Year In Review

During fiscal year 1999, 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 used by rating agencies such as Moody's, and reflect the University's strong financial condition.

Debt Service as a Percentage of Unrestricted Current Funds Revenue The University and its operating units have a very healthy debt service compared to unrestricted current funds revenue. The University's combined debt service percentage has been stable since 1995, giving the University significant capacity to handle additional debt to meet future needs.

The University's total current funds revenues were $1.22 billion, an increase of 3 percent over 1998, while total expenditures increased at a slightly higher rate of 4.1 percent to $1.2 billion. The University posted a net surplus of revenue over expenditures of $27 million, producing a net revenue percentage of 2.3 percent, a decrease from last year's 3.3 percent. The major operating divisions -- Educational and General (E and G), Auxiliary Enterprises, and the Medical Center -- had mixed results. The Auxiliaries saw a decrease in their net revenue percentage from last year's record high, while E and G's net revenue percentage increased to its highest level since 1996. The Medical Center reported a net deficit in the University's combined financial statements, which are based on the audit guide for colleges and universities. (Note that the Medical Center's individual financial statements, which must follow the audit guide for health care organizations, reflect a net surplus of $5.7 million. Certain reporting standards of the audit guide for health care organizations are different than the audit guide for colleges and universities.) Information on the major operating units is contained in the review of divisional operations that follows.

As of June 30, 1999, the University's total assets increased $97 million to $3.69 billion, a 2.7 percent increase over 1998. The small increase is a result of the University curtailing its security-lending program during the year. As mentioned in last year's report, the University was planning to discontinue this program. At June 30, 1998 the University's investments included $319 million that were offset by an equivalent amount of liability for collateral held for security lending. At June 30, 1999 only $3 million of investments is related to security lending. Assets, net of the security-lending program, actually increased approximately 13 percent for the year. The two largest assets continue to be investments, and buildings and equipment, valued at $1.66 billion and $1.61 billion 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.)

Expendable Fund Balances as a Percentage of Expenditures and Mandatory Transfers The growth in the University's expendable fund balances has exceeded the growth in expenditures. The 1999 percentage of 109 percent means the University could fund its operations for just over a year from its reserves, providing a strong cushion for any downturn in revenues.

By contrast, total liabilities at year-end were $557 million, a net decrease of $237 million over 1998. The curtailment of the University's security-lending program resulted in collateral held for security lending decreasing by $316 million. The change in liabilities, net of the impact of the security-lending program, was a $79 million increase. Long-term debt accounted for the major portion of the change in liabilities, increasing $62 million to $305 million as of June 30, 1999. The net increase in debt is primarily related to the expansion of the University's football stadium and a new student residence hall. The debt will be repaid from gifts, and revenues from the athletics and housing programs. The increase in debt was planned and the University and its operating units continued to maintain a very low and healthy debt service ratio. For 1999, the University's debt service as a percentage of unrestricted revenue was 3.3 percent, a slight increase from the 3.2 percent for 1998.

The University's total fund balances -- the equity in its assets -- rose $334 million to $3.14 billion, a 12 percent increase over 1998. The largest increases were due to growth in the University's endowment and similar funds and plant funds. Endowment fund balances climbed $170 million to $1.28 billion. Market appreciation accounted for $169 million of the increase, while additions from gifts to the endowment were $15 million. Management also approved the transfer of $14 million to other funds. 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. The University's plant funds increased $153 million due to the various construction projects that have been completed or were in progress during the year. The University added $82 million to completed buildings and equipment and increased its fund balances for construction in progress $71 million.

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, 1999, expendable fund balances as a percentage of total expenditures and mandatory transfers were 109 percent, compared to 91 percent for 1998. This means the University could, without additional revenue inflows, cover its operating expenditures for just over one year, 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: Educa-tional 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 1999 were $603 million, a rise of 4.6 percent over 1998, while expenditures and mandatory transfers increased only 4 percent to $588 million. This resulted in a percentage of net revenue of 2.5 for 1999, a healthy improvement from 1.9 for 1998.

Net Revenues as a Percentage of Total Revenues The University and its three divisions have maintained positive net revenue over the past five years, except for the Medical Center for 1999. The Academic Division has improved its percentage for the past two years.

Tuition and fees revenues for 1999 were $167 million, an increase of 6 percent, reflecting rate hikes for selected professional graduate 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 45 percent of the student body, ranged from 4.2 percent to 5.9 percent. The remaining portion of the increase was attributable to increases from summer session, continuing education, and selected student fees. The University did not increase either its in-state undergraduate or its in-state graduate tuition. Student tuition and fees, even with limited increases, continues to be the University's largest revenue source, accounting for 28 percent of 1999 E and G revenue.

Sponsored program funding in 1999 reached $165 million, an increase of approximately 11 percent for the year, and accounted for 27 percent of E and G revenue. The significant increase in revenue reflects the success of the University's faculty in obtaining support for their research and related activities. Funding from federal sponsors, which accounts for approximately 76 percent of the University's sponsored funding, rose 7 percent for the year. The Department of Health and Human Services was the largest sponsor, providing 45 percent of total awards. Funding from industry and foundations increased 25 percent. In accordance with generally accepted accounting principles for public higher education, the University only recognizes sponsored program revenues to the extent they are expended during the year, rather than actual awards received.

State appropriations for 1999 rose approximately $8 million, or 6 percent, to $145 million, accounting for 24 percent of E and G revenues. This increase reflects the Commonwealth's continued commitment to higher education. This is the second year that state appropriations have increased as a percent of total revenue and reverses the downward trend experienced from 1995 to 1997.

Gifts and endowment income continue to be an important source of funding even though they decreased approximately 7 percent for the year. They still accounted for 17 percent of total 1999 E and G revenues. Endowment income increased 8 percent for the year while gifts decreased 14 percent.

The University increased spending on its primary missions of instruction, research, and public service by a combined 3.4 percent during 1999. The increases ranged from 2.5 percent for instruction to 4.7 percent for research.

The University's 1999 expenditures for support activities such as academic support, institutional support, and operations and maintenance of plant increased 4.9 percent. Two key support functions leading that increase were libraries at 8.4 percent and scholarships and fellowships (excluding direct lending) at 6.4 percent. Libraries have a direct impact on the University's primary missions while scholarships help maintain a quality and diverse student body. Institutional support increased 12 percent, primarily due to the University making its systems and related hardware Y2000 compliant and the planning and start up costs for replacing its core administrative systems. This increase reflects, in part, a commitment to improve support for information technology.

The E and G debt service as a percent of unrestricted revenues increased slightly to 3.5 percent compared to the 3.4 percent for 1998. This continues to be a very healthy percentage and reflects increased financing for equipment purchased through the Commonwealth's Equipment Trust Fund program.

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, ranging from approximately $50 million to $54 million over the four year period, in current funds as restricted federal grants and contracts revenue and as off-setting restricted scholarship expenditures. This program did not exist prior to 1996. The inclusion of Direct Lending in the ratios distorts selected 1996 to 1999 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 1995 to 1999. 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 1999 combined revenues for these and other auxiliaries were $98 million, which represents a 5 percent increase over 1998, while expenditures were $85 million, which represents an 8 percent increase. The auxiliaries' combined 13 percent net revenue as a percent of total revenue is down from the record high 16 percent in 1998. The percent has ranged from 12 to 16 percent over the past five years 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 9 percent for 1999, an increase from 8 percent for 1998. For the past five years, this percent has ranged from 8 to 10 percent and reflects a strong ability to handle the existing debt service.

E and G Expenditures by Function For 1999, 60 percent of E and G expenditures were for the primary missions of instruction, research, and public service, while 29 percent of expenditures were for support activities and 11 percent for student financial aid.

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 Health Care Organizations. Certain reporting standards are different than the reporting standards upon which the University's consolidated financial statements are based. In the University's consolidated financial statements, which are based on the audit guide, Audits of Colleges and Universities, the Medical Center reported an operating deficit instead of the surplus described in the following review.

In fiscal year 1999, the Medical Center continues to meet the challenges of an increasingly competitive healthcare market, while fulfilling its mission of teaching, research, and patient care. This challenge is becoming more acute as evidenced by the decline in the Medical Center's 1999 net income to $5.7 million from 1998's $19.8 million. This decrease resulted primarily from a decline in total revenue of 1 percent from last year while total expenses grew by 2 percent during this same period. The principal reason for the decline in revenue is the continuing financial impact of legislative changes in Medicare reimbursement. These changes reduced net operating revenues by $8.2 million in 1999 and are projected to reduce revenues by an additional $5.5 million in 2000. 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 to reduce cost while maintaining its mission. Although there was a decline in operating margin, the Medical Center's financial position at the end of fiscal year 1999 is sound. The 2.1 percent operating margin compares favorably to other academic hospitals around the country. The non-operating loss of $1.5 million included operating losses incurred by affiliated companies including the Blue Ridge Health Alliance which provides health plans to employers and governments in Virginia under the name of QualChoice of Virginia. The Medical Center recognized an extraordinary loss on the early extinguishment of debt during 1999 of $2.9 million. Through this transaction, the Medical Center reduced its aggregate debt service by $13.7 million over the next fourteen years. Cash reserves remained strong at year-end at approximately 172 average days cash-on-hand.

Medical Center Net Patient Revenue on the Rise (in millions) From 1995 to 1999, Medical Center net patient revenue increased 24 percent.

Hospital admissions continue to increase with a 3.8 percent increase from 1998. Length of stay decreased from 6.0 days in 1998 to 5.4 days in 1999. As a result of this decrease, patient days declined by 7.5 percent to 154,500 days in 1999. During this same period, outpatient visits, including visits to the emergency room, increased by 3.1 percent to 530,202 visits. The Medical Center continues to encourage the growth of outpatient services as the foundation of its clinical enterprise. During 1999, the Virginia Musculoskeletal Center was opened and will house clinics in the following departments: Orthopedics, Radiology, Rheumatology, Physical Medicine and Rehabilitation, and Pain Management. The Medical Center also expanded outpatient services into the Orange County, Virginia area by opening a new facility that will provide a full spectrum of primary care services and certain specialty services.

In summary, the Medical Center continued its efforts to succeed in an increasingly competitive healthcare industry, providing excellent care and favorable fiscal results. The Medical Center enters fiscal year 2000 well prepared to carry out its mission to provide high-quality patient care, teach future healthcare providers, and undertake medical research while managing the demands of increasing volumes, decreasing reimbursements, and rising costs.