Annual. Financial Performance Reports. August 2, 2007 Board of Trustees Finance & Audit Workgroup

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1 Annual Financial Performance Reports August 2, 2007 Board of Trustees Finance & Audit Workgroup

2 Index Annual Investment Report 3-12 Debt Management Report Derivatives Profile Variable Rate Exposure Report Status of Pending Bond Transactions Page 2

3 Annual Investment Report Investment Management Issues Endowment and Operating Portfolios are Fundamentally Different Key Differences cash flows and volatility determine investment structure Endowment Portfolio long-term, stable Operating Portfolios fund payrolls, research, student aid, construction University Operating Portfolio can fluctuate $40 million daily, annual turnover of $900 million (3 times $344 million balance) Investment Committees More Demanding Investment manager performance, consultants, support costs Moody s Believes Investment Management and Oversight is an Increasingly Important Factor for University Ratings Page 3

4 Annual Investment Report Investment Portfolio Structure Total Investment Portfolio Total March 2007 approximates $900 million Report includes the University and seven DSOs Portfolio excludes bank cash balances Investment Portfolios Two Types Endowment Funds - $380 million Operating Funds - $517 million Investment Horizons Short-Term Investments - $446 million (cash equivalents & short-duration fixed income) Page 4

5 Annual Investment Report Investment Portfolio Structure (cont.) Investment Horizons (cont.) Long-Term Investments - $451 million Fixed Income - $147 million (all Domestic) Equity - $271 million ($181M Domestic, $90M Foreign) Real Estate - $ 15 million (REIT) Alternative Investments - $ 18 million (Private Equity / Venture Capital) Investment Portfolio Composition Pooled Funds SEC Registered $ 460 million Direct Investments Listed on major exchange $ 37 million (RF&PG) Other Pooled Funds State of Florida Pool $ 374 million PE / VC Partnerships $ 18 million Intracompany Loans $ 8 million Page 5

6 USF INVESTMENT REPORT As of March 31, 2007 (In Thousands) TOTAL PORTFOLIO INVESTMENT PORTFOLIO BALANCES Consolidated Endowment Operating Funds ASSET CLASS USF TOTAL INVESTMENTS FOUNDATION UNIVERSITY FINANCING FOUNDATION UMSA RESEARCH ALUMNI SUNDOME CHARTER SCHOOL SHORT TERM Cash Equivalent (< 180 days) $72,816 $40,249 $22,587 $704 $11,277 $11 $435 Fixed Income - Domestic (+ 180 days) $373,560 $343,560 $30,000 SHORT TERM SUBTOTAL $446,376 $0 $343,560 $70,249 $22,587 $704 $11,277 $11 $0 $435 LONG TERM Fixed Income - Domestic $146,915 $92,546 $35,110 $19,259 $1,599 $735 Fixed Income - Foreign Equity - Domestic $181,307 $167,386 $13,921 $2,890 $1,329 Equity - Foreign $89,754 $87,277 $2,477 $1,507 $693 Real Assets $14,566 $14,566 $249 $114 Alternative Investments $17,983 $17,983 $308 $142 LONG TERM SUBTOTAL $450,525 $379,758 $0 $0 $35,110 $35,657 $6,553 $3,013 $0 $0 TOTAL PORTFOLIO $896,901 $379,758 $343,560 $70,249 $57,697 ¹ $36,361 $17,830 ² $3,024 ³ $0 $435 ¹ FOUNDATION Operating Funds totaling $9,198,000 invested in the ENDOWMENT Fund are not included in the FOUNDATION Operating Fund Portfolio. ² RESEARCH FOUNDATION Operating Funds totaling $2,436,000 invested in the FOUNDATION Operating Fund are eliminated in the Consolidated Investment balances. RESEARCH FOUNDATION Operating Funds totaling $6,553,000 invested in the ENDOWMENT Fund are eliminated in the Consolidated Investment balances. ³ ALUMNI ASSOCIATION Operating Funds totaling $11,000 invested in the FOUNDATION Operating Fund are eliminated in the Consolidated Investment balances. ALUMNI ASSOCIATION Operating Funds totaling $3,013,000 invested in the ENDOWMENT Fund are eliminated in the Consolidated Investment balances. Page 6

7 Annual Investment Report Portfolio Asset Allocation Asset Allocation Benefits Diversify Investments Provide for Liquidity Policy Provides Limits on Types of Investments University s short-term portfolio exceeds limit for fixed income investments University has a plan to diversify its Operating Portfolio University s investment in the State Pool provides for daily liquidity Moody s is Looking Closer at Liquidity as Universities Move Assets into Longer-Term and Locked-Up Investments Page 7

8 USF INVESTMENT REPORT As of March 31, 2007 TOTAL PORTFOLIO PORTFOLIO ASSET ALLOCATION Policy Endowment Operating Funds ASSET CLASS LIMITS Minimum Maximum FOUNDATION UNIVERSITY FINANCING FOUNDATION UMSA RESEARCH ALUMNI SUNDOME CHARTER SCHOOL SHORT TERM Cash Equivalent (< 180 days) 0% 100% 57% 100% 100% 100% 100% 100% Fixed Income - Domestic (180 days +) 0% 90% 100% 43% SHORT TERM TOTAL 0% 100% 100% 100% 100% 100% 100% 0% 100% LONG TERM Fixed Income - Domestic 20% 75% 24% 100% ¹ 54% 24% 24% Fixed Income - Foreign 0% 20% Equity - Domestic 25% 75% 44% 0% ¹ 39% 44% 44% Equity - Foreign 0% 25% 23% 7% 23% 23% Real Assets 0% 20% 4% 4% 4% Alternative Investments 0% 20% 5% 5% 5% LONG TERM TOTAL 100% 0% 0% 100% 100% 100% 100% 0% 0% ¹ FOUNDATION exception to Investment Policy Asset Allocation Guidelines granted on December 7, Page 8

9 Annual Investment Report Primary Performance Objective 3-YEAR OBJECTIVE = Investment Returns Exceed Index (Benchmark standards) Returns are net of investment management expenses but exclude advisory and other fees For certain DSOs, these fees are material Returns for all entities exceed their benchmarks except UMSA UMSA is restructuring its portfolio and investment management Returns on $80 million in Operating Funds are not Reported Investments held less than 3 years Cumulative returns for Financing, Research, and Charter School exceed their benchmarks Page 9

10 USF INVESTMENT REPORT As of March 31, 2007 TOTAL PORTFOLIO PRIMARY PERFORMANCE OBJECTIVE - 3 YEAR ANNUAL AVERAGE Endowment Operating Funds ASSET CLASS FOUNDATION UNIVERSITY FINANCING FOUNDATION UMSA RESEARCH ALUMNI SUNDOME CHARTER SCHOOL SHORT TERM Cash Equivalent (< 180 days) NA ³ 3.60% 2.87% 3.60% ³ 3.60% NA ³ Fixed Income - Domestic (180 days +) 3.79% LONG TERM Fixed Income - Domestic 4.65% 3.70% 2.73% 4.65% 4.65% Fixed Income - Foreign Equity - Domestic 11.20% 8.35% 11.20% 11.20% Equity - Foreign 21.80% 19.83% 21.80% 21.80% Real Assets 21.70% 21.70% 21.70% Alternative Investments NA ¹ NA ¹ NA ¹ WEIGHTED PORTFOLIO RETURN 13.10% ² 3.79% NA ³ 4.50% ² 5.02% 10.53% 13.07% NA ³ WEIGHTED INDEX RETURN 11.80% ² 3.40% NA 4.00% 6.89% 9.52% 11.77% NA RELATIVE PORTFOLIO RETURN 1.30% 0.39% NA 0.50% (1.87)% 1.01% 1.30% NA ¹ The Endowment Private Equity and Venture Capital Investments do not lend themselves well to interim return calculations. ² FOUNDATION Endowment and Operating Fund Performance and Weighted Index Returns are based on 3-year average daily balances, not period-end balances. ³ FINANCING, $8,842,000 of RESEARCH, and CHARTER SCHOOL short-term portfolios have not been in existence for 3 years. These entities' short-term portfolios, or portion thereof, have exceeded their index returns. Page 10

11 Annual Investment Report Secondary Performance Objective 5-YEAR OBJECTIVE = Investment Returns Exceed Inflation + Spread Returns are net of investment management expenses but exclude advisory and other fees For certain DSOs, these fees are material Returns for all entities exceed inflation + spread except UMSA UMSA is restructuring its portfolio and investment management Returns on $80 million in Operating Funds Are Not Reported Investments held less than 5 years Cumulative returns for Financing, Research, and Charter School exceed inflation + spread Page 11

12 USF INVESTMENT REPORT As of March 31, 2007 LONG TERM PORTFOLIO SECONDARY PERFORMANCE OBJECTIVE - 5 YEAR ANNUAL AVERAGE Endowment Operating Funds ASSET CLASS FOUNDATION UNIVERSITY FINANCING FOUNDATION UMSA RESEARCH ALUMNI SUNDOME CHARTER SCHOOL SHORT TERM Cash Equivalent (< 180 days) NA ³ 2.80% 2.84% 2.80% ³ 2.80% NA ³ Fixed Income - Domestic (180 days +) 4.03% LONG TERM Fixed Income - Domestic 6.32% 5.80% 4.21% 6.32% 6.32% Fixed Income - Foreign Equity - Domestic 9.40% 4.91% 9.40% 9.40% Equity - Foreign 17.50% 15.96% 17.50% 17.50% Real Assets 21.20% 21.20% 21.20% Alternative Investments NA ¹ NA ¹ NA ¹ WEIGHTED PORTFOLIO RETURN 11.50% ² 4.03% NA ³ 4.80% 4.70% 9.14% 11.47% NA ³ INFLATION BENCHMARK - CPI INDEX 2.81% 2.81% 2.81% 2.81% 2.81% 2.81% RETURN OBJECTIVE - LONG-TERM % 0.00% 1.64% 3.84% 3.29% 4.50% RETURN OBJECTIVE - ACTIVELY MANAGED % 0.00% 0.27% 0.49% 0.30% 0.41% RELATIVE PORTFOLIO RETURN % 1.22% NA ³ 0.08% (2.44)% 2.74% 3.75% NA ³ ¹ The Endowment Private Equity and Venture Capital Investments do not lend themselves well to interim return calculations. ² FOUNDATION Endowment and Operating Fund Performance is based on 5-year average daily balances, not period-end balances. ³ FINANCING, $8,842,000 of RESEARCH, and CHARTER SCHOOL short-term portfolios have not been in existence for 3 years. These entities' short-term portfolios, or portion thereof, have exceeded their index returns. 4 Only Long-Term Funds are subject to the Policy Return Objective of 3.0% for fixed income and 5.0% for all other asset classes. The Return Objective is calculated based on period-end balances, not 5-year daily average balances. Thus, the Relative Portfolio Return may be affected by changes in asset classes over this period. The Return Objective is weighted between the Short Term Portfolio and the Long Term Portfolio based on period-end balances. 5 Only Long-Term Funds are subject to the Policy Return Objectives for Actively Managed Portfolios of 0.5%. The Return Objective is calculated based on period-end balances, not 5-year daily average balances. Thus, the Relative Portfolio Return may be affected by changes in asset classes over this period. The Return Objective is weighted between the Short Term Portfolio and the Long Term Portfolio based on period-end balances. 6 All entities employ 5-year index benchmarks to assess investment performance in addition to the Policy's real return Secondary Performance benchmark. Page 12

13 Debt Management Report Debt Management Issues Continued Need for Capital Projects Assessing Potential for Funded Projects Evaluating Sources of Financing Other Than Bonds Moody s considers off-balance sheet developer-financed projects on the books Recognizing Debt Capacity Constraints Modest growth in Revenues Recent growth in Debt Page 13

14 Debt Management Report Market Position Assessment Substantial Student Enrollment Increased 2% to 44,300 in Fall 2006 Attractive Student Demand Accepted 51% of first-time-in-college freshman applicants in fall 2006 (59% in 2005) Enrolled 39% of those accepted (43% in 2005) USF Continues to Shift to a More Residential University 12% of undergraduates reside on-campus Goal is 25% Graduate Students Comprise 18% of Enrollment and Are Expected to Increase as USF Pursues its Research Focus Perceived Tuition Value Page 14

15 Debt Management Report Balance Sheet Assessment Adequate Cushion to Support Debt and Operations Financial Resources equal $696 million in 2006 ($622 million in 2005) Financial Resources Provide Adequate Coverage of $356 million of Debt 2.0x in 2006 (2.4x in 2005) 50% of USF s Financial Resources are Held in the Endowment Portfolio Expendable Financial Resources Cover Debt 0.8x (1.0x in 2005) and Cover Operations 0.4x (unchanged 2005) Debt Up 85% Over the Past 3 Years to $356 million Debt Projected to Increase 43% to $511 million in 2008 Page 15

16 Debt Management Report Operating Performance Assessment USF s Operating Margin was (1.6)% in 2006 (4.3% in 2005) USF s 3-Year Average Operating Margin Equals 1.4% USF s Revenues are Diversified Contracts & Grants Comprise 35% State Appropriations Equal 40% Net Tuition & Fees, Auxiliary and Other Revenue Equal 25% The State s Aa1 GO Rating Provides Strong Support Page 16

17 Debt Management Report Strengths / Challenges Strengths Student demand & quality USF size & Tampa Bay location Diversified revenues Private sector support Financial resource base Challenges Growing capital program & total outstanding debt Debt service coverage Limits on resident tuition Page 17

18 Debt Management Report Debt Capacity 2007 Pro Forma Pro Forma Impact Includes Parking Garage ($17 million) Moody s Pro Forma A Median Debt Service Coverage 6.00x 4.52x 6.57x 2.90x Debt Service / Op Exp 1.84% 0.92% 0.85% 2.50% Operating Margin 4.28% (1.55)% 0.40% 1.10% Exp Fin Res / Debt 1.02x 0.84x 0.83x 1.00x Total Fin Res / Debt 2.37x 1.96x 1.94x 1.70x Exp Fin Res / Exp 0.36x 0.37x 0.35x 0.38x Page 18

19 UNIVERSITY & COMPONENT UNIT 5-YEAR FINANCIAL PERFORMANCE PROJECTION University of South Florida ($, in thousands) FY 2002 FY 2003 FY 2004 FY 2005 * Historical Peer Measures FY Key Financial Statistics USF USF USF USF University Component Units Eliminations Total USF Consolidated Total Cash & Investments 155, , , , , , ,452 Invested in capital assets 449, , , , ,467 25, ,064 Unrestricted net assets 154, , , , ,272 77, ,101 Restricted expendable net assets 46,603 74, , , , ,339 Less: Invested in capital projects (39,858) (61,972) (75,739) (102,287) (92,250) - - (92,250) Expendable Financial Resources 161, , , , ,362 77, ,191 Restricted expendable & nonexp 326, , , , , ,724 Total Financial Resources 488, , , , , , ,914 Moody's A1 Rating Total Debt 215, , , ,054 72, ,650 (12,195) 355, ,360 Depreciation 31,189 33,179 35,734 41,484 43,603 2,848-46,451 Interest 3,923 4,865 4,870 7,445 3,174 6,478-9,652 Principal payments on debt 4,030 12,466 4,503 6,386 4,404 1,838-6,242 Actual annual debt service 7,953 17,331 9,373 13,831 7,578 8,316-15,894 Income Statement Revenues: Net Tuition Revenue 88,378 87, , , , ,251 Less: Scholarships & Fellowships Expense (39,013) (41,339) (36,631) (55,105) (58,098) (2,939) - (61,037) Net Auxiliary Enterprise Revenue/CU 70,213 86,125 68,030 62,486 64, ,376 (77,350) 173,319 Net Invest Earnings & Gains and Losses 4,788 8,955 3,197 10,511 3,021 45,929-48,951 Grants and contracts 204, , , , ,731 51,077 (8,637) 327,171 Sales and Services of Educational Depts 3,200 1, Other operating revenue 5,442 1,907 6,867 6,564 6,378 66,959-73,336 State Appropriations 267, , , , , ,341 Other Nonoperating Revenue 2,020 4, ,872 62,405 13,083 (11,309) 64,179 Total Revenues 607, , , , , ,486 (97,296) 1,070, ,280 Expenses: Compensation & Employee Benefits 418, , , , , ,549 (30,656) 694,630 Depreciation 31,189 33,179 35,734 41,484 43,603 2,848-46,451 Interest 3,923 4,865 4,870 8,007 3,174 6,478-9,652 Other expenditures 210, , , , , ,739 (66,640) 277,081 Total Operating Expenses 664, , , , , ,614 (97,296) 1,027, ,320 Operating Profit (57,254) 28,413 10,944 33,553 (12,516) 54,871-42,355 2,960 Key Ratios Debt Service Coverage (2.78) Debt Service to Operations 1.20% 2.49% 1.31% 1.84% 0.92% 2.50% Operating profit (9.43%) 3.93% 1.51% 4.28% (1.55%) 1.10% Expendable Fin Resources to Debt Total Fin Resources to Debt Expendable Fin Resources to Ops * University figures adjusted for blending of USFFC for one year only. Depreciation: The 2005 figure excludes a one-time adjustment of $45.7 million, which is the cumulative effect of the change in estimate for depreciating buildings from 50 years to 40 years. Page 19

20 USF Outstanding Debt $600 $511 mil $500 $400 $356 mil $371 mil $, in Millions $300 $215 mil $192 mil $189 mil $262 mil DSOs University $200 $100 $ Proj 08 Proj Page 20

21 USF Operating Profit (%) 20.00% 17.42% 15.00% 15.22% 10.85% 10.00% 7.75% 5.00% 3.93% 2.06% 1.51% 4.28% University DSOs 0.00% (1.55)% (5.00)% (9.43)% (10.00)% Page 21

22 Derivatives Report Derivatives Management Issues Quarterly Monitoring of $186 Million of Swaps Quarterly Monitoring of Counterparty Credit Quality Counterparties must have credit rating of AA- or higher Negotiate Swap Renewal Prior to Termination No swaps nearing termination Remaining terms 5-12 years Page 22

23 USF DERIVATIVES PROFILE As of June 30, 2007 USF Party Foundation (Athletics) Financing Financing Research Research Research Research Bond Issue Series 2003A Series 2005B Series 2006A Series 1999 Series 2004A Series 2004B Series 2004C Counterparty SunTrust Royal Bank of Canada Morgan Stanley Bank of America Bank of America Bank of America Bank of America Counterparty Credit Rating Initial Underlying Bond Issue Aa3 Aaa Aa3 Aa1 Aa1 Aa1 Aa1 $13,200,000 $92,250,000 $47,315,000 $11,500,000 $18,455,000 $4,635,000 $11,455,000 Initial Amount of Swap $12,710,000 $80,000,000 $47,315,000 $11,500,000 $18,455,000 $4,635,000 $11,455,000 Remaining Amount of Swap $12,195,000 $80,000,000 $47,315,000 $10,000,000 $18,455,000 $4,275,000 $11,310,000 Effective Date 12/1/2005 5/25/2005 3/16/2006 6/1/2001 4/1/2006 4/1/2006 4/1/2006 Initial Term 7 yrs 10 yrs 10 yrs 18 yrs 10 yrs 9 yrs 10 yrs Fixed Rate 3.34% 3.22% 3.58% 4.46% 3.52% 5.17% 5.26% Floating Index Rate 67% LIBOR 67% LIBOR 67% LIBOR 67% LIBOR 67% LIBOR 100% LIBOR 100% LIBOR Fair Value of Swap at 6/30/07 124,664 1,598,020 (122,304) (452,139) 209,402 32, ,846 Page 23

24 Variable Rate Exposure Report Variable Rate Management Issues Variable Rate Exposure is Assessed Periodically Variable Rate Debt = 53% of Total Unhedged variable rate debt was reduced from $161 million in 2004 to $12 million today (48% - 3%) Moody s reports that A or higher-rated universities have 50% of their debt in a variable mode (excluding swaps) Moody s views the use of swaps for A or higher-rated universities as lower risk than endowment investments Page 24

25 USF Variable Rate Exposure Proforma As of June 30, 2007 UNHEDGED HEDGED VARIABLE FIXED VARIABLE TOTAL RATE RATE RATE DEBT DSO Debt - Major Transactions Tampa Housing, St. Pete Housing & Parking $12 Mil $48 Mil $80 Mil $140 Mil Marshall Center USF Health CAHC & MOB Research Foundation Athletic Training Facility Other DSO Debt Sub-Total $12 $97 $184 $293 University Debt Parking (Including $18 Garage) $0 $44 $0 $44 Academic & Student Services Facilities Sub-Total $0 $78 $0 $78 TOTAL DEBT $12 Mil $359 Mil $371 Mil PERCENT OF TOTAL DEBT 3% 97% 100% Page 25

26 4-Year Downward Trend in Unhedged Variable Rate Exposure $400 $356 mil $371 mil $350 $300 $262 mil $, In Millions $250 $200 $150 $189 mil Fixed Rate Hedged Variable Unhedged Variable $100 $50 $ Page 26

27 Status of Pending Bond Transactions Housing Medical Office Transaction Size $80 Mil $26 Mil Bonds Variable Rate Auction Rate Securities Variable Rate Demand Obligations Swap Term Minimum 10 Yrs Minimum 10 Yrs Swap vs. Fixed Benefit + 47 bps + 57 bps NPV Savings $4.4 Mil $1.4 Mil Credit Enhancement Insured (AAA) Letter of Credit (AA-) Underwriter Fee Plan Assumption $4.50 / bond $4.00 / bond Actual $2.25 / bond $0.25 / bond Firm Award JP Morgan & UBS Bear Stearns Page 27

Annual. Debt Management. August 20, 2009 Board of Trustees Finance & Audit Workgroup

Annual. Debt Management. August 20, 2009 Board of Trustees Finance & Audit Workgroup Annual Debt Management Policy Report August 20, 2009 Board of Trustees Finance & Audit Workgroup Debt Management Issues USF Carefully Rationing Debt Capacity Slowing Revenue Growth and Past Increase in