Financial Statement Analysis for Public and Private Colleges and Universities Presented by: Naomi Richman Susan Fitzgerald Diane Viacava

June 1, 2004

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Agenda

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Overview of Credit/Financial Statement Analysis Private Higher Education Financial Statement Analysis Public Higher Education Financial Statement Analysis Red Flags

6

Overview of Credit/Financial Statement Analysis

7

Overview of Credit Analysis

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Five key areas: – Market position (education, research, patient care, outreach) – Financial resources – Operational profile and performance – Capital needs, sources of financing, debt structure and profile – Governance and management

8

Financial Statement Analysis

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Point in time reflection of financial strength – Historical vs. prospective

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Context of: – Industry – Peer Group

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Trend analysis is key

9

Private Higher Education Financial Statement Analysis

Statement of Financial Position Assets: Cash and investments Trustee-held funds Property, plant & equipment

($ in thousands)

2003

2002

106,917

104,950

649

971

72,526

73,381

0

0

11,945

13,635

192,037

192,937

($114,383 gross, less $41,857 accumulated depreciation) Funds held in trust by others Other assets Total assets

11

Statement of Financial Position Liabilities and Net Assets:

($ in thousands)

2003

2002

27,967

28,522

0

0

Other liabilities

10,394

10,925

Total liabilities

38,361

39,447

Unrestricted

89,047

86,825

Temporarily restricted

24,933

29,093

Permanently restricted

39,696

37,572

153,676

153,490

Liabilities: Debt Operating line of credit

Net Assets:

Total net assets

12

Statement of Financial Position Moody’s Calculations: Net investment in plant (PPE net PLUS

($ in thousands)

2003

2002

45,208

45,830

43,838

40,995

68,772

70,088

108,468

107,660

trustee-held funds LESS plant debt) Unrestricted resources (Unrestricted net assets LESS net investment in plant) Expendable resources (unrestricted resources PLUS temporarily restricted resources) Total resources (expendable resources PLUS permanently restricted net assets)

13

Statement of Activities Revenues

($ in thousands)

2003

2002

26,648

24,792

Auxiliary enterprises

9,656

9,168

Grants and contracts

1,721

2,208

Investment return*

4,800

4,560

Gifts and pledges

1,587

2,571

Net assets released**

2,783

9,473

585

497

47,780

53,269

Net tuition and fees

Other revenue Total revenue

14

Statement of Activities

($ in thousands)

Expenses and Change in Net Assets

2003

2002

Auxiliary expenses

7,546

7,510

Other expenses

35,579

30,768

Total expenses

43,125

38,278

4,655

14,991

(1,475)

(5,187)

Other below line adjustments

(980)

(1,353)

Change in unrestricted net assets

2,220

8,451

(2,035)

(9,639)

185

(1,188)

Operating Surplus (Deficit) Net excess investment gains (losses)

Change in temp. and perm. restricted net assets Change in net assets

15

Statement of Cash Flows and Other

($ in thousands)

2003

2002

4,452

3,742

554

531

1,227

1,327

Maximum annual debt service (S)

1,901

1,901

Full-time equivalent enrollment (S)

1,888

1,865

Depreciation and amortization Repayment of long-term debt (excluding refunded principal or other extraordinary payments) Cash paid for interest (memo item; may be disclosed in footnote)

S = supplemental disclosure

16

Moody’s Calculations: Net Tuition and Fees ($ in thousands)

Gross tuition and fees Less: sponsored scholarships (S) Less: unsponsored scholarships

2003

2002

42,846

39,699

(14,629)

(13,632)

(1,569)

(1,275)

26,648

24,792

(S) Net tuition and fees

S = supplemental disclosure

17

Moody’s Calculations: Investment Return for Operations ($ in thousands) 2003 Pro-forma 5% of a 3 year moving

2002

5,561

5,605

3,325

(627)

(2,236)

(6,232)

average of total cash and investments (from 2000, 2001 and 2002) (operating) Total investment return from statement of activities Net excess investment gains or losses (non-operating)

18

Moody’s Calculations: Net Assets Released from Restrictions ($ in thousands)

Gifts available for operations or other

2003

2002

329

1,194

1,619

6,882

835

1,397

2,783

9,473

(operating) (S) Gifts used for construction or acquisition of fixed assets (nonoperating) (S) Investment income and gains (nonoperating) (S) Total net assets released from restrictions

S = supplemental disclosure

19

Moody’s Restatement of Operations Revenues

($ in thousands)

2003

2002

26,648

24,792

Auxiliary enterprises

9,656

9,168

Grants and contracts

1,721

2,208

Investment return*

5,561

5,605

Gifts and pledges

1,587

2,571

Net assets released**

329

1,194

Other revenue

585

497

46,087

46,035

Net tuition and fees

Total revenue

20

Moody’s Restatement of Operations

($ in thousands)

Expenses and Change in Net Assets

2003

2002

Auxiliary expenses

7,546

7,510

Other expenses

35,579

30,768

Total expenses

43,125

38,278

Operating surplus (deficit)

2,962

7,757

Non-operating revenue/expense

1,494

6,926

(2,236)

(6,232)

2,220

8,451

(2,035)

(9,639)

185

(1,188)

Net excess investment gains (losses) Change in unrest. net assets Change in temp. and perm. restricted net assets

Change in total net assets

21

Moody’s Ratio Analysis: Market Position 2003

2002

Net tuition per student ($)

$14,228

$13,437

Educational expenses per student ($)

$19,077

$16,676

Change in net tuition revenue (%)

15.6%

7.7%

Institutional tuition discount (%)

34.1%

34.3%

Total tuition discount (%)

37.8%

37.6%

22

Moody’s Ratio Analysis: Capital and Balance Sheet 2003

2002

Unrestricted resources to debt (x)

1.57

1.44

Expendable resources to debt (x)

2.46

2.46

Total resources to debt (x)

3.88

3.77

Actual debt service to operations (%)

4.1%

4.9%

Peak debt service to operations (%)

4.4%

5.0%

9.4

10.0

Unrestricted resources to operations (x)

1.02

1.07

Expendable resources to operations (x)

1.59

1.83

$57,451

$57,727

Age of plant (number of years)

Total resources per student ($)

23

Moody’s Ratios: Operating 2003

2002

6.4%

16.9%

11.4%

13.3%

3.1%

11.9%

Actual debt service coverage (x)

4.9

6.9

3-year avge. actual debt service coverage (x)

5.7

5.8

3-year avge. max. debt service coverage (x)

5.3

5.1

Return on financial resources (%)

0.7%

(0.8%)

Return on net assets (%)

0.1%

(5.3%)

Annual operating margin (%) 3-year average operating margin (%) Operating margins excluding gifts (%)

24

Moody’s Ratios: Contribution (% share of revenue)

2003

2002

Net tuition and fees

57.8%

53.9%

Auxiliary enterprises

21.0%

19.9%

Investment income

12.1%

12.2%

Net assets released from restrictions

0.7%

2.6%

Gifts and pledges

3.4%

5.6%

Grants and contracts

3.7%

4.8%

Other

1.3%

1.1%

25

Public Higher Education Financial Statement Analysis

Statement of Net Assets Assets:

($ in thousands)

2003

2002

11,725

11,475

272,545

233,811

Other University assets

15,278

15,825

Foundation total assets

25,458

22,924

376,555

339,467

Cash and investments Capital Assets, net ($407,734 gross, less $135,189 accumulated depreciation)

Total assets

27

Statement of Net Assets Liabilities and Net Assets:

($ in thousands)

2003

2002

73,322

62,651

0

0

4,823

4,523

17,295

16,328

3,116

2,683

98,556

86,185

Liabilities: University debt Foundation debt Accrued compensation absences Other University liabilities Other Foundation liabilities Total liabilities

28

Statement of Net Assets Liabilities and Net Assets:

($ in thousands)

2003

2002

211,803

193,288

Unrestricted

19,248

18,175

Restricted expendable

21,788

18,810

2,818

2,768

11,305

11,254

Foundation permanently restricted

11,067

8,987

Foundation total resources

22,342

20,241

277,999

253,282

Net Assets (Deficit): Invested in capital assets

Restricted nonexpendable Foundation unrestricted/temporarily restricted

Total net assets

29

Statement of Net Assets

($ in thousands)

Moody’s Calculations: Unrestricted resources (Unrestricted net

2003

2002

19,248

18,175

52,341

48,238

66,196

59,993

assets) Expendable resources (unrestricted resources PLUS restricted expendable PLUS foundation unrestricted / temporarily restricted resources) Total resources (expendable resources PLUS permanently restricted net assets PLUS foundation permanently restricted resources)

30

Statement of Revenues, Expenses and Changes in Net Assets ($ in thousands) Revenues

2003

2002

62,354

56,779

6,540

6,725

Net tuition and fees

55,814

50,054

Auxiliary enterprises

32,233

27,206

25,300

22,080

3,058

2,876

116,405

102,216

Gross tuition and fees Less: scholarship discounts and allowances

(net) Grants and contracts Other revenue Total revenue

31

Statement of Revenues, Expenses and Changes in Net Assets ($ in thousands) Expenses and Change in Net Assets

2003

2002

Auxiliary expenses

22,009

31,259

Depreciation expense

11,385

11,614

Scholarship expense

11,606

8,671

Other expenses

123,203

106,812

Total expenses

179,809

167,027

(63,404)

(64,811)

Operating income (loss)

32

Statement of Revenues, Expenses and Changes in Net Assets ($ in thousands) Expenses and Change in Net Assets

2003

2002

57,183

59,858

0

0

(3,298)

(2,568)

4,330

5,048

0

0

(5,189)

(2,473)

Other revenues, expenses, gains or losses

27,803

18,513

Increase (decrease) in net assets

22,614

16,040

Non-operating revenues (expenses): State Appropriations Gifts Interest expense Investment Income Other non-operating revenue/expense Gain (loss) before other revenues, expenses, gains or losses

33

Statement of Cash Flows and Other

Repayment of long-term debt

($ in thousands)

2003

2002

1,515

4,198

5,557

5,557

11,505

11,377

(excluding refunded principal or other extraordinary payments) Maximum annual debt service Full-time equivalent enrollment (S)

S = supplemental disclosure 34

Moody’s Calculations Investment Return for

($ in thousands)

2003

2002

3,011

3,011

Investment return from SRECNA

5,048

4,330

Net excess investment gains or

2,038

1,320

Operations: Pro-forma 4.5% of prior year’s total cash and investments (operating)

losses (non-operating)

35

Moody’s Restatement of Operations Revenues

($ in thousands)

2003

2002

Gross tuition and fees

62,354

56,779

Less: scholarships

18,146

15,396

Net tuition revenue

44,208

41,383

Net auxiliary enterprises

32,233

27,206

3,011

3,011

State appropriation

57,183

59,858

Grants and contracts

25,300

22,080

0

0

3,058

2,876

164,994

156,415

Endowment spending

Gifts and pledges Other revenue Total revenue

36

Moody’s Restatement of Operations

($ in thousands)

Expenses and Change in Net Assets

2003

2002

Research expenses

3,204

2,623

11,385

11,614

3,298

2,568

22,009

31,259

Other expenses

131,605

112,859

Total operating expenses

171,501

160,924

(6,507)

(4,509)

Depreciation expense Interest expense Auxiliary expenses

Operating surplus (deficit)

37

Moody’s Restatement of Operations Expenses and Change in Net Assets

($ in thousands)

2003

2002

Net excess investment gains (losses)

$1,320

$2,038

Capital appropriations, grants and gifts

27,753

17,953

50

560

0

0

22,616

16,041

Gifts for endowments Other below line adjustments Increase (decrease) in net assets

38

Moody’s Ratio Analysis: Market Position 2003

2002

Net tuition per student ($)

$3,886

$3,674

State appropriation per student ($)

$5,026

$5,314

$12,858

$11,278

$13,140

$11,510

29.1%

27.1%

Educational expenses w/o Research per student ($) Educational expenses per student ($) Total tuition discount (%)

39

Moody’s Ratios: Capital and Balance Sheet: 2003

2002

Unrestricted resources to debt (x)

0.3

0.3

Expendable resources to debt (x)

0.7

0.8

Total resources to debt (x)

0.9

1.0

Actual debt service to operations (%)

4.4%

2.5%

Peak debt service to operations (%)

3.2%

3.5%

Age of plant (number of years)

11.9

10.8

Unrestricted resources to operations (x)

0.11

0.11

Expendable resources to operations (x)

0.31

0.31

$5,754

5,273

Total resources per student ($)

40

Moody’s Ratios: Operating 2003

2002

(3.9%)

(2.9%)

N/A

N/A

(3.9%)

(2.9%)

1.9%

1.6%

1.1

2.4

3-year avge. actual debt service coverage (x)

N/A

N/A

3-year avge. max. debt service coverage (x)

N/A

N/A

Return on financial resources (%)

9.8%

N/A

Return on net assets (%)

8.5%

N/A

Annual operating margin (%) 3-year average operating margin (%) Operating margins excluding gifts (%) Research expenses to total operating expenses (%) Actual debt service coverage (x)

41

Moody’s Ratios: Contribution (% share of revenue)

2003

2002

Net tuition and fees

26.8%

26.5%

Auxiliary enterprises

19.5%

17.4%

1.8%

1.9%

0

0

Grants and contracts

15.3%

14.1%

State appropriation

34.7%

38.3%

1.8%

1.8%

Investment income Gifts and pledges

Other

42

“Red Flags”

43

Ten Red Flags in Credit Analysis 1.

Declining enrollment, applications

2.

Stagnant or falling net tuition revenue

3.

4.

5. 6.

Multiple years of operating deficits/high endowment spending Inability to explain financial statement results, tie to budget Declining resource levels Aggressive investment policy in light of liquidity needs or management expertise 44

Ten Red Flags in Credit Analysis (cont.) 7.

8.

9.

10.

Reliance on debt as sole financing instrument due to fundraising weakness, lack of cash flow Variable rate debt/swaps with rating triggers, collateral provisions In-bred board or management, lack of industry expertise in key areas Major strategic/capital initiatives inconsistent with institution’s historic mission or resource levels

45

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