These minutes reflect
discussion and debate at a meeting of a committee of the
Minutes
Senate Committee on Finance and Planning
Tuesday, April 3, 2007
2:30 – 4:15
238A Morrill Hall
Present:
Judith Martin (chair), Jesse Andrist, Rachel Curtiss, Steve
Fitzgerald, Darwin Hendel, Thomas Klein, Mikael Moseley, Kathleen O'Brien, Kathryn
Olson, Richard Pfutzenreuter, Terry Roe, Nicholas Treat, Warren Warwick, George
Wilcox, Aks Zaheer
Absent:
Rose Blixt, Daniel Feeney, Lincoln Kallsen, Joseph
Konstan, Michael Korth, Justin Revenaugh, Michael Rollefson, Karen Seashore,
Thomas Stinson, Michael Volna, John Ziegenhagen
Guests:
Associate Vice President Robert Kvavik; Associate
Controller Denise Seck
[In these minutes: (1) six-year capital plan; (2) annual report
on insurance and risk management; (3) central reserves fund report; (4) update
on the biennial request]
1. Six-Year Capital Plan
Professor
Martin convened the meeting at 2:35 and welcomed Vice President O'Brien and
Associate Vice President Kvavik to discuss the six-year capital plan.
Vice
President O'Brien said the Committee would be hearing a presentation similar to
the one presented to the Board of Regents in March. In the capital planning process, there are
two components to the six-year capital improvement plan: the capital improvement budget (year 1,
2006-07, which provides the actual funding for projects), and the capital
improvement plan (years 2-6, which has been the process for about 18 years, is
updated every fall, and is a rolling plan).
The updating of the capital improvement plan was postponed this year in
order to be sure that it is aligned with academic priorities out of the
strategic positioning process.
Vice
President O'Brien explained the components of the capital improvement plan as
well as the timeline leading to the next (2008) capital request to the state
legislature. She also reviewed the
various stages of the capital improvement planning and oversight process, from
potential projects (in the gleam of someone's eye) to preliminary review and
program analysis to adding it to the six-year capital improvement plan to
approval and implementation. For
potential projects, the primary drivers are programmatic needs and facilities
conditions (an inspection-based assessment of all 28 million square feet of
University property).
The
second stage is one that includes a greater exploration of:
-- program needs and facility conditions
(regental and presidential priorities, strategic positioning goals, academic
and service unit strategic directions, and compact initiatives)
-- financial
constraints (health and safety concerns,
project
interdependency)
-- space utilization issues (will it be
new or renovated space?) (improves over all utilization, supports highest and
best use of space/location, solves other space availability issues)
-- other considerations (geographic
balance, historic status, master and precinct plan impact, and legal
obligations).
Dr.
Kvavik commented that there is a list of buildings that will not be missed and
should be taken down; the cost of removal should be built into the capital
request. The University needs to have
the discipline not to put people in them—and to tear them down.
Professor
Martin asked if there is still a problem with the availability of swing
space. Dr. Kvavik said there is and
always will be. Vice President O'Brien
added that some of the swing space is quite bad.
Professor
Roe asked if it is easy to distinguish between new construction and renovation
when it comes to the use of HEAPR funds.
Ms. O'Brien said that HEAPR has stringent definitions in state law,
which the University is careful to follow.
The University's R&R funds (about $11 million per year across the
system) are more flexible.
Vice President O'Brien said, vis-à-vis
the last three items in the list, that they do think about whether a building
can be re-used and they do a multi-dimensional analysis. Some space is obsolete, Professor Roe said;
the question is what to with it. Dr.
Kvavik cited as an example the interest in building a biofuels research
facility: to build it new would cost
about $40 million, but the University would get a lot more bang for the buck
doing that than putting the activity into an existing building on the St. Paul
campus; the building could be remodeled, but it would not be as useful. The University can build a new building—but
then it still has a "sick" building that it must do something with or
about.
Vice
President O'Brien next touched on the principals that guide the six-year
capital plan.
"The University Six Year
Capital Plan is being developed to ensure long term academic excellence by:
Aligning capital
projects with the established strategic positioning goals of:
-
Recruiting and educating outstanding students
-
Recruiting and supporting innovative, energetic world-class faculty and staff
-
Enhancing and effectively using resources and infrastructure
-
Inspiring innovation, exploration, and discovery
Capitalizing on
unique opportunities that are aligned with academic and service unit priorities
Ensuring that investments in existing
facilities and infrastructure contribute to
renewal, preservation, and restoration objectives and are aligned with
the priorities of the capital plan
Giving preference to projects that
create flexible space, improve space utilization, and reduce operational cost
Advancing the
guiding principles of the master plan and
sustainability policies
Protecting the University’s financial
position by keeping capital expenditures within the projected debt capacity
limits"
Dr. Kvavik then reviewed some of the projects that
would be supported in the six-year capital plan that would help the University
have exceptional students (e.g., TC science teaching and student services,
classroom renewal, recreation center expansion, Northrop renovation to house,
inter alia, honors programs, UMM library renovation to create a learning
commons, a new UMM residence hall with learning spaces), exceptional faculty
and staff (Folwell and Pillsbury Hall renovations, a new Bell Museum, and UMD
civil engineering addition), excellent organization (HEAPR funding, system-wide
data center, UMM renewable energy projects), and exceptional innovation
(Biomedical Sciences Research Facilities Authority, new science and technology
building, energy and the environment, and renovation of the existing Bell
Museum for the College of Design).
The
data center caught the attention of Committee members. The project includes remodeling space to
accommodate expanding needs for information technology operations, a secure
facility for systemwide data distribution, improved utilization of space, and
increased operational efficiency. Dr.
Kvavik reported that at present there is 37,000 square feet being used for
servers all over the campus, which means use of space, HVAC, electricity,
etc. Vice President Cawley could provide
the same service with 15,000 square feet and more security. Would putting them under Mr. Cawley take away
independence from the units, Professor Martin asked? Not all of it, Dr. Kvavik said; a dean could
decide to keep spending the money on the local server—but some of them the
University MUST take down because of security risks; units will be able to get
information from the central system. The
site will be on
In
terms of space needed for "exceptional innovation," Dr. Kvavik noted
that there is a new Physics building slated for 2010, which would be able to
support the nanotechnology initiative and other activities. The challenge the University has, and it must
work with faculty on addressing it, is that a lot of multi-disciplinary fields
need space the University does not have.
Thought must be given to how to design space that is attractive for
collaborators. As new research
facilities are built, those kinds of activities must be kept in mind so that
there is easy interaction among faculty, coffee shops, lounges, and so on, that
encourage collaboration. Professor
Martin said there is a caveat: the
assuming is that if the University creates spaces where faculty would bump into
each other, that will encourage collaboration—but faculty have to get out of
their offices first, which most haven't time to do. Dr. Kvavik said that is a chicken & egg
problem. The University also has to
build more flexible research space, with movable HVAC and walls; Boston
Scientific can do in three days what it takes the University 30 years to
do. Professor Zaheer said he does
research on communication and knowledge flow; there is a lot of research
documenting the importance of informal space.
Creating it would be one way to link space to strategic
positioning.
Professor
Zaheer asked if they are doing any benchmarking. Vice President O'Brien said that people at
the University are active in their professional organizations in the Big Ten
and beyond and they also have partners in local corporations to learn what can be
adapted from their practices. In
Facilities Management they are trying to do two things: (1) achieve more consistent performance and
productivity, and (2) improve the product.
Dr. Kvavik noted that benchmarking required better use of technology and
space data to do more sophisticated analyses, and identify the metrics they
need to decide what to do with a building (both qualitative and
quantitative). To what extent is the
building designed to support the program in it?
What can the building do? There
are also financial considerations: can
the building be brought to the desired level of productivity (big lecture rooms
versus smaller classes, lab space that can generate grant revenues, etc.)? It is a multi-dimensional analysis to identify
intelligent use of the building.
Professor
Roe asked what weight is given to ICR rates in deciding whether to invest in a
building. Dr. Kvavik said ICR income is
considered in some projects. The Cargill
building was funded by a significant gift and expected to generate ICR funds to
pay off the debt. That is more common in
biomedical bonding bills and it does enter the expectations about what the
University can afford. It also jumped up
on the list when the gift became available, Professor Martin observed. Has anyone done an analysis to see if the
projections worked out, Ms. Olson asked?
That is a sore point, Dr. Kvavik said; there have not been
post-construction audits about whether the building is being used the way it
was said it would be used. That is why
metrics are needed. So if a building
jumps up on the list, Professor Martin said, the University should have data to
support the higher priority. The
internal budget model makes this more transparent, Ms. O'Brien said.
Dr.
Kvavik told the Committee that they are looking at the capital as a portfolio
and will consider buildings in an aggregate:
should the University build these seven buildings rather than deciding
one building at a time.
They also want to change the learning
environment for students. They do not
want to build traditional auditoria but rather spaces where students learn by
doing that can be quickly adapted to different teaching approaches. He said he believes the new undergraduate
science building will be the best in the country. They are also seeking a $3 million in funding
every biennium to fix or upgrade classrooms.
Dr. Kvavik said the
Professor Hendel asked where UMR fits
in the capital planning process. Vice
President O'Brien said there is an amendment to the capital budget to fund an
interim facility now and potential for additional space in 2010. The City of
Professor Roe said that given the pace
of change in science, designing buildings so that it is possible to cut costs
and eliminate obsolete space is important.
Dr. Kvavik agreed; flexible buildings cost more up front but the life
expectancy is greater. Professor Wilcox
said that medical bioscience buildings built in the last ten years are very
flexible, and they need not cost more.
Professor Martin thanked Vice President
O'Brien and Associate Vice President Kvavik for their report.
2. Annual Report on Risk Management and
Insurance
Professor
Martin turned next to Associate Controller Denise Seck to provide the annual
report on risk management and insurance.
Ms.
Seck distributed copies of the annual report and explained that risk management
and insurance are a subset of the University's financial activities; the report
provides a comprehensive overview of how the University is doing. She said she was pleased to be able to
present a positive report.
The
mission of the Office of Risk Management is "to protect the resources of
the University from the financial impact of accidental loss. The total cost of risk managed through the
Office of Risk Management totals approximately $10 million annually. The University employs a combination of
self-insurance and commercial insurance to cover the myriad of risk areas
within the institution."
The
key accomplishments for 2005-06 (the period covered by this report)
included: an 8.6% decrease in overall
cost of risk, compared with the previous year;
the five-year annualized increase in the cost of risk is 2.7%; there has
been a 4.5% decrease in the property premium despite several large losses (the
University has paid $10.6 million in premiums over the past five years compared
to $15.4 in losses); they have obtained $560,000 in dividends; there has been a
16% reduction in workers' compensation claim frequency; and they switched from
commercial to self-insurance in three programs (Boynton professional liability,
intercollegiate athletic accident insurance, and electronic data-processing
coverage, with a total estimated annual savings of $311,000, recurring). The University decided to participate in the
Midwestern Higher Education Compact (MHEC) property program, which has
prevented several major premium increases; the MHEC program is insurance within
insurance, a consortium with other institutions to increase buying power.
Ms.
Seck noted a graph illustrating the savings achieved as a result of self-insuring
rather than going on the commercial market; the estimated savings for the last
six years is $23.3 million, or about $3.9 million per year. Professor Martin asked where that money went;
Ms. Seck responded that it was not spent on insurance.
Professor
Roe asked, apropos the savings in workers' compensation claims, if the
employees received the same or better service than they would have if the
University had had commercial coverage.
Ms. Seck said she was not talking about service, only the funding mechanism
to pay for the insurance; she said she was not aware of any complaints about
the service.
Professor
Roe also surmised that professional liability varies by field; is there an
uneven distribution of outlays for professional activities? There is, Ms. Seck said; it is very
volatile. Some can be very high while
others are zero, Professor Martin observed.
How does this play out in the internal budget model, Professor Roe asked? It is an insurance pool, Vice President
Pfutzenreuter observed.
Professor
Hendel said the MHEC program is a great idea and inquired if there have been
discussions about other ways it could save the institutions money. Ms. Seck said they are being discussed but
she did not know the state of the plans.
Professor Martin pointed out that the CIC has purchasing programs to
save the institutions money as well.
Mr.
Fitzgerald said that student groups classified as part of campus life are
covered by the University's policy while those that are not must find their own
insurance. Ms. Seck said the University
purchases student organization general liability insurance and groups can
participate through paying a fee. Mr.
Fitzgerald said participation should be mandatory.
Professor
Martin thanked Ms. Seck for the report.
3. Central Reserves Fund Report
Mr.
Pfutzenreuter distributed copies of the Regents' policy on central reserves and
the summary report on the reserves as of December 31, 2006. The central reserves are resources not
allocated to any specific unit but held centrally; the only sources of income
for central reserves are investment earnings from the Temporary Investment Pool
and legal settlements. The purpose of
the reserves is to insulate the University from major financial risks (e.g.,
unanticipated or uninsured catastrophic events, temporary revenue declines,
unforeseen legal obligations, failures in central infrastructure, or failure of
major business systems). A central
reserves budget is prepared annually and submitted to the Regents as part of
the annual operating budget. The
two-page Regents' policy can be found at http://www1.umn.edu/regents/policies/financial/Central_Reserves_Fund.pdf
.
Normally
the central reserves should not fall below 4% of the state appropriation, or
$25 million, whichever is greater. If
there are earnings above that amount, the President can recommend to the
Regents that the money be spent on University needs.
For
2006-07 the central reserves are projected to have a balance of slightly over
$40 million (after a $10 million transfer to the University's operating
budget); that is $15 million more than the minimum required, and that surplus
has been allocated for capital projects (e.g., Northrop, Folwell). The balance at the end of the year will be
between $25 and $30 million.
Mr.
Andrist asked what kind of short-term investments the central reserves are
placed in. Mr. Pfutzenreuter said they
are put in very safe places, like government bonds; they will not take risks
with such core funds. By Regents'
policy, units are allowed to set aside funds (on an exception basis) in
quasi-endowments in securities, which are more risky. The units can reap the rewards but they also
take the risk. Those funds could be
provided as incentives, Professor Roe said; Mr. Pfutzenreuter said that only
about $20 million of department funds, out of about $600 million, have been
moved into quasi-endowments, and that is mostly by the more sophisticated
business units.
Mr.
Pfutzenreuter touched on highlights for the Temporary Investment Pool for
FY2006. It generated $26.8 million, $8.8
million more than the previous year; the yield was 4.7%; it maintained a high
average portfolio credit rating; there was $55 million invested in the CEF pool
to enhance return and diversity risk; and the balance on December 31, 2006 was
$637 million, a decline of $20 million from last year.
4. Biennial Budget Update
Mr.
Pfutzenreuter next reported on the status of the University's biennial request
as of the end of March. In general, the
House and Senate are proposing greater funding than the Governor recommended;
the House proposal includes a considerable amount of money ear-marked for specific
purposes. The House also funded (not by
legislation but in work papers) various elements of the University's request;
the Senate proposes a block grant.
One
item in the House bill provides $7 million for a scholarship matching program;
the University would be required to match it on a 2:1 basis. That would provide $21 million for
scholarships, an enormous amount in a two-year period. The legislation does not stipulate if the
scholarships are for undergraduate education, the
Mr.
Andrist asked if the legislature was generating ideas or if the University was
filling in the gaps; Mr. Pfutzenreuter said it was both. The University has endorsed tuition banding
for the coordinate campuses and buying down the tuition rates at those campuses
so they are below the Twin Cities rates.
That would be good for those campuses and the University can support the
proposal.
In
the past, Professor Roe recalled, Mr. Pfutzenreuter has said the legislative
appropriation for the University has not differed significantly from the
Governor's recommendation. Is this a
change? Mr. Pfutzenreuter said the House
number is not reliant on increased taxes; the Senate number is. He cautioned that the University shouldn't
spend the money yet; there is another month to go in the legislative process. He also noted that there are items in bills
outside the higher education appropriation that are for the University.
Professor
Martin thanked Mr. Pfutzenreuter for his report and adjourned the meeting at
4:25.
--
Gary Engstrand