Financial Highlights

The University began participating in the Federal Direct Lending Program on July 1, 1995. Generally accepted accounting principles required the University to record the loan activity, approximately $54 million in 1997 and $50 million in 1996, in current funds as restricted federal grants and contracts revenue and as offsetting restricted scholarship expenditures. In 1995 and prior years, this loan activity was not reflected in the University's financial statements because the loans were made by financial institutions instead of through the federal government. The loan activity distorted selected 1997 and 1996 ratios, as compared to prior years, that were reviewed in the financial highlights. Therefore, the 1997 and 1996 ratios were calculated without the loan activity in order to provide the reader with more comparable information over the period from 1993 to 1997. The only ratio not affected was debt service as a percentage of unrestricted current funds revenue. The discussion of educational and general activity also excludes the direct lending amounts.

Year In Review

During fiscal year 1997, the University continued to maintain its good financial health as evidenced by its Moody's bond rating of Aa1. Some of the ratios highlighted in this review are similar to those used by the rating agencies and reflect certain aspects of the University's strong financial condition.

Expendable Fund Balances as a Percentage of Expenditures and Mandatory Transfers
The growth in the University's expendable fund balances has exceeded the growth in expenditures. The 1997 figure of 88 percent means the University could fund its operations for about eleven months from its reserves, providing a strong cushion for any downturn in revenues.

The University's total current funds revenues were $1,102 million, an increase of 6.5 percent over 1996 while total expenditures also increased 6.5 percent to $1,077 million. The University had a net surplus of revenue over expenditures of $25 million, resulting in a net revenue percentage of 2.4 percent, similar to last year's 2.5 percent. Each of the major operating divisions, Educational and General (E and G), Medical Center, and Auxiliary Enterprises, also maintained a positive net revenue and information on the major operating units is contained in the following review of divisional operations.

The University's total assets increased $372 million during the year, a 13 percent increase over 1996, to $3.3 billion as of June 30, 1997. The two largest assets continue to be buildings and equipment, and investments valued at $1.5 billion each. Note that in accordance with generally accepted accounting principles for public institutions, the reported value of the building and equipment is original cost and does not include accumulated depreciation.

Total liabilities at year end were $722 million, a net increase of $134 million over 1996. Two liabilities increased significantly from 1996. Accrued expenses increased $42 million and a major reason was the University had to accrue its June salaried payrolls because the state moved the paydate from June 30 to July 1, 1997.

Debt Service as a Percentage of Unrestricted Current Funds Revenue
The University and its operating units have a healthy, low debt service compared to unrestricted current funds revenue. The debt service percentages have generally improved since 1993, giving the University the capacity to handle additional debt for future needs.

Collateral held for security lending also increased $162 million, and this amount was offset by an equal increase in assets. Long term debt decreased $7 million to $247 million. The University and its operating units continued to maintain a very low and healthy percentage of debt service. For 1997, the University's debt service as a percentage of unrestricted revenue was 3.2 percent, a slight improvement from 1996's 3.4 percent. The University's three operating units also showed slight improvement for the year.

The University's total fund balances, the equity in its assets, increased $238 million to $2.6 billion, a 10 percent increase over 1996. The largest increase was due to growth in the University's endowment and similar funds, which increased $145 million to $976 million. Market appreciation accounted for $116 million of the increase, and gift additions to endowment were $18 million for the year. The University's endowment continues to rank in the top five public institutions and provides additional funds to supplement state appropriations and student tuition.

Because of the strong growth in expendable fund balances and controlled growth in expenditures, the University maintained a very healthy coverage of expenditures compared to fund balances. Expendable fund balances consist of those funds that the University could easily spend such as current and quasi-endowment funds. At June 30, 1997, expendable fund balances as a percentage of total expenditures and mandatory transfers were 88 percent. This means the University could cover its operating expenditures for approximately 11 months, thus providing a comfortable cushion for funding operations should the University experience a temporary decline in its revenues.

Review of Divisional Operations
The University has three main operating units: Educational and General (E and G), Auxiliary Services, and the Medical Center. Following is a brief summary of the year's results of operations.

Educational and General Review

E and G Revenue by Source
There is a good balance between the four major E and G revenue sources of tuition, sponsored programs, state appropriations, and gifts and endowment income. The decrease in state appropriations has been offset by a significant increase in gifts and endowment income and a slight increase in tuition.

The E and G component supports the University's instruction, research, and public service missions. E and G total revenues for 1997 were $539 million, an increase of 6 percent over 1996, while expenditures and mandatory transfers increased 7 percent to $529 million. This resulted in a percentage of net revenue of only 1.7 percent for 1997 compared with 2.9 percent for 1996. A major reason for the decrease was a significant increase in mandatory transfers for debt service. These transfers were only $1.7 million in 1996 and were $5.5 million for 1997. Approximately $2 million of the increase was related to the recently completed buildings for the Darden School. Another reason for the decrease in net revenues was the state's lag pay. The University accrued salary and related fringe benefit costs of approximately $3 million that were not funded in this year's state appropriations. The University also recognized additional expenses without accruing the offsetting state appropriations. We expect this to be a one year downturn due to these timing differences of recognizing expenses and related revenues.

Tuition revenues for 1997 were $153 million and increased just under 6 percent, primarily due to rate increases for selected professional schools, such as business, law and medicine, and for out-of-state undergraduate and graduate students. Base tuition increases for these students were in the 3.5 percent to 4 percent range with the business and law schools also adding a surcharge to their base tuition increases for instate students. The University did not increase its instate undergraduate and graduate tuition. Student tuition, even with limited increases, still accounted for 28 percent of 1997 E and G revenue.

Net Revenues as a Percentage of Total Revenues
The University and its three divisions have maintained positive net revenue over the past five years except for the Medical Center in 1996. In 1997 the downturn for E and G was a result of planned increased debt service for construction and timing differences between recording state appropriations and the related expenditures. Unlike the other divisions, Auxiliary Services' expenditures exclude the replacement of fixed assets.

Sponsored program funding in 1997 was $143 million, an increase of approximately 4 percent for the year, and accounted for 27 percent of E and G revenue. Federal sponsors' funding increased 10 percent for the year while funding from industry and foundations decreased 12 percent. The decrease for the year is primarily a result of the timing of spending the funds from nonfederal sponsors. Note that in accordance with generally accepted accounting principles for public higher education, the University only recognizes sponsored program revenues based on the expenditures made during the year instead of the actual awards received. The Federal Government funds approximately 75 percent of the University's sponsored programs. For 1997, the Department of Health and Human Services was the largest sponsor at 46 percent of total awards.

State appropriations, while a major funding source, decreased approximately $4 million from 1996 to $118 million. The decrease resulted from not recognizing some budgeted state appropriations for 1997 until 1998, such as when the state changed the June 30 pay date to July 1. For 1997, actual state appropriations accounted for only 22 percent of revenues, less than student tuition and sponsored program funding.

Gifts and endowment income continue to be an important source of funding and increased 20 percent for the year and accounted for 19 percent of total 1997 E and G revenues.

E and G Expenditures by Function
In 1997, 61 percent of E and G expenditures were for the primary missions of instruction, research, and public service, while 28 percent of expenditures were for support activities and 11 percent for student financial aid.

Gifts increased 23 percent and are a tangible result of the success of the University's capital campaign. The University increased spending for instruction by 7 percent during 1997 while research expenditures increased 10 percent. Research expenditures are more affected by sponsored program funding, and over the last years, sponsored program awards have shown a healthy increase. Funding for other E and G programs are more impacted by student tuition and state appropriations which have seen limited increases the past few years.

The University held 1997 expenditures for support activities such as academic and institutional support, and operations and maintenance to a 4 percent increase. Student financial aid expenditures, excluding direct loan activity, increased only 1 percent from 1996. This represents lower amounts of aid being provided by federal and state agencies and more reliance on student loans as a component of the student's financial package.

Auxiliary Services

Auxiliary service units primarily provide services to students and employees. The major auxiliaries include student housing, dining, athletics, bookstore, and parking and transportation. The 1997 combined revenues for these and other auxiliaries were $85 million which represents a 9 percent increase over 1996, while expenditures increased 11 percent to $74 million. The auxiliaries combined net revenue as a percent of total revenue of 12.3 percent is still a healthy percentage even though it has decreased from 13.6 percent for 1996. The auxiliaries continue to have excellent debt service coverage as shown in their debt service as a percent of unrestricted revenue of 9.6 percent for 1997.

Medical Center

The financial operating results for fiscal year 1997 improved significantly from the previous year. The Medical Center's excess of revenues over expenses from operations was $26.6 million, representing 6.4 percent of total revenues for 1997 compared to 2.3 percent for 1996. Total operating revenues grew by 7.2 percent over last year, while total operating expenses remained virtually

Medical Center Net Patient Revenue on the Rise (in millions)
From 1993 to 1997, Medical Center net patient revenue increased 18 percent.

unchanged. Non-operating losses totaling $14.4 million included a $5 million contribution to HealthCare Partners, the joint venture corporation organized by the University on behalf of the Medical Center and the UVA Health Services Foundation. Also included in non-operating losses were $11.3 million in operating losses for Blue Ridge Health Alliance, which provides health plans to employers and governments in Virginia under the name of QualChoice of Virginia, a $2.1 million transfer to the University for the parking capital outlay project, and a $.9 million loss on disposal of equipment. Approximately $4.9 million in investment income from trustee-held funds partially offset the non-operating losses.

Total hospital admissions increased by 2.9 percent from 1996. The Medical Center provided 165,833 days of inpatient care in 1997, only a .4 percent decline from 1996. The average length of stay continued to decline from 6.2 days in 1996 to 6.0 days in 1997. Outpatient visits, including the emergency room, increased by 6.3 percent from 1996 to 486,600. Cash reserves remained strong at year end at approximately 171 days cash-on-hand.

The Medical Center continues to face the challenge of an increasingly competitive health care marketplace while serving its mission of teaching, research, and patient care (including indigent patient care). Government support for indigent care remained unchanged from 1996. Although the costs of providing indigent care decreased from the prior year, the gap between costs and support continues to be significant ($6.5 million in 1997). Joint ventures continue to be an important factor in allowing the Medical Center to meet its competitive challenges. HealthCare Partners, which supports health care network development, entered into a joint venture with Culpeper Memorial Hospital to form Culpeper Medical Associates, LLC (CMA), which will provide primary care physician services in the Culpeper area. CMA will also provide expanded medical education opportunities. Blue Ridge Health Alliance (QualChoice) has seen enrollment grow beyond initial expectations and has needed additional capital in order to maintain required reserves. The UVA/HealthSouth, LLC, formed in 1996 to provide inpatient and outpatient rehabilitation services, has begun construction of a 50-bed rehabilitation hospital at Fontaine Park. Construction of a medical office building is also underway on the same site.

This year marked the introduction of an employee gainsharing program. The distributions of the gainsharing program are based on financial results of the Medical Center as well as the scores recorded on patient satisfaction surveys. The enactment of legislative codified autonomy by the General Assembly in 1996 provided the Medical Center with the flexibility to implement this gainsharing program. Additional enhancements to the compensation and benefits program are anticipated for the future.

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President's Report 1996-97 Contents

Financial Report 1996-1997