Budgeting and Financial Management at Case 101 Overview of Balance Sheet Session 3 December 7, 2006

1
Budgeting and Financial Management at Case
101Overview of Balance SheetSession 3
December 7, 2006

• Hossein Sadid, Chief Financial and Administrative
  Officer
• Sally Staley, Chief Investment Officer

2
Budget and Financial Management at Case
101Course Objectives

• Session I Understand the alignment between
  academic and financial priorities
• Understand the budget process on a university
  and school level
• Session II Ability to read and understand the
  Universitys Budget Book
• Session III Become familiar with financial
  drivers endowments, debt and working capital

3
Guiding Principles for Financial Management

• Responsible risk taking guided by strategic
  academic plans and priorities
• Focus on business plans to support spending
• First quartile endowment performance
• Capital investment guided by integrated planning
• Debt supported by credible business plans
• Transparency in all activities and communications
  coupled with accountability
• Focus on optimal maintenance of physical assets

4
Balance Sheet - June 30, 2006Total Assets (
millions)

• Total Assets - 2,931 million
• Investments 48
• Property, Plant and Equipment (Net) 28
• Funds Held in Trust 10
• Cash 4
• Accounts and Notes Receivable 4
• Securities Lending Agreements 3
• Pledges Receivable 2
• Other Assets Intangible Assets 1

5
Balance Sheet June 30, 2006Total Liabilities (
millions)

• Total Liabilities - 882 million
• Notes and Bonds Payable 70
• Payable Under Securities Lending 11
• Accounts Payable Accrued Expenses 6
• Annuities Payable 6
• Refundable Loans and Advances 3
• Deferred Income Deposits 3
• Minimum Pension Liability 1

6
Comparative Net Assets (000s)

• Total Net Assets - 2,050 million

7
Definitions of Endowment

• What is an Endowment and what does it do?
• An endowment is a gift of money or other assets
  received from a donor who specifies that the
  original value of the gift is to be invested and
  preserved and the investment earnings are to be
  spent for a charitable purpose.
• The donor may specify generally or very exactly
  the definition of charitable purpose.
• The original gift itself is kept in perpetuity.
• At CWRU, a gift that creates an endowment must be
  a minimum of 20,000 and may be up to 1 or 2
  million or more, depending on its purpose
• We have received almost 2,300 individual endowed
  gifts over many years
• We pool or combine all of these gifts together
  and manage them for investment like a mutual
  fund.

8
Endowment Facts

• Size of CWRU Combined Endowment
• 1,621,600,000 (as of June 30, 2006)
• Size comparison to other schools
• Harvard (29 billion) and Yale (18 billion) are
  the largest by far
• CWRU is 32 (per NACUBO 2006 Endowment Study)
• Other schools in the 1.6 billion range
• NYU, UNC, CalTech, Purdue
• Amount of total investment earnings distributed
  proportionately to each individual endowment to
  support the donors purpose
• About 80,000,000 annually
• Percentage of Universitys revenues generated by
  endowment investments
• About 10

9
Endowment Assets June 30, 2006

• Pooled Endowment 1,241.0 million (76)
• Consists of about 2,300 individual endowments
• Utilized accounting system operates like a mutual
  fund
• each endowment is a unit holder in the
  Pool
• Most new Endowment gifts go into Pool for
  investment
• Investment Committee of Board of Trustees sets
  investment policy
• Investment Staff executes investment policy and
  day-to-day decisions
• Finance Committee of Board of Trustees approves
  spending policy
• Funds Held in Trust by Others (FHBOs or Outside
  Trusts) 295.4 million (18)
• Nearly 50 individual irrevocable trusts mostly
  gifts from the 1920s
• Major names Squire, Vair, Hord, Hanna
• CWRU is beneficiary of the trusts
• Trustee banks hold and manage the assets
• Spending rate is governed by State of Ohio code
• Un-Pooled Endowments 62.2 million (4)
• Donor-designated gifts (donor chooses investment
  manager
• and/or investment vehicle and/or spending rate)

10
Breakdown of Endowment by School and by
Purposeas of June 30, 2006
11
Asset Allocation of Combined Endowment June 30,
2006

• Combined Endowment holds very diversified
  investments in traditional and alternative assets
• Traditional assets are US and foreign public
  equity and fixed income
• Alternative assets are private equity, marketable
  alternatives (hedge funds), and real assets

12
Endowment Summary

• Long-term, strategic diversification into
  alternative investments and away from public
  equity and fixed income has reduced volatility
  and supported returns
• Excellent performance results for Total Endowment
  in FY04-06
• Up 16.8, 13.2 and 13.2, respectively
• Flexible investment policy of Pooled Endowment
  produced even stronger returns in FY04-06
• Up 17.8, 14.6 and 14.3, respectively
• Excellent bear market performance for Total
  Endowment and Pool
• Losing only 5.3 and 3.0 respectively in 3-year
  period ended 6/30/03

13
Current Debt Profile June 30, 2006

• Diversified debt portfolio contains multiple
  types of variable rate debt as well as
  swaps-to-fixed
• Opportunistic use of swaps including hedging new
  issues to lower cost of financing - not for
  speculation or leverage

14
Projected Debt Service FY 2007 FY 2045

• Before refunding and restructuring
• Average Coupon 4.45
• Average Life 20.42 yrs.
• After refunding and restructuring
• Average Coupon 4.48
• Average Life 22.49 yrs.

15
Planned Future Projects

• Over the next five years Capital Projects will be
  only funded through fundraising
• Several Projects remain on the drawing board
  including
• Campus Center
• West Quad
• College Town
• Capital Renewals and Replacements of Academic
  Facilities

• Completion of the Universitys first integrated
  campus master plan in 2005 provides a
  comprehensive blueprint to ensure that the
  integrity of the campus physical environment will
  be preserved for decades to come. It also lays
  the groundwork for our capital investment and
  future campaign priorities.
• Significant initiatives undertaken to curb energy
  costs and to expand the commitment to
  sustainability resulted in a major reduction in
  campus-wide energy consumption, virtually
  offsetting the significant rise in energy costs.
  

16
Guiding Principles for Financial Management

• Responsible risk taking guided by strategic
  academic plans and priorities
• Focus on business plans to support spending
• First quartile endowment performance
• Capital investment guided by integrated planning
• Debt supported by credible business plans
• Transparency in all activities and communications
  coupled with accountability
• Focus on optimal maintenance of physical assets