Office of the President July 12, 2000 3-GF TO MEMBERS OF THE COMMITTEE ON GROUNDS THE : For Joint Meeting of ITEM FOR ACTION AMENDMENT OF THE BUDGET FOR CAPITAL IMPROVEMENTS AND THE CAPITAL IMPROVEMENT PROGRAM AND EXTERNAL FINANCING FOR CANCER CENTER FACILITY, SAN DIEGO CAMPUS The President recommends that: (1) The Committee on Grounds and Buildings recommend to The Regents, subject to the concurrence of the Committee on Finance, that the 2000-2001 Budget for Capital Improvements and the 2000-2003 Capital Improvement Program be amended to include the following project: San Diego: UCSD Cancer Center Facility - preliminary plans, working drawings, construction, and equipment -- $87,109,000 to be funded from gifts ($67,879,000) and external financing ($19,230,000). (2) The Committee on Finance concur with the recommendation of the Committee on Grounds and Buildings to include this project, as described in (1) above. (3) The Committee on Finance recommend to The Regents that: a. The Treasurer be authorized to obtain external financing not to exceed $19,230,000 to finance the project listed in (1) above, subject to the following conditions: i. Interest only, based on the amount drawn down, shall be paid on the outstanding balance during the construction period; and ii. Repayment of the debt shall be from the gross revenues of the UC San Diego Medical Center funds; b. The Treasurer be authorized to obtain standby financing not to exceed $20,900,000 and interim external financing not to exceed $22,979,000, for a total of $43,879,000, prior to awarding a construction contract, for any gift funds not received at that time and subject to the following conditions: i. Interest only, based on the amount drawn down, shall be paid on the outstanding balance during the construction period; and
COMMITTEE ON GROUNDS -2-3-GF ii. Repayment of the debt shall be from gift funds and in the event such gift funds are insufficient, from the UC San Diego campus' share of the University Opportunity Fund. c. The general credit of The Regents shall not be pledged. d. Officers of The Regents be authorized to provide certification to the lender that interest paid by The Regents is excluded from gross income for purposes of federal income taxation under existing law. e. Officers of The Regents be authorized to execute all documents necessary in connection with the above.
COMMITTEE ON GROUNDS -3-3-GF KEY Capital Improvement Program Abbreviations S A P W C A/C E A/E Studies Acquisition Preliminary Planning Working Drawings Construction Augmentation for Construction Equipment Augmentation for Equipment - State (no abbreviation) F G HR LB LR N R U X Q CCCI EPI Federal Funds Gifts Hospital Reserve Funds Bank Loans or Bonds Regents Loans Reserves other than University Registration Fee University Registration Fee Reserves Regents Appropriations Others (Source known, but not included above, e.g., campus discretionary funds) Funds from sources yet to be determined California Construction Cost Index Equipment Price Index
COMMITTEE ON GROUNDS -4-3-GF 2000-01 Budget for Capital Improvements and 2000-03 Capital Improvement Program Scheduled for Regents' Allocation, Loans, Income Reserves, University Registration Fee Reserves, Gift Funds, And Miscellaneous Funds Campus and Project Title (Total Cost) Prefunded Proposed 2000-01 Projected 2001-02 San Diego --- P $ 3,136,000 (G) -- UCSD Cancer Center P $ 784,000 (LB) Facility W $ 3,833,000 (G) ($87,109,000) W $ 958,000 (LB) C $60,910,000 (G) C $17,488,000 (LB) $87,109,000 DESCRIPTION UCSD proposes to build the Cancer Center Facility ( Facility ), a 149,000 assignable square feet facility that would provide state-of-the-art, critically needed space for key cancer research programs and clinical care provided by the Medical Center. The Facility would include clinic space, research laboratories and support, offices, conference rooms, a vivarium, and shell space. Also included in the project is an underground parking structure to accommodate approximately 130 vehicles, landscaped open spaces, and a portion of Health Sciences Walk. Construction is expected to begin in Fall 2001, with projected occupancy in Summer 2003. The Facility would be located on the East Campus in La Jolla, south of the Shiley Eye Center and to the east of Thornton Hospital. Two related proposed projects, East Campus Utilities Plant-Phase 1 (administratively approved in July 2000) and Medical Center Drive South Road Realignment (approved by the Chancellor in July 2000), are expected to begin construction in Fall of 2000, with projected completion by Summer 2001. The UCSD Cancer Center ( Center ) is an Organized Research Unit (ORU), comprised of more than 180 members from 19 departments, and serves as the organizational hub of a campus-wide program integrating cancer research, teaching and patient care. The Center is a National Cancer Institute-designated Clinical Cancer Center with multiple areas of expertise in the prevention, diagnosis, and treatment of all forms of cancer, and has a wide range of research programs devoted to understanding the origins of cancer, effects on the body, and prevention and treatment. Cancer research and clinical programs at the San Diego campus are currently constrained by existing facilities which are insufficient in size, and scattered in numerous locations on the La Jolla
COMMITTEE ON GROUNDS -5-3-GF and Hillcrest campuses, making collaboration and the sharing of resources difficult. The Center relies heavily on leased space to conduct research and clinical trials due to the lack of space on campus. Outpatient clinical care for cancer patients is currently conducted in many different locations within UCSD Healthcare, making it difficult to offer integrated, convenient patient care. Project Description The Facility would be approximately 149,000 asf and consist of: 56,200 asf of research laboratories and support space, 30,000 asf of clinic and support space, 5,000 asf of clinical trials space, 23,100 asf of Cancer Prevention and Control space, 14,700 asf of administrative, public education, and conference facilities, and 20,000 asf of shell space to accommodate future research laboratories. By housing cancer research, clinical trials, and clinical programs under one roof, the Facility will promote an integrated, cohesive environment. The research laboratories would be designed with maximum flexibility to support a broad range of research disciplines. The shell space would be built-out as specific research requirements and additional funds are made available. The clinic spaces would be designed to be convertible to accommodate a variety of needs, such as patient exams rooms, treatment and procedure rooms, and offices. In addition to the 149,000 asf described above, appropriate amounts of circulation and lobby space have been included in the Facility program in order to accommodate the large volumes of patient and visitor traffic generated by the clinic, public education, Cancer Prevention and Control, and clinic trials functions. Statistics regarding the assignable and gross square footage allowances can be found in Attachment 1. Project Costs and Environmental Consideration The total project cost is $87,109,000, including interest during construction. Additional information regarding the project budget and comparable projects are included in Attachment 1. In accordance with University of California guidelines for the implementation of the California Environmental Quality Act of 1970, a Tiered Initial Study/Mitigated Negative Declaration will be prepared for consideration by The Regents in conjunction with the project design review and approval at a future meeting.
COMMITTEE ON GROUNDS -6-3-GF Program Justification and Financial Feasibility The total project cost is estimated to be $87,109,000, funded from a combination of (1) gift funds of $67,879,000 to fund the research portion of the facility, and (2) $19,230,000 of external financing to fund the clinical portion of the building, which will be repaid from Medical Center revenues. A review of the research and clinical programs and a financial discussion are presented below. Attachment 2 summarizes the Financial Feasibility for the project as a whole. Attachment 3A and Attachment 3B provide Financial Feasibility data specific to the clinical portion of the project to be repaid from Medical Center Revenues. The Research Program and Financial Discussion The Center is experiencing rapid growth in faculty and research activity and the provision of clinical care. The Center anticipates steady increases in these areas; however, this growth is dependent on the availability of additional state-of-the-art space. Existing facilities are utilized beyond capacity, including off-campus leased space. The construction of this new Facility is essential if the Center is to realize its projected growth and continue its leadership role in cancer research and treatment. The new Facility is planned to meet the following: provide a consolidated research and treatment facility to promote collaboration among scientists and clinicians; provide a state-of-the-art research environment that attracts leading scientists; provide laboratory space which will relieve existing deficiencies; stimulate growth in funding for cancer research; consolidate the full spectrum of services from prevention to palliative care to meet the needs of cancer patients and their families; and enrich the existing cancer research and treatment community Gift Funds for the Research Portion ($67,879,000): The San Diego campus is committed to raise $67,879,000 to fund the research portion of the Facility. As of June 1, 2000, the gift campaign status is as follows for the Facility and the two related projects, the East Campus Utility Plant and the South Road Realignment: Cash gifts received $ 11,000,000 Pledges to be collected 40,000,000 (a portion subject to standby financing) Funds to be used for related projects ( 6,100,000) Gifts to be raised 22,979,000 (subject to interim external financing) Total $ 67,879,000 As gift funds would be collected over time, approval for interim external financing is requested in order to meet Regental policy to have funds on hand when the bid is awarded. It is anticipated that the campus would have $24,000,000 of gift funds in hand for the Facility at the time of bid award.
COMMITTEE ON GROUNDS -7-3-GF Standby financing of $20,900,000 is requested to support the remainder of pledges to be collected and interim external financing of $22,979,000 is requested for the balance of the gifts to be raised, for total interim financing of $43,879,000. Gift funds would continue to be collected during the construction phase, and after completion. As gift funds are received, the campus would prepay the principal amounts outstanding on the interim financing. Although it is anticipated that the campus will be able to raise gift funds sufficient to pay the principal and interest on the interim financing, in the event such gifts are insufficient, the San Diego campus' share of the University Opportunity Fund has been pledged as an additional source of repayment. Opportunity Funds are a portion of the indirect cost recovery on federal contracts and grants. Should the campus be unable to raise additional gifts by the termination of the interim financing, the campus may choose to seek Regental approval for long term financing for the shortfall in the gift campaign. Inclusive of this amount for the interim external financing, the campus meets both the pledge and payment tests for the Opportunity Funds. In FY 2004, the first full year of occupancy, 58% of Opportunity Funds are pledged for debt service. See Attachment 2 for further details. The Clinical Program and Financial Discussion Cancer is a disease that can initially occur in and then metastasize to virtually all of the body s organ systems and tissues. As a result, the diagnosis and treatment of cancer involves physicians and allied health professionals across virtually all the specialties of clinical medicine. The hallmark of a National Cancer Institute-designated Cancer Center is the ability to bring together physicians within these specialties who have developed expertise specific to cancer and to attract a large enough patient base to sustain this specialized capability in both the delivery of service and the conduct of clinical research. Advances in understanding the molecular and genetic basis of cancer are also making expertise in evaluating patients genetic profiles and customizing treatment based on this analysis an increasingly important component of services provided. UCSD clinicians currently include specialists in the following aspects of cancer prevention, screening, diagnosis, and treatment: Hematology/Oncology Surgical Oncology Mammography/Stereotactic Radiology Chemotherapy Radiation Oncology Dermatologic Oncology/Mohs Surgery Gynecologic Oncology Head and Neck Oncology Urologic Oncology Bone Marrow Transplantation Molecular Pathology Palliative Care Psychosocial Support
COMMITTEE ON GROUNDS -8-3-GF The Center also includes experts in the nutritional aspects of cancer, patient and family education, clinical trials management, and community outreach. At present, the Cancer Center Clinic within the Perlman Ambulatory Care Center in La Jolla and the Gildred Facility in Hillcrest have space to house only Hematology/Oncology, Head and Neck Oncology, and some physicians in Surgical Oncology. All other cancer specialists are scattered in multiple ambulatory locations in both Hillcrest and La Jolla. Mammography is in facilities separate from the clinics in both Hillcrest and La Jolla, and radiation therapy services are provided in yet another location in the basement of UCSD Medical Center Hillcrest. The Pain Clinic and other palliative services are in still other locations. Patients often must travel to multiple locations for the various facets of their care. This dispersion of locations makes it difficult to provide the patientoriented, healing environment and coordinated, comprehensive care so important to cancer patients and their families and limits the opportunities for collaboration among the clinicians providing care. These locations are also distant from the laboratories and offices of faculty conducting translational research and clinical trials, inhibiting the conduct of clinical research that is an essential component of an effective Cancer Center. The proposed new Facility provides the opportunity to consolidate the full spectrum of services from preventive to palliative care in one location that also houses clinical research and clinical trials and is in close proximity to inpatient facilities at Thornton Hospital. A Cancer Center Clinical Business Planning Group was appointed to develop detailed program and business plans for this new Center with consulting assistance from Hamilton HMC. With FY 1999 as a base year, detailed program plans and volume and financial projections were developed through FY 2009, both for services to be provided within the new Facility and for the associated downstream services provided to cancer patients in the inpatient and ancillary service facilities of UCSD Medical Center. Despite facility limitations, in Fiscal Year 1999, more than 6,000 patients with cancer or suspected cancer made more than 23,000 visits to UCSD clinics, received more than 3,300 chemotherapy treatments, had almost 6,400 radiation therapy treatments, and accounted for more than 1,700 discharges from UCSD Medical Center-Hillcrest and the Thornton Hospital. With successful recruitments of key oncologic faculty specialists who are attracted by the prospect of a new cancer center that integrates basic and clinical research with patient care, projections indicate that these volumes could grow to more than 9,500 patients, 34,000 visits, 6,000 chemotherapy treatments, 8,000 radiation therapy treatments, and 2,200 discharges by 2009 with the creation of the proposed new Facility. 10 Year Growth Annual Activity Forecast 1999 2009 Percentages Patients 6,000 9,500 58% Visits 23,000 34,000 48% Chemotheraphy Treatments 3,300 6,000 82% Radiation Treatments 6,400 8,000 25% Admissions/Discharges 1,700 2,200 29%
COMMITTEE ON GROUNDS -9-3-GF Projected increases are based on assumptions of new faculty recruitment, continued population growth (as forecast by the San Diego Association of Governments) of 2% annual growth, and a one-time 10% increase in patient volume attributable to the opening of the proposed Facility. Year ($thousands) Incremental Margin** 2001 2002 2003 2004 2005 due to increased patient volumes $ 1,325 $ 1,925 $ 2,266 $ 2,969 $ 3,370 ** as calculated before debt service related to the project It is expected that projected increases in patient volumes will contribute incremental margin (measured before debt service related to the project) to the Medical Center as shown below: Currently and in the projections, margin from outpatient services is expected to be roughly breakeven while increases in inpatient services will provide the incremental margin. Medical Center Debt: Based on long-term debt of $19,230,000 amortized over 27 years at 6.5% interest, the estimated average annual debt service will be $1,529,305. Repayment of the debt will be from the San Diego Medical Center's gross revenue. The project cost does not include $6 million in medical equipment that will be financed separately through lease financing. To provide a context for the external financing proposal under this item, Attachment 3A describes the total projected debt which would be in place for the Medical Center in FY 2004 upon completion of the project. Current Medical Center debt totals $103.1 million, as follows: Debt outstanding as of June 30, 2000 ($ million) UCSD Thornton Hospital Debt $ 70.1 UC Multiple Purpose Revenue Bonds 20.5 Other debt (including equipment leases) 12.5 Total $103.1 The outstanding debt above will amortize, and new bonds for the clinical portion of the cancer center are anticipated to be issued in FY 2004. Debt for the Medical Center after bond issuance is expected to total as follows: i.estimated debt outstanding July 1, 2003 ($ million) UCSD Thornton Hospital Debt $ 65.9 UC Multiple Purpose Revenue Bonds 19.0 Other debt (including new equipment leases) 18.1 New Cancer Center Debt 19.2 Total $122.2
COMMITTEE ON GROUNDS -10-3-GF The combined annual debt service on $122.2 million is estimated at approximately $14.8 million (FY 2004) and would be repaid from Medical Center gross revenues. In FY 2005, the year following anticipated opening of the new Facility, cash available for debt service is anticipated to total $58.1 million for a debt coverage ratio of 3.8 times. In consultation with the Office of Clinical Services Development and the Office of the Treasurer, the UCSD Medical Center has prepared a business plan confirming the financial feasibility of this endeavor. Financial discussion: Detailed financial projections for the Medical Center are included in Attachment 3B. These projections are based on assumptions from the Office of the President, where available, and local assumptions for years beyond 2001. The local assumptions are based on a review of (1) UCSD s recent service and financial performance; (2) the occupancy and outpatient volume levels experienced in the past three years; (3) projections of continued revenue/program enhancements, including the clinical component of the new Facility; (4) continuing cost reduction activities; (5) projections of increased patient volume growth due to population growth in the area; and (6) the projected financial impact on the Medical Center of the potential amalgamation of pediatrics services with Children s Hospital and Health Center. Net patient revenue declines from $357 million in FY 2000 to $340 million in 2001 and $343 million in 2002 primarily due to the decreases in inpatient census discussed below and Medicare payment reductions resulting from the Balanced Budget Act of 1997 and the Balanced Budget Refinement Act passed in 1999. These reductions will be partially offset by anticipated increases in Medi-Cal medical education funds and SB 1732 funding, which provides debt service support for public hospitals. The projected inpatient census of 328 in FY 2000 declines to 312 and 307 in 2001 and 2002, respectively. The census decline reflects a conservative projection of patient days and the potential loss of pediatric patients resulting from the projected amalgamation of pediatric services with Children s Hospital in mid-year FY 2001. The inpatient census increases to 316 by 2005 as a result of continued program enhancements, including the clinical component of the new Facility, and projected population growth in UCSD s service area. Projected operating expenses decline from $300 million in FY 2000 to $289 million in 2001 and $292 in 2002 due to decreases in inpatient census and continued efforts to improve productivity. Projected salaries and benefits assume a 3.5% annual inflation rate; medical supplies and pharmaceuticals are projected to inflate 10% annually, and non-medical supplies and purchased services are projected to inflate 2% annually. Depreciation and interest expense incorporate the proposed financing and building costs for the new Facility. Net income in FY 2000 is projected at $30 million for a net margin of 8.2%. Net income and net margin decline to $28 million and 8% in 2001 primarily due to the effect of lower inpatient census. Net income begins to increase slightly in 2002 and 2003 as a result of increases in inpatient census
COMMITTEE ON GROUNDS -11-3-GF but decreases in 2004 with the opening of the new Facility when additional depreciation and interest expense are incurred. Sensitivity analyses were performed to evaluate the impact on net gain of selected changes in base assumptions. The greatest negative impact on margins results from lower inpatient admissions. Inpatient admissions are projected to increase 17% between FY 2000 and 2005, based on a 31% increase in the volume of total patients seen during the same period. Management believes the projections of inpatient volumes are realistic assuming success in essential faculty recruitment and increases in the population. If these volume increases do not occur, management is committed to achieving its overall financial goals through interventions including enhancement of other programs and cost reductions. The outcome of these sensitivity analyses is described in Attachment 3B. In all of the financial projections, the costs and benefits of future capital projects included in the Medical Center s capital plans, including the cost of medical equipment, are factored into the calculations. The plan includes projects which have not yet been approved, and which will be regularly re-evaluated as to need, scope and cost. Future projects will be deferred or eliminated, as appropriate and as necessary, to ensure the Medical Center s financial viability. Attachment, Attachment 2, and Attachment 3