ARIZONA BOARD OF REGENTS Minutes of the Business and Finance Committee Wednesday, June 3, 2015

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1 ARIZONA BOARD OF REGENTS Minutes of the Business and Finance Committee Wednesday, June 3, 2015 A meeting of the Arizona Board of Regents Business and Finance Committee was held on Wednesday, June 3, 2015 at the University of Arizona, Student Union Memorial Center in Tucson, AZ. Present: Regent Jay Heiler (Chair), Regent Rick Myers, Regent Ron Shoopman, Regent Ram Krishna, Regent Greg Patterson, Regent Valerie Hanna, Regent Mark Killian. Absent: Also present were President Eileen Klein (ABOR), Regent LuAnn Leonard, Regent Bill Ridenour, Nancy Tribbensee (ABOR), John Arnold (ABOR) Lorenzo Martinez (ABOR), Gale Tebeau (ABOR), Chad Sampson (ABOR), Morgan Olsen (ASU), Christine Wilkinson (ASU), Gregg Goldman (UA), Jennus Burton (NAU), Bjorn Flugstad (NAU) Regent Heiler called the meeting to order at 1:45 p.m. Upon motion by Regent Heiler and seconded by Regent Patterson, the meeting convened into Executive Session at 1:50 p.m. Motion passed. Public Session reconvened at 2:40 p.m. APPROVAL OF MINUTES Upon motion by Regent Heiler, seconded by Regent Krishna, the Committee unanimously approved the minutes of the April 8 and April 27, 2015 Business and Finance Committee meetings. Motion passed. Ground Lease with American Campus Communities for Development of a Privatized Residence Hall (NAU) (Item 1) Jennus Burton presented an overview of the Northern Arizona University request to facilitate and execute a ground lease for development of a residence hall project on the Flagstaff campus with American Campus Communities. Upon motion by Regent Heiler and seconded by Regent Myers, the Committee recommended forwarding for Board approval, the Northern Arizona University request to take all appropriate actions necessary to facilitate and execute a ground lease with American Campus Communities for development of student housing as presented in the Executive Summary. Motion passed. Addendum to the ASU-City of Phoenix Master Lease for property at the Downtown Phoenix Biomedical Campus (ASU) (Item 2) Morgan Olsen presented an overview of the Arizona State University request to enter into an addendum to the existing master lease with the City of Phoenix for the ability to lease additional land within the Phoenix Biomedical Campus. NantWorks LLC, which is a leader in the health, 1

2 biomedical and medical research fields will partner with Arizona State University on development of research space on the first leased parcel of the identified property. President Crow added that this has been an extension of ten years of interaction that ASU has had in the evolution of the Phoenix Biomedical Campus, as well as the ASU Downtown campus. The campus is meant to accommodate a range of new education, research and technology orientated efforts, with the intention to stimulate both health solutions and the regional economy. Upon motion by Regent Heiler and seconded by Regent Krishna, the Committee recommended forwarding for Board approval Arizona State University's request to enter into an amendment to the Downtown Phoenix campus master lease with the City of Phoenix for a series of thirty-year leases, and related subleases, for parcels in the Phoenix Downtown Biomedical Campus under the terms presented in the Executive Summary. Motion passed. FY 2016 Annual Operating Budgets (ASU, NAU, UA, ABOR) (Item 3) Gale Tebeau presented an overview, including PowerPoint slides of the FY 2016 Annual Operating Budget for Committee approval. Each university will provide more detail of their proposed operating budget in their presentations. The budget combines general purpose, designated and restricted fund budgets into a consolidated budget format that includes projected revenues and expenditures for the fiscal years for each university and the central office. Total FY 2016 projected revenues for the universities is $4.7 billion, an increase of $289.6 million or 6.5% over the FY 2015 budget, with comparable increases in expenditures. The original FY 2016 general fund appropriations totaled $666.9 million for the system, a decrease of $101.5 million or 13.2% below FY However, there were additional adjustments included in the appropriations bill for reductions in the employer health insurance contributions that were not allocated yet. Those allocations have now been made, and for the universities an additional $6.1 million was reduced from the original general fund appropriations. The adjusted general fund appropriation for the university system is $660.8 million, a decrease of $107.6 million or 14% below FY Net tuition and fee revenues and general fund appropriations makeup the largest share of the operating budget comprising approximately 55% of the total. The universities are maintaining their tuition revenues and fee projections as presented to the Board at the April tuition and fee setting process. The universities are in the process of analyzing the impact of the general fund reductions and are developing strategies for implementation through fund reallocations, operational savings and other cost savings measures. Each university is prepared to present their reduction strategies at this meeting. Gregg Goldman presented a detailed overview, including a PowerPoint presentation of the proposed FY 2016 Annual Operating Budget for the University of Arizona. Mr. Goldman highlighted that they are processing a $28.4 million reduction in general funds, while protecting the guarantee student tuition program which is in its second year, and UA is offering students that did not take advantage the first year to opt in. They are expecting an enrollment growth increase of 970 students and have increased their monthly days cash on hand from 105 to 127 days. There are ongoing discussions across campus how the reductions are going to affect the university, with the reality that there will be some staff reductions. In response to Regent Killian, Lorenzo Martinez stated that there is about $650 million in total deferred building maintenance costs system-wide and that about $115 million is needed 2

3 annually. There are discussions regarding documenting what the universities are doing relative to preventative maintenance and deferred maintenance. Bjorn Flugstad presented a detailed overview, including a PowerPoint presentation of the proposed FY 2016 Annual Operating Budget for Northern Arizona University. Mr. Flugstad highlighted that they are processing a $17.3 million reduction in general funds with one-time and permanent strategies being implemented to address the FY 16 appropriation reduction, while protecting the NAU tuition pledge program. They are expecting an enrollment growth increase of 1,150 FTE students. Projected monthly days cash on hand has been reduced from 140 days to 120 days, as previously anticipated. In response to Regent Ridenour, Mr. Flugstad stated that the enrollment growth is a mix of instate and out of state students, including out of state students enrolled through the Western Undergraduate Exchange program. Mr. Olsen presented a detailed overview, including a PowerPoint presentation of the proposed FY 2016 Annual Operating Budget for Arizona State University. Mr. Olsen stated that they are processing a $55.8 million reduction in general funds, not including an additional $3.4 million in reductions related to the Health Insurance Trust Fund for employee benefits. Other revenue increases include $31 million in Thunderbird activities. Strategic measures are being discussed to address the reduction in appropriation funding, including $34 million of reductions and reallocation in departments across campus. Arizona State University is expecting an enrollment growth increase of 7.5%. Their monthly days cash on hand is expected to remain constant at 138 days. In response to Regent Heiler, Mr. Olsen stated that the 21.7 % reduction in funding per FTE student reflects a change from $4,100 per student currently to $3,300 and some change next year. Mr. Olsen will follow up and send Regent Heiler the exact numbers. In response to Regent Krishna, Mr. Olsen stated that Thunderbird, as an independent entity had over $64 million in revenue last year, and as they become integrated into ASU will be built into the budget for FY ASU is just beginning to see the impact of acquiring Thunderbird. In response to Regent Ridenour, Mr. Olsen stated that the monthly days cash on hand is a liquidity measure, if the number of days get too low, you could potentially have difficulties with cash flow. It also shows the strength of our balance sheet, which credit rating agencies use to determine credit risk. John Arnold presented an overview of the proposed FY 2016 budget for the system office. The system office budget is about $23.7 million which is comprised from general funds, local funds that are received from the three universities, TRIF and an ITQ (Improving Teaching Quality) grant. The system office will be returning $1 million in unspent local funds back to the universities from the FY 2015 budget monies. Upon motion by Regent Heiler and seconded by Regent Krishna, the Committee recommended forwarding for Board approval, the FY 2016 Annual Operating Budgets for Arizona State University, Northern Arizona University, the University of Arizona and the ABOR System Office as presented in the Executive Summary. Motion passed. 3

4 FY 2016 Capital Development Plans (ASU, NAU, UA) (Item 4) Mr. Martinez provided a brief overview of the FY 2016 Capital Development Plans. Mr. Olsen presented an overview of the Arizona State University FY 2016 Capital Development Plan (CDP), which includes one new project and one previously approved project. The total CDP totals $226.8 million. Debt service associated with the CDP will increase the overall debt ratio by 0.55%. Mr. Burton presented an overview of the Northern Arizona University FY 2016 Capital Development Plan (CDP), which includes one third-party project for student housing. There is no debt service associated with the CDP. Mr. Goldman presented an overview of the University of Arizona FY 2016 Capital Development Plan (CDP), which includes four previously approved projects that are currently on hold. The total CDP totals $176.7 million. Debt service associated with the CDP will increase the overall debt ratio by 0.27%, excluding SPEED projects, and 0.28% including SPEED projects. recommended forwarding for Board approval, the FY 2016 Capital Development Plans for Arizona State university, Northern Arizona University, the University of Arizona, as presented in the Executive Summaries. Motion passed. Guidance for Developing FY 2017 State Budget Requests including Presentation on The Budget Outlook (Item 5) John Arnold presented an overview, including a PowerPoint for the Committee to begin the discussion and provide guidance to the universities and the system office on the development of the FY 2017 state operating budget and capital budget requests. The FY 2017 budget is due by September 1, 2015, but an extension will be requested to submit by October 1, 2015, so the Board can review and approve the FY 2017 budget at its September 24-25, meeting. President Klein requested that Mr. Arnold share his PowerPoint presentation Arizona State Budget Outlook for the Next Ten Years with Greater Phoenix Leadership. The presentation is not a forecast, but a status of where the state budget is at and some of the risk factors, including issues that drive the revenue and expenditures in the state budget. The first slide depicts a 20- year trend line. Arizona experienced a bubble in 2006 to 2008, but has returned to its natural trend line in revenue. President Klein commented that the point of the presentation is to give the Regents an idea of what could be expected in the long-term and to help inform policy makers and encourage business leaders to take a ten-year look on how the state manages its business. The Committee and Regents engaged in a discussion regarding the current state budget issues and problems in the past and the budget outlook for the future. This item was for discussion only. Technology and Research Initiative Fund-Regents Innovation Fund Proposals (Item 6) Chad Sampson provided an overview for Committee approval of the proposed projects from the Regents Innovation Fund for fiscal year The board office received and reviewed four proposals requesting a total of approximately $1,400,000. The four proposals are: 4

5 Digital Research Infrastructure: Live Data A Unique Arizona Resource: Three-Photon Microscope Proposal for Peptide Array Core Track System Implement Public-Facing and Internal-only ABOR Metrics Dashboards A description of each proposal is in the executive summary. The complete proposals are available at the board office. recommended forwarding for Board approval, the proposed projects from the Regents Innovation Fund for the fiscal year , as presented in the Executive Summary. Motion passed. Ground Lease with American Campus Communities for Development of New Student Housing (ASU) (Item 7) Mr. Olsen presented an overview of the Arizona State University request to execute a ground lease with American Campus Communities for development of third-party student housing on the Tempe campus. recommended forwarding for Board approval, Arizona State University s request to enter into a ground lease with American Campus Communities for the development of third-party student housing on the Tempe campus in accordance with terms and condition, as presented in the Executive Summary. Motion passed. Request for Ratification of Exception to Board Policy ( University Investments ) (Item 8) The Committee reviewed an exception to Board Policy ( University Investments ) for the Academic Enhancement Fund established as part of the Academic Affiliation Agreement between the University of Arizona and Banner Health. The exception is necessary as a result of the Banner agreement with the University of Arizona, which established the Fund to be held in trust for the benefit of the University of Arizona. The agreement provides for Banner Health to manage the Academic Enhancement Fund investments. recommended forwarding to the full Board to ratify an exception to Board Policy 6-212, effective February 28, 2015, with respect to the Academic Enhancement Fund established by the merger University of Arizona Health Network into Banner Health, and the Academic Affiliation Agreement with the University of Arizona, as presented in the Executive Summary. Motion passed. Debt Issuance Pricing Report for System Revenue Bonds (UA) (Item 9) Mr. Goldman presented an overview of the University of Arizona s report on the final pricing for a recent bond issue to finance $88.8 million for the Bioscience Research Laboratories project and associated costs of issuance, as well as $40.5 million of refunding bonds to refund a portion of outstanding bonds and associated costs of refunding. 5

6 Debt Issuance Pricing Report for Refunding Certificates of Participation (UA) (Item 10) Mr. Goldman presented an overview of the University of Arizona s report on the final pricing of the issuance of $ million Refunding Certificates of Participation to refund all or a portion of 14 outstanding series, and associated costs of refunding. Debt Issuance Pricing Report for Refunding Certificates of Participation and System revenue Bonds (NAU) (Item 11) Mr. Burton presented an overview of the Northern Arizona University s report of the final pricing for the issuance of $45.4 million to refund portions of five series of outstanding bonds and costs of issuance, as well as $18.8 million to refund a portion of outstanding certificates of participation and associated costs of refunding. Code and Safety Renovation Guaranteed Maximum Price Report (NAU) (Item 12) Mr. Burton reported that the renovation phases related to code and safety projects has a total budget of not-to-exceed $19.8 million, which is being financed with $12.5 million in system revenue bonds and $7.3 million in auxiliary funds. Debt Issuance Pricing Report for System Revenue and Refunding Bonds (ASU) (Item 13) Mr. Olsen presented an overview of the Arizona State University s report on the final pricing details for the issuance of $418.5 million in system revenue bonds to finance: Center for Law and Society Facility, Psychology Building Renovation, Sun Devil Stadium Renovation-Phase 1, IT Infrastructure Improvements, West Campus Housing Refunding and Acquisition, and refunding of three bond issuances. ADJOURNMENT The meeting adjourned at 5:15 p.m. Submitted by: Sue Sosa Committee Secretary 6