Intercollegiate Athletics Annual Financial Review and Updated Semi-Annual Borrower Report

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1 STANDING COMMITTEES F 6 Finance and Asset Management Committee Intercollegiate Athletics Annual Financial Review and Updated Semi-Annual Borrower Report INFORMATION For information only. BACKGROUND At the June 9, 2016 Board of Regents meeting, the University of Washington Department of Intercollegiate Athletics (ICA) presented a three-year Financial Stability Plan (FSP) to address recent operating deficits and ICA s noncompliance with Internal Lending Program loan covenants. The Board approved ICA s FSP and temporarily modified ICA s loan covenants through FY 2019 as follows: a. Suspend Debt Service Coverage covenant b. Reduce minimum unrestricted fund balance to $10M. ICA will report on the progress made over the last 10 months to achieve financial solvency through the term of the FSP, and beyond through FY ICA has also provided an updated Semi-Annual Borrower Report (SABRe), which incorporates the financial impact of the coaching change in Men s Basketball that occurred after the March 2017 SABRe was submitted. Attachments 1. Intercollegiate Athletics, Annual Financial Review and Financial Stability Plan Update 2. Intercollegiate Athletics (ICA) Semi-Annual Borrower s Report April 2017 F 6/204-17

2 Intercollegiate Athletics Annual Financial Review Board of Regents Presentation April 13, 2017 ATTACHMENT 1 Page 1 of 8

3 Executive Summary Academic and athletic success over the last year Financial projections illustrate expectation of excellence for all 22 programs Significant improvements made since June 2016; this presentation focuses on favorable FY17 results and updated projections through FY22. Work remains to bring FY19 FY21 in-balance; presentation will include several possible solutions. Page 2 of 8

4 Financial Stability Plan Review Pre Stadium Post Stadium ICA FINANCIAL STABILITY PLAN Base Case Proforma as of June 9, 2016 Three Year Financial Plan $ʹ000 Actual Actual Actual Estimated Projected Projected Projected FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 Beginning Balances (1) 24,666 35,647 32,967 32,111 17,286 11,680 12,460 CAGR (FY14 FY16) CAGR (FY17 FY19) OPERATING REVENUE Gate Revenue 20,481 28,830 25,422 24,528 23,420 27,156 26, % 5.9% Contributions 22,553 23,906 22,443 21,695 23,679 25,725 26, % 5.1% NCAA/Conference Distributions 22,453 24,935 28,462 29,961 33,507 35,235 35, % 3.5% Multimedia Rights Signing Bonus 0 0 7, Royalties, Adv. & Sponsorships 8,554 11,321 12,707 14,061 16,236 16,552 16, % University Funded Tuition Waivers 3,336 3,550 3,895 1,948 3,896 4,013 4, % 3.0% Don James Center Renewal 4, ,530 6, % Other Income (2) 3,650 7,608 9,091 9,275 8,995 9,150 9, % 2.0% Total Revenue 85, , , , , , , % 1.8% OPERATING EXPENSES Salaries 23,908 26,786 29,089 30,335 33,294 35,033 36, % 5.2% Benefits 6,945 7,155 6,585 8,485 9,414 10,034 10, % 6.0% Athletics Student Aid 10,894 11,806 11,959 12,979 13,413 13,726 14, % 2.9% Sport Operational Expense (3) 19,845 23,349 25,400 26,128 27,924 28,294 28, % 0.5% Direct Facilities, Maintenance & Utilities 2,316 4,395 4,039 4,300 4,099 4,222 4, % 3.0% Misc. Marketing/Promotion Expense (4) 2,512 2,546 3,557 3,556 5,106 5,118 5, % 1.6% UW Institutional Overhead 2,180 2,454 1,748 2,200 2,092 2,454 2, % 6.9% Misc. Expenses (5) 7,609 7,605 7,934 7,836 7,811 7,994 7, % 0.4% Projected Budget Cut (2,000) (2,060) (2,122) Total Expenses 76,209 86,097 90,311 95, , , , % 3.1% Unidentified Revenue Enhancement/Expense Reduction 8,000 NET OPERATING REVENUE (A) 8,863 14,178 19,344 5,649 13,111 19,811 18, % 20.4% DEBT SERVICE (B) (6) 1,138 14,583 17,477 17,689 16,232 16,232 16, % 0.0% Subtotal: Net Operating Cash Flow 7,725 (405) 1,867 (12,040) (3,121) 3,580 2,766 Capital Expenditures (C) (7) 4,932 7,952 1,624 2,785 2,485 2,800 2, % 6.1% Adjustments Cash vs Accrual, Gain/Loss on Investment 8,188 5,677 (1,099) CASH FLOW 2,793 (8,357) 243 (14,825) (5,606) 780 (34) ENDING BALANCE (D) 35,647 32,967 32,111 17,286 11,680 12,460 12,426 Page 3 of 8

5 ICA Financials FY17 FSP Updated ICA $'000 Projected Projected FY 2017 FY 2017 Difference Beginning Balances 17,286 26,304 9,018 OPERATING REVENUE Gate Revenue 23,420 25,669 2,249 Contributions 23,679 27,782 4,103 NCAA/Conference Distributions 33,507 36,170 2,664 Royalties, Adv. & Sponsorships 16,236 16, University Funded Tuition Waivers 3,896 3,905 9 Don James Center Renewal 4,530 6,000 1,470 Other Income 8,995 9, Total Revenue 114, ,040 10,777 OPERATING EXPENSES Salaries 33,294 37,076 3,782 Benefits 9,414 8,809 (605) Athletics Student Aid 13,413 13, Sport Operational Expense 27,924 26,833 (1,091) Direct Facilities, Maintenance & Utilities 4,099 4, Misc. Marketing/Promotion Expense 5,106 4,457 (649) UW Institutional Overhead 2,092 2, Misc. Expenses 7,811 8, Projected Budget Cut (2,000) 0 2,000 Total Expenses 101, ,106 4,954 NET OPERATING REVENUE 13,111 18,933 5,822 DEBT SERVICE 16,232 16,228 (3) Subtotal: Net Operating Cash Flow (3,121) 2,705 5,826 Capital Expenditures 2,485 2, CASH FLOW (5,606) 2 5,608 ENDING BALANCE 11,680 26,306 14,626 NOTES (1) Other Income includes concessions, souvenirs, parking, facilities rental and endowment distributions. (2) Misc Expenses include job candidate hiring and moving expenses, consultants, credit card fees, admin and recruiting travel, Pac-12 assessment, insurance, travel transaction fees, and UBIT tax. Revenue notes: Overall revenue exceeded FSP projections by $10.8M due to the following: - Gate revenue for football and women s basketball were favorable by $2.8M and $150K, respectively; this was offset by men s basketball gate revenue which was $600K below prior estimate, and 5% city admission tax paid on overall higher revenues. - ICA s fundraising team surpassed their year 1 campaign goals for annual giving and team support by $3.0M. An additional $1.1M is anticipated in seatrelated contributions for the 2017 football season. - ICA received $2.6M additional revenue from the Pac12 related to the Peach Bowl and expanded network deals. - Don James Center renewals are $1.5M higher than initially anticipated; DJC renewal revenue will therefore be $1.5M lower in FY18. - Souvenirs and concessions have generated approximately $200K additional revenue. Expense notes: Overall expenses exceeded FSP projections by $4.9M due to the following: - $1.3M in salary and benefit expenses for Peach Bowl incentive bonuses and Pac12 sales team commissions due to success of 2016 football season. - $2.8M in salary and benefit expenses related to coaching staff changes in men s basketball. - $900K related to the Peach Bowl. Ending Balance notes: The $14.6M variance in ending balance is driven by the factors noted above, as well as savings realized in FY16 (when cash flow was $7M higher than the FSP projection). Page 4 of 8

6 ICA Financials FY18 FY22 Updated Five Year $'000 Projected Projected Projected Projected Projected CAGR FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 (FY18 - FY22) Beginning Balances 26,306 28,445 24,436 23,063 16,542 OPERATING REVENUE Gate Revenue 29,363 30,548 32,604 34,803 36, % Contributions 27,304 27,372 27,711 27,936 28, % NCAA/Conference Distributions 35,084 35,983 38,091 39,742 41, % Royalties, Adv. & Sponsorships 16,342 16,382 20,373 18,417 18, % University Funded Tuition Waivers 4,022 4,143 4,267 4,395 4, % Don James Center Renewal 5, , % Other Income 9,659 9,891 10,089 10,341 10, % Total Revenue 127, , , , , % OPERATING EXPENSES Salaries 34,930 37,276 39,239 41,529 43, % Benefits 9,485 10,362 11,183 12,148 13, % Athletics Student Aid 14,097 14,737 15,409 16,114 16, % Sport Operational Expense 26,842 25,842 27,846 30,933 29, % Direct Facilities, Maintenance & Utilities 4,699 4,840 4,968 5,116 5, % Misc. Marketing/Promotion Expense 4,469 4,603 4,605 4,750 4, % UW Institutional Overhead 2,652 2,719 3,149 3,122 3, % Misc. Expenses 8,613 8,335 8,593 8,832 9, % Total Expenses 105, , , , , % Unidentified Revenue Enhancement/Expense Reduction NET OPERATING REVENUE 21,311 15,604 18,143 13,089 20, % DEBT SERVICE Principal 5,008 5,219 5,439 5,668 5, % Interest 11,224 11,013 10,793 10,564 10, % Subtotal: Net Operating Cash Flow 5,080 (627) 1,912 (3,142) 4, % Capital Expenditures 2,940 3,382 3,285 3,379 3, % CASH FLOW 2,140 (4,009) (1,373) (6,521) % ENDING BALANCE 28,445 24,436 23,063 16,542 17,519 NOTES (1) Other Income includes concessions, souvenirs, parking, (2) Misc Expenses include job candidate hiring and moving expenses, consultants, credit card fees, admin and recruiting Major takeaways: - The FSP assumed ICA would break-even in FY18; updated projections show $2.1M in cash flow. - The FSP included $8M in unidentified revenue enhancements and/or expense reductions in FY19 in order to break-even. So far ICA has identified solutions which bridge half the gap. - Salaries assume annual merit increases, staff investment of 2-3 FTE s per year, and football contract negotiations every 2 years. - ICA continues to work on mitigating deficits in years between Don James Center renewals. - FY20 includes revenue associated with new apparel deal. - ICA s reserve balance is not projected to fall below annual debt service payment of $16.2M, which is consistent with debt covenant. Page 5 of 8

7 Risks & Opportunities Risks: NCAA legislative items Impacts of future litigation Revenue sports underperform, contributing to lower gate and contribution revenue Increasing internal charges (tuition, benefits, security, overhead) Opportunities: Football season ticket sales returning to historic high levels (55k vs. 45K in current projections) could generate up to $4M more annually in gate and seat-related contributions. Men s basketball has the capacity to generate up to $3M more annually in gate and seatrelated contributions. Expansion of hospitality and fan amenities (including beer and wine sales) throughout all venues could generate $1.5M annually. New Transportation Management Plan could allow ICA to hold 1-2 non-athletic events in Husky Stadium each year; $750K additional revenue. Apparel deal could generate up to $1M in additional revenue in FY20 and beyond. Pac-12 Network distributions could generate up to $6.5M additional revenues per year. Page 6 of 8

8 Projections vs. Potential Page 7 of 8

9 Next Steps SABRe in October will show final FY17 results Periodic briefings with EVP and Treasury throughout the year Annual financial report and Financial Stability Plan update in spring 2018 Page 8 of 8

10 Intercollegiate Athletics (ICA) Semi-Annual Borrower's Report - April 2017 Summary ICA has made significant progress in improving their financial stability, however the department continues to anticipate operating deficits in the years between Don James Center renewals (FY19, FY20, FY21). Despite the added cost of the coaching change in Men's Basketball, ICA anticipates breaking-even in FY17. The Financial Stability Plan estimate for FY17 was a deficit of ($5.6m). FY17 projections reflect $10.8M higher revenues than the FSP in the following categories: o $2.4M favorable in gate revenue, o $4.1M favorable in contributions ($3M in annual giving related to Game Changer campaign, $1.1M 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). o Don James Center renewals are $1.5M higher than originally estimated; DJC renewal revenue will therefore be $1.5M lower in FY18. The revenue increase is offset by $5.0M additional expenses in the following areas: o $3.1M in salary and benefits related to incentive bonuses and the coaching change in Men's Basketball, o $1.1M in travel expenses for the Peach Bowl, o $250K 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 excludes the $8M placeholder. Risks and Mitigations While ICA has surpassed its annual fundraising goal by $3M 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. Selected Indicators % of prior year Football Season Ticket Renewals (as of Feb 1) 32,740 38, % New Season Ticket Sales* 3,249 5, % Football Luxury/Premium Seating Sold Out Sold Out NA *Projection for 2017 Debt Service Coverage 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 $ Millions FY14 FY15 FY16 FY17 FY18 FY (8.4) Cash Flow Net operating income plus gifts minus debt service and capital expenses (14.8) (5.8) (5.6) 2016 FSP Proforma Actual (FY14-FY16) / Projected (FY17-FY19) (0.0) (4.0) $ Millions $50 $ Reserve Balance Unrestricted net assets; FSP established ILP minimum at $10M through FY $0 F 6.2/ FY14 FY15 FY16 FY17 FY18 FY FSP Proforma Actual (FY14-FY16) / Projected (FY17-FY19) ILP Minimum ATTACHMENT 2 Page 1 of 1

Asset Liability Management Semi-Annual Borrower Reports (SABRe)

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