THE UNIVERSITY OF NORTH CAROLINA

1. THE UNIVERSITY OF NORTH CAROLINA Continuing Operational Efficiencies October 10, 2013

2. Outline Setting the Stage Mr. Charles Perusse, Chief Operating Officer UNC Resourcing Survey Analysis Mr. Ken Craig, UNCFIT Program Management Officer Public-Private Partnerships Dr. Rick Niswander, Chief Financial Officer, East Carolina University Unlocking Capital Assets Mr. Jonathan Womer, Associate VP for Finance and Economic Analysis Moving Forward Mr. Charles Perusse, Chief Operating Officer Continuing Operating Efficiencies

3. Setting the Stage Guiding Principles

4. Setting the Stage Higher Education Trends • Providing instruction, research, and public service excellence within the context of declining or finite resources • Increased focus on Return on Investment (ROI) • Heightened demand for transparency and accountability

5. Setting the Stage UNC Efficiency Background McKinsey & Company PACE Ernst & Young Campus- Initiated Innovation(i.e. Bain) UNC / OSBM Efficiency Report UNC Strategic Plan Goal 4: Maximizing Efficiencies GA Execution Campus Execution UNC Resourcing Survey Analysis

6. UNC Resourcing Survey Analysis

7. UNC Resourcing Survey Analysis Definitions Fully Supported By Campus: Business functions performed solely by campus Examples: business affairs services, law enforcement, student tutoring, or library operations Intra-campus Resource Share: Business functions performed by sharing resources with other campuses Examples: regional facility maintenance and IT support Contracted: Business functions performed external to UNC System Examples: energy performance contracting, printing services, and facility maintenance operations

8. UNC Resourcing Survey Analysis Campus Innovation In continuing the Strategic Plan efforts regarding Maximizing Efficiencies, General Administration conducted a campus survey in July to: Determine similarities related to campus services being delivered internally, co-sourced, or outsourced; Provide examples of campus effectiveness efforts; and Identify building blocks for new operational efficiency actions.

9. UNC Resourcing Survey Analysis Survey Results

10. UNC Resourcing Survey Analysis Selected Examples – Facilities

11. UNC Resourcing Survey Analysis Selected Examples – Finance and Administration

12. UNC Resourcing Survey Analysis Selected Examples – Information Technology

13. UNC Resourcing Survey Analysis Selected Examples – Student Services

14. UNC Resourcing Survey Analysis Selected Examples – System-wide Services

15. Public-Private Partnerships

16. Public-Private Partnerships What are PPPs? • Contract between a public and private entity to complete a project (or run an operation) • Often exchange of public revenue stream for constructing asset or up-front payment • Both public and private directly share the risks and rewards of completing the project: • Typically the private is not paid if benefits are not realized even if the project is completed • Focused on outcome rather than output • Often requires long time frames

17. Public-Private Partnerships What are PPPs? Potential Risks: • Requires more vendor/contract management skills • It’s “different” – legal, process, financial issues Potential Benefits: • Vendor and the public agency can focus on core expertise • Start without a big budget or get large up-front payment Recent construction example (2013):

18. Public-Private Partnerships ECU Physicians Women’s and Children’s Clinical Operations • Includes consolidating Pediatrics, OB/GYN, fertility lab, and other operations that are currently located in multiple far flung locations • Approximately 120-140K gross square feet • Savings of $750K+ from consolidation • Original Project: • Self Liquidating Bond • Included a 900-space parking deck • Amount authorized for self-liquidating issue = $71,605,960 • Annual payment on a 30-year full amortization at 4.5% = $4,396,000 (4% is $4,140,980)

19. Public-Private Partnerships ECU Physicians Women’s and Children’s Clinical Operations • New Project: • Lease term will be 10 years and ECU will have the right to enter into another 10-year lease with option to purchase at fair market value • Annual lease cost is estimated to be $2.5M to $3.1M, depending on eventual size and the types of operations within the facility • Annual cash flow savings between $1.3M to $1.9M • Parking deck not needed since facility will be built in a lower density area where surface parking is sufficient • Adjacent to two leased clinical buildings and across the street from Brody School of Medicine

20. Public-Private Partnerships ECU Women’s and Children’s Clinic Greenville, NC

21. Public-Private Partnerships ECU Physicians Women’s and Children’s Clinical Operations • Benefits: • Lowers risk and higher return • Reduces leverage on balance sheet • Reduces operating risk to ECU Physicians • Facility built to ECU specifications • Shorter time of construction • Helps control fixed costs

22. Unlocking Capital Assets The Ohio State University Parking Case Study

23. Unlocking Capital Assets What is asset monetization? • Exchanging the long‐term operation and use of infrastructure assets (or other capital assets with a revenue stream) for an up-front cash payment: • Sale vs. lease • Must be able to isolate (enough) from core services to enable independent operation • Legal constraints and possible tax benefits • Deal must be big enough • Common public sector examples: highways, parking, water treatment plants

24. Unlocking Capital Assets Benefits and Risks • Potential Benefits: • More value can be extracted from the asset • Access to a lot of money now • Transformative • Potential Risks: • Performance oversight and unanticipated change • Loss of annual revenue • Use of up-front payment Recent parking in higher education example (2012):

25. Unlocking Capital Assets Ohio State University (OSU) – Background • About 70,000 student FTEs • 10% of budget comes from state funds ($6,000 per FTE) • AA Bond Rating but endowment behind aspirational peers • What was OSU selling? • 36,000 parking spaces for 82,000 students and employees at about a 2% annual growth rate • City of Columbus: 2,300,000 population, campus two miles from downtown • $28.8 million in annual revenue and $11.5 million in operations, maintenance and annualized capital outlays • Permit prices have increased at about 5% a year

26. Unlocking Capital Assets OSU Lease Parking Operations Transportation Ohio State University Parking Services Public Safety

27. Unlocking Capital Assets Ohio State University Timeline • March 2011 – University Working Team formed • Hired Morgan Stanley as financial advisor • Mapping/questioning business processes, inventory and condition of assets • September 2011–Board authorization • October 2011–RFQ issued for Concessionaires • January 2012–Four bidders begin Due Diligence • April 2012–RFP issued to three remaining bidders • May 2012–Three proposals received by OSU • June 29, 2012–University awards to QIC • September 21, 2012–Closing Day Governance Forums, protests, meetings, faculty papers, email campaigns

28. Unlocking Capital Assets Ohio State University – Accepted Bid Terms • $483M one-time up-front payment ($375M was minimum bid allowed) • 20% higher than other two bids • 5.5% cap on rate increases for the first 10 years and 4% thereafter • Protections against competition • Acceptance of OSU Transportation Sustainability Plan • Performance requirements • Faculty/student parking benefits remain Giving up about $17.3M a year – funded buses and other transportation

29. Unlocking Capital Assets Ohio State University – Where the money is spent? • $483M put into endowment and designated for: • Faculty Initiatives & Research: $200M • Transportation & Sustainability: $150M • CABS (partial funding of the bus system) • Pedestrian friendly infrastructure • Energy efficiency projects • Student Scholarships: $83M • Arts District: $50M Remaining transportation operating costs coming from other sources. 9% Expected Growth 4.75% Reinvest 4.25% Spend

30. Unlocking Capital Assets Ohio State University – Was it a good deal? • Ohio State • Larger endowment • Removed from permit/rate setting/parking deck construction process (somewhat) • Transportation Sustainability Plan accurate for 50 years? • Good performance/contract management? • Risk of operation and capital cost vs. rate of return (9%?) • Private Investor/Operator • Stability of transportation/ infrastructure assets. • Able to extract more revenue in the future? • Significant urban public demand? • Able to operate more efficiently than in the past? • Able to meet performance requirements?

31. Moving Forward

32. Moving Forward Priorities

33. Moving Forward On-going Plans • Continue expanding energy conservation efforts and reducing energy consumption • Implement a spend analysis tool to enable further catalog and strategic sourcing savings • Continue expanding strategic sourcing efforts with Department of Administration, public schools, and private colleges and universities • Expand IT shared services for ERP hosting and DBA support services

34. Moving Forward Future Plans • Leverage center of excellence support from UNC-CH/NCSU to constituent campuses • Develop facilities maintenance optimization plans to reduce operating costs, seek private-public facility partnerships, and leverage existing capital assets

35. BOG Discussion Questions?