MEMORANDUM. The Board of Governors of the Colorado State University System

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1 MEMORANDUM Date: 29 November 2014 To: From: Subject: Copy: The Board of Governors of the Colorado State University System Tony Frank, President Stadium Recommendation Chancellor Mike Martin Mike Nosler, General Counsel BACKGROUND On February 3, 2012, nearly three years ago, the newly appointed Stadium Advisory Committee held its first meeting. In August, after six months of meetings, discussions and debate, this committee concluded that building an on-campus stadium -- capable of serving additional sports and fulfilling additional needed functions for campus -- was feasible. Vice President for University Operations Amy Parsons co-chaired that committee, and she will make a brief summary presentation of their process and findings during my formal report and recommendation to you on December 5, During the Stadium Advisory Committee process, we also engaged CSU s Center for Public Deliberation to help us more effectively engage in a constructive dialogue with those interested in the topic. The Center s Director, Dr. Martin Carcasson, also will present a short summary of the Center s role and his observations on this process December 5. In early October 2012, I recommended to the Board that the construction of a new, on-campus stadium was desirable, within parameters that limited risk to the university s general fund (specifically, I did not want to utilize tuition, fees or state funding on the project). The Board approved that we proceed with attempts to raise 50% of the funds needed to construct the stadium, working under the assumption that the remaining 50% of the costs would be covered by revenue bonds, using the most conservative revenue estimates generated by professional consulting firms specializing in this field. The revenue estimates are, obviously, the lynch-pin to the entire analysis of the stadium options. You ve seen my analysis of these estimates previously. At the December meeting, Tim Romani of ICON will provide you a short discussion of the CSL analysis as seen through the eyes of his professional experience in this area. In early October 2013, following my update report, the Board authorized us to proceed from schematic design to design development with a focus on engaging the community so the stadium s design would, to the fullest extent possible, address neighborhood concerns. To that 1

2 end, the Community Design Development Advisory Committee, chaired by former City Councilman and State Representative Bob McCluskey, worked for several months, presenting their findings to me in September Mr. McCluskey will also provide a short summary of CDDAC s work to you December 5. In October of this year, at the end of our self-imposed two-year fund raising period, I reported to you that we had not raised the approximately $110M of private funding needed to move the project forward under the Board s authorization of October As you know, I also was reluctant to bring forward to you a plan to deal with chronic deferred maintenance issues at Hughes Stadium that would have had at least a $30M impact over the next decade alone (this amount increasing to $60M over 30 years if we were to bond the project), falling nearly totally onto the university s general fund, thus using student tuition and state funding. Instead, I recommended that you grant me two additional months to explore four primary options around the stadium: (1) the maintenance of Hughes Stadium; (2) a major renovation and expansion of Hughes Stadium; (3) a new, on-campus stadium owned and operated by CSU, likely scaled back to fit a budget including funds raised to date paired with projected revenue bond resources; and (4) a new, on-campus stadium built and operated under a public-private partnership (P3). You approved this approach and to that end, we provided details surrounding those options in a blue book format and solicited public comment. I also solicited formal, public input from four sources: (1) a Campus Leadership Committee co-chaired by Dr. Katherine Leigh (chair of the Faculty Council Committee on Strategic & Financial Planning) and Dr. Sue LaRue (chair of the Faculty Council Committee on Intercollegiate Athletics); (2) a Community Leadership Committee chaired by UCHealth CEO Kevin Unger; (3) CSU Facilities; and (4) CSU Athletics. The committee reports as well as the recommendations from Facilities and Athletics are available at and are attached to this recommendation. Drs. Leigh and LaRue, Mr. Unger, Facilities Director Steve Hultin, and Interim Athletic Director John Morris also will provide you with brief summaries of their recommendations December 5. In brief, the Community Leadership Committee and the Department of Athletics favor either option for a new on-campus stadium, while the Campus Leadership Committee and CSU Facilities favor a CSU-owned and -operated facility (option #3). Public input favored option #4 the public private partnership with nearly 2/3 of participants supporting an on-campus stadium. (NOTE: This was not a poll or survey and does not match the one formal survey or the non-scientific polls that have been conducted). Vice President for Advancement Brett Anderson and Interim Athletic Director John Morris met with nearly every donor who pledged $100,000 or more to the new stadium effort. None of these donors were interested in supporting either option #1 or #2. All but two of the donors were supportive of option #4. It s important to note here that 2

3 this interest was related to the scope of the project rather than the funding mechanism. Fully 85% of the donors were willing to support option #3. These results are summarized in the attached memo from VP Anderson and Interim AD Morris. There has been much written and said about the stadium process and discussion. While it is clear the topic is an emotional one for many people and the processes that we employed were not as effective as I might have wished at depolarizing the discussion and fostering a more fact-based dialogue, I remain convinced we made every reasonable effort to accept input, allow voices to be heard, engage viewpoints from around the topic, and arrive at a reasoned and thoughtful decision. I think the brief reports from the leaders of various steps in the process will support this contention and Vice President for External Relations Tom Milligan will also summarize the public process that has surrounded the entire project. ASSUMPTIONS Without re-plowing old ground, I believe it is critical to understand the assumptions behind any decision. Again, I present these as informed opinions, not as indisputable facts. My basis for these assumptions is available in my previous communications to you on this topic. Football will continue to be played as a collegiate sport and will remain popular with a wide segment of the population. In Colorado and at Colorado State, as elsewhere, there is abundant interest in attending live sporting events, obviously with a competitive product deriving more interest and attendance. Colorado State University is an exceptional comprehensive, student-centered research university, yet the brand of the university is not as broadly understood as we might wish it to be. Intercollegiate athletics, despite the obvious flaws and challenges we face in our day, add value to the life of the campus, the life of the community and whether we might think appropriate, excessive or not draw a great deal of attention to a university. Intercollegiate athletics, despite the large sums of money and costs associated with them, are worthy of some rational investment. At Colorado State, our net investment is extraordinarily low, and I believe the return on reasonable additional investments will be very high. Improvements in intercollegiate athletics do not have to come at the expense of academics, either fiscally or in focus. Our budgets, investments and priorities have been and will remain unambiguously focused on our academic mission. There is no substitute for expecting excellence in everything we do as a university. DISCUSSION I have attempted to approach this issue first, last, and always from the perspective of what was in the best long-term interest of Colorado State University, as best as it has been within my ability 3

4 to see those interests. All of the above and previous discussions notwithstanding, our role and mission (in the language of our day) remain unchanged after nearly 1½ centuries: the discovery of new knowledge, the passage of that knowledge (including the method to further future discovery) to the next generation, and the application of that knowledge for the benefit of the society we exist to serve. We strive to discharge that role and mission in the face of the greatest challenge American public higher education has ever faced: the on-going transfer of the cost of education from us as a society viewing education as a collective public good to our students and their families as an individual consumer commodity. Against this backdrop, every effort must be made to be extraordinary stewards of the public trust and the trust of those who invest their time, treasure, talent and futures with us. In short, I remain convinced that every effort must be made to minimize the use of and risk to our general fund made up predominantly of tuition and, to a lesser extent, state funding. This must be the standard for our decision. I am convinced that a major renovation or expansion of Hughes Stadium (option #2) is not viable against that standard. Without donor support, with uncertain costs, with uncertain revenue bond support, the risk to the general fund of following this approach is, to me, unacceptable. I am also convinced that simply attempting to maintain Hughes Stadium (option #1) is not in our best long-term interests. Without substantial donor support, without additional revenues to support revenue bonds, with a challenged infrastructure and with the signals that taking this path would send about our university, the minimum price tag of $30M (rising to $60M if we were to fund this project via the issuance of bonds) essentially all falling directly upon the general fund is simply too high for me to recommend this option as our best path forward. That brings us to a discussion of options #3 and #4. Both of these options share the predominant feature of being located on our main campus. Clearly this issue of location has been the driving polarizing issue for many involved in the stadium discussion. From the beginning of our discussions, I have stated that I believe all things being equal locating the facility on our campus is desirable. But I have also maintained that people who care every bit as much about our university and community as I do can legitimately arrive at different conclusions on this point. I remain convinced that there are highly viable options to deal with transportation and parking. I believe that our Facilities staff has done an exceptional job in assuring we have more than adequate academic space available on the campus to meet any reasonable projected growth needs. I am in receipt of the materials that the City Council will be considering at their meeting December 2; these materials urge the university to work carefully with the City and the impacted neighborhoods to mitigate the effects of a new stadium if we move forward with such an option. I have been and remain committed to doing exactly that. We have budgeted for impact costs in our models and have exchanged this information with the City. We will be analyzing the City s response, and we are committed to working in good faith to respond to any differences in the assessments. The City Manager and I will travel to Minneapolis if we elect to move forward to 4

5 study how that city and university have dealt with stadium-related issues. I am willing to negotiate and bring to you for your approval appropriate IGAs to provide confidence that we will meet our commitments in this area. In sum, I believe there is nothing about an on-campus location that disqualifies option #3 or #4; indeed, I believe location is one of the primary benefits of these options. Option #3 is defined primarily by CSU owning and operating the facility, scaled as needed to fit the budgetary standard detailed above. Under this option, we currently estimate the cost of the stadium at $195M. Design features that have been modified from the original design include: redesign of the East Stadium by removing the upper concourse seating sections while preserving the ability to add back in a future phase; re-design of the East and South Stadium seating bowl from steel/concrete to an engineered aluminum system; simplification of the suite/press tower construction; and an overall reduction of the stadium capacity from 41,200 to 35,872 patrons. In this process, we have maintained design elements critical to the success of the new stadium, including; football operations program as designed in the original design; revenue producing premium seating, suites, loge boxes and clubs; comprehensive technology features including video boards and connectivity; and the infrastructure to expand the stadium in the future. If we apply our low-case revenue assumptions (again, I believe these highly likely to be conservative based on the methodology of the consultants and the additional data since their study was completed) and our anticipated philanthropic support, I believe this option meets the fiscal standard discussed above. It is important to understand clearly how such an option would function in a fiscal sense. The university would issue $195M in bonds. I would recommend to you that these not be part of the State s Intercept Program. Although that program comes with a lower interest rate, I think it is a fair criticism that this is unlikely to have been what legislators envisioned when this program was established. Further, I would recommend to you that we utilize subordinated bonds to protect to the full extent possible the academic credit rating of the university. We have utilized these assumptions in the financing model discussed above, and accounting for modest inflation in interest rates between now and the date of issuance, we are advised that we can model around a 4% interest rate. The payments on such bonds are estimated at $12.1M annually for 30 years. If we assume the low-case revenue scenario, apply philanthropy as the current gifts and pledge documents would indicate funds will be received, and apply an assumed 3% rate of inflation to both revenues and expenses of the new stadium, total resources available exceed bond payments by $76M over the 30-year period. However, in the first 12 years, if revenues do not exceed the low-case projection, the project would face a cumulative deficit of $19.4M. I d note that if we attain a level of revenue performance intermediate between the low and base case (the base case is the scenario at which the consulting firm had 90% confidence), the project never sees a deficit hence never having any impact on the general fund. The potential deficit of $19.4M (or greater, if even the low-case revenue scenario is not attained) is buffered against approximately $10M currently in estate gift pledges to the stadium, the value of Hughes Stadium and its associated land (likely in the $10M range net 5

6 of demolition costs), final stage philanthropy associated with the project but not budgeted as revenue and the eventual projected net surpluses over the life of the project. If needed, internal bridge loans would be a logical source of connection of any initial source of short-term deficit to these longer-term resources. Further, even if we were to miss these conservative revenue projections and exceed the fiscal buffers, we would have to see a total cumulative deficit in excess of $60M for any negative impact to be greater than the certain costs (principal and interest) and general fund impact associated with option #1 (maintaining Hughes Stadium). As discussions around financing and this project have progressed, we have also re-analyzed the costs, revenues, and risk profile associated with CSU financing the entire project as originally designed (currently estimated at $220M). A comparison between these two options in the form of an illustration of the financing is appended to this recommendation. I d draw your attention to the fact that, with either project scope, base or hybrid revenue scenarios result in cash flows that are always in excess of payments. With either scope of project, the low-case revenue scenarios would run interim deficits that are buffered as described above. In either scenario, there is minimal risk of impacting the general fund, and this risk needs to be viewed in the context of the $60M general fund impact of option #1. Option #4 is defined as a P3 (public private partnership), which we presumed might allow the entire stadium as designed to date to be constructed. In the span of the last two months, we have explored potential P3 opportunities with a variety of potential partners. Some of these were not, in our opinion, viable because of either the cost of the financing or the loss of control over the programming/operation of the facility. Others resulted in further discussions about partnerships around financing and support for the project that do not result in transfer of ownership or operation to a private entity, and hence do not meet the definition of a P3. We do not, at this point in time, have a P3 option (in the classic sense) to consider. However, we remain in discussions that evolved from our P3 conversations about financing options that would, in essence, provide comparable interest rates and additional financial reserves to further buffer the possibility of failing to attain adequate revenues. In some cases, such benefits are generally provided in exchange for some portion of the potential revenues that might be generated above the financing payments. In short, versions of option #3 (a CSU-owned and -operated facility) may exist in which minimal changes from the original design can meet the fiscal standard we ve established: the lowest risk of any negative impact on the general fund. I should note that in any of these options, the potential for adding academic space to the east side of the facility remains fully intact. Such space would take advantage of existing infrastructure provided by the stadium, thus reducing future academic construction cost. All of these options 6

7 retain the multiuse characteristics of the facility such that any risk taken is not taken simply for six football games per year, but for other uses that are part and parcel of campus life. RECOMMENDATION At our meeting December 5, I will recommend that you approve the construction of a new stadium located on Colorado State University s main campus. I will recommend that you authorize me to return to the Board with both a final program plan and a plan of finance in accord with State and Board policies. I will recommend that you authorize me to select a scope of plan and financing option that meet the standard of minimizing the risk of any negative impact to the general fund. After much thoughtful and careful consideration, it is my belief that we may be in the fortunate position to support our athletic programs with a new facility, demonstrate our commitment to excellence in all we do, return the game-day experience to our campus with all the inherent benefits of doing so, and have the likely outcome of a positive fiscal impact without any utilization of tuition, fees or state support. As always, I am available to respond to any questions. 7