The University of Virginia began participating in the Federal Direct Lending Program July 1, 1995. Generally accepted accounting principles required the University to record the related loan activity, approximately $50 million for 1996, in current funds as restricted federal grants and contracts revenue and as an off-setting restricted scholarships expenditure. The accounting for the direct loan activity is the primary reason for the large increase in both federal revenues and scholarship expenditures. In 1995 and prior years, this loan activity was not reflected in the University's financial statements because the loans were made by financial institutions instead of through the federal government. The loan activity also distorted selected 1996 ratios, as compared to prior years, that are reviewed in the financial highlights. Therefore, the 1996 ratios were calculated without the loan activity in order to provide the reader with more comparable information over the period from 1992 to 1996. The affected ratios were: expendable fund balances as a percentage of expenditures and mandatory transfers; net revenues as a percentage of total revenues for the University and educational and general; and revenue sources as a percentage of total revenues.

Balance Sheet

One measure of an institution's financial health is whether or not expendable fund balances are growing at a rate equal to or greater than the growth in expenditures. For the University, expendable fund balances primarily consist of the current funds and the quasi-endowment funds. The net assets, the University's equity in these funds, can be more readily converted into cash than the equity in the nonexpendable funds, such as investment in plant and true endowment funds.

The information presented in Figure 1 represents solid performance. Over the four year period, June 30, 1992 to June 30, 1996, the University's expendable balances exceeded the growth in expenditures with the current year's performance representing the highest percentage for the period and a slight increase over 1995. The University has been successful at both controlling the growth in expenditures and increasing its expendable fund balances, notably the quasi-endowment and unrestricted current funds. Overall, expendable fund balances increased 44 percent while expenditures increased only 26 percent since 1992.

Current Operations

A critical question for any organization is whether revenues exceed expenditures. If they do not, the organization will be unable to retain a portion of revenues for use in future years when needs may exceed resources.

Figure 2 shows the net revenues as a percentage of total revenues for the University's operating segments, measuring the degree to which revenues exceed expenditures. On a consolidated basis, the University's revenues exceeded expenditures during the year by 2.5 percent, a significant decrease from 1995. Two operating units of the University, educational and general and auxiliary enterprises, experienced slight decreases in their percentages for 1996 compared to 1995, while the Medical Center had a small operating deficit for 1996. The educational and general component's percentage of net revenues for 1996 was 2.9 percent, adjusted for the direct lending activity, and has remained fairly stable in the 3 percent range.

The auxiliary enterprises experienced a slight decrease from last year and the combined percentage of net revenues stands at 13.6 percent. When evaluating the results for the auxiliary enterprises, it must be noted that the percentages do not reflect all expenditures related to the replacement of equipment and renovation of facilities. Such expenditures, which are a significant component of their operations, are generally recorded in reserve accounts that are not included in the current funds. Also note that the auxiliaries are required to generate all revenues through user charges and, therefore, do not receive state appropriations.

Educational and General Revenue Sources

While maintaining a healthy net revenue percentage for the educational and general component, the University has also seen changes in the composition of its revenue stream from 1992 to 1996. The educational and general operations has four major sources of revenue: student tuition and fees; state appropriations; sponsored programs; and private sources (gifts and endowment income). The most notable changes have been the shifts in state appropriations and tuition. State appropriations accounted for 29 percent of total revenue in 1992 and only 24 percent in 1996. Student tuition increased from 25 percent to 28 percent for the same period. Over the last two years, this shift has moderated as tuition revenues have increased approximately 6 percent and we have seen small increases in state appropriations compared to the reductions of prior years.

Sponsored program activity is primarily the result of faculty research and other proposals to federal and non-federal sponsors. This revenue has increased from 26 percent of total revenues in 1992 to 28 percent in 1996 and equals the portion of revenue contributed by tuition. During the period, the University has experienced a change in the sources of sponsored programs. Federal funding increased 22 percent from 1992 to 1996 while funding from private sources for sponsored programs increased 214 percent. Federal sponsors still represent approximately 70 percent of funded research and other related activity.

Private gifts and endowment income as a percentage of total educational and general revenue, has grown slightly during the period and represents approximately 16 percent of total revenue. Private sources are expected to increase significantly, over the next few years, as a result of the University's capital campaign. This source of income will continue to be critical since in the coming years we can expect the University to confront pressures to hold down tuition increases, with little prospects for increases in state appropriations. This will be the case at the same time that we encounter increased competition for limited sponsored program funding.

Credit Worthiness

Another equally important financial indicator is the University's ability to satisfy obligations from current revenues. Just as the University is expected to fund operations from current revenues, it must also repay its borrowings from these revenues. The University continues to maintain a positive relationship between annual debt service requirements and unrestricted revenues. Overall, the University's debt service was 3.4 percent for fiscal year 1996, unchanged from the past two years. This particular measure (where lower percentages indicate successful management) is most significant when analyzed for each separate unit, as shown in Figure 3, since debt issued for each operational unit should be repaid from resources generated by that unit.

Despite the wide variance in debt service percentages, each segment's measure is well within acceptable guidelines. Both the Medical Center and auxiliary enterprises showed improvement from 1995. Auxiliary services had a small increase in debt that was more than offset by increased revenues, while the Medical Center had a small decrease in debt. The educational and general unit's percentage increased slightly from 1995 because of the additional debt service for the new Darden School facilities and the Commonwealth's equipment trust fund program.

Medical Center

Note that this review of the Medical Center's financial results is based on the reporting standards as prescribed by the AICPA's audit and accounting guide entitled Audits of Providers of Health Care Services. Certain reporting standards are different than the reporting standards upon which the University's consolidated financial statements are based. In the University's 1996 consolidated financial statements which are based on the audit guide, Audits of Colleges and Universities, the Medical Center reported a slight operating deficit instead of the surplus described in the following review.

The financial operating results from fiscal year 1996 declined substantially from the previous year. The Medical Center's excess of revenues over expenses from operations was $9.1 million, representing 2.2 percent of total revenues for 1996 as compared to 5.9 percent for 1995. Total operating revenues grew by 4.8 percent over last year, to $414.4 million for fiscal year 1996. The non-operating loss of $64,000 included $3 million in contributions to HealthCare Partners, the joint venture corporation organized by the University on behalf of the Medical Center and UVA Health Services Foundation. Cash reserves remained relatively strong at year-end at approximately 146 days cash-on-hand. The Medical Center provided 166,442 inpatient days of care in 1996, a 2.5 percent decline from 1995. The decline reflected a downward trend in the average length of stay in the hospital, from 7.5 days in 1992 to 6.2 days for 1996. Admissions to the hospital in 1996 were within 0.7 percent of last year, at 26,936. Outpatient visits, including the emergency room, increased by more than 6 percent to 475,700 for 1996.

The Medical Center continues to face the challenge of an increasingly competitive health care market place while serving its missions of teaching, research, and patient care, including indigent patient care. Support of indigent patient care services actually declined in 1996, which significantly widens the gap between the cost of providing indigent care services and government support. At the same time, the 1996 General Assembly enacted legislation that grants greater flexibility to the Medical Center in the areas of personnel, purchasing, capital projects, and leases. This added flexibility, combined with the joint venture legislation enacted in 1995, will assist the Medical Center in meeting its competitive challenges. Three joint ventures began operations in 1996: Blue Ridge Health Alliance, with health plans to employers and governments in Virginia under the name of QualChoice of Virginia; HealthCare Partners, which supports health care network development; and the UVa/HealthSouth L.L.C., which will provide inpatient and outpatient rehabilitation services.