Financial Statements and Required Supplementary Information
Independent Auditors’ Report
801 Second Avenue
Seattle, WA 98104
Independent Auditors’ Report
The Board of Regents
University of Washington:
We have audited the accompanying financial statements of the business-type activities of the University of Washington (the University), an agency of the state of Washington, as of and for the years ended June 30, 2010 and 2009, and its discretely presented component unit as of and for the 18-month period ended June 30, 2010. These financial statements are the responsibility of the University’s management. Our responsibility is to express opinions on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions.
As discussed in note 1, the financial statements of the University of Washington, an agency of the state of Washington, are intended to present the financial position, and the changes in financial position and cash flows of only that portion of the activities of the state of Washington that is attributable to the transactions of the University of Washington. They do not purport to, and do not, present fairly the financial position of the state of Washington as of June 30, 2010 and 2009, the changes in its financial position or its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Washington as of June 30, 2010 and 2009, and the changes in its financial position and its cash flows for the years then ended, and the financial position of its discretely presented component unit as of June 30, 2010, and the changes in its financial position and its cash flows for the 18-month period then ended in conformity with U.S. generally accepted accounting principles.
The management’s discussion and analysis on pages 10 through 15 is not a required part of the basic financial statements but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplemental information. However, we did not audit the information and express no opinion on it.
December 15, 2010
KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(“KPMG International”), a Swiss entity.
Management’s Discussion and Analysis
The discussion and analysis below provides an overview of the financial position and activities of the University of Washington (“University”) for the years ended June 30, 2010 and 2009. This discussion has been prepared by management and should be read in conjunction with the financial statements and accompanying notes which follow this section.
Financial Highlights for Fiscal Year 2010
The University recorded net income of $431 million in fiscal year 2010, compared to a net loss in fiscal year 2009 of $374 million: a bottom line improvement of $805 million. This is directly related to an increase in investment income of $778 million, a result of market value increases in the value of investments in fiscal year 2010. The University adjusts the carrying value of investments to market value each year, with the change recorded as investment income or loss.
Other significant, but offsetting, factors in the 2010 financial performance included a $150 million decline in operating and capital state support, a $70 million increase in tuition revenues, increased federal funding of research and instruction, and continued strong performance by the University of Washington Medical Center (UWMC).
|Key Financial Results for Fiscal Years 2010, 2009 and 2008:|
|Total operating revenues||$ 3,124||$ 2,902||$ 2,730|
|Federal ARRA Education Funding||44||-||-|
|Investment income (loss)||309||(469)||77|
|Other nonoperating revenue, net||25||94||75|
|Increase (decrease) in net assets||431||(374)||163|
|Net assets, beginning of year||4,763||5,137||4,974|
|Net assets, end of year||$ 5,194||$ 4,763||$ 5,137|
Operating revenues minus operating expenses typically result in an operating loss in the University’s financial statements. Nonoperating items, including state support, investment income, and gifts have brought each year’s results to a modest increase in the net assets, or “equity” of the University, with the exception of 2009. This surplus has been reinvested within the University to add a margin of educational excellence, upgrade the University’s facilities, and provide a prudent reserve for contingencies such as the current period of economic instability.
Economic Factors Affecting the Future
A number of contingencies face the University over the next few years. The continuing economic downturn is a primary source of uncertainty. This economic downturn has already impacted the University directly through revenue reductions in state support, investment income, and contributions from donors.
The state of Washington, which provided 8% of the University’s total revenues in fiscal year 2010, compared to 10% in fiscal year 2009, and 11% in fiscal year 2008, continues to face declining tax revenues. As a result, the state’s funding of higher education will continue to erode in 2011. To help alleviate the effects of this educational shortfall, the legislature has granted the University the flexibility to increase undergraduate resident tuition rates up to 14% per year, but only through fiscal year 2011.
In 2010, the sharp decline in state funding was partially offset by $44 million of federal education funding under the American Recovery and Reinvestment Act of 2009 (ARRA); these funds were passed through to the University by the state of Washington.
Funding for research activities was temporarily boosted in 2010 by $86 million of Federal ARRA funding for basic research and activities in the health sciences. In addition, the University has $241 million of unspent ARRA research awards that will be completed in fiscal year 2011 and later.
Rising benefit costs, particularly for health care and pensions, continue to impact the University.
In March 2010, health care reform was passed by the U.S. Congress and signed into law by President Obama. The financial effects of this legislation may have significant financial impacts to health care providers. Thus, the environment in which health care organizations currently operate is dynamic and uncertain.
While 2010 remained relatively stable for UWMC compared with 2009 due to stable volumes and increasing surgical activity, the economic downturn continues to put pressure on operating results. Operating results of UW Medicine/Northwest (formerly Northwest Hospital & Medical Center) reflect a volume reduction in outpatient and inpatient activities; however, their recent affiliation with the University of Washington provides significant opportunities for joint program development and growth, facilities development and efficiencies. State budget changes to hospital reimbursement rates and medical assistance eligibility, as well as increased charity care and bad debts, have reduced hospital margins.
Using the Financial Statements
The University’s financial statements include the Balance Sheets, the Statements of Revenues, Expenses, and Changes in Net Assets, the Statements of Cash Flows and the Notes to the Financial Statements. These financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) principles, which establish standards for external financial reporting for public colleges and universities. GASB standards require that financial statements be presented on a consolidated basis in order to focus on the University as a whole.
On January 1, 2010, the University affiliated with Northwest Hospital & Medical Center. GASB standards require that this affiliation be presented discretely; therefore, a separate column displays its financial position at June 30, 2010 and the results of its operations for the 18 months ended June 30, 2010. (See Note 1 to the Financial Statements.)
The analysis presented below includes the consolidated balances of the University of Washington and its blended component units, but excludes the financial position and results of operations of UW Medicine/Northwest, unless otherwise noted.
The Balance Sheets present the financial condition of the University at the end of the last two fiscal years and report all assets and liabilities of the University. A summarized comparison of the University’s assets, liabilities and net assets as of June 30, 2010, 2009, and 2008, follows:
|Current assets||$ 851||$ 907||$ 1,406|
|Capital assets, net||2,958||2,840||2,714|
|Net assets||$ 5,194||$ 4,763||$ 5,137|
The excess of current assets over current liabilities of $303 million in 2010 reflects the continuing ability of the University to meet its short-term obligations. Current assets consist primarily of cash, short-term investments, collateral from securities lending (2008 only) and accounts receivable. The June 30, 2010 current asset balance of $851 million was a decrease of $56 million from 2009, due to changes in cash and short-term investments. The short-term portion of the University’s investment portfolio can fluctuate based upon changes in investment mix and the expected short-term needs for University funds.
Long-term investments as of June 30, 2010 increased by $390 million from 2009, as a result of significant market gains during the year in the value of the University’s investments. Realized and unrealized gains in fiscal year 2010 totaled $224 million, versus realized and unrealized losses of $544 million in 2009.
The difference between total assets and total liabilities, referred to as net assets or “equity,” is one indicator of the current financial condition of the University. The change in net assets measures whether the overall financial condition has improved or deteriorated during the year.
The University reports its “equity” in four categories:
- Invested in Capital Assets, net of related debt – This is the University’s total investment in capital assets, net of accumulated depreciation and amortization and outstanding debt obligations related to those capital assets;
- Restricted Net Assets:
- Nonexpendable net assets, primarily endowments, consist of funds on which the donor or other external party has imposed the restriction that the corpus is not available for expenditures but rather for investment purposes only;
- Expendable net assets are resources which the University is legally or contractually obligated to spend in accordance with time or purpose restrictions placed by donors and/or other external parties;
- Unrestricted Net Assets – are all other funds available to the institution for any purpose associated with its mission. Unrestricted assets are often internally designated for specific purposes.
The University’s net assets at June 30, 2010, 2009, and 2008 are summarized as follows:
|Invested in capital assets, net of related debt||$ 1,982||$ 1,944||$ 1,816|
|Total net assets||$ 5,194||$ 4,763||$ 5,137|
Net investment in capital assets increased $38 million, or 2%, in 2010, and increased $128 million, or 7%, in 2009. This balance increases as debt is paid off or when the University funds fixed asset purchases without financing. This balance decreases as assets are depreciated.
Restricted nonexpendable net assets increased $75 million, or 8%, in 2010, due to new endowment gifts and a significant increase in the value of investments in the Consolidated Endowment Fund (CEF). The 2009 decrease of $18 million, or 2%, was a result of declines in the value of investments, partially offset by donor support.
Restricted expendable net assets increased $85 million, or 8%, in 2010, and decreased $391 million, or 28%, in 2009. This category is primarily affected by new operating and capital gifts, and earnings or losses in restricted investments, including endowments. The sharp decline in the market value of investments, which began in fiscal year 2008, had a significant effect in 2009; the University partially recovered its investment losses in 2010.
Unrestricted Net Assets increased in 2010 by $233 million, or 25%, primarily due to an increase in tuition and patient services revenue, together with an increase in the market value of investments related to unrestricted funds. The Unrestricted Net Asset decrease in 2009 of $93 million, or 9%, was driven by the decline in the market value of investments related to unrestricted funds, offset by increases in tuition revenue and patient services margins.
The ratio of expendable financial resources to operations (as defined by Moody’s) measures the strength of net assets. This ratio, illustrated in the chart below, shows that in 2010 the University had enough expendable resources from various sources to fund operations for a period of 7.9 months.
Endowment and Other Investments
1. The sum of Unrestricted Net Assets and Restricted Expendable Net Assets, divided by Total Operating Expenses (Operating Expenses plus interest expense).
The result is multiplied by 12 to arrive at months of coverage. Does not include results for UW Medicine/Northwest.
The CEF returned 12.5% in fiscal year 2010, ending the year
at $1.8 billion, compared to a negative return of 23.3% in the prior year. Over the past 10 years, the CEF has averaged a 4.5% annual return.
The Invested Funds (IF), invested operating monies of the University, are held in three pools: cash, liquidity, and the CEF. The IF (including the portion invested in the CEF) returned a positive 6.3% in fiscal year 2010, and a negative 5.0% in fiscal year 2009. The market value of the cash and liquidity pools was $1.1 billion at June 30, 2010.
Capital Improvements and Related Debt
During 2010, capital expenditures included $54 million on Phase 1 of PACCAR Hall for the business school, $43 million for the expansion of UWMC, $16 million for the new Molecular Engineering building and $13 million for Phase 3 of the UW Tacoma campus.
In 2009, capital expenditures included $47 million for renovation of Clark and Savery Halls, $22 million on Phase 1 of PACCAR Hall for the business school, $17 million for upgrading the Communications Data Center, and $14 million for the expansion of UWMC.
The 2010 ratio of expendable financial resources to debt (as defined by Moody’s) shows that the University has sufficient expendable resources to pay its long-term debt obligations 2.1 times over.
2. The sum of Unrestricted Net Assets and Restricted Expendable Net Assets, divided by total capital lease obligations, bonds and notes payable outstanding.
Does not include results for UW Medicine/Northwest.
STATEMENTS OF REVENUES, EXPENSES, AND
CHANGES IN NET ASSETS
The Statements of Revenues, Expenses, and Changes in Net Assets present the University’s results of operations and nonoperating items that result in the changes in net assets for the year. In accordance with GASB reporting principles, revenues and expenses are classified as either operating or nonoperating.
A condensed comparison of the University’s revenues, expenses and changes in net assets for the years ended June 30, 2010, 2009, and 2008 follows:
|Total operating revenues||$ 3,124||$ 2,902||$ 2,730|
|Nonoperating revenues, net of expenses||707||(62)||523|
|Increase (decrease) in net assets||431||(374)||163|
|Net assets, beginning of year||4,763||5,137||4,974|
|Net assets, end of year||$ 5,194||$ 4,763||$ 5,137|
The University has a diversified revenue base. The following table summarizes revenues from all sources for the years ended June 30, 2010, 2009, and 2008:
|Tuition and fees||$ 528||$ 458||$ 420|
|Grants and contracts||1,256||1,120||1,063|
|Sales and services of
|State funding for operations||303||385||388|
|Federal ARRA education funding||44||-||-|
|Investment income (loss)||309||(469)||77|
|State funding for capital projects||33||101||71|
|Total revenue – all sources||$ 3,966||$ 3,099||$ 3,489|
The largest source of revenues continues to be grants and contracts. This revenue increased $136 million, or 12%, in 2010, compared to an increase of $57 million, or 5%, in 2009
The University received 15% more individual research awards in fiscal year 2010 than in 2009. The increase is primarily due to federal ARRA research funding, which generated revenues of $86 million in fiscal year 2010.
Grant and contract revenue is earned when direct expenditures (such as researchers’ compensation or purchases of goods and services) are made; therefore, there is little effect on the University’s operating margin as a result of this direct expense reimbursement process.
Facility and administrative expenses necessary to support grants and contracts are reimbursed by an indirect cost recovery. The current indirect cost recovery for research grants is approximately 29 cents on every direct expenditure dollar.
Primary Nongrant Funding Sources
The University relies primarily on student tuition and fees and state appropriations as revenue sources to support its nongrant funded educational operating expenses. State support for education has declined since fiscal year 2008, with a sharp cut in fiscal year 2010, although part of the reduction in state support was offset by federal ARRA education funding in 2010, as reflected in the table, above right:
|Operating Support for Instruction|
|State operating appropriations||$ 303||35%||$ 385||46%||$ 388||48%|
|Federal ARRA education funding||44||5%||-||-||-||-|
|Operating tuition and fees||351||40%||296||35%||271||34%|
|Fees for self-sustaining education programs||177||20%||162||19%||149||18%|
|Total educational support||$ 875||100%||$ 843||100%||$ 808||100%|
Noncapital state appropriations are considered nonoperating revenue under GASB Statement No. 35, “Basic Financial Statements – and Management’s Discussion and Analysis – for Public Colleges and Universities,” and are reflected in the nonoperating section of the Statements of Revenues, Expenses and Changes in Net Assets; however, they are used solely for operating purposes.
Tuition and fees, net of scholarship allowances, increased from $420 million in 2008 to $458 million in 2009, and to $528 million in 2010. The increases were primarily due to a 7% increase in average undergraduate resident tuition rates in 2008 and 2009, and a 14% increase in 2010, as permitted by the state legislature. The University also has flexibility in its ability to set non-undergraduate resident tuition rates, which helps to compensate for shortfalls in state funding.
The impact of these tuition increases was partially offset by the increase in scholarships and scholarship allowances of $21 million in 2010, $15 million in 2009, and $16 million in 2008.
Self-sustaining educational programs include $63 million for UW Educational Outreach (the continuing education branch of the University), $33 million for summer quarter, and $28 million for Business School and School of Medicine programs.
Patient Services – UW Medicine
The financial statements of the University include the operations of the School of Medicine, two hospitals, associated physicians and clinics, and the University’s share of two joint ventures. These entities, plus a third hospital, Harborview Medical Center (activities not included in the University’s financial statements — see Footnote 14) and Airlift Northwest (affiliated as of July 1, 2010), comprise UW Medicine, an umbrella organization serving to coordinate these activities and promote quality health care in the Pacific Northwest and beyond, and to conduct cutting edge medical research with worldwide benefit.
Patient care activities included in the University’s financial statements include:
University of Washington Medical Center (UWMC) is a 450-bed hospital that provides comprehensive health care services to the Puget Sound community and patients from throughout the Pacific Northwest. UWMC also serves as the major clinical, teaching and research site for students and faculty in the Health Sciences at the University. Over 19,000 patients receive inpatient care at UWMC each year. Specialized inpatient care needs are met by the Cancer Center, the Regional Heart Center, Neonatal ICU and Organ Transplantation program. During fiscal year 2010, work was in progress on Phase 1 of a new five-story UWMC tower, which will create significant space for expansion of patient care activities with an emphasis on neonatal and oncology patients.
UW Medicine/Northwest (Northwest) is a full-service medical facility with 281 beds, and treats approximately 11,000 inpatients per year. Northwest joined UW Medicine in January 2010. Northwest’s Balance Sheet as of June 30, 2010 and Statement of Revenues, Expenses and Changes in Net Assets for the 18 months ended June 30, 2010 are presented in a discrete column on the financial statements of the University.
UW Physicians Network (UWPN) operates seven neighborhood clinics throughout the greater Seattle area, providing primary and selected speciality care with a staff of nearly 70 health care providers.
University of Washington Physicians (UWP) is the physician practice group for more than 1,500 faculty physicians and health care providers associated with UW Medicine. The revenues, expenses, assets and liabilities of UWP are included in the University’s financial statements.
The University is also a participant in two joint ventures: Seattle Cancer Care Alliance and Children’s University Medical Group. The University’s share in these activities is reflected in the University’s financial statements.
In combination, these organizations (not including Northwest) contributed $1,029 million in patient service revenues in fiscal year 2010, $988 million in fiscal year 2009, and $924 million in 2008. UWMC generated 74% of this revenue in 2010, 71% in 2009, and 70% in 2008. UWMC admissions remained stable in 2010 compared to 2009, and increased 2% in 2009 over 2008. Patient length of stay (shorter average length of stay, or higher turnover, is financially favorable) remained relatively constant at 5.9 days in 2010 and 2009, and decreased from 6.1 days in 2008. Other factors contributing to the increase in hospital revenue over the period have been the increased acuity of patients and improved documentation and coding.
Gifts, Endowments and Investment Revenues
Net investment returns for the years ended June 30, 2010, 2009, and 2008 consisted of the following:
|Interest and dividends||$ 78||$ 66||$ 70|
|Metropolitan Tract net income||8||6||7|
|Investment in Seattle Cancer Care Alliance||7||8||5|
|Net appreciation (depreciation) of fair value of investments||224||(544)||3|
|Net investment income (loss)||$ 309||$ (469)||$ 77|
Net appreciation includes both realized and unrealized gains and losses; however, the unrealized gains are not expendable until the underlying securities have been sold. Net investment income increased by $778 million in 2010 over 2009, and decreased by $546 million in 2009 from 2008. The change in unrealized gain or loss was the major factor in the variance each year. The sharp decline in the University’s investment performance in 2009 and 2008 was related to market declines which began in the latter part of fiscal year 2008.
Donor support declined in 2010 and 2009 after years of dramatic growth – a direct result of the worsening economy during that period. Gifts are a key, necessary source of support for a variety of purposes including capital improvements, scholarships, research and endowments for various academic and research positions.
A comparative summary of the University’s expenses by functional classification (purpose for which the costs are incurred) for the years ended June 30, 2010, 2009, and 2008 follows:
|Educational and general instruction||$ 905||$ 908||$ 824|
|Operation and maintenance of plant||155||178||169|
|Scholarships and fellowships||93||71||71|
|Total operating expenses||$ 3,493||$ 3,429||$ 3,284|
Research expenditures, which represent sponsored research, increased $60 million, or 9%, from the prior year, reflective of the increase in grant and contract revenue.
Operation and maintenance of plant decreased $23 million, or 13%, compared to 2009. The state of Washington appropriated $12 million for operations and maintenance and $4 million for the Guggenheim renovation in the prior fiscal year. These appropriations were not continued in fiscal year 2010.
Scholarships and fellowships increased $22 million, or 31%, primarily due to an increase in federal funding for Pell Grants.
Depreciation/amortization increased $22 million, or 11%, during fiscal year 2010 compared to 2009. This increase was due to asset additions of $106 million for equipment and intangibles, and $149 million for buildings.
Operating expenses increased $63.7 million, or 1.9%, in fiscal year 2010. Salaries decreased $20.7 million, or 1.2%, due to reductions in staffing and restrictions on rate increases; however, the decrease was moderated by increased activities on grants, due to ARRA, and by federal funding for education. Expenses associated with the rental of office space also decreased, due to increasing utilization of the University Tower for housing administrative offices.
Supplies and purchased services expense increased $44.3 million, or 5.9%, due to ARRA research activities and benefits expense increased $12.8 million, or 2.5%, due to increases in health care and retirement costs.
In 2009, the University’s operating expenses increased $145 million, or 4%, over 2008, primarily driven by increased salaries and benefits expense. Salary rate increases ranging from 2% to 4% had an impact on salary costs, but were moderated by a one-time decrease in health care rates related to favorable claims experience.
The University’s operating loss decreased to $369 million in 2010 from $527 million in 2009. The 2009 operating loss was a decrease from $554 million in 2008.
State appropriations have declined; however, they are shown as nonoperating, pursuant to GASB standards. If state appropriations were classified as operating, the operating loss would be as follows for 2010, 2009, and 2008, respectively: $21 million, $142 million, and $166 million. The University continues to rely on nonoperating revenues, in addition to state appropriations, to fund its operations including operating gift revenues and investment income distributions.
Moody’s measures the net result of revenue and expense activity by including several nonoperating revenues in the margin.
The 2010 operating margin increased to 5.50% from 1.12% in 2009; increases in tuition, patient services revenue and operating gifts, as well as conservative spending, accounted for much of the higher margin. The 2009 margin was a slight increase over 2008.
Operating margin calculations include an estimated return on the University’s investments rather than actual investment income. Therefore, variances in investment performance in a given year will not impact the operating margin.
3. Operating loss, (including interest expense, operating appropriations, nonoperating federal grants, an assumed 5% spending rate on investments and nonpermanent endowment gifts),
divided by operating revenues (less scholarship expenses, and including operating appropriations, nonoperating federal grants, an assumed 5% return on investments and nonpermanent
endowment gifts). Does not include results for UW Medicine/Northwest.
|University Of Washington||UW Medicine / Northwest1|
|June 30,||June 30,|
|CASH AND CASH EQUIVALENTS (NOTE 2)||$ 31,902||$ 35,754||$ 15,018|
|INVESTMENTS (NOTE 6)||314,721||376,787||2,159|
|ACCOUNTS RECEIVABLE (NET OF $92,341 AND $82,873 ALLOWANCE) (NOTE 5)||470,194||461,936||31,031|
|OTHER CURRENT ASSETS||4,536||4,185||5,579|
|TOTAL CURRENT ASSETS||851,287||906,728||58,115|
|DEPOSIT WITH STATE OF WASHINGTON (NOTE 3)||72,170||72,002||-|
|INVESTMENTS, NET OF CURRENT PORTION (NOTE 6)||2,847,279||2,456,877||51,427|
|METROPOLITAN TRACT (NOTE 7)||115,902||117,759||-|
|STUDENT LOANS RECEIVABLE (NET OF $9,136 AND $9,499 ALLOWANCE) (NOTE 4)||70,507||68,467||-|
|CAPITAL ASSETS (NET OF $2,530,064 AND $2,352,246 ACCUMULATED DEPRECIATION) (NOTE 8)||2,957,777||2,839,901||132,715|
|TOTAL NONCURRENT ASSETS||6,149,028||5,627,765||187,029|
|TOTAL ASSETS||$ 7,000,315||$ 6,534,493||$ 245,144|
|ACCOUNTS PAYABLE||$ 93,705||$ 109,938||$ 12,128|
|COMMERCIAL PAPER (NOTE 11)||30,000||30,000||-|
|FUNDS HELD FOR OTHERS||16,752||11,469||-|
|LONG-TERM LIABILITIES, CURRENT PORTION (NOTES 9-12)||64,857||61,135||6,068|
|TOTAL CURRENT LIABILITIES||548,387||578,982||44,092|
|DEFERRED REVENUES, NET OF CURRENT PORTION||18,055||21,799||-|
|U.S. GOVERNMENT GRANTS REFUNDABLE||50,873||51,618||-|
|LONG-TERM LIABILITIES, NET OF CURRENT PORTION (NOTES 9-12)||1,189,331||1,119,324||106,765|
|TOTAL NONCURRENT LIABILITIES||1,258,259||1,192,741||106,765|
|INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT||1,981,797||1,943,511||50,089|
|TOTAL NET ASSETS||5,193,669||4,762,770||94,287|
|TOTAL LIABILITIES AND NET ASSETS||$ 7,000,315||$ 6,534,493||$ 245,144|
- 1 A component unit of the University of Washington (NOTE 1)
- See accompanying notes to basic financial statements.
- Dollars in thousands
Statements of Revenues, Expenses and Changes in Net Assets
|University Of Washington||UW Medicine / Northwest1|
|Year Ended June 30,||18-Month Period Ended June 30,|
|STUDENT TUITION AND FEES (NET OF SCHOLARSHIP ALLOWANCES OF $82,461 AND $82,813)||$ 527,958||$ 458,061||$ -|
|PATIENT SERVICES (NET OF CHARITY CARE OF $46,945 AND $33,058)||1,029,057||988,370||389,838|
|FEDERAL GRANTS AND CONTRACTS||982,413||865,053||-|
|STATE AND LOCAL GRANTS AND CONTRACTS||73,540||69,002||-|
|NONGOVERNMENTAL GRANTS AND CONTRACTS||155,876||150,943||-|
|SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS||115,999||111,405||-|
|HOUSING AND FOOD SERVICES||58,508||54,486||-|
|SPORTS PROGRAMS (NET OF SCHOLARSHIP ALLOWANCES OF $3,858 AND $3,977)||39,445||37,041||-|
|OTHER AUXILIARY ENTERPRISES||46,592||48,946||-|
|OTHER MEDICAL-RELATED REVENUE||39,868||47,361||15,016|
|OTHER OPERATING REVENUE||44,055||62,093||-|
|TOTAL OPERATING REVENUES||3,124,075||2,902,422||404,854|
|OPERATING EXPENSES (NOTE 13)|
|SCHOLARSHIPS AND FELLOWSHIPS||93,219||71,394||-|
|SUPPLIES AND MATERIALS||324,133||308,736||82,755|
|TOTAL OPERATING EXPENSES||3,492,655||3,428,960||399,606|
|OPERATING INCOME (LOSS)||(368,580)||(526,538)||5,248|
NONOPERATING REVENUES (EXPENSES)
|FEDERAL ARRA EDUCATION FUNDING (NOTE 1)||43,971||-||-|
|INVESTMENT INCOME (LOSS) (NET OF INVESTMENT EXPENSE OF $7,788 AND $5,759)||308,752||(469,492)||2,792|
|INTEREST ON CAPITAL ASSET-RELATED DEBT||(42,980)||(44,732)||(5,263)|
|PELL GRANT REVENUE||37,356||25,332||-|
|OTHER NONOPERATING REVENUES (EXPENSES)||(8,861)||2,486||499|
|NET NONOPERATING REVENUES (EXPENSES)||706,992||(62,843)||(773)|
|INCOME (LOSS) BEFORE OTHER REVENUES||338,412||(589,381)||4,475|
|CAPITAL GRANTS AND GIFTS||16,005||27,453||580|
|GIFTS TO PERMANENT ENDOWMENTS||43,943||86,084||-|
|TOTAL OTHER REVENUES||92,487||214,841||580|
|INCREASE (DECREASE) IN NET ASSETS||430,899||(374,540)||5,055|
|NET ASSETS – BEGINNING OF YEAR||4,762,770||5,137,310||89,232|
|NET ASSETS – END OF YEAR||$ 5,193,669||$ 4,762,770||$ 94,287|
- 1 A component unit of the University of Washington (NOTE 1)
- See accompanying notes to basic financial statements.
- Dollars in thousands
Statements of Cash Flows
|University Of Washington|
|Year Ended June 30,|
CASH FLOWS FROM OPERATING ACTIVITIES
|STUDENT TUITION AND FEES||$ 531,730||$ 432,411|
|GRANTS AND CONTRACTS||1,171,348||1,064,735|
|PAYMENTS TO SUPPLIERS||(320,184)||(310,333)|
|PAYMENTS FOR UTILITIES||(51,522)||(55,373)|
|OTHER OPERATING DISBURSEMENTS||(103,653)||(125,057)|
|PAYMENTS TO EMPLOYEES||(1,707,863)||(1,727,376)|
|PAYMENTS FOR BENEFITS||(467,299)||(497,527)|
|PAYMENTS FOR SCHOLARSHIPS AND FELLOWSHIPS||(93,219)||(71,394)|
|LOANS ISSUED TO STUDENTS||(29,102)||(26,541)|
|COLLECTION OF LOANS TO STUDENTS||26,317||24,966|
|OTHER MEDICAL-RELATED RECEIPTS||39,868||47,361|
|AUXILIARY ENTERPRISE RECEIPTS||167,322||133,013|
|SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS||115,472||114,051|
|NET CASH USED BY OPERATING ACTIVITIES||(137,511)||(380,486)|
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES
|FEDERAL ARRA EDUCATION FUNDING||43,971||-|
|GIFTS AND GRANTS FOR OTHER THAN CAPITAL PURPOSES||37,356||25,332|
|PERMANENT ENDOWMENT RECEIPTS||43,942||86,084|
|DIRECT LENDING RECEIPTS||227,033||189,153|
|DIRECT LENDING DISBURSEMENTS||(217,575)||(187,752)|
|RECEIPTS FROM OUTSIDE AFFILIATED AGENCIES||600,562||562,573|
|DISBURSEMENTS TO OUTSIDE AFFILIATED AGENCIES||(611,240)||(568,805)|
|NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES||457,017||522,752|
CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES
|PROCEEDS FROM CAPITAL DEBT||121,461||109,162|
|STATE CAPITAL APPROPRIATIONS||42,559||95,864|
|CAPITAL GRANTS AND GIFTS RECEIVED||15,302||27,453|
|ACQUISITION AND CONSTRUCTION OF CAPITAL ASSETS||(353,206)||(323,274)|
|PRINCIPAL PAYMENTS ON CAPITAL-RELATED DEBT AND LEASES||(77,098)||(49,512)|
|INTEREST PAYMENTS ON CAPITAL-RELATED DEBT AND LEASES||(47,538)||(47,237)|
|NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES||(297,046)||(192,821)|
CASH FLOWS FROM INVESTING ACTIVITIES
|PROCEEDS FROM SALES OF INVESTMENTS||3,987,515||5,873,091|
|PURCHASES OF INVESTMENTS||(4,091,814)||(5,878,173)|
|NET CASH PROVIDED BY INVESTING ACTIVITIES||(26,312)||69,602|
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS||(3,852)||19,047|
|CASH AND CASH EQUIVALENTS – BEGINNING OF THE YEAR||35,754||16,707|
|CASH AND CASH EQUIVALENTS – END OF THE YEAR||$ 31,902||$ 35,754|
RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES
|OPERATING LOSS||$ (368,580)||$ (526,538)|
|ADJUSTMENTS TO RECONCILE OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES:|
|CHANGES IN ASSETS AND LIABILITIES:|
|ACCOUNTS PAYABLE AND ACCRUED LIABILITIES||12,364||(688)|
|OTHER LONG-TERM LIABILITIES||28,964||(25,353)|
|U.S. GOVERNMENTAL GRANTS REFUNDABLE||(745)||366|
|LOANS TO STUDENTS||(2,040)||(1,941)|
|NET CASH USED BY OPERATING ACTIVITIES||$ (137,511)||$ (380,486)|
- See accompanying notes to basic financial statements.
- Dollars in thousands
Notes to Financial Statements
Summary of Significant Accounting Policies
FINANCIAL REPORTING ENTITY
The University of Washington (University), an agency of the state of Washington, is governed by a 10-member Board of Regents, appointed by the Governor and confirmed by the state Senate.
The financial statements include the individual schools, colleges and departments of the University, the University of Washington Medical Center (UWMC), Portage Bay Insurance (a wholly-owned subsidiary of the University) and certain affiliated operations determined to be a part of the University’s financial reporting entity. Affiliated organizations are evaluated for inclusion in the reporting entity as component units based on the significance of their relationship with the University.
Component units are legally separate organizations for which the University is financially accountable. These entities may be reported in the financial statements of the primary government in one of two ways: the component units’ amounts may be blended with the amounts reported by the primary government, or they may be shown in a separate column, depending on the application of the criteria of Governmental Accounting Standards Board (GASB) Statement No. 14, “The Financial Reporting Entity” as amended by GASB Statement No. 39, “Determining Whether Certain Organizations Are Component Units, an amendment of GASB Statement No. 14.” All component units of the University meet the criteria for blending except UW Medicine/Northwest. It is reported discretely since it has a separate board of directors and it does not provide services exclusively to the University.
BLENDED COMPONENT UNITS
The following entities are presented as blended component units because they provide service exclusively or almost exclusively to the University. Financial information for these affiliated organizations is available from their respective administrative offices.
The University of Washington Alumni Association was established as a tax-exempt entity to connect and celebrate alumni and to support the University’s mission. The Alumni Association had operating revenues of $5,304,000 and $5,644,000 in 2010 and 2009, respectively.
The Association of University Physicians dba UW Physicians (UWP) was established as a tax-exempt entity for the exclusive benefit of the University of Washington School of Medicine (UWSOM). UWP employs UWSOM faculty and bills and collects for their clinical services as an agent for UWSOM. UWP had operating revenues of $174,998,000 and $173,572,000 in 2010 and 2009, respectively.
UW Physicians Network (UWPN) was established as a tax-exempt entity for the benefit of UWSOM, UWP and its affiliated medical centers, Harborview Medical Center (HMC) and UWMC, exclusively for charitable, scientific and educational purposes. UWPN was organized to coordinate and develop patient care in a community clinical setting. It enhances the academic environment of UWSOM by providing additional sites of primary care practice and training for faculty, residents and students. UWPN had operating revenues of $10,928,000 and $10,187,000 in 2010 and 2009, respectively.
Real estate financing entities – The entities listed below are nonprofit corporations that were formed to acquire, construct or renovate certain real properties for the benefit of the University in fulfilling its educational, medical or scientific research missions. These entities issue tax-exempt and taxable bonds to finance these activities.
Community Development Properties C-D
Educational Research Properties
Radford Court Properties
Twenty-Fifth Avenue Properties
Washington Biomedical Research Properties I
Washington Biomedical Research Properties II
Washington Biomedical Research Facilities 3
These entities collectively have net capital assets of $262,577,000 and $273,836,000 in 2010 and 2009, respectively. They collectively have long-term debt of $300,325,000 and $307,358,000 in 2010 and 2009, respectively. These amounts are reflected in the University’s financial statements.
DISCRETELY PRESENTED COMPONENT UNIT
UW Medicine and Northwest Hospital & Medical Center, a 281-bed full-service acute care hospital, entered into an affiliation agreement effective January 1, 2010. Northwest Hospital & Medical Center has been reorganized and renamed UW Medicine/Northwest (Northwest). The University is the sole corporate member of Northwest.
The change in the reporting entity was retrospectively applied to the combined University and Northwest financial statements. The 2010 Northwest financial information is presented to show activity starting January 1, 2009, the beginning of its most recent fiscal year. In conjunction with this change in entity, Northwest changed its fiscal year-end from December 31 to June 30, in order to be consistent with the University. Accordingly, the discretely presented component unit reports activity for the 18 months ended June 30, 2010 in the Statements of Revenues, Expenses and Changes in Net Assets.
The audited financial statements of Northwest are available by contacting UW Medicine/ Northwest at 1550 N. 115th Street, Seattle, WA 98133-9733, Mailstop X-112.
In 1998, the University entered into an agreement with Seattle Children’s Hospital and Fred Hutchinson Cancer Research Center to establish the Seattle Cancer Care Alliance (SCCA). The SCCA integrates the cancer research, teaching and clinical cancer programs of all three institutions to provide state-of-the-art cancer care. Each member of the SCCA has a one-third interest. The University accounts for its interest in SCCA under the equity method and has recorded $63,390,000 and $55,998,000 in “Other Assets,” together with $7,392,000 and $7,755,000 in “Investment Income,” for its share of the joint venture in 2010 and 2009, respectively.
In 1986, the University entered into an agreement with Seattle Children’s Hospital to establish Children’s University Medical Group (CUMG) to assist the organizations in carrying out their pediatric patient care, charitable, educational, and scientific missions. CUMG employs UWSOM faculty physicians, and bills and collects for their services as an agent for UWSOM. The University records revenue from CUMG based on the income distribution plan effective December 31, 2008. The University’s patient services receivable (Note 5) includes amounts due from CUMG of $15,229,000 and $13,408,000 in 2010 and 2009, respectively.
BASIS OF ACCOUNTING
The financial statements of the University have been prepared in accordance with GASB Statement No. 34, “Basic Financial Statements — and Management’s Discussion and Analysis — for State and Local Governments,” as amended by GASB Statemnet No.35, “Basic Financial Statements — and Management’s Discussion and Analysis — for Public Colleges and Universities.” The University is reporting as a special-purpose government engaged in business-type activities (BTA). In accordance with BTA reporting, the University presents management’s discussion and analysis, balance sheets, statements of revenues, expenses and changes in net assets, statements of cash flows and notes to the financial statements. The financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting.
Under the accrual basis of accounting, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All intra-agency transactions have been eliminated. The University has elected not to apply any Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989. The University reports capital assets net of accumulated depreciation/amortization (as applicable), and reports depreciation/amortization expense in the Statements of Revenues, Expenses and Changes in Net Assets.
On July 1, 2008, the University adopted GASB Statement No. 52, “Land and Other Real Estate Held as Investments by Endowments.” This Statement requires endowments to report their land and other real estate held for investment at fair value. The University increased the carrying value of real estate held for investment in its endowment by $1,040,000 during 2009.
On July 1, 2009, the University adopted GASB Statement No. 51, “Accounting and Financial Reporting for Intangible Assets.” This Statement requires that all intangible assets not specifically excluded by its scope be classified as capital assets. The University recognized $2,707,000 in new intangible assets and $2,540,000 in intangible projects in process in the fiscal year ended June 30, 2010.
On July 1, 2009, the University adopted GASB Statement No. 53, “Accounting and Financial Reporting for Derivative Instruments.” This Statement prescribes rules for the recognition, measurement, and disclosure of information regarding derivative instruments entered into by state and local governments. A key provision is that derivative instruments are to be reported at fair value. Changes in the fair value of derivative instruments that are used for investment purposes, or that are reported as investment derivative instruments because of ineffectiveness, are reported as investment income. Changes in the fair value of derivative instruments that are classified as hedging derivative instruments are reported in the Balance Sheets as deferrals. There was no financial statement impact to the University as a result of the implementation. Additional disclosure is included in Note 6.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP involves management estimates that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates; however, in each case, the University believes that allowances, reserves and estimates of expected liabilities are adequate.
The University estimates the pollution remediation liability by reviewing the current status of known polluted sites and developing estimates of cleanup costs. These estimates are subject to change due to improvements in technology, inflation, changes in the scope of work and the pursuit of reimbursement from other responsible parties.
Allowances for doubtful accounts (Notes 4 and 5) are estimates based on the historical experience of the University and current economic circumstances with respect to the collectability of accounts and loans receivable.
The liability and expense related to the supplemental component of the University of Washington Retirement Plan (UWRP) (Note 16) is based on an actuarial valuation. The results of an actuarial valuation are estimates based on historical data and the demographics of the employee population.
The self-insurance reserve (Note 17) is estimated through an actuarial calculation using individual case-basis valuations and statistical analyses. Considerable variability is inherent in such estimates.
OTHER ACCOUNTING POLICIES
Investments. Investments, other than miscellaneous investments, are stated at fair value. Miscellaneous investments are stated at cost or, in the case of gifts, at fair values at the date of donation. The fair value of all debt and equity securities with a readily determinable fair value is based on quotations from national securities exchanges. The alternative investments, which are not readily marketable, are carried at the estimated fair values provided by the investment managers. The University reviews and evaluates the values provided by the investment managers and agrees with the valuation methods and assumptions used in determining the fair value of the alternative investments. Those estimated fair values may differ significantly from the values that would have been used had a ready market for these securities existed.
Investments under long-term strategies are considered noncurrent. Short-term investments consist primarily of cash equivalents and fixed income vehicles with maturities of less than one year.
Inventories. Inventories are carried at the lower of cost or market value. Consumable inventories, consisting of expendable materials and supplies held for consumption, are generally valued using the weighted-average method. Merchandise inventories are generally valued using the first-in, first-out method.
Capital Assets. Land, buildings, equipment, library books and intangibles are stated at cost or, if acquired by gift, at fair market value at the date of the gift. Additions, replacements, major repairs and renovations are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, generally 15 to 50 years for building components, 20 to 50 years for infrastructure and land improvements, 5 to 7 years for equipment, 15 years for library books, and 3 to 15 years for intangibles.
Capitalized construction-related interest was $5,848,000 and $1,960,000 during 2010 and 2009, respectively.
Deferred Revenues. Deferred revenues occur when funds have been collected in advance of an event, such as advance ticket sales, summer quarter tuition and unspent cash advances on certain grants.
Deferred Giving – Split-Interest Agreements. Under these agreements, donors make initial gifts to trusts or directly to the University. The University has beneficial interest, but is not necessarily the sole beneficiary. The University records an asset related to these agreements at fair market value at year-end. The University also records a liability related to the split-interest agreements equal to the present value of expected future distributions; the discount rates applied range from 5.1% to 8.0%.
Compensated Absences. University employees accrue annual leave at rates based on length of service and for sick leave at the rate of one day per month. Annual leave accrued at June 30, 2010 and 2009 was $72,797,000 and $73,163,000, respectively, and is included in Accrued Liabilities. Sick leave accrued as of June 30, 2010 and 2009 was $29,014,000 and $29,991,000, respectively, and is included in Long-Term Liabilities.
Scholarship Allowances. Tuition and Fees are reported net of scholarship allowances that are applied to students’ accounts from external funds that have already been recognized as revenue by the University. Student aid paid directly to students is reported as scholarships and fellowships expense.
State Appropriations. The state of Washington appropriates funds to the University on both annual and biennial bases. These revenues are reported as nonoperating revenues in the Statements of Revenues, Expenses, and Changes in Net Assets.
Federal ARRA Education Funding. As a result of the American Recovery and Reinvestment Act of 2009 (ARRA), the federal government granted funds to the state of Washington to support K-12 and higher education. Accordingly, the state of Washington passed through $43,971,000 to the University in fiscal year 2010. These revenues are reported as nonoperating revenues in the Statements of Revenues, Expenses and Changes in Net Assets.
Operating Activities. The University’s policy for reporting operating activities in the Statements of Revenues, Expenses, and Changes in Net Assets is to include activities that generally result from exchange transactions. Examples of exchange transactions are payments received for tuition, patient services or grants under which services are performed, as well as payments made for the delivery of goods or services. Certain other significant revenue streams used for operations, such as state appropriations, Pell grants, gifts and investment income are recorded as nonoperating revenues, as prescribed by GASB Statement No. 35.
Net Assets. The University’s net assets are classified as follows:
Invested in capital assets, net of related debt: The University’s investments in capital assets, less accumulated depreciation/amortization, net of outstanding debt obligations related to capital assets;
Restricted net assets – nonexpendable: Net assets subject to externally-imposed requirements that they be maintained permanently by the University, including permanent endowment funds and annuity and life income funds;
Restricted net assets – expendable: Net assets which the University is obligated to spend in accordance with restrictions imposed by external parties, generally scholarships, research and department uses;
Unrestricted net assets: Net assets not subject to externally imposed restrictions and which may be designated for specific purposes by management, or the Board of Regents.
Tax Exemption. The University, as an agency of the state of Washington, is not subject to federal income tax pursuant to Section 115 of the Internal Revenue Code, except for tax on unrelated business income.
Cash and Cash Equivalents
Cash includes cash on hand, petty cash and bank deposits. Most cash, except for cash held at the University, is covered by federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (PDPC). At June 30, 2010 and 2009, bank balances of $4,770,000 and $2,917,000, respectively, were insured by the FDIC and balances of $30,020,000 and $33,395,000, respectively, were collateralized under the PDPC.
Deposit with State of Washington
State law requires the University to deposit certain funds with the State Treasurer, who holds and invests the funds. The deposits include amounts held for the University’s permanent land grant funds, the University of Washington building fee collected from students and certain general obligation bond reserve funds. The fair value of these funds approximates the carrying value.
Student Loans Receivable
Net student loans of $70,507,000 and $68,467,000 at June 30, 2010 and 2009, respectively, consist of $50,873,000 and $51,618,000 from federal programs and $19,634,000 and $16,849,000 from University programs. Interest income from student loans for the years ended June 30, 2010 and 2009 was $1,306,000 and $1,225,000, respectively. These unsecured loans are made primarily to students who reside in the state of Washington.
The major components of accounts receivable as of June 30, 2010 and 2009 were:
|(Dollars in thousands)||2010||2009|
|PATIENT SERVICES||$ 267,083||$ 241,342|
|GRANTS AND CONTRACTS||151,380||152,528|
|SALES AND SERVICES||10,406||9,880|
|DUE FROM OTHER AGENCIES||35,135||28,361|
|LESS: ALLOWANCE FOR DOUBTFUL ACCOUNTS||(92,341)||(82,873)|
|TOTAL||$ 470,194||$ 461,936|
INVESTMENTS – GENERAL
The Board of Regents of the University of Washington is responsible for the management of the University’s investments. The Board establishes investment policy, which is carried out by the Chief Investment Officer. The University of Washington Investment Committee, comprising Board members and investment professionals, advises on matters relating to the management of the University’s investment portfolios. The composition of the carrying amounts of investments by type at June 30, 2010 and 2009 is listed in Table 1.
TABLE 1 – UNIVERSITY INVESTMENTS (Dollars in thousands)
|CASH EQUIVALENTS||$ 337,842||$ 440,742|
|DOMESTIC FIXED INCOME||1,105,961||968,847|
|FOREIGN FIXED INCOME||18,909||12,272|
|TOTAL INVESTMENTS||$ 3,162,000||$ 2,833,664|
The University combines most short-term cash balances into the Invested Funds Pool. At June 30, 2010, the Invested Funds Pool totaled $1,068,762,000 compared to $884,680,000 at June 30, 2009. The fund also owns units in the Consolidated Endowment Fund valued at $354,942,000 on June 30, 2010 and $322,324,000 on June 30, 2009. By University policy, departments with qualifying funds in the Invested Funds Pool receive distributions based on their average balances and on the type of balance. Campus depositors received 2.0% in fiscal years 2010 and 2009. Endowment operating and gift accounts received 3% in both fiscal years 2010 and 2009. The difference between the actual earnings of the Invested Funds Pool and the calculated distributions is used to support activities benefiting all University departments.
The majority of the endowed funds are invested in a pooled fund called the Consolidated Endowment Fund (CEF). Individual endowments purchase units in the pool on the basis of a per unit valuation of the CEF at fair value on the last business day of the calendar quarter. Income is distributed based on the number of units held. RCW 24.55 of the Washington State Code allows for the spending of appreciation in the CEF.
During fiscal year 2009, in light of the 2008-2009 financial crises and the decline in the CEF market value, the Board of Regents implemented an interim spending policy. Under the interim policy, year-over-year CEF distributions decreased from the fiscal year 2008 level by 25% in fiscal year 2009 and again in fiscal year 2010.
At their October 21, 2010 meeting, the Board of Regents adopted a new spending policy for the CEF replacing the interim spending policy. Under the new policy, quarterly distributions to programs will be made based on an annual percentage rate of 4%, applied to the five-year rolling average of the CEF’s market valuation. The new policy is effective with the December 2010 quarterly distributions with the five-year averaging period implemented incrementally. The administrative fee of 1% supporting campus-wide fundraising and stewardship activities (0.80%) and offsetting the internal cost of managing endowment assets (0.20%) continues but will now be based on a five-year average value similar to program distributions.
The University records its permanent endowments at the lower of original gift value or current market value in the Restricted Nonexpendable Net Assets category. Of the total $1,122,974,000 and $1,003,451,000 permanent endowment funds (at fair value) as of June 30, 2010 and 2009, the aggregate amount of the deficiencies where the fair value of the assets is less than the original gifts is $53,318,000 and $80,694,000 at June 30, 2010 and 2009, respectively.
Funds in irrevocable trusts managed by trustees other than the University are not reported in the financial statements. The fair value of these funds was $45,580,000 at June 30, 2010 compared to $43,365,000 at June 30, 2009. Income received from these trusts, which is included in Investment Income, was $2,215,000 for the year ended June 30, 2010 and $2,329,000 for the year ended June 30, 2009.
Net appreciation (depreciation) in the fair value of investments includes both realized and unrealized gains and losses on investments. The University realized net gains of $138,053,000 in 2010 and losses of $67,054,000 in 2009 from the sale of investments. The calculation of realized gains and losses is independent of the net appreciation of the fair value of investments. Realized gains and losses on investments that have been held in more than one fiscal year and are sold in the current year include the net appreciation of these investments reported in the prior year(s). The net appreciation (depreciation) in the fair value of investments during the years ended June 30, 2010 and 2009 was $223,803,000 and $(544,175,000), respectively.
The University enters into contracts with investment managers to fund alternative investments. As of June 30, 2010 and 2009, the University had outstanding commitments to fund alternative investments of $215,300,000 and $254,228,000, respectively.
The University’s investment policies permit it to lend its securities to broker dealers and other entities. Due to market conditions, the University terminated this program in September 2008. As of June 30, 2010 and 2009 the University had no securities on loan.
Table 2 outlines the University’s participation in investment derivative activity in total return swaps during the year ended June 30, 2010:
TABLE 2 – INVESTMENT DERIVATIVES (Dollars in thousands)
Changes in Fair Value
|CLASSIFICATION||AMOUNT||CLASSIFICATION||AMOUNT||NOTIONAL AMOUNT||COUNTERPARTY CREDIT RATING|
|EQUITY SWAP||INVESTMENT REVENUE||$ (5,110)||INVESTMENTS||$ (5,110)||$ 92,940||A-1|
Values are based on quoted market prices. Credit exposure represents exposure to counterparties relating to financial instruments where gains exceed collateral held by the University or losses are less than the collateral posted by the University. There was no credit exposure as of June 30, 2010. An increase in the London Interbank Offered Rate (LIBOR) could affect the University’s net payment on the swap. No derivative instruments have been reclassified from a hedging instrument to an investment instrument.
Details on foreign currency derivatives are disclosed under Foreign Currency Risk.
INTEREST RATE RISK
The University manages interest rate risk through its investment policies and the investment guidelines established with each manager. Each fixed-income manager is assigned a maximum boundary for duration as compared to the manager's relevant benchmark index. The goal is to allow ample freedom for the manager to perform, while controlling the interest rate risk in the portfolio. Modified duration, which estimates the sensitivity of a bond's price to interest rate changes, is based on a calculation entitled Macaulay duration. Macaulay is an accepted calculation developed for a portfolio of bonds assembled to fund a fixed liability. Macaulay duration is calculated as follows: sum of discounted time-weighted cash flows divided by the bond price. Modified duration is calculated using the following formula: Macaulay duration divided by (one plus yield-to-maturity divided by the number of coupon payments per year). As of June 30, 2010 and 2009, modified duration of the University's investments for which duration is measured is as follows:
TABLE 3 – INVESTMENTS MANAGED BY THE UNIVERSITY (Dollars in thousands; duration in years)
Duration as of June 30, 2010
Duration as of June 30, 2009
|Asset Category||Asset Value||Duration||Asset Value||Duration||Asset Value||Duration||Asset Value||Duration|
|DOMESTIC FIXED INCOME|
|ASSET-BACKED SECURITIES||$ 28,716||2.11||$ 33,336||1.87||$ 9,442||2.96||$ 29,263||2.96|
|GOVERNMENT & AGENCIES||143,467||1.99||692,698||3.26||117,966||2.43||660,920||2.43|
|FOREIGN FIXED INCOME|
|TOTAL||$ 333,538||2.14||$ 1,068,762||2.36||$ 311,336||1.84||$ 884,680||2.61|
Fixed income securities are subject to credit risk, which is the risk that the issuer or other counterparty to a financial instrument will not fulfill its obligations, or that negative perceptions of the issuer’s ability to make these payments will cause prices to decline. Concentration of credit risk is the risk of loss attributed to the magnitude of a government’s investment in a single issuer.
The University Investment Policies limit fixed income exposure to investment grade assets. The Investment Policy for the Invested Funds’ cash pool requires each manager to maintain an average quality rating of “AA” as issued by a nationally recognized rating organization. The Invested Funds’ liquidity pool requires each manager to maintain an average quality rating of “A” and to hold 50% of their portfolios in government and government agency issues. The Investment Policy for the CEF reflects its long-term nature by specifying average quality rating levels by individual manager, but still restricting investment to investment-grade credits.
Investments subject to credit risk are presented in the table below:
TABLE 4 – INVESTMENTS CREDIT RATING (Dollars in thousands)
Credit rating as of June 30, 2010
Credit rating as of June 30, 2009
|Asset Value||%||Asset Value||%||Asset Value||%||Asset Value||%|
|TRSY||$ 19,346||5.8%||$ 414,678||38.8%||$ 17,777||5.7%||$ 333,049||37.6%|
|TOTAL||$ 333,538||100.0%||$ 1,068,762||100.0%||$ 311,336||100.0%||$ 884,680||100.0%|
Duration and credit risk figures at June 30, 2010 and 2009 exclude $60,412 and $225,845, respectively, of fixed-income securities held outside the CEF and the Invested Funds Pool. These amounts make up 1.91% and 7.97%, respectively, of the University’s investments, and are not included in the duration figures detailed in Tables 3 and 4.
FOREIGN CURRENCY RISK
The University’s Investment Policies permit investments in international equity and other asset classes which can include foreign currency exposure. The University also enters into foreign currency forward contracts, futures contracts, and options to manage the foreign currency exposure.
At June 30, 2010 and 2009, the University had net outstanding forward commitments to sell foreign currency with a total fair value of $4,701,000 and $40,164,000 , respectively, which equals 0.15% and 1.42% of the total portfolio.
Table 5 details the market value of foreign denominated securities by currency type in the CEF at June 30, 2010 and 2009.
TABLE 5 – INVESTMENTS DENOMINATED IN FOREIGN CURRENCY
|(Dollars in thousands)||
June 30, 2010
|Foreign Currency||Foreign Fixed Income||Foreign
|Alternatives and Other Investments|
|EURO (EUR)||$ 1,681||$ 52,258||$ 59,432|
|JAPANESE YEN (JPY)||-||40,845||13,273|
|INDIAN RUPEE (INR)||-||30,865||22,170|
|BRITISH POUND (GBP)||4,134||34,199||16,970|
|CHINESE RENMINBI (CNY)||-||43,613||7,511|
|BRAZILIAN REAL (BRL)||-||43,553||306|
|HONG KONG DOLLAR (HKD)||-||31,300||4,804|
|RUSSIAN RUBLE (RUB)||-||27,717||2,070|
|CANADIAN DOLLAR (CAD)||1,224||9,023||15,353|
|SWISS FRANC (CHF)||1,600||18,971||3,431|
|TAIWANESE DOLLAR (TWD)||3||19,845||2,648|
|SOUTH KOREAN WON (KRW)||-||18,897||867|
|SINGAPORE DOLLAR (SGD)||-||10,641||1,946|
|AUSTRALIAN DOLLAR (AUD)||-||7,159||4,436|
|25 OTHERS (<1.8% EXPOSURE)||-||77,545||20,999|
|TOTAL||$ 8,642||$ 466,431||$ 176,216|
The above schedule does not include $6,252 thousand of foreign investments held in the Invested Funds Pool or $16,598 thousand of U.S. Dollar denominated foreign mutual funds.
June 30, 2009
|Foreign Currency||Foreign Fixed Income||Foreign
|Alternatives and Other Investments|
|EURO (EUR)||$ 397||$ 40,985||$ 42,239|
|JAPANESE YEN (JPY)||-||48,803||14,984|
|CHINESE RENMINBI (CNY)||-||37,546||3,851|
|BRITISH POUND (GBP)||113||29,405||8,726|
|BRAZILIAN REAL (BRL)||-||25,017||9,100|
|INDIAN RUPEE (INR)||-||18,215||13,160|
|HONG KONG DOLLAR (HKD)||-||25,110||2,079|
|CANADIAN DOLLAR (CAD)||780||7,263||12,868|
|RUSSIAN RUBLE (RUB)||-||16,925||126|
|SINGAPORE DOLLAR (SGD)||-||14,551||1,133|
|SOUTH KOREAN WON (KRW)||-||15,164||(391)|
|TAIWANESE DOLLAR (TWD)||-||12,985||573|
|SWISS FRANC (CHF)||201||12,070||479|
|30 OTHERS (<2.0% EXPOSURE)||175||81,279||7,296|
|TOTAL||$ 1,666||$ 385,318||$ 116,223|
The above schedule does not include $7,117 thousand of foreign investments held in the Invested Funds Pool or $17,227 thousand of U.S. Dollar denominated foreign mutual funds.
The Metropolitan Tract, located in downtown Seattle, comprises approximately 11 acres of developed property, including office space, retail space, parking and a luxury hotel. This land was the original site of the University from 1861 until 1895 when the University moved to its present location. Since the early 1900’s, the Metropolitan Tract has been leased by the University to entities responsible for developing and operating the property.
On July 18, 1953, the Board of Regents of the University and the entity now known as Unico Properties, Inc. entered into a lease agreement for office, retail and parking facilities which will expire in 2014. On January 19, 1980, the Board of Regents of the University entered into a lease with the Urban/ Four Seasons Hotel Venture for the Olympic Hotel property, which will expire in 2040. The hotel was operated as the Four Seasons Olympic Hotel until July 31, 2003. On August 1, 2003, the remaining lease term was assigned to LHCS Hotel Holding (2002) LLC. The hotel was renamed the Fairmont Olympic Hotel and is now managed by Fairmont Hotels & Resorts.
The balances as of June 30, 2010 and 2009 represent operating assets, net of liabilities, and land, buildings and improvements stated at appraised value as of November 1, 1954. The balances also include subsequent capital additions and improvements at cost, less retirements and accumulated depreciation of $125,861,000 and $117,606,000, respectively, and are net of the outstanding balance of the line of credit described below.
In July 2004, the University obtained a 10-year term, variable rate revolving credit line for the Metropolitan Tract of up to $25,000,000 for capital repairs and improvements. The credit line is secured by future revenues of the Metropolitan Tract. As of June 30, 2010 and 2009, $8,500,000 was outstanding on the credit line.
Capital asset activity for the two-year period ended June 30, 2010 is summarized as follows:
|(Dollars in thousands)||BALANCE AT
JUNE 30, 2008
JUNE 30, 2009
JUNE 30, 2010
|LAND||$ 106,280||$ 6,405||$ -||$ 112,685||$ 1,959||$ -||$ 114,644|
|FURNITURE, FIXTURES AND EQUIPMENT||982,365||93,712||66,329||1,009,748||86,196||50,483||1,045,461|
|INTANGIBLES IN PROCESS||-||-||-||-||2,540||-||2,540|
|CONSTRUCTION IN PROGRESS||145,448||60,651||-||206,099||71,881||-||277,980|
|LESS ACCUMULATED DEPRECIATION/AMORTIZATION|
|FURNITURE, FIXTURES AND EQUIPMENT||773,962||83,840||61,439||796,363||80,813||49,901||827,275|
|CAPITAL ASSETS, NET||$ 2,714,429||$ 130,811||$ 5,339||$ 2,839,901||$ 118,942||$ 1,066||$ 2,957,777|
Long-term liability activity for the two-year period ended June 30, 2010 is summarized as follows:
|(Dollars in thousands)||BALANCE AT
JUNE 30, 2008
JUNE 30, 2009
JUNE 30, 2010
|GENERAL OBLIGATION BONDS PAYABLE (NOTE 11)||$ 254,404||$ -||$ 14,418||$ 239,986||$ 31,040||$ 45,124||$ 225,902||$ 11,719||$ 12,433|
|REVENUE BONDS PAYABLE (NOTE 11)||652,800||75,835||16,195||712,440||77,710||16,835||773,315||17,335||19,000|
|UNAMORTIZED PREMIUM ON BONDS||15,433||-||1,647||13,786||2,271||1,799||14,258||1,608||1,808|
|TOTAL BONDS PAYABLE||922,637||75,835||32,260||966,212||111,021||63,758||1,013,475||30,662||33,241|
|NOTES PAYABLE AND CAPITAL LEASES:|
|NOTES PAYABLE & OTHER – CAPITAL ASSET RELATED
|NOTES PAYABLE & OTHER – NONCAPITAL ASSET RELATED
|CAPITAL LEASE OBLIGATIONS (NOTE 10)||24,482||702||11,162||14,022||5,391||8,155||11,258||6,952||6,019|
|TOTAL NOTES PAYABLE AND CAPITAL LEASES||61,516||3,747||15,369||49,894||8,653||11,423||47,124||10,923||11,871|
|OTHER LONG-TERM LIABILITIES:|
|CHARITABLE AND DEFERRED GIFT ANNUITY LIABILITY||38,080||1,023||9,783||29,320||956||-||30,276||8,965||4,891|
|POLLUTION REMEDIATION LIABILITY (NOTE 1)||6,000||580||-||6,580||-||580||6,000||580||-|
|SICK LEAVE (NOTE 1)||25,965||4,026||-||29,991||-||977||29,014||1,054||488|
|SELF-INSURANCE (NOTE 17)||47,515||14,606||10,471||51,650||21,272||15,298||57,624||8,188||12,885|
|NET PENSION OBLIGATION (NOTE 16)||21,477||26,080||745||46,812||26,080||2,217||70,675||763||1,481|
|TOTAL OTHER LIABILITIES||139,037||46,315||20,999||164,353||48,308||19,072||193,589||19,550||19,745|
|TOTAL LONG-TERM LIABILITIES||$ 1,123,190||$ 125,897||$ 68,628||$ 1,180,459||$ 167,982||$ 94,253||$ 1,254,188||$ 61,135||$ 64,857|
Future minimum lease payments under capital leases, and the present value of the net minimum lease payments, as of June 30, 2010, are as follows:
|Year (Dollars in thousands)||Future
|TOTAL MINIMUM LEASE PAYMENTS||11,826|
|LESS: AMOUNT REPRESENTING INTEREST COSTS||568|
|PRESENT VALUE OF MINIMUM PAYMENTS||$ 11,258|
Buildings and equipment under capital lease were as follows:
|(Dollars in thousands)||Balance at
June 30, 2008
June 30, 2009
June 30, 2010
|EQUIPMENT||$ 63,467||$ 702||$ 12,177||$ 51,992||$ 5,391||$ 23,197||$ 34,186|
|LESS ACCUMULATED DEPRECIATION|
|TOTAL ACCUMULATED DEPRECIATION||65,161||7,127||12,177||60,111||2,550||23,197||39,464|
|LEASED CAPITAL ASSETS, NET||$ 8,293||$ (6,425)||$ -||$ 1,868||$ 2,841||$ -||$ 4,709|
The University has certain lease agreements in effect that are considered operating leases, primarily for leased building space. During the years ended June 30, 2010 and 2009, the University recorded rent expenses of $27,169,000 and $29,024,000, respectively, for these leases. Future lease payments under these leases as of June 30, 2010 are as follows:
Year (Dollars in Thousands)
|2016 – 2020||44,801|
|2021 – 2025||26,672|
|2026 – 2030||27,547|
|2031 – 2052||42,924|
|TOTAL MINIMUM LEASE PAYMENTS||$ 234,211|
Bonds and Notes Payable
The bonds and notes payable at June 30, 2010 consist of state of Washington General Obligation and Refunding Bonds, University Revenue Bonds, and Notes Payable. These obligations have fixed interest rates ranging from 3.00% to 7.38%. Debt service requirements at June 30, 2010 were as follows:
BONDS AND NOTES PAYABLE (Dollars in thousands)
STATE OF WASHINGTON
UNIVERSITY OF WASHINGTON
|2011||$ 12,433||$ 11,346||$ 19,000||$ 36,443||$ 5,852||$ 1,395|
|2016 – 2020||77,370||28,993||117,335||147,499||11,393||2,865|
|2021 – 2025||60,610||12,111||103,050||122,220||5,660||582|
|2026 – 2030||16,809||1,344||85,225||97,830||369||14|
|2031 – 2035||-||-||51,350||75,804||-||-|
|2036 – 2040||-||-||311,975||31,922||-||-|
|TOTAL PAYMENTS||$ 225,902||$ 92,070||$ 773,315||$ 648,142||$ 35,866||$ 8,925|
State law requires that the University reimburse the state for debt service payments relating to its portion of the state of Washington General Obligation and Refunding Bonds from Medical Center patient revenues, tuition, timber sales and other revenues. The University has pledged the net revenues from the Housing and Dining System, the Parking System and a special student fee to retire the related revenue bonds.
On July 8, 2009, the state of Washington refunded General Obligation Bonds totaling $29,780,000 (UW portion) with new bond issuances with a par value of $27,430,000 and premium of $2,637,000. The refunded bonds had coupon rates ranging from 3.50% to 5.00%; the new bonds have an average interest rate of 4.871%. The refunding decreased the total debt service payments to be made over the next 14.5 years by $3,318,000 and resulted in a total economic gain of $2,582,000.
On October 28, 2009, the state of Washington refunded General Obligation Bonds totaling $3,715,000 (UW portion) with new bond issuances with a par value of $3,610,000 and premium of $394,000. The refunded bonds had a coupon rate of 5.25%; the new bonds have an average interest rate of 5.00%. The refunding decreased the total debt service payments to be made over the next 16 years by $319,000 and resulted in a total economic gain of $252,000.
On June 15, 2010, the state of Washington refunded Certificates of Participation (COP) totaling $4,455,000 with new COP issuances with a par value of $4,485,000 and premium of $39,000. The refunding decreased the total debt service payments to be made over the next 11 years by $671,000 and resulted in a total economic gain of $609,000.
SUBSEQUENT DEBT OFFERING
On August 10, 2010, the state of Washington partially refunded series 2002A & Series 2002B General Obligation Bonds totaling $32,975,000 (UW portion) with new bond issuances with a par value of $29,840,000 and premium of $4,894,000. The refunded bonds had a coupon rate of 5.00%; the new bonds have an average interest rate of 5.00%. The refunding decreased the total debt service payments to be made over the next 14.5 years by $4,008,000 and resulted in a total economic gain of $3,621,000.
On September 28, 2010, the state of Washington refunded General Obligation Bonds totaling $19,795,000 (UW portion) with new bond issuances with a par value of $18,865,000 and premium of $2,869,000. The refunded bonds had coupon rates ranging from 4.00% to 5.00%; the new bonds have an average interest rate of 4.802%. The refunding decreased the total debt service payments to be made over the next 16.3 years by $2,539,000 and resulted in a total economic gain of $1,891,000.
On October 5, 2010, the University issued $165,005,000 in General Revenue & Refunding Bonds, 2010 A&B. Part of the proceeds were used to partially refund the 2002 Housing and Dining Revenue & Refunding bonds.The amount refunded was $10,890,000; the new par value was $10,400,000 with a premium of $605,000. The refunded bonds had coupon rates ranging from 4.75% to 5.375%; the new bonds have an average interest rate of 3.943%. The refunding decreased the total debt service payments to be made over the next 21 years by $991,000 and resulted in a total economic gain of 640,000. In addition, proceeds were used to pay off $35,000,000 in commercial paper. The remainder of the proceeds will be used to fund a variety of projects including Tacoma Phase 3, Balmer Hall Renovation, UWMC Expansion, and Housing & Dining Phase 1 Master Plan. The average life of the 2010 A&B bonds (new money only) is 23.8 years with final maturity on October 1, 2040. The average coupon of these bonds is 4.91%.
In December, 2010, Washington Biomedical Research Facilities 3 has committed to issue approximately $165 million in lease revenue bonds. The bond proceeds will fund construction of a research facility that the University will occupy through a long-term lease arrangement.
COMMERCIAL PAPER PROGRAM
In July 2006, the Board of Regents authorized a commercial paper program with a maximum borrowing limit of $250,000,000, payable from University General Revenues. This short-term borrowing program is primarily used to fund capital expenditures. As of June 30, 2010 and 2009, there was $30,000,000 and $30,000,000, respectively, in outstanding commercial paper.
On September 3, 2009, the University issued $2,000,000 in short-term commercial paper. The commercial paper was paid off with proceeds from the General Revenue Bond, 2009B, issued on December 22, 2009.
Between July 1, 2010 and September 30, 2010, the University issued $35,000,000 in short-term commercial paper. The commercial paper was paid off with proceeds from the issuance of General Revenue & Refunding Bonds,2010 A&B.
The University has pledged specific revenues, net of specified operating expenses, to repay the principal and interest of revenue bonds. The following is a schedule of the pledged revenues and related debt:
* Total future principal and interest payments on the debt
|Source of Revenue Pledged (Dollars in thousands)||Total Future
|Description of Debt||Purpose of Debt||Term of
|Proportion of Debt Service to Pledged Revenues (current year)|
|Housing and Dining Revenues, net of operating expenses||$43,680||Housing and Dining Bonds, issued in 2002 and 2004||Construction and renovation of student housing||2032||15.8%|
|Student Housing gross rent from Component Unit Entities, net of permitted operating expenses||$149,653||Student Housing Revenue Bonds (Component Unit Entities), issued in 1996, 2000, and 2002||Construction and renovation of student housing||2033||78.4%|
|Student Facilities Fees and earnings on invested fees||$68,419||Student Facilities Refunding Revenue Bonds, issued in 2005||Construction of student facilities||2030||20.0%|
|Parking Revenues from the University Parking System, net of operating expenses – reported as Auxiliary Revenues||$26,770||University of Washington Parking System and Refunding Bonds, issued in 2004||Construction of improvements and additions to the University's parking system||2030||14.0%|
Operating Expenses by Function
Operating expenses by functional classification for the years ended June 30, 2010 and 2009 are summarized as follows:
|Operating Expenses (Dollars in thousands)||2010||2009|
|EDUCATIONAL AND GENERAL INSTRUCTION||$ 904,812||$ 908,394|
|OPERATION & MAINTENANCE OF PLANT||155,188||178,131|
|SCHOLARSHIPS & FELLOWSHIPS||93,219||71,394|
|TOTAL OPERATING EXPENSES||$ 3,492,655||$ 3,428,960|
Harborview Medical Center (HMC), a hospital and Level I adult and pediatric trauma center in Seattle, is a component unit of King County, Washington. It has been managed by the University under a management contract between King County and the University since 1967. The current management contract will be in force through June 30, 2015.
Under the contract, the HMC Board of Trustees determines major institutional policies and retains control of programs and fiscal matters, while King County retains ultimate control over capital programs and capital budgets. The University is responsible for the operations of HMC, including the provision of medical, dental and management services. All of the individuals employed at HMC, including physicians, are employees of the University of Washington. HMC expenses, including payroll, are reimbursed to the University from HMC fund sources.
HMC revenues and expenses are not recognized in the University's financial statements. The University's financial statements do, however, include accounts receivable from HMC of $24,501,000 in 2010 and $21,715,000 in 2009, as well as HMC investments of $2,411,000 and $2,125,000, respectively, and accrued liabilities of $17,288,000 and $16,012,000, respectively.
The University of Washington Foundation (UWF) is a nonprofit organization that performs fundraising activities on behalf of the University of Washington. The UWF is not included in the University's financial statements as a component unit because gifts and grants that are made to the UWF are immediately transferred to the University. In 2010 and 2009, the UWF transferred $43,831,000 and $46,393,000, respectively, to the University in gifts and grants received on its behalf; these are included in the financial statements of the University. The remaining amounts retained by the UWF are not significant to the University's financial statements.
AIRLIFT NORTHWEST– SUBSEQUENT EVENT
On July 1, 2010, Airlift Northwest, a preeminent provider of air medical services in the Pacific Northwest, dissolved its separate 501(c)(3) status and became a self-sustaining unit of the University of Washington.
Other Post Employment Benefits (OPEB)
Health care and life insurance programs for employees of the state of Washington are administered by the Washington State Health Care Authority (HCA). The HCA calculates the premium amounts each year that are sufficient to fund the statewide health and life insurance programs on a pay-as-you-go basis. These costs are passed through to individual state agencies based upon active employee headcount; the agencies pay the premiums for active employees to the HCA. The agencies may also charge employees for certain higher cost options elected by the employee.
State of Washington retirees may elect coverage through state health and life insurance plans, for which they pay less than the full cost of the benefits, based on their age and other demographic factors.
The health care premiums for active employees, which are paid by the agency during employees’ working careers, subsidize the “underpayments” of retirees. An additional factor in the OPEB obligation is a payment that is required by the State Legislature to reduce the premiums for retirees covered by Medicare (an “explicit” subsidy). For calendar year 2009, this amount was $183 per retiree eligible for parts A and B of Medicare. This is also passed through to state agencies via active employee rates charged to the agency.
There is no formal state or University plan that underlies the subsidy of retiree health and life insurance.
Actuarial studies performed by the Washington Office of the State Actuary calculated that the total OPEB obligation of the state of Washington at January 1, 2009 and 2008 was $3.8 billion and $4.0 billion, respectively. The annual cost was $349 million and $332 million for 2010 and 2009, respectively. The actuary calculated the OPEB obligation based on individual state employee data, including age, retirement eligibility and length of service. The probability of an employee of a given age and length of service retiring and receiving OPEB benefits is based on statewide historical data.
The actuary’s allocation of the cumulative statewide liability related to the University, including its unconsolidated affiliates, was estimated at approximately $636 million and $590 million for 2010 and 2009, respectively. These amounts are not included in the University’s financial statements.
The University paid $250 million and $186 million for healthcare expenses in 2010 and 2009, respectively, which included its pay-as-you-go portion of the OPEB liability, calculated by the actuary at $6.5 million and $6.9 million in 2010 and 2009, respectively.
The State Actuary's report is available at: http://osa.leg.wa.gov/Actuarial_Services/OPEB/OPEB.htm
The University offers two contributory plans: the Washington State Public Employees Retirement System (PERS) plan, a defined-benefit retirement plan; and the University of Washington Retirement Plan (UWRP), a defined-contribution plan with supplemental payments to beneficiaries, when required.
PUBLIC EMPLOYEES RETIREMENT SYSTEM
Plan Description: The University of Washington contributes to PERS, a cost sharing, multiple-employer, defined-benefit pension plan administered by the state of Washington Department of Retirement Systems. PERSPlan 1 provides retirement and disability benefits and minimum benefit increases beginning at age 66 to eligible nonacademic plan members hired prior to October 1, 1977. PERS Plans 2 and 3 provide retirement and disability benefits and a cost-of-living allowance to eligible nonacademic plan members hired on or after October 1, 1977. In addition, PERS Plan 3 has a defined-contribution component, which is fully funded by employee contributions. The authority to establish and amend benefit provisions resides with the legislature. The Washington State Public Employees Retirement System issues a publicly available financial report that includes financial statements and required supplementary information for PERS. The report may be obtained by writing to the Department of Retirement Systems, P.O. Box 48380, Olympia, WA 98504-8380, or visiting http://www.drs.wa.gov/administration/
Funding Policy: The Office of the State Actuary, using funding methods prescribed by statute, determines actuarially required contribution rates for PERS. Plan 1 members were required to contribute 6% of their annual covered salary in both fiscal years 2010 and 2009. Contributions for Plan 2 members are determined by the aggregate method, and may vary over time. The contribution rate for Plan 2 employees at June 30, 2010 and 2009 was 3.9% and 5.45% respectively. Plan 3 members can choose contributions ranging from 5% to 15% of salary, based on the age of the member. The defined-contribution benefit for PERS 3 will depend on the member's contributions, the investment earnings on those contributions, and if an annuity is taken, the age at which the member receives payment. The contribution rate for the University at June 30, 2010 and 2009, for each of PERS Plans 1, 2, and 3 was 5.31% and 8.31%, for the respective years.
The University's contributions to PERS for the years ended June 30, 2010, 2009, and 2008 were $41,680,000, $64,169,000, and $45,351,000, respectively, which were equal to the annual required contributions for each year.
UNIVERSITY OF WASHINGTON RETIREMENT PLAN (403(B)) & UNIVERSITY OF WASHINGTON SUPPLEMENTAL RETIREMENT PLAN (401(A))
Faculty, librarians and professional staff are eligible to participate in the University of Washington Retirement Plan, a 403(b) defined- contribution plan and the UW Supplemental Retirement Plan, a 401(a) defined-benefit retirement plan which operates in tandem with the 403(b) plan. Both plans are administered by the University.
403(b) Plan Description: Contributions to the plan are invested by participants in annuity contracts or mutual fund accounts offered by one or more fund sponsors. Employees have at all times a 100% vested interest in their accumulations. Benefits from fund sponsors are available upon separation or retirement at the member's option. RCW 28B.10.400 et. seq. assigns the authority to the University of Washington Board of Regents to establish and amend benefit provisions.
403(b) Funding Policy: Employee contribution rates, based on age, are 5%, 7.5% or 10% of salary. The University matches the contributions of employees. Within parameters established by the legislature, contribution requirements may be established or amended by the University of Washington Board of Regents. Employee and employer contributions for the years ended June 30, 2010 and 2009 were $80,018,000 and $76,878,000, respectively.
401(a) Plan Description: This plan provides for a supplemental payment component, which guarantees a minimum retirement benefit based upon a one-time calculation at each eligible participant's retirement date. The University makes direct payments to qualifying retirees when the retirement benefits provided by the 403(b) plan do not meet the benefit goals.
401(a) Plan Funding: The supplemental component of the UWRP is financed on a pay-as-you-go basis. The University received an actuarial valuation of the supplemental payment component of the UWRP with a valuation date of July 1, 2009. The previous evaluations were performed in 2007 and 2004.
The Unfunded Actuarial Accrued Liability (UAL) and Annual Required Contribution (ARC) as of July 1 of the respective year were:
|(Dollars in thousands)||2009||2007||2004|
The UAL and ARC were established using the entry age normal cost method.
|UAL||$ 218,036||$ 64,215||$ 32,454|
|AMORTIZATION OF UAL, INCLUDING INTEREST||17,220||4,374||1,993|
|ARC||$ 26,080||$ 7,743||$ 3,363|
|Actuarial assumptions (Dollars in thousands)||2009||2007||2004|
|PAYROLL COVERED BY PLAN||$ 976,000||$ 771,000||$ 640,000|
|RATE OF RETURN ASSUMPTION||5%||5%||4%|
|SALARY INCREASES FOR YEARS 1 AND 2||2%||4%||2%|
|SALARY INCREASE FOR THIRD YEAR||4%||4%||2%|
|SALARY INCREASES THEREAFTER||4%||4%||4%|
The following table reflects the activity in the Net Pension Obligation for the years ended June 30, 2010, 2009, and 2008:
|(Dollars in thousands)||2010||2009||2008|
|BALANCE AT BEGINNING OF FISCAL YEAR||$ 46,812||$ 21,477||$ 14,515|
|ANNUAL REQUIRED CONTRIBUTION||26,080||26,080||7,743|
|PAYMENTS TO BENEFICIARIES||(2,217)||(745)||(781)|
|BALANCE AT END OF FISCAL YEAR||$ 70,675||$ 46,812||$ 21,477|
Commitments and Contingencies
Authorized expenditures for construction projects unexpended as of June 30, 2010 and 2009, were $263,779,000 and $158,014,000, respectively. These expenditures will be funded from local funds and state appropriations.
The University receives and expends substantial amounts under federal and state grants, contracts and programs such as Medicare. This funding is used for research, student aid, Medical Center operations and other programs, and is subject to audit by governmental granting agencies. Certain grant and contract costs billed to the federal government are subject to audit under OMB Circular A-133, “Audits of States, Local Governments, and Non-Profit Organizations.” The University is also involved in various other claims and legal actions arising in the ordinary course of business. University management believes that any liabilities arising from these matters will not have a material effect on the University's financial statements.
The University is exposed to risk of loss related to tort liability, injuries to employees and loss of property. The University purchases insurance protection for workers' compensation as well as marine, aviation and certain other risks. The University also purchases insurance protection for loss of property at self-sustaining units, bond-financed buildings and where otherwise required by contract; otherwise, the risk of property loss is retained, unfunded. For professional, general, employment and automobile liability, the University maintains a program of self-insurance reserves and excess insurance coverage. The self-insurance reserve represents the estimated ultimate cost of settling claims resulting from events that have occurred on or before the balance sheet date. The reserve includes the amount that will be required for future payments of claims that have been reported and claims related to events that have occurred but have not been reported. The reserve is discounted at 4% and 4.25% in the years ended June 30, 2010 and 2009, respectively.
The self-insurance reserve is estimated through an actuarial calculation. Changes in the self-insurance reserve for the years ended June 30, 2010, 2009 and 2008 are noted below:
|(Dollars in thousands)||2010||2009||2008|
|RESERVE AT BEGINNING OF FISCAL YEAR||$ 51,650||$ 47,515||$ 40,133|
|INCURRED CLAIMS AND CHANGES IN ESTIMATES||21,272||14,606||13,286|
|RESERVE AT END OF FISCAL YEAR||$ 57,624||$ 51,650||$ 47,515|