Scott Kelley

Decreasing international crude oil prices may affect the money available to the UT System, according to Bruce Zimmerman, CEO and CIO of the University of Texas Investment Management Company.

From June 2012 to June 2014, the market value of the Permanent University Fund, or PUF, increased from $13.1 billion to $17.2 billion, according to reports from UTIMCO, the organization that invests money for the System.

The PUF is an endowment containing 2.1 million acres in West Texas that was created by the Texas Constitution to benefit the UT and Texas A&M University systems. The proceeds from the sale of oil, gas, sulfur and water royalties are invested in the form of stocks, bonds and equity interest to establish the Available University Fund, or AUF. Two-thirds of these funds go toward the UT System, and one-third goes to the Texas A&M system.

Scott Kelley, executive vice president for business affairs at the UT System, said the PUF’s market value grew as a result of increased oil production in West Texas.

“The new technology and horizontal drilling and the ability to extract oil and gas from some of the shale that’s out there has just created a whole new wave of production,” Kelley said.

In August, United States crude oil production averaged an estimated 8.6 million barrels per day, the highest monthly production recorded since July 1986, according to a report from the U.S. Energy Information Administration. The report also said demand for oil in industrialized economies is weakening, which may be causing oil prices to drop.

As the price of oil declines, Zimmerman said the revenue contributed to the PUF is also affected.

“Rising oil prices means more money coming into the endowment,” Zimmerman said. “Falling oil and gas prices mean less revenue.”

While the government report shows declining prices, Kelley said the market price for oil has remained steady for a number of years between $80 and $100 a barrel, allowing for an increase in production.

“If it were to drop to $50 a barrel or do something dramatic, then the drilling would likely be curtailed and even some of the production may stop,” Kelley said.

Zimmerman said even though the revenue from West Texas oil affects the PUF, UTIMCO does not invest heavily in natural gas and oil companies, making it less susceptible to the volatility of oil prices.

“We have a very diversified portfolio,” Zimmerman said. “It’s diversified globally. It’s diversified across stocks, bonds and real assets. It’s diversified across private equity and public equity [and] hedge funds. We have a relatively small amount of the endowment invested in oil and gas.”

Zimmerman said about 10 percent of PUF funds are invested in natural resources across the globe. He said UTIMCO tends to invest most heavily in stocks, since the System endowments are meant to last for an indefinite period of time.

“The biggest impact on the investment returns is whether the stock markets are going up or down,” Zimmerman said.

The UT System has selected “Page/,” an Austin architectural firm, as project architect for the construction of the new System headquarters downtown. 

The System will consolidate its employees and services into one new building on Seventh Street between Lavaca and Colorado streets. The building will be nine stories high with more than 258,000 square feet of office space. 

“Page/” was selected from 12 different proposals submitted to the System and will provide all of the new building construction’s design services, which is expected to be completed by early 2017.

Currently, the System operates out of five buildings downtown: Henry Hall, Johnson Hall, Ashbel Smith Hall and the Lavaca and Colorado buildings. According to System spokeswoman Jenny LaCoste-Caputo, the Lavaca and Colorado buildings will be demolished to make room for the construction of the new building.

In a press release from the System, Scott Kelley, executive vice chancellor for business affairs, said the total project cost is more than $102 million and will be funded through Revenue Financing System bonds and not through general revenue or tuition dollars. 

According to Kelley, the projected savings for the System could be between $2 million and $8 million a year, with a total estimated net savings of more than $125 million over 30 years.

Kelley said more than 50,000 square feet of the new building will be leased to retailers. The remaining System buildings  — Henry Hall, Johnson Hall and Smith Hall — will be available for leasing after services move to the new building.

LaCoste-Caputo said the construction will displace approximately 200 employees, who will temporarily move to other office spaces around Austin.

The UT System will lease out more than 50,000 square feet of its new consolidated building to retailers. 

Last week, the System announced administrative services and employees in downtown Austin will be integrated into one building on Seventh Street, between Lavaca and Colorado streets. The building will be completed in late 2016 or early 2017. 

The System currently operates out of five buildings downtown: O. Henry Hall, Claudia Taylor Johnson Hall, Ashbel Smith Hall and the Lavaca and Colorado buildings. According to System spokeswoman Jenny LaCoste-Caputo, the Lavaca and Colorado buildings will be demolished to make room for the construction of the new building.

According to Scott Kelley, executive vice chancellor for business affairs, the estimated cost of the project is $102 million. Kelley said projected savings for the System could be between $2 million and $8 million a year, with a total estimated net savings of more than $125 million over 30 years. 

“If you look at the age, it’ll start saving money right away,” Kelley said. “[Ashbel Smith Hall] needs roof repair right now, the little plaza area needs to be waterproofed. If we chose not to [build a new office] we would be spending millions of dollars over the next couple of years to do those. By deciding to move, we can halt that and defer those costs and not make [those changes] and save money from the beginning.”

Kelley said current office space occupied across all five System buildings totals approximately 226,000 square feet, while the new building will have about 258,000 square feet.

“Because we’ll be more efficiently using the space, we can take the employees here and move them over to occupy about 200,000 square feet, so we’ve got about 58,000 additional square feet,” Kelley said.

Kelley said leasing out some of the space for commercial development has always been a possibility. 

“We’d always envisioned potentially putting some retail on the first floor,” Kelley said. “We thought that would be good for our employees. We think, and we had discussions with the city, it also may create a catalyst for future development in this area, which we would also applaud as residents here during the day.”

LaCoste-Caputo said approximately 200 employees will be displaced once construction begins and will be temporarily moved to other office spaces around Austin. In a press release from the System, Kelley said the remaining System buildings — O.Henry Hall, Claudia Taylor Johnson Hall and Ashbel Smith Hall — will be available for leasing.

“O. Henry Hall will remain owned by the UT System and leased to new tenants,” Kelley said in the press release. “The property housing the Claudia Taylor Johnson Building and Ashbel Smith Hall will be available for improvement or redevelopment.”

System Chancellor Francisco Cigarroa, who announced last month that he is stepping down as chancellor, updated his higher education improvement plan, “A Framework for Advancing Excellence,” in 2012. In the plan, Cigarroa said he wanted the System to develop stronger “space utilization efficiencies.”

UT System employees and services will be consolidated into one new building on Seventh Street between Lavaca and Colorado streets in downtown Austin. 

Currently, the System operates out of five buildings: O. Henry Hall, Claudia Taylor Johnson Hall, Ashbel Smith Hall and the Lavaca and Colorado buildings. According to System spokeswoman Jenny LaCoste-Caputo, the Lavaca and Colorado buildings will be demolished to make room for the construction of the new building. 

According to an email sent to System employees from Scott Kelley, executive vice chancellor for business affairs, the estimated cost of the project is $102 million. Kelley said projected savings for the System could be between $2 million and $8 million a year. 

In the email, Kelley said construction should be complete by late 2016 or early 2017.

The UT System allocates more than one-third of the money in the Available University Fund directly to UT-Austin, and the campus is growing more dependent on these allocations as state funding shrinks. 

While the funding the University receives from the UT System only makes up about 7 percent of the University’s $2.48 billion annual budget, the campus remains the largest recipient of System funds, using the allocations for projects as far-ranging as the Dell Medical School and the Engineering Education Research Center.

Scott Kelley, the UT System executive vice chancellor for business affairs, said roughly 45 percent of the money is intended to fund “excellence,” lending UT a competitive edge, especially when the University attempts to attract faculty. 

“If we’re recruiting a biologist, they might want a lab re-fitted — we can get money to fix up a lab, buy equipment for research,” Kelley said. 

The 2.1 million acres of oil-rich land that make up the Permanent University Fund, a 137-year-old state endowment, support the UT and Texas A&M systems. Though the fund itself cannot be spent, as mandated by the Texas Constitution, profits from land lease sales and oil and gas production revenue are invested. A portion of the returns from these investments make up the Available University Fund. For the fiscal year ending in August, the AUF had almost $644 million.

Once the AUF total is determined, two-thirds of the money is allocated to the UT System for the Board of Regents to then allocate to the System’s nine academic institutions and six medical schools.

Still, Kelley said, the money from the fund is not enough to comprise an entire operating budget.

“[The AUF], spread among institutions, makes a lot of difference at the margin, but it is not transformational,” Kelley said. “The fund doesn’t replace basic needs for appropriation, or for tuition — it helps us in those marginal areas, but it’s not going to pay for the institution.”

AUF money, gifts and endowments take on a new importance in the face of decreasing state funding for the University. In the 1984-85 school year, state general revenue represented 47 percent of UT’s operating budget. Today, it represents 13 percent.

While 45 percent of the UT System’s AUF money is already distributed to UT, the University’s portion of the fund could increase over the next few years with the creation of the Dell Medical School. 

Last year, the Board of Regents committed additional funding for the creation of the Dell Medical School. This contribution, forecast to begin in 2014, will total $25 million annually for the next several years and will eventually increase once the school is established.

Mary Knight, UT’s associate vice president for financial affairs, said the money allocated to the medical school will initially be used for start-up activities and salaries because the school is still at the beginning of the development process.

“We don’t quite have a dean yet, but [the medical school steering committee] is using it now for kind of start-up activities … there are people who are appointed to work there, some full-time, some part-time — and those people are being paid from the funds,” Knight said. 

Beyond the money directly given to UT, a portion of the UT System funds are also allocated for System-wide initiatives that also benefit the University. For the 2012 fiscal year, such projects included $50 million for the Institute of Transformational Learning, an organization created by the board to build the System’s online learning efforts. UT professors currently teach four massive open online courses — better known as MOOCs — which each cost $150,000 to develop, as part of the System’s online learning initiative.

The System also designated $10 million to purchase stock in MyEdu, an online course directory, with the intention of increasing graduation rates by facilitating course schedule planning for students.

Though some money from the AUF helps fund construction projects at all UT institutions, the money alone is not sufficient to fund new projects like the planned Engineering and Education Research Center. This leaves system institutions dependent on state funding.

The engineering building, and other planned UT construction projects, did not receive expected state funding through tuition revenue bonds earlier this year. A package of tuition bonds that would have provided more than $2.5 billion to campus construction projects statewide was not approved despite bipartisan support during the regular legislative session and the Texas Legislature’s two special sessions this year. 

Knight said the budgeting process usually depends on several variables but has been more difficult in recent years because of decreased state funding.

“We go through a legislative session and don’t know until the very end what our state general revenue is going to be, and we’re dependent on the regents for tuition, and that’s just part of what we have to deal with,” Knight said. “Uncertainty is just part of the budgeting process right now.”

Correction: Because of an editing error, the graphic on an earlier version of this story used an incorrect logo. The logo should have been from UT-Permian Basin in Odessa.

Photo Credit: Zachary Strain | Daily Texan Staff

University Lands, a division of the UT System’s Office of Business Affairs, generated $1 million by leasing land in far West Texas on Wednesday. This sale is dwarfed by the $70 million sale of oil and gas leases in the Permian Basin on the same day, but the $1 million might prove to be a flag signaling University Lands’ newest revenue stream.

University Lands manages 2.1 million acres that together make up the Permanent University Fund, a state endowment for public higher education. The division’s semi-annual lease sales typically focus on the oil-rich acreage University Lands manages in the central Permian Basin, and on Wednesday, the 60,844 acres up for lease in the basin went for an average $1,144 each. 

The areas owned in Hudspeth County, near El Paso, get less attention — they haven’t been leased since the ‘90s — and on Wednesday, 134,000 acres were leased for a little more than $7 each. The reason for this difference in value is that Hudspeth County has not historically been rich in oil production. But Scott Kelley, the UT System executive vice chancellor for business affairs, said because of technological advancements and the popularization of techniques including fracking, some investors are looking at the unexplored lands with new confidence that they will be able to strike black gold. 

“[The land in Hudspeth County] isn’t a very attractive area, and there hasn’t been much production there,” Kelley said. “But there were some interested parties who were willing to take on a little more risk.”

The lease sales in the two areas of land were also structured differently. Normally, companies submit sealed bids to compete for oil and gas leases on specific tracts, and University Lands receives a 25 percent royalty on any oil and gas revenue. Because the land in Hudspeth County was sitting unused, University Lands offered acres for a fee that Kelley described as “relatively nominal” and companies submitted bids on the percentage of royalties University Lands will receive. The winning bid was a 20 percent royalty contract. 

Kelley said if horizontal drilling and hydraulic fracturing lead to the discovery of oil, the Hudspeth lands might one day be sold alongside the other oil-producing tracts.

“If [the bidders] are able to start producing in the future, we might be able to move toward a more traditional lease bid for the tract,” Kelley said. 

University Lands’ Executive Director Jim Benson expressed similar hopes. 

“The ability to drill into source rock has really widened the scope of what people can look for,” Benson said. “The last time we drilled, there was no really fabulous result. But things have progressed quite a bit since then, so I think someone thinks there’s room for improvement.” 

Jeanne Eckhart, the Senior Student Associate at UT’s Campus Environmental Center, said hydraulic fracturing makes sense from an economic perspective, even though it can be risky if executed incorrectly. 

“Generally, hydraulic fracturing can have severe environmental implications if not done in the proper way,” Eckhart said. “[But] I think that economically and financially, the practice is the best way the System sees to acquire the funds it needs to sustain its operations.”

The UT System released records Monday indicating that a total of $2 billion has been saved over the past six years through coordinated efforts between the nine UT campuses. 

Due to efficient strategies and newly implemented practices, the UT System has cut costs while at the same time allocating more resources for students.

The $2 billion in savings has a direct effect on UT. According to UT President William Powers Jr., current efforts could produce as much as $490 million over the next ten years. Overall these initiatives will save the System nearly $4 billion by 2016, according to executive vice chancellor for business affairs, Scott Kelley.

In a press release, the System attributed the savings to energy-use reduction and the sharing of resources, journal subscriptions and software between campuses. Costs were also diminished through methods like centralized investments and outsourcing.

System spokeswoman Jenny LaCoste-Caputo said the System is making careful decisions to avoid hurting productivity or students. 

“We want to look for areas where we can cut excess and do the same job or better with less resources and using that [excess] money for investments which will allow for a bigger return for students,” LaCoste-Caputo said.

Kelley will release updates on savings at a Board of Regents meeting Wednesday. According to Kelley, a total of $383 million has been saved in the past year. 

“We’re well positioned because our 15 institutions allow us to come together and look at things collectively and holistically,” Kelley said in the press release.

According to LaCoste-Caputo, institutions have combined to invest in resources to help reduce cost.

“So, for example, we all need notebooks. The idea is let’s purchase them together and get a better deal. That’s a small example but you can save a lot of money that way,” LaCoste-Caputo said.

The UT System is comprised of nine academic universities and six health institutions with more than 87,000 employees.

The UT System Board of Regents approved $102.4 million for a new administrative building slated for completion in 2016 that will consolidate its current five-building complex in downtown Austin.

The new 16-story administrative building will be built on the site of the System’s existing Lavaca and Colorado Buildings on Seventh Street and will have capacity for a parking garage for more than 650 vehicles.

During their regular meeting Wednesday, the regents unanimously voted to amend the 2013-2018 Capital Improvement Program, a long-term System plan to improve and maintain facilities, to allow construction of the new building.

The System projects the consolidation of its downtown offices will save between $2 million and $5 million annually that will be allocated to existing student success initiatives.

The building would encompass 258,500 square feet for System offices, meeting space and a central eating space. Scott Kelley, executive vice chancellor for business affairs, said 60,000 square feet of the building will be available for lease or for further expansion of System operations.

During the meeting, regent Robert Stillwell said funding System institutions should be the board’s first priority and said he was concerned about spending money internally while asking campuses to tighten budgets.

“I would not feel comfortable, or we should be concerned, about approving stuff for ourselves in the System while not for campuses,” Stillwell said. “Let’s be careful and thoughtful of where we spend.”

Stillwell said he supports the new administrative building, but he would have preferred to review the proposal for the new building after deciding on funding requests from various campuses.

He eventually voted in support of the new administrative building.

Kelley said the System would spend between $4 million and $8 million annually in maintenance costs for existing buildings if the new building plan was not implemented.

“It’s a clearly fiscally responsible response to our space utilization needs,” Kelley said. “I can tell you with great confidence that this activity will save the System money.”

The System will issue debt through its revenue financing system to pay for the building, Kelley said. The System will eventually repay the debt through the Available University Fund, which includes funds from a state land endowment, and with income from office space leases.

The System plans to vacate and lease its three remaining buildings, Ashbel Smith Hall, O. Henry Hall and Claudia Taylor Johnson Hall when the new building is complete.

Kelley said the System hopes the University of Texas Investment Management Company, the System’s nonprofit investment company, will lease office space in the building.

Chancellor Francisco Cigarroa said discussions for the new administrative building have been taking place for more than a year and the idea was part of an organizational review he completed in 2009.

“Every year the deferred maintenance cost continues to increase,” Cigarroa said. “This will be a real cost-saving and will provide dollars that can be reinvested in line with the productivity and efficiency goals in the [Framework for Advancing Excellence].”

Adopted in 2011, the Framework for Advancing Excellence is Cigarroa’s long-term plan to improve System institutions.

Kelley said the Facilities Planning and Construction Committee will move forward with a design development to be presented to the regents in early 2013 and will begin demolition next fall. During demolition of the two buildings where the new facility will be constructed, staff will work in the remaining three buildings.