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Moody's Upgrades the University of Virginia's General Pledge Revenue Bond Issues to Aaa/Approximately $220 Million Debt Affected 
Oct.
6, 2000 -- Moody's Investors Service
has upgraded the ratings of the University of Virginia's (UVA) Series
1993A, 1993B, 1998A, 1998B and Series 1999A General Pledge Revenue
Bonds. The upgrade is based on the University's: -- Superior balance
sheet position, with over $2.5 billion in its endowment and related
foundations, and only $323 million of total debt outstanding; --
Excellent student demand for undergraduate and graduate programs,
attracting a geographically diverse and academically strong applicant
pool; -- Manageable plans for additional borrowing; and -- Improved
operations at the region's academic medial center, and strong overall
University operating performance from a diverse revenue base. A
stable outlook is assigned, reflecting our confidence that the University's
management team will continue to manage the inherent risk associated
with owning a large academic medical center, as well as continue
its superior treasury function and fundraising performance, sustaining
and enhancing an excellent financial cushion. Moody's believes the financial resources of UVA provide the highest debtor security, as a sophisticated treasury office, along with successful fundraising, has contributed to the accumulation of substantial endowment and operating reserves. Above-average growth in UVA's endowment has resulted from prudent spending levels (5% of market value) and favorable investment returns (43.7%, 24.8% and 16.6%, one-, three- and ten-year returns, respectively, through June 30, 2000). Investments are highly diversified with a growing focus on non-traditional asset classes such as venture capital, real estate, and oil and gas, with value-biased publicly traded equity used as a hedge. When coupled with additional liquidity provided by $200 million in unrestricted operating and plant fund reserves, total resources are substantial at approximately $132,000 per student and core liquidity provides a satisfactory 51.5% reserve for more than $1.1 billion of aggregate operating expenses for 2000. Supplementing $1.7 billion of endowment funds held by UVA are more than $500 million of financial resources controlled by three affiliated foundations (alumni association, law school, Darden School, medical school) and another $140 million held on the University's behalf by outside trustees. Although these foundations legally separate from the University, UVA enjoys ultimate use of such funds through the limited charters of these foundations. Future balance sheet growth is expected in view of the impressive success of UVA's capital campaign, which has eclipsed its goal of $1 billion and is estimated to conclude at $1.2 billion in December of 2000. While a new campaign will not begin immediately, Moody's expects fundraising efforts to continue to exhibit notable success.
PROGRAM HIGHLIGHT PRESTIGIOUS REPUTATION:
While Moody's often views state-mandated tuition changes negatively, this $700 decrease in tuition creates potential for future pricing flexibility for the university should the state need to reduce its future support. Moody's expects that UVA's net tuition revenue ($5,390 per student in 1999) will remain favorable, especially given its primary competitors for nonresident students are more expensive private universities. Reported applications showed a sharp decline in Fall 2000 from 17,090 to 14,472, but management indicates this is the result of a change in the definition of "applicants" to those who complete a more thorough application. The stable enrollment level of 2,930 freshmen and matriculation rate of 53%, combined with high median SAT scores of 1306 and 94% of freshmen graduating in the top 20% of high school class, affirm the school's strong draw of high-quality students. Furthermore, UVA's high retention rate of 97% from freshman to sophomore year remains outstanding. As one of the nation's top 50 research universities in dollar volume of Federal awards, UVA remains well positioned to continue garnering a strong share of the growing pool of grant and contract funding from governmental and private sources. Grants and contracts aggregate about $200 million annually (excluding Federal direct lending and Pell Grants), with the Federal Department of Health and Human Services providing the largest share (over 40%) of total research expenditures.
Moody's expects UVA's debt burden to remain manageable despite capital plans. A traditionally infrequent borrower, UVA has recently undertaken two large capital projects, including the recently completed expansion of the football stadium and the construction of a new campus for the Darden School of Business. These projects have been funded largely from gifts. Management currently expects to borrow as much as $130 million over the next three to four years. Future borrowing plans currently include debt financings of $70 to 80 million likely to occur by 2002 for further Darden construction and a new hospital parking garage, plus an additional $30 to 50 million by 2004 for additional parking and hospital expansions. Consistent
with previous practice, about two-thirds of the University's
overall capital plans will be funded through sources other
than bonding. Projects to be funded from gifts, general funds and
operating funds include the planned construction of a new basketball
arena with initial cost estimates in the range of $75-100 million. ALTHOUGH
IMPROVED, MEDICAL CENTER REMAINS AN ONGOING CHALLENGE: The University of Virginia Medical Center ("UVAMC") comprises 42% of university revenues. While UVA's health care component remains anintegral component to UVA's research and clinical mission, we believe it also denotes a large risk factor -- if not the largest risk factor - for UVA going forward. Although the medical center has shown consecutive years of profitable operations, Moody's believes it is not immune to the rapidly changing health care industry that encompasses both strategic and reimbursement challenges. As an academic medical center, the facility has been negatively impacted by the Balanced Budget Act of 1997 ($107 million estimated impact through 2005). While the medical center has enjoyed stable Medicaid Disproportionate share funds for several years (approximately $36 million annually), these funds remain subject to government legislation or unfavorable changes in the funding formula. On a more immediate front, we believe management will be challenged to recruit additional clinical personnel, namely intensive care and surgical nurses, given the tight labor environment in Charlottesville. Future staff additions remain integral to supporting the university's advances in clinical research. To that end, the medical center budget shows an 8.3% increase in salaries and benefits for FY 2001 to enhance retention and recruitment efforts. Finally, while the medical center has not lost market share in recent years, and remains the largest provider in both Charlottesville and its service area with over 28,000 admissions, Moody's believes competitive threats cannot be dismissed. UVAMC's sole competitor in Charlottesville, 156-bed Martha Jefferson Hospital, is experiencing some volume increases with a noted increase in newborn deliveries in recent years. The elimination of Certificate of Need regulation in the state over the next four years may alter the comfortable market position that UVAMC enjoys and will need to be closely watched. UVAMC has reported profitable earnings from operations for several years. This trend continues in (unaudited) FY 2000 with $21.3 million of income or 4.3% operating margin. Operating cash flow reached $56 million or 11.5%. FY 2000 results include a one-time positive settlement related to Medicare cost reports for $5.4 million. FY 2000 represents a noted increase in performance and follows $10 million in operating income (2.1% margin) and $46.4 million in operating cash flow or 9.6%. Expenses remained flat in FY2000 while revenue grew by 3%. The payer mix remains atypical of an academic medical center with relatively light Medicaid 11.5% and self-pay/other, 13%. Medicare remains above average, 38.4%. Blue Cross is the dominant provider in this part of the state and represents 14% of UVAMC's cash flow. Management reports that all managed care contracts are profitable on a total cost basis. Bottom line performance has been limited by UVAMC's health care insurance strategy that it embarked upon in 1995. Performance has not met expectations with cumulative losses reaching $28 million in FY 1999. Prior plans to sell the health plan were aborted as new management was hired to address the financial issues. With an increase in premiums, the HMO is expected to reach break-even performance for CY 2000; management will still consider its future strategies regarding the health care insurance business over the next 18 months. A possible sale of the plan has not been ruled out. Losses
on the HMO and other joint ventures have only partially been offset
by investment income, suppressing net income levels through FY
1999, with some improvement in FY 2000. While the health care risks
of the medical center (and related strategies) and its impact on
UVA's creditworthiness is noted, the relationship with the university
and the university's commitment to the medical center are integral
and provide some comfort when specifically analyzing UVAMC's
financial performance. Likewise, we gain some comfort that University
management continues to rebuild some of its key services, including
obstetrics, surgery and orthopedics, that have shown some decline
in volumes in recent years. Further changes in the administrative
structure of the University, including the addition of
four non-voting experts in the field of health services management
to the Health Affairs Committee Board of Rectors, play a key
role in our confidence that the University will keep a close eye
on its
exposure to health care risk. CONSISTENT
ANNUAL OPERATING SURPLUSES FROM DIVERSE REVENUE BASE: Operating stability and cash flow are enhanced by UVA's established record of positive, albeit modest, surpluses from a diverse stream of revenues. Major operating revenues stem from patient care (42%), student charges for tuition and auxiliary services (17%), grants and contracts (15%), and state appropriations (15%). State operating support ($8,269 per student) has improved steadily over the last few years. The bulk of the approximately $25 million state funding increase in FY 2000 (unaudited) came to offset the cost of a lowering of resident tuition charges, but UVA retains its price-setting power over nonresident tuition and resident fees, and a degree of flexibility concerning in-state rates going forward. The Commonwealth has also improved its funding of capital improvements and equipment, and continues to loosen relatively strict operational and financial policies and procedures. The
stable outlook is based on Moody's expectation that under its strong
leadership, UVA will maintain and strengthen its reputation as
one of the nation's leading public universities in terms of financial
resource base, academic reputation and student demand. We believe
that, despite the inherent risks associated with the health care
industry, the combination of management's focus and the University
Medical Center's favorable location in a fundamentally sound
market limit the potential for any significant future downturn.
The outlook also reflects our expectation that future borrowing
will be manageable. KEY
DATA AND RATIOS
Total Enrollment: 20,161 full-time equivalent students Total Debt: $323 million (including Commonwealth of Virginia and College Building Authority bonds) Expendable Resources to Debt: 4.6x Expendable Resources to Operations: 1.3x Total Resources per Student (FY 2000 pro forma): $132,446
University: Alice Handy, Treasurer, (804) 924-4245
The
stable outlook is based on Moody's expectation that under its strong
leadership, UVA will maintain and strengthen its reputation as
one of the nation's leading public universities in terms of financial
resource base, academic reputation and student demand. We believe
that, despite the inherent risks associated with the health care
industry, the combination of management's focus and the University
Medical Center's favorable location in a fundamentally sound
market limit the potential for any significant future downturn.
The outlook also reflects our expectation that future borrowing
will be manageable. ANALYSTS : Maura Flood, Analyst, Public Finance Group, Moody's Investors Service Lisa Goldstein, Backup Analyst, Public Finance Group, Moody's Investors Service John C. Nelson, Senior Credit Officer, Public Finance Group, Moody's Investors Service Dennis Farrell, Director, Public Finance Group, Moody's Investors Service
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