04-01-11KaragoziantoAdministration_re.CPBEvaluationRCCwithReport

UCLA Academic Senate April 1, 2011 Chancellor Gene Block Executive Vice Chancellor and Provost Scott Waugh Vice Chancellor Steve Olsen Dear Gene, Scott, and Steve, The Academic Senate’s Council on Planning and Budget (CPB) has completed its evaluation of the financial feasibility plan and related issues associated with the proposed Residential Conference Center/Faculty Club. Their report is attached.

As you know, per Senate bylaws, CPB “specifically reviews and formally articulates a Senate view regarding the campus budget and each major campus space-use and building project at each project's proposal, planning, and building stages” (http://www.senate.ucla.edu/FormsDocs/bylaws/ch4-4-3.htm#b65_3). As such, CPB’s opinion in the attached document constitutes the Senate’s official view on this proposed project at this time.

Please let me know if I can provide further information to you.

Regards,

Ann Karagozian Chair UCLA Academic Senate cc: Administrative Vice Chancellor Sam Morabito Interim Chancellor Emeritus Norm Abrams Senate Vice Chair/Chair Elect Andrew Leuchter Senate Immediate Past Chair Robin Garrell Senate Council on Planning and Budget Chair David Lopez Senate Faculty Welfare Committee Chair Shane White Senate University Emeriti & Pre-Retirement Relations Committee Chair Larry Kruger Faculty Center Board of Governors Chair Richard Weiss Senate Chief Administrative Officer Jaime Balboa Senate Assistant Chief Administrative Officer Linda Mohr Senate Administrative Specialist Dorothy Ayer

UCLA Academic Senate, Council on Planning and Budget April 1, 2011 Professor Ann Karagozian Chair, UCLA Academic Senate Re:

Residential Conference Center Proposal

Dear Professor Karagozian, On The Residential Conference Center Proposal: The Council on Planning and Budget was asked by Senate leadership to provide an independent assessment of the Residential Conference Center and Faculty Club financial feasibility plan. We have confined our analysis to the proposal’s financial aspects, in the context of the CPB’s charge: to advise the Senate and the campus administration on budgetary matters as they relate to the academic goals of the University. We have relied primarily on the (redacted) PKF Market Analysis, the only systematic and databased source we have for assessing potential demand. For statements of Chancellor’s Office policy we rely primarily on the Demand Narrative and presentations to CPB from Vice Chancellors Morabito and Olsen. Most of this is now posted on the Academic Senate website. We also had access to two documents that are not posted: a summary of the unredacted PKF Market Analysis prepared by the CPB Chair and detailed financial information from the Faculty Center Board on operations through December 2010. We also looked up some current rate information for local hotels and university conference centers, but we lacked the time and resources for any systematic study. We note the existence of several recent university press releases as well as the opposition from campus and community to which these releases are apparently responding. Important issues are being raised, but we felt it would be most helpful to all for CPB to focus on the finances as we see them. Some CPB members felt that it was not within our present mission to assess the Faculty Center Association's current finances, and confined their scrutiny to the RCC data. Others felt that both had to be considered together; their views are represented at the end of this statement.

The Council on Planning and Budget does not support the UCLA Residential Conference Center and Faculty Club proposal as described in the eponymous February 28, 2011 draft document. Our analysis of the data leads to the conclusion that demand from the UCLA academic community is and will remain far too low to support a facility of this size and at these high price levels, even taking into account the generous gifts for construction and operating subsidy. PKF employs three methodologies to project demand. One, the Fair Share and Market Penetration Approach, is inappropriate to the task at hand because it is based on the total Westside market for group and individual hotel accommodations. But, as the Demand Narrative and other recent statements of university policy emphasize, the UCLA facility will not be and cannot be open to the general public. Of the other two methodologies, the more empiricallygrounded Build-Up Approach projects demand from campus-linked groups and individual travelers combined at half or less the level needed to cover expenses and also service the interest –only construction loan over the first ten years. PKF states clearly that the Anderson Graduate School of Management would be the largest user, consistent with their experience that executive continuing education is the prime customer for university hotel/conference centers. Other significant demand could

come from three other professional schools. No other potential users are specifically mentioned, and PKF states that they did encounter “price sensitivity” in their survey and focus groups. The other relevant methodology, the less empirical Population Multiplier Approach, does project more substantial demand, but it does so without regard to price, assuming that there will be sufficient effective demand at the very top of the market for the UCLA facility. For that matter, it is not clear to us that price requirements were explicit in the survey methodology of the Build-Up approach; we are certain that price is not factored into the Population Multiplier Approach because it is just a simple multiplication of the size of the UCLA community times a factor derived from occupancy data at other university conference centers. But university hotel/conference centers typically charge rates far lower than those envisioned in the PKF Analysis and the UCLA Financial Feasibility Presentation… rates that are, in fact, similar to what several local hotels charge to UCLA and its visitors today. The price levels that PKF estimates the UCLA facility could charge are based on corporate-style conference centers, not university facilities. While this might be a reasonable way to project prices that the high-end executive education market could bear, it makes no sense for a general use university conference center.

The failure to consider price levels in estimations of demand from campus-linked trade is one serious problem. Equally serious in our view is that the projections are of total campus-linked business, and seem to assume that all of this business will go to the new UCLA facility. Neither methodology takes into account the continuing competition of several hundred nearby commercial hotel rooms and campus guesthouse rooms priced at far lower levels. Most campus departments and visitors are accustomed to paying hotel rates half to two-thirds the $270 rate projected as necessary for the UCLA facility. The upmarket W Hotel on Hilgard currently advertises rooms at $200…and most departments opt for lower rates, e.g. the circa $150/night university rate at the Angeleno and several other hotels closer to campus.

To compete in this market the UCLA RCC would have to employ flexible pricing for its rooms.

Interestingly, this is just what PKF’s explicit model for UCLA -- the ATT Executive Education and Conference Center at UTA -- does: we have seen prices quoted as low as $97 on the internet. Another recently built facility, the Hyatt Place at UC Davis, currently advertises rooms at $140, well below their prices this time last year. Both market aggressively beyond their university communities, which of course would not be an option for the UCLA facility. We have not investigated conference space competition for the RCC, though we doubt that other facilities on and off campus charge anywhere near the $200+ per capita non-residential rate that is planned for the UCLA facility.

Most CPB members agree that even if the project did meet its narrow financial goals by attracting sufficient high-end trade from the four professional schools, it would still not be serving the needs of most campus academic units, and therefore not serve the general academic goals for the project as set out by the Chancellor’s Office. But there is no need to invoke these higher principles; the amount of demand for conference facilities charging $400 package rates and hotel rooms going for $270 nightly is well below what even our more affluent professional schools can provide. Indeed, PKF’s maximum estimate of this sort of business is about 24,000 room nights (PKF, p. V-6), one-third what is required to support this project. As we see it, the Chancellor’s Office faces a dilemma with respect to these current plans: only a small portion of campus academic units and their visitors could pay the high-end prices; the majority of campus academic units would be shut out, or have very limited access made possible through the recently-announced subsidy. But that subsidy would provide less than two percent the revenue this project will require…clearly not enough to impact overall finances significantly. If the general rates were reduced to competitive levels, without a commensurate decrease in costs, then revenue would be insufficient to cover even the interest -only construction loan after operating expenses.

CPB is also concerned about the implications of the financing model proposed. We understand that no state funds are being used and that debt financing is one important financial resource available to UCLA. Most of us accept that the initial ten-year interest- only note is a perfectly acceptable way of doing business. And some of us are not even terribly bothered by the possibility that the project might not generate sufficient revenue to service the loan; UCLA could cover the loss somehow. However, given the present and almost certain medium/long-run future financial straits facing UCLA we advise against

embarking on a project that carries such risk. Granting that UCLA could cover the losses, the opportunity costs of diverting resources for this purpose would negatively affect the academic enterprise; and of course it would look terrible to the campus and the broader community. Furthermore, UCLA’s debt capacity is a shared campus resource that is used with caution in the best of times. Three-quarters of the campus’ current long-term debt is in the form of hospital revenue bonds. The bonded indebtedness for the RCC/FC project would add 14 percent to UCLA’s total long-term debt, and over fifty percent to the general campus long-term debt (we are relying on figures from the 2009/10 UCLA Financial Report, pp.

38-41). Even if the revenue should prove sufficient to meet the project goals, choosing to use UCLA’s long-term debt capacity for this project would mean that some other worthy project is not funded.

As mentioned above, half the membership of CPB feels that it is not within our mission to include analysis of the Faculty Center’s finances in this assessment of the RCC proposal. But the other half, who feel differently, have concluded that the Faculty Center’s best hope for future stability is, in fact, incorporation into a conference center project, but one that is smaller and less pricey. They come to this conclusion based on the rising gap between the Faculty Center’s expenses and income from operations in the past two years, as well as the substantial deferred maintenance costs that must be met in the next few years.

In FY 2010 the FCA had a net operating loss of over $300,000, and this year it is on track to lose over $500,000 (both figures exclude investment gains/losses and the projection for FY 2011 allows for a substantial increase in income hoped for in the last months of the fiscal year). These deficits are driven primarily by increasing salary and benefit costs, which will only continue to increase as benefit costs continue to rise. Deferred maintenance was estimated to be 1.3 million dollars two years ago (Building Assessment Report, 2009). The FCA’s reserves of about $900,000 cannot last long under these circumstances. These CPB members also recognize the value, if not the necessity, of an affordable and widely accessible central residential conference center on campus, especially if the campus were to lose the current Faculty Center.

In summary, CPB’s conclusion is that the RCC/FC project as proposed is not financially viable. Half of the Council on Planning and Budget believe that incorporating the faculty club into a residential conference center scaled down in size, and at customer price levels appropriate to what most UCLA academic units can afford, could serve the academic goals of the University and may well be the best option for the faculty club’s future viability. The others on the committee, however, believe that whatever financial challenges the Faculty Center may face are best dealt with directly and in ways that maintain this valuable academic asset in its current form. They argue that this era of budgetary austerity is not the time, and the Faculty Center site is not the place, for undertaking what many in and outside the campus community already perceive to be a luxury project for the university.

Respectfully,

David Lopez Chair, UCLA Council on Planning and Budget cc:

Jaime Balboa, Chief Administrative Officer, Academic Senate Linda Mohr, Assistant Chief Administrative Officer, Academic Senate