The Ohio State University Board of Trustees
Fiscal Affairs Committee
Audit and Compliance Committee
November 6, 2008
TOPIC:
Annual and Quarterly Financial Report
CONTEXT:
At this time each year the Board receives a combined Year End and First Quarter Financial Report
from the Chief Financial Officer.
SUMMARY:
Because of the unusual financial environment across the country, this report is
presented in a modified format. Reports on year end and first quarter have been
summarized and a new section on prospects for FY 2010 and beyond has been
added.
CONSIDERATIONS:
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Are the results for FY 2008 and First Quarter 2009 clear and complete?
Are the issues identified for FY 2010 clear and complete?
How does what we are doing compare with our benchmarks?
Is there any additional information the Committees would like to have?
What happens next?
REQUESTED OF FISCAL AFFAIRS and AUDIT AND COMPLIANCE COMMITTEES:
For information and discussion only. No vote required.
Subject:
Annual Financial Report
Date:
October 29, 2008
From:
William Shkurti
To:
Gordon Gee
The purpose of this report is to give you a sense of how we ended FY 2008 financially, to share
with you the results from the First Quarter of FY 2009, and then to discuss emerging issues for the year
ahead. This document has also discussed with the Integrated Financial Planning Group.
The University's financial results for both FY 2008 and the first quarter of FY 2009 show
stability in nearly every area. Consequently, except for the financial stress on the long term investment
pool caused by the decline in the stock market, the fallout to the University from the worldwide
economic turmoil has been minimal to this point. However, the longer the economic crisis continues,
the greater the risk of collateral damage to the University's financial stability and its support of core
academic functions. Therefore, this a particularly appropriate time to review potential financial risks
to make sure they are managed strategically so the University can continue to advance its academic
mission and take advantage of opportunities.
This report is structured differently than past reports. Financial results for FY 2008 year end
and the first quarter of FY 2009 are presented in summary form and a new section has been added
identifying the risks posed by economic uncertainty, along with possible strategies to address them.
Year End FY 2008
The University ended FY 2008 in a stable position. The status of each financial risk area is
summarized below.
 Health System exceeded its financial targets in all three measures (margin, cash on hand
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and debt coverage).
Enrollments on the Columbus Campus exceeded both the previous year totals and budget
projections.
State support increased significantly.
Both externally funded research grants and private gifts increased.
The long term investment pool declined 8% because of the decline in the stock market.
The deficit in Student Financial Aid was reduced dramatically and should be eliminated
entirely by FY 2010, two years ahead of schedule. Large deficits in the College of Math
and Physical Sciences and the Heart and Lung program continue to be a concern, but are
being addressed.
All major auxiliaries (Recreational Sports, Students Life and Athletics) met or exceeded
budgets.
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 Debt remained within approved limits.
 All regional campuses ended the year with positive balances, as did the Hawk's Nest Golf
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Course.
Most affiliated entities are stable financially. However, UMC Partners/Prologue, Campus
Partners and SciTech merit additional review.
Reserves are very close to target in General Funds and over target in restricted funds.
The SIS installation continues on time and on budget, with 12 months remaining.
All major capital projects in the construction phase (including the Library and the Ohio
Union) are on time and on budget; however, carryover issues remain with the private fund
raising portion of several legacy projects.
Most of the financial targets approved by the Board in June 2008 were met except for the
SB6 score (see Attachment A) and the debt service coverage. Both of these declined
primarily due to net investment losses. However, even though an SB6 score of 3.4 is below
the target of 3.6, it is still well above the 1.8 minimum threshold established by the State of
Ohio. The decline in the debt service coverage is more marked, but is based on the
Moody's median, which means other universities are likely facing similar drops. All three
credit rating agencies did reaffirm an AA2 rating or its equivalent for the University in
September.
A more complete report of year end financials can be found on the Resource Planning website.
First Quarter FY 2009
The first quarter of FY 2009 (July 1 – September 30, 2008) got off to a good start in most areas.
First quarter enrollment was up over last year and over projected headcounts, essentially because of
higher numbers of returning students and transfer students at the undergraduate level. The Health
System performed better than budgeted in the three financial target areas, although volume at the Ross
Heart Hospital was below target.
Most of the areas under the University's control continue to perform well, but there are several
areas that merit additional discussion. These are state support, investments, student loans, fundraising
for capital projects, general fund deficits, bond sales and cash management, and selected affiliated
entities.
State Support
In September, Governor Strickland directed that most state appropriations be cut by 4.75% to
deal with a growing projected budget deficit. Fortunately, the Governor protected the State Share of
Instruction so that state universities, including Ohio State, could continue the second year of the
resident undergraduate tuition freeze. However, other state line items were cut, including several that
affected Ohio State, such as OARDC, Cooperative Extension, the Glenn Institute and various medical
support line items. The total cost of those reductions to Ohio State campuses will be $6.1 million,
almost half of which are related to agriculture. Since the fiscal year is not yet half over and the
economy continues to decline, the possibility of additional cuts cannot be ruled out.
Investments
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As mentioned previously, the long term investment pool returned a negative 8.2% in FY 2008.
For the first quarter of FY 2009, the loss is nearly 12%. October was the worst month for the stock
market in recent memory. The University's new Chief Investment Officer, Jonathan Hook, arrived on
campus August 1. He has already taken steps to diversify investments and improve returns, but it is
important to remember that the focus for the long term pool is the long term and it will take some time
for the changes Jon is making to be reflected in the fund's performance. Meanwhile, the Investments
Office will seek to use this environment as an opportunity to make selective investments and
strategically rebalance the portfolio.
Student Loans
The impact of the credit crisis on loans for Ohio State students has been muted because Ohio
State has been a participant in the U.S. Department of Education's direct lending program, which has
not been affected. However, due to previous federal policy changes regarding consolidations and
slower repayments, there may be less money available under the Perkins Loan Program. Perkins loans
account for less than 3% of OSU's loan volume. Stafford loans, which are not affected, make up the
remainder. This issue is currently under review for corrective action.
General Fund Deficits
The stabilization of the General Fund Financial Aid accounts was a significant positive event.
However, three other large deficits continue to be a concern:
 The College of Math and Physical Sciences has an accumulated deficit of $23 million as of
June 30. The new leadership team in the college has developed a plan to eliminate the
deficit by 2014. That plan has been approved.
 The Heart and Lung Institute had a year end deficit of $7 million. A deficit reduction plan
is being prepared.
 The College of Engineering ended FY 2008 with a deficit of $3.9 million in its central
operations. A plan to eliminate that deficit is being prepared.
Fundraising for Capital Projects
Appendix B summarizes the status of legacy fundraising shortfalls. Unfortunately, little
progress was made in FY 2008, except for the Thompson Library Renovation where a generous $9
million commitment from the Department of Athletics allowed that campaign to be successfully
closed.
Two large projects coming forward, the Medical Center Master Facilities Plan and the
Chemical Engineering Expansion, have significant fundraising components. Consequently, we need to
make sure the Board policy that requires 75% of the fundraising target be on hand in the form of cash
or written pledges is met prior to proceeding to construction.
Bond Sales and Cash Management
The University has over $400 million in variable rate debt. This represents about 40% of the
outstanding debt. Because of the University's strong credit rating and high liquidity, Ohio State did not
suffer the same fate as many other tax-exempt entities. We did not pay rates as high as 10%, we did
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not have most of our bonds tendered back to us, and all of our bonds have been successfully
remarketed. On September 30th, the University issued $127.8 million in variable rate bonds. Due to
market volatility, the bonds were issued in "term mode" with a maturity date of January 14, 2009 at a
rate of 3.75%. It is our expectation that at maturity in January, the bonds will be reset in our typical
"weekly reset mode". $81 million of the proceeds were used to retire the outstanding commercial
paper program, with the remaining proceeds to be used to pay issuance costs and be available to pay
Board approved bond projects.
The fixed rate bond issue of $240 million was scheduled to be priced on October 14th. We have
decided to postpone that issue indefinitely due to market volatility. Tax-exempt long term interest
rates rose over 1.5 percent between the middle of September and the middle of October. We will wait
until tax-exempt rates approach a more reasonable level before issuing. Prior to our bond issuance, all
three rating agencies affirmed our AA/AA2 ratings with a stable outlook.
The University had approximately $57 million of its $850 million short term portfolio invested
with the Common Fund when the fund was frozen by its trustee, Wachovia Bank, at the end of
September. These funds are now being liquidated. As of this date, about $17 million, or 30% of the
investment has been returned. We expect to receive most of the remaining money over the next 12
months. Because our portfolio is diversified we do not expect an impact on our financial operations at
this point.
Affiliated Entities
As mentioned previously, most of our affiliated entities are in good shape financially; however,
some will require additional attention.
 UMC Partners has been dissolved and the carryover deficit assigned to the Medical Center.
Prologue, a self-sustaining, for profit clinical trials organization, has market value. Our
hope is to continue to strengthen Prologue to make it an attractive candidate to eventually
sell to an appropriate buyer.
 Campus Partners has been successful programmatically, but has not met all of the
University's expectations regarding its financial goals. Consequently, the business model is
under review by the University in collaboration with Campus Partners' management and its
Board.
 SciTech has made all required payments to the university and equity remains positive;
however, financial strength has eroded and the SciTech Board has taken this issue under
review.
FY 2010 and Beyond
The University is reasonably well prepared to address the economic challenges remaining in
FY 2009, assuming no additional major negative economic news. However, this does not mean we
can afford to be complacent about FY 2010 and beyond. If the credit crisis is not resolved, we could
face slowdowns in needed capital investments. Even if the credit crisis is resolved, we could face the
consequences of a long worldwide recession. The University has survived prolonged downturns before
– most recently 1980-1982, 1991-1993 and 2002-2003, but in all three cases the University was
required to make major adjustments in management philosophy, organization and financing of
University activities. Consequently, this portion of the memo is focused on what needs to be done
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over the next six months to prepare for 2010 and beyond. The structure of this section is organized by
revenue source, expense and compensating event as summarized in Attachment C. This is intended to
be the starting point for a discussion rather than a final recommendation.
Revenues
The biggest challenge here is a precipitous decline in state support, similar to reductions in
previous downturns. Fortunately, the University is less dependent on state support today than 10 or 20
years ago, but it is also more difficult to make up the loss of state revenue through tuition increases.
Consequently, we need to work with state officials to make sure they understand the relationship
between the two. In addition, if state support is declining, the state needs to provide more relief from
burdensome and duplicative state regulations, such as restrictions on the use of construction delivery
methods widely used in private industry.
In past downturns, enrollments have gone up, presenting the opportunity to generate additional
tuition revenue. However, we do not know how declining home prices and other pressures on family
income will affect ability to pay. The University should be better positioned than many of its
competitors because we are a direct lender, but it still may make sense for the University to target
additional financial aid, similar to the emergency aid fund the University used successfully during the
Asian financial crisis of the 1990's.
An economic downturn is almost always preceded by a stock market collapse and that pattern
has certainly held at this point. Fortunately, the University's long term investment fund is intended for
the long term, but the short term consequences of reduced distributions on unit budgets and the
President's Strategic Investment fund need to be addressed.
It is also likely that a downturn will adversely affect revenues of the University's selfsupporting auxiliaries. For example, receivables may go up for the Health System if patients lose
insurance coverage, conference business may decline at the Blackwell and Athletics could see a
flattening in corporate sponsorships. All of these units are currently healthy financially and have some
reserves set aside, but the University and management will need to closely work together to make sure
they remain financially strong.
Expenses
The uncertainty on the income side means the University will have to devote more effort to
controlling expenses. One area we have already targeted is outdated facilities. Plans are underway to
selectively demolish buildings that are no longer worth saving, such as Lord hall and Brown Hall.
This will not only save money in utility and maintenance costs, but will open up opportunities for more
efficient use of land and space.
A second area of savings involves strategic purchasing, benefit costs and energy savings. We
have an opportunity to build on successful efforts already begun, while seeking additional new
opportunities.
Difficult decisions lie ahead regarding capital projects. The University cannot afford to stop
everything, nor can it afford to proceed with business as usual. The University also needs to take a
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look at affiliated entities to determine which ones need to become more self-supporting, down-sized or
eliminated.
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Reserves
The University has set aside various reserves to address economic uncertainty (see Attachment
D). In July, the Board of Trustees approved holding back $10 million in continuing General Funds
generated by higher than expected enrollments for this purpose. This income is the equivalent of a
$250 million unrestricted endowment or 3% of our annual state share of instruction appropriation.
While these funds will help address uncertainty for FY 2009, they are not likely to be sufficient to
address a long term downturn. The University also has a $13.5 million rainy day fund and a $64
million debt service stabilization reserve, but both of these are one-time funds, so once they are
expended, they are gone.
Compensating Events
The turmoil associated with a downturn may also provide some opportunities. A sagging
economy will most likely exert downward pressure on prices, as well as create other opportunities.
The University needs to be prepared to address these on a strategic basis, perhaps increasing
investment in some areas, while decreasing investment in others. For example, the Office of Research
is establishing an Industry Liaison Office to help diversity our research portfolio. As industry
downsizes its internal research and development operations in response to economic pressures, this
increases OSU's opportunities to form industry-university partnerships.
Conclusions
The short term impact of the current economic crisis on the University has been noticeable, but
manageable. It is most evident in the following areas:
 $6 million cut in state line item appropriations, particularly for agriculture.
 Significant unrealized losses in the long term investment portfolio due to the precipitous
decline in stock prices.
 Placement of the variable rate portion of the CY 2008 bond issue at a slightly higher
interest rate.
 A temporary (hopefully) delay in the fixed rate portion of the bond issue planned for CY
2008.
 A portion of the cash pool tied up in the Common Fund, which should hopefully be
recovered in full over the nest several months.
There are also assets available to the University that will help us manage these challenges over
the short run, including:
 Solid financial standing for the University overall, including higher than expected fall
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enrollments and stable finances in the Medical Center.
Governor's efforts to protect State Share of Instruction from budget reductions.
OSU's participation in the direct lending program.
Confirmation of the University's AA2 credit rating.
Appropriate management of reserves.
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The longer term picture (FY 2010 and beyond) is much more uncertain, but the University
possesses the assets, the leadership and the determination to continue to improve academically under a
variety of circumstances.
Clearly, the events of the last two months have created a series of serious challenges that are
not yet fully understood. The University cannot afford to continue business as usual under these
circumstances, nor can it afford to react hastily or hunker down in fear. We have substantial resources
to apply. Our size and revenue diversity can be allies in circumstances such as these.
My colleagues on the Integrated Financial Planning team have discussed this at length and have
agreed to recommend that we make shaping the University's response to this crisis our first priority for
the next 60 days, so that by the time the mid-year financial report is due in early February, we will be
able to report on how the University can continue to move ahead in FY 2010 and beyond.
If you would like any additional information or would like to discuss this further with the
Integrated Financial Planning Group, please feel free to call on us.
Attachments
c:
Joe Alutto
Steve Gabbe
Chip Souba
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Attachment A
Status of Financial Performance Goals
The Ohio State University
Financial Performance Goals
Annual Scorecard
Category
Liquidity
Primary Reserve Ratio
Rainy Day Fund
Operating Margin
General Fund2
Target
Performance
In FY 2007
Performance
In FY 2008
At least 150 days of cash1
150 Days
145 days
At least 1% of General
Fund
1.1%
1.1%
At least 1%
4.6%
2.8%
At least 1.0X
No greater than 4.0%
At least 3.0X
2.6X
2.2%
6.3X
2.6X
2.1%
0.7X
4.2
3.4
Debt
Total Financial Resources to Direct Debt3
Actual Debt Service to Operations3
Debt Service Coverage3
SB6 Ratio4
At least 3.6
Credit Rating3
At least AA2
AA2
AA2
Health System
Operating EBIDA Margin5
10.0 – 12.5%
12.1%
12.1%
+6.4 days
7.7X
+5.1 days
7.3X
Days of Cash on Hand
Debt Service Coverage
Increase by 3-5 days
annually
At least 4X
Office of Business and Finance
10/22/08
1
In this case, cash means expendable net assets. This includes cash, liquid investments and current receivable minus
current payable.
2
The operating margin in FY 2007 was unusually high. Some FY 2007 expenditures were carried over to FY 2008
resulting in a decrease in the operating margin more in line with the recent trend.
3
Moody's definitions. The decrease in debt service coverage is due to unrealized investment losses of the endowment. The
endowment return went from 18% in FY 2007 to -8% in FY 2008.
4
State of Ohio definition
5
EBIDA means earnings before interest, depreciation and amortization.
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Attachment B
FY 08 Status of Development Efforts for Projects with a significant
Development Funding Component
Development
Funds Required
(Millions)
Total
thru FY07
(Millions)
Total
in FY08
(Millions)
Total
thru FY08
(Millions)
Remaining
Balance
(Millions)
Comments
Biomedical Research
Tower
$25.0
$7.6
$0.1
$7.7
$17.3
Note 1
Jennings Hall
Renovation
$5.0
$4.0
$0.1
$4.1
$0.9
Knowlton School of
Architecture
$20.0
$18.4
$0.3
$18.7
$1.3
Mech. Engineering
Replacement
$22.0
$16.2
$0.4
$16.6
$5.4
Page Hall Renovation
$5.0
$1.6
$0.05
$1.65
$3.35
Thompson
Library Renovation
$30.0
$23.8
$6.2
$30
$0
Project
Note 2
Note 1
The funding of the remaining balance for this project is under review with the Medical Center and the Office of
Development in conjunction with the development of the fund-raising plan for the Medical Center Master Facility Plan.
Note 2
Total includes $19M in private gifts, $9M transfer from Athletics, and $2M from University funds.
The information for this chart was received from University Development
Office of Business and Finance
10/22/08
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Attachment C
Summary of Potential Impact of Economic Turbulence
and Possible Response
Area
Additional Risk
Countermeasure
Revenue
Health System
Increased Accounts Receivable
Circuit Breakers
Enrollments
Ability to Pay
Targeted Financial Aid
State Support
Mid-Year State Budget Reductions
FY 2008 Carryover/Rainy Day Fund
Research
Long-Term Funding
Diversification
Development
Economic Pressure on Donors
TBD
Investments
Loss of Value
Diversification/Long-Term Horizon
General Fund Operations
State Support
FY 2008 Carryover/Rainy Day Fund
Auxiliaries
Varies
Varies
Bond Sales/Debt Management
Credit Market Uncertainty
Debt Service Reserve
Affiliated Entities
Varies
Varies
Reserves
Varies
Varies
Systems
N/A
N/A
Expenses
Compensating Events
Reduced Inflationary Pressure

Energy

Construction

Wages

Interest Rates (possibly)
Other

Stress on Competitors

Enrollment Tends to Increase

Federal Stimulus Package (?)
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Attachment D
Status of Specialized Reserve Accounts
September 30, 2008
This table summarizes the status of various specialized reserve accounts. Amounts available
are below targets in some cases due to the financial stress of the last several years. The goal is
to bring all reserves up to target levels within the next 1-2 years. In the interim, the $13.5M
Rainy Day Fund and other cash balances will serve as an additional back up, if needed.
Account
General Fund Reserves
Enrollment
Reserve/College
Stabilization
Utility Reserve
Financial Aid Reserve
Legal Reserve
Property and Liability
Insurance Reserve
Rainy Day Fund
General Fund Totals
Restricted Reserves
Malpractice Insurance
Reserve
Health Benefits Reserve
Debt Service Reserve
Restricted Reserves Total
Grand Total
Sep 08
Amount
(in millions)
Target
Amount
(in millions)
Target Description
$6.0
$7.4
1% of annual tuition and
IDC’s
12.6
2.8.
0.9
14.6
3.9
1.0
15% of annual expense
5% of annual expense
$1M
5.8
5.0
13.5
11.9
$40.6
$43.8
155.4
122.0
45.5
28.3
63.6
48.4
$264.5
$198.7
$305.1
$242.5
Size of deductible
1% of University’s annual
general funds revenue
Actuarially determined
One Month of total claims
and admin costs
One year’s principal
payment on all general
receipt bonds
Office of Business and Finance
10/22/08
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