June 7, 2018

MEMORANDUM

TO: The Finance Committee:

James B. Murray Jr., Chair

Robert M. Blue

Thomas A. DePasquale

Maurice A. Jones

John G. Macfarlane III

Jeffrey C. Walker

Frank M. Conner III, Ex Officio

Daniel M. Meyers, Consulting Member

and

The Remaining Members of the Board:

Mark T. Bowles Robert D. Hardie

L.D. Britt, M.D. Babur B. Lateef, M.D.

Whittington W. Clement Tammy S. Murphy

Elizabeth M. Cranwell James V. Reyes

Barbara J. Fried Margaret F. Riley, Faculty Member

John A. Griffin Brendan T. Nigro, Student Member

FROM: Susan G. Harris

SUBJECT: Minutes of the Meeting of the Finance Committee on June 7, 2018

The Finance Committee of the Board of Visitors of the University of Virginia met, in Open Session, at 3:30 p.m. on Thursday, June 7, 2018, in the Board Room of the Rotunda. James B. Murray Jr., chair, presided.

Present: Frank M. Conner III, Thomas A. DePasquale, Maurice A. Jones, John G. Macfarlane III, and Jeffrey C. Walker

Absent: Robert M. Blue and Daniel M. Meyers

L.D. Britt, M.D., Whittington W. Clement, Elizabeth M. Cranwell, Barbara J. Fried, John A. Griffin, Robert D. Hardie, Babur B. Lateef, M.D., Tammy S. Murphy, Margaret F. Riley, and Brendan T. Nigro also attended. Mark T. Bowles monitored by telephone.

Present as well were Teresa A. Sullivan, Patrick D. Hogan, Thomas C. Katsouleas, Richard P. Shannon, M.D., Melody S. Bianchetto, Jonathan D. Bowen, Susan G. Harris, Donna P. Henry, Patricia M. Lampkin, W. Thomas Leback, David W. Martel, Debra D. Rinker, Roscoe C. Roberts, Pamela H. Sellers, Colette Sheehy, and Kelley D. Stuck.

Douglas E. Lischke and James S. Matteo were presenters.

Mr. Murray opened the meeting. After reviewing the agenda, he gave the floor to Mr. Hogan and Ms. Bianchetto.

Action Item: 2018-2019 Operating Budget – Academic Division, Pratt Fund, Medical Center and Transitional Care Hospital, and The University of Virginia’s College at Wise

The presentation reviewed 1) key elements in the state’s biennial budget; 2) Organizational Excellence savings targets; 3) the Academic Division’s budget including non-base budget investments, uses of Strategic Investment Fund reserves, multi-year financial plan, and the faculty hiring plan; 5) Pratt Fund allocations; 6) the Medical Center’s budget; and 6) the College’s budget.

Ms. Bianchetto said the state budget provides incremental funding for the Academic Division and the College at Wise. The Academic Division will receive $1.4 million for operating expenses in FY 2019 and $3.5 million in FY 2020. It will also receive $4.0 million in both years for maintenance reserve and $13 million in FY 2019 for equipment for approved projects. In FY 2019, the College will receive $1.0 million in for operating expenses in FY 2019 and $2.8 million in FY 2020. It will receive $256,000 each year for maintenance reserve.

The state budget funds a 2% compensation increase for all Academic Division employees and a 2% merit salary increase for classified employees. $20 million is provided for the Commonwealth Cyber Initiative, which is led by Virginia Tech. The budget expands Medicaid, but its financial impact to the Health System is expected to be minimal.

Ms. Bianchetto said Organizational Excellence is on track to achieve its $22 million savings target for FY 2018. The savings target for FY 2019 is $23 million.

The Academic Division’s budget for FY 2019 is $1.8 billion, a 5% increase over FY 2018. The budget is supported by a 5% increase in tuition and fees, a 0.2% increase in state appropriations, an 8.1% increase in externally sponsored research, a 11.5% increase in endowment distribution and administrative fee, and a 5.2% increase in the sales, service and other category; it assumes a 5.1% reduction in expendable gifts. The budget provides a 4.0% increase in instruction, a 7.7% increase in research and public service, a 1.8% increase in academic support, a 3.0% increase in student services, a 3.5% increase in financial aid, a 39.5% increase in general administration with 37.1% for the Third Century Campaign, a 3.1% increase in operating and maintenance, and a 3.4% increase in auxiliaries; it includes 0.9% decrease in debt service transfers.

Ms. Bianchetto reviewed a projection of non-base budget investment expenditures from FY 2019 through FY 2023. These initiatives are funded from one-time sources and include infrastructure, safety and security, the Cornerstone Plan, Pan-University Centers and Research, Cluster/ToPS+Start Up packages, academic support, finance transformation, and minor capital. New initiatives in the budget include additional investment in Cluster/ToPS+Start Up packages, institutional debt service, and the planning phase of the Finance Transformation initiative.

Strategic Investment Funds reserves will be used for a balloon debt service payment ($27 million) due in 2021 and for two quasi-endowments for translational research from Ivy Foundation Funds ($48 million). The reserves will also be used for the Medical Center’s $50 million investment in Inova, which will be made in three installments over the next 18 months.

Ms. Bianchetto reviewed the multi-year financial plan for FY 2020 through FY 2025. Its fund source assumptions include 1) enrollment growth within approved parameters; 2) a 3% annual increase in the Higher Education Price Index; 3) 3% annual increase in undergraduate tuition; 4) no increase in state appropriations; 5) increases in research funding consistent with the award increases over the last three years; 6) endowment distribution increases within the approved band and an annual 7% rate of return; 7) a 2.5% annual growth in gifts, and 8) a 2.5% annual increase in auxiliary enterprises revenues. The plan assumes 1) 3% annual compensation increases; 2) no substantial fringe benefit changes (health plan changes may impact this assumption); and 3) inflationary increases in ‘Other Than Personnel Services.’

Mr. Katsouleas reviewed the status of the 2014 faculty hiring plan for the undergraduate schools. Overall retirements and faculty growth have been slower than projected. The projection for FY 2018 called for 75 new hires and 52 departures; the final count was 66 new hires and 55 departures. The FY 2019 projection is 50 new hires and 50 departures. Mr. Katsouleas anticipates that faculty growth will increase.

Ms. Bianchetto reviewed the Pratt Fund allocations. The School Medicine will receive $4.6 million for research and $1.2 million for fellowships. The College of Arts & Sciences will receive $3.2 million for faculty salaries; $0.7 million for fellowships, and $0.6 million for faculty startups.

Mr. Douglas Lischke presented the Medical Center’s FY 2019 Operating Budget. The overall Health System budget assumes $2.54 billion in revenues, $2.52 billion in expenses, and $23.1 million in income. The Medical Center component has an $87.4 million operating income for a 5.1% operating margin. After transfers to UPG and the School of Medicine, the income will be $40.7 million.

Ms. Bianchetto reviewed the proposed $43.8 million budget for the College at Wise. It is a 2.1% increase over FY 2018 and is based on a 9% decrease in tuition and fees, a 6.3% increase in state appropriations, a 121.6% increase in sponsored research reflecting the receipt of a GO Virginia grant, 5.6% increase in the endowment distribution and administrative fee, a 1.4% increase in expendable gifts, and an 11.2% decrease in sales and auxiliary services. The budget assumes a 3.2% decrease in instruction, a 75.1% increase in research and public service, a 11.7% increase in academic support, a 0.4% decrease in student services, a 0.9% increase in financial aid, a 2.3% increase in general administration, a 4.6% increase in operating and maintenance, and a 8.4% decrease in auxiliaries.

On motion, the committee approved the following resolutions and recommended them for full Board approval:

2018-2019 OPERATING BUDGET FOR THE ACADEMIC DIVISION

RESOLVED, the 2018-2019 $1.8 billion operating budget for the Academic Division is approved as recommended by the President and the Chief Operating Officer. If additional state general funds are allocated with the approval of the Commonwealth’s Appropriation Act, these funds will be directed based upon included language from the General Assembly; and

RESOLVED FURTHER, $101.0 million in non-recurring investments to meet critical infrastructure, safety and security, and strategic activities are approved as recommended by the President and the Chief Operating Officer; and

RESOLVED FURTHER, the Board of Visitors approves transferring $27.0 million from Strategic Investment Fund operating reserves to fund a balloon debt service payment, and transferring $48.0 million of Ivy Foundation Funds from the Strategic Investment Fund to create two Board of Visitors-approved quasi-endowments for translational research.

2018-2019 PRATT FUND DISTRIBUTION

RESOLVED, the budget for the expenditure of funds from the Estate of John Lee Pratt is approved to supplement appropriations made by the Commonwealth of Virginia for the School of Medicine and the Departments of Biology, Chemistry, Mathematics, and Physics in the College of Arts and Sciences. Departmental allocations, not to exceed $10,594,833 for 2018-2019, are suggested by the department chairs and recommended by the dean of each school. The disbursement of each allotment will be authorized by the Executive Vice President and Provost. To the extent the annual income from the endowment is not adequate to meet the recommended distribution, the principal of the endowment will be disinvested to provide funds for the approved budgets.

2018-2019 OPERATING BUDGET FOR THE UNIVERSITY OF VIRGINIA MEDICAL CENTER AND THE TRANSITIONAL CARE HOSPITAL

RESOLVED, the 2018-2019 $1.7 billion operating budget for the University of Virginia Medical Center, inclusive of the Transitional Care Hospital, is approved as recommended by the President, the Chief Operating Officer, and the Health System Board.

2018-2019 OPERATING BUDGET FOR THE UNIVERSITY OF VIRGINIA'S COLLEGE AT WISE

RESOLVED, the 2018-2019 $43.8 million operating budget for The University of Virginia’s College at Wise is approved as recommended by the President and the Chief Operating Officer. If additional state general funds are allocated with the approval of the Commonwealth’s Appropriation Act, these funds will be directed based upon included language from the General Assembly.

Action Item: 2018 Multi-Year Major Capital Plan Financial Plans

Ms. Sheehy said the cost of the multi-year capital plan is $3.33 billion with approximately 50% funded by debt, 20% by gifts, 18% by the state, and 12% by cash. The Academic Division uses a variety of these fund sources, the Health System relies heavily on debt and cash, and the College relies heavily on state funding.

Ms. Sheehy reviewed the financial plans for the near-term (2018-2020) projects that have not been previously approved by the Board. There were five Academic Division projects: the softball stadium, the Brandon Avenue Upper-Class Residence Hall Phase II, an Upper-Class Residence Hall, the North Grounds Mechanical Plant, and the West Grounds Chilled Water Capacity. The stadium will be funded by cash and gifts, the residence halls by a mix of debt and cash, and the infrastructure projects by debt. There were two Health System projects: the Pinn Hall Building Envelope and the Pinn Hall Nobel Laureate Atrium. The first will be funded by deferred maintenance funds and cash and the second will be funded by cash and possibly philanthropy.

On motion, the committee approved the following resolution and recommended it for full Board approval:

FINANCIAL PLANS FOR THE 2018 MULTI-YEAR MAJOR CAPITAL PLAN

WHEREAS, major capital projects are vetted by the Space Leadership Committee and executive leadership, as well as by appropriate committees of the Board of Visitors, to ensure alignment with institutional priorities; and

WHEREAS, the projects included in the proposed 2018 Major Capital Plan are arrayed across a six-year plus timeframe based on the anticipated work related to each project; and

WHEREAS, the Executive Vice President and Chief Operating Officer will confirm that appropriate funding is in place before any project commences construction;

RESOLVED, the financial plans for the following capital projects expected to begin by 2020 in the 2018 Multi-Year Major Capital Plan are complete and approved: Softball Stadium (revised); Brandon Avenue Upper-Class Residence Hall Phase II; Upper-Class Residence Hall (site to be determined); North Grounds Mechanical Plant and Infrastructure; West Grounds Chilled Water Capacity; Pinn Hall Building Envelope; and Pinn Hall Nobel Laureate Atrium.

Action Item: Debt Issuance for Acquired Northridge Property

Mr. Hogan said this action authorizes the use of debt to reimburse the University for the cash it used to acquire the Northridge property in April 2017.

On motion, the committee approved the following resolution and recommended it for full Board approval:

ISSUANCE OF GENERAL REVENUE PLEDGE BONDS FOR ACQUISITION OF THE NORTHRIDGE BUILDING

WHEREAS, Chapter 22, Title 23.1 of the Code of Virginia of 1950, as amended (the "Virginia Code"), establishes a public corporation under the name and style of The Rector and Visitors of the University of Virginia (the "University") which is governed by a Board of Visitors (the "Board"); and

WHEREAS, Title 23.1 of the Virginia Code classifies the University as an educational institution of the Commonwealth of Virginia; and

WHEREAS, by Chapter 10, Title 23.1 of the Virginia Code (the "Act"), the University entered into a management agreement with the Commonwealth of Virginia which was enacted as Chapter 3 of Chapter 933 of the 2006 Virginia Acts of Assembly, pursuant to which the University is empowered to undertake the acquisition of any interest in land, including improvements on the acquired land at the time of acquisition, new construction, improvements, or renovations, and to borrow money and make, issue, and sell bonds of the University for such purposes, including the refinancing of any such facilities; and

WHEREAS, the University desires to issue debt for the acquisition of the Northridge Building;

RESOLVED, the Board of Visitors authorizes the University to issue debt of not more than $18.4 million to fund the acquisition of the Northridge Building; and

RESOLVED FURTHER, all acts of officers of the University which are in conformity with the purposes and intent of this Resolution are ratified, approved and affirmed; and

RESOLVED FURTHER, this action shall take effect immediately.

Action Item: Acquisition of the Meadow Creek Corporation from the UVA Foundation

Mr. Hogan said this action is deferred to the September committee meeting.

Action Item: Delegation of Signatory Authority for Certain Medical Center Contracts

Mr. Hogan said four contracts require Board action because each exceeds $5 million a year: Virginia Blood Services, Medtronic, CDW Corporation, and Hill-Rom.

On motion, the committee approved the following resolution and recommended it for full Board approval:

DELEGATION OF SIGNATORY AUTHORITY FOR CERTAIN MEDICAL CENTER CONTRACTS

RESOLVED, the Board of Visitors authorizes the Executive Vice President for Health Affairs to execute contracts on behalf of the Medical Center with Virginia Blood Services, Medtronic, CDW Corporation, and Hill-Rom.

Action Item: Commending Resolution for Daniel M. Meyers and the Council of Foundations

The resolution was introduced by Mr. Hogan and read by Mr. Macfarlane.

On motion, the committee approved the following resolution and recommended it for full Board approval:

COMMENDING RESOLUTION FOR DANIEL M. MEYERS AND THE COUNCIL OF FOUNDATIONS

WHEREAS, Daniel M. Meyers was engaged with the work of the University of Virginia Curry School of Education as a result of his expertise in the field of education finance, becoming a strong advocate for the Curry School’s mission; and

WHEREAS, Mr. Meyers has served with great commitment on the Council of Foundations since its inception as a representative of the Curry School of Education Foundation, and has represented the Council as a Consulting Member to the Board of Visitors Finance Committee; and

WHEREAS, Mr. Meyers has been a dedicated supporter of the University of Virginia and has contributed in various and substantial ways across the institution;

RESOLVED, the Board of Visitors offers significant thanks and appreciation to Daniel M. Meyers for his generous support and dedication to the University of Virginia, and for representing the Council of Foundations before the Board of Visitors Finance Committee.

Introductions of Associate Vice President for Safety and Security and Chief Executive Officer/Chief Investment Officer of the University of Virginia Investment Management Company

Mr. Hogan introduced Ms. Gloria S. Graham as the University’s Associate Vice President for Safety and Security, and Mr. Robert W. Durden as the Chief Executive Officer/Chief Investment Officer of the University of Virginia Investment Management Company.

Executive Vice President’s Remarks

Mr. Hogan’s remarks focused on the $500 million “shelf” registration for long-term debt the Board approved a year ago. He said the University had a remarkable year in the capital markets and asked Mr. James Matteo to review the subsequent actions. Mr. Matteo said the University issued $200 million in tax-exempt bonds in April. The proceeds will primarily be used for the Emergency Room bed tower and residence hall projects. The bonds have 30-year maturities and a 3.824% yield. Last September, $300 million in taxable, 100 year, century bonds were issued. Their yield was 4.179%, which was the second lowest yield of any higher education century bond. The bonds were primarily for Medical Center projects.

Mr. Matteo explained that a shelf registration is an authorization to issue a number of securities up to a certain amount over a specific period of time. It allows more efficient access to capital markets, reduces issuance expenses, and reduces staff time. He said the University also benefits from its AAA rating, which reduces interest costs. A comparison of the annual interest costs for the April bond issuance to similar issuances during the same time period by AA rated schools determined that the University saved $800,000 per year. When this savings is projected to the University’s entire debt portfolio, the savings is approximately $8 million.

Mr. Matteo reviewed a long-term debt maturity schedule for the University’s $1.89 billion debt portfolio. He said the University’s cash and assets exceed the debt by more than three times and the cost of the debt is 3.91%.

Mr. Hogan said the University will likely present a proposal in September for new debt issuances during the 2018-2019 academic year.

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Mr. Murray said Mr. Hogan has announced he will be stepping down as Executive Vice President and Chief Operating Officer. Mr. Murray said he has never dealt with a better financial officer or chief operating officer.

On motion, the chair adjourned the meeting at 4:55 p.m.

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These minutes have been posted to the University of Virginia’s Board of Visitors website: http://bov.virginia.edu/committees/205