Year in Review

Successfully navigating through turbulent conditions, the University of Virginia concluded the 2000-2001 fiscal year in a strong financial position. The pooled endowment generated a 2 percent positive return despite a weak economy and volatile markets. All revenue streams continued to grow and remained well balanced, providing protection against uncertain times. The University's financial strength was recognized once again by a credit rating agency when Fitch, Inc., upgraded the University's General Pledge Revenue Bond issues to AAA, its highest category. Last year, Moody's upgraded the University to Aaa, their highest credit rating, and one shared by only two other public universities. Both upgrades demonstrate the high level of confidence the financial community places in the University.

Financial Position

The University's balance sheet once again revealed the institution's strong financial position. Total assets increased 11.3 percent to almost $4.9 billion. From a liquidity perspective, total current fund assets of $566 million are available to cover $204 million of total current fund liabilities.

Total fund balances increased 5.3 percent to $4 billion. All individual fund balances increased again this year, with the exception of endowment and similar funds. The University raised its endowment distribution, providing increased support for critical school needs, such as faculty recruitment and retention. The additional funds also provided a significant increase in student financial aid. While the endowment fund balance decreased slightly by 1.5 percent, the endowment still comprises almost half of the University's fund balances, providing financial stability and flexibility.

Due to implementation of Statement No. 33 of the Governmental Accounting Standards Board this year, the University recorded pledge receivables of $43.4 million in its balance sheet for the first time. Of this total, $30.9 million was recorded in current funds, restricted, and $12.5 million was recorded in plant funds. These pledge receivables were discounted and reported net of an allowance for uncollectible pledges.

Investment in plant increased $136 million or 7.8 percent to a total of $1.88 billion, reflecting the University's ongoing commitment and financial ability to build prudently for its future needs. The Scott Stadium expansion was concluded for a total of $90.2 million; new construction costs during the year were $16.5 million. Other capital projects of note were the Darden School expansion ($14.4 million), the new Medical Research building ($22.3 million), and the Medical Center's acquisition of the Jefferson Park Center ($6.4 million).

Examining two debt-related ratios provides another picture of the University's financial health. The ratio of unrestricted operating resources to debt is 212.1 percent, indicating there are $2.12 of unrestricted funds available to pay each $1 of debt. These funds afford the University enormous flexibility because they are available for general use rather than specific purposes. The ratio of total resources to debt is 677.6 percent. Thus, total resources cover outstanding debt almost seven times over, illustrating the strength of the University's financial position.
 

Revenue Sources

The University's revenue streams create a solid funding base for its operations. For the academic division, there were four major sources of educational and general funds. Grants and contracts provided 28 percent; state appropriations provided 25 percent; tuition and fees provided 25 percent; and endowment income and private gifts provided 17 percent. By maintaining this comparative balance in revenues, the University avoids relying heavily on any one stream of income. It should be noted that figures for revenue sources and uses exclude the $51.4 million of federal Direct Lending activity for the 2000–2001 fiscal year.

Last year this report noted that "the Commonwealth chose to reduce in-state tuition for the benefit of its citizens, and then provided additional state appropriations to cover the reduction in tuition revenue." After last year's slight decline in revenue from tuition and fees, the University experienced an increase of $10 million or 5.9 percent this year due to its continued strong student demand as undergraduate and graduate enrollments both increased.

Grants and contracts rose as a share of the revenue base from 27 percent to 28 percent, continuing a trend of increasing awards for research, public service, and educational initiatives over the past five years. The largest contributor to this growth remains the School of Medicine through its awards from the U.S. Department of Health and Human Services. The school provides more than 60 percent of total grant and contract revenue received by the University. In the face of pressing national security issues, federal funding for biotechnology is likely to increase. The University and the School of Medicine are well positioned to meet this anticipated research demand.


Uses of Funds

The University's top-priority missions of instruction and research continue to draw almost 60 percent of total educational and general funds. Educational and general expenditures increased $44 million or 6.5 percent, and of this amount, $29 million was devoted to instruction and research. Funds spent on instruction grew from $207.3 million to $226.5 million, an increase of more than $19 million or 9.3 percent. Research expenditures rose $10 million or 6.9 percent to $154 million.

Smaller increases occurred in scholarships and fellowships, student services, and academic support. Scholarships and fellowships increased by $3.3 million to $120 million, while student services rose $1.2 million to $18.8 million, and academic support grew by $3.2 million to a total of $83.3 million.

Institutional support rose 16.2 percent to $54 million, due largely to the University's replacement of outdated administrative systems with an integrated suite of systems from Oracle Corporation. In July 2001 the University successfully launched the Oracle financial accounting modules; the Oracle human resources and student information modules remain to be implemented in the next two phases.

Meeting Future Challenges

The University faces many challenges as it strives to maintain its status as one of the top-ranked public institutions in the country. Numerous capital projects lie ahead, including a new basketball arena, additional parking facilities, and critical research space. Meeting these needs will require the sound financial practices and discipline the University has employed over time.

The University's Debt Advisory Committee will examine each project to ensure that the 4 percent debt service to revenue ratio is maintained. Additional capacity is available as we head into the new year. Our AAA rating by Fitch, Inc., and our Aaa designation by Moody's will ensure that we obtain financing at the best possible rates.

The University's financial condition will be presented and analyzed in a new format next year. As discussed in Notes to Financial Statements, the University of Virginia will adopt the provisions of Statement No. 35 of the Governmental Accounting Standards Board: Basic Financial Statements--and Management's Discussion and Analysis--for Public Colleges and Universities (GASB 35), effective for fiscal year 2002. This statement will require the replacement of the three audited financial statements presented herein with three new financial statements: (1) Statement of Net Assets; (2) Statement of Revenues, Expenses, and Changes in Net Assets; and (3) Statement of Cash Flows. The most visible alteration will be the elimination of traditional fund group classifications. In addition, GASB 35 will require significant changes to the footnote presentation and will change the Financial Highlights section to a Management Discussion and Analysis. These extensive changes are designed to simplify financial reporting and to provide information in a format more easily understood by readers of the financial statements.


Medical Center

Note: This review of the Medical Center's financial results is based on the reporting standards prescribed by the AICPA's audit and accounting guide, Health Care Organizations. Certain reporting standards are different from the reporting standards upon which the University's consolidated financial statements are based. The University's consolidated financial statements are based on the audit guide Audits of Colleges and Universities.

The Medical Center's operating income was $14.7 million in 2001. Net revenue after non-operating gains and losses was $21.5 million. The Medical Center remains financially competitive relative to other academic medical centers in the United States. To sustain its financial strength in a competitive health care market, Medical Center management continues to strive to improve patient services while controlling costs. Outpatient services have increased over the last several years, reflecting an ongoing shift in patient needs.

In August 2000, the Medical Center assumed management of the outpatient clinic operations. This new arrangement, in addition to changes in third-party payor contracts and rate increases, resulted in a rise in both gross and net patient revenue. The strong economy in fiscal year 2001 brought about an increase in the level of third-party coverage for patients and a decline in the number of patients eligible for indigent care or who received care on a self-pay basis. Although revenue increased overall, the Medical Center continues to see a decline in Medicare reimbursement as a result of the Balanced Budget Act of 1996.

Operating costs grew this year largely as a result of salary increases and implementation of other special programs to help the Medical Center attract and retain health care personnel. The labor shortage, which will likely continue for nurses and various technical positions in the foreseeable future, has and will continue to drive up labor costs for these employees. The rapid growth in the number of new drugs and the continued rise in drug prices also have contributed to the increase in operating costs and make pharmaceutical cost management a particular challenge. We have used new techniques and procedures, including new robotic technologies in the pharmacy to fill prescriptions in a more cost-effective manner.

As a result of operations, the Medical Center had a 2.4 percent operating margin. The principal source of non-operating gains was income derived from the Medical Center's investment of its depreciation reserve fund with the Treasurer of Virginia. The non-operating loss from investments in affiliated companies of $2.3 million includes operating losses incurred by the Blue Ridge Health Alliance, which provides health plans to employers in Virginia under the name of QualChoice of Virginia, and HealthSouth, which operates an acute rehabilitation hospital.

Hospital admissions decreased by 2.1 percent in fiscal year 2001. During this same period, length of stay was up from 5.3 days to 5.5 days, due largely to an increase in patient acuity. These factors resulted in a slight increase in patient days. During this same period, outpatient visits, including visits to the emergency room, grew by 4.5 percent to 567,525.
 

Treasurer Wins Top Honor Alice W. Handy, the treasurer of the University, received the National Association of College and University Business Officers' Rodney H. Adams Award for her leadership role in the growth of the University's endowment. During her tenure, the pooled endowment fund has grown from $60 million in 1974 to approximately $1.7 billion in 2001.