Asset Liability Management Semi-Annual Borrower Reports (SABRe)

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1 STANDING COMMITTEES F 4 Finance and Asset Management Committee Asset Liability Management Semi-Annual Borrower Reports (SABRe) INFORMATION For information only. BACKGROUND The Semi-Annual Borrower Reports (SABRe) are an aspect of an overall credit framework that is used at UW to assure that financial risks are identified and managed from the origination of an internal loan or debt issue to its final maturity. SABRes provide the Board of Regents with up-to-date information on the financial health of major borrowers and present proforma vs. actual performance along with financial metrics. Key financial indicators show changes in performance and allow the Regents to see how the entities are responding to a dynamic funding environment. Housing and Food Services, UW Medical Center, Northwest Hospital, Intercollegiate Athletics and the School of Dentistry Clinics present a debt metric, a cash flow metric, and a reserves measure. When available, these measures are from audited financial statements and benchmarked against the most recent Regent approved proforma or current financial plan. The research campus at South Lake Union presents actual and projected School of Medicine support and four-year historical growth in grants and reserves. Attachments 1. Credit Framework for ILP Loans 2. Housing and Food Services 3. Intercollegiate Athletics (ICA) 4. University of Washington South Lake Union (SLU) Semi-Annual Borrower s Report March University of Washington Medical Center (UWMC) Semi-Annual Borrower s Report March Northwest Hospital (NWH) 7. School of Dentistry (SOD) F 4/203-17

2 BOARD OF REGENTS Credit Framework for ILP Loans ORIGINATING OPERATING REPORTING MANAGING Institutional / Project Risks & Opportunities Timely Funding & Accurate Accounting Transparency & Early Warning Loan Maintenance & Financial Mitigation REVIEW APPROVE APPROVE Capital Project Budget 1,3 Internal Loan 1,4 Space Utilization 3 One Capital Plan 2,3 UNIVERSITY ADMINISTRATION Institutional Debt Capacity Estimate 4 Financial Due Diligence 1,4 Base Case Key Risks Stress Tests Mitigation Plans Financing Agreement 1,4 Debt covenants Reporting requirements Annual disclosure 1,4 Financial statement audits Covenant requirements Funding Plan 1-4 Draw schedule for project by source (debt, gifts, reserves, state) Loan Servicing 1,4 Amortization schedule Recording of loan Repayment budget F 4.1/ Financial Stability Plan 1,2,4 Semi-Annual Borrowers Report 1,4 Semi-Annual ILP Report 4 ILP Audit 4 ATTACHMENT 1 Dedicated staff specialist for each borrower 1,4 Regular borrower meetings 1,4 Review covenant compliance Discuss upcoming challenges Stakeholder 1 Borrower 2 Planning & Budgeting 3 Capital Planning and Development 4 Treasury

3 Housing and Food Services (HFS) Occupancy and demand remain robust throughout the HFS system for the current academic year putting the program on solid financial footing for FY17. In FY16, reserves increased by $8.2M and debt service coverage was 1.48x. Phase 4a of the Housing Master Plan (HMP) was approved by the Board of Regents in January 2016 and will open to students in Autumn This phase is underway and proceeding as planned. The proforma and projections include Phases 1-4a of the HMP. In July 2016 the Board of Regents approved the architect, site, and $10M pre-construction budget for phase 4b, the final phase of the HMP. Phase 4b includes two residence halls, Oak and new Haggett, consisting of approximately 1,070 beds. Oak is planned to open Autumn 2019 followed by new Haggett Hall, which will open in Autumn Cash flows for FY16 exceeded the proforma due to higher than planned occupancy, increased off-campus property revenue (Radford Court, Nordheim Court, Commodore Duchess), and strong summer conference sales. Funding for the phase 4b pre-construction budget will be provided directly from HFS reserves and contributes to the reduced cash flows projected for FY17 and FY18. As a result of strong cash flows in recent fiscal years, HFS system reserves exceeded proforma levels at the end of FY16 by $11M. The reserve requirement totaled $17.2M in FY16 and is equivalent to 4 months of operating expenses plus $2.5M. HFS has earmarked $18M in restricted reserves for phase 4a FF&E ($9M) and phase 4b pre-construction costs ($9M). The remaining reserve balance of $26.6M is held for risk mitigation, early debt repayment, equity contributions to phase 4b, and savings for future renovations of McMahon and Hansee Halls. Risk and Mitigations A significant decline in student occupancy is the primary risk to the system. Private market competition, price sensitivity, and reductions in longrange UW enrollment impact student occupancy. These risks are monitored by HFS throughout the year and, if necessary, mitigated by strategic occupancy planning. Total HFS debt service is equivalent to 28% of FY17 gross revenues or 46% of total FY17 operating expenses. HFS maintains debt service coverage (DSC) of at least 1.25x to mitigate this risk. DSC for FY17 is forecasted to be 1.36x. Strong reserve balances mitigate risks in the short term and are being saved for future capital projects. System wide as-built occupancy indicates the overall health of residence hall and dining operations and measures demand for the system As-Built Occupancy 110.2% 106.9% 110.9% 110.0% 110.2% Returning Residents (1) 35.2% 38.0% 40.4% 37.3% 38.6% Freshman Capture Rate (2) 66.9% 71.6% 67.0% 68.6% 68.3% (1) Percent of prior year Spring resident count (2) Percent of freshman admission count Net operating income as a multiple of debt service $15 $10 $5 ($5) ($10) ($15) Pro forma (Phase 3 FY14-15 & Phase 4a FY16+) Actual thru FY16/Projected ILP Minimum 1.25x Cash Flow Net operating income less debt service and capital expenses Pro forma (Phase 3 FY14-15 & Phase 4a FY16+) Actual thru FY16/Projected $ Reserve Balance (1) Unrestricted net assets; ILP minimum is 4 months of adjusted HFS operating expenses Pro forma (Phase 3 FY14-15 & Phase 4a FY16+) Actual thru FY16/Projected ILP minimum ATTACHMENT 2 (1) Actual balances will be used on future capital expenditures or to retire debt F 4.2/203-17

4 Intercollegiate Athletics (ICA) ICA has made significant progress in improving its financial stability; however, the department continues to anticipate operating deficits in the years between Don James Center renewals (FY19, FY20, and FY21). ICA's updated cash flow projection for FY17 is $720K; the FSP estimate for FY17 was a $5.6m deficit. FY17 projections reflect $8.1M higher revenues than the FSP in the following categories: o $2.4M increase in gate revenue, o $2.9M increase in contributions ($1.9M in annual giving related to Game Changer campaign, $1.0M is the anticipated increase in seat-related contributions for the 2017 football season), o $2.6M additional from the conference ($2.2M is tied to participation in the Peach Bowl / CFP Semi-Final, $400K additional is related to the Pac12 network's expanded deals with Dish Sling, FIOS and Charter). The revenue increase is offset by $2.5M additional expenses in the following areas: o $1.4M in salary and benefits related to incentive bonuses, o $900K in travel expenses for the Peach Bowl, o $240K anticipated additional University overhead charges tied to increases in gate revenue. FY18 and FY19 projections assume steady gate revenue growth associated with the strength of the football program. In addition to aggressive goals set around ticket sales, ICA is also anticipating revenue growth in seat-related contributions tied to the seat reallocation process for the 2018 season, and commensurate expansion of premium seating options within Husky Stadium. The FSP included $8M in unidentified revenue enhancements/expense reductions in FY19 in order to break-even; the updated projection below excludes the $8M placeholder. ICA's FY18 budget presentation to the Board in April will include updated 5-year projections including cost reductions and proposed opportunities for campus support to help minimize deficits. Risks and Mitigations Financial projections do not include the significant financial impacts associated with any coaching changes in any of our teams. While ICA has surpassed its annual fundraising goal by $1.9M in FY17, sustaining that momentum over the life of the campaign will be difficult. Football day of game expenses - including cost of security and guarantees paid to visiting non-conference opponents - continue to escalate at a significant pace. Mounting costs associated with NCAA deregulation, challenges to amateurism and litigation pose considerable financial risks. Increasing Pac12 distributions, revenue sports outperforming expectations, and an apparel deal in FY20 would help mitigate these risks % of prior year Football Season Ticket Renewals (as of Feb 1) 32,740 38, % New Season Ticket Sales (1) 3,249 5, % Football Luxury/Premium Seating Sold Out Sold Out N/A (1) Projection for 2017 Net operating income as a multiple of debt service; FSP suspended ILP minimum through FY FY14 FY15 FY16 FY17 FY18 FY FSP Proforma Actual (FY14-FY16) / Projected (FY17-FY19) Pre-FSP ILP Minimum Cash Flow Net operating income plus gifts less debt service and capital expenses FY14 FY15 FY16 FY17 FY18 FY FSP Proforma Actual (FY14-FY16) / Projected (FY17-FY19) $50 $ Reserve Balance Unrestricted net assets; FSP established ILP minimum at $10M through FY FY14 FY15 FY16 FY17 FY18 FY FSP Proforma Actual (FY14-FY16) / Projected (FY17-FY19) ILP Minimum 25.4 F 4.3/ ATTACHMENT 3

5 University of Washington South Lake Union (SLU) South Lake Union (SLU) includes SLUI, SLUII, SLU3.1, and SLU3.2. The recently negotiated F&A rate has led to increasing surpluses in future years to partially offset administrative costs (74% in FY16, 75% in FY17, 76% in FY18 and FY19, and 76.5% in FY20-22). For the period FY13 to FY16, grant activity has grown at SLU by an average of 7.7% compared to -0.2% at non-slu locations. The decrease in FY15 and FY16 over FY14 is a combination of factors including faculty departures and competitive renewals requiring multiple submissions for approval. UW Medicine faculty were second in the country among all medical schools and first among public medical schools in total NIH research funding based on Federal FY15 awards. Actual results reflect lower density in research space due to challenging federal grant environment, as well as the decision to include a Biological Safety Level 3 (BSL3) lab in SLU3.1 with the same research density assumption as other research space. SLU 3.2 ($143M in borrowing) was approved by the Board of Regents in September 2015 and activity is included in this report starting in FY18. Risks and Mitigations Potential federal research funding cutbacks, similar to 2013 sequestration, could result in delayed awards and reduced funding. Potential shift from federal research to non-federal research at SLU could result in lower ICR. Grant conversion to higher indirect cost rate at slower rate than forecast would move higher indirect cost recovery into later years (assumed 25% of grants convert to new rate each year). SoM has the opportunity to increase research density at SLU with ongoing recruitments which will reduce AICR and other support required. NIH is requesting overall higher funding in FY17, compared to FY16 levels. SLU Actual vs Proforma Total SLU ICR 1 and Other Revenues vs Expenses - Surplus/(Deficit) by Year $9.0 $6.0 $ $3.0 -$ ICR Surplus/(Deficit) - Proforma (op bud/projected after 10 years) ICR Surplus/(Deficit) - Actual (projection for FY17-22) ICR excludes central libraries and central administration. Values for ICR Surplus/(Deficit) in FY18 and beyond have been updated and may differ from prior SABRe reports. $400 $300 $200 Total SoM Reserves (excluding grants/contracts) $100 FY13 FY14 FY15 FY16 Reserves were the primary funding source of the FY16 forecasted operating loss. FY16 has been updated to final. CAGR* (1.8%) SoM Direct Research Expenditures $600 $400 $ FY13 FY14 FY15 FY16 South Lake Union SoM excluding South Lake Union SLU CAGR* 7.7% *Note: CAGR = Compound Annual Growth Rate F 4.4/ ATTACHMENT 4

6 University of Washington Medical Center (UWMC) UWMC is experiencing a challenging FY17 as pressures on net revenue are significant and labor expenses are higher than anticipated. The expansion project is expected to be completed in FY18. UWMC s total margin for FY17 through December was -3.9%. Days cash on hand of 80 days remains above the Internal Lending Program (ILP) minimum. As of December, debt service coverage of 1.19x is below the 1.25x ILP minimum. Financial ratios for FY14-FY16 represent audited actuals. FY17 represents preliminary unaudited results through December FY18 through FY22 are from the most recent Long Range Financial Plan (LRFP) presented to the UW Medicine Board Finance and Audit Committee in January Risks and Mitigations Success at executing priorities in the strategic plan and implementing performance improvement initiatives is key to the achievement of financial objectives going forward. UWMC continues to monitor against internal and external benchmarks and seeks to achieve best practices. Declines in commercial payer reimbursement have significant impacts and are being monitored on a monthly basis. Impacts on net revenue from health care reform and activities of commercial and government payers continue to be incorporated into financial planning for UWMC. Transformation of care and strong expense management continue to be high priorities. Leadership is focused on process improvements targeted at improvement in financial results. This work is a priority of leadership both at the Medical Center and executive leadership within UW Medicine. NOTE: Measurement date for ILP covenants is June 30 of each year at which point compliance is assessed. FY14 Actuals FY15 Actuals FY16 Actuals FY17 Budget Admissions 18,033 18,092 18,362 18,787 Total Surgeries 14,538 15,313 15,895 15,754 Occupancy 81% 80% 82% 82% ICU Occupancy 84% 85% 87% 75% Net operating income as a multiple of debt service, Proforma (2012) Actual (FY14-FY17 YTD Dec) / LRFP (FY18-FY22) ILP minimum 1.25x 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% 3.4% 3.2% 1.5% Total Margin Operating income plus non-operating income expressed as a percentage of revenue 2.5% 4.0% -2.5% 3.2% 3.7% 3.3% 3.5% 2.6% 2.9% 3.4% 3.9% 3.8% -3.9% Proforma (2012) Actual (FY14-FY17 YTD Dec) / LRFP (FY18-FY22) Days Cash On Hand Unrestricted cash divided by daily operating expenses Proforma (2012) Actual (FY14-FY17 YTD Dec) / LRFP (FY18-FY22) ILP minimum 75 days F 4.5/ ATTACHMENT 5

7 Northwest Hospital (NWH) The Financial Stability Plan (FSP) for NWH targeted a break-even bottom line through volume and revenue enhancements and expense reductions in FY16. For FY17, through December 2016, margins are negative. o NWH's audited total margin for FY16 was -1.2%. Preliminary unaudited total margin for FY17 through December is -7.1%. o Debt service coverage is below the 1.25x Internal Lending Program (ILP) minimum at for FY17 through December. o Days cash on hand of 60.5 in FY16 was above the ILP minimum of 50 days. Cash has declined to 47 days for FY17 and is below the ILP minimum. Financial ratios for FY13-FY16 represent audited actuals. FY17 represents preliminary unaudited results through December FY18-FY22 reflect the Long Range Financial Plan (LRFP) presented to the UW Medicine Board Finance and Audit Committee in January The Financial Stability Plan (FSP) represents the plan presented to the Board of Regents in October of Projections are revised and updated annually as part of the budget and planning cycle. o The plan includes lease payments associated with campus enhancements to be completed in This project has not been approved by the Board of Regents. Assumptions are being revisited as part of the budget cycle. Risks and Mitigations Success at executing priorities in the strategic plan and implementing performance improvement initiatives are key to the achievement of financial objectives going forward. Leadership continues to monitor performance monthly. Potential negative impacts to net revenue from health care reform and activities of commercial and government payers continue to be incorporated into financial planning for NWH. Transformation of care and strong expense management continue to be high priorities. The strategic priorities as outlined in the FSP presented to the Regents in October, 2015 continue to be a leadership focus. NOTE: Measurement for ILP covenants is June 30 of each year at which point compliance is assessed. FY14 Actuals FY15 Actuals FY16 Actuals FY17 Budget Admissions 9,211 9,934 10,060 10,559 Surgeries 9,428 9,581 9,907 11,079 Occupancy 61% 66% 67% 70% % 1.0% -2.0% -5.0% -8.0% Net operating income as a multiple of debt service % Financial Stability Plan (Oct '15) Actual (FY14-FY17 YTD Dec) / LRFP (FY18-FY22) ILP Minimum 1.25x Total Margin Operating income plus non-operating income expressed as a percentage of revenue -1.4% -1.2% 1.2% 2.1% 2.3% 2.5% 1.2% 1.5% 1.8% 1.8% 1.8% -7.1% Financial Stability Plan (Oct '15) Actual (FY14-FY17 YTD Dec) / LRFP (FY18-FY22) Days Cash On Hand (1) Unrestricted cash divided by daily operating expenses Financial Stability Plan (Oct '15) Actual (FY14-FY17 YTD Dec) / LRFP (FY18-FY22) ILP Minimum 50 days (1) Cash and cash equivalents as defined in the bond documents is composed of cash and short term investments. F 4.6/ ATTACHMENT 6

8 School of Dentistry (SOD) SOD is working to meet commitments outlined in the Financial Stability Plan (FSP). A preliminary audit report is complete and it is clear that the Dean s Office does not have enough oversight of departmental/program expenditure approvals and budget transfers. Predoctoral clinics have increased patient visits and reduced expenditures. Increases in expenditures in the postdoctoral clinics and faculty practice clinics are driven by the allocation of teaching faculty salaries to clinical budgets. SOD, working with University administration, has limited staff and faculty hiring. Only crucial positions impacting patient safety and/or the students educational program are being filled. The Oral and Maxillofacial Surgery faculty practice has moved to the second floor of the Center for Pediatric Dentistry and is treating patients. The Advance General Practice clinic has moved from its second floor location in Health Sciences to the third floor, reducing the number of staff. The School of Pharmacy has been assigned to the vacated space. FY17 revenue includes onetime grants of $3M. Additional revenue enhancements are in the planning stages and not reflected in the projection. FY15 FY16 FY17 Q2 Patient Volume 95, ,160 50,915 Patient Mix Medicaid 45% 50% 45% Private Insurance 27% 26% 20% Self-Pay 28% 24% 35% Clinical net operating income as multiple of debt service FY14 FY15 FY16 FY17 FY18 FY19 FY FSP Proforma Actual thru FY16/Projections Operating Margin Clinical operating expenses expressed as a percentage of revenue (excluding debt service) 20% 0% FY14 FY15 FY16 FY17 FY18 FY19 FY20 12% 6% 6% 5% -20% -40% -31% -22% -10% -29% -23% -23% -23% 2016 FSP Proforma Actual thru FY16/Projections Fund Balance Cumulative clinical net assets FY14 FY15 FY16 FY17 FY18 FY19 FY FSP Proforma Actual thru FY16/Projections F 4.7/ ATTACHMENT 7

Semi-Annual Borrower Reports (SABRe) for Housing & Food Services, Intercollegiate Athletics and School of Medicine South Lake Union

STANDING COMMITTEES F 3 Finance and Asset Management Committee Semi-Annual Borrower Reports (SABRe) for Housing & Food Services, Intercollegiate Athletics and School of Medicine South Lake Union INFORMATION