Year In Review

During fiscal year 1998, the University continued to strengthen its financial resources, once again earning an Aa1 bond rating from Moody's. Many ratios highlighted in this review are similar to those rating agencies such as Moody's use and refiect the University's strong financial condition.

The University's total current funds revenues were $1,186 million, an increase of 7.7 percent over 1997 while total expenditures increased only 6.7 percent to $1,149 million. The University posted a net surplus of revenue over expenditures of $37 million, producing a net revenue percentage of 3.3 percent, a significant improvement over last year's 2.4 percent. Each major operating division -- Educational and General (E and G), Auxiliary Enterprises, and the Medical Center -- also improved its net revenue percentages. (Information on the major operating units is contained in the review of divisional operations that follows.)

As of June 30, 1998, the University's total assets rose $302 million to $3,598 million, a 9 percent increase over 1997. The two largest assets continue to be investments, and buildings and equipment, valued at $1,690 million and $1,515 million respectively. (In accordance with generally accepted accounting principles for public institutions, the reported value of the buildings and equipment is the original cost and does not include accumulated depreciation.)

By contrast, total liabilities at year end were $794 million, a net increase of $72 million over 1997. Collateral held for security lending accounted for $53 million of the net change, an amount offset by an equal increase in assets. Subsequent to year end, the University discontinued its security lending program entirely. Long-term debt decreased $4 million to $242 million. The University and its operating units continued to maintain a very low and healthy debt service ratio. For 1998, the University's debt service as a percentage of unrestricted revenue was 3.2 percent, unchanged from 1997.

The University's total fund balances -- the equity in its assets -- rose $230 million to $2,803 million, a 9 percent improvement over 1997. The largest increase was due to growth in the University's endowment and similar funds, which climbed $134 million to $1,110 million. Market appreciation accounted for $108 million of the increase, while gifts and transfers to the endowment were responsible for $26 million. The University's endowment now ranks in the top five among public universities, providing a reliable source of funds to supplement state appropriations and student tuition.

Because of the strong growth in expendable fund balances and controlled growth in expenditures, the University maintained a very healthy ratio of fund balances to expenditures. (Expendable fund balances consist of those funds that the University can easily spend, such as current and quasi-endowment funds.) At June 30, 1998, expendable fund balances as a percentage of total expenditures and mandatory transfers were 90 percent, compared to 88 percent for 1997. This means the University could cover its operating expenditures for approximately eleven months, thereby providing a comfortable cushion for funding operations should it experience a temporary revenue decline.

Review of Divisional Operations

The University has three main operating units: Educational and General (E and G), Auxiliary Services, and the Medical Center. Following is a brief summary of the year's results of operations.

Educational and General Review

The E and G component supports the University's instruction, research, and public service missions. E and G total revenues for 1998 were $577 million, a rise of 7.4 percent over 1997, while expenditures and mandatory transfers increased 6.9 percent to $565 million. This resulted in a percentage of net revenue of 1.9 percent for 1998, a healthy improvement from 1.5 percent for 1997.

Tuition and fees revenues for 1998 were $158 million, an increase of 3 percent, refiecting rate hikes for selected professional schools including business, law, and medicine, and for out-of-state undergraduate and graduate students. Tuition and fees increases for these students, which account for approximately 47 percent of the student body, ranged from 3.5 percent to 4 percent. The University did not increase its in-state undergraduate and graduate tuition. Student tuition and fees, even with limited increases, still continues to be the University's largest revenue source, accounting for 27 percent of 1998 E and G revenue.

Sponsored program funding in 1998 reached $148 million, an increase of approximately 4 percent for the year, and accounted for 26 percent of E and G revenue. Funding from federal sponsors, which is responsible for approximately 75 percent of the University's sponsored funding, rose 11 percent for the year. The Department of Health and Human Services was the largest sponsor, providing 46 percent of total awards. At the same time, funding from industry and foundations decreased 17 percent. In accordance with generally accepted accounting principles for public higher education, the University only recognizes sponsored program revenues based on the expenditures made during the year instead of the actual awards received. The decrease in industry and foundation support for the year is primarily a result of the timing of spending, as awards received during the year decreased only 1 percent from 1997.

State appropriations for 1998 rose approximately $19 million, or 16 percent, to $137 million, accounting for 24 percent of E and G revenues. This large increase refiects the deferred recognition of some appropriations that would normally have been refiected in 1997. As a result of this accounting procedure, appropriations actually decreased in 1997. The two-year increase in state appropriations from 1996 to 1998 -- just under 13 percent for a 6 percent annual increase -- more accurately refiects the level of the Commonwealth's commitment to higher education.

Gifts and endowment income continue to be an important source of funding and grew 9 percent for the year, accounting for 19 percent of total 1998 E and G revenues. Gifts increased 7 percent and are a tangible result of the success of the University's capital campaign.

The University increased spending on instruction by 5 percent during 1998 while research expenditures rose 10 percent. Research expenditures tend to refiect trends in sponsored program funding, and over the last years, sponsored program awards have shown steady growth. Funding for other E and G programs are more affected by student tuition and state appropriations which, for the most part, have seen limited increases the past few years.

The University's 1998 expenditures for support activities such as academic support, institutional support, and operations and maintenance of plant increased 8 percent. This increase refiects, in part, a commitment to improve support for information technology and telecommunications. The E and G debt service as a percent of unrestricted revenues reached 3.4 percent from 3 percent for 1997. This is still a very healthy percentage and refiects financing for equipment purchased through the Commonwealth's Equipment Trust Fund program and for construction of the new Northern Virginia Education Center.

Adjustments for Federal Direct Loan Activity

The University began participating in the Federal Direct Lending Program on July 1, 1995. Generally accepted accounting principles require the University to record this loan activity -- approximately $50 million in 1996 and $54 million in both 1998 and 1997 -- in current funds as restricted federal grants and contracts revenue and as off-setting restricted scholarship expenditures. Before 1996, this loan activity was not refiected in the University's financial statements because the loans were made by financial institutions rather than through the federal government. This change distorts selected 1996 to 1998 ratios, as compared to prior years. Therefore, these ratios have been calculated without the loan activity to provide the reader with comparable information over the period from 1994 to 1998. The only ratio not affected was debt service as a percentage of unrestricted current funds revenue. The discussion of Educational and General activity also excluded the direct lending amounts.

Auxiliary Services

Auxiliary service units primarily provide services to students and employees. The major auxiliaries include student housing, dining, athletics, the bookstore, and parking and transportation. The 1998 combined revenues for these and other auxiliaries were $93 million, which represents an 11 percent increase over 1997, while expenditures increased only 6 percent to $79 million. The auxiliaries' combined 16 percent net revenue as a percent of total revenue is up from 12 percent in 1997 and demonstrates the health of these operations. The auxiliaries continue to have excellent debt service coverage. Their debt service as a percent of unrestricted revenue was 8 percent for 1998, refiecting improvement each year since 1994.

Medical Center

In fiscal year 1998, the Medical Center carried out a number of initiatives to meet the challenges of an increasingly competitive healthcare market, while fulfilling its mission of teaching, research, and patient care. As a result, the Medical Center's net income for 1998 rose to $19.8 million, compared to $12.2 million for 1997. The increase was due to reducing non-operating losses to only $3.3 million, down from $14.4 million a year earlier. A major component of this year's non-operating loss was the $9.1 million share of operating losses incurred by the Blue Ridge Health Alliance, which provides health plans to employers and governments in Virginia under the name of QualChoice of Virginia. This loss was partially offset by a $7.4 million gain from investment income on trustee-held funds.

The Medical Center's excess of revenues over expenses from operations, for 1998, was $23.1 million, a reduction of $3.5 million from 1997. Total net operating revenues grew by 8.7 percent over last year, while total operating expenses grew by 10.2 percent, a trend seen throughout the healthcare industry. This operating margin represents 5.0 percent of total net revenues for 1998. Cash reserves remained strong at year-end at approximately 177.9 average annual days cash-on-hand.

Total hospital admissions increased by only 0.3 percent from 1997 and continue to refiect the shift from inpatient to outpatient visits. In fact, the Medical Center's 165,093 days of inpatient care in 1998 represents a 0.4 percent decline from 1997. The average length of stay remained constant at 6.0 days. At the same time, outpatient visits, including visits to the emergency room, increased by 5.7 percent to 514,509 visits.

One area of concern continues to be care of indigent patients. Government support for indigent care remained unchanged from 1997. Although the Medical Center was able to decrease the costs of providing indigent care 8.9 percent from 1997, the gap between costs and support continues to be significant.

One of the biggest challenges facing the Medical Center is the continuing financial impact of legislative changes in Medicare reimbursement. These changes reduced net operating revenues by approximately $6.7 million in 1998 and are projected to reduce net operating revenues by an additional $3.7 million in 1999. At the same time, the costs of pharmaceuticals and medical supplies are on the rise, and third-party reimbursement has become very tightly controlled. To counter these trends, the Medical Center has launched a set of strategic initiatives, which range from fine-tuning our market positioning and implementing further cost containment to improving productivity and participating in purchasing cooperatives and strategic alliances.

In fact, the Medical Center joint ventures are expected to play a pivotal role in enabling the Medical Center to meet its competitive challenges. Blue Ridge Health Alliance (QualChoice) has seen enrollment continue to grow beyond projections and consequently has needed additional capital in order to maintain required reserves. The UVA/HealthSouth, LLC. completed construction of its 50-bed rehabilitation hospital at Fontaine Park at the end of fiscal year 1998 and opened its doors for patient care in August 1998.

The Medical Center's success depends, ultimately, on the dedication and loyalty of its employees, and our gainsharing program, now in its second year, whichhas been designed to reward their efforts. As a result of meeting or exceeding financial targets, while maintaining appropriate patient satisfaction scores, Medical Center employees and Medical School faculty received $2.6 million in gainsharing. The Medical Center's compensation and benefits program will be refined further as the new Human Resources system is fully implemented.

In summary, the Medical Center continued its efforts to succeed in an increasingly competitive healthcare industry, providing excellent care and favorable fiscal results. The Center enters fiscal 1999 well prepared to carry out its mission to teach future healthcare providers, undertake medical research, and provide high-quality patient care while managing the demands of increasing volumes, decreasing reimbursements, and rising costs.