Board of Visitors Finance Subcommittee Meeting September 10, 2014 1
Agenda I. Introduction and Comments from Chair II. Reports A. Research B. Philanthropy C. Observations from Completion of Recent Admissions Cycle D. Strategies to Leverage the University s AAA Balance Sheet 2
I. Introduction and Comments from Chair 3
Finance Subcommittee Charge Develop a financial/pricing model (including a long term financial plan) that promotes: Affordability for low-income and middle-income students and their families Predictability of tuition and fee costs and associated financial aid A sustainable student financial aid program Sustainable funding for instruction that preserves and enhances academic excellence Diversity and inclusiveness Process efficiencies and savings achieved through the Organizational Excellence initiative 4
II.A. Research 5
Research Background UVa decided to be research intensive long ago Attracts top students and faculty, achieves UVa mission Research is important lever for academic excellence and supports Cornerstone Plan However not a revenue lever to subsidize tuition Every dollar of research revenue must translate into at least one dollar of research expenditure Federal agencies and sponsors support some costs associated with research infrastructure (F&A) Institution and state must co-invest 6
Research Requires Investment Research does not generate net dollars F&A are those costs which cannot be identified readily and specifically with a particular sponsored project Examples: Shared resources such as libraries, electricity, maintenance of buildings, and administrative support Actual UVa F&A costs are 67%, government grants provide F&A of 58%, our overall recovery due to mix of grants is 39%, so UVa F&A subsidy is 28% Research costs UVa about 17 cents on every dollar of research (i.e. we pay $0.28 for every $1.67 of research conducted) Research provides a deep discount of 83% on our $275M+ annual portfolio, which is critical to our research university mission 7
UVa Research Awards vs Recovered F&A FY 2010-2014 $400,000,000 $350,000,000 $300,000,000 5% uptick in 2014 research awards $250,000,000 $200,000,000 $150,000,000 Stability due to F&A rate increase negotiated with gov t., and some diversification of grant sources Awards F&A $100,000,000 F&A recoveries lag awards $50,000,000 $- 2010 2011 2012 2013 2014 Stimulus (ARRA) 8
UVa Research Eco-Cycle Landscape view & pan-university, school & scholar level programs Philanthropy & university investments Seeding research, creative scholarship, Innovation, ideas PEOPLE: hiring, renewal, retention Top faculty & students Premiere Research University Grants and Contracts New understanding, creations, discoveries, innovations Reputation and impact Impact on the World New Ideas Philanthropy New ventures, licensing revenues, corporate partnerships An eco-cycle of people, actions, and resources producing UVa impact 9
UVa Research Growth UVa annual sponsored research is equivalent to nearly $5 billion in additional endowment Research distinguishes UVa from other institutions attracts great faculty and graduate students, and provides experiences for undergraduate students Research is an important lever for academic excellence... but is not a revenue lever To grow, we must seed early-stage research and plan for generational faculty turnover Strategic recruitment leads to targeted research growth To support growth we need investments 10
II.B. Philanthropy 11
Post-Campaign Analysis Impact of Big Gifts Profile of $1M Donors Principal Gift Pipeline
Recent Progress Restructuring and Rebuilding the Team in University Development Organizational Discipline and Collaboration Initial Campaign Planning
Impact of Big Gifts
Profile of $1M+ Donors
Principal Gift Pipeline Principal Gift Pipeline Score Description Annual Gift Dollar Range # Prospects Tier 1 $1 Million+ 168 Tier 2 $750,000 - $1 Million 831 Tier 3 $500,000 - $750,000 1,373 Tier 4 $250,000 - $500,000 2,592 Note that figures above count Individuals, not Households
Geographic Distribution of Principal Gift Prospects 16 3 6 3 5 9 12 1 5 10 391 1 9 281 3 3 31 2 2 2 23 36 7 19 24 7 67 81 157 9 1,283 184 9 9 5 4 2 59 65 105 2 29 103 179 8 185
Restructuring/Rebuilding Regional Fundraiser Redeployment Priority Based Principal Gifts Model Gift Planning Parents Development Expansion Foundation Focus Discovery Team **No Additional Funding all redeployment of existing funds
Organizational Discipline Performance Metrics Travel Planning Strategic Goal Setting
Need-Based Scholarships Regional Development vs. Need-Based Development Redeployed three FTEs (July 14) Presidential Events Communications/Matching Challenge Website Presidential Direct Mail Appeal E-newsletter Pilot Initial Results: $9M+ in commitments since late 13
Samples of Success Penn Goal of $600 million for Scholarship over $360 million raised 797 new scholarships and additions to 793 existing scholarships Matching funds encouraged over 65 people to give over $2 million each Matching funds at multiple levels, including recent alums
Samples of Success Penn State $500 million for scholarships in the last campaign $120 million+ was raised through Trustee Matching Scholarship Program--matched the endowment yield in perpetuity (1:1 and 2:1 matches) Match went into effect immediately
Going Forward Tell the Students Stories Formalize a Matching Program to Leverage Additional Support Educate/Incentivize the Schools/Foundations
II.C. Observations from Completion of Recent Admissions Cycle 24
Profile of Incoming First-Year Class of 2018 Application increase Early Action volume Selectivity Academic profile Class diversity Virginia residents Yield Impact of Blue Ridge Scholarship Partnerships 25
Highlights from the Class of 2018 Record applicant pool (+7%) 31,021 Early Action applications (+8%) 14,799 Largest enrolling class in history 3,709 First generation (even) 348 Low income (+10%) 263 African American (+17%) 238 Hispanic (+21%) 244 Asian (+16%) 481 Multi-race (+15%) 180 Minority 31% Financial aid recipients 34% Blue Ridge Scholars 110 26
Highlights from the Class of 2018 Offer Rate Yield SAT Mean Top Decile Virginians 29.0% 41.4% 2009 89.1% 67% 27
Influential factors in student decisions Academic reputation or prestige Value/Return on Investment Need blind and meeting full-need Net cost of attendance-affordability and availability of financial aid Culture or fit Student/faculty interactions 28
AccessUVa Mission driven Components of AccessUVa Race neutral Contributes to diversity Impact on recruitment and yield Virginia vs. non-virginia Reputational impact Access Communications Task Force 29
THE UNIVERSITY of VIRGINIA UNIVERSITY COMMUNICATIONS 30
UNIVERSITY COMMUNICATIONS DEFINING OUR ROLE Articulate and promote the value of the University of Virginia, in order to: More effectively compete for faculty talent; Attract the best and brightest students; Grow the reputation and reach of the institution; Galvanize constituent support in advance of the bicentennial; Support critical business and strategic priorities; and Demonstrate the value the University delivers to the people of the Commonwealth, the nation and the world. 31
TELLING THE UVA STORY 32
UNIVERSITY COMMUNICATIONS First Steps, Early Wins Use of social to leverage earned media Increase in national rankings and best practice in social media for higher ed Leveraging social platforms for increased engagement Better use of photography to capture the essence of the student experience Strategic use of videography and multimedia to engage key audiences 33
UNIVERSITY COMMUNICATIONS Video Highlights Video Placeholder 34
UNIVERSITY COMMUNICATIONS Social Media Growth 35
THE UNIVERSITY of VIRGINIA Fall advertising: Uncommon Thinking 36
OWNED & PURCHASED MEDIA VISIBILITY Special edition of Forbes, showcasing the Commonwealth of Virginia as a hotbed of investment opportunity and innovation. UVA has a full-page ad. Football season provides important venues for brand visibility including: full page program ads, :30 television spot, :30 radio ads, online banner advertising, and more. Donation from Gannett of 1M digital impression ads will run on USAToday.com. Virginia Magazine provides a critical platform for brand visibility with the alumni audience. We have an ongoing display advertising contract at the CHO airport that is due for rotation. 37
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II.D. Strategies to Leverage the University s AAA Balance Sheet 46
Background Since last Finance Subcommittee meeting: Reviewed Began Considered Reviewed the current and discussion on alternative composition historical appropriate forms of and liquidity operating levels of balance sheet needs of our requirements liquidity liquidity debt portfolio 47
Ongoing Subcommittee Discussion Required Operating Funds Allocable Operating Funds Endowment Spending Rate Short- vs. Long-Term Funding 48
Board of Visitors Policy on Required Reserves Capital: At least 1.5% of replacement value of buildings and equipment Intended to provide sufficient funds for ongoing capital renewal and replacement Operating: Three months of operating expenses Intended to provide sufficient liquidity for monthto-month operating needs 49
Monthly Days Cash on Hand An Important Liquidity Measure for AAA Rating 50
Ongoing Subcommittee Discussion Required Operating Funds Allocable Operating Funds Endowment Spending Rate Short- vs. Long-Term Funding 51
Strategic Use of Operating Funds What targets for liquidity should we establish to determine adequate levels of operating funds? In seeking to leverage our strong operating position and create sustainable funding for strategic needs: How much of our operating funds can be thoughtfully harvested for strategic needs? How often should we review operating funds balances and liquidity targets? Consider current and future operating risks such as state appropriation, research funding, health care reform. 52
Ongoing Engagement with UVIMCO Date UVIMCO Long-Term Pool Return 06/30/2008 5.9% 06/30/2009-21.0% 06/30/2010 15.1% 06/30/2011 24.3% 06/30/2012 5.1% 06/30/2013 13.4% 06/30/2014 19.0% 06/30/2015 Estimated at 7.5% Thoughtful discussion on how best to deploy allocable operating funds 53
Ongoing Subcommittee Discussion Required Operating Funds Allocable Operating Funds Endowment Spending Rate Short- vs. Long-Term Funding 54
UVa s Endowment Spending Percentage Inflation Growth Within a Band $250 $200 Endowment Spending (in millions) $150 $100 4.00%* 4.50%* 5.00%* 5.50%** 5.25% 4.63% 4.83% 4.95% 4.68% $50 $0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Potential Lower Limit of Band (4%) Potential Upper Limit of Band (6%) Actual Distribution * Rate set by Board because inflationary change would have caused rate to fall below the band. ** Rate set by Board because inflationary change would have caused rate to fall above the band. 55
Endowment Sensitivity Analyses The following four slides illustrate sensitivity analyses related to the potential impact on the endowment distribution given three drawdown scenarios: 1-year Drawdown Probability for the Long Term Pool Probability for the Policy Portfolio 30% 0.2% 1% 25% 1% 2% 15% 8% 10% The Long Term Pool currently has a slightly lower level of market risk versus the Policy Portfolio, resulting in a relatively lower probability of a given one-year drawdown compared to the Policy Portfolio 56
Impact of a 30% Decline in Market Value Scenario 1: 30% decline in 2015 The distribution percentage would rise to 6.5% in 2017, exceeding the top of the band. This would trigger BOV review and possible action to re-set the rate. Distribution in $ Millions R&V Endowment Payout (with -30% Drawdown in FY 2015 and no Adjustments to Spending $) 260 240 220 200 180 160 199 164 214 167 239 170 159 174 178 183 189 194 159 160 161 161 161 Assumptions -30% investment return in 2015 +7.5% investment return in years 2016-21 3% HEPI inflation each year 0.7% fees each year 140 120 100 133 143 106 107 107 107 107 2014 2015 2016 2017 2018 2019 2020 2021 Fiscal Year 6% Ceiling $ 4% Floor $ Distribution $ The unadjusted distribution amount will increase at the five-year average HEPI rate. 57
Impact of a 25% Decline in Market Value Scenario 2: 25% decline in 2015 The distribution percentage would rise to 6.1% in 2017, just above the 6% ceiling. This would trigger BOV review and possible action to re-set the rate. Distribution in $ Millions R&V Endowment Payout (with -25% Drawdown in FY 2015 and no Adjustments to Spending $) 260 240 220 200 180 160 199 164 214 167 239 170 159 194 189 183 178 174 171 172 174 175 176 Assumptions -25% investment return in 2015 +7.5% investment return in years 2016-21 3% HEPI inflation each year 0.7% fees each year 140 120 100 133 143 114 115 116 117 117 2014 2015 2016 2017 2018 2019 2020 2021 Fiscal Year 6% Ceiling $ 4% Floor $ Distribution $ The unadjusted distribution amount will increase at the five-year average HEPI rate. 58
Impact of a 15% Decline in Market Value Scenario 3: 15% decline in 2015 With a -15% decline in FY15, the distribution percentage would rise to 5.4% in 2017, and will continue to rise slowly in each year thereafter. However, the spending rate would continue to stay within the 4-6% band in the foreseeable future. Assumptions -15% investment return in FY 2015 +7.5% investment return in years 2016-21 3% HEPI inflation each year 0.7% fees each year Distribution in $ Millions R&V Endowment Payout (with -15% Drawdown in FY 2015 and no Adjustments to Spending $) 260 240 220 200 180 160 140 120 100 199 164 133 214 167 143 239 170 159 194 174 197 178 200 183 203 189 205 194 129 131 133 135 137 2014 2015 2016 2017 2018 2019 2020 2021 Fiscal Year 6% Ceiling $ 4% Floor $ Distribution $ The unadjusted distribution amount will increase at the five-year average HEPI rate. 59
Impact of a 15% Decline in Market Value with an Adjusted Spending Rate (+19 bps) Scenario 4: 15% decline in 2015 and adjusted spending rate With a 15% decline in FY15, the distribution percentage would rise to 5.4% in 2017. In order for the spending to reach the 6% ceiling in five years, the FY16 spending could be increased to $178M, or 4.47%, compared to current plan of $170M, or 4.28%. This is a 19 bps adjustment to FY16 spending. Assumptions -15% investment return in FY 2015 (8% likelihood) +7.5% investment return in years 2016-21 3% HEPI inflation each year 0.7% fees each year Distribution in $ Millions R&V Endowment Payout (with -15% Drawdown in FY 2015 and 4.47% Spending Rate in FY 2016) 260 240 220 200 180 160 140 120 100 199 164 133 214 167 143 239 178 159 194 182 196 186 199 191 201 203 197 129 131 132 134 135 2014 2015 2016 2017 2018 2019 2020 2021 Fiscal Year 6% Ceiling $ 4% Floor $ Distribution $ The unadjusted distribution amount will increase at the five-year average HEPI rate. 60
Observations The projected FY16 endowment distribution will be 4.3% of the endowment, providing headroom within the 4%-6% band. A drawdown of 24% or greater to the endowment in FY15 would cause the spending rate to exceed the 6% ceiling in FY17. The probability of a 24% drawdown for UVIMCO s Long Term Pool in any given year is approximately 1%. A 15% drawdown (approximately 8% probability) allows spending to continue to increase within the band. Adding 19 bps to FY16 distribution would cause the spending rate to reach 6% cap in FY21, assuming a 7.5% investment return in every year post-drawdown. A 25-basis point increase in the endowment spending rate generates approximately $4.5 million available for unrestricted purposes. 61
Ongoing Subcommittee Discussion Required Operating Funds Allocable Operating Funds Endowment Spending Rate Short- vs. Long-Term Funding 62
Strategic Use of Debt Portfolio What is an appropriate level of short-term and longterm funding in our debt portfolio? Operating Risks (state appropriations, research funding, health care reform) Interest expense vs. rollover or put risk Liquidity needs of debt portfolio and how to use alternate sources of liquidity (cash, credit lines) The impact of operating fund decisions - what is an appropriate risk tolerance for debt portfolio Working under parameters of Board-approved debt policy - 50% variable rate debt limit 63