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REVISED UNIVERSITY OF VIRGINIA BOARD OF VISITORS MEETING OF THE FINANCE COMMITTEE NOVEMBER 16, 2009 FINANCE COMMITTEE Monday, November 16, 2009 1:30 – 3:00 p.m. Board Room, The Rotunda Committee Members: Vincent J. Mastracco, Jr., Chair Daniel R. Abramson A. Macdonald Caputo The Hon. Alan A. Diamonstein Helen E. Dragas Robert D. Hardie Randal J. Kirk Austin Ligon Warren M. Thompson John O. Wynne, Ex-officio Daniel M. Meyers, Consulting Member AGENDA PAGE I. II. CONSENT AGENDA (Mr. Sandridge) A. Purchase of 11th Street Garage Pedestrian Link and Air Rights from the University of Virginia Foundation B. Sale or Conveyance of Property Located at 608 Spruce Street, Appalachia, Virginia C. Creation of Quasi-Endowment for the School of Engineering and Applied Science ACTION ITEMS (Mr. Sandridge) A. Short-Term Investment Policy (Mr. Sandridge to introduce Ms. Yoke San Reynolds; Ms. Reynolds to report) B. Medical Center Joint Ventures with MediCorp Health System for Stereotactic Head and Body Radiosurgery III. REPORTS BY THE EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER (Mr. Sandridge) A. Vice President’s Remarks B. Impact of State Budget Reductions (Mr. Sandridge to introduce Colette Sheehy; Ms. Sheehy to report) C. Financial Model of the Future: Conclusions D. Endowment Report – Market Value and Performance as of September 30, 2009 (Mr. Sandridge to introduce Christopher Brightman; Mr. Brightman to report) E. Miscellaneous Financial Reports 1. Academic Division Accounts and Loans Receivable 2. Capital Campaign Summary Report 3. Internal Loans to University Departments and Activities 1 1 3 6 8 10 11 12 14 23 25 26 PAGE 4. 5. 6. IV. Quarterly Budget Report Endowment/Investments for University of Virginia and Related Foundations Quasi-Endowment Actions APPENDIX University of Virginia Short-Term Investment Policy 27 30 31 UNIVERSITY OF VIRGINIA BOARD OF VISITORS CONSENT AGENDA A. PURCHASE OF 11TH STREET GARAGE PEDESTRIAN LINK AND AIR RIGHTS FROM THE UNIVERSITY OF VIRGINIA FOUNDATION: Authorizes the Executive Vice President and Chief Operating Officer to execute the documents necessary to purchase the 11th Street Garage Pedestrian Link and air rights. The Pedestrian Link from the 11th Street Garage to the East Garage was completed in 2009. It provides covered and convenient pedestrian access from the 11th Street Garage across an active railroad line and hospital. It is appropriate that we formally purchase the improvements and air rights from the University of Virginia Foundation. ACTION REQUIRED: Approval by the Finance Committee and by the Board of Visitors APPROVAL TO PURCHASE 11th STREET GARAGE PEDESTRIAN LINK AND AIR RIGHTS FROM THE UNIVERSITY OF VIRGINIA FOUNDATION WHEREAS, the University of Virginia desires to purchase the 11 Street Garage Pedestrian Link and the associated air rights from the University of Virginia Foundation. TH RESOLVED, the purchase of the 11th Street Garage Pedestrian Link and air rights parcel from the University of Virginia Foundation is approved; and RESOLVED FURTHER, the Executive Vice President and Chief Operating Officer is authorized to execute any and all documents pertaining to the purchase of the real estate. B. SALE OR CONVEYANCE OF PROPERTY LOCATED AT 608 SPRUCE STREET, APPALACHIA, VIRGINIA: Authorizes the transfer of 608 Spruce Street, Appalachia, Virginia to the University of Virginia Foundation for further disposition. 608 Spruce Street was bequeathed to the College at Wise by Ms. Charlotte King on November 30, 1998. The gift was subject to a life estate, the beneficiary of which has recently passed away. The College at Wise is now responsible for the maintenance and upkeep of the property. It is recommended the property be transferred to the University of Virginia Foundation for further disposition. The property – an approximately 2,454 1 square-foot, single family home situated on .521 acres – is appraised at $70,000. ACTION REQUIRED: Approval by the Finance Committee and by the Board of Visitors APPROVAL TO SELL OR CONVEY PROPERTY LOCATED AT 608 SPRUCE STREET, APPALACHIA, VIRGINIA WHEREAS, by Last Will and Testament dated August 11, 1998, Charlotte A. King devised to Clinch Valley College of the University of Virginia (now known as The University of Virginia’s College at Wise) her residence located at 608 Spruce Street, Appalachia, Virginia (the “Property”), subject to a life estate in favor of her sister, Louise Adams Minor; and WHEREAS, Louise Adams Minor is now deceased such that title to the Property is vested free and clear in the name of Clinch Valley College of the University of Virginia (now known as The University of Virginia’s College at Wise); and WHEREAS, the Board of Visitors finds it to be in the best interest of the University of Virginia to dispose of the Property. RESOLVED, the Board of Visitors approves the sale of the Property to the University of Virginia Foundation (the “Foundation”) or any other interested party; and RESOLVED FURTHER, the Board of Visitors, in the alternative, approves the conveyance of the Property to the Foundation, subject to the conditions that (i) the Foundation shall market and sell the Property for the benefit of the University of Virginia, on such terms as are approved by the Executive Vice President and Chief Operating Officer or his designee, and (ii) the net proceeds of such sale shall be returned to the University for its College at Wise, in accordance with the instructions of the Executive Vice President and Chief Operating Officer or his designee; and RESOLVED FURTHER, the Executive Vice President and Chief Operating Officer is authorized, on behalf of the University, to approve and execute agreements and related documents, to incur reasonable and customary expenses, and to take such other actions as deemed necessary and appropriate to consummate such property sale or conveyance and to facilitate the Foundation’s activities, if any, concerning the Property; and 2 RESOLVED FURTHER, all prior acts performed by the Executive Vice President and Chief Operating Officer, and other officers and agents of the University, in connection with such property sale or conveyance and the Foundation’s activities, if any, concerning the Property, are in all respects approved, ratified and confirmed. C. CREATION OF QUASI-ENDOWMENT FOR THE SCHOOL OF ENGINEERING AND APPLIED SCIENCE: Authorizes the creation of a quasiendowment account by the School of Engineering and Applied Science to fund chaired professorships with monies to be received from the State in support of the joint collaboration between various State entities and Rolls-Royce North America. In June 1996, the Board of Visitors delegated authority to the Executive Vice President and Chief Operating Officer to approve individual quasi-endowment transactions, including establishments and divestments, of less than $2 million. Individual quasi-endowment transactions of $2 million or more require the approval of the Board of Visitors. In February 2008, the Board of Visitors approved a resolution to support an educational and research collaboration among the University of Virginia, the Commonwealth of Virginia, Virginia Polytechnic Institute and State University, the Virginia Community College System, Rolls-Royce North America (USA) Holdings Co., and related parties as set forth in a Memorandum of Understanding dated November 20, 2007, and signed by all parties. An integral part of the collaboration was Rolls-Royce’s interest in creating a partnership with the Commonwealth of Virginia, the University of Virginia, Virginia Polytechnic Institute and State University and the Virginia Community College System for a number of joint research and education initiatives related to business, mechanical engineering, and aerospace technology. One of the initiatives of the collaboration is the creation of the Center for Aerospace Propulsion Systems (“CAPS”) – a partnership among Rolls-Royce, the University of Virginia School of Engineering and Applied Science and Virginia Tech's College of Engineering to foster collaborative aerospace research while creating new educational opportunities for students at both schools. 3 The University of Virginia’s School of Engineering and Applied Science stands to benefit from the creation of these endowed professorships. These new faculty members will have expertise to conduct research of interest to CAPS, as well as the Commonwealth Center for Advanced Manufacturing, an applied research center associated with the partnership. In support of this partnership, the Commonwealth of Virginia will provide funding to the University of Virginia, Virginia Tech, and the Virginia Community College System over a five-year period beginning in fiscal year 2010. Of the money provided by the State over the five-year period, $7,666,667 is intended to fund chaired professorships in the University of Virginia’s School of Engineering and Applied Science (SEAS). The State funding provided to SEAS in fiscal year 2010 is expected to be $3,666,667. SEAS will create a quasi-endowment for the investment of this initial installment, as well as future installments, from the State. The School will maintain the quasi-endowment in perpetuity using distributions from the quasi-endowment to support the chaired professorships. ACTION REQUIRED: Approval by the Finance Committee and by the Board of Visitors APPROVAL TO CREATE A QUASI-ENDOWMENT FOR THE SCHOOL OF ENGINEERING AND APPLIED SCIENCE WHEREAS, the University has entered into an educational and research collaboration among the University of Virginia, the Commonwealth of Virginia, Virginia Polytechnic Institute and State University, the Virginia Community College System, RollsRoyce North America (USA) Holdings Co., and related parties as set forth in the Memorandum of Understanding dated November 20, 2007; and, WHEREAS, one of the initiatives of the collaboration is the creation of the Center for Aerospace Propulsion Systems (“CAPS”) – a partnership among Rolls-Royce, the University of Virginia School of Engineering and Applied Science and Virginia Tech's College of Engineering to foster collaborative aerospace research while creating new educational opportunities for students at both schools; and WHEREAS, in support of this partnership, the Commonwealth of Virginia will provide funding to the University of Virginia over a five-year period beginning in fiscal year 2010, a portion of 4 which will fund chaired professorships in the School of Engineering and Applied Science. WHEREAS, it is expected that the State funding provided to SEAS in fiscal year 2010 for chaired professorships will be $3,666,667, and the School wishes to create a quasi-endowment for the long-term investment of these monies; RESOLVED, that the Board hereby authorizes the creation of a quasi-endowment account by the School of Engineering and Applied Science to fund chaired professorships with monies to be received from the State in support of the joint collaboration between various State entities and Rolls-Royce North America. 5 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 16, 2009 COMMITTEE: Finance AGENDA ITEM: II. A. Short-Term Investment Policy BACKGROUND: At the Board of Visitors’ September 2009 meeting, there was discussion of the new Financial Model of the Future for Debt and Liquidity, accompanied by a white paper on the same topic. The Board of Visitors was informed that policies for the University’s Internal Bank (working capital) would be developed for future review. The Short-Term Investment Policy is the first of these policies, replacing the Board of Visitors’ Current Funds Investment Guidelines approved on October 5, 2002. Since that time, the Governmental Accounting Standards Board has mandated a new financial accounting model that, among other changes, eliminated the use of the term “Current Funds.” Additionally, at the request of the University, the General Assembly enacted legislation that permits investment of working capital in a broader array of investment vehicles. Consequently, on October 5, 2007, the Board of Visitors approved the delegation of cash management authority to the Vice President and Chief Financial Officer, authorizing the investment of “cash of and held by the University” in investment vehicles as permitted by law. This action has created a need for an updated short-term investment policy. As recounted in the white paper on Debt and Liquidity, the University, in July 2007, implemented its Internal Bank, consolidating investment and cash management activities across all segregated fund sources. To provide liquidity when needed, the University’s Treasury Operations office manages the investment of cash in various commercial bank accounts, a shortterm investment vehicle named the Aggregate Cash Pool – which is outsourced to the Dreyfus Corporation – and the UVIMCO Long-Term Pool. Investment policies for the UVIMCO Long-Term Pool are approved by the UVIMCO Board of Directors. Investment policies for the University’s short-term investments remain within the purview of the Board of Visitors. DISCUSSION: The Debt and Liquidity white paper contains an explanation of our investment philosophy for working capital: to maximize safety and to optimize liquidity of these assets, 6 which therefore earn market returns consistent with the allocation. This philosophy was tested during the financial market stresses of 2008 and served the University well. The Board of Visitors will be asked to review and approve the University of Virginia Short-Term Investment Policy (see Appendix) that seeks to implement this philosophy. The proposed policy formalizes current practices and contains risk mitigation provisions including standards of care, custody and control requirements, permitted investments and concentrations, and standards for selecting external managers for short-term investments. This policy would formalize current practices. ACTION REQUIRED: Approval by the Finance Committee and by the Board of Visitors APPROVAL OF SHORT-TERM INVESTMENT POLICY WHEREAS, the University wishes to replace the “Current Funds Guidelines” approved by the Board of Visitors on October 5, 2002, to reflect several changes in external regulations. RESOLVED, the Board of Visitors approves the investment philosophy that the University’s working capital should be allocated to investment instruments that maximize safety and optimize liquidity; and RESOLVED, the Finance Committee recommends approval of the Short-Term Investment Policy attached as an Appendix. 7 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 16, 2009 COMMITTEE: Finance AGENDA ITEM: II. B. Medical Center Joint Ventures with MediCorp Health System for Stereotactic Head and Body Radiosurgery BACKGROUND: The University of Virginia Medical Center desires to expand its stereotactic radiosurgery business by entering into one or more joint ventures with Mary Washington Hospital or its parent, MediCorp Health System (collectively “MediCorp Health System”). DISCUSSION: The University of Virginia Medical Center and MediCorp Health System will establish one or more limited liability companies for the purpose of providing stereotactic head and body radiosurgery to patients at Mary Washington Hospital in Fredericksburg, Virginia. University of Virginia physicians will provide medical direction for the program. ACTION REQUIRED: Approval by the Medical Center Operating Board, the Finance Committee, and the Board of Visitors MEDICAL CENTER JOINT VENTURES WITH MEDICORP HEALTH SYSTEM FOR STEREOTACTIC HEAD AND BODY RADIOSURGERY PROCEDURES WHEREAS, the Medical Center Operating Board and the Finance Committee find it to be in the best interests of the University of Virginia and its Medical Center for the Medical Center to establish one or more joint ventures with Mary Washington Hospital or its parent, MediCorp Health System (collectively “MediCorp Health System”), for purposes of providing stereotactic head and body radiosurgery at Mary Washington Hospital; and WHEREAS, Section 23-77.3 of the Code of Virginia grants authority to the Medical Center to enter into joint ventures. RESOLVED, the University, on behalf of the Medical Center, is authorized to enter into one or more joint ventures with MediCorp Health System to provide stereotactic head and body radiosurgery, with the Medical Center’s interest in each joint venture not to exceed 20 percent; and 8 RESOLVED FURTHER, the Executive Vice President and Chief Operating Officer of the University, in consultation with the Vice President and Chief Executive Officer of the Medical Center, and with the concurrence of the Chair of the Medical Center Operating Board and the Chair of the Finance Committee, is authorized to negotiate the terms of such joint ventures, including execution of contracts and all other documents necessary for the establishment of such joint ventures, on such terms as the Executive Vice President and Chief Operating Officer of the University deems appropriate, and to take such other action as the Executive Vice President and Chief Operating Officer of the University deems necessary and appropriate to consummate the foregoing. 9 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 16, 2009 COMMITTEE: Finance AGENDA ITEM: III.A. ACTION REQUIRED: None Vice President’s Remarks The Executive Vice President and Chief Operating Officer will inform the Board of Visitors of other recent events that do not require formal action, but of which it should be made aware. 10 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 16, 2009 COMMITTEE: Finance AGENDA ITEM: III.B. ACTION REQUIRED: None Impact of State Budget Reductions BACKGROUND: The University has experienced reductions in its state appropriation during the past economic recessions. However, with perhaps the exception of the Great Depression, the current period is unprecedented in its severity of impact on the economy in general and specifically on institutions of higher education, both public and private. Governor Kaine has responded to state revenue shortfalls totaling $7.1 billion from August 2007 through August 2009. Public higher education institutions have been among the state agencies hardest hit. The University has experienced a cumulative general fund budget reduction of $51.5 million over this period. If not for the funds from the American Recovery and Reinvestment Act of 2009, which have temporarily offset the cuts by about $20 million, the impact on colleges and universities would be much more severe. DISCUSSION: The Finance Committee will hear a report on the current financial state of the University; ways in which the University has adjusted operations to meet its reduced funding level; and early predictions of what the next biennium (20102012) may bring. 11 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 16, 2009 COMMITTEE: Finance AGENDA ITEM: III.C. Financial Model of the Future: Conclusions ACTION REQUIRED: None BACKGROUND: Over the past 18 months, the University carefully examined its cash flow in order to preserve liquidity and looked for creative approaches to contain costs. At its 2009 Retreat, the Board of Visitors began to develop a financial model of the future, with the objective of establishing a better platform for financial success coming out of challenging economic conditions. As part of developing this model, the Board of Visitors received necessary background on various sources of revenue and cost containment. This background will help determine how the University could thoughtfully and intentionally maximize both revenue and cost containment to the extent practicable and prudent. At the Board of Visitors July 2009 Retreat, Vice President for Management and Budget Colette Sheehy discussed General Funds, focusing on what is realistic to expect from state funding. Ms. Sheehy also reviewed in-state and out-of-state tuition, looking at historical trends and future projections. Executive Vice President and Provost Tim Garson, Vice President for Research Tom Skalak, and Vice President and Chief Financial Officer Yoke San Reynolds led a discussion of Sponsored Research, an important revenue generator and resource consumer, highlighting indirect cost recoveries and how they are used. Executive Vice President and Chief Operating Officer Leonard Sandridge provided an overview of where and how the University has made permanent cost reductions. At both the July and September Medical Center Operating Board meetings, the Medical Center’s Vice President and Chief Executive Officer Ed Howell and the Associate Vice President for Business Development and Finance for External Business Initiatives Larry Fitzgerald reviewed Medical Center revenues, including increased support for the School of Medicine and the expansion of the Medical Center. 12 In September, the Finance Committee reviewed debt and liquidity and the endowment – both performance and distribution. The Educational Policy Committee focused on intellectual property and the Patent Foundation. The External Affairs Committee discussed annual giving and the capital campaign. DISCUSSION: The work of the last six months underscores the importance of diverse and reliable revenue streams. A key strength of the University is that it is not overly dependent on state funds, a source that has become less and less reliable over time. Of the revenue streams examined by the Board of Visitors, two in particular – tuition and private support (including gifts and endowment) – hold both the potential for growth and the promise for providing the amount of revenue necessary to make a difference in the University’s future. Tuition revenue is driven by two factors – the rates charged and the size of the student body. Over the next several months, it is likely that the Board of Visitors will carefully consider alternatives to price appropriately our educational product relative to the value received by students while continuing to address financial need in a way that ensures a University of Virginia education will be affordable for all. The Board should also discuss a longer-term objective for enrollment growth in the undergraduate population. The University has a long history of success in raising private support for restricted, expendable gifts and endowment. The track record for raising unrestricted dollars, however, is less impressive. Individual schools and major units have the autonomy to raise their own funds to support self-identified purposes. The University intends to expand private support by focusing on fundraising that: 1) addresses institutional priorities; 2) results in gifts for restricted purposes that relieve commitments on the unrestricted endowment; and, 3) provides a more efficient approach to ensure that private support for particular purposes covers the full costs – e.g., operating and maintenance costs of new buildings. The Board of Visitors’ analysis of the Financial Model of the Future has identified key areas of revenue capable of impacting the University’s future. Over the next 12 months, the Board of Visitors’ Special Committee on Planning should address the issues of tuition and enrollment growth as well as identify priorities to which private funds should be applied. 13 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 16, 2009 COMMITTEE: Finance AGENDA ITEM: III.D. Endowment Report – Market Value and Performance as of September 30, 2009 ACTION REQUIRED: None BACKGROUND: The University of Virginia’s endowment is the source of sustainable private support for instruction, service, and research. The University's endowment consistently ranks among the five largest endowments of public institutions and among the 30 largest of all colleges and universities in the nation. Equally important, the endowment per student has consistently ranked among the largest in the nation for a public university. The University of Virginia Investment Management Company (UVIMCO) is a University-related foundation that provides investment management services to the University, independent foundations and other entities affiliated with the University operating in support of its mission. UVIMCO is governed by a board of directors, three of whom are appointed by the Board of Visitors and one of whom is appointed by the University of Virginia President. Daily investment management is delegated to UVIMCO's full-time staff. UVIMCO’s primary objective in managing the endowment pool is to maximize long-term real return commensurate with the risk tolerance of the University. To achieve this objective, UVIMCO actively manages the pool in an attempt to achieve returns that consistently exceed the returns on a passively investable policy benchmark with similar asset allocation and risk. Recognizing that the University must attract outstanding students, faculty, and staff and provide appropriate resources to them, UVIMCO strives to manage pool assets to provide long-term returns that compare favorably with the returns of endowments of other outstanding schools. UVIMCO follows a fundamental value investment philosophy with an emphasis on long-term returns and alignment of interests. UVIMCO believes that market prices for investment securities sometimes deviate materially from reasonable 14 estimates of their intrinsic value. Because such mispricing often persists and grows for long periods, UVIMCO recognizes that consistently exceeding the return of investment markets over short-term periods is unlikely. Nonetheless, UVIMCO is convinced that a fundamental value discipline provides the opportunity for superior long-term returns. Process The UVIMCO board has established a traditional policy portfolio benchmark comprised of public market indices. At present, this policy benchmark is 60 percent equity, 10 percent real estate, and 30 percent fixed income. It represents the investable global securities market, and its historical returns closely track the average returns of the broad universe of institutional investors. The board directs staff to manage actively the endowment pool, primarily by employing external investment managers, with the goal of pursuing returns substantially in excess of this passively investable policy benchmark. Staff researches investment strategies seeking opportunities to employ skilled managers within all asset classes and regions of the world. Some of these managers focus in niches while others have a global reach. Many use leverage and/or sell securities short. Some invest in private markets. While few of these individual investment strategies resemble the market capitalization weighted indices that comprise the policy benchmark, the mix of active strategies produces a set of asset class exposures and risk similar to the policy portfolio benchmark. Performance Long-term performance of the UVIMCO pool continues to exceed the returns available through ownership of the passive policy portfolio benchmark. Over the 10 years ended September 2009, the pool has compounded at a rate of 10 percent per annum, strongly outperforming the 4 percent annualized return for the policy benchmark. Over the five years ended September, the pool compounded at 7 percent per annum, outperforming the 5 percent return for the policy benchmark. For the quarter ended September the pool appreciated by 6 percent, lagging far behind the 14 percent return for the policy benchmark. This recent underperformance is attributable to the pool’s allocation to alternative investments. The 22 percent 15 allocation to public equity matched the 18 percent return of the global equity market, and the 28 percent allocation to bond, credit, absolute return, and cash strategies appreciated by 7 percent versus 4 percent for the bond market. The half of the pool allocated to long/short, private equity, and real asset funds, however, did not appreciate this quarter. These alternative investments, which have provided very strong returns over many years, do not closely track the short-term pattern of public market securities prices. For the past quarter, the public equity portfolio matched the 18 percent return offered by the benchmark MSCI All Country World Index. Emerging markets and smaller capitalization securities outperformed the averages, but the assumption of equity risk in all its flavors was broadly rewarded during the quarter. Over the trailing 10-year period, the public equity portfolio has compounded at a rate of 8 percent per annum, strongly outperforming the 2 percent annualized rate of return available through ownership of the passive benchmark. The long/short equity portfolio returned 1 percent for the quarter, underperforming both the 8 percent return of the Tremont Long/Short Equity composite and the 18 percent return of the global equity market. While manager returns varied considerably over the past quarter, no manager outperformed the global equity markets. UVIMCO’s long/short managers hold substantial short positions in the stocks of smaller, more expensive, less profitable and highly levered companies, the prices of which have led the recent stock market rally. Over longer periods, the long/short strategy has been very profitable. Over the trailing 10-year period, the long/short equity portfolio returned an annualized 12 percent while the U.S. equity market was approximately flat and the global market was up only 2 percent per annum. For the one-year period ending September the private equity portfolio was down 23 percent, real estate down 45 percent, and resources down 24 percent. Losses in private funds are not directly comparable to public market indices. Staff are using net asset values reported on the most recent manager statements (as of June at this writing) to value private funds and have not marked up positions to take account of recent appreciation in public markets. Over longer-term periods, the returns on private funds have exceeded the returns provided by public market indices. 16 The absolute return portfolio returned 7 percent for both the quarter and the 10 years ending September. These results are consistent with the objective for this idiosyncratic strategy. Staff intends to achieve long-term returns at or above the policy benchmark with low correlation to markets. The credit portfolio returned 13 percent for the quarter ending September, benefitting from appreciation of risky assets across the distressed corporate and mortgage-related securities that comprise the bulk of this portfolio. Over the trailing 10year period, the credit portfolio has provided a compound annual return of 7 percent versus 6 percent for high yield and investment grade bond indices. A slight decline in government bond yields during the quarter ending September produced a 2 percent gain in the value of the government bond portfolio. Over the trailing 10-year period, the internally directed government bond portfolio has provided a compound annual return of 9 percent, versus the 6 percent return provided by investment grade and government bond indices. Peer Comparison As displayed on the table below, UVMICO’s long-term returns for periods ended June 2009 compare favorably with the returns reported by other institutional investors including large university endowments. For fiscal year 2009, large University endowments recorded larger losses than smaller endowments, and colleges and universities recorded larger losses than the broad universe of institutional investors. Even after this difficult year, large university endowments have achieved far higher returns than other institutional investors over three-, five-, 10-, and 20-year periods. 17 Period Ending June 30, 2009 Long-Term Pool 1 YR (21.0) 3 YR 1.6 5 YR 6.5 10 YR 9.5 20 YR 11.6 Peer Data (1) TUCS All Master Trusts Top Quartile TUCS All Master Trusts Median TUCS All Master Trusts Bottom Quartile (2) Cambridge Universe Top Quartile Cambridge Universe Median Cambridge Universe Bottom Quartile (3) Cambridge $2+ Billion Top Quartile Cambridge $2+ Billion Median Cambridge $2+ Billion Bottom Quartile (1) (12.9) (17.0) (23.6) (0.8) (2.5) (5.8) 3.1 2.1 (0.3) 3.9 2.9 0.9 8.4 7.9 7.3 (17.9) (19.9) (22.3) (0.6) (1.5) (3.0) 4.9 3.7 2.6 5.4 4.2 3.2 9.6 8.7 8.0 (18.2) (21.2) (23.2) 0.5 (0.4) (1.2) 7.3 5.8 3.9 8.9 7.2 4.6 11.5 10.4 9.3 Trust Universe Comparison Service (TUCS) reports performance of nearly 1300 institutions representing $3.04 trillion in assets under management. (2) Cambridge Universe consists of 168 colleges and universities. 145 of those institutions self-reported returns as of June 30, 2009. An additional nine reported preliminary results for a total of 154 colleges and universities contributing to the displayed returns. (3) Represents data for 24 colleges and universities with more than $2 billion in assets as compiled by Cambridge Associates. Nine of the 24 have not reported official Cambridge data; preliminary results and self-reported returns were used. Position The policy portfolio benchmark is comprised of 60 percent equity, 10 percent real assets, and 30 percent fixed income. In line with these policy allocations, 63 percent of the long-term pool is invested in public, private, and long/short equity strategies, 10 percent is invested in real estate and resource strategies, and 28 percent is invested in bonds, credit, absolute return, and cash. The pool remains defensively positioned with 14 percent in cash and government bonds and low borrowing. Last year the pool became uncomfortably over-committed to private funds as a result of a rapid pace of commitments in 2005, 2006, and 2007, an additional 10 percent tactical allocation to private credit in 2008, and the collapse of capital markets last fall. Over recent quarters, staff significantly reduced commitments by transferring uncalled commitments to other investors, selling fund positions in the secondary market, negotiating fund size reductions, and ceasing new commitments. The pool has now reached a more comfortable level of uncalled commitments and is approaching the inflection point where staff will stop reducing commitments and slowly resume making new private fund investments. 18 19 20 21 This page intentionally left blank. 22 MISCELLANEOUS FINANCIAL REPORTS Finance Committee University of Virginia November 16, 2009 UNIVERSITY OF VIRGINIA ACADEMIC DIVISION FINANCIAL REPORT ACCOUNTS AND LOANS RECEIVABLE AS OF SEPTEMBER 30, 2009 Summary of Accounts Receivable: The University’s Academic Division’s total accounts receivable at September 30, 2009, was $55,367,000 as compared to $19,221,000 at June 30, 2009. The major sources of receivables at September 30, 2009, were student accounts of $37,314,000 and sponsored programs of $13,979,000. The past due receivables over 120 days old were $1,978,000 as of June 30, 2009, or 3.57 percent of total receivables, which is below the Commonwealth’s management standard of 10 percent. Student Accounts Gross Accounts Receivable Sponsored Programs $ 37,314,000 Less: Allowance for Doubtful Accounts $ 13,979,000 $ 150,000 Net Accounts Receivable $ 37,164,000 Accounts Receivable Greater than 120 Days Past Due $ 375,000 Other Receivables 465,000 $ $ SOURCE: DATE: 23 $ 176,000 13,514,000 $ 1,162,000 4,074,000 Total $ 55,367,000 791,000 3,898,000 $ 54,576,000 441,000 $ 1,978,000 Financial Administration October 12, 2009 UNIVERSITY OF VIRGINIA ACADEMIC DIVISION FINANCIAL REPORT ACCOUNTS AND LOANS RECEIVABLE AS OF SEPTEMBER 30, 2009 Summary of Loans Receivable: The default rate for the Perkins Student Loan Program was 0.48 percent for the quarter ending September 30, 2009. This is based on the cohort default calculation and is well below the 15 percent threshold set by federal regulations. The Health Professions Loan Program default rate remained the same at 0.0 percent. The Nursing Undergraduate Student Loan Program default rate increased by 0.37 percent to 1.88 percent. Both medical loan programs are well below the 5 percent federal threshold. The University Loan Program default rate increased by 0.59 percent to 3.63 percent for the quarter ending September 30, 2009. Current Default Rate Inc./(Dec) From Last Quarter 19,794,000 0.48% (5.45)% 11,000 0.00% 0.00% 1,435,000 1.88% (0.37)% 14,209,000 3.63% 0.59% Gross Loans Receivable Perkins Student Loans $ Health Professions Loans Undergraduate Nursing Loans University Loans Total Student Loan Outstanding $ 35,449,000 24 SOURCE: DATE: 25 Financial Administration October 14, 2009 UNIVERSITY OF VIRGINIA CAPITAL CAMPAIGN SUMMARY As of September 30, 2009 All Units Gifts and Pledge Payments Outstanding Pledge Balances Deferred Gifts Private Grants Gifts in Kind Expendable 807,350,778 201,291,036 88,945,550 164,082,204 66,559,771 Endowment 384,723,088 72,728,797 25,189,818 0 1,325,517 Total 1,192,073,866 274,019,833 114,135,368 164,082,204 67,885,288 Gift and Pledge Total Future Support 1,328,229,339 165,451,316 483,967,220 47,262,704 1,812,196,559 212,714,020 Campaign Total 1,493,680,655 531,229,924 2,024,910,579 43,720,661 1,371,950,000 1,144,082,780 1,628,050,000 1,187,803,441 3,000,000,000 Additional Amounts To Be Raised(1) Total Rector & Visitors Gift Accounts Only Expendable 291,742,129 46,511,678 57,409,383 0 27,312,322 Endowment 222,167,941 18,418,308 9,562,646 0 10,587 Total 513,910,070 64,929,986 66,972,029 0 27,322,909 Gift and Pledge Total Future Support 422,975,512 107,567,069 250,159,482 3,592,539 673,134,994 111,159,608 Campaign Total Additional Amounts To Be Raised Total 530,542,581 TBD 530,542,581 253,752,021 TBD 253,752,021 784,294,602 TBD 784,294,602 Gifts and Pledge Payments Outstanding Pledge Balances Deferred Gifts Private Grants Gifts in Kind Rector & Visitors Unrestricted Giving Gifts and Pledge Payments Deferred Gifts Outstanding Pledge Balances Total NOTE: 3,904,282 200,000 327,086 4,431,368 0 3,904,282 200,000 327,086 4,431,368 (1) Excludes future or revocable support SOURCE: Office of Development and Public Affairs DATE: September 9, 2009 26 UNIVERSITY OF VIRGINIA INTERNAL LOANS TO UNIVERSITY DEPARTMENTS AND ACTIVITIES As of September 30, 2009 INTEREST RATE 2 Cocke Hall 06/30/06 4.75% 1,941,787 1,212,128 729,659 June 2011 ITC ISIS Software 06/30/06 4.75% 1,575,000 1,230,107 344,893 July 2010 National Radio Astronomy Observatory Piping 09/01/06 6.25% 706,833 410,643 296,190 August 2011 Varsity Hall 06/30/07 4.75% 1,517,726 716,649 801,077 March 2012 Wilsdorf Hall 11/01/06 4.75% 3,311,328 2,924,288 387,040 November 2011 Wise Football Facility 10/01/07 4.75% 629,171 98,662 530,509 October 2022 PURPOSE 26 Total Internal Loans Subject to $15M Limit Established by BOV 1 ORIGINAL LOAN AMOUNT PRINCIPAL PAYMENTS MADE TO DATE DATE OF LOAN $ 9,681,845 $ 6,592,477 OUTSTANDING PRINCIPAL $ APPROXIMATE FINAL PAYMENT 3,089,368 NOTES: 1. Per January 1990 Board of Visitors resolution establishing the internal loan pool at $10 million, and per April 2003 Board of Visitors resolution approving the expansion of the internal loan pool from $10 million to $15 million. All internal loans are subject to the approval of the Executive Vice President and Chief Operating Officer. 2. The University’s blended borrowing rate for tax exempt financing is 4.75 percent. charged for the National Radio Atronomy Observatory Piping project. A taxable rate of 6.25 percent is being SOURCE: DATE: Financial Administration October 10, 2009 QUARTERLY BUDGET REPORT As of September 30, 2009 This report compares the actual results for the sources and uses of funds to the Academic Division annual budget (excluding the Medical Center and the University of Virginia’s College at Wise). At the end of the first quarter of 2009-2010, 43 percent of the budgeted sources were collected and 31 percent of the budgeted uses were expended. The operating budget is developed using differing rules and conventions from the audited financial statements, which are developed in accordance with generally accepted accounting principles (GAAP). In some cases, similar descriptions are used in both reports even though the precise definitions and the specific amounts are not identical. However, both sets of figures are accurate for their particular purposes, and both are drawn from the University’s financial applications. Outlined below are several of the differing conventions used in the operating budget and the actual results presented on the accompanying statement: The operating budget is prepared on a cash basis. The operating budget presents tuition and fees as gross income and the full amount of student aid as an expense. In the operating budget, depreciation is not funded and non-capital outlay purchases are recognized as expensed rather than spread over the useful life of the purchase. Debt service, major repair or renovation expenditures occur within the capital outlay accounts – and off the operating budget. The Federal Family Education Loan Program is excluded from the operating budget. Sources of funds are shown net of transfers to capital reserves/projects in the operating budget. Fringe benefit expenditures are included in the operating budget using pooled benefit rates. The operating budget recognizes recoveries of indirect costs only upon distribution of those revenues, and not when billed to granting agencies. A definition of terms is included to explain the categories for the sources and uses of funds. SOURCE: DATE: 28 University Budget Office October 26, 2009 University of Virginia Academic Division 2008-2009 Operating Budget Report As of September 30, 2009 (in thousands) 2009-10 Original Budget Sources of Available Funds, net of transfers to capital reserves Tuition & Fees for Operating Plan State General Fund Appropriation for Operating Plan Sponsored Research for Operating Plan Endowment Distribution Net Gifts Available for Operating Plan Sales, Investment & Other American Recovery and Reinvestment Act of 2009 Net Auxiliary Enterprises for Operating Plan Total Sources of Available Funds Uses of Available Funds Direct Instruction Research and Public Service Library, Information Tech., & Academic Administration Student Services General Administration Operation & Maintenance of Physical Plant Scholarships, Fellowships, & Other Graduate Support Athletics Bookstore Housing and Conference Services Other Auxiliary Operations Total Operating Expenses Total Operating Reserves and Temporary Allocations Total Uses of Available Funds Net Sources and Uses of Operating Funds 29 9/30/2009 Actual Results Variance 9/30/2009 Results Percentage $374,647 $141,011 $299,200 $134,960 $88,702 $28,261 $11,173 $151,595 $1,229,549 $205,444 $131,829 $84,723 ($877) $14,453 $14,789 $1,703 $76,779 $528,843 $169,203 $9,182 $214,477 $135,837 $74,249 $13,472 $9,470 $74,816 $700,706 54.8% 93.5% 28.3% (0.6%) 16.3% 52.3% 15.2% 50.6% 43.0% $312,604 $304,256 $118,148 $32,404 $74,918 $82,031 $136,316 $65,819 95,235 40,859 8,422 18,918 44,434 55,888 $246,785 209,021 77,289 23,982 56,000 37,597 80,428 21.1% 31.3% 34.6% 26.0% 25.3% 54.2% 41.0% $42,788 $29,173 $21,669 $58,179 $1,212,486 14,573 12,782 5,937 15,106 $377,973 28,215 16,391 15,732 43,073 $834,513 34.1% 43.8% 27.4% 26.0% 31.2% $16,663 $1,229,149 2,845 $380,818 13,818 $848,331 17.1% 31.0% $400 $148,025 ($147,625) DEFINITION OF TERMS Sponsored Research -- primarily research projects, but also includes activities restricted to institutional and service programs. Auxiliary Enterprises -- those activities which are supported entirely through fees charged to users, such as housing, athletics, dining services, the telephone system and the bookstore. Instruction -- expenditures for the primary mission of the University, which includes teaching faculty, support staff, instructional equipment, and related routine operating costs. Research -- includes expenditures for activities such as support for research faculty and sponsored research. Activities include the Center for Public Service, the State Climatologist, and the Center for Liberal Arts. Public Service -- includes activities such as the Miller Center of Public Affairs, the Virginia Foundation for the Humanities, and that portion of the medical school's clinical physicians’ salaries and fringe benefits related to patient care. Library, Information Technology and Academic Administration -encompasses the libraries, the activities of the deans of the schools, and other related expenditures. Student Services -- activities whose primary purpose is to contribute to the students' emotional and physical well-being and to their intellectual, cultural, and social development outside the classroom. General Administration -- includes the financial, administrative, logistical, and development activities of the University. Operation and Maintenance of Physical Plant -- includes expenditures for activities related to the operation and maintenance of the physical plant, net of amounts charged to auxiliary enterprises and the Medical Center. 30 Endowment/Long Term Investments for UVa and Related Foundations September 30, 2009 Unaudited (in thousands) Rector and Vis itors Funds The University of Virginia Medical School and related foundations $ The College of Arts and Sciences and related foundations 617,088 Related Foundation Funds Inves ted by UVIMCO $ 28,044 Related Foundation Funds Inves ted by Direction of Foundation Board Alum ni As s ociation Funds Inves ted by UVIMCO $ 5,659 $ Total - $ 650,791 274,906 32,933 8,383 3,648 319,870 The University of Virginia Law School and related foundation 36,406 165,933 - 80,139 282,478 Darden School and related foundation 92,536 173,498 - 4,987 271,021 The McIntire School of Commerce and related foundation 65,458 - 18,844 437 84,739 Batten School of Leadership and Public Policy 82,056 - - - 82,056 School of Engineering and related foundation 65,576 245 2,186 1,460 69,467 University of Virginia's College at Wise and related foundation 35,095 3,612 1,699 8,013 48,419 Graduate School of Arts and Sciences 39,670 - - - 39,670 School of Nursing 32,531 - 1,382 - 33,913 Curry School of Education and related foundation 10,544 5,887 - 1,538 17,969 School of Architecture and related foundation 13,640 - 336 480 14,456 61 - 41 - 102 University of Virginia Medical Center and related foundations 315,321 50,355 3,640 18,373 Centrally Managed University Scholarships 126,595 - - - 126,595 Athletics and related foundation 32,947 50,795 310 580 84,632 Provost 78,332 - - - 78,332 Alumni Association - - 41,582 9,797 51,379 University of Virginia Foundation and related entities - 51,182 - 154 51,336 44,322 6,514 - - 50,836 - 42,680 - - 42,680 40,442 - 38 - 40,480 University - Unrestricted but designated 256,960 - - - 256,960 University - Unrestricted Quasi and True Endowment 154,419 - - - 154,419 University - Unrestricted Other 125,487 - - - 125,487 All Other 161,807 10,037 189,188 - 361,032 129,606 $ 3,726,808 School of Continuing and Professional Studies 30 Miller Center and related foundation Alumni Board of Trustees University Libraries $ 2,702,199 *Includes funds on deposit for other areas/schools not individually listed. **Excludes approximately $34.4 million of board designated pension funds. $ 621,715 $ 273,288 * $ Source: Date: ** 387,689 Financial Administration October 26, 2009 UNIVERSITY OF VIRGINIA QUASI-ENDOWMENT ACTIONS July 1, 2009, through September 30, 2009 The quasi-endowment actions listed below were approved by either (1) the Executive Vice President and Chief Operating Officer, under the following Board of Visitors’ resolutions, or (2) the Vice President and Chief Financial Officer, under the delegation of authority from the Executive Vice President and Chief Operating Officer. In October 1990 and June 1996, the Board of Visitors approved resolutions delegating to the Executive Vice President and Chief Operating Officer the authority to approve quasiendowment actions, including establishments and divestments of less than $2,000,000, with regular reports on such actions. In February 2006, the Board of Visitors approved a resolution permitting approval of quasi-endowment transactions, regardless of dollar amount, in cases in which it is determined to be necessary as part of the assessment of the business plan for capital projects. Additionally, to the extent that the central loan program has balances, they may be invested in the long-term investment pool managed by UVIMCO or in other investment vehicles as permitted by law. Additions from Gifts Amount Berger, Roger Fellowship in French Quasi-Endowment* $ Hecht, Sidney M. Fellowship in Chemistry* 226,249.87 250,000.00 President's Fund for Excellence Unrestricted Quasi-Endowment 49,677.97 University Quasi-Endowment Fund (1) 339,205.83 Total Additions from Gifts to Quasi-Endowments 31 $ 865,133.67 Additions from Endowment Income (Capitalizations) Antrim, Lottie C. Income Capitalization Quasi-Endowment $ Corcoran, W. W. Chair in History Restricted Quasi-Endowment 7,746.66 103,000.00 Corcoran, W. W. Chair in History Income Capitalization 50,000.00 School of Medicine Fund for the Future Quasi-Endowment 523,266.59 Total Additions from Endowment Income to Quasi-Endowments $ 684,013.25 Divestments McIntire School of Commerce Operations Fund 905,331.47 Total Divestments from Quasi-Endowments $ 905,331.47 Notes: *Quasi-endowment newly established or originally funded since July 1, 2009. (1) Includes current unrestricted gifts to the University which, under a standing Board of Visitors resolution, are required to be added to the University's Unrestricted Endowment Fund. SOURCE: DATE: 32 Financial Administration October 7, 2009 APPENDIX Short-Term Investment Policy Table of Contents I. Governing Authority ..............................................................................................................3 II. Scope ......................................................................................................................................3 III. General Objectives ..............................................................................................................3 1. Safety .........................................................................................................................3 2. Liquidity.....................................................................................................................3 3. Yield ...........................................................................................................................4 IV. Standards of Care ................................................................................................................4 1. Prudence ....................................................................................................................4 2. Ethics and Conflicts of Interest ...............................................................................4 3. Delegation of Authority ............................................................................................4 V. Custody, Trust, and Controls...............................................................................................4 1. Custody /Trust...........................................................................................................4 2. Internal Controls .......................................................................................................4 VI. Suitable and Authorized Investments ................................................................................5 1. Investment Types ......................................................................................................5 2. Duration .....................................................................................................................5 3. Collateralization ........................................................................................................5 4. Permitted Investments ..............................................................................................5 VII. Portfolio Risk Management ..............................................................................................7 1. Interest Rate Risk .....................................................................................................7 2. Credit Risk .................................................................................................................7 3. Liquidity Risk ............................................................................................................8 VIII. Investment Parameters & Diversification .......................................................................8 1. Portfolio Diversification ...........................................................................................9 2. Security Downgrades ................................................................................................9 3. Selection of Broker/Dealers ......................................................................................9 4. Engagement of Investment Managers .....................................................................9 IX. Portfolio Benchmarks .......................................................................................................10 I. Governing Authority The University‟s investment program shall be operated in conformance with applicable federal, state, and other legal requirements, including, but not limit to, that certain Management Agreement dated November 15, 2005, by and between the Commonwealth of Virginia and The Rector and Visitors of the University of Virginia, as amended (Chapter 3 of Chapter 943 of the 2006 Virginia Act of Assembly) (including Exhibit R, Policy Governing Financial Operations and Management, thereto); the Security for Public Deposits Act, Chapter 44 (§ 2.2-4400 et seq.) of Title 2.2 of the Code of Virginia, as amended; the Investment of Public Funds Act, Chapter 45 (§ 2.2-4500 et seq.) of Title 2.2 of the Code of Virginia, as amended; the Uniform Prudent Management of Institutional Funds Act, Chapter 15, Article 1.2 (§ 55-268.11 et seq.) of Title 55 of the Code of Virginia, as amended; and § 23-76.1 of the Code of Virginia, as amended, concerning the University‟s investment of endowment funds, endowment income, and gifts. II. Scope The purpose of this policy is to set guidelines for the parameters, responsibilities, and controls for the short term (24 months or less) investment of University funds. Proceeds from tax-exempt bond issues, endowment assets, and money held in bank demand deposit accounts are not covered under this policy. Except for cash in certain legally restricted and special accounts, the University will consolidate cash and reserve balances to optimize University-wide liquidity management and investment earnings and to increase efficiencies with regard to investment pricing, custody/trust and administration. III. General Objectives The primary objectives of the policy are to set short-term investment parameters, establish limits consistent with the University‟s risk tolerance, and provide appropriate benchmarks for performance. Investment activities shall be guided by the following priorities, listed in order: 1. Safety - Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio by mitigating credit risk and interest rate risk. 2. Liquidity - The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. Appendix Page 3 of 11 3. Yield - The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles. IV. Standards of Care 1. Prudence - The standard shall be the "prudent person" standard, except as may otherwise be prescribed by applicable laws or regulations now or in the future. Under the "prudent person" standard, investments shall be made with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. Investment officers acting in accordance with written procedures and this investment policy and exercising due diligence in good faith shall be relieved of personal responsibility for an individual security's credit risk or market price changes, provided deviations from expectations are reported in a timely fashion. 2. Ethics and Conflicts of Interest - The University‟s officers and employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions or otherwise be in violation of state law and/or University policy. 3. Delegation of Authority - Authority to manage the investment program in accordance with this investment policy is granted to the University‟s Vice President and Chief Financial Officer, who shall act and may further delegate in accordance with any procedures and internal controls for the operation of the investment program consistent with this investment policy. V. Custody, Trust, and Controls 1. Custody/Trust - The University will not take physical possession of investment securities. Securities will be held by an independent third-party custodian selected by the University as evidenced by custody/trust receipts in the University‟s name. The custody/trust institution shall annually provide a copy of their most recent report on internal controls (Statement of Auditing Standards No. 70, or SAS 70). 2. Internal Controls - Treasury Operations is responsible for establishing and maintaining an internal control structure designed to ensure that the assets of the University are protected from loss, theft, or misuse. Appendix Page 4 of 11 VI. Suitable and Authorized Investments 1. Investment Types - USD-denominated securities, issued by entities with capitalization of at least $250 million that are in compliance with the Investment of Public Funds Act and the Security for Public Deposits Act will be permitted under this policy. However, from time to time, more stringent requirements may be imposed and approved by the Vice President and Chief Financial Officer in order to ensure that the University‟s goals, as set forth in this policy, are met. 2. Duration - The average duration of any short-term investment portfolio must not exceed nine months. Any individual security may not have a maturity longer than 24 months. 3. Collateralization - Where appropriate and allowed by state law the University may require full collateralization of any investment assets. 4. Permitted investments - Subject to the foregoing, the University may invest in the following investment vehicles: U.S. Treasury Obligations - Bills, notes, and any other obligation or security issued by or backed by the full faith and credit of the United States Treasury. Federal Agency Obligations - Bonds, notes, and other obligations of the United States, and securities issued by any AAA-rated federal government agency or instrumentality or government sponsored enterprise except for collateralized mortgage obligations. Negotiable Certificates of Deposit, Bank Deposit Notes and Non-Negotiable Certificates of Deposit / Time Deposits - Negotiable and non-negotiable certificates of deposit, time deposits and negotiable bank deposit notes of domestic banks and domestic offices of foreign banks with a rating of at least A-1 by Standard & Poor‟s, Inc., and P-1 by Moody‟s Investor Service, Inc., for maturities of one year or less, and a rating of at least AA by Standard & Poor‟s, Inc., and Aa by Moody‟s Investor Service, Inc., for maturities over one year. The final maturity may not exceed a period of five years from the time of purchase. Bankers’ Acceptances - Issued by domestic banks or domestic offices of foreign banks, which are eligible for purchase by the Federal Reserve System with a maturity of 180 days or less. The issuing corporation, or its guarantor, must have a short-term debt rating of no less than “A-1” (or its equivalent) by at least two of the Nationally Recognized Statistical Rating Organizations (“NRSRO‟s”). Corporate Debt Obligations - High quality corporate notes with a rating of at least Aa by Moody's Investors Service, Inc., and a rating of at least AA by Appendix Page 5 of 11 Standard and Poor‟s, Inc., and a maturity of no more than two years from the date of purchase. Commercial Paper - “Prime quality” commercial paper, with a maturity of 270 days or less, issued by domestic corporations (corporations organized and operating under the laws of the United States or any state thereof) provided that the issuing corporation, or its guarantor, has a short-term debt rating of no less than “A-1” (or its equivalent) by at least two of the NRSRO‟s. Municipal Obligations - Bonds, notes, and other general obligations of a municipal authority organized within the United States upon which there is no default and having a rating of at least AA by Standard & Poor‟s, Inc., and Aa by Moody‟s Investor Service, Inc. and maturing within two years of the date of purchase. Repurchase Agreements - Overnight, term, and open repurchase agreements provided that the following conditions are met: the contract is fully secured by deliverable U.S. Treasury and federal agency obligations as described above (with a maximum maturity of two years), having a market value at all times of at least 102 percent of the amount of the contract; a master repurchase agreement or specific written repurchase agreement governs the transaction and which in each case contains terms qualifying each transaction as a securities loan for purposes of Section 512 under the Internal Revenue Code, and provides for master netting of obligations; the securities are free and clear of any lien and held by an independent thirdparty custodian acting solely as agent for the University, provided such third party is not the seller under the repurchase agreement; a perfected first security interest under the Uniform Commercial Code in accordance with book entry procedures prescribed at 31 C.F.R. 306.1 et seq. or 31 C.F.R. 350.0 et seq. in such securities is created for the benefit of the University; for repurchase agreements with terms to maturity of greater than one day, the University will have the collateral securities valued daily and require that if additional collateral is warranted, then that collateral must be delivered within one business day (if a collateral deficiency is not corrected within this time frame, the collateral securities will be liquidated); the counterparty is a: Appendix Page 6 of 11 - - primary government securities dealer who reports daily to the Federal Reserve Bank of New York, or a bank, savings and loan association, or diversified securities brokerdealer having at least $5 billion in assets and $500 million in capital and subject to regulation of capital standards by any state or federal regulatory agency; and the counterparty meets the following criteria: 1. a long-term credit rating of at least „AA‟ or the equivalent from an NRSRO; and 2. has been in operation for at least five years. Collateral under repurchase agreements with a maturity of 14 calendar-days or less may be held by the agreement counterparty. Collateral under repurchase agreements with a maturity of over 14 calendar days must be held by an independent custodian. Money Market Mutual Funds (Open-Ended Investment Funds) - Shares in open-ended, no-load, money market investment funds, provided such funds are registered under the Federal Investment Company Act of 1940 and rated at least “AAAm” or the equivalent by an NRSRO. The mutual fund must comply with the diversification, quality, and maturity requirements of Rule 2a-7, or any successor rule, under the Investment Company Act of 1940, provided the investments by such funds are restricted to investments otherwise permitted by the Code of Virginia for political subdivisions. Local Government Investment Pool (LGIP) - A specialized money market fund created in the 1980 session of the Virginia General Assembly designed to offer a convenient and cost-effective investment vehicle for public entities. The Fund is administered by the Treasury Board of the Commonwealth of Virginia and is rated AAA by Standard & Poor‟s, Inc. VII. Portfolio Risk Management The University evaluates the following primary risks as part of its short-term investment management: 1. Interest Rate Risk - The University seeks to manage the impact of interest rates on the market value and cash flows of its short-term investments. The University develops an annual cash flow forecast and, through the use of sensitivity modeling, determines its tolerance for interest rate risk. 2. Credit Risk - The University will invest in securities with a short-term rating of no lower than A-1 by Standard and Poor‟s, Inc., and P-1 by Moody‟s Investors Service, Inc. Government obligations and municipal securities must be rated AAA. Corporate Appendix Page 7 of 11 obligations must be rated no lower than AA by Standard and Poor‟s, Inc., and Aa by Moody‟s Investors Service, Inc. 3. Liquidity Risk - The University assesses its need for liquidity by (a) using its cash flow forecast to predict periods of greater liquidity needs and (b) by providing for sufficient liquidity to support outstanding debt as prescribed by the rating agencies. VIII. Investment Parameters & Diversification It is the policy of the University to diversify its investment portfolios to eliminate risk of loss resulting from the over-concentration of assets in a specific maturity, issuer, or class of securities. The portfolio should consist largely of securities with active secondary or resale markets. The University will diversify its short-term investments within the following categories: 1. Portfolio Diversification - The Investment Portfolio shall be diversified by security type and institution. The maximum percentage of the portfolio permitted in each eligible security is as follows: Permitted Investment U.S. Treasury Obligations Federal Agency Obligations Municipal Obligations Commercial Paper Bankers‟ Acceptances Corporate Notes Negotiable Certificates of Deposit and Bank Deposit Notes Non-negotiable Certificates of Deposit Virginia Local Government Investment Pool (LGIP) Collateralized Bank Deposits Repurchase Agreements Money Market Mutual Funds Sector Limit 100% 100% 25% 35% 35% 20% 20% Issuer Limit 100% 50% 5% 5% 5% 5% 5% 10% 5% 100% 100% 50% Limited by underlying asset limits above Limited by underlying asset limits above 50% 10% 25% The Sector Limit and Issuer Limit shall be applied to the total Investment Portfolio value at the date of acquisition. For all pooled investments (e.g., mutual funds, etc.) the University‟s holding must represent no more than 10 percent of the net assets of the pool. Appendix Page 8 of 11 2. Security Downgrades - In the event that any security held in the Investment Portfolio is downgraded below the rating required by this investment policy, the security shall be sold within 60 days of such downgrade. 3. Selection of Broker / Dealers - All broker/dealers, and their affiliates, who desire to provide investment services to the University shall be provided with current copies of this investment policy. Before an organization, or its affiliates, can provide investment services to the University, it must confirm in writing that it has received and reviewed this investment policy and is able to comply with it. Broker/dealers, and their affiliates, shall supply the University with information sufficient to adequately evaluate their financial capacity and creditworthiness. The following information shall be provided: audited financial statements; regulatory reports on financial condition; proof of Financial Institution Regulatory Authority (“FINRA”); certification and of state registration; a sworn statement by an authorized representative of the broker/dealer pledging to adhere to “Capital Adequacy Standards” established by the Federal Reserve Bank and acknowledging the broker/dealer understands that the University has relied upon this pledge; and any additional information requested by the University in evaluating the creditworthiness of the institution. Only firms meeting the following requirements shall be eligible to serve as broker/dealers for the University: “Primary” dealers and regional dealers that qualify under Securities and Exchange Commission Rule 15C3-1 (uniform net capital rule); Capital of at least $10,000,000; Registered as a dealer under the Securities Exchange Act of 1934; Member of FINRA; Registered to sell securities in the Commonwealth of Virginia; and Engaged in the business of effecting transactions in U.S. government and agency obligations for at least five consecutive years. 4. Engagement of Investment Managers - The Vice President and Chief Financial Officer of the University of Virginia may engage one or more qualified firms to provide investment management services for the University. All investment management firms who desire to provide investment management services to the University shall be provided with current copies of this investment policy. Before an organization can provide investment management services to the University, it must Appendix Page 9 of 11 confirm in writing that it has received and reviewed this investment policy and is able to comply with it. Only firms meeting the following requirements will be eligible to serve as investment manager for the University: a) Registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940; b) Must have provided to the University an annual updated copy of Form ADV, Part II; c) Must be registered to conduct business in the Commonwealth of Virginia; and d) Must have proven experience in providing investment management services under the Investment of Public Funds Act. Any firm engaged by the University to provide investment services shall: a) select security brokers/dealers who meet the requirements defined under this policy; b) provide monthly reports of transactions and holdings to the University; c) provide performance reports at least quarterly; d) report on performance in comparison to the University‟s investment benchmarks and provide evidence that the manager has solicited at least three bids for any security purchased or sold on behalf of the University; and e) not collect any soft dollar commissions or credits, from mutual funds or others, in exchange for services directly provided to a customer. IX. Portfolio Benchmarks The University structures a portfolio benchmark that is consistent with the security types and duration, or weighted average maturity, guidelines established under this policy. The University will use the Merrill Lynch 6-month T-Bill Index as its benchmark. Appendix Page 10 of 11 A copy of this policy and related procedures manual will be placed on file in the Treasury Operations Department and an electronic version will be posted on the University‟s website. This statement of investment policy is adopted on __________________, ___ 20___ by ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ Appendix Page 11 of 11