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UNIVERSITY OF VIRGINIA BOARD OF VISITORS MEETING OF THE FINANCE COMMITTEE NOVEMBER 15, 2013 FINANCE COMMITTEE Friday, November 15, 2013 8:00 – 9:30 a.m. Board Room, The Rotunda Committee Members: Victoria D. Harker, Chair John A. Griffin, Vice Chair Frank B. Atkinson Marvin W. Gilliam Jr. Stephen P. Long, M.D. Edward D. Miller, M.D. Timothy B. Robertson Linwood H. Rose George Keith Martin, Ex-officio Daniel M. Meyers, Consulting Member Martin N. Davidson, Faculty Consulting Member AGENDA PAGE I. II. CONSENT AGENDA (Mr. Hogan) A. Acquisition of Department of Forestry Property Located at 480 George Dean Drive, Charlottesville, Virginia B. Amendment to the Qualified Governmental Excess Benefit Arrangement Plan C. Capital Project Approvals – Financial Plans 1. Education Resource Center 2. Wilson Hall Renewal 3. Gross Anatomy Lab Renovation REPORTS BY THE EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER (Mr. Hogan) A. Organizational Excellence (Mr. Hogan to introduce Ms. Sarah L. Collie; Ms. Collie to report) B. 2014-2015 Academic Division Budget Planning and Preliminary Assumptions (Mr. Hogan to introduce Ms. Colette Sheehy; Ms. Sheehy to report) C. Treasury Report (Mr. Hogan to introduce Mr. James S. Matteo; Mr. Matteo to report) D. Report on University Workforce (Mr. Hogan to introduce Ms. Susan Carkeek; Ms. Carkeek to report) E. Executive Vice President’s Remarks F. Written Financial Reports 1. Interim Academic Division Financial Report for September 30, 2013 2. Endowment Report – Market Value and Performance as of September 30, 2013 1 3 5 5 6 7 8 12 14 16 17 25 PAGE 3. 4. Endowment/Long-Term Investments, Including Related Foundations at September 30, 2013 Quasi-Endowment Actions: July 1, 2013 September 30, 2013 42 43 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: I.A. Acquisition of Department of Forestry Property Located at 480 George Dean Drive, Charlottesville, Virginia BACKGROUND: The Commonwealth of Virginia Department of Forestry owns 13.37 acres of land, more or less, located on George Dean Drive, Charlottesville, Virginia, as further described in the deed from the Department of Conservation and Historic Resources to the Department of Forestry dated March 29, 1989, and recorded in the Office of the Circuit Court Clerk of Albemarle County. George Dean Drive is located off Fontaine Avenue approximately one-half mile west of the Fontaine Research Park. There are nine structures on the property to include warehouses, shop spaces, offices, and housing. The property is currently served by a well and septic field; however, public utilities are available. DISCUSSION: The Department of Forestry has determined it no longer needs the property if it can suitably relocate its equipment maintenance facilities. Proximity to Fontaine Research Park and other University of Virginia Foundation properties, access to Route U.S. 29 and Interstate 64, and the potential for redevelopment suggest the property is of strategic value to the University. The property was appraised in 2010 at $1,860,000. The state would handle the transaction as a transfer of property between two state agencies. ACTION REQUIRED: Approval by the Finance Committee and by the Board of Visitors APPROVAL TO ACQUIRE 480 GEORGE DEAN DRIVE, CHARLOTTESVILLE, VIRGINIA WHEREAS, the Board of Visitors finds it to be in the best interest of the University of Virginia to acquire that parcel or tract of land transferred to Department of Forestry from the Department of Conservation and Historic Resources in Deed Book 1040, page 341, containing approximately 13.37 acres of land, more or less, together with all improvements situated thereon, located at 480 George Dean Drive, Charlottesville, Virginia (the 1 “Property”), on terms and conditions as authorized by the Chair of the Finance Committee of the Board of Visitors and the Executive Vice President and Chief Operating Officer of the University of Virginia; RESOLVED, the Board of Visitors approves the acquisition of the Property on terms and conditions as authorized by the Chair of the Finance Committee of the Board of Visitors and the Executive Vice President and Chief Operating Officer of the University of Virginia; and RESOLVED FURTHER, the Executive Vice President and Chief Operating Officer is authorized, on behalf of the University, to approve and execute purchase 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 acquisition; and 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 acquisition, are in all respects approved, ratified, and confirmed. 2 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: I.B. Amendment to the Qualified Governmental Excess Benefit Arrangement Plan BACKGROUND: The Qualified Governmental Excess Benefit Arrangement Plan (Section 415[m]) is a retirement plan used to defer taxation on retirement contributions in excess of the limitations otherwise imposed by the IRS on other retirement plans. This “excess benefit” plan is considered non-qualified deferred compensation and the contributions basically sit on top of the supplemental executive retirement plan. There are fewer than 10 active employees with assets in the plan. Employees have an immediate vested interest in the assets. DISCUSSION: The current forms of distribution allowed for these assets are very limited. An amendment to the plan is proposed that would offer additional forms of distribution, essentially providing a longer horizon for assets to be distributed from the plan. Current Forms of Distribution (a) Lump sum (b) Equal installments over five (5) years Requested Forms of Distribution (a) Lump sum (b) Equal installments over five (5), ten (10), fifteen (15), or twenty (20) years (c) Life Annuity (d) Joint and Survivor Annuity This change will not negatively impact any of the current plan participants, as none have elected their form of distribution. An amendment approved by the Board of Visitors in November 2012 allows employees to elect the form of distribution at time of separation. This amendment is not a substantive or policy level issue. It merely supplements the resolution approved by the Board last year by providing more flexibility to employees on the distribution. ACTION REQUIRED: Approval by the Finance Committee and by the Board of Visitors 3 APPROVAL OF AN AMENDMENT TO THE QUALIFIED GOVERNMENTAL EXCESS BENEFIT ARRANGEMENT PLAN FOR EMPLOYEES OF THE UNIVERSITY OF VIRGINIA RESOLVED, the Board of Visitors approves amending the Qualified Governmental Excess Benefit Arrangement Plan of the University of Virginia such that a participant may elect to receive a distribution of his/her Excess Benefit Account as either a lump sum, life annuity, joint and survivor annuity, or in equal installments over a period of five (5), ten (10), fifteen (15), or twenty (20) years. 4 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: I.C. Capital Project Approvals – Financial Plans BACKGROUND: The Board of Visitors approves major capital projects every two years with the update of the Major Capital Projects Program. This plan was last approved in April 2013. When the University identifies new projects outside the biennial update cycle, approval by the Finance and Buildings and Grounds Committees is required. The Finance Committee will review the financial plans and the Buildings and Grounds Committee will review the proposed projects for inclusion in the University’s Major Capital Projects Program. DISCUSSION: The University recommends three revisions to the multi-year capital program. Education Resource Center Debt Med Center Cash $25.54 million $ 4.32 million $29.86 million In accordance with the policy adopted by the Board of Visitors in October 2004, capital project budget increases in excess of 10% require the approval of both the Finance and Buildings and Grounds Committees. Resulting from the September 2013 Buildings and Grounds Committee Schematic Design Review, this project is now proposed to add a fourth floor of 10,500 gross square feet with a cost of $4 million, to be funded from Medical Center operating funds. Build out of this additional level maximizes the use of the site while preserving the original design intent for graduate medical and patient education, a relocated outpatient pharmacy, and an outpatient imaging center. This increases the project to a total of 45,900 gross square feet and a total project cost of $29.86 million. Wilson Hall Renewal Gifts and Other $5.5 - $6.0 million The Wilson Hall Renewal project will provide interior renewal of the entire building, a partial renovation of the first and second floors, and a new accessible entrance at the first floor south elevation facing Jefferson Park Avenue. 5 Improvements will include a new sprinkler system, new lighting, modification to HVAC and Building Automation System control systems, new security access and increased access and utilization of natural light for interior spaces. The project will be fully funded by gifts and other cash reserves. Gross Anatomy Lab Renovation Gifts and Other $4.0 - $5.0 million The project will provide interior renovation of the gross anatomy teaching space and co-locate the fresh tissue teaching laboratory on the first floor of Jordan Hall. The improvements are necessary to meet accreditation standards. The project will be fully funded with School of Medicine gifts and other cash reserves. ACTION REQUIRED: Approval by the Finance Committee, the Buildings and Grounds Committee, and by the Board of Visitors APPROVAL OF REVISION TO THE UNIVERSITY’S MAJOR CAPITAL PROJECTS PROGRAM - EDUCATION RESOURCE CENTER, WILSON HALL RENEWAL, AND GROSS ANATOMY LAB RENOVATION WHEREAS, the University proposes an increase of 10,500 gross square feet at an estimated cost of $4 million for the Education Resource Center; the addition of the Wilson Hall Renewal project; and the addition of the Gross Anatomy Lab Renovation to the Major Capital Projects Program; RESOLVED, the Board of Visitors approves the expanded scope of the Education Resource Center bringing the total budget to $29.86 million; the addition of the Wilson Hall Renewal project at an estimated cost of $5.5 - $6 million; and the addition of the Gross Anatomy Lab Renovation project at an estimated cost of $4.0 - $5.0 million to the University’s Major Capital Projects Program. 6 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: II.A. ACTION REQUIRED: None Organizational Excellence BACKGROUND: Organizational Excellence is Strategy 14 in the Strategic Plan under Pillar 5: Steward the University’s Resources to Promote Academic Excellence and Affordable Access. Organizational Excellence seeks to enable the achievement of institutional strategic goals and priorities - excellence in education, research, and scholarship - and to leverage institutional core strengths and distinctions through resource alignment and optimization. At its August Retreat, the Board of Visitors heard an overview of the implementation plan to establish a formal program of Organizational Excellence. DISCUSSION: This session will provide an update on the establishment of the formal Organizational Excellence program and its related activities and achievements. The discussion will summarize the work of the Leadership Council and the steering committee guiding the effort, and will highlight examples across the institution in three categories: • Process/Functional Improvement - Action results in measureable, non-monetary, improvements in services or outcomes. • Partnerships/Collaborations - Action results in internal or external partnerships resulting in enhanced services or programs and/or avoids duplication of efforts. • Cost Savings/Avoidance - Action results in a reduction of operating expenses. 7 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: II.B. 2014-2015 Academic Division Budget Planning and Preliminary Assumptions ACTION REQUIRED: None BACKGROUND: Each year at this time, the University begins formulating the Academic Division budget for the subsequent fiscal year, including the establishment of budget assumptions which will provide guidance to units in developing their 2014-15 budgets. The assumptions are considered preliminary and may be modified as additional information becomes available, particularly after release of the Governor’s budget and actions by the General Assembly. DISCUSSION: The objectives of the 2014-15 budget process are to: (1) demonstrate commitment and resources available to address high-priority items emerging from the strategic planning process and the President’s priorities of faculty retention and recruitment, curriculum enhancement, and research; and (2) transition to an activity-based resource allocation model based on multi-year financial planning in the schools and major service units. Revenue Assumptions: • The University is developing a comprehensive undergraduate tuition and financial aid strategy that will be discussed with the Board of Visitors in the coming months. Actual tuition and fee charges for 2014-15 will reflect rates that will be approved by the Board of Visitors at a later date. o The second year of a four-year phase-in of the School of Engineering and Applied Science differential tuition will be implemented, with both first- and second-year undergraduate students paying $2,000 more than the base undergraduate tuition rate. o Tuition rates for graduate and professional schools will reflect increases in the cost of instruction and financial 8 aid, re-allocation of funds where appropriate, and consideration of market sensitivity. • For Proposed fees, administration will consider the reallocation of existing resources before increasing student charges. Total mandatory auxiliary fees should range between 2-2.5%. In considering new or increased fees, the administration will consider: o the impact to existing students – both cost and benefit; o the impact to AccessUVa; o how proceeds will be deployed (including, whether intended use is aligned with the University strategic plan, a school strategic plan, or is needed to address a debt or contractual obligation); and o other factors brought forward by the vice president or dean. • For 2014-15, the University takes a conservative estimate of growth in the state general fund appropriation, assuming that the state will fund its proportionate share of any state authorized salary and benefit increases, as well as in-state enrollment growth. • According to Board of Visitors policy the 2014-15 endowment spending distribution will be 4.68% of the June 30, 2013, market value. • A 0.5% administrative fee (based on the endowment’s June 30th market value for the preceding fiscal year) will be assessed to each endowment. • In 2014-15, funds from annual giving will be projected based upon estimates from University Development and school officials. • Reimbursements for direct and indirect costs related to externally-sponsored research (primarily federally funded) are currently projected at a 1.0% decrease due to declining federal investment in research and the impact of sequestration. The final 2014-15 budget will be based on historical spending patterns, sponsored program awards, expected indirect cost recoveries, and discussion with the research-intensive schools and the Vice President for Research. The budget will reflect a 58% Facilities and Administrative cost recovery rate on new grants. 9 • For 2014-15, preliminary projections indicate a 1.7% increase in activity related to sales and services (primarily from self-supporting entities that exist to provide services to students, faculty, and staff, such as Housing, Bookstores, and Athletics). Final budgets will be based upon services to be provided, including fees which will be considered by the Board of Visitors in February. Expenditure Assumptions: • The budget for 2014-15 will incorporate $8-9 million in organizational excellence savings. • Full funding will be provided for the projected cost of AccessUVa. After implementation of administrative changes and a loan modification for low-income students, the institutional contribution to AccessUVa in 2014-15 is expected to remain unchanged from 2013-14. • Compensation: The following assumptions will apply to salaries and benefits in 2014-15: o Teaching and Research (T&R) Faculty: Fiscal year 2014-15 will be the second year of a four-year strategy to raise T&R faculty salaries so that the University can attain a rank of #20 among the Association of American Universities by 2016-17. A merit pool equivalent to 4.75% of base T&R faculty salaries will be included in the budget. • Other Faculty and University Staff: A 3% merit increase for University staff and Administrative and Professional faculty will be budgeted in 2014-15. o Classified Staff: Any classified staff salary increase for 2014-15 will be authorized by the state in the approved budget. For planning purposes the University will assume a 2% increase. o The minimum hiring rate for salaried staff will increase in July 2014 by 2% from $11.53 to $11.76 per hour, or $24,461 per year. o All schools and units will continue planning/reserving funds for the 2015-16 fiscal year when there will be 27 (rather than 26) bi-weekly payroll periods. 10 o Estimated 2014-15 fringe benefit rates are outlined below. Full-time (FT) faculty and university staff—exec FT classified staff, university staff— managerial & professional and operational & administrative Part-time (PT) faculty and staff with benefits PT faculty and staff without benefits and wage • 2013-14 FB Rates Submitted to DHHS 24.9% Preliminary 2014-15 FB Rates 32.1% 39.5% 24.9% 29.9% 6.0% 6.0% 29.9% Auxiliaries should plan for quarterly general and administrative assessments based on a rate of 6.2% of their adjusted 2012-2013 expenditure base to cover their share of central services. Reserves and Other: • Units will comply with the Board of Visitors Capital and Operating Reserves Policy established in April 2006: (a) operating reserves equivalent to three months of operating expenses and (b) annual capital expenditures or contributions to capital reserves of at least 1.5% of replacement value of buildings and equipment. 11 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: II.C. ACTION REQUIRED: None Treasury Report BACKGROUND: The University’s Treasury Department manages the University’s debt portfolio, working capital investment portfolio, liquidity, and banking operations. From time to time, we report to the Board on debt, liquidity, and financing activities. DISCUSSION: Debt Management The University manages its debt portfolio according to its Debt Policy, last approved by the Board in February 2013. We manage the debt portfolio to achieve the following four goals: 1) maintain adequate access to the financial markets, 2) manage the University’s credit rating, 3) optimize the University’s debt mix, and 4) manage debt maturities to meet liquidity objectives. As of June 30, 2013, the University had approximately $1.28 million of debt outstanding. Approximately 17% of this debt is variable rate, or $218 million. A portion of the University’s variable rate debt is issued as commercial paper. Commercial paper is primarily used to provide short-term funding for capital projects during construction. As the outstanding commercial paper balance grows, the University will issue longterm debt to refund the commercial paper. The University’s long-term debt is rated “AAA” by Moody’s, S&P, and Fitch, resulting in us being one of only three public universities with this distinction. This top-tier rating provides us with strong access to the capital markets and the lowest borrowing rates available in our market. The University’s weighted cost of debt capital, as of June 30, 2013, was 4.05%. 12 Liquidity The University manages its liquidity to ensure it can fund its operations during normal periods and in times of stress. Liquidity is principally in the form of bank deposits, shortterm investments and, to a lesser extent, credit lines. The University prepares a monthly cash flow forecast and runs stress tests (e.g. government shutdown failure to remarket variable rate debt, etc.) against this forecast to assess the adequacy of its liquidity. Liquidity is meant to support the University’s operating and reserve requirements. University departments maintain reserves for various purposes including capital construction, operations, and strategic initiatives. Many of these reserves are maintained in compliance with the April 2006 Board-approved capital and operating requirements for self-sufficient programs. The University as a whole maintains reserves to support department-level reserves and meet entity-wide obligations, such as debt service. A portion of reserves may be invested longterm if they are meant to meet long-term needs. The majority of reserves are invested short-term and their adequacy is best represented by the University’s day’s cash on hand (“DCH”) ratio. The DCH ratio compares cash and cash equivalents to annual operating expenses to determine how many days of operating expense can be supported by current cash and cash equivalent balances. As of September 30, 2013, the University’s DCH is 240 days, which compares favorably to the median for AAArated public institutions. 13 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: II.D. ACTION REQUIRED: None Report on University Workforce UNIVERSITY OF VIRGINIA EMPLOYEE CATEGORIES Employees at the University of Virginia are found in three budget entities - the Academic Division, the Medical Center, and the College at Wise. Total headcount of all employees is approximately 21,000. A count and description of employee categories follows. This report also includes a comparison of the workforce profile as of October 2012. Employee Category Teaching & Research Faculty Temporary/Wage Faculty Head Count 2,467 -25.9% 449 -9.1% 4,981 Graduate Assistants 1,561 Student Employees College at Wise Medical Center TOTAL -1.9% 375 Administrative & Professional Faculty Professional Research Staff Staff Temporary/Wage Staff Comparison to October 2012 548 -14.4% Additional Description Includes 1,511 tenure track (-4.1%) and 956 non tenure track (-2.3%); also includes 1,061 faculty in the School of Medicine Part-time faculty typically teaching one course. -3.7% Includes 1,903 Classified Staff (38%) and 3,078 University Staff (62%) -2.4% Includes 928 Teaching Assistants and 633 Research Assistants 682 - 8.8% 2,530 -2.1% 445 +21.9% 7,306 +1.2% 21,344 -2.5% 14 Includes 238 student employees at College at Wise Includes 94 T&R faculty (+2.2%), 40 A&P Faculty (no change), 172 staff (+ 3.0%), and 139 temp/wage employees (+110.6%) Includes 5,989 salaried employees (+2.6%), 555 temporary employees (-10.6%), and 762 “house staff”, i.e. medical residents Notes: New employees are not hired as Administrative and Professional Faculty and Classified Staff. Most employees that would have fallen into those categories are now being hired as University Staff. These counts do not include employees of the University Physician’s Group (primarily billing staff for the physician practice plan) nor do they include the majority of employees with the many other University Foundations. 15 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: II.E. ACTION REQUIRED: None Executive Vice President’s Remarks BACKGROUND: The Executive Vice President and Chief Operating Officer, Patrick D. Hogan, will inform the Board of recent events that do not require formal action, but of which it should be made aware. 16 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: II.F.1. Interim Academic Division Financial Report for September 30, 2013 ACTION REQUIRED: None BACKGROUND: The Commonwealth’s Auditor of Public Accounts has completed the June 30, 2013, audit and will provide a verbal report to the Board’s Audit & Compliance Committee. For the new fiscal year, the University is implementing Governmental Accounting Standards Board Statement 63, which will change how the University’s financial statements are organized and named. The statement adds new categories of deferred inflows and outflows of resources and will report on “net position” rather than “net assets.” The unaudited financial report for the University’s Academic Division for the quarter ended September 30, 2013, follows and includes: • • • statement of net position (formerly statement of net assets) compared to June 30, 2013; statement of revenues, expenses, and changes in net position (formerly, statement of revenues, expenses, and changes in net assets) compared to prior year; and operating sources and uses, budget versus actual results through September 30, 2013. DISCUSSION: Statement of Net Position This statement, on the following page, provides Academic Division’s net positions as of September 30 and June 30, 2013. The unaudited statement is developed based on Generally Accepted Accounting Principles (GAAP). The unaudited statements include material adjustments and accruals in order to be reasonably accurate, but are not on a full accrual basis. 17 UNIVERSITY OF VIRGINIA - Academic Division Only Statement of Net Position (Unaudited) As of 9/30/13 ASSETS Current Assets Cash and short term investments Receivables (accounts, notes, other) Inventories, prepaids and other Total current assets As of 6/30/13 (in 000s) $ Noncurrent Assets Endowment and other investments Receivables (pledges and notes) Deposits with bond trustees & other Capital assets, net Total noncurrent assets 632,196 53,869 266 686,331 $ 4,164,363 22,288 14 2,170,906 6,357,571 Total assets LIABILITIES Current Liabilities Accounts payable and accrued liabilities Deferred revenues and deposits Commercial Paper Internal deposits held Wise, SWVHEC & and agencies Total current liabilities 4,023,415 21,166 21 2,161,194 6,205,796 $ 7,043,902 $ 6,750,054 $ 28,798 101,187 148,893 3,114 281,992 $ 17,150 152,071 139,593 9,872 318,686 Noncurrent Liabilities Long-term debt Other long-term liabilities Total noncurrent liabilities 814,198 621 814,819 Total Liabilities NET POSITION Invested in capital assets, net of related debt Restricted: Nonexpendable Expendable Unrestricted Total Net Position 815,078 493 815,571 $ 1,096,811 $ 1,134,257 $ 1,195,839 $ 1,220,059 499,831 2,624,265 1,627,156 5,947,091 Total Liabilities & Net Position $ 18 495,297 48,695 266 544,258 7,043,902 498,277 2,541,985 1,355,476 5,615,797 $ 6,750,054 Net position is up $331.3 million or 5.9%, primarily due to the recognition of tuition and state appropriation revenues that will be spent down as fiscal year 2014 progresses and investment gains. The $53.9 million in receivables are primarily comprised of billing for fall tuition and student charges ($26.6 million) and sponsored research ($25.9 million). Past due receivables over 120 days are only $2.2 million, just over 3.9% and well within the Commonwealth of Virginia’s management standard of 10%. Endowment and other long-term investments are up nearly $141 million, on the strength of the return on investments in the first quarter of 2014. Further information on the endowment’s performance this year is included in the written report from the University of Virginia Investment Management Company (UVIMCO) on page 25. Student loan receivables, depending on payment schedules, are included in accounts payable and long-term debt. Student loan receivables of $39.0 million include $21.0 million through the Federal Perkins Loan Program, $1.0 million through the Federal Nursing Student Loan Program, and $19.1 million through loan programs managed by the University using philanthropy given for this purpose. The default rates by University students on the federal loan programs are below required thresholds: 2.0% for Perkins versus the federal requirement of 15.0% and 1.7% for nursing versus the 5.0% federal threshold. Collectively, the default rate on University managed loan programs stands at 2.2%. Statement of Revenues, Expenses, and Changes in Net Position (SRECNP) Shown on the following page, this statement outlines the Academic Division’s revenues, expenses, and other changes in net position as of September 30, 2013, as compared to the same period last year. It is developed based on GAAP but is unaudited. At September 30th, net position is up $331.3 million or 5.9% from June 30, 2013, primarily attributable to the receipt of tuition and state appropriations in the first quarter of fiscal year 2014; these monies will be spent as the University progresses through the fiscal year. 19 UNIVERSITY OF VIRGINIA - Academic Division Only Statement of Revenues, Expenses, and Changes in Net Position (Unaudited) OPERATING REVENUES AND EXPENSES: Operating Revenues Student tuition and fees, net Grants and contracts (federal, state, nongovernmental) State appropriations Gifts Sales and services of educational departments Auxiliary enterprises revenues, net Pell grants Total operating revenues Three Months Ended Three Months Ended 9/30/2013 9/30/2012 (in 000s) $ 237,416 85,114 137,082 28,220 5,024 53,086 3,411 549,353 $ 220,341 93,603 130,508 24,123 5,300 52,872 526,747 Operating Expenses Instruction Research Public service Academic support Student services Institutional support Operation of plant Student aid, net Auxiliary Depreciation Other Total operating expenses 72,125 81,499 10,663 39,549 10,378 18,877 31,707 25,208 37,002 26,300 (1,023) 352,285 68,879 85,982 9,841 37,838 10,160 19,803 34,294 23,450 35,165 25,362 4,677 355,451 Operating revenues less operating expenses 197,068 171,296 5,939 134,664 1,484 397 142,484 26,905 121,133 537 276 148,851 7,611 648 8,259 8,230 924 9,154 Nonoperating revenues less nonoperating expenses (losses) 134,225 139,698 Total Revenues Total Expenses Increase (decrease) in net position 691,837 360,544 331,293 675,598 364,605 310,993 5,615,797 4,989,847 NONOPERATING REVENUES AND EXPENSES Nonoperating Revenues Capital appropriations, grants and gifts Investment income (loss) Additions to permanent endowments Other Total nonoperating revenues Nonoperating Expenses Interest on capital asset related debt, net Loss on capital assets (gain) Total nonoperating expenses NET POSITION Net position - July 1 (Beginning) Net assets -- September 30 (ending) $ 20 5,947,091 $ 5,300,840 Operating Revenues: Total operating revenues for the quarter ended September 30, 2013, were $549.4 million, up 4.3% over the prior year. Student tuition and fees are reported net of discounts and allowances, and are up about 7.7% as compared to last year. Undergraduate enrollment growth and increases in undergraduate, graduate, and professional tuition and fees approved by the Board of Visitors in April 2013 account for the increase. Spending from grants and contracts is down 9.1% overall, but with a varied mix by source. As anticipated, the federal budget uncertainty with Continuing Resolutions and Sequestration in lieu of an approved federal spending plan has adversely affected federally funded grants which are down over $7 million, or nearly 7%. Spending on state and local grants is up by $2.6 million, while spending on grants from private industry and foundations is about flat. State appropriations increased $6.6 million or 5.0%, with the additional funding coming to support the July 2013 faculty and staff salary increase, employee benefits, and additional appropriations in support of the HEOA of 2011. Investment income is $134.7 million, reflecting the investment performance on the UVIMCO Long Term Pool through September 30, 2013. Additions to permanent endowment have increased by nearly $1 million to $1.5 million. Operating Expenses: Operating expenses were down $3.2 million, or 0.9% for the quarter ended September 30, 2013, compared to the same quarter in fiscal year 2013. A decrease in sponsored research expenditures was partially offset by the salary increases that went into effect in July 2013. However, it is too early to draw firm conclusions about fiscal year 2014 expenditures. Operating Sources and Uses, Budget vs. Actual This report, on the following page, reviews actual results as of September 30, 2013, compared to budgeted outcomes for the sources and uses of funds of the Academic Division. The cash-based operating plan differs from the GAAP SRECNP in the following ways: 21 • External debt service, UVa Health Plan activity, and endowment investment performance are excluded, while repayments of debt to the internal bank and the expendable endowment distribution are included. • Depreciation is excluded and most equipment purchases are reported as a use of funds, and are not capitalized. • Only gifts received and available for the operating plan are included. Pledges, non-cash gifts, gifts transferred to the endowment or capital program, and gifts held at foundations are excluded. • The operating plan nets financial aid funded from tuition from gross tuition, but does not exclude financial aid funded from other sources (gifts, endowments, and grants). • The operating plan reflects mandatory fees collected for auxiliaries and internal revenues collected from internal departments as other tuition and fee and sales, investment, & other revenue. • The operating plan excludes unrealized gains. Through September 30, 2013, actual net sources exceeded uses by $253.1 million related to the difference in timing of the receipt of sources as compared to uses. In the first quarter, one-half of tuition revenues (representing one semester of billings), a majority of the annual appropriation revenue, and one-half of the endowment distribution have been recognized, while expenses are incurred more evenly throughout the year. Sources of Funds: Actual available sources of funds for the Academic Division as of September 30, 2013, were $646.2 million, or 0.3% greater than the $644.5 million budgeted for the quarter. 22 Schedule 1 University of Virginia Academic Division Comparative Statement of Sources and Uses of Funds, Year to Date as of 09/30/2013 (in thousands) 2013-14 Revised Budget Actuals Through 9/30/2013 2013-14 Quarterly Budget Actuals Over Actuals as a (Under) Budget % of Budget Sources of Available Funds Tuition and Fees Undergraduate Less: Tuition to financial aid Net Undergraduate 266,871 $ (32,624) 234,247 136,000 $ (18,000) $ 118,000 136,657 $ (17,837) 118,820 657 163 820 0.5% -0.9% 0.7% Graduate Less: Tuition to financial aid Net Graduate 41,662 $ (27,231) 12,936 22,000 $ (13,500) $ 8,500 21,956 (13,308) 8,648 (44) 192 148 -0.2% -1.4% 1.7% Professional (Law, Darden, McIntire & SEAS Exec.) Less: Tuition to financial aid Net Professional 103,123 $ (7,813) 95,673 55,000 $ (3,500) $ 51,500 56,135 (3,344) 52,791 1,135 156 1,291 2.1% -4.5% 2.5% School of Medicine Less: Tuition to financial aid Net School of Medicine 29,007 $ (510) 28,497 15,000 $ 0 $ 15,000 14,516 (455) 14,061 (484) (455) (939) -3.2% n/a -6.3% Other Less: Tuition to financial aid Net Other Total Net Tuition & Fees 97,996 $ (1,193) 96,211 467,564 51,000 $ 0 $ 51,000 244,000 52,147 (254) 51,893 246,213 1,147 (254) 893 2,213 2.2% n/a 1.8% 0.9% 137,082 68,875 19,633 70,450 19,151 2,272 82,534 582 1,875 (367) (550) 151 (1,728) (466) - 0.4% 2.8% -1.8% -0.8% 0.8% -43.2% -0.6% n/a 1,710 0.3% $ State Appropriations Grants & Contracts Facilities & Administrative Cost Recoveries Endowment Distribution & Fee Gifts-Via Affiliated Foundations Expendable Gifts Sales, Investment & Other Operating Cash Balances Total Sources of Available Funds 144,890 229,328 63,200 158,422 100,571 35,245 184,911 39,199 $ 1,423,330 $ $ 368,937 $ 300,526 146,912 42,976 76,256 110,261 101,517 156,508 109,028 Total Uses of Available Funds $ Net Sources in Excess of Uses $ 136,500 67,000 20,000 71,000 19,000 4,000 83,000 $ $ $ $ $ $ $ 644,500 $ 646,210 $ Uses of Available Funds Direct Instruction Research & Public Service Academic Support Student Services General Administration Operation & Maintenance of Physical Plant Scholarships, Fellowships, & Other Auxiliary Enterprises Internal Debt Service/Transfers 74,000 90,500 41,000 11,000 24,000 41,000 48,000 45,000 27,500 $ $ $ $ $ $ $ $ 71,880 $ 90,919 39,747 10,319 21,277 36,121 47,296 47,832 27,746 (2,120) 419 (1,253) (681) (2,723) (4,879) (704) 2,832 246 -2.9% 0.5% -3.1% -6.2% -11.3% -11.9% -1.5% 6.3% 0.9% 1,412,920 $ 402,000 $ 393,138 $ (8,862) -2.2% 10,410 $ 242,500 $ 253,072 $ 10,572 4.4% 23 Total net tuition and fees ended the quarter at $2.2 million or 0.9% above the budget for the quarter. Spending on grants and contracts through the end of September 2013 totaled $68.9 million, a $1.9 million increase over the quarterly projection. The 2013-14 budget conservatively estimated fiscal year spending due to anticipated federal budget reductions and sequestration. Expendable gifts for operations ended the quarter $1.7 million or 43.2% lower than expected. The timing of gift receipts is difficult to project over the year, with the majority of gifts coming in before the calendar year-end. We will have a better idea if this is a trend or a timing difference next quarter. Uses of Funds: Total uses of available funds for the Academic Division through September totaled $393.1 million which is 2.2% below the quarterly budget. • General Administration is $2.7 million or 11.3% below the quarterly budget, primarily due to timing differences and operational savings efforts. • Operation and Maintenance of Physical Plant is $4.9 million or 11.9% below the quarterly budget, primarily due to the seasonal impact of utility spending. • Auxiliary Enterprises is $2.8 million or 6.3% above the quarterly estimate primarily as a result of Cavalier Computers and the Bookstore purchasing inventory needed for fall semester sales. 24 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: II.F.2. Endowment Report – Market Value and Performance as of September 30, 2013 ACTION REQUIRED: None BACKGROUND: The University of Virginia Investment Management Company (UVIMCO) provides investment management services to the Rector and Visitors of the University of Virginia and its related Foundations. Assets deposited in UVIMCO are held in the custody and control of UVIMCO on behalf of the University and Foundations within a long-term, co-mingled investment pool. UVIMCO’s primary objective in managing the 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 managed benchmark with similar asset allocation and risk. Recognizing that the University must attract outstanding students, faculty, and staff and provide them appropriate resources, UVIMCO attempts to manage pool assets to provide long-term real returns that compare favorably with the returns of endowments of other outstanding schools. UVIMCO does not set spending rates. UVIMCO communicates the Pool’s risk and return estimates to the University and Foundations for their consideration in setting spending rates. DISCUSSION: The September 30, 2013, report follows. Quarter-End September 2013 SUMMARY The following commentary provides information on the recent market environment as well as the asset allocation, performance (unaudited), risk management, and liquidity position of UVIMCO’s Long Term Pool as of and for periods ending September 30, 2013. The Long Term Pool returned 2.9% for the three months ending September 30, 2013, versus 5.0% earned by the policy portfolio benchmark. The Pool’s relative underperformance for the quarter 25 is unsurprising given that we generally trail public benchmarks during rapidly appreciating markets, and the majority of our private drawdown funds (approximately 40% of the Pool) remain marked at fair values recorded as of June 30. While we report on short-term performance, we encourage all of our investors to focus most on longer-term performance. Over the twenty-year period ending September 30, 2013, the Pool’s annualized return was 11.8%, exceeding the policy benchmark return by 460 bps. The Long Term Pool’s asset allocation has remained relatively constant for the past few years. However, as equity markets rise, our exposure to equities grows organically. Therefore, we have recently begun to actively reduce the Long Term Pool’s equity exposure by trimming certain positions and hedging with portfolio overlays, when needed, to keep our equity risk in line with that of our policy portfolio. More information about actual exposures is available in the following report. MARKET ENVIRONMENT Global market participants spent most of the third quarter of 2013 anticipating that the Fed would begin tapering its bond purchasing program, if only by a small amount. However, the Fed surprised investors in September by announcing a delay in any near-term tapering. Capital markets around the world responded positively. The S&P 500 was up 5.2% for the three months ended September 30, 2013, while the MSCI World Index rose 8.3% over the same time period. The Fed’s decision to stay on course gave fixed income markets a small boost as well. The Barclays Global Aggregate Index reversed its previous sell-off and ended up 0.8% for the quarter, bringing the total year-to-date loss for the index to -0.4% through September 30. The Fed’s announcement also led to the largest one-day price jump since 2011 in the U.S. Treasury 10-year bond. The U.S. Treasury 10-year bond entered the quarter at 2.48%, traded as high as 2.99%, and then finished the quarter at 2.62%. The entire yield curve was volatile, ending the quarter slightly steeper than before. The quarter also saw signs of recovery in Chinese exports, industrial production and manufacturing. Investors responded to the positive news with renewed enthusiasm for Chinese equities as the Shanghai Composite Index returned 11.1% for the quarter (in Yuan). At the end of September, the Chinese government formally opened the Shanghai Free Trade Zone as a test area for potential financial reform. Details are unclear, but some believe the Shanghai Free Trade Zone will enable the Chinese to 26 open up their banking sector, test a freely convertible Yuan, and potentially allow western companies to stage local IPOs. In November, the Communist Party of China is expected to use the Third Plenum to discuss the direction of reform under the new Chinese leadership. Investors see these potential reforms as positive for the region, but many are questioning the pace of reform. Japan continued its 2013 climb as the Nikkei rose 6.3% (in Yen) during the three months ended September 30, extending the market's gains to 41.1% (in Yen) year-to-date. However, other parts of Asia did not fare as well as China and Japan. Thailand and Indonesia both felt the impact of the potential U.S. bond tapering, with those markets down 3.7% and 10.0% (in local currencies) during the quarter, respectively. In August, India's currency fell to a record low of 68.825 INR against the dollar as investors worried about the country's declining growth and consumer inflation. Bullish U.S. markets continued to reward an improved outlook for the domestic economy. Whereas the U.S. market slightly lagged China and Europe, it managed to gain just over 5% during the three months ended September 30, driving calendar year-to-date gains to nearly 20%. At the end of September, Bloomberg reported that U.S. stocks were trading “in lockstep with 1954,” when U.S. equity markets finally regained their preGreat Depression levels. Bloomberg reported that the correlation between U.S. equity returns in 1954 and 2013 was 0.95, implying that confidence in today’s equity markets is remarkably similar to the strong investor sentiment in 1954. In both 1954 and 2013, stocks reached new highs after the respective market declines of the Great Depression and Great Recession. Warren Buffett recently addressed rising equity valuations in an interview, saying that equities “were very cheap five years ago, ridiculously cheap. And, that’s been corrected. They're probably more or less fairly priced now... We're having a hard time finding things to buy.” (CNBC, September 19, 2013). The same situation can be seen in credit markets. Money has poured into high yield and loan funds, resulting in easing of terms by lenders. The issuance of covenant-lite loans has returned to pre-crisis levels, and acceptable levels of leverage continue to creep up. The fourth quarter of 2013 began with many uncertainties including a potential missile launch into Syria, a partial government shutdown, and the need for an increase in the national debt ceiling approaching again. As we write this 27 update, all of these concerns have been temporarily resolved without any real impact on markets. However, as markets continue to rise, they become more vulnerable to a sudden change in sentiment. Bond tapering is inevitable; it’s just a question of when it will happen. If investors truly believe that the U.S. economy is healthy, bond tapering could be a non-event. However, this is a delicate issue and as seen over the past three months, global markets are watching. Asset Allocation Our policy portfolio for the Long Term Pool continues to be an allocation of 60% global public equity, 10% global public real estate, and 30% global investment grade fixed income. This portfolio is designed to provide long-term growth from equities, an inflation hedge from real assets, and a deflation hedge from fixed income. The Long Term Pool's actual allocation as of September 30, 2013, is 66.3% to equity managers (public and private), 13.4% to real asset managers and 20.3% to fixed income (including marketable alternatives, credit, bonds, and cash). Looking through to our managers' underlying investments, the Long Term Pool has a 55.6% allocation to equities, 14.8% allocation to real assets, and 29.6% allocation to fixed income (including credit, bonds, and cash) as of September 30, 2013. Our equity exposure is up slightly due to the rise in equity markets, but remains consistent with that of the policy portfolio. We carefully monitor the market risk of the Long Term Pool and reduce equity exposure by trimming certain positions and hedging with portfolio overlays, when needed, to keep our equity risk in line with that of the policy portfolio. PERFORMANCE The Long Term Pool returned 2.9% for the quarter ending September 30, 2013, versus the policy benchmark gain of 5.0%. These results are eerily similar to last year, when the Long Term Pool returned 3.0% for the quarter ending September 30, 2012 versus the policy benchmark gain of 5.1%. Returning to 2013, the Long Term Pool is up 10.7% for the nine months ended September 30 versus the benchmark gain of 8.7%. We are pleased with this level of relative performance, as it is unusual for the Pool to keep pace with strong market rallies in the short term. Our public equity, long/short equity, venture capital, real estate, and marketable alternatives portfolios have all recorded double digit gains year-to-date, while buyouts have earned a very healthy 9.1%. Resources investments have gained only 2.0% year-to-date, but the asset class continues to exhibit 28 our highest long-term returns. The 9.7% of the Long Term Pool held in cash and bonds continues to be a drag on performance, but it helps maintain the appropriate level of risk in the Pool and provides critical liquidity for shareholder distributions, capital calls and new investments. EQUITIES Public Equity UVIMCO’s public equity portfolio gained 7.2% in the quarter ended September 30, 2013, versus the 8.0% return for the benchmark MSCI All Country World Index (MSCI ACWI). The public equity portfolio returned 16.6% for the first nine months of calendar year 2013, versus the 14.9% return for the MSCI ACWI benchmark. Over the past three, five, and ten-year periods, the public equity portfolio has gained 17.1%, 14.9%, and 14.4%, compared to 10.8%, 8.3%, and 8.4%, respectively, for the benchmark. A number of factors have driven our strong absolute and relative long-term public equity returns. First, we have benefited from a large allocation to quality and consumer companies, which have continued to outperform the market. In addition, our tilt towards emerging markets has often benefited the public equity portfolio, although in recent periods this position has served as a headwind as emerging market indices have lagged developed markets. Most importantly, we have long benefited from outstanding stock selection by our underlying managers. Our managers rely on fundamental research, take a long-term approach, and are willing to concentrate their portfolios in only their best ideas. This approach, along with great stock selection, has resulted in most of our managers generating returns well in excess of the broader global equity market regardless of whether the managers operate on a global basis, in the small cap universe, or within the emerging markets. We remain diligent in monitoring our managers and the tilts inherent in the Long Term Pool’s public equity portfolio, and we recognize that historic levels of outperformance will be difficult to achieve going forward. However, we will continue to take a bottom-up approach to manager selection, as we believe partnering with managers who focus on long-term value creation through individual stock selection provides us with the best chance to generate excess returns. 29 Long/Short Equity UVIMCO’s long/short equity portfolio gained 1.5% for the three months ended September 30, 2013, versus 3.5% for the Dow Jones Credit Suisse Long/Short Equity Index and 8.0% for the MSCI ACWI. The long/short equity portfolio returned 13.1% for the first nine months of calendar year 2013, versus 10.7% for the Dow Jones Credit Suisse Long/Short Equity Index and 14.9% returned by the MSCI ACWI. We expect our long/short managers to generate alpha on both the long and short sides of their portfolios by utilizing fundamental research to identify longterm winners and losers across the global investment universe. This is easier said than done. As has been the case throughout 2013, our long/short managers posted relatively strong results from long investments during the three months ended September 30. However, performance on the short side continued to be a drag, as lower-quality stocks or those facing longer term structural headwinds have rallied with the general markets throughout 2013. More broadly, UVIMCO’s long/short portfolio tends to underperform in periods where markets move sharply higher, as the net long exposure of that portfolio remains below 50%. Over longer timeframes, UVIMCO’s long/short portfolio has consistently outperformed the long/short equity universe. On a three, five and ten-year basis, our portfolio has generated returns of 11.7%, 8.1%, and 9.7%, exceeding the Dow Jones Credit Suisse Long/Short index by 2 to 6 percentage points per annum. Long-term excess returns versus global equity markets are smaller, but in most cases still present, as our managers have been able to generate sufficient alpha to compensate for a lower level of market exposure. Despite recent performance challenges across the long/short universe, we continue to believe there is value in the investment strategy. The benefits of investing in long/short may be less evident in periods where markets are appreciating steadily, as has been the case over the past two years. However, over longer time periods, our long/short managers have provided equity-like returns or better with significantly lower levels of volatility, and have provided downside support in periods of market distress. Our long/short managers also have more flexibility to adjust quickly to changing market conditions relative to other investment strategies. While we are comfortable maintaining a meaningful exposure to long/short equity, we are constantly evaluating our current relationships, 30 weighing them against other opportunities within the space and across the broader investment universe. Private Equity UVIMCO’s private equity portfolio returned 2.1% for the quarter ending September 30 compared to a return of 8.0% for its benchmark, the MSCI All Country World Index. UVIMCO’s buyout investments recorded gains of 2.1%, and venture capital valuations rose 2.0%. As noted in the past, quarterly reports from our private equity managers lag our performance reporting schedule by one quarter. Therefore, our September 30, 2013, returns reflect certain adjustments to June 30 valuations, but not the full impact of manager valuations as of September 30. For the ten years ended September 30, 2013, the annualized return for the private equity portfolio was 11.4% versus 8.4% for the MSCI ACWI. Over this same period, the 13.1% return earned by our buyout portfolio outperformed the 6.4% gain in our venture capital portfolio. Venture capital is still recovering from the 2000–2010 period in which venture capital returns were negative. Continuing the trend that began earlier in 2013, exits for venture-backed companies via the public markets continued to surge during the quarter ended September 30. Favorable public market conditions and strong valuations contributed to good quality IPOs for venture-backed companies. Twenty-six venturebacked companies went public during the quarter, raising $2.7 billion, according to the National Venture Capital Association and Thomson Reuters. That represented an increase of 13% over the second quarter of 2013 and an 11% increase for the year. It was also the first time since 2004 that twenty or more venturebacked IPOs have occurred in consecutive quarters. When the $16 billion Facebook IPO is stripped out, the quarter ending September 30 was the strongest quarter for dollars raised by venture-backed companies since the fourth quarter of 2011. The largest IPO of the quarter was FireEye, a security network company that raised $349 million and currently trades at more than double its offering price of $20 a share. What received even more attention than any actual IPO, however, was the muchanticipated announcement that Twitter has filed to go public before the end of 2013. The UVIMCO portfolio has exposure to both FireEye and Twitter. On the other hand, private equity-backed exits declined from the previous quarter as 289 exits valued at $63 billion took place during the three months ended September 30, versus 31 344 exits valued at $94 billion in the second quarter, according to Preqin. North America led the way in the third quarter with $36 billion spent on 363 deals. Total deal flow in Europe dropped in half compared to the $29 billion of deal flow during the previous quarter. Buyout deals in Asia were up with $7.1 billion in deals in the quarter versus $2.5 billion during the second quarter. The private equity portfolio generated positive cash flows of $27 million during the three months ended September 30, 2013. We received cash distributions of $45 million from the portfolio, and funded capital calls to our managers of $18 million. REAL ASSETS Real Estate The real estate portfolio returned 2.9% for the third quarter of 2013 versus -0.2% for the blended benchmark of publicly-traded U.S. and international real estate securities. Calendar year-to-date, the real estate portfolio has generated a return of 10.6% versus the benchmark return of 1.8%. As we explain in most commentaries, our private real estate investments differ materially from the composition of the publicly traded real estate benchmark. Calendar year-to-date, 10-year Treasury bond yields have risen 86 bps to 2.62%, contributing to the modest benchmark REIT returns in 2013. While the U.S. economy has added jobs, the labor participation rate continues to decline, with the current rate of 63.2% representing the lowest level recorded since 1978. The slow economic recovery has helped commercial real estate fundamentals to improve, with all sectors experiencing modest declines in vacancy in the third quarter of 2013. CMBS issuance is also on the rise, as evidenced by total volume of $56.4 billion through August 2013, versus annual totals of $33.4 billion and $48.3 billion in 2011 and 2012, respectively. UVIMCO’s real estate portfolio generated positive cash flows of $11 million during the three months ended September 30, 2013. We received cash distributions of $26 million from the portfolio, and funded capital calls to our managers of $15 million. 32 Resources UVIMCO’s resources portfolio returned 1.1% during the three months ended September 30, 2013, compared to a 0.2% loss on our formal real assets benchmark, the blended MSCI Real Estate index. Meanwhile, commodities and commodity-related equities generated strong overall returns for the quarter, with the Goldman Sachs Commodity Index increasing by 4.8% and the S&P North American Natural Resources Equity Index up 8.6%. However, intra-period commodity returns were mixed. Crude oil and precious metals both posted strong gains during the first two months of the quarter and then sold off in September due to macroeconomic concerns surrounding the U.S. government shutdown and Federal Reserve policy outlook. However, a rebound in China’s commodity demand drove a modest recovery in industrial metals which were hit hardest by concerns over a slowdown in Chinese growth. Natural gas prices experienced large monthly swings, but ended the period essentially flat as continuing concerns over excess supply were offset by increases in demand due to hotter than normal summer weather. Despite the persistent supply overhang and depressed natural gas prices, U.S. natural gas production has remained relatively stable. It is not unusual for our resources portfolio to underperform benchmarks during periods of strong commodity and equity market performance. The majority of our resources portfolio is invested in privately-held companies that provide lagged valuation updates, and most of our resources portfolio is still marked at June 30, 2013, values. The long-term performance of the resources portfolio continues to be outstanding. Over the last ten years, our resources portfolio has returned 23.2% annually compared to a 1.8% and 12.6% annualized return on the Goldman Sachs Commodity Index and S&P North American Natural Resources Equity Index, respectively. The resources portfolio generated positive cash flows of $27 million during the three months ended September 30, 2013. We received cash distributions of $45 million from the portfolio, and funded capital calls to our managers of $18 million. The majority of the distributions represented proceeds from the June sale of a co-investment position. 33 FIXED INCOME AND MARKETABLE ALTERNATIVES Marketable Alternatives and Credit For the three months ended September 30, 2013, our marketable alternatives and credit portfolio gained 1.9% versus 0.7% returned by the Barclays Aggregate Bond Index and 2.3% on the Barclays High Yield Index. Calendar year-to-date, the marketable alternatives and credit portfolio has generated a return of 11.0% versus -1.1% on the Barclays Aggregate Bond Index and 3.7% on the Barclays High Yield Index. Credit spreads tightened during the quarter after the Fed announced that they would delay any tapering of expansive monetary policy. Our managers positioned in liquid credit and reorganization equity performed well, and we expect managers who focus on illiquid credit will see a positive but lagged impact from recent market movements as well. The credit markets have been rallying for several years, and many investors feel that there is little upside left in credit going forward. However, UVIMCO’s credit managers are opportunistic and do not rely on a passive exposure to credit or duration to produce returns. Rather, they approach credit from many angles and have the flexibility to maintain short duration and/or move into multiple asset classes, including reorganization equities, which present unique opportunities. In addition, we have managers who can short the credit markets when needed. As credit markets tighten, this expertise will be beneficial. Bonds and Cash Our bond and cash portfolios continue to be managed as sources of liquidity. At the end of the quarter our bond and cash portfolio made up 9.7% of the Long Term Pool. This did not materially change from last quarter. Over time, we continue to expect the sum of the liquid U.S. Treasury bond and cash portfolios to vary between 8% and 12% of the Long Term Pool. Although this is a drag on returns (especially in a zero interest rate environment), we believe it provides insurance against future turbulent markets and will allow us to fund attractive investments that will more than make up for the return drag. Our government bond portfolio has been in short-term U.S. Treasury notes and bonds with maturities under three years. The average duration of this portfolio as of quarter end was 0.84 34 years. We have continued to maintain our position in shorter duration bonds, as we feel that the small additional return for longer duration bonds does not compensate us for the risk of higher rates in the near future. Our cash portfolio is invested in U.S. Treasury bills and notes with maturities less than one year and U.S. Treasury-guaranteed Repurchase Agreements with U.S.-domiciled counterparties. The duration of the cash portfolio as of September 30, 2013, was 0.41 years. The negligible returns reported for the short-term cash investments are consistent with an environment in which current interest rates are near 0%. RISK MANAGEMENT Investors may be willing to bear risk if they are adequately compensated with future higher returns. At UVIMCO, we are willing to bear certain risks, but others must be eliminated if we are unable to absorb the downside losses or if we do not earn a sufficient risk premium from assuming those risks. We consider three broad portfolio risks when managing the Long Term Pool – market risk, manager risk, and liquidity risk – and evaluate these factors relative to the risk tolerance of the Long Term Pool shareholders. Market Risk The largest risk factor present in the Long Term Pool is equity market risk. On a long-term basis we manage this exposure through our investments in managers. On a short-term basis we monitor our equity exposure with portfolio overlays through the option and futures markets. A common definition of market risk is the standard deviation or volatility of a portfolio’s return. Volatility provides a useful proxy for market risk if returns are normally distributed. However, it is clear that both the broad market as well as individual investment strategies are not normally distributed, but rather are subject to a much higher probability of negative “tail” events. Since investment returns are subject to “tail risk,” it is useful to complement the standard deviation statistic with an estimate of drawdown risk. We manage market risk in the Long Term Pool by diversifying across three broad asset classes: equity, fixed income, and real assets. Our objective is to maintain estimated market risk in the Long Term Pool that is less than or equal to the estimated market risk of the policy portfolio. Our current estimate of 35 the volatility of the Long Term Pool returns is 11.0% versus 11.8% for the policy portfolio. In addition, the one-percentile tail annual drawdown on the Long Term Pool is estimated to be 25.5%, less than the drawdown estimate of -30.8% on the policy portfolio. Manager Risk The Long Term Pool invests with more than one hundred external managers. We seek to maintain a portfolio of managers that generates sufficient returns to compensate us for bearing both market risk and the additional risk inherent in working with individual managers. Manager risk includes tracking error or active bets away from the benchmark, operational or business risks, lack of transparency, and leverage. Over time, UVIMCO has been well compensated for assuming manager risk. Attribution analyses suggest that manager selection is the largest contributor to the Long Term Pool’s long-term outperformance versus the policy benchmark and peers. Liquidity Risk At UVIMCO, we define liquidity risk as an inability to meet any of the following four primary liquidity requirements: (i) withdrawals by the University and foundation investors, (ii) the excess of capital calls over expected capital distributions from private funds, (iii) the need to rebalance exposures following a market decline, and (iv) the ability to deploy cash opportunistically as new investment opportunities arise. We manage this risk by maintaining a portfolio of Treasury bills and bonds, maintaining sufficient liquidity with our public equity and hedge fund managers, and by managing the pace of commitments to private investments. Given our four primary liquidity requirements, we believe that an appropriate target for liquidity is to have 10% of the Long Term Pool invested in assets that are safe and highly liquid, and at least 30% of the Pool should be available for conversion to cash in any twelve-month period. As of September 30, 2013, we had 10% of the Long Term Pool invested in Treasuries, 36% of the Long Term Pool that could be turned to cash within one quarter, and 43% of the Pool that could be turned into cash within one year. We also limit our unfunded commitments to private investments to be no more than 25% of the Long Term Pool. Our goal is to have 15% of unfunded commitments 36 outstanding on average. As of quarter end, our unfunded commitments were 16% of the Long Term Pool. 37 38 39 40 Investment Report September 30, 2013 Endnotes (1) UVIMCO's fiscal year runs from July 1 through June 30. (2) All investments are recorded at estimated fair market value in accordance with UVIMCO's valuation policy. (3) The Policy Benchmark is the geometrically linked monthly average of the underlying asset classes' benchmarks, weighted by the Fiscal Year 2014 policy target allocations: 60% Equity, 10% Real Assets, 30% Fixed Income. (4) The Real Estate component of our Fiscal Year 2014 policy portfolio is comprised of 50% MSCI U.S. Real Estate Index and 50% MSCI All Country World Real Estate Index. Prior to January 1995, the benchmark is comprised of 100% FTSE National Association of Real Estate Investment Trusts Equity Index. (5) The Fixed Income component of our Fiscal Year 2014 policy portfolio is comprised of 50% Barclays Capital U.S. Aggregate Bond Index and 50% Barclays Capital Global Aggregate Bond Index (Hedged in U.S. Dollars). Prior to January 1990, the benchmark is comprised of 100% Barclays Capital U.S. Aggregate Bond Index. Represents the current market values and performance of overlay positions designed to change the Long Term Pool exposures. Performance is calculated to reflect the impact of overlays relative to the entire Long Term Pool (6) (7) Represents securities and funds that may be readily sold for cash within the designated time periods. (8) Represents the market values of investments where distributions are at the sole discretion of the managers, plus all uncalled commitments. (9) Market and currency exposures are estimated by looking through managers and funds to the underlying security positions. Policy ranges express the expected variation in asset class, regional, and currency exposures during normal market circumstances. Totals may not add due to rounding. (10) Latin America, Middle East, and Africa. 41 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: II.F.3. Endowment/Long-Term Investments, Including Related Foundations at September 30, 2013 (in thousands) ACTION REQUIRED: None Rector and Visitors Funds The University of Virginia Medical School and related foundations The College of Arts and Sciences and related foundations The University of Virginia Law School and related foundation Darden School and related foundation Batten School of Leadership and Public Policy School of Engineering and related foundation The McIntire School of Commerce and related foundation University of Virginia's College at Wise and related foundation Graduate School of Arts and Sciences School of Nursing Curry School of Education and related foundation School of Architecture and related foundation School of Continuing and Professional Studies $ 859,080 391,839 47,254 119,594 118,876 100,524 46,868 48,450 57,665 47,329 14,266 18,488 2,132 Related Foundation Funds Invested by UVIMCO Alumni Association Funds Invested by UVIMCO Related Foundation Funds Invested by Direction of Foundation Board $ $ $ 46,020 71,266 243,935 234,203 10,264 7,791 10,033 2,706 - 9,923 12,524 44,489 2,567 2,535 435 53 Total $ 915,023 475,853 396,569 366,991 118,876 112,726 91,956 60,226 57,665 49,864 25,504 22,283 2,185 224 105,380 13,194 1,938 599 1,418 1,205 654 - University of Virginia Medical Center and related foundations Centrally Managed University Scholarships Athletics and related foundation Alumni Association Provost University of Virginia Foundation and related entities Miller Center and related foundation Alumni Board of Trustees University Libraries 471,413 186,350 43,328 98,486 55,570 56,351 61,996 64,795 67,473 10,669 59,655 - 1,405 456 75,366 101 28,985 29,267 203 - University - Unrestricted but designated University - Unrestricted Quasi and True Endowment University - Unrestricted Other 336,567 176,447 162,582 - - - 336,567 176,447 162,582 All Other 233,809 237,472 54,783 12,393 538,457 $ 3,693,268 $ 1,128,278 $ 204,637 $ 195,460 $ 5,221,643 * ** 563,799 186,350 108,579 104,633 98,486 67,676 66,239 59,655 56,452 *Includes funds on deposit for other areas/schools not individually listed. **Excludes approximately $62.8 million of board designated pension funds. SOURCE: AVP/Finance DATE: October 28, 2013 42 UNIVERSITY OF VIRGINIA BOARD OF VISITORS AGENDA ITEM SUMMARY BOARD MEETING: November 15, 2013 COMMITTEE: Finance AGENDA ITEM: II.F.4. Quasi-Endowment Actions: 2013 – September 30, 2013 ACTION REQUIRED: None July 1, BACKGROUND: 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 Assistant Vice President for Finance and University Comptroller, 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 quasi-endowment 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 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. 43 Additions from Gifts Osher Lifelong Learning Institute Quasi-Endowment 1 Otolaryngology Quasi-Endowment - Head and Neck Surgery President's Fund for Excellence Unrestricted Quasi-Endowment 1 Shea, Eleanor Quasi-Endowment Professorship in Music 1 Shea, Eleanor Quasi-Endowment Professorship in Art History 2 University Quasi-Endowment Fund Whitener, Ellen Quasi-Endowment Fund Total Additions from Gifts to Quasi-Endowments Additions from Endowment Income (Capitalizations) Antrim, Lottie C. Income Capitalization Quasi-Endowment Athletics General Operations Quasi-Endowment Chrysler, W. P. Fund for Engineering Library Coulter, Wallace H. Endowment Match Dermatology General Investment Fund Hecht, Sidney M. Fellowship in Chemistry Hecht-Cruachem Chemistry Quasi-Endowment #3 HOPE Physician Incentive Quasi-Endowment Hughes Endowment Income Capitalization Quasi-Endowment Jordan, Harvey E. Lectureship Low, Emmet F. and N. Alyce Chair Quasi-Endowment McIntire, Howard Quasi-Endowment in Neurology 3 Medical Center Capital Assets Quasi-Endowment Miller, Mae W. Cancer Research Quasi-Endowment Moyston, Vernah Scott Professorship in Ophthalmology Investment Quasi-Endowment Plastic Surgery Quasi-Endowment Fund Radiology Fund Special Diagnostic Samuels, Bernard Ophthalmology Library Quasi-Endowment School of Medicine Quasi-Endowment Southwest-Dishner Gift Quasi-Endowment Fund Taylor, Henry N. Fund Virginia Quarterly Review - Anonymous Total Additions from Endowment Income to Quasi-Endowments Divestments Thaler, Myles H. Quasi-Endowment for HIV Research Amount 950,000 1,000,000 33,312 210,000 202,000 3,966,299 148 $ 6,361,759 $ $ 9,582 87,525 1,744 1,723 32,734 9,214 1,521 67,449 1,995 1,500 1,287 23,670 7,103,805 6,353 4,574 19,360 4,613 2,614 92,345 17,203 339 587 $ 7,491,737 $ $ Total Divestments from Quasi-Endowments 75,000 75,000 Notes: 1 Quasi-endowment newly established or originally funded since July 1, 2013. 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. 3 Per February 7, 2008 BOV authorization, additional amounts up to $300 million can be made to this fund without further BOV approval. SOURCE: AVP Finance DATE: October 10, 2013 2 44