In light of the state budget crisis' continuing impact on the UC system, the campus is examining new ways to fund some of its upcoming capital projects.

The new twist is that the UC system is taking a very conservative approach to financing debt. At UC Davis, this approach may slow down or reduce in scope several initiatives in the campus's 10-year capital plan. A total of $212 million in UC Davis projects are paid through debt financing and, in the worst-case scenario, the campus expects only about one-third of that amount from the state.

Like a credit card, debt financing occurs when the campus draws upon bonds issued on Wall Street to help pay for its capital projects. But with the state mired in its own budget and credit problems, planners here and on other UC campuses realize that such funds will be severely limited for the foreseeable future.

According to the independent Legislative Analyst's Office, by the end of 2004 the state had accumulated $26 billion in debt to cover its operating costs and has the lowest credit rating of any state in the nation.

Rick Keller, assistant vice chancellor for capital resource management, said the Office of the President and the Board of Regents in the past year have expressed concern about the amount of debt the UC is taking on as an organization.

"Simply, if you have too much debt, your credit-worthiness goes down, and this is already a problem for the state," he said.

As a result, several months ago the Office of the President asked all UC campuses to prepare adjustments to their debt-financed projects. At UC Davis, the campus was told to prepare debt target amounts of both $65 million and $130 million, the latter being a more optimistic figure.

"We are exploring revising project timetables and using funding alternatives," Keller said. "Other funding options exist, and the upcoming comprehensive fundraising campaign may play a role in helping to support some of these construction projects."

No link to budget compact

The debt-financing dilemma is separate from the budget compact, which will provide the UC with increased state funding to cover annual enrollment growth through 2010-11. In particular, the new debt conditions will not affect $180 million in state capital funding for UC Davis projects through 2010, which is expected under the compact.

"We are talking about one slice of the construction pie, not the entire pie," said Keller. "The areas most affected will be student housing and parking projects."

All the number crunching is preliminary and the regents are set to discuss the issue's UC-wide implications at their May meeting, he added. However, the planning has begun as the new fiscal reality sinks in.

"The $65 million debt target will be our most likely figure to operate within," Keller said. "It is difficult to propose delays in upcoming capital projects that represent serious investments for the campus in achieving its key objectives."

Keller said that his office is gathering input from the units involved.

Changing timetables

With many of the specifics under discussion, a rough outline of the impact is beginning to emerge.

For example, a planned expansion and renovation of the Coffee House may be delayed until the campus can find alternative funding that would not involve the use of debt financing, Keller said. Though the project is to be paid for through student fees, he explained, the UC typically would use debt financing and then repay the loan through student fees generated in ensuing years.

"It is a concept sometimes complicated and difficult to understand," said Keller. "But this is how large-scale financing is done in a complex organization that uses state bonds."

Janet Gong, associate vice chancellor for student affairs, says much of the process has yet to unfold.

"When we know more about the specifics and how this will affect our student fee-funded projects," she said, "we will begin extensive consultations with students. Meanwhile, we are proceeding with the normal program planning and conceptual design phases so that our projects can move forward."

Other funds sought

Apart from debt financing, Keller said, the campus uses four other methods of funding for facility projects — state capital funding, campus funding, gift funds and reserves.

Another project, the Equestrian Center, will not be relocated to the west side of campus as originally envisioned. Plans now call for a new arena on the current site near the arboretum with an "internal loan" from the campus possibly used to fund the project, said Keller.

"We realize this is frustrating to all the good people who have worked on planning a new equestrian facility, but circumstances have changed," he added.

The campus is studying whether to use cash reserves to help fund the Segundo Services building, a new replacement facility for student housing, and the Student Resource Center, which would be a redevelopment of Walker Hall to provide an expansion for student services.

"The university recognizes that student housing and services are not only a matter of providing room and board, but are an integral part of the academic experience," said Keller.

Discussions underway

The timing is a question in many of the projects, including the upcoming Health and Wellness Center, which would consolidate student heath services, employee health services and Health System services at a new site. With the new debt rules, the center may be reduced in scope.

Elsewhere, Keller said, discussions are underway on alternative funding strategies for a new Graduate School of Management building and a proposed Neurosciences building — both projects originally involved debt financing and so plans are now to look for new funding sources.

Much of the consultation is occurring within the faculty and leadership in those affected units, he added.

Building progress

Planned projects not affected include the Robert Mondavi Institute for Wine and Food Science, the physical sciences expansion project, Vet Med 3B, King Hall additions, the Music Building, Engineering Unit 4, Briggs Hall safety improvements and Haring Hall renovations, among others. These projects do not rely on debt financing.

For similar reasons, the planned West Village for faculty, staff and student housing does not face any reductions or shortfalls in funding.

The reason is that the university has a "third-party arrangement" with developers who will undertake the central financing for the site. In these debt-lean times, the possibility for more outside collaborations is not lost upon the campus planners.

"It is prudent to seek out third-party funding arrangements for such projects, especially those like housing and parking that may be self-supporting through user fees," said Keller.

Fundraising vital

Keller said the upcoming comprehensive fundraising campaign comes at the right time. "It is clear that we need to look to our many generous benefactors to assist us in funding capital needs."

As if the state budget issue were not bad enough, he said, construction costs are rising rapidly industry wide and "jeopardizing our ability to deliver the full scope of the planned projects."

Above all, Keller observed, "The academic mission of the university is the highest priority."