Minutes of August 1, 1994 Meeting The meeting convened at 2:03 p.m. in room 817 Cathedral of Learning. UPBC members present were: Thomas Anderson, Toni Carbo Bearman, Jacob Birnberg, George Chambers, Ronald Gardner, Darlene Harris, James Holland, Randy Juhl, Carol Kenderes, Peter Koehler, Franklin McCarthy, Dennis McNair, Richard Nelson, Sharon Nelson-Le Gall, Jack Ochs, Ben Tuchi, Julius Youngner, and Judith Zimmerman. Also present were: Michael Gaber, Jeffrey Liebmann, William Madden, Robert Pack, Lawrence Weber, and Bruce Williams. UPBC members not present were: Nitin Badjatia, Thomas Detre, James Isaacs, James Maher, Jeffrey Romoff, and Philip Wion. Approval of Minutes The UPBC approved the June 21 minutes. Capital Projects Subcommittee Report Juhl summarized the initial context of the FY 1995 proposed capital projects and previously approved projects. The $188.6 million total for proposed projects included $81.9 million for Education and General (E&G) projects; $69.0 million for projects funded from anticipated gift revenues; $25.9 million for auxiliary enterprise projects; and $11.8 million for UPMC projects. The proposal called for $64.8 million to be financed through new debt during FY 1995 and $90.1 million to be deferred contingent on funding assumptions, project management ability, and evaluation of consistency with the institutional long-range plan. The remaining $33.7 million proposed would be funded from Plant Funds or supported from current fund revenues. Juhl added that the $64.8 million of proposed projects to be funded in FY 1995 would add $4.1 million in gross debt service and $1.5 million in annual operating costs to the E&G budget. Juhl stated that the Subcommittee did not view as part of its charge the recommendation to reduce the total scope of capital projects approved, or to remove any particular project from any further consideration. In reviewing the schedule of capital projects, he discussed several changes that had occurred in the list, which included the following. - The proposed $1 million renovation to Swarts Hall (Bradford) was deferred. - The proposed $1 million renovation to Fisher Hall (Bradford) was increased to $1.5 million subsequent to receiving bids on the project. - Costs related to privately-funded projects were removed from the Master Plan/Jump Start Support listing and placed in the private funding category. - The $70,000 Physics Lab Upgrade and $130,000 Engineering Distance Learning Classroom were moved from the deferred list to the recommended projects list. - Projects to be funded from business and auxiliary sources were separated into those funded through cost recovery and those funded through auxiliaries. - The source of funds for the $190,000 Low Tension Conduit project (Johnstown) remained unresolved. Bearman asked whether telecommunications charges paid by Johnstown could be used to fund the Low Tension Conduit project. Juhl stated that the Subcommittee's recommendation was that while it may be a deserving project, it should not be funded from E&G sources. Bearman asked about including the CIS Projects using the Student Computing Fee under the Auxiliary Funding category. Tuchi responded that these revenues do not actually fit into any of the categories on the capital list. Birnberg expressed concern that adequate needs assessments be produced and that CIS not be permitted to construct a capital budget based on revenues collected. Tuchi responded that this was not the case, and stated that the Information Technology Steering Committee oversees this process. Bearman, a member of the ITSC, stated that CIS projects should be submitted to the same scrutiny as any other business- related projects. Ochs asked whether policies exist regarding the growth and use of Plant Funds at a time when E&G operating budgets have decreased. McCarthy stated that the Plant Funds are used as an endowment as long as interest rate differentials make it more beneficial to borrow money. Tuchi discussed the nature of the Plant Funds and their contribution to the operating budget, adding that $1 of Plant Funds buys $1.50 of debt. Tuchi and Ochs agreed that this strategic issue should be examined further. Juhl submitted the report of the Subcommittee, consisting of several recommendations and two motions regarding privately funded capital projects and the approval process of capital projects in the University's business units, and including the revised tables detailing FY 1995 capital project recommendations. Several alternative wordings to the recommendations and motions were discussed and approved. Koehler moved that projects requiring further review be pulled from the current UPBC recommendation and reincluded at a later date if no problems appear, including the Johnstown Parking Lot/Roadway Restoration, the Residence Hall Renovations, and the Low Tension Conduit project. Youngner seconded. The motion was approved unanimously. Youngner moved that all Computing and Information Services projects be pulled from the current recommendation for further consideration. Birnberg seconded. The motion was approved 16 to 1. Juhl moved that the Subcommittee report be adopted. McCarthy seconded.=20 The report consists of the following six recommendations and two motions: Recommendation #1 p Projects to be Deferred All projects listed on the Recommended Projects to be Deferred schedule contained in the FY 1995 Proposed Capital Budget, dated June 30, 1994 should remain deferred until at least FY 1996, when they will be required to be re- submitted through the capital budget process (with the exception of the Physics Lab Upgrade for $70,000 and Engineering Distance Learning Classroom for $130,000, which have been moved to the recommended list). In addition, the privately-funded projects on the deferred schedule (Convocation Center, Athletics Stadium Renovation Phases 3-8, and the College of Business Administration) should adhere to the Subcommittee's motion #1 (see below) before they are re-submitted. Recommendation #2 p Telecommunications Switch Although this project is listed as "funded", it is really a cost- recovery operation that obtains its funding through charges to other units, therefore its funding is really through E&G operations. This project should be deferred pending an analysis of the telecommunications operation in a manner similar to that proposed in motion #2 (see below). If this analysis concludes that telecommunications should remain in-house, then a formal needs analysis of the new switch should be completed and accompany the submission of this project. Recommendation #3 p Five-Color Printing Press For the same reasons stated in Recommendation #2 above, this project should be deferred pending an analysis of University Printing in accordance with motion #2. Additional questions related to this project include: 1) Who would receive the benefit of the projected cost savings of approximately $300,000/year, University Printing or the user departments? 2) The projected savings are dependent upon University Printing's ability to capture the market that is currently using outside printers. What steps are contemplated to ensure that this revenue source be successfully captured and maintained? Will it be necessary to adopt policies compelling units to use the in-house printing operation instead of external vendors? 3) What policies would be developed regarding a uniform pricing structure that could be compared to external vendors for competitiveness? Recommendation #4 p Magellan Telescope In addition to motion #1, a formal financial assessment of the total costs of this project and its connection with the long-range plan of the University should be presented prior to its consideration. Recommendation #5 p Athletics Projects The UPBC has previously stated that the approval of the Stadium Renovations, as well as other Athletics-related projects, should be conditioned upon the development, by Athletics, of a formal plan to facilitate the systematic review of the Department of Athletics budget as soon as possible. The Subcommittee recommends that all Athletics projects be deferred =66rom consideration until this plan has been developed by Athletics and reviewed by the UPBC for consistency with the University's long-range plan. Recommendation #6 p Recommended Approval of Remaining Projects on Schedule All projects on the schedule attached to the Subcommittee report noted for approval are hereby recommended for approval to the Chancellor as the Revised Proposed Capital Budget for FY 1995. Motion #1 p Privately-Funded Capital Projects Proposals for capital projects to be funded from private funds must identify total pledges needed and threshold amounts received so that structural activities can be matched to fund raising levels. Should a project fail to achieve a proposed threshold, that portion of the project should be deferred until such time as the threshold is achieved. Threshold amounts must be developed for all pending projects to be funded from private funds. Such a modular project design proposal should be developed, when applicable, for all major capital projects. Motion #2 p Business Units Within the near future, each of the University's business units should be thoroughly evaluated to determine its effectiveness and efficiency relative to external providers of similar services. This "make or buy" analysis should determine whether, and under what conditions, the University should provide administrative support services rather than contract with outside suppliers. Proposals for the purchase of major capital equipment or for the significant expansion of services provided by an administrative or business unit should be deferred until the unit has been evaluated. The methodology for analysis should be developed by the University's Business and Finance unit, with participation by the UPBC. The methodology should address, at a minimum, the following: direct costs, indirect costs, scope of services provided, source and volume of revenues, reliability of revenue sources, availability of external providers of the service, comparisons of fully costed pricing of internal versus external providers, quality consideration (including surveying of the units' customers), and any intangible benefits that may be derived from having the service provided in- house (e.g., convenience, prestige, etc.). The analysis should be applied on a uniform basis to each unit. Where qualified University personnel are available to perform the analysis, they should be used, but the use of external consultants should also be considered where special expertise is needed. It is also recommended that this evaluation be performed first on the University's printing operation, since that unit is proposing a significant expansion into multi-color work with a related capital investment of approximately $800,000. The motion to adopt the report of the Subcommittee was approved 16 to 1. In response to Anderson's concern, Tuchi stated that any cost overrun related to a capital project must be treated as a separate capital project, including all reviews and approval. Strategic Issues Subcommittee Action Ochs discussed the need, as identified by the Subcommittee, to establish principles to guide financial decision making. In particular, he cited concern over the growing proportion of the E&G budget represented by Mandatory and Nonmandatory Transfers to Plant Funds which, if continued in future years, will create increasing net deficits. Ochs stated that since the University has probably already overburdened the E&G budget as a source of capital funding, one possible solution is to establish an upper bound on the percentage of the E&G budget represented by these transfers. He presented the following resolution passed by the Subcommittee. Successful long-range planning requires the integration of capital planning and budgeting with operational planning and budgeting. The Subcommittee believes that one way of assuring this integration is to place limits on the percentage of the Unrestricted E&G budget that is available to support annual capital expenditures. It therefore proposes that, for planning purposes, an upper bound be set on the percentage of the Unrestricted E&G budget that can be used to support such capital expenditures as are currently supported via Mandatory and Nonmandatory Transfers to the Plant Fund. The planned level and pattern of financing of capital expenditures must be done within the context of this planning parameter. Ochs moved that the UPBC adopt the recommendation, stipulating that the exact bounds be determined after further analysis. McCarthy seconded. Tuchi supported the proposal as a necessary financial disciplinary measure. Juhl stressed the need to balance components of the University budget and emphasized that a lower bound would also be needed to ensure adequate levels of funding for capital renovations and preservation. Youngner expressed concern over the need for more information. Bearman moved to table action on the motion until October and supply the UPBC with more detailed information. Youngner seconded. The motion to table was approved 6 to 1 (with three abstentions). The meeting adjourned at 4:30 p.m.