Higher Education Capital Projects and

Facilities Needs Committee

Senate Finance Committee Room Tuesday, August 26, 2008 at 9:00 A.M.

ITEMS

Higher Education Capital Finance – Part II 1 Mr. Dennis Taylor, Vice Chancellor for Administration Mr. Richard Donovan, Acting Co-Director of Finance and Facilities

Marshall University: Overall Scope of Private Venture Project 5 Dr. Stephen Kopp, President, Marshall University

West Virginia University: Experience with Performance Contracting 11 Mr. Joe Fisher, Associate Vice President for Facilities and Services, West Virginia University

Energy and Water Savings Revolving Loan Fund 13

Mr. Richard Donovan, Acting Co-Director of Finance and Facilities

MEMORANDUM

TO: Higher Education Capital Projects and Facilities Needs Committee FROM: Mr. Dennis Taylor, Vice Chancellor for Administration Mr. Richard Donovan, Acting Co-Director of Finance and Facilities DATE: 25 August 2008 RE: Higher Education Capital Finance – Part II During last month’s meeting, staff provided extensive information about higher education bonded indebtedness. The purpose of this presentation is:

(1) To answer some outstanding questions; (2) To summarize the major recommendations made to date; and (3) To provide information about innovative capital financing arrangements.

Outstanding Questions Q: Provide a definition of an auxiliary enterprise. (Senator Plymale) A: According to the National Association of College and University Business Officers

(NACUBO), an auxiliary enterprise is “an entity that exists to furnish goods or services to students, faculty, or staff, and that charges a fee directly related to, although not necessarily equal to, the cost of the goods or services. The distinguishing characteristic of auxiliary enterprises is that they are managed as essentially self-supporting activities.”

“Examples of auxiliary enterprises are residence halls, food services, intercollegiate

athletics (only if essentially self-supporting), college stores, faculty clubs, faculty and staff parking, and faculty housing. Student health services, when operated as an auxiliary enterprise, also are included. The general public may be served incidentally by auxiliary enterprises. Hospitals, although they may serve students, faculty, or staff, are classified separately because of their financial significance.”

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“Auxiliary enterprises” are often contrasted with “educational and general” activities, which include instruction, research and public service, the three main functions of higher education institutions.

House Bill No. 101 (2004) restructured the higher education account structure to

include:

• An educational and general fund, into which most tuition revenue is deposited; • An educational and general capital fund, into which student capital fees

dedicated to educational and general facilities are deposited; and • An auxiliary and auxiliary capital fund, into which fees collected to support both

the operations and capital needs of auxiliary enterprises are deposited.

Auxiliary fees, including auxiliary capital fees, charged to all students are included within tuition and required fees, which are subject to statutory caps.

Q: Are resident and non-resident students charged different capital fees? (Delegate Poling) A: As indicated during last month’s presentation, the answer generally is yes. The chart

that appears on page 4 compares capital fees charged to resident and non-resident students.

Summary of Recommendations At the last meeting, Senator Plymale requested that staff provide a summary of recommendations made to the Capital Projects and Facilities Needs Committee to date. Below are the major recommendations:

• The Legislature should fund most new educational and general capital construction and major renovation projects through a dedicated funding source and periodic bonding. Auxiliary projects should be an institution responsibility.

• In the near term, the Legislature should redirect lottery revenue dedicated to Education, Arts, Science and Technology (EAST) bonds, due to be paid off in 2010, to a new higher education bond issue for the benefit of four-year institutions.

• The Commission and Council should develop a system facilities plan that supports state and system goals and objectives. The plan should outline a principled method for prioritizing capital projects across institutions, and system priorities should not vary markedly from year to year.

• The Commission and Council must do a better job of coming forward with reasonable requests (not $1+ billion) and of evaluating capital project priorities across the higher education system.

• Before institutions are allowed to incur significant capital debt, the Commission and Council should scrutinize carefully both the institution’s debt capacity and students’ abilities to pay additional tuition and required fees.

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• If the Legislature is to fund most higher education capital construction and renovations, the Commission and Council must ensure that state resources are maximized and that state capital funds are spent efficiently. The Commission and Council should play a larger role in overseeing capital projects at smaller institutions than at larger institutions.

• The Commission and Council should ensure that institutions generate sufficient revenue, after any state contribution, for facilities maintenance. The minimum amount should be calculated utilizing a building renewal formula. To keep community and technical college tuition low, the Legislature should consider covering all or a significant portion of community and technical college facilities maintenance costs.

• The Legislature should consider “buying down” the capital fees for the formerly administratively-linked community and technical colleges.

Innovative Capital Financing Arrangements Although we frequently talk in terms of bonding, there are other ways to finance capital projects. Rich Donovan, Marshall University President Stephen Kopp and West Virginia University Associate Vice President for Facilities and Service Joe Fisher will talk about three such arrangements:

• A private-venture project to build a student recreation center and residence halls at Marshall University;

• Performance contracting at West Virginia University; and • The recently-created Energy and Water Savings Revolving Loan Fund.

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West Virginia Higher Education InstitutionsUndergraduate Capital Fee Rates - Academic Year 2008-09

Resident Non-Resident

Institution

E & G Capital

FeesSpecial Capital

Institution Special Capital

Total Capital Fees 2008-09

E & G Capital

FeesSpecial Capital

Institution Special Capital

Total Capital Fees 2008-09

Four-Year InstitutionsBluefield State College $450 $0 $0 $450 $1,400 $0 $0 $1,400Concord University $368 $12 $0 $380 $1,366 $12 $0 $1,378Fairmont State University $410 $170 $220 $800 $1,600 $370 $220 $2,190Glenville State College $744 $0 $0 $744 $2,028 $0 $0 $2,028Marshall University* $410 $0 $0 $410 $1,460 $300 $0 $1,760Shepherd University $986 $0 $0 $986 $1,936 $0 $0 $1,936West Liberty State College $200 $0 $0 $200 $200 $0 $0 $200West Virginia School of Osteopathic Medicine $1,400 $0 $0 $1,400 $4,200 $0 $0 $4,200West Virginia State University $350 $0 $0 $350 $1,300 $0 $0 $1,300West Virginia University $430 $246 $0 $676 $1,570 $740 $0 $2,310 Potomac State College $100 $100 $0 $200 $500 $200 $0 $700 WVU Institute of Technology $350 $254 $0 $604 $1,300 $688 $0 $1,988

Two-Year InstitutionsBlue Ridge Community & Technical College $350 $138 $0 $488 $1,300 $138 $0 $1,438Community & Technical College of WVUIT $350 $0 $0 $350 $1,300 $0 $0 $1,300Eastern West Virginia Community & Technical College $100 $0 $0 $100 $500 $0 $0 $500Marshall Community & Technical College $430 $0 $0 $430 $1,460 $0 $0 $1,460New River Community & Technical College $350 $0 $0 $350 $1,300 $0 $0 $1,300Pierpont Community & Technical College $410 $130 $220 $760 $1,600 $370 $220 $2,190Southern West Virginia Community & Technical College $100 $0 $0 $100 $500 $0 $0 $500West Virginia Northern Community College $100 $0 $0 $100 $500 $0 $0 $500West Virginia State Community & Technical College $350 $0 $0 $350 $1,300 $0 $0 $1,300West Virginia University at Parkersburg $100 $0 $0 $100 $500 $0 $0 $500

*Marshall University will charge an additional $150 Special Capital Fee each semester starting Spring 2009, with the opening of the Student Recreation Center.

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MARSHALL UNIVERSITY OVERALL SCOPE OF PRIVATE VENTURE PROJECT

Overview

Project emulates strategies and practices for capital facility development followed by private, not-for-profit colleges and universities;

Centerpiece project was the Student Recreation/Wellness Center, a facility promised to Marshall students and a priority of theirs for more than a decade;

RFP Submission Requirements: comprehensive design, construction, financing and facility management – benefits to Marshall University and the State of West Virginia:

• Consolidation of design, engineering, financing and construction fees affording economies of scale;

• Proposers required to present evidence of successful performance (i.e., successful project development and management) in all domains of the project – qualified and experienced;

• Consolidation of procurement processes into a single request for proposals (RFP), thereby eliminating the expense (e.g., monetary, time) of several different procurement processes;

• Bond applications are not obligations of the State but rather that of a charitable, non-profit corporation;

• Facility operating costs are included in the financing structure – no cost to Marshall University’s base budget;

• Developed properties will be transferred to Marshall University’s ownership after bond debt has been retired;

• Accelerated project procurement processes helped lock-in the cost of construction materials and contracts with qualified subcontractors and skilled labor;

• By including the facility management component in the RFP, the mutual, long-term interests of the developer, the companies managing the facilities, Marshall University and the State are served – all have a stake in the success of the project.

An objective of the financing arrangements for the project was to minimize debt implications and ramifications (audit ruling pending);

Non-profit (e.g., foundation) chartered to further higher education interests for charitable purposes was required, and it represented interests of Marshall University in advancing the project;

Represents a pilot venture for West Virginia involving non-public sectors.

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The Series 2007 Project

Residence Halls Consist of 2 buildings, each 4 stories in height, aggregating 160,698 square feet. The combined student housing facilities contain:

Learning/Instructional spaces in each Residence Hall comprised of: • One classroom (seating capacity 25) • One Theater Classroom (seating capacity 20) – also an entertainment venue

for students • One conference/meeting room • Student study lounges on each floor • Large first-floor student commons/snack area

418 residential units comprised of: • Three hundred ninety two (392) one-bedroom [two (2) beds per room], one

bathroom units • Twenty two (22) one-bedroom, one bathroom private (RA) units • Two (2) one-bedroom, one bathroom apartment-style units • Two (2) two-bedroom, one bathroom apartment-style units

Halls Completed and Open: August 15, 2008

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Student Recreation Center Project Scope

• Three (3) story, 123,000 gross square foot comprehensive recreation facility • Program for facility based on student survey priorities and utilization

Facilities, programs, services and typical hours of operation offered at the new Student Recreation Center, which is slated to open in February of 2009, are outlined below:.

Facilities • Natatorium that accommodates four lanes of lap swimming plus a recreational

aquatics area (e.g., leisure pool and whirlpool) • Four (4) court gymnasium for basketball, volleyball, badminton and other

court sports • Three-story rock climbing and bouldering Wall • Four (4) group exercise / multipurpose studios for aerobics, spinning and other

group activities • 17,000 square feet of weight and fitness (cardio and strength training

equipment) on two levels • 1/7 mile elevated jogging/walking track • Three (3) Racquetball courts • Locker rooms • Administrative suite (Recreation and Wellness Staff) • Wellness Resource Center and Exercise Testing Lab • Outdoor adventure equipment and resource center • Outdoor sun deck • Juice bar and lounge areas

Facility Completion/Opening Date: Projected February 2009

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View from the Corner of 5th Avenue and 20th Street Looking Northwest

Interior Campus View Looking Southeast

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Total Project Cost $81,065,000 Collateral: Pledged student housing and recreation center fees; fee escalation

underwriting agreement with Capstone Development Corp.

The Offered Bonds Cabell County, West Virginia revenue bonds issued – County offered the bonds through Morgan Keegan & Company Inc., Nashville, TN. (Underwriter).

Note: Moody’s Long term rating Aa; Short-term rating VMIG-1 The Borrower MSH – Marshall, LLC; whose sole member is Mustard Seed Housing, Inc., a California non-profit corporation

Trustee Regions Bank, Birmingham, Alabama

Letter of Credit Issued by Regions Bank

Bond Repayment Timetable Essentially 30 years

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West Virginia University Experience with Performance Contracting

1. State Code Authorization

• §5A-3B-1 et al. ENERGY SAVINGS CONTRACTS • Requires measures that are “guaranteed to result in a net savings of a minimum of

five percent” • and “at a minimum, satisfy any debt service required” • A 30 day notice to the joint committee on government and finance is required

before a RFP may be issued 2. The WVU Process

• RFP created from combination of: Office of General Services at the WV State Capital and the State of PA

• 19 companies attended mandatory pre-proposal meeting • 8 firms responded to phase 1 • 3 firms were invited to perform Investment Grade Audits (IGA) at their cost • Only 1 firm, Siemens Building Technologies, submitted an IGA • Siemens’ proposal was judged acceptable by WVU staff and an expert consultant

retained by WVU 3. The WVU Contract to Date (4 phases planned)

• Contractor pays if savings don’t meet projected, WVU keeps all excess savings • Phase 1, approved by BOG in June 2006, involved ½ of the Evansdale campus • WVU selected a subset of all proposed measures:

o $7.8 million project o 91 measures implemented (lights, chillers, controls, water, power factor,

ventilation) o Annual energy savings $715,094 o Simple payback 10.7 years o 15 year term o 4.22 % interest rate o 4.0 % escalation rate

• Phase 2, approved by the BOG in December 2007 involved the Evansdale campus, Downtown campus, WVU Parkersburg and WVU Institute of Technology

• WVU selected a subset of all proposed measures: o $12.5 million project o 106 measures implemented (lights, boiler, controls, water, ventilation,

insulation) o Energy savings of $1,085,261 in first year o Simple payback 11.5 years o 15 year term

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o 3.98 % interest rate o 4.0 % assumed escalation rate

• Phase 3 planned for FY 2010 5. Performance to Date:

• 4 ways savings are measured: o Measured capacity (base line is established by one time measurement) o Measured consumption (continuous periodic measurements) o Main meter comparison o Calibrated simulation model (e.g. industry standard efficiencies – lights)

• Performance of phase 1 from March through June of 2008: o Guaranteed savings $ 62,783 per month o Actual savings $ 95,945 per month

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Energy and Water Savings Revolving Loan Fund The Legislature appropriated $7 million to provide start-up money so that the Higher Education Policy Commission may provide energy and water savings revolving loans to institutions. The program is not yet operational, but will be during the current fiscal year. For an institution to be eligible for a loan, it will need to: (1) identify potential energy and/or water savings projects, including the specific work to be performed; (2) calculate the potential savings and the payback period for each project; and (3) provide supporting documentation of the savings and projected payback. The following are expected to be some of the basic guidelines for the energy and water savings revolving loan program:

Projects will be selected on a competitive basis; Those projects guaranteeing the highest savings and the quickest payback will be given

the highest priority; The minimum loan for any single project will be $50,000 and the maximum loan will be

$1 million; and Repayment will be required from the institution over a calculated energy payback period

that may not exceed ten years. In addition, according to the legislation, the Policy Commission is to propose an emergency rule to implement the provisions of § 18B-5-11. The rule must address the following:

1. Project information required in a loan application; 2. Criteria for evaluating loan applications; 3. A method for calculating the terms of loan repayment; and 4. Other provisions the Commission considers necessary to administer the program in

accordance with this section of the West Virginia Code. Also, the emergency rule may not be implemented without prior approval of the Legislative Oversight Commission on Education Accountability.

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