Okay, we have roof and insulation estimates. There are basically three options. The most expensive involves using this foam insulation between the attic rafters. This would give us essentially a conditioned attic which would be usable in for living space in the future. Given the price, and what we're going to use the attic for this seems overkill.
The second option involves insulating between the joists in the second floor ceiling but there are problems with this approach because batt insulation to code won't fit in the old shorter joists. So this option will include building up the joists to accept the R38 insulation.
The final (and cheapest) option seems best to me. This involves using 12" rafters in the new roof so that it can accept the 10.5" R38 batt insulation. We're going to go this route and it'll cost us approximately $6500. I have to hand it to the builder for really working with us to make this as palatable as possible. It's definitely not something I expected to spend money on and it's definitely a painful hit, but in the long run I think it will work out by giving us much better insulation and usable attic space. I also think it will be easier for the builder.
Now we just need plans for the roof, and the county will probably have to approve it. (I wonder how much that's going to cost?!)