NOTES 7-14

NOTE 7: Retirement Plans

Employees of the University are employees of the Commonwealth. Substantially all full-time classified salaried employees participate in a defined benefit pension plan administered by the Virginia Retirement System (VRS). Information relating to this plan is available at the statewide level only in the Commonwealth of Virginia's Comprehensive Annual Financial Report (CAFR). The Commonwealth, not the University, has overall responsibility for contributions to this plan.

Substantially all full-time faculty, certain administrative staff, and Health Care Professionals participate in Faculty Optional Retirement Plans. These are fixed-contribution plans where the retirement benefits received are based upon the employer and employee contributions (all of which are paid by the University), and the interest and dividends. Individual contracts issued under the plans for full-time faculty and certain administrative staff provide for full and immediate vesting of both the University's and the participant's contributions. Health Care Professionals' employer contributions fully vest after one year of employment. Total pension costs under the plans were approximately $27.3 million and $26.3 million for the years ended June 30, 2000 and 1999, respectively. Contributions to the Optional Retirement Plans were calculated using base salaries of $260.7 million and $251.3 million for the years ended June 30, 2000 and 1999, respectively. The contribution percentage amounted to 10.5 percent and 10.4 percent for the years ended June 30, 2000 and 1999, respectively.

NOTE 8: Postemployment Benefits Other Than Pension Benefits

The Commonwealth of Virginia participates in the VRS administered statewide group life insurance program, which provides postemployment life insurance benefits to eligible retired and terminated employees. The Commonwealth also provides health care credits against the monthly health insurance premiums of its retirees who have at least 15 years of state service and participate in the state health plan. Information related to these plans is available at the statewide level in the Commonwealth's Comprehensive Annual Financial Report.

NOTE 9: Self-Insurance

All University employees have an option to participate in the University's self-funded, comprehensive medical care benefits program. The cost of medical care is paid out of employee and employer contributions and is held in a separate bank account. The University has contracted with QualChoice of Virginia of Blue Ridge Health Alliance, Inc., a third-party administrator, to provide administrative services for this health care benefits program. As of June 30, 2000 and 1999, cash and investments of $18,330,000 and $9,941,000 were in the account, respectively. The estimated liability for outstanding claims at June 30, 2000 and 1999, was $7,846,000 and $7,441,000, respectively.

The risk management insurance plans are administered by the Department of General Services, Division of Risk Management. Risk management insurance includes property, boiler and machinery, crime, employee faithful performance of duty bond, general (tort) liability, professional liability (includes medical malpractice), aviation and watercraft coverage, and automobile liability. The University is self-insured for the first $100,000 of each property and boiler and machinery loss, and for the first $20,000 of each vehicle physical damage loss. The University also maintains excess crime and vehicle physical damage insurance coverage.

NOTE 10: Funds Held in Trust By Others

Assets of funds held by trustees for the benefit of the University are not reflected in the accompanying balance sheet. The University has irrevocable rights to all or a portion of the income of these funds, but the assets of the funds are not under the management of the University. The following reflects the market value of these funds as of June 30, 2000 and 1999, and the amount of income received from the trustees during the years then ended (in thousands):

NOTE 11: Pledges

Outstanding pledges to the University amounted to $99.2 million and $76.8 million as of June 30, 2000 and 1999, respectively. Included in both totals are $19.7 million of pledges relating to plant construction. It is not practicable to estimate the net realizable value of such pledges and, therefore, they are not reflected in the accompanying financial statements.

NOTE 12: Commitments and Contingencies

Contractual commitments

As of June 30, 2000, the University was a party to construction contracts and commitments totaling approximately $191.4 million of which $130.2 million had been incurred. The University's commitments for equipment, leases, and services are as follows:

The total rental expense for all property and equipment was approximately $12.2 million and $10.1 million for the years ended June 30, 2000 and 1999, respectively.

Prior bond defeasance

In prior years, certain outstanding bonds have been defeased by placing assets in irrevocable trusts with escrow agents. Accordingly, these assets and the liability for the defeased bonds are not reflected in the accompanying financial statements. As of June 30, 2000, $6.6 million of the defeased bonds remain outstanding.

Litigation

The University is a defendant in a number of legal actions. While the final outcome cannot be determined at this time, management is of the opinion that the liability, if any, for these legal actions will not have a material effect on the University's financial position.

Settlements

During fiscal year 2000, the Department of Justice reviewed outpatient billings submitted to Government Payers by the University of Virginia Health Services Foundation (HSF) and the University of Virginia Medical Center. This review revealed a small number of billing errors. To avoid protracted legal and operational costs, the Justice Department, Medical Center, and HSF negotiated a tentative settlement of this issue. A final settlement has not been reached, but the parties believe they are close to agreement. The settlement will have several provisions, one of which will be a payment to the Government of $3,000,000. Internal controls have been implemented which will prevent a re-occurrence of the problems identified during the investigation.

NOTE 13: Direct Lending

The University began participating in the Federal Direct Lending Program in July 1995. For the year ended June 30, 2000, the Current Restricted Fund additions for federal grants and contracts of $191.4 million and the Current Restricted Fund expenditures for scholarships and fellowships of $100.0 million include $52.1 million for direct lending, respectively. For the year ended June 30, 1999, the Current Restricted Fund additions for federal grants and contracts of $179.6 million and the Current Restricted Fund expenditures for scholarships and fellowships of $99.1 million include $53.1 million for direct lending, respectively.

NOTE 14: Subsequent Events

Provider-Based Clinics

On April 7, 2000, the Health Care Financing Administration (HCFA) published its final rules concerning a new prospective payment system (PPS) for most hospital services. In addition to establishing the outpatient PPS, the rules also established complex requirements for obtaining provider-based status for clinic facilities that are operated by a hospital. The new PPS rules clearly defined a provider-based clinic and established specific criteria that must be met to obtain this designation. The existing organization of the clinics in the University of Virginia Health System did not comply with the new regulations. In order to be in compliance, the Health System was required to transfer ownership of most of the clinics to the Medical Center. The revenues and expenses of the clinics had historically been included in the HSF and Clinical Department financial statements. The transfer of the operation of the clinics was finalized August 1, 2000.

Real Property Transactions

During fiscal year 2000, the Medical Center entered into an agreement to purchase a newly constructed child care center. The center, named in honor of the late Malcolm W. Cole, was dedicated on May 31, 2000. It contains 15,000 square feet of space and will accommodate 170 children from infants to pre-schoolers. The property was initially leased from the builder and subsequently purchased by the Medical Center for $2.4 million on July 18, 2000.

In May 2000, the Medical Center entered into an agreement to purchase the University Towers building from Genesis ElderCare National Centers, Inc. dba Jefferson Park Center, a Florida for-profit corporation. Genesis operated the property as a 173-bed nursing home. It contains 88,593 square feet of building space that rests on 58,238 square feet of land. The closing date is tentatively scheduled for mid-November. The purchase price is expected to be $7.3 million.

Finally, the Medical Center has agreed to purchase the building it currently operates as the Zion's Crossroads Dialysis Center. The building is currently owned by the Health Services Foundation and is leased by the Medical Center. It contains 5,013 square feet of space and is used to treat dialysis patients exclusively. Closing is scheduled to take place pending the resolution of the ground lease with Virginia Oil, Inc. The purchase price is expected to be $1.1 million.