Oregon State Board of Higher Education
Board Budget and Finance Committee
February 16, 2001

Table of Contents

1. Action Item
   1. Ratification of Restated Ground Lease, as Amended, and Consent to the Assignment of a New Long-Term Ground Lease, SOU

2. Report Items
   1. Urban Center Acceptance of Street Vacation by City of Portland, PSU
   2. Employee Insurance Benefits
   3. Enrollment Report
   4. Deloitte & Touché Audit Report (written report to be provided at the meeting)
   5. Joint Legislative Audit Report (RAM) (written report to be provided at the meeting)

3. Meeting Notes
   1. January 17, 2001

Ratification of Restated Ground Lease, as Amended, and
Consent to the Assignment of a New Long Term Ground Lease (SOU)

Executive Summary
(Action Item)

Purpose:
SOU is seeking Board approval of the assignment of 1993 "restated" long term ground lease for a parcel on the campus of Southern Oregon University to a new lessee. Under the 1993 lease the Pacific Institute of Natural Science (PINS) built the Pacific Northwest Museum of Natural History (Museum), and the Oregon State Board of Higher Education had the right to consent to any assignment of that lease and subleases. Unfortunately, the Museum defaulted on its (non-OUS) bonds in 1997, and, since then, the building has lain unoccupied. The bondholder's trustee has now negotiated a sale of the Museum from PINS to the Kirlin Foundation, which will permit the bondholders to be partially repaid. Kirlin will, in turn, sublease to a new Southern Oregon Science Center (Science Center) which will recreate within the former Museum a hands-on, interactive science learning center with rotating exhibits, such the Oregon Museum of Science and Industry (OMSI) in Portland. This new use has been found to meet compatibility requirements, and financing and management concerns have been reasonably satisfied. Certain amendments to the long term lease have been negotiated including a return of 6.28 acres to SOU for its use. A copy of the reassignment has been provided to the Board Secretary for perusal by any member of the Board prior to signature by the Secretary and Board President.

Background:
The Pacific Northwest Museum of Natural History opened in July 1994 and operated for three years. (See Map A, identifying the location of the museum and the area leased.) In 1997, PINS defaulted on approximately $3.5 million in bonds and the museum was closed. The Kirlin Foundation, a 501(c)(3) public benefit corporation in Seattle, Washington, has offered to purchase the building for $1.5 million and to sublease it to the new Science Center of Southern Oregon (Science Center), run by Sharon and John Javna, Ashland residents. The Javnas intend to expand a program they have established as the Ashland Middle School Science Institute into the Museum. Under the proposal, Kirlin would hold title and a non-profit corporation of the State of Oregon would be formed to operate and raise funds for the operation of the Science Center.

SOU requests the Board approve the Consent to Assignment of the Restated Ground Lease, with amendments, to the Kirlin Foundation and Sublease to the Science Center. SOU has negotiated various amendments to the Restated Ground Lease in return for giving its consent to the assignment.

Staff Report to the Board:
The request by SOU to seek approval for assignment of the Restated Ground Lease required considerable due diligence. Legal issues that were resolved included the negotiation of options whereby either SOU or the SOU Foundation reserve the right to acquire the Museum outright over the next five years for a price that is below the cost of the bonds outstanding on the property, including costs for capital repair and unusual building and land maintenance. SOU sought and was given the return of 6.28 acres they may need to solve other needs for space or construction of facilities in the future.

Staff Recommendation
Given SOU's limited rights under the terms of the original lease and more favorable posture of the consent and sublease, staff recommend that the Board ratify the Restated Ground Lease signed in 1993, as amended, and approve the Consent to Assignment to the Kirlin Foundation and Sublease to the Southern Oregon Science Center.

(Note: A hard copy of "Map A, Overview of SOU Campus and Site of Proposed New Lease" is on file in the Board's office.)

(See further detail)

Vacation of SW Montgomery Street (PSU)

(Report Item)

Summary:
The City of Portland has vacated to Portland State University and Tri-Met that portion of SW Montgomery Street lying between the easterly line of SW Sixth Avenue and the westerly line of SW Fifth Avenue in the City of Portland. The vacation was requested to consolidate the property for construction of a plaza for the PSU Urban Center project, which opened in the fall of 2000. The PSU portion of the vacated street was 0.229 acres (Note: a hard copy of accompanying exhibit is on file in the Board's office).

Employee Insurance Benefits

Executive Summary
(Report Item)

Summary:
Employee health insurance benefit costs through the Public Employees' Benefit Board (PEBB) are projected to increase by nearly 27% in 2002 unless significant changes are adopted by PEBB. The OUS has proposed plan modifications and the option of entering into a joint purchasing relationship with PEBB should benefits designs for 2002 not meet OUS' funding target. The rising cost of health insurance requires reassessment of using the insurance program's taxable compensation component to supplement faculty/unclassified employees' salaries, and estimation of the costs and benefits of segregating OUS funds for use with a subset of PEBB's most cost-effective plans.

Staff Report to the Board:
Three OUS studies since 1996 have shown that OUS' insurance costs have been lower than those of other state agencies under PEBB. To retain funds budgeted to OUS for use within the OUS employee population, OUS has proposed segregation of OUS and other state funds. This would be enacted if the PEBB insurance program is unable to reduce its current reliance on subsidization from agencies and among participant groups to purchase benefits.

The current PEBB program is projected to reduce cash compensation for OUS employees in 2002 by $5.56 million, due to increasing plan costs and PEBB's retention of employer contribution to selectively subsidize certain plans and programs, while holding employee-shared premiums at a constant rate.

PEBB has consistently advocated that OUS should reconsider its employer contribution strategy, which is designed to provide supplemental cash to employees selecting less costly insurance coverage. Discussions on plan design changes by PEBB, and OUS' employer contribution toward benefits will be concluded by March 31, 2001, at which time OUS will provide PEBB with an indication of OUS' intent to continue participation in the PEBB insurance program after 2001.

(See further detail)

2000-01 Enrollment Report

(Report Item)

In keeping with the policy changes associated with implementation of the new resource allocation model, enrollment for all academic terms (including summer session) and extended programs is now counted.

Oregon University System enrollment is up 3.2% over fall 1999 as of the fourth week of class. Drawing strongly from the largest pool of Oregon high school graduates in almost twenty years, the official count of OUS campus headcount enrollment reached 69,508 compared with 67,347 in fall 1999, close to what had been targeted for the System and the highest seven-campus enrollment ever.

Over 100,000 students are expected to enroll in both regular campus and extended campus credit courses during 2000-01. In addition, an estimated 200,000 students will enroll in OUS noncredit courses.

The greatest gains were again made in resident first time freshman headcounts, up over 5 percent from the previous fall. Over the two-year biennium, resident first time freshmen counts have gone from 6,439 in fall 1998 to 7,456 in fall 2000, a rise of 15.8%. Legislative support for the undergraduate resident tuition freeze, aggressive recruiting, increased scholarship offers, and a renewed confidence in the direction of the Oregon University System are reasons new students continue to be attracted to our seven public universities.

Resident undergraduate enrollment has increased 4.5% since fall 1999, from 45,621 to 47,676. Nonresident and graduate enrollment is steady.

EOU
Fourth week enrollment at Eastern Oregon University is up over 6.6%, the largest percentage increase of OUS campuses for the second year in a row. Resident first time freshman counts are up 3.3%, but nonresident first time freshman enrollment is down, and nonresident transfer students have increased. The total enrollment also reflects an increase in nonadmitted students as Eastern continues to expand its outreach role in the region.

OIT
Oregon Institute of Technology shows a 1.0% increase in enrollment, with a steady first time freshman enrollment and an increase in new transfer students from within the state. Campus growth may have been slowed by the expansion of Klamath Falls Community College. OIT has started new programs in Washington state, and recruiting efforts for the Klamath Falls campus have shown success within the state. While new nonresident enrollment is down slightly, the nonresidents already enrolled have successfully been retained.

OSU
For the third year in a row, increased resident freshman participation and very strong retention rates have contributed to Oregon State University's growth, attaining their highest enrollment since 1980 at 16,777, up 4.5%. The increase over last year's banner recruitment of Oregon first time freshmen shows OSU continues to be a first choice for many of Oregon's high school graduates, although nonresident enrollment in this category has declined over 20%. Graduate admissions are up slightly, again buoyed by the new PharmD program, while transfer admissions declined slightly.

PSU
Portland State also shows an increase in resident first time freshman, with enrollment in that category up 3.3%. Resident transfer admits are up 7.4%, with an even stronger increase in nonresident transfer admits. The emphasis on freshman retention, student services, recruitment efforts, and the growth of the City of Portland have given PSU their highest enrollment ever.

SOU
Southern Oregon University enrollment has declined about 4.3% in spite of a slight increase in resident first time freshmen. A decline in resident new transfers is seen largely as a result of increased enrollment at Rogue Community College. While the effects of higher enrollment at Rogue have provided anticipation for increased transfers from there, the students have not shown up on the SOU campus. Nonresident enrollment is down significantly, likely due to California's major commitment to student financial aid. Key programs such as Theater Arts continue to draw more students than can be accommodated; however, recruitment efforts have not resulted in the desired overall enrollment increase to the campus.

UO
First time freshmen enrollment surged this fall, up 13.6% over last fall, offset slightly by a decline of new transfer admits. Resident enrollment continues to outpace nonresident enrollment overall, with a 4.6% increase in resident and a 0.5% increase in nonresident enrollment resulting in a 3.3% increase in total enrollment. Graduate enrollment is steady, with growth in resident enrollment slightly higher than the decline in nonresident enrollment. International student enrollment, hurt in the past by fluctuations in the dollar, has reversed a declining trend with new admits increasing 3.4% over fall 1999, nearly offsetting the loss of graduating and non-returning international students.

WOU
Western Oregon University has increased 4.8% overall, with increases in nearly all categories. Both resident and nonresident first time freshmen counts are up, and have lead to a new all-time high enrollment of 4,731. New admits were up over 10%, and an increase in non-admitted students illustrates Western's commitment to the nonstandard students as well. With teacher education drawing more students, graduate enrollment has increased 15.4%, and now accounts for about 8.7% of the admitted students.

Tables A through C provide the 1999 and 2000 enrollment statistics.

A five-year look at OUS enrollment shows an increase in total enrollment of almost 7,900 students, or 12.8%. Undergraduate resident enrollment growth exceeded 25.5% during that time, more than offsetting the 10% declines in nonresident undergraduate and graduate enrollment, partly due to the fluctuations in the Asian currencies. This growth outstripped the percentage increases in high school graduates in Oregon, and the OUS participation rate showed steady increases even while some institutions have raised admission requirements.

Tables D through F provide the two and five year comparative enrollment statistics.

Table D. Summary of OUS Headcount Changes, Two and Five year Comparisons
	Fall 2000	Fall 1998	Fall 1995	Two-year % Change	Five-year % Change
Undergraduate Resident	47,676	43,363	39,695	9.9	20.1
Undergraduate Nonresident	8,377	8,105	9,301	3.4	(9.9)
Graduate Resident	11,649	11,598	10,622	0.4	9.7
Graduate Nonresident	1,806	1,923	1,996	(6.1)	(9.5)
Total	69,508	64,989	61,614	7.0	12.8
Total Resident	85.3%	84.6%	81.7%	0.8	3.7
Total Nonresident	14.7%	15.4%	18.3%	(0.8)	(3.7)
Total Undergraduate	80.6%	79.2%	79.5%	1.4	1.1
Total Graduate	19.4%	20.8%	20.5%	(1.4)	(1.1)

Table E. Summary of Institution Headcount Changes, Two and Five Comparisons
	Fall 2000	Fall 1998	Fall 1995	Two-year % Change	Five-year % Change
Eastern Oregon University	2,784	2,460	2,306	13.2	20.7
Oregon Institute of Technology	2,842	2,679	2,441	6.1	16.4
Oregon State University	16,777	15,197	14,457	10.4	16.0
Portland State University	19,029	17,303	15,842	10.0	20.1
Southern Oregon University	5,502	5,465	4,963	0.7	10.9
University of Oregon	17,843	17,366	17,512	2.7	1.9
Western Oregon University	4,731	4,519	4,093	4.7	15.6
Total	69,508	64,989	61,614	7.0	12.8

Table F. Summary of Resident First Time Freshmen Changes, Two and Five Comparisons
	Fall 2000	Fall 1998	Fall 1995	Two-year % Change	Five-year % Change
Eastern Oregon University	247	243	322	1.6	(23.3)
Oregon Institute of Technology	320	310	265	3.2	20.8
Oregon State University	2,432	1,972	1,669	23.3	45.7
Portland State University	975	882	731	10.5	33.4
Southern Oregon University	637	610	648	4.4	(1.7)
University of Oregon	2,053	1,754	1,672	17.0	22.8
Western Oregon University	792	668	622	18.6	27.3
Total	7,456	6,439	5,929	15.8	25.8

Toward the future:
The projections for the next ten years show continued increases in the number of Oregon high school graduates of about 13% (see graph). Nationwide, Oregon ranks 15th in anticipated postsecondary enrollment growth at about 16%, with California, Nevada, Washington and Idaho also in the top 15. Oregon Community Colleges have been reporting four to five percent annual increases for the past few years, so the expectations are for a substantial pool of potential students well into the next decade.

(Note: A hard copy of the graph "Oregon High School Graduates" is on file in the Board's office)

Ratification of Restated Ground Lease, as Amended, and Consent to the Assignment of a New Long Term Ground Lease (SOU)

Summary:
In 1986, OUS granted a long term ground lease to the Pacific Raptor Rehabilitation Corporation (PNRRC) which planned to erect a private museum of natural history on the campus of Southern Oregon University. In 1993, this ground lease was technically "restated" and assigned to the Pacific Institute of Natural Sciences (PINS), which subsequently obtained bond financing to construct the Pacific Northwest Museum of Natural History (Museum). In 1997, the Museum defaulted on the bonds sold to construct the building, and the Museum closed. The bondholder's trustee has now negotiated a sale of the Museum from PINS to the Kirlin Foundation, which will permit the bondholders to be partially repaid.

Under the terms of the original and restated leases, in order for this transaction to proceed the Board must consent to the assignment of the long term ground lease from PINS to Kirlin. The Board must also agree to the sublease from Kirlin to a new Southern Oregon Science Center (Science Center) which will recreate within the former Museum a hands-on, interactive science learning center with rotating exhibits, such the Oregon Museum of Science and Industry (OMSI) in Portland and the Exploratorium in San Francisco. This docket item describes the transaction in detail and provides due diligence on the new uses to which the building would be put.

A copy of the reassignment has been provided to the Board Secretary for perusal by any member of the Board prior to signature by the Secretary and Board President.

Background:
On December 31, 1986, Southern Oregon University entered into a long term ground lease to the Board of Directors of the Pacific Raptor Rehabilitation Corporation (PNRRC) for the purpose of constructing and operating a natural science museum on the SOU campus. Over time, the plans for the museum evolved and the lease was rewritten (technically "restated") on November 19, 1993; the initial term of the ground lease was set for 50 years with two 24-year renewal terms as options. The restated ground lease is between the State Board of Higher Education and the Pacific Institute of Natural Sciences (PINS) and replaces the lease agreement with PNRRC. The lease payment for each term and renewal term is $1.00.

PINS successfully sought bond financing via the Oregon Health, Housing, Education and Cultural Facilities Authority (HECFA) and the Pacific Northwest Museum of Natural History (Museum) subsequently was constructed with these bonds. The Museum opened in July 1994 and operated for three years. (See Map A, identifying the location of the museum and the area leased.) Unfortunately, after an initial success, the Museum encountered difficulties in generating sufficient revenues to cover its needs and pay debt service with the result that in 1997 the museum defaulted on approximately $3.5 million in bonds. The museum was closed in September, 1997, due to inadequate revenues to pay bond debt service.

Since the closure, SOU has been in discussions with the trustee for the bondholders, the Bank of New York, concerning the possibility of acquiring the museum; however, to date, SOU has not been able to determine a viable plan that would guarantee sufficient revenue to defray the bonds. During this period, the building has remained empty and certain building maintenance concerns have arisen.

The bondholder's trustee listed the museum for sale nationally and received an offer from Sharon and John Javna, residents of Ashland. They submitted an offer to the bondholder's trustee to buy the museum for $1.5 million in order to create a hands-on experiential science center to be named the Science Center of Southern Oregon (Science Center), an expansion of the Ashland Middle School Science Institute, a newly created science education program they recently funded to serve the Ashland School District. The prospective buyers received a commitment of cash funding from the Kirlin Foundation, a 501(c)(3) public benefit corporation registered in Seattle, Washington, and which is dedicated to funding educational initiatives and museums in the Pacific Northwest. Under the proposal Kirlin would hold title and a non-profit corporation of the State of Oregon would be formed to operate and raise funds for the operation of the Science Center.

The bondholder's trustee has now obtained approval for this sale from 98% of the bondholders and is now requesting the Oregon University System, on behalf of SOU, approve the Consent to Assignment of the Restated Ground Lease, with amendments, to the Kirlin Foundation and Sublease to the Science Center.

SOU has negotiated various amendments to the Restated Ground Lease in return for giving its consent to the assignment. These include:

• Parcel size reduction. A portion of the parcel that was originally part of the ground lease is being deleted from the lease to the Kirlin Foundation (see Map B, showing changes to parcel). SOU will receive back 6.28 acres.
• Initial options to purchase. Under an option agreement, either SOU or the SOU Foundation may purchase the Museum for the $1.5 million purchase price, plus closing costs, for the first 14 months after the Kirlin Foundation acquires the Museum.
• Longer-term options to purchase. For the period of three years and ten months ensuing after the first 14 months, either SOU or the SOU Foundation may acquire the museum for $1.8 million, plus interest on the $1.8 million from the end of the initial option term, pending completion by the Kirlin Foundation of certain repairs to the Museum. If either party exercises the option, it has 240 days to secure all funding and acquire the building.
• Kirlin right to sell. The Kirlin Foundation may sell the Museum at any time, so long as it first gives SOU and the SOU Foundation the option to purchase the building during the combined five-year option period described immediately above.
• Compatibility of future uses with SOU mission. In any event, if the Kirlin Foundation proposes to sell the Museum, the use to which the buyer puts the Museum must remain compatible with SOU's instructional, research or public mission, and must comply with all applicable federal, state and local laws and rules, and all rules and internal management directives of the Board of Higher Education.
• Prohibitions on future uses. There remains a prohibition against the Museum being used for a commercial use, including a store, shop, market, shopping center, shopping district, shopping mall or any type of retail or wholesale shopping which is not incidental to the operation of a museum.

Note: Through an oversight, the Restated Ground Lease was never approved by the Board in 1993, although the 1983 lease was so approved. Under ORS 351.150 and OAR 580-050-0005 the Board must approve all leases of this length. In addition, since the Consent to Assignment and Sublease significantly modify the terms of the Restated Ground Lease, the Board should also approve the Consent. Full Board approval is required per OAR 580-050-0010 to ratify the original Restated Ground Lease and to formally approve this long-term assignment of the lease and amendment thereto.

Staff Report to the Board:
The request by SOU to seek approval for assignment of the Restated Ground Lease required considerable due diligence. To date, the following reviews have been conducted:

• Appropriateness of land use.
• Review of compatibility of the proposed use with SOU's mission.
• Review of the financial viability of the new venture, based on review of business plan, management structure and plan for collaboration with other entities, particularly SOU.
• Review of terms of the Restated Ground Lease Assignment, including purchase price for options

Appropriateness of land use
The current building was specifically designed to house a museum of natural history. It is 26,000 gsf in size, and includes an 8,000 square foot exhibit hall, meeting and multi-purpose rooms, a theater, offices and a classroom. The building is located on SOU's northern boundary (see Map A), adjacent to the U.S. Fish and Wildlife Forensics Laboratory and the Ashland Middle School. This zone of the campus is designated for public/private partnership opportunities in the new 2000 SOU Campus Master Plan. As such, the use is consistent with the Master Plan and the land use and zoning laws of the City of Ashland, as required by the State Land Conservation and Development Commission.

Review of Compatibility
The Science Center of Southern Oregon is proposed to be similar to other hands-on, interactive science learning centers with rotating exhibits, such the Oregon Museum of Science and Industry (OMSI) in Portland and the Exploratorium in San Francisco. This relatively new type of museum encourages visitors to work directly with the exhibits and is intended as a means of stimulating interest in science and technology, particularly among school children. Highly popular, the number of such museums is growing; the Association of Science-Technology Centers now includes more than 550 members in 40 countries. Exhibit themes will be built around earth and space, physical science and natural science.

A model for this learning center was created as a pilot program in the Ashland School District in the form of the Ashland Middle School Science Institute, funded by a donation from the same individuals who are establishing the new museum, Sharon Javna and John Javna. The new Science Center will expand the program from the Institute.

The Science Center is seeking status as a 501/(c)(3) public benefit corporation. It will have a Board of Advisors and a volunteer Board of Directors, including a founding member of the Science Center, a member of the Kirlin Foundation, and a representative from Southern Oregon University.

Review of the Financial Viability of the Proposed Museum
SOU and OUS have reviewed the Business Plan of the Science Center, its capital plan for facilities work, copies of the articles of incorporation, by-laws and list of officers for the limited liability corporation and the descriptive program statement discussing how the Science Center will directly assist SOU in fulfilling its stated mission by working together to support SOU programs in environmental science and youth outreach. The new Science Center management plan calls for building on an enthusiastic science program now in the Ashland K-12 system. Moreover, the business plan is cautious. Operating costs for the programs overall were tested against the costs for similar small "interactive" museums of natural history or science elsewhere in the country and fell near the average of those. Finally, the enthusiasm and dedication of the Kirlin Foundation and their sublessee is based on longstanding interest in science education, and a track record of success in establishing them collaboratively with school systems and communities.

Review of Terms of the Restated Ground Lease Assignment and Sublease
OUS obtained review by campus officials at Southern Oregon University as well as: review by the Oregon Department of Justice, review internally by the Director of Legal Services, and review by the Director of Capital Construction Planning & Budget. SOU undertook extensive campus consultation to ascertain that the future uses would be compatible and agreed to appoint a representative to the Board of Directors of the new Science Center.

Legal issues that were resolved included the negotiation of options whereby either SOU or the SOU Foundation reserve the right to acquire the Museum outright over the next five years, for a negotiated price (see above) that is below the cost of the bonds outstanding on the property, including costs for capital repair and unusual building and land maintenance.

Finally, SOU sought and was given the return of 6.28 acres they may need to solve other needs for space or construction of facilities in the future.

Staff Recommendation:
Staff recommend that the Board ratify the Restated Ground Lease signed in 1993, as amended, and approve the Consent to Assignment to the Kirlin Foundation and Sublease to the Southern Oregon Science Center.

Employee Insurance Benefits

(Report Item)

Summary:
The Oregon University System (OUS) is reviewing plan year 2002 options for providing employee insurance through the Public Employees' Benefit Board (PEBB). Key points of the review relate to accommodating the needs of OUS faculty while at the same time responding to rapidly increasing costs for health insurance. OUS has proposed entering into a purchasing agreement with PEBB that will segregate funding for OUS from other state agencies unless benefit plans for 2002 are redesigned for improved cost-effectiveness. OUS' current flat-rate employer contribution for faculty and unclassified employees will be reconsidered as one option to cover rapidly increasing health insurance costs, at the expense of the cash compensation it permits employees to elect.

Background:
Ongoing discussions about benefits levels, the effects of giving employees a choice between comprehensive health insurance plans and taxable cash benefits, and induced migration of enrollment to health maintenance organizations (HMOs) have been hallmarks of OUS' participation in the newly merged PEBB benefits program. Accommodation has been made by PEBB to help preserve taxable cash compensation elements for the unique faculty recruitment and retention uses of the benefits program. However, continued use of the benefits program to augment compensation has been and promises to continue to be complicated by rapidly escalating health insurance and services costs. To date, PEBB has been able to hold health insurance cost increases close to the national average, but faces marked increases in 2002 unless significant changes are made to the insurance program.

Table 1. PEBB Rate Increase History and Projections

Independent Insurance Plan Permitted by SB271 (1995)
OUS has performed three costing studies on the option of operating an insurance program independent of the State. Findings in 1996, 1998 and 1999 demonstrated that marginal savings from $1 million to $2.3 million, based on OUS demographics and utilization patterns, would be realized by separating from the state insurance program. Authority to self-insure is, however, critical to achieving significant savings, and attempts to gain statutory authority for self-insurance have failed for both the State and OUS, as recently as with the failure of OUS' legislative concept denied in 2000.

Plan Funding, 1999 to 2002
PEBB completed merging the predecessor insurance boards (BUBB and SEBB) in 1999, and offered a joint program to all state employees beginning in 2000. During that time, cash compensation to employees for economical plan selection has decreased. This is partly a function of increasing premiums and partly due to PEBB's increased retention of the employer contribution provided to employees who decline (opt- out of) medical coverage or select the least costly insurance plan. Under current plan structure, cash compensation for OUS employees would be reduced as much as $5.56 million in 2002.

Table 2. OUS Costs and Total Compensation Through PEBB

Plan Year 2001 Funding Agreements
OUS will receive up to $4.36 million from PEBB for classified and faculty/unclassified employees. These transfers offset assessments that PEBB levied on all state agencies to fund unexpectedly high health insurance cost increases, plus the transfer funding applied for all state agencies to support PEBB's enrollment policies. The 2001 Rate Subsidy and $2.77 million of the HMO Subsidy to OUS are one-year, non-renewable agreements.

OUS Benefits Philosophy:
OUS relies on the employee insurance program as a keystone of the total compensation package for faculty/unclassifed employees, and supports strategies to create consumer awareness of the total costs of insurance through market pricing of plans and services. Since 1996, the universities have maintained contribution rate equity among all employees.

Until 2001, OUS provided the same rate of employer contribution to all employees, regardless of family enrollment status. This strategy has provided cash compensation to employees who do not select high premium plans, and was effective while insurance rates were decreasing or stable. However, since 1999, insurance costs have increased markedly, affecting the affordability of dependent coverage and eroding supplemental compensation.

Classified employees bargained and received tiered employer benefits contributions beginning in 2001, through which single employees receive fewer employer dollars than do those who enroll families for benefits. The effect on employees of changing the employer contribution from a flat rate--currently $470/month/employee--to a family-tiered rate is illustrated in Table 3.

Table 3. 2001 Supplemental Compensation Effects for Employees

(dollars per plan year)	Employee Only	Employee +	Opt-Out
Flat Rate Employer Contribution
Maximum Cash-back	3,339	2,054	2,850
Maximum Employee-Shared Premium	0	-1,710
Tiered Employer Contribution
Maximum Cash-back	2,345	2,797	2,253
Maximum Employee-Shared Premium	-63	-966
Enrollment (Faculty / Unclassified)	2,521	3,982	752

Competitive Recruitment and Retention Practices
OUS surveyed peer universities in 1998 to compare employer contribution strategies to the fixed dollar contribution OUS provides faculty/unclassified employees. Results indicated that most competitors for faculty do not provide the type of fully paid family coverage advocated to date by PEBB.

Options Under Consideration:
In January 2001, at PEBB's request, OUS outlined priorities the PEBB Board should address for plans in 2002.

• Health insurance plans should be affordable without reliance on incentive subsidies that exacerbate price insensitivity of consumers, i.e., third-party payor effects. Cost control through higher deductibles and co-insurance is needed to provide premiums employees can afford, along with a reduction of the customized benefits menu that exceeds standard industry plans.
• Affordable premiums should be available not only to part-time employees, but also to pre-Medicare retirees who may not receive an employer contribution toward the cost of health insurance. Managed care plans offered in 2002 should include both high and low option plans in place of the current comprehensive PEBB HMO plan design.
• The university system's reliance on the compensation and benefits budget to improve faculty compensation precludes adoption of PEBB's practice of providing fully-funded, comprehensive benefits. OUS proposes a segregation of State and OUS funding for the benefits program to permit PEBB and OUS to diverge in the methods of allocating budgeted dollars for benefits and compensation. The proposal anticipates pooled purchasing, with or without risk-adjustments, to preclude fragmentation of the state's purchasing power with insurance carriers.
• Access to providers and coverage in worldwide and rural areas is a continuing need for OUS employees. New carrier contracts should contain provisions for broad provider networks or enrollment changes at the beginning of out-of-area periods of service.

Pending Decisions and Activities:
The adequacy of PEBB's plan design and funding methods for 2002 will be evaluated by OUS no later than March 20, 2001. If OUS priorities are insufficiently addressed at this time, OUS will begin work to segregate funding and employer contributions for OUS faculty/unclassified employees. A trust and cafeteria plan for OUS employees may be required if PEBB is unable to provide separate accounting for State and OUS employees.

PEBB has expressed serious concern that employees' free choice among multiple plans and OUS' use of the benefits program to supplement cash compensation causes under-purchasing of benefits. Employees elect higher cash returns by choosing less expensive plans and ultimately drive up plan costs through excessive utilization. A key decision for the OUS is to determine if the best course of action at this time is to covert from the current strategy of supplementing cash compensation for faculty/unclassified employees to a strategy that ensures affordable dependent coverage.

Status and Timeline:
Establishment of a segregated cafeteria plan and trust should begin immediately if that option is necessary.

PEBB plan designs will be completed for carrier negotiations to begin on March 20, 2001.

Final notice of OUS' intent to participate in PEBB program is due March 31, 2001.

Recommendation:
A recommendation will be submitted to Board after PEBB provides information about plan design changes on March 20, 2001.

Oregon State Board of Higher Education
Board Committee on Budget and Finance

January 17, 2001

Minutes

Meeting Participants: Board Budget and Finance Committee members: Tom Imeson, chair; Geri Richmond and Don VanLuvanee. Directors Shawn Hemple (SSP), Bill Williams, and Tim Young participated via telephone.

OUS University Presidents: Phil Creighton, EOU; Martha Anne Dow, OIT; Paul Risser, OSU; Dan Bernstine, PSU; Sara Hopkins-Powell, SOU; Dave Frohnmayer, UO; and Betty Youngblood, WOU.

Chancellor's Office staff: Joe Cox, Chancellor; Tom Anderes, Vice Chancellor for Finance and Administration.

Governor's Office staff: Jean Thorne, Policy Advisor to the Governor, and Kelly Freels, Analyst, DAS Budget and Management Division.

Meeting participants also included other institutional representatives, other members of the Chancellor's Office staff, and interested observers.

The meeting was called to order at 3:15 p.m.

Director Tom Imeson welcomed the Committee members and stated that the purpose of meeting was to provide the Governor with input on the 2001-2003 budget. Vice Chancellor Anderes provided an overview of the Governor's recommendations and related them to the OUS agency request.

Director Imeson then introduced Jean Thorne, policy advisor to the Governor. Ms. Thorne advised that, according to projections, there is a $700-800 million gap in revenues needed to meet the CSLs of all state agencies in the next biennium. Due to this funding shortfall, the Governor had to ask the questions "What significant need has to remain underfunded in order to meet other significant needs?" and "Wwhat is it that this agency can do that no other agency can do?" (core mission). Ms. Thorne advised that every state agency has reductions; however, agencies that deal with human services (e.g., Department of Corrections, K-12, Senior and Disabled Services, etc.) have mandatory entitlement programs but cannot obtain revenue from their constituency. Community College Services and OUS can charge tuition, thereby making them different from other agencies.

Ms. Thorne introduced Kelly Freels, senior analyst from the DAS Budget and Management Division. Mr. Freels provided an overview of the Governor's Budget, with examples of the how the Governor's budget recommendations affected the other education sector in the state.

Ms. Thorne stated that the core mission of OUS, as stated by the Governor to the Board in the December 2000 meeting, is instruction at the undergraduate level. Ms. Thorne emphasized that it is important to understand that the Governor did not look at individual campuses and how to keep certain campuses open but he used the budget model as a policy making tool. The Governor attempted to avoid reducing cell values. The Governor believes a tuition increase of 4% per year during the biennium is not unreasonable, and would shift cost from state General Fund to tuition. The Governor focused on policy option packages to determine important areas of investment, both geographically and economically.

Ms. Thorne noted that although agencies may anticipate improved revenue forecasts in March and May, the state economists have advised that this is unlikely. However, if there are any improvements in revenue, K-12 and the "early childhood investment" (0-5 years) will be the main focus of the Governor's recommendations. Currently, tobacco settlement funds ($110 million) have been appropriated from the state General Fund to the School Improvement Fund (K-12); the Governor and Republican leaders have expressed the desire to have these settlement funds replaced with another source of revenue should additional revenue become available.

With regard to the Governor's recommended budget, Ms. Thorned advised there are two areas of determination: 1) If OUS believes that any of the policy decisions that underpin the Governor's budget are not appropriate and would like to propose alternatives, the Governor would like to be informed; and 2) OUS should prioritize the requested add-backs. These should be provided to the Governor prior to the March revenue forecast.

In relation to the anticipated revenue forecast increase, Director Young asked where the OUS would place in the Governor's priorities for distribution of these added funds. Ms. Thorne advised that the Governor's highest priorities are to remove the tobacco funds from K-12 funding and allocate additional funding to the human services divisions; therefore, she indicated the OUS would follow these priorities. Director Young advised, as a student himself, he understands the student community and their worries. It is important that current students remain in the System and that new students be allowed to enroll. Ms. Thorne stated that although she understands Director Young's position, the Governor has a responsibility to balance the budget. However, she emphasized the System cannot backfill the budget with a large tuition increase; OUS must look at what reductions can be made without penalizing the students with a large increase in cost. Director Imeson remarked that the Board needs to consider the broader approach to tuition policy and whether or not there are areas where current tuition policy limits the ability to pay for the cost of programs (plateau vs per credit hour). This issue needs to be addressed in the near future.

Efficiencies and Reinvestment Gains from the Current Budget:
Vice Chancellor Anderes stated that a very specific agenda was approved through the Higher Education Efficiency Act (Senate Bill 271) which granted increased authority to OUS over personnel, labor relations, purchasing, and contracting procedures. The goal of SB 271 was to allow OUS to manage its business in a more responsive and efficient manner. A review was conducted in 1998 to determine the effectiveness of OUS in conducting business under SB 271. This review concluded that OUS "met the goal of serving 2,000 more resident undergraduate students without any additional General Fund support...or increasing classroom size." In the personnel arena, OUS "achieved more effective and responsive services." And in purchasing and contracting, OUS "saved time and money with delegated authority...achieved more effective and responsive services...[and realized] savings and efficiencies [of] over $6.7 million.

Vice President Rob Specter, OSU Finance and Administration, provided a report concerning efficiencies instituted at OSU:

• Administration combined two offices in Human Resources, classified staff and faculty, which have two different cultures and technical needs. This action broke through the cultural differences in personnel to serve the entire campus.
• Out-sourced the advancement programs and placed them all under the foundation's oversight.
• Reorganized the Budget Office.
• Facilities services faced the challenge of creating energy conservation awareness (OSU is facing a $1.7 million increase over anticipated budget in energy costs this year alone). Meters have been installed on each building and departments will be held responsible for their energy consumption.
• Finance offices have instituted careful cash management, reorganizing debt service, and moved to creation of multi-department service centers.

Specter advised OSU will be identifying more areas of efficiency in the future. However, there are recurring costs over which OSU has no control (e.g., payroll, healthcare, collective bargaining, and unfunded mandates from the state and federal government).

Ron Bolstad, Vice President of Finance and Administration for SOU, provided examples of efficiencies effected at SOU. The University administrators have made decisions through the 1990s since Measure 5 which resulted in a broad-range of efficiencies. Supervisors and managers at Southern work with a mind-set of frugality. They are disciplined now in prioritizing the use of their resources. Examples:

• Increasing the current fund balance to the point where SOU is confident they are operating at a prudent level.
• In the academic arena, SOU reduced the number of faculty positions during 1997-98. SOU has since been reallocating positions because there are no new faculty lines.
• The Office of Business Services, with the increasing e-commerce transactions, has implemented direct deposit of financial aid checks, which could result in increased savings in the next years.

Director Imeson asked, if there were to be an "SB 271-2," what things OUS should add to increase organizational efficiencies. Chancellor Cox stated that there were areas that OUS wanted to pursue when SB 271 was created but couldn't, and there have been erosions to the authority since 1995. Management of cash-flow was the main issue OUS was unsuccessful in obtaining under SB 271. This was disallowed by the state Treasurer due to the large amount of interest earned on General Fund allocated to OUS. Chancellor Cox asked that the campuses pursue this topic further. Mr. Freels added that this should also be looked at from the statewide level.

Chancellor Cox advised that state assessments were reduced under SB 271; however, these assessments have since increased or doubled (e.g., Secretary of State audit assessment).

Anderes stated that, although OUS can identify efficiencies and reallocate funds to support programs, unless the state support cost-per-student changes, OUS will remain below the median of its peers. Provost John Moseley reminded the Board that prior to the SB 271 process, the Board Administrative Review Committee (BARC) had studied the System's administrative processes. The UO had, in the early years subsequent to Measure 5, managed to reduce administrative costs by 15%; however, the BARC study concluded that UO was very efficiently run compared to national statistics. Moseley asked if national comparators were made for K-12 and community colleges on a per capita basis, when the Governor looked at the budgets and proposals for this biennium, and if he considered where the OUS stood in relation to these comparators. Ms. Thorne responded that a model for K-12 was built with national consultants; in comparing K-12's level of resources to its peers in other states, Oregon was $800 million below the national average. Community Colleges Services was also impacted by Measure 5 limitations and, like the OUS, has instituted tuition increases. However, the Community College Services had to absorb enrollment increases without any additional state funds. Provost Moseley rejoined that while state funding for K-12 ranked in the top quartile of their peers nationally, public higher education in Oregon ranked in the bottom quartile of its peers nationally.

Historical Perspective
Grattan Kerans, Government Relations, provided a historical context to the discussion. During Mark Hatfield's Governorship, the "baby boomers" hit the college campuses and 40% of today's facilities were constructed (late 60s/early 70s). From 1960 to 1980, the state funded 75% of the costs of instruction and students paid about 25% of their education costs. During the recession of 1981 to 1984, budgets were cut and taxes raised; funding split (the "social impact") was stabilized at 66% state General Fund and 33% student support. Even with the $95.5 million increase provided by the legislature in the 1999-2001 biennium, when adjusted for inflation, OUS has only 95% of the purchasing power that it had during the 1989-1991 biennium . Looking at the next biennium, OUS will lose three-fifths of the purchasing power under the Governor's Recommended Budget. At the same time, OUS received a "D-" in a national report card on state tax support appropriated for access (only Montana had a lower score than Oregon). The next report card would have an "F" for access if the next budget is approved as supported by Governor. Oregon began the 1990s in the top five for enrollment growth, but closed the decade in the top 10. Growth of its high school graduates has increased and with it, greater demand; however, Oregon has the lowest percentile in the nation in terms of financial aid.

From a regional perspective, Washington and Idaho are limiting access of nonresident students; California, Arizona, and New Mexico have increased state support, thereby allowing a decrease in tuition for their resident students. Every university's operating budget is unbalanced due to deferred maintenance and capital repair needs that continue to increase each biennium. Some campuses may even lose the use of buildings.

Discussion:
Anderes stated that, since the February meeting will be the last before the Ways & Means session, the Board is left with two avenues to pursue: 1) provide a historical perspective, and/or 2) provide reactions to the Governor's budget and how it would affect cell values. We must look at policy decisions that are implicit in the state investment as opposed to the student investment and find other options that we can pursue. Although funds are allocated to the universities through the model and then the universities can reallocate the funds at their discretion, we must ask if the Governor's recommendations might cause constraints that prevent the campuses from accomplishing goals. All of these issues must be presented to the Ways & Means in understandable terms.

President Hopkins-Powell noted that many areas have been reduced as much as possible through efficiencies; therefore, the Board and Governor will ultimately need to lead the universities in a direction that is clearly set. And OUS must clearly articulate to the Governor what we believe that direction should be. Director Imeson stated that OUS will either need to comply with the Governor's request for efficiencies, or "hunker down" for an intense session.

President Creighton noted that, even with the $8 million in small school support, there will still be reductions to the regional universities to the extent that they will either be required to cut access or increase tuition above the Governor's recommendation. President Creighton added that he believes EOU will never pull out of a downward spiral if enrollment decreases as a result of these actions. He added that regional university needs are not being addressed and the Governor's recommended cuts will hurt the small universities even more.

Director Geri Richmond stated that, as a result of the talk in other states concerning Oregon's situation, potential students and faculty are cancelling interviews. Priorities set by those outside the System impact the System's ability to attract and retain students and faculty. President Frohnmayer stated that there is a sense of real urgency that we can't make the pieces move anymore with the budgets cut back to this level, especially with the new budget model so underfunded. When we are asked to respond, and we have multiple constituencies asking (students, alumni, trustees, etc.), we cannot even say that this budget is adequate, or one in which the university can live. We are trying to be diplomatic yet truthful to our constituencies.

Director Imeson responded by stating that the Board is not asking anyone to say the budget is adequate, the Governor has already said that it's not, but providing good information to people is important. Provost Moseley stated that OUS did respond to Measure 5 reductions and that, while it is difficult to identify programs that may be cut within this budget, it is not difficult to show the decisions that were made during that era. OUS lost students as a result of those cuts (approximately 6,000 students at the UO alone). Historically, the Governor's recommendations are comparable to the worst of the Measure 5 cuts on the campuses. OUS responded heroically, but there were major losses. For example, UO closed a college, cut another in half, and closed many other programs throughout the University. If history isn't heeded, actions will be repeated that were damaging to OUS. President Youngblood agreed with Moseley's assessment, but added that the Measure 5 eliminations were implemented over a three-biennia period, whereas the Governor's recommendations will take effect in one biennia.

Director Imeson asked what cells in the RAM should be supported and what cells should have funding reallocated to other cells? A discussion ensued in which Provost Moseley explained the relationship between loss of state funds through the cells and their possible replacement through grants and contracts, federal funds, and other income. However, he emphasized that increasing tuition to replace the loss of state General Funds will result in a loss of students. Chancellor Cox added that, subsequent to Measure 5, when there was a decrease in enrollment, OUS remained obligated for all indebtedness incurred by earlier (higher) enrollment levels.

Director Imeson noted that policy decisions need to be identified, and a course of action planned. OUS must be constructive and make decisions that respond to the Governor's recommendations. Director VanLuvanee emphasized the Board and campuses must get engaged in thinking about what can be done to help the Governor understand the impact his budget will have on the System. And that student aid should be a state issue and not just a System issue.

Ms. Thorne added, to reiterate comments the chair made regarding policy decisions, the potential for there being new money allocated to OUS is slim in the next few months, yet the OUS will need to confront these allocation and policy issues during this short time frame.

President Hopkins-Powell asked Ms. Thorne if the Governor views access to undergraduate education as OUS' guiding principle? Ms. Thorne replied that, from the Governor's perspective, OUS' core mission is instruction and undergraduate education and, if the Board doesn't agree with this perception, then OUS should describe its core mission to the Ways & Means subcommittee.

Chancellor Cox noted that these issues will be discussed at the Presidents, Academic, and Administrative Councils and a consolidated response in the form of impact and prioritized add-back lists will be presented at the February Board meeting.

Meeting adjourned at 5:25 p.m.