The Ohio State University Board of Trustees



The Ohio State University Board of Trustees

Fiscal Affairs Committee

February 6, 2009

TOPIC: Mid-Year Financial Report

CONTEXT:

This report is always presented at this time of year and in more recent years has become enterprise-wide risk-based by major funding category.

SUMMARY:

Because of the extraordinary level of economic uncertainty, this part of the report is being presented in three parts:

• Summary of current status of major funding sources and risks

• Discussion of strategic principles going forward

• Reference material from Moody's Investor Services

CONSIDERATIONS:

Considerations are included in the cover sheets for each specific item.

REQUESTED OF FISCAL AFFAIRS COMMITTEE:

For discussion and advice. No vote requested.

Office of Business and Finance

1/26/09

The Ohio State University Board of Trustees

Fiscal Affairs Committee

February 6, 2009

TOPICS:

Mid-Year Financial Report – I

CONTEXT:

The purpose of this report is to identify areas of financial risk from an enterprise-wide perspective.

SUMMARY:

Areas highlighted include:

• Enrollments

• OSU Medical Center

• State Support

• Research

• Private Fund Raising

• Investments

• General Fund Operations

• Auxiliaries

• Bond Sales/Debt management

• Affiliated Entities

• Reserves

• Enterprise Systems

CONSIDERATIONS:

• Have key risks been identified?

• What action steps have been taken, are they appropriate and what are next steps?

• What additional information would the Committee like to have?

REQUESTED OF FISCAL AFFAIRS COMMITTEE:

For discussion and advice only. No vote required.

Note: Because this document was completed prior to the Governor's State of the State and Budget messages, they are not included. The Governor's budget proposal will be addressed at the February 6 meeting, however.

Date: January 26, 2009

Subject: Mid-Year Financial Report - I

From: Joe Alutto

Steve Gabbe

Bill Shkurti

Chip Souba

To: E. Gordon Gee

This memorandum summarizes our review of the University's financial condition at the mid-year point of Fiscal Year 2009. Despite the turmoil in the economy, the University's finances at this point are stable, but significant challenges lie ahead. Listed below are the major areas of financial risk and our assessment of the outlook for the remainder of FY 2009 and then FY 2010 and beyond.

Enrollment - Columbus Campus

Actual Headcounts continue to exceed the Projected Headcount by a total of 1.5%, primarily in the undergraduate population. The impact of the economy on enrollment for FY 2010 is not yet clear.

Budget vs. Actual Headcounts

Fiscal Year 2009

|Category |Projected Budget |Actual |Actual – Budget |Percent Change |

|1 - Undergraduate |87,885 |89,578 |1,693 |1.9% |

|2 – Graduate |27,249 |27,346 |97 |0.4% |

|3 – Professional |7,568 |7,606 |38 |0.5% |

|Grand Total |122,702 |124,530 |1,828 |1.5% |

Note: Includes Summer, Autumn and Winter Quarters

Sources: Budget: Budget Planning (Headcount Enrollment Projection Summary) for Columbus Campus; Actual: Quarter 15th Day Enrollment, University Registrar

Status: FY 2009 Green FY 2010 Yellow

Enrollment - Regional Campuses

The combined summer, autumn and winter quarter headcount enrollment figures are included in the following chart. Because of their relatively small size, regional campus enrollment fluctuations of +5% are not unusual. Enrollment variances on the regional campuses and ATI continue to be monitored.

|Campus |Projected Budget1 |Actual2 |Actual - Budget |Percent Change |

| | | | | |

|Lima |3,104 |3,130 |26 |0.8 |

|Mansfield |3,435 |3,422 |-13 |-0.4 |

|Marion |3,609 |3,754 |145 |4.0 |

|Newark |5,751 |5,357 |-394 |-6.9 |

|ATI |1,608 |1,597 |-11 |-0.7 |

1 Projected FY 2009 headcounts provide by regional campus fiscal officers.

2 Headcounts per Registar’s 15th Day Report

3 Percentage difference between actual and projected headcount enrollment for FY 2009 summer, autumn and winter terms.

Status: FY 2009 Green FY 2010 Yellow

OSU Medical Center

The Health System is close to budget for the first six months of the fiscal year. Net revenue is slightly (4.5%) below budget target due to declining interest rates, but operating EBIDA margin is at target and cash and debt service indicators are above target. Aggressive planning is already underway for what is likely to be a challenging FY 2010.

Status: FY 2009 Green FY 2010 Yellow

State Support

Governor Strickland announced a third round of Executive Cuts necessary to balance the state budget for FY 2009 in the face of deteriorating economic conditions. Fortunately, the State Share of Instruction has been protected and the University will be able to maintain the two year tuition freeze. Various state line items have been reduced, in many cases by 11.5%, from original appropriations. At this writing, the next biennium is very uncertain, with most of the risk on the downside.

Status: FY 2009 Orange FY 2010 Red

Research

After the second quarter, Indirect Cost Recoveries are running 3.0% higher than FY 2008 and above college FY 2009 projections.  New awards are up 11% compared to the second quarter of FY 2008, but it is too early to draw any conclusions about year-to-year growth. Research continues to work on implementing of the recommendation to include OSURF within the University as a support unit with the goal of completing the restructuring in FY 2010.

Status: FY 2009 Green FY 2010 Yellow

Private Fund Raising

For the first two quarters of FY09, cash receipts, including current use gifts and additions to endowments, but excluding grants processed through the Research Foundation decreased 18% compared to the same period in FY 08.  Overall, fundraising activity for the first two quarters, which includes gifts, private grants, pledge commitments and planned gifts, increased 2% compared to the same period in FY08.  

Status: FY 2009 Yellow FY 2010 Yellow

Investments

The return rate of the long term investment pool is down 26.7% for the first half of FY 2009 due to poor performance of the stock market. Although the University is oriented towards the long run, the Chief Investment Officer is evaluating alternatives to mitigate risk and improve performance.

Status: FY 2009 Red FY 2010 Yellow

General Fund Operations

General fund operations are stable. The College of Math and Physical Sciences now has an approved plan to eliminate its deficit by FY 2013.

Status: FY 2009 Green FY 2010 Yellow

Auxiliaries

The results here are mixed. Athletics and the Blackwell have already seen some fall-off in revenue due to the economy and are taking corrective action. Other operations, such as the Fawcett Center and Housing have not, but are making preparations to respond swiftly as needed.

Status: FY 2009 Yellow FY 2010 Yellow

Bond Sales/Debt Management

Both University short term and long term debt have been placed at very favorable interest rates. Variable rate debt continues to be reset weekly. The next long term debt issue will not take place until FY 2011.

Status: FY 2009 Green FY 2010 Green

Affiliated Entities

Most of the 12 affiliated entities appear to be stable at this point. Of the three identified as facing financial challenges, SciTech is having a strong year, with rental revenue ahead of projections. Campus Partners is re-working its business plan to remain financially flexible in this uncertain environment, and Prologue is focusing its efforts on improving its financial performance.

Status: FY 2009 Yellow FY 2010 Yellow

Reserves

Reserves continue to be at or above targeted levels.

Status: FY 2009 Green FY 2010 Yellow

Enterprise Systems

Installation of the Student Information System continues to be on time and on budget.

Status: FY 2009 Green FY 2010 Green

Stimulus Package

The proposed federal stimulus package may have both direct and indirect benefits for OSU. The situation is being monitored closely, but is very fluid. We are prepared to participate in whatever federal support is available, but will not count any revenue until or unless it is received.

It is clear we are in the middle of the country's worst financial crisis in 75 years. Extraordinary efforts will be needed for OSU to maintain momentum in its academic programs while remaining financially sound. We will present more of the details of how we will approach that issue at the February Board meeting. Meanwhile, if you would like any additional information or clarification, please let us know.

The Ohio State University Board of Trustees

Fiscal Affairs Committee

February 6, 2009

TOPIC: Mid-Year Financial Report - II

CONTEXT:

Because of the severity and uncertainty surrounding the current economic crisis, this part of the report will focus exclusively on that topic.

The University's response to the economic crisis is designed to advance these three strategic goals:

• Enhance the University's value to the people of Ohio

• Advance the goals of the Academic Plan

• Be fiscally prudent

RECOMMENDATIONS:

The recommended response addresses the following areas of emphasis:

• Students First (Attachment A)

• Maintain a Financially Strong Health System (Attachment B)

• Re-Focus Priorities (Attachment C)

• Preserve Liquidity (Attachment D)

• Restructure the Long term Investment Portfolio (Attachment E)

• Address the Remaining FY 2009 Challenges (Attachment F)

• Prepare for FY 2010 and Beyond (Attachment G)

• Implementation Timetable (Attachment H)

• Summary and Conclusions (Attachment I)

CONSIDERATIONS:

• Have the key issues been defined?

• Are the responses appropriate?

• What happens next?

• What's the appropriate role of the Board?

REQUESTED OF FISCAL AFFAIRS COMMITTEE:

For information and discussion. No vote requested.

ATTACHMENT A

Students First

Student tuition and fees are the single largest source of General Funds that support the academic core of the University. Fee income is determined primarily by enrollment levels; therefore, it is in the interest of both students and the University to make sure otherwise qualified students are able to complete their education regardless of changes in their financial status.

On December 22, 2008, the University announced the "Students First" initiative which is designed to assure both current and prospective students of the University's commitment to make sure they can succeed, regardless of changes in their economic status in a time of financial uncertainty.

The elements of this program are as follows:

• No mid-year tuition increases.

• Guarantee to increase financial aid proportionally if tuition increases.

• Protection of financial aid through any University-wide budget reductions.

• Add $1M to the short-term emergency loan fund.

• Assistance to secure additional financial aid for students whose economic condition changes due to job loss by either the student or parent(s).

• Continued access to low cost student loans through the University's direct lending program.

• Make available more University long-term loans.

Enrollments will continue to be monitored on a weekly basis to insure issues are identified quickly and resolved quickly.

ATTACHMENT B

Maintaining a Financially Strong Health System

The key to sustaining the financial health of the OSU Medical Center and the University is the financial health of the Health System. The Health System accounts for 75% of Medical Center revenues and 36% of total University revenues. The annual operating margin of 10-12.5% is critical to the College of Medicine's academic and research programs and the University's financial ratios. Therefore, maintaining the operating margin targets is essential to future programmatic and financial success.

The following elements contribute to continued success:

• Sustain high quality patient outcomes and patient satisfaction

• Generating volume

• Controlling costs

• Managing net revenue

• Recruiting clinical faculty

• Thoughtfully upgrading facilities

• Leveraging the OSU brand

Note: University success in reducing costs such as benefits, energy, and construction, will have collateral benefits for the Health System.

The quarterly monitoring system and circuit breakers established by the Board in preparation for Project One provide an excellent framework for monitoring financial performance. This will be supplemented by monthly tracking reports on key variables to assure the Health System remains financially strong.

ATTACHMENT C

Refocusing Priorities

Highest priority programs need to advance, even in a time of financial stress. However, this means other priorities may need to be slowed down or modified.

Proceed as Planned

• Physical Planning Comprehensive Review

• Project One East of Cannon

• Student Financial Aid Carryover Deficit Elimination

• Targeted Investments in Excellence

• Student Information System Installation

• Potential Conversion to Semesters

• Arts and Sciences Consolidation

• Royal Shakespeare Program

• Scheduled Demolitions of Outdated Facilities

• BRT Build Out

• Center for Innovation

Proceed but at a Slower Pace or Different Configuration

• Project One West of Cannon

• Campus Partners Acquisition Plans

• Student Housing Expansion

• North Academic Core

• Particle Therapy

ATTACHMENT D

Preserving Liquidity

The University currently has over $900 million in operating funds invested in highly liquid, very safe government and corporate securities. The important issue moving forward is to make sure sufficient liquidity is maintained to address unexpected financial issues. This will protect both core academic programs and the University's financial rating.

Elements of this strategy include:

• Protecting remaining reserves through FY 2009, including:

o Rainy Day Fund ($13.5M)

o Debt Service Reserve ($64M)

• Putting a six month freeze on new internal lines of credit to preserve liquidity

• Reviewing and modifying, as needed, our property and liability insurance coverage

• Slowing down large capital commitments for which funding sources have not yet been identified

• Maintaining a financially healthy Medical Center

• Finance acquisitions through bonds or leases, rather than cash outlays

• Re-evaluate University's debt capacity

Note: The University is currently experiencing no difficulties placing its debt. Variable rate debt has been placed regularly since December at very favorable rates. Current rate has been as low as 0.25%. The $230M long term component of the University's last debt issue was successfully placed January 14-15, 2009. The interest rate of 3.72% is the lowest in at least 35 years. The additional $230M in cash from this issue will eventually be spent, but over the short run will improve the University's financial ratios.

ATTACHMENT E

Restructuring the Long Term Investment Portfolio

The University's long term investment pool suffered an unrealized loss of over 30% between December 31, 2007 and October 31, 2008, or about $800 million. The University's Chief Investment Officer has already undertaken a number of steps to begin to address the challenges this creates. Please keep in mind that although the losses are significant, we are in this for the long haul and income from the long term investment fund only accounts for about 2 ½% of the University's total annual income.

Jonathan Hook will present a full report at the February Development and Investments Committee meeting, but remedial steps include:

• Further diversification of investments

• Focus on high quality managers

• Review of asset allocation policy

• Review of distribution policy

• Will need to restructure President's Strategic Reserve since this is a major funding source

ATTACHMENT F

Addressing FY 2009

FY 2009 is now more than half over. Enrollments remain strong, the Health System continues to meet its financial targets, and the University's liquidity continues to be sufficient. The most immediate challenge is the impact of the economic downturn on state finances. Fortunately, Governor Strickland has chosen to protect the State Share of Instruction from three rounds of Executive Cuts implemented to balance the state budget.

Although this has allowed Ohio State to continue to maintain the tuition freeze while remaining financially responsible, it is important for the University to not be complacent and to maintain flexibility. Therefore, the following steps have either been implemented or are recommended:

1. The $10 million generated from increased enrollments in FY 2008, but held back in July, continue to be held until FY 2009 is completed. If not needed to address budget issues in FY 2009, it should be allocated as part of the FY 2010 budget process.

2. The $12 million in state cuts to line items and other programs not exempted from the Executive Cuts in this fiscal year will be absorbed by the affected units. The University may provide cash support in some cases, but will provide no continuing support outside the FY 2010 budget process.

3. All units, regardless of funding source, are directed to manage vacancies and non-personnel costs in such a way as to preserve flexibility in FY 2009 and FY 2010.

4. An update on these measures will be presented at the April Board meeting.

ATTACHMENT G

Planning for FY 2010 and Beyond

With only six months left in FY 2009, the University should have sufficient reserves to deal with any additional economic bad news that manifests itself prior to June 30, 2009. However, FY 2010 and beyond is another matter. No one knows how long or how deep the economic downturn will be and what negative developments may manifest themselves in coming months. Therefore, it is important to begin planning now for a variety of contingencies for all fund groups over the next 18-30 months.

As part of the FY 2010 budget process, units have already been instructed to develop plans to address a range of contingencies for FY 2010 and FY 2011. These will be in place prior to the beginning of FY 2010.

Units have also been instructed to develop additional controls to manage vacant positions and non-personnel spending in order to preserve financial flexibility.

In addition, central administration has highlighted several areas for special emphasis in order to either reduce costs or increase revenues. These are listed in Attachment G-1.

Attachment G-1

Areas of Emphasis Regarding Cost Reduction

FY 2009-FY 2011

Acceleration of Initiatives Already in Place

• Strategic Purchasing

• Energy Conservation

• Employee Benefits

• Construction Management

• Streamlining Initiative

• Service Centers

• Arts and Sciences Consolidation

Regulatory Reform

• Construction

• Voluntary Separation Incentives

New Areas

• Classroom and Other Space Usage

• Cost Savings in IT Services

• Integration of Clinical Facilities

• Cost Savings in Partnership with Other Institutions

• Restructuring OSURF

• Internal Bank

Revenue Enhancements

• Admit Additional Qualified Students

• Possible Asset Sales

• Stimulus Package

• Additional Opportunities

Selective Controls Regarding:

• New Hires

• Non-Personnel Costs (travel, furniture, business entertainment)

• Salaries

• Capital Expenditures

Planning Initiatives

• Five-Year Financial Plan

• Integrated Physical Planning

• University System of Ohio

• College Strategic Plans

• Restructuring Long Term Investment Portfolio

• Campaign Planning

ATTACHMENT H

Implementation Timetable

December 2008

• Students First

• Flexible Spending Controls

January 2009

• Budget Guidance for FY 2010 and Beyond

February 2009

• Restructuring of Long Term Investment Portfolio (First Reading)

• Update to Fiscal Affairs Committee

March 2009

• Unit Budget Plans Due

April 2009

• Update to Fiscal Affairs Committee

• Preliminary FY 2010 Budget Projections

May 2009

June 2009

• First Reading of Operating Budget for FY 2010

July 2009

• Approval of FY 2010 Operating Budget

• First Reading of FY 2011-2012 Capital Plan

ATTACHMENT I

SUMMARY AND CONCLUSIONS

• The University is committed to maintaining a balance between tuition and financial aid so that access for all qualified students can be maintained.

• The University is financially stable at the present time. The biggest short run challenge is addressing $12M in FY 2009 cuts to state line items.

• The biggest challenge in the longer run is maintaining academic momentum in the face of an economic crisis of unknown length and depth.

• Seven areas of focus have been identified to help address those challenges. Work has already begun and will continue as long as necessary.

• A progress report will be presented to the Fiscal Affairs Committee at the April Board meeting.

The Ohio State University Board of Trustees

Fiscal Affairs

February 6, 2009

TOPIC:

Mid-Year Financial Report - III

CONTEXT:

This is Moody's Investor Services most recent review of higher education trends (see attached).

SUMMARY:

• Overall outlook for higher education is negative, but less so for public institutions than for private ones.

• Sound management skills and governance oversight will be even more important in this period of financial challenges.

CONSIDERATIONS:

• How relevant are Moody's conclusions for where OSU stands in this economic environment at this point?

• How does OSU's response to this crisis align with Moody's suggestions?

• Is there any additional information the Committee would like to have?

REQUESTED OF FISCAL AFFAIRS COMMITTEE:

For information and discussion. No further action necessary.

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