
basis. He repeated what he told the
Senate Consultative Committee earlier in the year about working with MSA on
other options, such as renting 15-passenger vans, taxies, etc. Professor Konstan said he could not see using
parking fees from commuter students and staff to pay for the service; doing so
would be redistribution to a special group that does not inherently reflect the
academic priorities of the University. It is important that as a service
provider, Parking be
willing to provide the
service if someone is willing to pay for it (e.g., through the student fees
process, as part of residence hall charges, etc.), but they should not
redistribute faculty, staff, and student parking fees.
Mr. Klein said it would be helpful to
have use/demand data, as well as trend information on the MetroPass and
UPass. One thesis might be that the
passes aid in reducing the cost of transportation facilities on campus—or that
different incentives are needed to generate greater levels of participation
that would take some of the pressure off the parking infrastructure. Mr. Baker reported that UPass sales continue
to increase moderately and that there has also been an increase in inter-campus
bus use (they provide about 20,000 passenger trips per day). And there are still parking vacancies (which
vary by location); they are doing all they can to eliminate waiting lists. They also continue to try to sell unused
space in order to keep revenues coming in so that they can keep rates down.
Ms. Blixt said she would like to see a
less expensive way to transport students.
The University is building more housing and encouraging students to live
on campus; it must provide safe ways for them to get around. She wondered if the system could work with
smaller vehicles. She also agreed with
other Committee members who expressed dismay at the prospect that contract
holders would be charged event parking on event nights; many people come back
to work and it would be inappropriate to charge them, she said. She also asked that Parking be more
discriminating in how it charges for events; there was recently a legislative
event, sponsored by the University, and people were not happy they had to pay
for parking when the University asked them to come. Organizers need to know how to deal with that
and Parking needs to be aware of the event, Professor Konstan agreed. Mr. Baker said that all that was needed was a
call to his office in order to reserve parking; they always try to accommodate
events such as that and do so all the time.
Vice President O'Brien said that the
Committee will read a lot in the future about planning for the central corridor
(light rail transit); this is a big issue in the legislature, she said, and the
University is involved in the planning.
The corridor could have a big impact on the circulators and they will be
back to talk about it later.
Professor Campbell thanked Mr. Baker, Vice
President O'Brien, and Associate Vice President Scheich and adjourned the
meeting at 4:15.
--
Gary Engstrand