Subject:2009 First Quarter Financial Report

Date:October 22, 2008

From: Lee Walker

To: Bill Shkurti

Attached is the First Quarter Financial Report which reviews financial performance for year end FY 2008 and first quarter FY 2009. The University finished FY 2008 in relatively good shape financially. The Health System’s financial performance exceeded expectations, enrollments exceeded projections, state support increased and most auxiliaries and affiliated units were within budget targets.

Of concern however was the performance of the University investments. Given the weakness of the national economy and volatility of the stock market lower rates of return were to be anticipated in FY 2008. However the impact is significant. Unrealized investment losses resulted in the endowment return dropping from +18% in FY07 to -8% in FY08. This drop resulted in $575 million dollars of fewer revenues reported in the university financial statementin FY2008 as compared to FY 2007.

First quarter results remain generally favorable. Enrollments continue to come in above projections. However the struggling national economy continues to play havoc with state tax revenues and university investment returns. We have reserves to protect against potential reductions in anticipated state support levels; however the combined impact of the losses in university investment income and a reduction in state support would be challenging.

We will continue to monitor the situation and will provide you with a mid year report in February. If you would like any additional information please let me know.

Attachment

Fiscal Affairs Committee

OSU Board of Trustees

First Quarter Financial Report

November 7, 2008

  1. Purpose of this Report
  1. UniversityMedical Center
  1. Capital Projects
  1. Columbus Campus Enrollments
  1. State Support
  1. Research
  1. Development and Fund Raising
  1. Investments
  1. General Funds
  1. Columbus Campus Auxiliaries
  1. Bond Sales and Debt Management
  1. Regional Campuses
  1. Affiliated Entities
  1. Reserves
  1. Systems
  1. Financial Performance Goals
  1. What Happens Next?
  1. Summary and Conclusion

Appendices

  1. Status of Development Efforts for Projects with a Significant Fund Raising Component
  2. Status of Deficit Reduction Plans
  3. Status of Earmarked Reserves
  4. Status of University Lines of Credit
  5. Status of Financial Performance Goals

I.Purpose of this Report

The national economy continues to be volatile and unstable. The fluctuations and downturns in the market are impacting our investment returns. We need to continue to be diligent in monitoring the national financial trends in order to manage our investments appropriately. The economy’s woes are also impacting state tax revenues which continue to be below revised revenue projections. Governor Strickland has implemented two rounds of state budget reductions. While Ohio State and other universities and colleges have been very fortunate that the Governor has continued his strong support for higher education funding by protecting the State Subsidy and financial aid programs for students from the first two rounds of reductions, the University did absorb over $6.1M in funding reductions to line item appropriations including a reduction of over $1.7M at the Ohio Agricultural Research and Development Center and over $1.2M to the Cooperative Extension program.

Given the economic situation that the nation and state are experiencing, it is more critical than ever that the University diversify its financial resources and closely monitor and manage all sources of funding.

As the University seeks to diversify its financial resources, it needs to behave more entrepreneurially. To the degree that we are successful, this will reduce reliance on state funds, which are becoming less predictable and less stable, even with the increases passed for this biennium.

As we become more entrepreneurial, we must also be prepared to undertake a different and much more diversified portfolio of risk. This in turn requires a strategically based assessment of risk and risk management.

The middle of the fall quarter provides a good opportunity to review these issues because the annual budget has been adopted, the annual financial statements have been completed and first quarter results are available.

This quarterly financial report reflects a continuing shift away from a focus on General Funds budgets to a broader assessment of financial conditions involving all funding sources. This is an evolutionary process and continued improvement will be made.

This report is designed to answer three questions for the current fiscal year:

  1. Where are the areas of largest risk?
  1. Where are potential problems most immediate?
  1. How will we know these problems have been addressed?

In addition, we need to continue to monitor the long term financial situation for The Ohio State University.

II.Medical Center

A. Health System

The Ohio State University Health System continued its planned growth during Fiscal Year 2008 with the addition of two floors on the Ross Heart Hospital, expansion of the digestive disease program, development of additional faculty space, and expanding the breadth of outpatient services at the Morehouse Medical Plaza on Kenny Road. The new digestive disease clinical areas opened in July 2007 and the two new floors of the Ross Heart Hospital opened the end of June 2008.

Fiscal Year 2008 inpatient admissions increased 1.3%, while outpatient volume grew by over 25,000 patients or 2.8%. Total Operating Revenue increased $103Mor 7.6% due to volume increases along with selective rate increases. Expenses (excluding depreciation, interest and interfund transfers) increased $90Mor 7.5%. The Gain from Operations was $108.3M, versus $100.3M in 2007. The operating EBIDA (earnings before interest, depreciation and amortization) percentage was 12.1% the same as the prior year. Days cash on hand was 52.9 days versus 47.8 in 2007 and debt service coverage was 7.3 times versus 7.7 in 2007. All three indicators exceeded the targets established in the long range financial plan.

The Health System’s Excess of Revenue over Expense for 2008 was $116.9M. After investing $69.4M in research, education and strategic programs, the change in net assets was $48.9M. A total of $104.0M was invested in projects and capital equipment, of which $41.6M was related to the Master Facility Plan, including the addition of two floors on The Ross Heart Hospital, the new MRI facility, the Digestive Health Center, the12th Avenue Faculty Office Tower and design costs for new clinical and faculty space.

Year-end cash and investments totaled $214.2M vs. $188.4M on June 30, 2007. Unrestricted cash totaled $186.9M vs. $157.4M a year ago.

For the first quarter of FY 2009, the Health System’s actual volumes, revenues, and expenses tracked close to budget. Inpatient admissions were 0.3% over budget and outpatient visits were 0.2% over budget. Total Operating Revenue of $393.3M was 0.6% below budget with volumes at RossHeartHospital contributing to the negative variance. Total Operating Expenses of $361.0M were 1.3% below budget with salaries and benefits contributing to the positive variance. Excess of Revenue over Expense (before transfers for research, education, and strategic programs) of $34.2M was 4.4% above budget. Operating EBIDA, cash, and debt service indicators are above target through the first three months of FY 2009.

  1. Malpractice Reserves

The Health System Self Insurance Fund I and Oval Limited (the captive insurance company of the University) held reserves of $47.3M and the Self Insurance Fund II had reserves of $108.1M as of June 30, 2007. During the first quarter, ending September 30, 2008, the Self Insurance Funds and Oval Limited have been fully funded.

III.Capital Projects

Thompson Library Renovation is scheduled for completion in June 2009. The project is on time and on budget.

Ohio Union Replacement project is approximately 50% complete and is scheduled to open in fall 2010.

Newark Campus—Warner Library and Student Center was completed on time and on budget. The facility is occupied and operational.

The Medical Center Facilities Plan is underway. Contracts for Architects and the Construction Manager for the East of Cannon portion of the project are currently being negotiated.

IV. Columbus Campus Enrollments

  1. In this report we are using headcount enrollments for the Columbus Campus. Headcount enrollments are running higher than budget projections for the combined summer and autumn quarters. Through two quarters, resident and non-resident undergraduate enrollments were 2.0% and 4.3% higher, respectively, than anticipated. While new freshmen enrollments were essentially on target, more juniors and seniors returned than expected and the enrollments of transfer students were higher than anticipated. The higher undergraduate headcount translates0.3% FTEs above budget projections.

For graduates, resident and non-resident enrollments were also higher than expected, at 1.2% and 0.6%. Professional headcounts, too, were higher with a variance from projected of 1.6% for resident and 4.7% for non-resident enrollments.

  1. We recommend no changes in our financial projections at this time. Enrollments will continue to be monitored and evaluated.

Category / Projected
Headcounts* / Actual
Headcounts* / Difference in
Headcounts / %
Undergraduate / 49,755 / 50,883 / 1,128 / 2.3%
Graduate / 17,376 / 17,542 / 166 / 1.0%
Professional / 4,300 / 4,381 / 81 / 1.9%
Total / 71,431 / 72,806 / 1,375 / 1.9%

NOTE: Includes total of Summer and Autumn Quarters

SOURCES: Projected: Budget Planning (Headcount Enrollment Projection Summary, May 16, 2008) for Columbus Campus; Actual: Quarter 15th Day Enrollment, University Registrar.

V.State Support

A.Because state revenues continue to lag estimates, the Governor directed that all state agencies cut line items by 4.75%, but did exempt State Share of Instruction and the Capital Component from the cuts. We will receive approximately $6.1M less in state appropriations than originally estimatedincluding a reduction of over $1.7M at the Ohio Agricultural Research and Development Center and over $1.2M for the Cooperative Extension program.

B.The Chancellor will be issuing recommendations to the Governor on a new funding formula for Ohio’s colleges and universities. The new formula will likely be based on enrollments, as well as performance measures in support of the Strategic Plan for Higher Education 2008-2017 released in March. OSU has been active in the conversations concerning the development of the new proposal and will continue to monitor the proposal as it moves forward.

C.State revenues continue to lag projections. Tax revenues exceed revised estimates by 2.2% for the month of September and 0.8% for the quarter.

VI.Research

  1. After the first quarter, Indirect Cost Recoveries are running 6.5% higher than FY 2008 and above college FY 2009 projections. New awards are down 2.9% compared to the first quarter of FY 2008. It is too early to draw any conclusions about year-to-year growth.
  1. OSURF – Finished FY 2008 with a substantial operating balance. However, the use of interest off the balances to fund continuing operations is a concern that needs to be addressed in FY 2009.
  1. There are other aspects of financial risk associated with sponsored research that will continue to need attention. These include: meeting human subjects research compliance regulations, handling of animals, hazardous substances, sponsor requirements, conflicts of interest, and licensing issues.

VII.Development and Fund Raising

A.Operating Budget

Development had FY 2008 operating resources of $22.9M and a year-end operating budget balance of $1.7M. Budget for FY 2009 is $24.3M, a 6% increase. In addition, $750,000 in on-going funding and $1.3M in cash from FY 2008 carry forward was set aside for campaign start-up funding.

B.Gift Receipts

Cash receipts, including current use gifts and additions to endowments, but excluding grants processed through the Research Foundation increased 5% in FY 2008, following an 11% increase in FY 2007. Overall, fund-raising activity,which includes gifts, private grants, pledge commitments and planned gifts, decreased by 8% from FY 2007.

C.Major Capital Campaigns

A status report on capital projects with a development funding component is shown as Appendix A. The BRT fund-raising is under review with the Medical Center and the Office of Development in conjunction development of the fund-raising plan for the Medical Center Master Facility Plan. Additional funds have been received for Jennings Hall, Knowlton School of Architecture, Mechanical Engineering replacement and Page Hall. These projects still have remaining balances. The Thompson Library Renovation project has met its fund-raising goal with the help of the Athletics Department.

VIII. Investments

  1. At the end of FY 2008, the University had $2.1B in long-term investments, which included $1.5B in the gifted endowment, $598M in the Long-Term Operating Fund, $21M in the President’s Strategic Investment Fund and $5M in the Maintenance and Renewal Fund. This total is in comparison to $2.3B at the end of FY 2007. Short-term investments were $778M in FY 2008 compared to $717M in FY 2007.
  1. As the University’s Long-Term Investment Pool continues to diversify its investments, overall risk of the portfolio will decline.The university has hired a Chief Investment Officer who will continue to strengthen processes and policies to manage the risks associated with the long-term investment markets.
  1. Revised Investment Policies for long-term and short-term investments were approved by the Board of Trustees in June 2008.
  1. For the 1st quarter of the new fiscal year, ended September 30, 2008, the Long-Term Investment Pool declined to an anticipated $1.8B or down approximately 11.7%. Financial markets experienced extraordinary pressures during the quarter, driving the U.S. stock market down approximately 9% and international stock markets down almost 22%.

IX. General Funds

  1. College and Support Unit operating deficits totaled $53.0M at the close of 2008 or $17.5M more than FY 2007. College and Support Units reduced deficits identified before FY 2008 by $10M. However, $27.5M in new deficits were identified. (See Appendix B)
  1. The largest operating deficit is in the College of Math and Physical Sciences and remains a concern. New management has been put in place in the College and a new deficit reduction plan has been reviewed and will be implemented this year.
  1. Student Financial Aid is not included in the deficit report because the program has a positive cash balance. However, we continue to monitor financial aid spending to ensure that annual commitments do not exceed the annual budget. In FY 2007, $7.5M more was committed than was budgeted. The projected FY 2009 deficit for undergraduate Student Financial Aid has been reduced to $676,000. This reduction in the projected deficit is a combined result of lower than projected expenditures and a planned increase of $3.1M in university support of undergraduate financial aid. Under current trends, the projected over-commitment in Financial Aid spending should be eliminated by 2010, two years ahead of the original projected schedule.

X. Columbus Campus Auxiliaries

  1. Department of Recreational Sports: Operating revenues finished nearly $3M ahead of budget in FY 2008, due primarily to the adjustment in theschedulefor the bond issuance to pay offremaining construction debt ($43M). Interest only payments continued through the first quarter of FY 2009.TheFY 2008 surplusescurrently areset aside as a hedge against the uncertaintyin the financialmarkets and potentially could be used to reduce eitherthe amount to be borrowed orthe debt amortization time period. Membership revenue from faculty and staff increased from $1.6M in FY 2007 to $1.7M in FY 2008.Thequarterly student fee increased from $81 to $82 fall quarter 2008. First quarter FY 2009 results are in line with budget.
  1. Other Student Affairs Auxiliaries
  1. The Blackwell: Occupancy in FY 2008 remained at 73%. Net income for FY 2008 was $860,000, which was $300,000 over budget. Fund equity increased from $260,000 to $1,120,000.The Blackwell is budgeting for a small operatingloss during FY 2009 due to the impacts of the construction of the SAS building and parking garage, but fundequity will remain positive. While first quarter FY 2009 revenues are slightly higher than projected, it remains too early to tell if this trend will continue.
  1. Schottenstein Center: During FY 2008 the Schottenstein Center, after transfers to the reserves of $180,000, has a net operating deficit of $4,900. Reserves through FY 2008 total $5.7M which includes monies designated to pay for the new scoreboard for arena.First quarter revenue and expenditures are in line with the projections.
  1. Housing: FY 2008 academic year student housing operations at Columbus and regional campuses maintained an occupancy rate above 95% and had a net surplus of $800,000 after increasing reserves by $3.2M. Total net capital reserves at the end of FY 2008 were $17M. Fall quarter 2008 occupancy is 99%.
  1. Athletics: During FY 2008, the Athletic Department had net income of $2,796,000 on total income of $117.9M. This $2.8M was transferred to Capital reserves for future department projects. First quarter FY 2009 operating revenue and expense are within budget.

XI.Bond Sales and Debt Management

The Ohio State University is in the process ofselling the Series2008 bonds for construction projects. The variable rate bonds weresold the week of September 30, 2008. Because of market conditions, the firstsale was done in term mode to mature on January14, 2009 at a 3.75%. It is our intent to convert to a weekly reset mode in January.Due to market volatility, the fixed rate bond issuance has been put on hold until there is more stability in the long-term tax exempt market. This could take weeks to months. The new series of commercial paper will likely begin sometime in November.

In March 2005, the Board of Trustees adopted a series of policies designed to assure that university debt is managed effectively and the University’s AA credit rating is protected. The first goal in implementing this policy was to limit the 2005 and 2007 bond issues to $400M and $450M, respectively. In November 2006 the Board of Trustees approved a limit of $500M for the 2009 bond issue. There was no new bond debt issued in FY 2008. The FY 2007 bond issue has been moved to FY 2009.

Internal lines of credit are within Board guidelines. The University has 25 lines of credit with an outstanding balance of $92M with all LOCs in compliance. This compares to 24 lines of credit with an outstanding balance of $90.5M at the end of FY 2007. During FY08, five lines of credit were paid off, and six new LOCs were established. During the past year, the total outstanding balance has increased by $1.5M.

Lines of credit do not directly affect debt capacity, but they can have an impact on net cash available and can reduce the amount of uncommitted funds available. See Appendix D for detailed information on the LOCs.

XII.Regional Campuses

These are the combined summer and autumn quarter headcount enrollment figures. Because of their relatively small size, regional campus enrollment fluctuations of +5% are not unusual. ATI’s declining enrollments appear to have stabilized; its progress, as well as enrollment variances on the regional campuses, continues to be monitored.