Public-Private Partnership Policy Casebook/UC Merced

Summary

UC Merced opened Sept. 5, 2005 and is the newest addition to the University of California system. It is situated near Yosemite National Park and its mission is primarily to increase college-going rates among students in the San Joaquin Valley. It is an advanced research institution and boasts it has a significant impact on economic growth and diversification throughout the region.

The UC Merced 2020 project is a public-private partnership (P3) between the University of California Merced (UC Merced) and Plenary Properties Merced (PPM) designed to “nearly double the physical capacity of the [UC Merced] campus by 2020” from 6,700 to 10,000 students. The $1.338 billion project broke ground on October 14, 2016 and is due to add 1.2 million gross square feet of new infrastructure by fall 2020 with the addition of 13 new buildings and associated infrastructure. This includes: 1,680 beds in student housing, a 600 seat dining hall, a wet-laboratory and computational lab building with classrooms and faculty offices, 1,570 parking spaces, a conference center, a transit bus hub, a pool and NCAA-II level athletic and recreational fields among other things. Of the budget approved by the UC Regents, $600 million will be funded by UC external funding, $590.35 million will come from PPM and the remaining $148.12 million will be supplemented by campus funds. Locally, the 2020 project is projected to create 10,800 new construction jobs regionally (12,600 statewide), add an additional $1.9 billion to the economy ($2.4 billion statewide) and increase permanent university employment by about 400 people.

The UC Merced project is unique in that it is the “first higher education availability payment P3 project to be awarded in the United States” and therefore, may become the precedent for future forays into higher education capital funding through P3 project financing within the U.S. UC Merced’s availability payments concession concept is two pronged. During the four year construction phase, they will make “predetermined progress payments” to PPM and “once the buildings becomes available for use, the university will make "performance-based" availability payments that cover remaining capital costs, as well as the operations and maintenance of major building systems.” The total concession period is 39 years of which 4 years are construction and the remaining 35 years are operations and maintenance. This is the first P3 project in the UC educational system to not only design and build the infrastructure, but also operate and maintain the facilities over the long-term concession. This case study will outline the UC Merced P3 process and address selected policy issues for the project.

List of Actors

Public Stakeholders

• University of California, Merced: UC Merced opened September 5, 2005 and is the newest campus in the University of California system. It’s claim to fame is that it’s the first American research university built in the 21st century. It strives to be “a major base of advanced research, a model of sustainable design and construction, and a stimulus to economic growth and diversification throughout the region.”

• UC Merced Leaders: The project is the brainchild of UC Merced Chancellor Dorothy Leland and Executive Vice President and Chief Financial Officer Nathan Brostrom.

• Project Board: This advisory group reports to the Chancellor on the progress of the project and manages campus interests. Members include the Associate Chancellor and Chief of Staff Ed Klotzbier as Board Chairman, Executive Vice Chancellor and Provost Tom Peterson, Vice Chancellor of Student Affairs Charles Nies, Vice Chancellor of Business and Administrative Service Michael Reese, Vice Chancellor of Planning and Budget Daniel Feitelberg, Assistant Vice Chancellor of Planning and Budget Veronica Mendez and Associate Vice Chancellor of Physical Operations, Planning and Development Michael McLeod.

• UC Regents Board: They are the advisory board to approve the financial budget of the 2020 Project.

• Stan Thurston: He is the mayor of the City of Merced and has firmly expressed the City's support for the 2020 project.

• Merced City Council: The City Council, as represented by Michael Murphy, also expressed support for the 2020 project at the November 19, 2015 Regents of UC meeting saying it would create many economic opportunities for the City of Merced.

• Hubert Walsh:As the Merced County Supervisor, he "affirmed the Merced community’s commitment to work with the University to support UC Merced and the 2020 Project" at the November Regents of UC meeting.

• Other Project Supporters: The Chairman of the UC Merced Foundation Board and the President of the UC Merced Alumni Association both expressed support the 2020 Project at the November Regent's of UC meeting.

Private Stakeholders

• Plenary Properties Merced (PPM): PPM is the winning bidder of the UC Merced campus development project. They are “a consortium of design, engineering, construction, maintenance, operations and financial partners” that was established as a SPV for non-recourse debt under their parent corporate sponsor, the Plenary Group.

• Plenary Group (Canada) Ltd:They are the corporate “lead developer, equity provider and financial arranger” for a range of international public infrastructure projects split fairly evenly across the Americas and Asia Pacific. The Plenary Group manages some 40 projects valued at approximately $26 billion.

• Webcor Builders: They are the lead contractor firm of PPM. Based out of San Francisco, their previous projects include “California Memorial Stadium at UC Berkeley, Zuckerberg San Francisco General Hospital and the California Academy of Sciences".

• Johnson Controls, Inc.: They are also part of the PPM team “providing the operations, maintenance and renewal services to the project throughout the 39-year contract term.”

• Skidmore Owings & Merrill, Inc.: This firm is the lead campus planner for the PPM team. Individual private architecture firms they are working with to design this project include: WRNS Studio for the academic classrooms, HOK for the student life facility, Page Southerland Page and Mahlum Architects for the student housing as well as Arup North America for the infrastructure and engineering.

• Initial RFQ/RFP and Procurement Advisors: UC Merced sought counsel from multiple private entities on how to solicit the project effectively to bidders. These entities include: WT Partnership, Nossaman LLP, Ernst and Young, AECOM, Solomon Cordwell Buenz, JLL and the Hvidt Group.

Timeline of Events

• Early 2012: This was the first step taken by UC Merced to study the most cost-effective and efficient way to develop the campus by soliciting an advisory service panel from Urban Land Institute (ULI). ULI submitted its report in September of 2012.
• Fall/Winter 2013: UC Merced started preparing the analysis of project delivery methods, project costs, budget, design strategies and project schedule. A development team working group was also established comprising staffs from the different departments.
• Fall/Winter 2014: In Fall of 2014, a request for qualifications (RFQs) was released to seek potential developer teams and six teams responded to such request. In winter of 2014, the working team selected three teams as qualified bidders out of the total six teams.
• November 2015: After the RFQ process, a request for proposals (RFPs) was solicited from the qualified teams.
• June 15, 2016: Plenary Properties Merced (PPM) was named the winning bidder
• July 2016: The UC Board of Reagents met to review and approve the project’s conceptual design and approve the required external financing
• August 14, 2016: Funding was approved & the contract was executed
• October 14, 2016: UCMerced held their Groundbreaking Ceremony
• Fall 2018: First phase of buildings is scheduled for completion: 700 new student housing beds, 600-seat Dining Facility, classrooms and 940 parking spaces
• Fall 2019: Second phase of buildings is scheduled for completion: Wet Laboratory building and Computational Laboratory building with faculty offices, and NCAA-II level outdoor competition field
• Fall 2020: Project is scheduled for completion: New Wet Laboratory building with faculty offices and classrooms, research greenhouse, 980 new beds of Student Housing, 630 new parking spaces, Conference Center, dedicated Transit Hub for buses, new Wellness Center, Enrollment Center, expansion of existing Early Childhood Education Center, Competition Swimming Pool, 3 Tennis Courts, and 4 Basketball Courts.
• 2055: 39 year contract term ends

File:2020map (1)-page-001.jpg

Maps of Locations

The map shows the location of buildings planned to be constructed in different phases.

Map of locations

Narrative of the Case

The University of California (UC) provides publicly-funded higher education at 10 major campuses located throughout the state of California. These campuses support goals in teaching, research and public service at the undergraduate and graduate levels. UC reported having a total of 251,700 students and 1.6 million alumni, being the third-largest employer in California, and providing the fourth-largest health care delivery system in California. Approximately 85 percent of UC’s undergraduates are from California, and UC provides an emphasis on supporting social mobility in the communities that they serve (for example, they report that 42 percent of their undergraduates are from families in which neither parent holds a four-year degree).

The UC reported that it spent about $1 billion on capital operations in 2014–15, with the majority of those funds used to support academic facilities and deferred maintenance. They reported that state funding was historically the primary source of funding for core academic facilities, but, over the last decade, only provided for about 15 percent of the funding, and that the amount of external financing is now greater than the amount provided by the state.

When looking at annual data for the overall UC system, they reported a total of $28.7 billion in revenues which includes about 14% in student tuition and fees and 10% in state educational funds. They noted inflation-adjusted expenditures per student dropping from $23,200 in 2000–01 to $18,900 in 2015–16. UC also reported that it has deferred maintenance backlogs, however a specific dollar estimate for those backlogs was not provided.

UC Merced is the newest of the 10 major UC campuses, and is located in the city of Merced, CA, which is in the San Joaquin Valley (near Yosemite National Park). UC Merced began operation in September 2005 and one of its missions is “to increase college-going rates among students in the San Joaquin Valley.“

As of July 2016, UC Merced reported having approximately 6,200 undergraduate and 450 graduate students, with all graduate students in academic programs. Among the undergraduates, 67% were reported as first-generation students and 61% are Pell grant recipients, as compared with 42% and 40%, respectively, across the UC system. In addition, since 2010, UC Merced has been identified as a “Hispanic Serving Institution.” UC Merced has approximately 3,000 faculty and staff including about 1,800 part-time and student employees.

For fiscal year 2015, UC Merced reported having annual revenues of approximately $257 million and expenses of approximately $282 million, for an estimated loss of approximately $25 million. Approximately 70% of UC Merced’s revenue currently comes from tuition and state general fund appropriations. Continued losses were projected through fiscal year 2017 and then positive income was projected for fiscal years 2018 – 2020. The FY 2020 projections were approximately $418 million for revenues and $417 million for expenses. These estimates include a variety of assumptions such as an increase of 4% per year from state general funds; an increase of 5% per year for student service fees; an increase of 2.5% per year for tuition (starting in 2017); an increase of 3% per year for salaries; an increase of 4% per year for health benefits; and an increase of 2.5% per year for inflation.

In fiscal year 2014, to help guide investments related to the UC Merced 2020 Project, the “Merced Corridor” was established through a Memorandum of Understanding between the campus and the Office of the President.

On August 1, 2014, UC announced that it received a Statement of Qualifications (SOQs) from six teams in response to a Request for Qualifications for the UC Merced 2020 P3 Project. The respondents and their equity members were :

• Edgemoor Plenary EdR Partners (EP2): Edgemoor Infrastructure & Real Estate LLC, Plenary Group USA Ltd., and Education Realty Trust, Inc.
• E3 2020: Balfour Beatty Investments, Inc.
• Gateway2Learn: HOCHTIEF PPP Solutions North America and Meridiam Gateway2Learn, LLC
• Innovation Partners: Hunt Development Group LLC and Shikun & Binui, Ltd.
• Merced Campus Collaborative: Lend Lease (US) Investments, Inc., Macquarie Capital Group Limited and American Campus Communities, Inc.
• Merced 2020 Partners: Skanska Infrastructure Development Inc. and Fengate Capital Management Ltd.

On August 16, 2016, UC reached financial close on the UC Merced 2020 Project. The project is “the first higher education availability payment P3 project to be awarded in the United States, and may well serve as a template for future higher education capital projects, both within the UC system and nationally.” UC’s project agreement is with Plenary Properties Merced LLC (PPM) and has a 39-year contract term. The PPM team includes Plenary Group, as sole equity member of PPM, Webcor Builders, as lead contractor, Skidmore, Owings & Merrill Inc., as lead campus planner, and Johnson Controls, Inc., as lead operations and maintenance firm. ,

The UC Merced 2020 Project is a 1.2 million square foot campus expansion and redevelopment project that will nearly double the campus’ physical capacity by 2020. The project had a financial close of August 12, 2016, with completion of construction by summer 2020. The contract terms cover design, build, finance and maintenance. The project is a mixed-use, master-planned development to be built on a 219-acre, university-owned greenfield site that is adjacent to existing campus facilities. It will include student housing (1,700 new beds) as well as new teaching facilities, research laboratories and faculty offices. The project will help UC Merced increase its enrollment from its current level of about 6,000 students to more than 10,000 students.

The project will be delivered in three phases with the first delivery deadline scheduled for summer 2018, the second by summer 2019, and the final by summer 2020. It includes several innovative design elements such as a master plan designed around an “academic walk” that will be lined with ground floor teaching, retail and meeting space, and have student housing on the upper floors.

The project will be “the first in the UC system to use a single private development team for a multi-year, multi-building project of this scope. PPM will not only design and build all of the new facilities as a single, fast-track project but will also ensure major building systems operate effectively over the 39-year term of the contract. In addition, the developer will be responsible for raising all required private financing as part of the public-private partnership.”

A budget of $1.3 billion was approved for the Merced 2020 Project. Approximately $600 million will be provided by UC, PPM will contribute approximately $590 million, and campus funds will provide about $148 million.

UC Merced Chancellor Dorothy Leland provided input about the rationale for using a P3 to expand the UC Merced campus. She reported that the “severe economic downturn and its aftermath made the funding our sister campuses had received highly improbable.” UC President Janet Napolitano has called the UC Merced project “a model for our other campuses” as “the system seeks to make the most efficient use of available financial resources”. The use of this P3 “will allow us to add 1.2 million square feet of classrooms, research labs, student housing and recreational facilities more rapidly and cost effectively than the traditional one-building-at-a-time method of developing.”

Daniel Feitelberg, UC Merced’s vice chancellor for Planning and Budget, provided input about some of the challenges and lessons involved with the procurement of the university system’s first large-scale P3 project. Input was provided about the rationale that UC Merced used in deciding to develop this project through a P3; how a P3 helped the university achieve its goals for this project; whether he encountered any difficulty in obtaining authorization for using this procurement method; why the university chose Plenary Properties Merced as the project developer (out of the three developers who were shortlisted); whether the university encountered any opposition to this project — either from within the university system or outside it — and, if so, how the school addressed these concerns; how the surrounding community will contribute to the project; how the project scope evolved from its initial plans; whether the developer brought modifications to the table that will be incorporated into the final plan; whether he would consider conducting planned or envisioned future phases or other projects the university is considering through a P3; and advice he would offer to his counterparts at other schools who might be considering this procurement method.

Policy Issues

Reduced State Funding: UC Merced is one of the largest public-private partnership of its kind in the U.S. higher education sector, calling it a model for expanding public research universities in leaner times. However, much of the P3 agreement is reliant upon government funding to succeed. Under the agreement approved by the UC Board of Regents, the state will pay about two-thirds of the cost, $600 million from bonds and $157 million from UC Merced funds. The private consortium will put out the remaining third, $386 million, recouping the investment over 35 years of $51 million payments. In this deal, the state could choose to withdraw some portion of the future funding to the University and cause a strain on UC Merced to maintain the project. As part of the deal, UC Merced is responsible for:

• Janitorial and Custodial
• Landscaping
• Security
• Parking Services
• Shipping and Receiving
• IT/Audio Visual Support
• Laboratory Fit-out and Safety

If funding is scarce and withdrawn, the university will have difficulty in hiring the approximately 400 people, a 50 percent increase in employment, needed to do these jobs and will struggle to maintain the campus. The university is relying on an increased student/tuition population, but even with current student population growth, the university still relies heavily on additional state income.

The Contract Structure

The UC Merced project is structured as an "availability-payment concession," a type of P3 with a single private developer responsible for design, construction, operation, maintenance and partial financing of all new facilities over the 38-year term of the contract. Plenary Properties Merced will be paid in installments over that time, and UC Merced will resume responsibility for maintenance at the end of the contract. UC Merced will own the buildings at all times.

Some advantages of a DBFOM contract is that is allows for competition as different stages of the contract for long-term maintenance and operation of the facility. Additionally, there are milestone payments and availability payments which the University would make. This is a little less burdensome on the University because milestone payments would be made to finance approximately 50-75 percent of the cost of the facilities. Under an Availability Payment DBFOM contract, the Developer is on the hook to design the facilities on time and maintain building systems in order to earn any availability payments. If not, the University can deduct an established amount from the payment. Lastly, there is an opt-out clause and the University can cancel the contract at any time.

With all the good, there still are some risks to this concession. Compared to a Design-Build approach, the financial structure of the DBFOM model results in a higher cost of capital to the University. In order to hold the developer accountable for the performance of the buildings over their lifecycle, the term of the contract needs to extend through at least one capital maintenance cycle. Therefore, the University would be in contract with the developer for up to 39 years. The financial structure of the DBFOM model also results in a higher cost of capital estimated to be a difference of 0.75 percent to 1.25 percent. To offset these higher costs, the other components of lifecycle costs (design, construction, operations and maintenance) would need to be at least 5 percent less expensive—this is called the “upset limit.”

Budgetary stability is also at the mercy of the maintenance and operation costs that the University now assumes.

Change in political leadership in the San Joaquin Valley Politicians who represented the San Joaquin Valley, California pushed for UC Merced to be built and in 2002, the university broke ground. However, following the 2008 economic downturn, the university faced rising construction costs and lower state contributions. This ultimately led to the university not being fully expanded to hold a potential 20,000 by 2020. Now, as politicians continue to push for funding, the Board of Regents has approved the expansion as a way to accommodate lower income students who hope to obtain a higher education. UC Merced’s student population largely consists of students of color, primarily Hispanics. However, if local politics change and the university is no longer a priority for voters in the area, politics can shift and money can shift. Many universities are moving away from brick and mortar to online environments. Politicians can see that as a cultural shift that may need to happen in order to conserve state funding.

Pressure from other UC campuses The approved $1.3 billion budget for the UC Merced project may cause other campuses to feel neglected and students may start to wonder how the UC Merced project will affect their services, tuition, and financial aid. Following the approval for UC Merced, the Board of Regents voted to stop providing need-based financial aid to incoming nonresident students to help fund the cost. When the board approved the UC Merced project, it was only for the budget plans to expand the campus’ infrastructure, not the costs of salaries and wages of more faculty and staff or other student support resources. This is reliant upon funding from the state, tuition, or a shift in funds away from other schools to support this project. By not increasing funding to student projects or to student resources, UC Merced is at risk of student backlash. Additionally, by placing greater emphasis on potential enrollment, UC Merced may be putting too many eggs in one basket.

Discussion Questions

• To what extent will the accuracy of the assumptions included in UC’s budget estimates (for example, about annual increases in state general funds and tuition) affect the anticipated profitability of this P3?
• Is UC Merced’s enrollment growth plan realistic?
• What are the advantages and disadvantages of Design-Build-Finance-Operate contracts?
• How did the project owner and developer use innovation to improve the quality of this project?
• How is the use of this P3 likely to affect student tuition and fees over the course of the 39-year contract?
• What types of attributes would likely be needed by a state university to encourage their potential use of a P3 similar to the one used by UC Merced?