2014 Annual Financial Report UCSF’s story begins when South Carolina surgeon Hugh Toland ventured west to San Francisco, where he established Toland Medical College. The campus grew over the years with the addition of the top- ranking schools of pharmacy, nursing and dentistry, a graduate division and medical center. Today, UCSF is a nearly $4.5 billion enterprise, where discoveries and innovation advance health worldwide. Celebrating 150 Years in Health and Science
Table of Contents
2 Letter from the Senior Vice Chancellor — Finance and Administration
6 Management Discussion and Analysis
32 2014 Financial Statements
36 Notes to Financial Statements Letter from the Senior Vice Chancellor
UC San Francisco is dedicated to transforming health worldwide through advanced biomedical research, graduate-level education in the life sciences and health professions, and excellence in patient care.
We have top-ranked graduate schools of medicine, nursing, UCSF is fortunate to receive large philanthropic gifts dentistry and pharmacy; a graduate division with world- from generous donors who recognize the potential and renowned programs in the biological sciences, a preeminent importance of combining research, commercial innovation biomedical research enterprise, and the top-tier hospitals and exceptional patient care. These gifts have enabled UCSF Medical Center and UCSF Benioff Children’s Hospital. us to move ahead with the new UCSF Medical Center at Mission Bay, the Mission Hall Global Health & Clinical We continue to earn top rankings among the best schools Sciences Building, increase student scholarships, housing, and hospitals nationally and worldwide: and faculty recruitment, as well as other advancements. • UCSF’s School of Medicine ranked fourth nationwide in both research and primary care education, according New Partnerships to a US News & World Report national survey. Core to UCSF’s leadership strategy is our transition from • We ranked among the top five in seven subject areas, an academic health center to an academic health system. according to the inaugural US News & World Report’s By engaging new partnerships with physician groups and Best Global Universities. hospitals across the region, we continue to improve our • UCSF also ranked second in clinical medicine and cross-disciplinary efforts within the community, finding pharmacy, and fifth in life sciences in the 2014 new ways to collaborate and expand our reach. Academic Ranking of World Universities (ARWU). At the beginning of the fiscal year UCSF appointed • UCSF Medical Center ranked among the nation’s Sam Hawgood as our new Chancellor. Dr. Hawgood’s premier hospitals for the 12th consecutive year appointment was met with high praise both inside UCSF and is the best in Northern California, according and externally, with members of the academic, scientific, to the 2013-2014 America’s Best Hospitals survey clinical and political worlds praising his capabilities. conducted by US News & World Report. Effective January 1, 2014 UCSF became the sole corporate In 2014, UCSF celebrated the 150th anniversary of our member of Children’s Hospital & Research Center Oakland founding as Toland Medical College. From this beginning (CHRCO). CHRCO has one of only five ACS Pediatric we are now a nearly $4.5 billion enterprise and the second Level 1 Trauma Centers in the state and one of the largest largest employer in San Francisco. We play a major role pediatric intensive care units in Northern California. in the Bay Area’s vast and vibrant health care sector. Six With 190 licensed beds, more than 500 physicians in years ago we broke ground at UCSF Mission Bay, which 43 specialties and more than 2,600 employees, CHRCO is now a 60-acre campus representing the largest single is a leading teaching hospital with a respected pediatric redevelopment project in the city. We are also recognized residency program and a number of unique pediatric for our catalytic role in biotech company spin-offs. QB3, a subspecialty fellowship programs. CHRCO’s research consortium run by UCSF, UC Berkeley and UC Santa Cruz, arm, Children’s Hospital Oakland Research Institute is is a pioneering magnet for the burgeoning biotech boom, internationally known for its basic and clinical research. with UCSF Mission Bay serving as the centerpiece of this The affiliation between UCSF Medical Center and CHRCO thriving innovation zone. brings together two leading Bay Area children’s hospitals, Three breakthrough hospitals in children’s, women’s and strengthening our ability to meet marketplace expectations. cancer care will open in February 2015. Located alongside The affiliation has the potential to provide better health our world-renowned research campus, UCSF Medical care value to consumers through higher-quality care, Center at Mission Bay will further encourage the collaborative lower costs, and more coordinated access to services work for which we are known and the translation of at hospital locations on both sides of the Bay, as well laboratory discoveries into next-generation therapies. as medical facilities throughout Northern California.
2 Advancing Patient Care, Achieving • BRAIN Initiative: UCSF partnered with Lawrence Berkeley Health Science Breakthroughs National Laboratory and UC Berkeley to form the Tri-Institutional Partnership (TrIP), in an effort to promote collaborative The achievements and milestones reached in 2014 are stepping research among the three institutions. The partnership will stones in our continuous push to excel in the health sciences. focus on the Presidential BRAIN Initiative, a White House- Some of our recent accomplishments include: sponsored research effort to develop new conceptual and • National Institutes of Health (NIH) Funding: For the second technological tools that could revolutionize our fundamental consecutive year, UCSF’s four schools topped the nation in understanding of neurological processes and abnormalities, 2014 federal biomedical research funding with UCSF as a and in turn reveal new ways to treat, prevent and cure brain whole receiving the most of any public recipient and second disorders such as Alzheimer’s, schizophrenia, autism, most overall in funds from the NIH. These highly competitive epilepsy and traumatic brain injury. funds, which for UCSF totaled nearly $546.6 million in • The 2014 Helen Diller Family Comprehensive Cancer contracts and grants combined, reflect the caliber of research Center Symposium focused on a protein called Ras, on campus. Through our schools of dentistry, medicine, which is responsible for roughly one-third of all cancer cases, nursing and pharmacy, and the graduate division, these including some of the deadliest such as lung, colon and funds enable our scientists to advance understanding of pancreatic cancers. The five scientific sessions discussed the underlying causes of cancer, cardiovascular disease, Ras biology and biochemistry in relation to normal and diabetes, HIV, Parkinson’s and Alzheimer’s disease, and abnormal development and relevance to cancer initiation, others, and work to develop improved therapies for them. progression and therapy, and brought together academic • Groundbreaking Research: Peter Walter, PhD, earned and industry colleagues. major recognition for his groundbreaking research on the From our founding 150 years ago to the birth of biotech and unfolded protein response. In May, he received the 2014 the ongoing renaissance at Mission Bay, UCSF and the city Shaw Prize in Life Science and Medicine, Asia’s highest biomedical science honor. of San Francisco have grown and prospered together. Now the leading university focused exclusively on health, UCSF’s reach • Global Greatness: On its 10-year anniversary as a formal extends across the San Francisco Bay and around the world program, UCSF Global Health Sciences has 700 investigators where scientists, scholars and healers are leading revolutions working in 110 countries, attracting some of the field’s in health. biggest influencers to UCSF. In late 2014, UCSF celebrated the opening of the Mission Hall Global Health & Clinical Sciences Building, made possible by a gift from Atlantic Philanthropies and founder Charles F. Feeney. • Brain Injury Funding: An unprecedented, public-private partnership funded by the Department of Defense was JOHN PLOTTS | Senior Vice Chancellor - Finance and Administration launched to develop better-run clinical trials and may lead to the first successful treatments for traumatic brain injury. UCSF neurosurgeon Geoffrey Manley, M.D., Ph.D., the chief of neurosurgery at the UCSF-affiliated San Francisco General Hospital, will serve as the research team’s primary liaison to the NIH.
2014 UCSF ANNUAL FINANCIAL REPORT 3 Strong Foundation, An Unlimited Future In 2014, UCSF celebrated our 150th anniversary. We date our founding to 1864, when South Carolina surgeon Hugh Toland founded a private medical school in San Francisco after coming west in 1849 to seek his fortune in the California Gold Rush. After a few discouraging months as a miner, Toland set up a surgical practice in booming San Francisco. As his wealth and influence grew, he purchased land in North Beach and opened Toland Medical College. Since our founding as a small Gold Rush era medical school, we have continued to push the boundaries in research, education and patient care to become one of the world’s leading health sciences universities.
In the spring of 2014, renowned pediatrician and School of Medicine Dean Sam Hawgood was appointed Chancellor of UCSF. As dean, he was a core HUGH HUGER TOLAND SAM HAWGOOD member of the Chancellor’s Executive Council, playing a central role in the university’s leadership and guidance during a time of profound growth and change. Dr. Hawgood’s tenure at UCSF dates back over 30 years. He joined UCSF as a research fellow in 1982, working with distinguished scientists Clements and William H. Tooley, M.D., pioneers in the discovery and therapeutic uses of pulmonary surfactant, the key lipoprotein that lines healthy lungs and enables them to expand with each breath. Dr. Hawgood has maintained his own laboratory since 1984 and through his research he has earned an international reputation in neonatology research. Chancellor Hawgood will provide the foresight and leadership needed for UCSF to continue to excel in innovative health sciences education, discovery and patient care.
4 The University of California System
UCSF is one of ten campuses within the University of California UCSF achieves its mission of advancing health worldwide™ through (University) system. As such, the UCSF Annual Financial Report is innovations in health sciences education, discovery, and patient care that prepared from official University records and accounts maintained in address the five goals outlined in its strategic plan through 2014-2015. accordance with University policies and relevant accounting principles, These goals are: generally accepted in the United States of America, as prescribed by the • Provide unparalleled care to our patients Governmental Accounting Standards Board (GASB). • Improve health worldwide through innovative science UCSF’s financial statements have not been separately audited but are included as part of the University financial statement audit. The three • Attract and support the most talented and diverse trainees basic financial statements in this report, the Statements of Net Position, in the health sciences the Statements of Revenues, Expenses and Changes in Net Position, • Be the workplace of choice for diverse, top-tier talent and the Statements of Cash Flows, are presented for UCSF, the University of California, San Francisco Foundation (the Foundation) and UCSF • Create a financially sustainable enterprise-wide business model Benioff Children’s Hospital and Research Center Oakland (CHRCO). The UCSF financial statements include information on the University Additionally, the financial statements include notes that are considered of California, San Francisco Medical Center (the Medical Center). integral to the statements and provide information on the primary A world-renowned research and teaching hospital with facilities located accounting principles applied to develop the statements. throughout San Francisco, the Medical Center is one of the leading hospitals in the United States. To help clarify the financial position The University of California of the Medical Center, many tables in the financial statements show The University was founded in 1868 as a public, constitutionally empowered, information on the Medical Center separately from information state-supported institution. The University is one of the largest and most for the rest of the UCSF enterprise (referred to as “Campus”). acclaimed institutions of higher learning in the world, dedicated to The financial statements also include information on the Campus excellence in teaching, research, health care and public service. Facilities Improvement Association (CFIA). This legally separate, The University has annual resources of approximately $26.6 billion, not-for-profit public benefit corporation established for charitable and encompasses ten campuses, five medical schools and medical centers, and educational purposes currently provides services for the benefit four law schools, and a statewide Division of Agriculture and Natural of the Regents on behalf of UCSF, including the development, financing, Resources. The University is also involved in the operation and management construction, and management of buildings and facilities. of three national laboratories for the U.S. Department of Energy. The Medical Center and CFIA have each issued separate financial The University’s financial statements are presented as a discrete statements containing additional information. component of the state’s general-purpose financial statements and are available at http://www.universityofcalifornia.edu/reportingtransparency. The University of California, San Francisco Foundation The University of California, San Francisco The Foundation was incorporated in 1982 as a not-for-profit corporation, dedicated to providing valuable assistance in fundraising, public outreach, UCSF, a public, state-supported institution, is a leading university dedicated and other support to UCSF. Although governed by an independent board, to promoting health worldwide through advanced biomedical research, the Foundation is affiliated with, and its assets are dedicated for, the sole graduate-level education in the life sciences and health professions, and benefit of UCSF. The Foundation holds and invests gifts and Foundation excellence in patient care. It is significantly different from the other nine expenditures are generally limited to distributions to support UCSF and University campuses as UCSF: normal administrative costs. This support is recorded as gift revenue • Focuses exclusively on the health sciences by UCSF. In accordance with GASB Statement No. 39, Determining • Enrolls approximately 3,000 graduate and professional students, Whether Certain Organizations Are Component Units, the Foundation’s and no undergraduate students financial statements are presented in UCSF’s financial statements in a separate column titled “UCSF Foundation.” In addition, this document • Receives 1 percent of revenues from student tuition and fees, summarizes information on the Foundation in a separate section. net of allowances • Receives 4 percent of revenues from the state, generally supporting Children’s Hospital and Research Center Oakland the educational mission and 15 percent of faculty Effective January 1, 2014, the UCSF Medical Center affiliated with • Receives approximately 80 percent of revenues from its clinical Children’s Hospital & Research Center Oakland (CHRCO) and the and research enterprises University of California became its sole corporate and voting member of CHRCO’s hospital, now known and doing business as UCSF Benioff • Operates a large, not-for-profit medical center in a highly Children’s Hospital Oakland, is one of only five American College of competitive market Surgeons Pediatric Level 1 Trauma Centers in the state, and has one of the • Creates an approximate $6 billion annual impact on the Bay Area largest pediatric intensive care units in Northern California. It is a leading and is San Francisco’s second-largest employer, after the city itself teaching hospital with an outstanding pediatric residency program and a number of unique pediatric subspecialty fellowship programs. CHRCO’s research arm, Children’s Hospital Oakland Research Institute, is internationally known for its basic and clinical research. In accordance with GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units, CHRCO is considered a discretely presented component unit of UCSF and is presented with UCSF’s financial statements in a separate column titled “CHRCO.” In addition, this document summarizes information on CHRCO in a separate section.i
5 MANAGEMENT DISCUSSION & ANALYSIS Management Discussion and Analysis
The Management Discussion and Analysis presented in this document is intended to help readers of the financial statements of the University of California, San Francisco (UCSF) better understand the financial position and operating activities for the fiscal year ended June 30, 2014, and includes selected comparative information for the year ended June 30, 2013. As an unaudited discussion prepared by management, it should be read in conjunction with the financial statements and notes to the financial statements. Unless otherwise indicated, years 2014 and 2013 in this discussion refer to the fiscal years ended June 30.
UCSF’s Financial Position
$7,033 $6,555
$5,100 $4,469
$1,991 $1,557 $1,134 $561 $788 $686 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013
ASSETS DEFERRED LIABILITIES DEFERRED NET OUTFLOWS INFLOWS POSITION
shown in millions of dollars
The Statements of Net Position present the financial position of UCSF at the end of each year. The statements display all of UCSF’s assets, deferred outflows, and liabilities. The difference between assets, deferred outflows, and liabilities is net position, representing a measure of the current financial condition of UCSF.
Data-Rich Wearable Devices: “The next big thing in personal medical technology What’s Ahead will be the creation of next generation of truly useful devices and sensors that can send data to care providers,” noted Michael Blum, MD, chief medical information officer of UCSF Medical Center. The Center for Digital Health Innovation (CDHI) is at the forefront, creating an open platform that integrates the data from patients’ sensors and devices into their electronic health records. Patients with insulin- dependent diabetes will soon be able to use Tidepool’s Blip app to aggregate glucometer, insulin pump and continuous blood glucose monitor data and transmit it to their providers via the CDHI platform.
6 MANAGEMENT DISCUSSION & ANALYSIS The major components of the assets, deferred outflows, liabilities, and net position, compared with the prior year, are as follows:
(in millions of dollars) 1 2014 2013 $ Change % Change ASSETS Cash and cash equivalents $2,322 $2,129 $193 9% Accounts receivable, net 454 440 14 3 Capital assets, net 4,017 3,716 301 8 Other assets 240 270 (30) (11) Total assets 7,033 6,555 478 7 DEFERRED OUTFLOWS OF RESOURCES 561 788 (227) (29) LIABILITIES Debt 2,067 2,045 22 1 Other liabilities 859 855 4 - Due to University 338 347 (9) (3) Pension liability 1,205 1,853 (648) (35) Total liabilities 4,469 5,100 (631) (12) DEFERRED INFLOWS OF RESOURCES 1,134 686 448 65 NET POSITION Invested in capital assets, net of related debt 2,028 1,746 282 16 Restricted expendable 310 306 4 1 Unrestricted (347) (495) 148 30 Total net position $1,991 $1,557 $434 28%
UCSF’s Assets and Deferred Outflows
Deferred out ows of resources $561 / 7%
Other assets $240 / 3%
Accounts receivable, net $454 / 6%
2014 ASSETS AND DEFERRED Cash and investments $2,322 / 31% OUTFLOWS Capital assets, net $4,017 / 53%
shown in millions of dollars
UCSF’s total assets and deferred outflows increased $251 million, or 3 percent, to $7.6 billion in 2014 from $7.3 billion in 2013. Assets comprise primarily cash and investments, investments held by trustee, accounts receivable, and capital assets. Capital assets have increased with the continued construction of the UCSF Medical Center and UCSF Benioff Children’s Hospital at Mission Bay. The sections below provide more details on the various components of UCSF’s assets, comparing the 2014 and 2013 positions where meaningful.
2014 UCSF ANNUAL FINANCIAL REPORT 7 Cash and cash equivalents Cash and cash equivalents increased $193 million, or 9 percent, in 2014 and consist of the following:
(in millions of dollars) 2 Campus Medical Center Total 2014 2013 2014 2013 2014 2013 $ Change % Change Bank depository accounts $ 3 $ 4 $ - $ - $ 3 $ 4 $ (1) (25%) Short-term investment pool 844 1,010 433 374 1,277 1,384 (107) (8) Total return investment pool 970 667 72 74 1,042 741 301 41 Cash and cash equivalents $1,817 $1,681 $505 $448 $2,322 $2,129 $193 9%
Cash and cash equivalents for the Campus increased $136 million, or 8 percent, primarily due to cash from operations as well as a slight increase in deferred private contract and grant revenue. Cash and cash equivalents for the Medical Center increased $57 million, or 13 percent, attributable to an increase in cash from operations. Substantially all of UCSF’s cash and cash equivalents are invested and managed by the Treasurer of the Regents of the University and are considered demand deposits. Cash equivalents are generally fixed or variable income securities in the Short-Term Investment Pool (STIP) and Total Return Investment Pool (TRIP), although TRIP has an allocation to foreign and domestic equity securities. STIP has a maximum maturity date of 5.5 years. TRIP is managed to a total return objective and is intended to supplement STIP. Investment income is reported as nonoperating revenue in the Statements of Revenues, Expenses, and Changes in Net Position.
Accounts receivable, net Accounts receivable, net of allowance for uncollectible accounts, increased $14 million, or 3 percent, and consists of the following:
(in millions of dollars) 3 2014 2013 $ Change % Change Federal government $ 31 $ 20 $ 11 55% State government 19 18 1 6 Local and private 47 51 (4) (8) Medical Center 334 325 9 3 Other 23 26 (3) (12) Accounts receivable, net $454 $440 $14 3%
Details on the key components of accounts receivable are as follows: • Federal, state and local government, as well as private support, primarily relates to contract and grants receivables and fluctuates based on timing of invoicing and payment cycles. • Medical Center accounts receivable increased primarily due to a $6 million receivable from CHRCO related mainly to personnel and marketing expenses. Patient receivables slightly increased $1 million due to an increase in patient volume offset by revenue cycle improvements which accelerated the timing of collections on patient billings. • Other accounts receivable includes a decrease of $2 million related to state appropriations
Capital assets, net Capital assets, net of accumulated depreciation, increased $301 million, or 8 percent in 2014. Capital assets include land, infrastructure, buildings and improvements, equipment, software, libraries, collections, and construction in progress. Capital spending continues at a brisk pace in order to provide facilities to support UCSF’s teaching, research, and patient care missions. These facilities include core academic research and teaching buildings, patient care facilities, student services facilities, housing and other auxiliary enterprises, utility plants and infrastructure, and remote centers for educational research and outreach.
8 MANAGEMENT DISCUSSION & ANALYSIS Capital asset balances by category consist of the following:
(in millions of dollars) 4 2014 2013 TOTAL Medical Campus Center Total Total $ Change % Change Land $ 137 $ 119 $ 256 $ 256 $ - -% Infrastructure 52 - 52 51 1 2 Buildings and improvements 2,752 1,028 3,780 3,694 86 2 Equipment 404 526 930 936 (6) (1) Libraries and collections 108 - 108 107 1 1 Construction in progress 124 1,172 1,296 919 377 41 Capital assets, at original cost 3,577 2,845 6,422 5,963 459 8 Less: accumulated depreciation (1,473) (932) (2,405) (2,247) (158) (7) Capital assets, net $2,104 $1,913 $4,017 $3,716 $301 8%
The original cost for capital assets, net of disposals, increased $459 million, or 8 percent. Similarly, accumulated depreciation increased $158 million, or 7 percent. The following major facilities and projects were capitalized in 2014: • Helen Diller Family Cancer Research Building at Mission Bay fourth floor build-out for $15 million. • Mission Bay 1500 Owens Street third floor clinics for $8 million. • Mount Zion seismic upgrade for $7 million. • Medical Science Building at the Parnassus anatomy lab renovation for $6 million. The following major construction is currently underway: • UCSF Medical Center and UCSF Benioff Children’s Hospital at Mission Bay for $1 billion, including $55 million in medical equipment. UCSF’s largest capital project, with a budget of $1.52 billion, will give UCSF room to evolve. The project includes construction of 878,000 gross square feet to accommodate a 289-bed inpatient building for three hospitals: Children’s, Women’s Specialty, and Cancer. The new facility will also include an outpatient building with a helipad, an energy center, and site improvements such as parking and infrastructure. Slated for completion in August 2014 with a target opening in February 2015, the complex will serve as a third major UCSF site providing patient care. UCSF Medical Center at Parnassus Heights will transition its focus to high-end adult surgical and medical services, including emergency medicine. UCSF Medical Center at Mount Zion will become a major outpatient hub, offering advanced diagnostic and therapeutic services. • Mission Hall: UCSF Global Health & Clinical Sciences Building at Mission Bay for $119 million. The building is approximately 264,000 square feet and will provide office space for Clinical Faculty supporting the Medical Center as well as a space for academic and research units, including the Global Health Sciences program, currently located in campus leased space. Construction began in March of 2013 and is scheduled for completion in August 2014.
Other assets Other assets include investments held by trustees, pledge receivables, note and mortgage receivables, inventories and other smaller assets. The decrease in other assets of $30 million, or 11 percent, is primarily related to a decrease in the Medical Center’s third-party payor settlements.
Deferred outflows of resources Changes in the net pension liability and changes in fair values of the University’s interest rate swaps that are determined to be hedging derivatives are reported as deferred outflows of resources. The decrease of $227 million, or 29 percent, in deferred outflows of resources is primarily related to the recognition of changes in the net pension liability.
2014 UCSF ANNUAL FINANCIAL REPORT 9 UCSF’s Liabilities and Deferred Inflows
Pension liability $1,205 / 22%
2014 LIABILITIES Due to University $338 / 6% AND DEFERRED INFLOWS Debt $2,067 / 37%
Deferred in ows $1,134 / 20%
Other liabilities $859 / 15%
shown in millions of dollars
UCSF’s total liabilities and deferred inflows decreased $183 million, or 3 percent, to $5.6 billion in 2014. Liabilities primarily consist of debt, deferred inflows, long-term pension liability, a payable due to the University and to a lesser extent, accounts payable to vendors for goods and services, accrued compensation for services performed, and deferred revenue. The sections below provide more details on the various components of UCSF’s liabilities, comparing the 2014 and 2013 positions where meaningful.
Debt Capital expenditures are financed from a variety of sources, including UCSF restricted gifts, federal and state support, revenue bonds, bank loans, leases, and other expendable resources. Commercial paper and bank loans provide interim financing. At $2.1 billion in 2014, outstanding debt increased $22 million, or 1 percent, from 2013. The debt activity is as follows:
(in millions of dollars) 5 2014 2013 Medical Medical Campus Center Total Campus Center Total ADDITIONS TO OUTSTANDING DEBT Commercial paper and bank loans $ 33 $ - $ 33 $ 22 $ - $ 22 University of California General Revenue Bonds 189 1 190 224 - 224 University of California Limited Project Revenue Bonds - - - 91 - 91 Other capital lease obligations 2 - 2 1 - 1 Additions to outstanding debt 224 1 225 338 - 338 REDUCTIONS TO OUTSTANDING DEBT Refinancing (135) - (135) (281) - (281) Prepayments of principal ------Scheduled principal payments (16) (47) (63) (21) (25) (46) Payments on commercial paper and bank loans (5) - (5) (19) - (19) Reductions to outstanding debt (156) (47) (203) (321) (25) (346) Net increase (decrease) in outstanding debt $ 68 $ (46) $ 22 $ 17 $ (25) $ (8)
10 MANAGEMENT DISCUSSION & ANALYSIS Details on the debt activities in 2014 are as follows: • The Campus received proceeds of $33 million from commercial paper to provide short-term financing primarily for construction of the Mission Bay Central Utility Plant. • The Campus received proceeds of $189 million from University General Revenue Bonds to refinance previously issued State Public Works Bonds of approximately $80 million and commercial paper related to various Campus projects. Details on the debt activities in 2013 are as follows: • The Campus received proceeds of $22 million from commercial paper to provide short-term financing primarily for construction of the Mission Bay Central Utility Plant. • The Campus received proceeds of $315 million from University General Revenue Bonds and University Limited Project Revenue Bonds to refinance previously issued General Revenue Bonds and commercial paper. Ratings for University bonds are as follows: • The University’s General Revenue Bond ratings are currently affirmed as Aa1 with a negative outlook by Moody’s Investors Service, AA+ by Fitch with a stable outlook, and AA by Standard & Poor’s with a stable outlook. • The University’s Limited Project Revenue Bonds and Medical Center Pooled Revenue Bonds are currently affirmed at Aa2 with a negative outlook by Moody’s Investors Service, AA by Fitch with a stable outlook, and AA- by Standard & Poor’s with a stable outlook.
Deferred pension liability UCSF has a financial responsibility for pension benefits associated with its defined benefit plans. UCSF’s 2013 financial statements have been restated for new accounting standards, and accordingly, UCSF’s pension obligation was $1.2 billion and $1.9 billion in 2014 and 2013, respectively. The change in net pension liability has been primarily driven by the investment performance of the UCRP investment portfolio. UCRP’s total investment rate of return was 17.4 percent in 2014 and 11.7 percent in 2013. The discount rate used to estimate the net pension liability for both June 30, 2014 and 2013 was 7.5 percent.
Due to University Due to University represents an amount owed to the University for reimbursement of a contribution made by the University to the pension plan assets.
Other liabilities Other liabilities remained relatively flat in 2014 and consist of accounts payable, accrued salaries, accrued employee benefits, unearned revenue, funds held for others, federal refundable loans and smaller other liabilities.
Deferred Inflows Deferred inflows of resources are related to changes in the net pension liability and increased in 2014 by $448 million, or 65 percent, due to higher than expected earnings on pension investments.
2014 UCSF ANNUAL FINANCIAL REPORT 11 UCSF’s Net Position
$(347) 2014 UNRESTRICTED $(495) 2013
2014 $310 RESTRICTED EXPENDABLE 2013 $306
2014 $2,028 INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT 2013 $1,746 2014 2013
shown in millions of dollars
UCSF’s net position represents the residual interest in assets and deferred outflows after all liabilities are satisfied. Net position increased $434 million, or 28 percent, to $2.0 billion in 2014. Net position was restated for 2013 as a result of adopting new accounting rules. Net position is reported in three categories: invested in capital assets, restricted expendable, and unrestricted. The sections below discuss each of these categories.
Invested in capital assets, net of related debt The portion of net position invested in capital assets net of accumulated depreciation and the related outstanding debt used to finance the acquisition, construction, or improvement of these capital assets is $2.0 billion in 2014, compared with $1.7 billion in 2013. The net increase represents UCSF’s continuing investment in physical facilities and infrastructure.
What’s Ahead
Cancer Immunotherapy: Imagine your own immune system — not chemotherapy —as the first line of defense to battle cancer. Lawrence Fong, MD, associate professor of medicine notes the new frontier in cancer treatment is “getting a person’s own immune system to eliminate tumors, rather than targeting the cancer cells with chemotherapy. In contrast to conventional cancer treatments, immunotherapies can lead to long-lasting clinical responses.”
12 MANAGEMENT DISCUSSION & ANALYSIS Restricted expendable UCSF’s restricted expendable net position of $310 million is subject to externally imposed restrictions governing use. This net position may be spent only in accordance with external restrictions and may include support received from gifts, appropriations, loans for specific programs, capital projects, or other third-party receipts. Restricted expendable net position by type of restriction is as follows:
$203
$140
$62 $65 $64
$31 $7 $14 $23 $7 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013
ENDOWMENT GIFTS LOANS CAPITAL DEBT SERVICE AND PROJECTS APPROPRIATIONS shown in millions of dollars
Restricted expendable net position increased $4 million, or 1 percent, primarily due to an increase in private gifts partially offset by spending on capital projects.
Unrestricted Under generally accepted accounting principles, net position components that are not subject to externally imposed restrictions governing their use must be classified as unrestricted for financial reporting purposes. Although UCSF’s unrestricted net position is not subject to externally imposed restrictions, substantially all of the net position is designated internally for academic and research initiatives or programs, or for capital purposes. Unrestricted net position is in a deficit position of $347 million at the end of the year. The decrease in the deficit of $148 million, or 30 percent, is due to changes in the net pension obligation related to strong financial market performance.
2014 UCSF ANNUAL FINANCIAL REPORT 13 UCSF’s Results of Operations The Statements of Revenues, Expenses, and Changes in Net Position provided in the sections below are a presentation of UCSF’s operating results, indicating whether the financial condition has improved or deteriorated. In accordance with GASB requirements, certain significant revenues budgeted for fundamental operational support of the core instructional mission of UCSF must be recorded as nonoperating revenues, including state educational appropriations, private gifts, and investment income. Below is a comparison of operating results for 2014 and 2013, arranged to show revenue and expenses associated with UCSF core activities:
(in millions of dollars) 6 YEAR ENDED JUNE 30, 2014 YEAR ENDED JUNE 30, 2013 CHANGE Non- Non- Operating Operating Total Operating Operating Total $ % REVENUES Student tuition and fees, net $ 56 $ - $ 56 $ 57 $ - $ 57 $ (1) (2%) State educational appropriations - 198 198 - 188 188 10 5 Grants and contracts, net 1,144 - 1,144 1,114 - 1,114 30 3 Medical Center, net 2,390 - 2,390 2,164 - 2,164 226 10 Other clinical revenue and educational activities, net 236 - 236 225 - 225 11 5 Auxiliary enterprises, net 48 - 48 49 - 49 (1) (2) Private gifts - 156 156 - 111 111 45 41 Investment income - 113 113 - 111 111 2 2 Other revenues 72 39 111 50 68 118 (7) (6) Revenues supporting core activities 3,946 506 4,452 3,659 478 4,137 315 8 EXPENSES Salaries 2,138 - 2,138 2,038 - 2,038 100 5 Benefits 635 - 635 797 - 797 (162) (20) Scholarships and fellowships 26 - 26 24 - 24 2 8 Utilities 35 - 35 33 - 33 2 6 Supplies and materials 487 - 487 477 - 477 10 2 Depreciation 221 - 221 215 - 215 6 3 Interest expense - 77 77 - 64 64 13 20 Other expenses 671 - 671 609 7 616 55 9 Expenses associated with core activities 4,213 77 4,290 4,193 71 4,264 26 1 Income (loss) from core activities (267) 429 162 (534) 407 (127) 289 228 OTHER CHANGES IN NET POSITION State capital appropriations - 2 2 - 73 73 (71) (97) Capital gifts and grants - 263 263 - 23 23 240 1,043 Changes in payable due to University 9 9 - - - 9 100 Transfers (to)/from University, net - - - - (4) (4) 4 100 Transfers to Regents’ endowments - (3) (3) - (12) (12) 9 75 Other changes in net position - 271 271 - 80 80 191 239 Increase (decrease) in net position (267) 700 433 (534) 487 (47) 480 1,021 NET POSITION Net position, beginning of year 3,675 3,465 210 6 Cumulative effect of change in accounting principle (2,117) (1,860) (257) (14) Net position, beginning of period, as restated 1,558 1,605 (47) (3) End of year $1,991 $1,558 $433 28%
The following sections present more information on revenues, expenses and changes in net position associated with UCSF core activities.
14 MANAGEMENT DISCUSSION & ANALYSIS Revenues Supporting Core Activities Revenues supporting UCSF’s core activities, including those classified as nonoperating revenues, increased $315 million, or 8 percent, to $4.5 billion in 2014 compared with $4.1 billion in 2013. Revenues in the various categories for fiscal years 2014 and 2013 are as follows:
$2,390
$2,164
2013 2012 2013 2012
$1,144 $1,114
$198 $188 $236 $225 $156 $111 $113 $111 $111 $118 $56 $57 2014 2013 2014 2013 2014 2013 2014 2013 $48 $49 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013
STUDENT STATE GRANTS AND MEDICAL OTHER CLINICAL AUXILIARY PRIVATE GIFTS INVESTMENT OTHER TUITION AND EDUCATIONAL CONTRACTS, CENTER, NET REVENUE AND ENTERPRISES, INCOME REVENUES FEES, NET APPROPRIATIONS NET EDUCATIONAL NET ACTIVITIES, NET shown in millions of dollars
What’s Ahead
Genome Editing: Wendell Lim, PhD, professor of cellular and molecular pharmacology and Howard Hughes Medicine Institute investigator is focused on CRISPRs, a new system “that gives us unprecedented ability to reach in and surgically alter and manipulate the genome. The impact on basic discovery and on biotechnology and medicine will be revolutionary.”
15 MANAGEMENT DISCUSSION & ANALYSIS UCSF’s diverse source of revenues, including student fees, federally sponsored grants and contracts, the Medical Center, private and local government support, the state of California, and self-supporting enterprises, represents a major financial strength for the institution. The importance of this diversity has grown over the past several years, as the state’s financial crisis required reductions in instructional as well as non-instructional programs. Operating and nonoperating revenues supporting UCSF’s core activities in 2014 are as follows:
Auxiliary enterprises, net $48 / 1% Student tuition and fees, net $56 / 1% Other revenues $111 / 2% Investment income $113 / 3% Private gifts $156 / 4% State educational appropriations $198 / 4%
Other clinical revenue and educational activities, net $236 / 5% 2014 REVENUES SUPPORTING CORE ACTIVITIES Medical Center, net $2,390 / 54%
Grants and contracts, net $1,144 / 26%
shown in millions of dollars
Student tuition and fees, net Student tuition and fees, net of scholarship allowances, remained relatively flat with a slight decrease of $1 million, or 2 percent, to $56 million in 2014, compared with $57 million in 2013. Scholarship allowances increased to $35 million in 2014 compared with $32 million in 2013. Total primary curriculum enrollment is as follows:
7 2014 2013 STUDENTS Graduate academic programs: Ph.D. programs 798 817 Masters programs 151 122 Graduate certificate programs 94 82 Graduate academic programs 1,043 1,021 Graduate professional students 2,051 2,059 Total students 3,094 3,080 TRAINEES Postdoctoral scholars 1,041 1,127 Residents 1,497 1,479 Total trainees 2,538 2,606 Total students and trainees 5,632 5,686
State educational appropriations State educational appropriations increased $10 million, or 5 percent, as a result of tax initiatives approved by the voters of California in November 2012. Appropriations are used to support the educational mission and University Office of the President administration.
16 MANAGEMENT DISCUSSION & ANALYSIS Grants and contracts, net Revenue from federal, state, private, and local government grants and contracts increased $30 million, or 3 percent, and consists of the following:
(in millions of dollars) 8 2014 2013 $ Change % Change Federal $ 665 $ 663 $ 2 0% State 66 67 (1) (1) Private 257 236 21 9 Local 156 148 8 5 Grants and Contracts, net $1,144 $1,114 $30 3%
Details on specific grant and contract revenues are as follows: • Federal grant and contract revenues remained relatively flat between fiscal years with a slight increase of $2 million, or less than one percent. Approximately 92 percent of federal revenue was received from National Institute of Health and Public Health Services of which $470 million was for research and public service. • State grant and contract revenues slightly decreased $1 million, or 1 percent, and consist primarily of California Department of Public Health awards. • Private grant and contract revenues increased $21 million, or 9 percent, primarily due to new large, multi-year awards supporting healthcare research and development. • Local government revenue increased $8 million, or 5 percent, primarily due to a cost of living increase and program expansion of the San Francisco General Hospital contract. • Facilities and administrative costs of federally sponsored programs are recovered at cost reimbursement rates negotiated with UCSF’s federal cognizant agency, the U.S. Department of Health and Human Services. For the fiscal year ended June 30, 2014, the facilities and administrative cost recovery totaled $197 million: $144 million from federally sponsored programs and $53 million from other sponsors. For the fiscal year ended June 30, 2013, the facilities and administrative cost recovery totaled $195 million: $144 million from federally sponsored programs and $51 million from other sponsors.
Medical Center, net The Medical Center provides basic care, moderate care and highly complex care, including transplants, neurosurgery and cancer treatment. Most patients receiving basic and moderate acute care live relatively close to the Medical Center. In contrast, patients receiving highly complex care may come to the center from greater distances. Approximately 75 percent of the Medical Center’s existing inpatient cases are adult cases, while 25 percent are pediatric. Total Medical Center revenues increased $226 million, or 10 percent, to $2.4 billion in 2014. The increase was primarily due to improved inpatient and outpatient reimbursement rates, an increase in the complexity of cases, and a slight change in the mix of payors to those with better contracted rates. The table below summarizes the revenue sources of the Medical Center:
(in millions of dollars) 9 2014 2013 $ Change % Change Medicare $ 462 $ 416 $ 46 11% Medi-Cal 195 164 31 19 Contracts 1,619 1,463 156 11 County/uninsured/self-pay 33 55 (22) (40) Net patient service revenue 2,309 2,098 211 10 Other revenue 81 66 15 23 Medical Center, net $2,390 $2,164 $226 10%
2014 UCSF ANNUAL FINANCIAL REPORT 17 Details on Medical Center revenue sources are as follows: • Revenue for Medicare beneficiaries increased $46 million, or 11 percent, partially due to an increase of inpatient volume compared with 2013. Medicare payments to the Medical Center take many forms. Inpatient services provided to Medicare beneficiaries are reimbursed on a per-discharge basis at rates set at the national level, with adjustments for prevailing labor costs. Medicare also reimburses the Medical Center for the direct and indirect costs of graduate medical education, capital costs, and outlier costs for cases with unusually high costs of care. Hospital outpatient care is reimbursed under a prospective payment system. • Laws and regulations governing the Medicare program are complex and subject to interpretation, and the Medical Center continues to work with Medicare to resolve open cost-report issues. As a result, actual amounts could differ from the recorded estimates. The Medical Center revenue includes loss contingencies related to these open cost-report issues, as required by generally accepted accounting principles. • Revenue for Medi-Cal, California’s Medicaid program, patients increased $31 million, or 19 percent. Medi-Cal fee for service (FFS) inpatient hospital payments are made in accordance with the federal Medicaid hospital financing waiver and legislation enacted by the state of California. Medi-Cal outpatient FFS services are reimbursed based on a fee schedule; the Medical Center also receives Medi-Cal inpatient FFS payments, Medi-Cal Disproportionate Share Hospital payments, and Safety Net Care Pool payments. In addition, the Medical Center is eligible to receive incentive payments designed to encourage delivery system innovation in preparation for federal health care reform. The increase in net revenue for Medi-Cal was due to higher patient volumes, as traditional Medi-Cal patients migrated to commercial-managed care plans and lower supplemental payments received under state of California Assembly Bill AB 1383. Medi-Cal net revenues in 2014 and 2013 also include supplemental reimbursement for a portion of unreimbursed facility costs under the state of California Assembly Bill AB 915. • The Medical Center receives most of its net patient service revenue from contracts with commercial health maintenance organizations and preferred provider organizations, which usually reimburse the Medical Center at contracted discount or per-diem rates. Net revenue earned on commercial contracts increased $156 million, or 11 percent, representing about 70 percent of total net patient service revenue in 2014, consistent with 2013. Commercial inpatient days, net revenue per inpatient day, outpatient visits, and patient acuity all increased in both 2014 and 2013. • Other revenues increased $15 million, or 23 percent, and consist of revenues generated through non-patient care activities, such as rebates, pharmacy and cafeteria revenue.
Other clinical revenue and educational activities, net Other clinical revenue and educational activities increased $11 million, or 5 percent, and is comprised of third-party affiliation agreements, patient services performed by non-Medical Center educational departments, dental clinic revenue, laboratory service fees and continuing education. The increase primarily represents third-party affiliation revenue.
Auxiliary enterprises, net Auxiliary enterprises remained relatively flat with a slight decrease of $1 million, or 2 percent, and consist of the following revenue sources: housing, parking, permits and recreation programs.
Private gifts, net Gifts are generally restricted to uses designated by the donor for research, instruction or institutional support. Private gifts are provided directly to UCSF from the donor, or are administered and transferred to UCSF by the Foundation. The increase of $45 million, or 41 percent, is primarily attributed to private gifts transferred from the Foundation designated for research.
18 MANAGEMENT DISCUSSION & ANALYSIS Investment income Investment income includes dividend and interest income from the earnings from STIP, TRIP, and expendable endowment income from the general endowment pool (GEP). The Regents utilize asset allocation strategies intended to optimize investment returns over time in accordance with investment objectives and at acceptable levels of risk. Investment income increased slightly by $2 million, or 2 percent, compared with 2013.
Other revenues Other revenues consist of non-educational sales and services representing revenues received from a variety of sources including federal financing appropriations, patent income, lease income, and state financing appropriations. Other revenues decreased $7 million, or 6 percent, compared with 2013.
Expenses Associated with Supporting Core Activities Expenses associated with UCSF’s core activities, including those classified as nonoperating expenses, increased $26 million, or 1 percent, to $4.3 billion in 2014. Expenses in the various categories for fiscal years 2014 and 2013 are as follows:
$2,138 $2,038
2013 2012
$797 $635 $671 $616 $487 $477
$26 $24 $35 $33 $221 $215 $77 $64 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013
SALARIES BENEFITS SCHOLARSHIPS UTILITIES SUPPLIES AND DEPRECIATION INTEREST OTHER AND MATERIALS EXPENSE EXPENSES FELLOWSHIPS shown in millions of dollars
Operating and nonoperating expenses associated with supporting UCSF’s core activities in 2014 are as follows:
Scholarships and fellowships $26 / 1% Utilities $35 / 1% Interest expense $77 / 2% Depreciation $221 / 5%
Supplies and materials $487 / 11%
2014 EXPENSES SUPPORTING CORE ACTIVITIES Benefits $635 / 15% Salaries $2,138 / 50%
Other expenses $671 / 15%
shown in millions of dollars
2014 UCSF ANNUAL FINANCIAL REPORT 19 Salaries Consistent with prior years, salaries account for 50 percent of UCSF’s total expenses. Salaries increased $100 million, or 5 percent, resulting both from employee growth and salary increases. Additionally, the salaries category includes Medical Center temporary employees who do not receive benefits. Details on salaries expense are as follows: • Campus salaries increased $54 million, or 4 percent, driven mainly by salary increases for faculty of $35 million, non-faculty academic of $8 million, non-represented staff of $6 million and represented employees of $2 million. • Medical Center salaries increased $46 million, or 6 percent, primarily driven by represented employee salaries of $33 million and non-represented staff of $8 million and a decrease in capitalized salaries of $16 million due to the completion of the APeX electronic medical records system. This is partially offset by a decrease in temporary staff of $9 million.
Benefits In 2014, benefits were approximately 30 percent of salaries, or 15 percent of UCSF’s total expenses. In 2013, these expenses were approximately 39 percent of salaries, or 19 percent of total expenses. Benefits decreased $162 million, or 20 percent, compared with 2013 and consist of the following:
(in millions of dollars) 10 Campus Medical Center Total 2014 2013 2014 2013 2014 2013 $ Change % Change UC Retirement Plan $124 $226 $ 99 $186 $223 $412 $(189) (46%) Retiree health benefits 28 22 22 17 50 39 11 28 Health, dental and vision 119 117 80 76 199 193 6 3 Social Security and Medicare 69 71 47 48 116 119 (3) (3) Workers’ compensation and other 20 21 27 13 47 34 13 38 Benefits $360 $457 $275 $340 $635 $797 $(162) (20%)
Details on benefit costs are as follows: • The University administers the University of California Retirement Plan (UCRP) on behalf of UCSF. UCSF and employees contribute to UCRP, as determined annually pursuant to the Regents’ funding policy and based on recommendations of the consulting actuary. UCRP pension expense decreased due to investment gains on plan assets in excess of expected returns. Partially offsetting this decrease is an increase in employer contributions to UCRP of $24 million, or 27 percent, in 2014. In 2014, UCSF contributed 12 percent compared with UCSF’s contribution of 10 percent in 2013. • Retiree health benefits increased $11 million, or 28 percent, and are funded separately by an assessment against covered compensation. This increase is attributable to a rate assessment increase from $1.80 to $3.24 per $100 of covered compensation, effective June 2013. • Health, dental, and vision benefits increased $6 million, or 3 percent, primarily due to benefit rate increases.
Scholarships and fellowships UCSF places a high priority on student financial aid as a part of its commitment to access and affordability. Scholarship allowances represent UCSF fee waivers and are reported as an offset to student tuition and fee revenue, not as an operating expense. Scholarships and fellowships represent payments of financial aid made directly to students and are reported as operating expense. Scholarships and fellowships increased $2 million, or 8 percent, to $26 million in 2014 compared with $24 million in 2013, in addition to the scholarship allowances recorded as an offset to tuition of $35 million and $32 million for 2014 and 2013, respectively.
20 MANAGEMENT DISCUSSION & ANALYSIS Supplies and materials Supplies and materials increased $10 million, or 2 percent, primarily attributable to inflation in pharmaceutical supplies, as well as medical service costs.
Depreciation Depreciation increased $6 million, or 3 percent, to $221 million in 2014 compared with $215 million in 2013. The depreciation increase is directly attributable to capital spending at the Mission Bay campus over the past several years.
Interest expense Interest expense increased $13 million, or 20 percent, to $77 million in 2014 compared with $64 million in 2013. The increase is due to a decrease in capitalized interest related to the construction of the UCSF Medical Center and UCSF Benioff Children’s Hospital at Mission Bay.
Other expenses Other expenses consist of a variety of expense categories including costs incurred by subcontractors who contribute to the overall completion of an award’s scientific deliverables, consultants, repairs and maintenance, rental of space and travel. Additionally, other expenses include an assessment fee from the University; UCSF retains all of its revenues directly, and Office of the President assessments are charged independently via a separately calculated fee.
Other changes in net position Similar to nonoperating activities, other changes in net position are also not available to support UCSF’s operating expenses in the current year. Other changes in net position increased $191 million, or 239 percent, to $271 million in 2014, compared with $80 million in 2013. The increase is primarily due to an increase in capital gifts and grants, partially offset by a decrease in State capital appropriations. Capital gifts and grants and state capital appropriations may only be used for the purchase or construction of specified capital assets. Capital gifts increased $240 million in 2014 primarily related to the construction of UCSF Medical Center and UCSF Benioff Children’s Hospital at Mission Bay. This state-of-the-art hospital complex will encompass children’s, women’s and cancer specialty care centers and will be completed in February 2015. The Foundation transfers funds to UCSF that are recorded as capital gifs and grants revenue as these funds are required to pay for specific facilities. Partially offsetting is a decrease of $71 million in the receipt of State capital appropriations from the Children’s Hospital Bond Act of 2008, California Propositions 3 and 61 for UCSF Benioff Children’s Hospital at Mission Bay. Transfers to Regents’ endowment represent amounts transferred from UCSF to the University for investment as quasi-endowments to support academic programs.
2014 UCSF ANNUAL FINANCIAL REPORT 21 UCSF Cash Flows The statements of cash flows present information about the significant sources and uses of cash. A summary comparison of cash flows for 2014 and 2013 is as follows:
(in millions of dollars) 11 2014 2013 $ Change Cash received from operations $3,836 $3,636 $200 Cash payments for operations (3,824) (3,605) (219) Net cash provided by operating activities 12 31 (19) Net cash provided by noncapital financing activities 375 328 47 Net cash used by capital and related financing activities (304) (460) 156 Net cash provided by investing activities 110 426 (316) Net increase in cash and cash equivalents 193 325 (132) Cash and cash equivalents, beginning of year 2,129 1,804 325 Cash and cash equivalents, end of year $2,322 $2,129 $193
Cash in demand deposit accounts is minimized by sweeping available cash balances into investment accounts managed by the University on a daily basis. Details on cash flows are as follows: • Cash of $12 million was provided by operating activities and is primarily attributable to cash generated from Medical Center operations. • Cash of $375 million was provided by noncapital financing activities. As defined by GASB, noncapital financing activities include state educational appropriations of $199 million and private gifts of $157 million received to support operational, rather than capital, purposes. • Cash of $304 million was used for capital and related financing activities. Of this, $493 million was used for capital spending and $326 million was used for debt service. Use of cash for capital and related financing activities is partially offset by proceeds from capital gifts and grants of $263 million, issuance of debt of $225 million and state and federal capital appropriations of $26 million. • Cash of $110 million was provided by investing activities. Investing activities includes investment income consisting of endowment income of $38 million, STIP investment income of $31 million, and TRIP investment income of $42 million.
What’s Ahead
The Human Microbiome: Susan Lynch, PhD, associate professor of medicine notes that microbiome research is rapidly identifying relationships between the bacterial ecosystem in the human gut and an ever-expanding range of diseases. “This field of research will prove transformative in the development of novel microbiome-based therapies to treat or prevent respiratory, gastro- intestinal and even neurological disorders.”
22 MANAGEMENT DISCUSSION & ANALYSIS UCSF Foundation Financial Position The Foundation’s Condensed Statements of Net Position provide information on the organization’s current financial condition. Over time, increases or decreases in net position provide one indicator of the improvement or erosion of the Foundation’s financial health when considered with other nonfinancial information. The table below summarizes the Foundation’s net position, and sections following the table provide additional details.
(in millions of dollars) 12 2014 2013 $ Change % Change ASSETS Cash and investments $1,153 $1,156 $(3) (0%) Pledges receivable, net 147 70 77 110 Other assets 2 41 (39) (95) Total assets 1,302 1,267 35 3 LIABILITIES Accounts payable and other liabilities 26 18 8 44 Unearned revenue 18 38 (20) (53) Funds held for others 20 22 (2) (9) Obligations under life income agreements 17 16 1 6 Total liabilities 81 94 (13) (14) NET POSITION Restricted nonexpendable 452 410 42 10 Restricted expendable 769 763 6 1 Total net position $1,221 $1,173 $48 4%
Assets The Foundation’s assets increased $35 million, or 3 percent, to $1.3 billion from 2013 and include cash and cash equivalents, investments, pledges, and other assets, including investment income receivable, receivable for investments sold, and all other assets. Cash and investments decreased $3 million, or less than one percent. Year over year changes in cash and investments are primarily the result of cash flows from contributions, additions to permanent endowments, proceeds from the sale of donated securities and disbursements to UCSF, and nonoperating income. For 2014, the increase in cash and decrease in investments of $34 million and $37 million, respectively, reflect liquidation of investments to fund distributions to UCSF and the Foundation’s decision to further liquidate investments and increase cash balances. Pledges receivable increased $77 million, or 110 percent, to $147 million from 2013. New pledges totaling $144 million were offset by pledge payments and other reductions of $66 million. The net increase was offset by an increase in the allowance for uncollectible pledges and discount on multi-year pledges of $2 million. Additionally, several significant pledges were recognized in 2014 as discussed below under operating revenues. Other assets decreased $39 million, or 95 percent, from 2013. Other assets include receivable for investments sold, investment income receivable and all other assets. The decrease is primarily related to investment income receivable due to trade date versus settlement date differences with investment trades executed in late June 2014 where the cash settlement occurred after fiscal year end in July 2014.
Liabilities The Foundation’s liabilities decreased $13 million, or 14 percent, to $81 million from 2013 and include accounts payable and other liabilities, unearned revenue, funds held for others, and obligations under life income arrangements.
2014 UCSF ANNUAL FINANCIAL REPORT 23 Unearned revenue of $18 million at June 30, 2014 reflects conditional pledge payments for construction of the UCSF Medical Center and UCSF Benioff Chidren’s Hospital at Mission Bay that will be recognized in 2015 when donor conditions or contingencies are met. The decrease in unearned revenue of $20 million, or 53 percent, from 2013 reflects recognition of pledge payments received prior to 2014 that became eligible for recognition in 2014. Accounts payable and other liabilities increased $8 million, or 44 percent, from 2013. The increase is primarily due to an increase in the payable to UCSF totaling $22 million for transfers made in June 2014 that were not funded until July 2014. This increase was offset by a $14 million decrease in payable for unsettled securities transactions from 2013 to 2014. Funds held for others and obligations under life income arrangements did not change significantly from 2013 to 2014.
Net Position Net position, or total assets less liabilities, increased $48 million, or 4 percent, to $1.2 billion from 2013. Net position is classified and reported based on the presence, or absence, of donor-imposed restrictions. Restricted nonexpendable net position includes the corpus of the Foundation’s permanent endowments and the fair value of planned giving arrangements intended to benefit permanent endowments upon realization. Restricted expendable net position includes gifts subject to donor designated restrictions governing their use by particular entities or programs, or for specific purposes or functions of UCSF as well as donor and internally designated quasi-endowments which may be expended, endowment income, and change in fair market value. Unrestricted net position includes gifts not subject to donor-imposed restrictions.
UCSF Foundation Results of Operations The Foundation’s Condensed Statements of Revenues, Expenses and Changes in Net Position present the Foundation’s operating and nonoperating results and other changes in net position. The table below summarizes the Foundation’s results and sections following the table provide additional details.
(in millions of dollars) 13 2014 2013 $ Change % Change OPERATING REVENUES Contributions $ 283 $ 188 $ 95 51% Total operating revenues 283 188 95 51 OPERATING EXPENSES Distributions to UCSF 399 103 296 287 Total operating expenses 399 103 296 287 Income (loss) from operations (116) 85 (201) (236) NONOPERATING INCOME Investment income, net of investment expense 7 8 (1) (13) Net increase in fair value of investments 119 64 55 86 Total nonoperating income 126 72 54 75 Net income before other changes in net position 10 157 (147) (94) OTHER CHANGES IN NET POSITION Additions to permanent endowments 38 24 14 58 Increase in net position 48 181 (133) (73) NET POSITION Beginning of year 1,173 994 179 18 Cumulative effect of change in accounting principle - (2) 2 100 Net position, beginning of year, as restated 1,173 992 181 18 End of year $1,221 $1,173 $48 4%
24 MANAGEMENT DISCUSSION & ANALYSIS Operating Revenues Operating revenues, consisting of income from fundraising activities, including gifts for current use and quasi- endowments, increased $95 million, or 51 percent, compared with 2013. Operating revenues fluctuate based on results of fundraising activities conducted throughout the year. Contributions result from donor interests, long-term donor cultivation, and specific appeals for immediate needs. Timing and amounts are not entirely predictable and the Foundation expects fluctuations in contribution revenue from year to year. 2014 was an exceptional year with charitable giving results setting a record for UCSF Foundation. Several significant pledges were recognized in 2014 including $50 million to support the new affiliation between UCSF and CHRCO, two pledges totaling $45 million to support UCSF Medical Center and UCSF Benioff Chidren’s Hospital at Mission Bay construction, $10 million to support UCSF’s Center of Excellence in Women’s Health, $10 million to support professorships in pediatric medicine, and $5 million to establish the Robert A. Naify Atrial Fibrillation Center at UCSF. Other large gifts recognized during 2014 include $6 million to support the Helen Diller Family Comprehensive Cancer Center and Cancer Center Programs, $5 million for the Mission Hall: Global Health & Clinical Sciences Building, $5 million to establish a Precision Medicine Innovation Fund, and $5 million to support research in cardiovascular health by the Cardiovascular Research Institute.
Operating Expenses Operating expenses, consisting primarily of distributions to UCSF for spending, increased $296 million, or almost 300 percent, compared with 2013. Distributions to UCSF are based on the Campus’s programmatic needs, subject to gift restrictions and the amount available in any particular year. Distributions include transfers of capital and other gifts, pledge payments, and accumulated endowment income or payout earned on Foundation endowments. As planned, the Foundation transferred substantial balances to UCSF in 2014 to pay for construction of the new UCSF Medical Center and UCSF Benioff Children’s Hospital at Mission Bay. Distribution of a large portion of these gifts, totaling $251 million, had been deferred from prior years.
Nonoperating Income Nonoperating income includes the results of all investment activities and endowment investment activities are the source for endowment payout. Net investment income and the change in fair value of investments increased $54 million, or 75 percent, compared with 2013. While net investment income decreased slightly from 2013, an increase in fair value of investments of $119 million was recognized in 2014, compared with an increase of $64 million in 2013. The net increase in fair market value of investments reflects continuing strong investment performance and includes realized gains of $28 million and an increase in unrealized appreciation of $91 million. The largest component of the increase for 2014 is related to the endowed portfolio of $116 million. The Foundation’s endowment investment performance for 2014 was 16.1 percent. The year was characterized by strong returns in all asset classes of domestic public equities 22.6 percent, international equities 20.3 percent, real estate 19.3 percent, hard assets 14.4 percent, private equity 17.1 percent, hedge funds 12.1 percent and fixed income (including cash) 6.7 percent. Performance was generally in line with policy benchmarks. The Foundation’s independent board is responsible for specific investment policy.
Other Changes in Net Position — Additions to Permanent Endowments Other changes in net position, consisting of additions to permanent endowments, increased $14 million, or 58 percent. The largest gifts to permanent endowments for 2014 were to support an endowed distinguished professorship to be named at the Chancellor’s discretion for $5 million, provide academic support for the Institute for Human Genetics for $3 million, support training in pediatric neonatal neurology for $2 million, and provide faculty support for research in the Diabetes Center for $2 million.
2014 UCSF ANNUAL FINANCIAL REPORT 25 CHRCO Financial Position CHRCO’s Condensed Statements of Net Position provide information on the organization’s current financial condition. Increases or decreases in net position provide one indicator of CHRCO’s financial health when considered with other nonfinancial information. The table below summarizes CHRCO’s net position, and sections following the table provide additional details.
(in millions of dollars) 14 2014 2013 $ Change % Change ASSETS Cash $ 12 $ 33 $(21) (64%) Patient accounts receivable, net 68 56 12 21 Other current assets 50 81 (31) (38) Total current assets 130 170 (40) (24) Restricted assets 53 48 5 10 Capital assets, net 284 242 42 17 Other assets 165 166 (1) (1) Total assets 632 626 6 1 Deferred outflows of resources 5 4 1 25 LIABILITIES Current liabilities 83 76 7 9 Long-term debt - 63 (63) (100) Pension obligations 11 39 (28) (72) Other liabilities 81 22 59 268 Total liabilities 175 200 (25) (13) Deferred inflows of resources 31 11 20 182 NET POSITION Invested in capital assets, net of related debt 224 176 48 27 Restricted 53 52 1 2 Unrestricted 154 191 (37) (19) Total net position $431 $419 $12 3%
Assets and deferred outflows CHRCO’s assets and deferred outflows increased $7 million, or 1 percent, to $637 million from 2013 and include cash and cash equivalents, investments, restricted assets from donor gifts, capital assets, deferred outflows and other assets, including inventories. Cash decreased $21 million, or 64 percent, compared with 2013 to $12 million due to capital spending on the electronic health record system not yet reimbursed by the state grant approved under the Children’s Hospital Bond Act of 2008, California Propositions 3 and 61, as well as the delayed approval of the current year’s California Quality Assurance Fee Program. Net patient accounts receivable increased $12 million, or 21 percent, to $ 68 million from 2013 due to the slowing of billing and collection as a result of the mid-year implementation of a new billing system and full implementation of the state’s change in payment methodology to APR-DRG as compared to a daily per-diem rate. Net capital assets increased $42 million or 17 percent to $284 million from 2013 due to capital spending on the electronic health record system.
Liabilities and deferred inflows CHRCO’s liabilities and deferred inflows decreased $5 million, or 2 percent, to $206 million from 2013 and include an obligation to the University as described below, pension liability and to a lesser extent accounts payable and accrued salaries and benefits.
26 MANAGEMENT DISCUSSION & ANALYSIS CHRCO’s long-term debt decreased $63 million or 100 percent from 2013 due to the refinancing of the 2007 bonds as part of the affiliation with the UC system. CHRCO’s debt was defeased by the University with commercial paper. CHRCO has a payable to the University until the debt is refinanced into University of California Medical Center Pooled Revenue Bonds. CHRCO received advances from the University to defease the long-term debt and the advances are due from CHRCO based on a repayment schedule or upon refinancing into long-term bonds. $2 million of this payable is included with other current liabilities and $56 million is included with other non-current liabilities. CHRCO’s pension obligation decreased $28 million, or 72 percent, to $11 million from 2013 due to investment earnings exceeding expected investment returns. CHRCO is the sponsor of a single employer defined benefit plan subject to ERISA that covers substantially all full-time employees. The net pension liability is measured as the total pension liability less the amount of the pension plan’s fiduciary net position.
Net Position CHRCO’s net position represents the residual interest in assets and deferred outflows after all liabilities and deferred inflows are satisfied. Net position increased $12 million, or 3 percent, to $431 million in 2014 and is reported in three categories: invested in capital assets, restricted expendable and unrestricted. The sections below discuss each of these categories.
Invested in capital assets, net of related debt The portion of net position invested in capital assets net of accumulated depreciation and the related outstanding debt used to finance the acquisition, construction, or improvement of these capital assets increased $48 million, or 27 percent, to $224 million in 2014, from $176 million in 2013. The net increase represents CHRCO’s investment in physical facilities and infrastructure, including capital spending on the electronic health record system.
What’s Ahead
Patient-Centered Medical Homes: Kevin Grumbach, MD, chair of the Dept of Family and Community Medicine is focused on high quality, affordable health systems. “A robust foundation of family physicians and other primary care clinicians who serve as patients’ entry point and the medical ‘home’ for personalized care is key. This model of the patient-centered medical home includes same-day appointments and “virtual visits” using digital forms of communication. With an emphasis on wellness and prevention, the model addresses a patient’s comprehensive care needs by integrating nurses, pharmacists, counselors and other health professionals into the primary care team. Coordinating care provided by specialists, hospitals, home care services and other sectors keeps the focus on the whole person.
27 MANAGEMENT DISCUSSION & ANALYSIS Restricted Restricted net position is comprised of gifts subject to donor restrictions which are invested and remitted to CHRCO in accordance with the donor’s wishes. Restricted net position increased $1 million, or 2 percent, to $53 million in 2014, from $52 million in 2013. The composition of CHRCO’s restricted assets is $11 million in cash and $42 million in mutual funds. Donor restrictions on these funds are $2 million for capital projects, $24 million for endowments, and $27 million for operations.
Unrestricted Unrestricted net position is not subject to specific restrictions, but may be designated for specific purposes by management or The Regents. Substantially all unrestricted net position of CHRCO is allocated for operating initiatives or programs, or for capital programs. Unrestricted net position decreased $37 million, or 19 percent, to $154 million in 2014, from $191 million in 2013 primarily due to CHRCO’s loss from operations.
CHRCO Results of Operations CHRCO’s Condensed Statements of Revenues, Expenses and Changes in Net Position present the organization’s operating and nonoperating results and other changes in net position. The table below summarizes the organization’s results and sections following the table provide additional details.
(in millions of dollars) 15 2014 2013 $ Change % Change OPERATING REVENUES Grants and contracts, net $ 49 $ 56 $ (7) (13)% Sales and Services, Medical Center, net 358 405 (47) (12) Other operating revenues, net 21 22 (1) (5) Total operating revenues 428 483 (55) (11) OPERATING EXPENSES Salaries and wages 228 206 22 11 Benefits 64 67 (3) (4) Supplies and materials 90 80 10 13 Other operating expenses 102 112 (10) (9) Total operating expenses 484 465 19 4 Income (loss) from operations (56) 18 (74) (411) NONOPERATING INCOME (LOSS) Investment income 24 9 15 167 Private gifts, net 9 9 - - Other nonoperating revenue (expense) (6) 6 (12) (200) Total nonoperating income 27 24 3 13 Net income (loss) before other changes in net position (29) 42 (71) (169) OTHER CHANGES IN NET POSITION Capital gifts and contracts 41 37 4 11 Increase in net position 12 79 (67) (85) NET POSITION Beginning of year 419 340 79 23 End of year $431 $419 $12 3%
Operating Revenues Operating revenues decreased $55 million, or 11 percent, to $428 million compared with 2013. Net patient service revenue decreased $47 million, or 12 percent, to $358 million due to delayed California Quality Assurance Fee revenue offset partially by higher reimbursement rates. Total operating revenues were also impacted by grant expirations and expiration in 2013 of supplemental state health care reimbursement programs.
28 MANAGEMENT DISCUSSION & ANALYSIS CHRCO’s payor mix remained relatively consistent from 2013 with 42 percent contracted, 56 percent Medi-Cal and 2 percent county and self-pay.
Operating Expenses Operating expenses increased $19 million, or 4 percent, to $484 million compared with 2013 due to one-time expenses related to the electronic health record implementation and affiliation costs, and an increase in depreciation expense due to the electronic health record system. Other expenses were lower due to a reduction in the California Quality Assurance Fee expenses.
Nonoperating Income Nonoperating income increased $3 million or 13 percent to $27 million compared with $24 million in 2013, with investment income increases more than offsetting the costs incurred related to the debt refinance.
Other Changes in Net Position Other changes in net position increased $4 million, or 11 percent, to $41 million compared with $37 million in 2013, due to increased contributions received for capital projects and higher receipts from the State of California’s Children’s Hospital Bond Act of 2008 Propositions 3 and 61 in 2014.
Looking Forward The University of California is a world center of learning, known for generating a steady stream of talent, knowledge, and social benefits, and has always been at the center of California’s capacity to innovate. The excellence of its programs attracts the best students, leverages hundreds of millions of dollars in state, federal, and private funding and promotes discovery of new knowledge that fuels economic growth. The University’s variety of funding sources has become increasingly important over the past several years given the effects of the state financial crisis. In June 2013, the legislature approved the governor’s 2014 budget recommendation for a multi-year funding plan for state educational appropriations that will provide an annual base budget increase beginning with 5 percent in 2014, another 5 percent in 2015, 4 percent in 2016, and another 4 percent in 2017. UCSF and the University remain highly competitive in attracting federal grants and contracts revenue, with fluctuations in the awards received closely paralleling trends in the budgets of federal research-granting agencies. In 2014, UCSF’s federal research revenue came primarily from the U.S. Department of Health and Human Services, primarily through the National Institutes of Health and the National Science Foundation. Currently, the University does not pre-fund retiree health benefits, providing for benefits on a pay-as-you-go basis. The unfunded liability for the University’s campuses and medical centers as of the July 1, 2013 actuarial valuation was $13.2 billion. The Regents approved a new eligibility formula for the Retiree Health Plan for all employees hired on or after July 1, 2013, and non-grandfathered members, based on a graduated formula using both a member’s age and years of Retirement Plan service credit upon retirement, subject to collective bargaining for represented members. UCRP costs are funded by a combination of investment earnings, employee member, and employer contributions. The unfunded liability for the University’s campuses and medical centers as of the July 1, 2013 actuarial valuation was $7.6 billion, or 80.0 percent funded. Total funding policy contributions in the July 1, 2014 actuarial valuation represents 29.0 percent of covered compensation in July 2013. Member contributions for the employees in the new benefit tier are 7.0 percent, and the employer rate is uniform across all members. On July 1, 2014 employer contributions increased to 14.0 percent and employee contributions to 8.0 percent. In July 2014, The Regents authorized additional contributions of $700 million to UCRP, representing the difference between the contribution rates and the funding requirements, to improve the Plan’s funded status. The additional $700 million contribution to UCRP is projected to result in a 95.0 percent funded status by July 1, 2042.
2014 UCSF ANNUAL FINANCIAL REPORT 29 The UCSF Medical Center has demonstrated very positive financial results, although they continue to face financial and competitive challenges, along with the added costs and responsibilities related to their function as academic institutions. The demand for health care services and the cost of providing them continue to increase significantly. In addition to the rising costs of salaries, benefits, and medical supplies faced by hospitals across the state, along with the costs of maintaining and upgrading facilities, the Medical Center also faces additional costs associated with new technologies, biomedical research, the education and training of health care professionals and the care for a disproportionate share of the medically underserved in California. Other than Medicare and Medi-Cal, health insurance providers do not recognize the added cost of teaching in their payments to academic medical centers. Over the last few years, Medicare margins have declined as a result of payment reductions. Changes to the Medi-Cal program will likely limit or reduce the rates of payment growth to academic medical centers in future years. The continuing financial success of the Medical Center is predicated on a multifaceted strategy, which includes competing in commercial markets and offering high-quality regional services. Positive results in commercial contracts have helped address the lack of support for medical education and care for the poor. Further, the Medical Center remains competitive by reducing costs through improved efficiencies, making strategic investments, and by expanding its presence in the market through stronger links with other providers and payors. Payment strategies must recognize the need to maintain an operating margin sufficient to cover debt, provide working capital, purchase state-of-the-art equipment, and invest in infrastructure and program expansion. UCSF must have a balanced array of many categories of facilities to meet its education, research and public service goals and continues to assess its long-term capital requirements. The support for UCSF’s capital program will be provided from a combination of sources, including external financing, gifts, the state of California and other sources.
What’s Ahead
Cell Therapy: David Rowitch, MD, PhD, professor of pediatrics and neurological surgery is leading innovations to use patient’s skin cells to create iPS cells that then can be induced to differentiate into the specialized cell types that make up the various organs of the body. Faulty genes can be corrected in these differentiated cells, which can then be placed 30directly MANAGEMENT into affected DISCUSSION organs. & ANALYSIS Celebrating 150 Years in Health and Science
“UCSF is on the cutting edge of innovation, medicine, and scientific progress — a key reason why San Francisco always[ Independent leads Auditor’s Report the Letter? ]way.”
HOUSE DEMOCRATIC LEADER NANCY PELOSI
2014 Financial Statements
UNIVERSITY OF CALIFORNIA, SAN FRANCISCO STATEMENTS OF NET POSITION UCSF UCSF FOUNDATION CHRCO At June 30, 2014 and 2013 (in thousands of dollars) 2014 2013 2014 2013 2014 ASSETS Cash and cash equivalents $2,322,083 $2,128,809 $ 23,346 $ 55,152 $ 11,674 Short-term investments - - 25,273 187,027 10,695 Investments held by trustee 78,338 74,357 - - - Accounts receivable, net 454,461 440,192 557 39,506 95,196 Pledges receivable, net 214 324 36,227 24,730 345 Notes and mortgages receivable, net 2,736 2,866 - - - Funds held for others 591 862 - - - Inventories 30,830 30,907 - - 4,857 Other current assets 41,286 77,556 138 347 6,976 Current assets 2,930,539 2,755,873 85,541 306,762 129,743 Restricted assets - - 109,394 43,947 53,353 Investments - - 995,400 870,347 158,518 Pledges receivable, net 1,049 2,137 110,994 45,311 3,518 Notes and mortgages receivable, net 38,064 37,127 - - - Capital assets, net 4,017,248 3,716,477 - - 283,632 Other noncurrent assets 45,697 43,862 1,016 909 2,468 Noncurrent assets 4,102,058 3,799,603 1,216,804 960,514 501,489 Total assets 7,032,597 6,555,476 1,302,345 1,267,276 631,232 DEFERRED OUTFLOWS OF RESOURCES 560,837 788,087 - - 5,445 LIABILITIES Accounts payable 267,569 276,898 1,317 15,821 32,242 Accrued salaries and benefits 309,039 266,135 - - 31,076 Obligations under life income agreements - - 2,024 1,865 - Deferred revenue 94,641 83,853 18,218 38,218 - Current portion of long-term debt 42,952 116,886 - - 1,198 Funds held for others - - 20,326 21,718 - Other current liabilities 125,977 107,174 23,665 1,244 18,427 Current liabilities 840,178 850,946 65,550 78,866 82,943 Federal refundable loans 29,085 28,862 - - - Obligations under life income agreements - - 14,724 14,553 - Long-term debt 2,024,388 1,928,519 - - - Due to University 337,873 346,847 - - - Pension liability 1,204,535 1,853,088 - - 11,212 Other noncurrent liabilities 32,750 92,088 920 920 80,715 Noncurrent liabilities 3,628,631 4,249,404 15,644 15,473 91,927 Total liabilities 4,468,809 5,100,350 81,194 94,339 174,870 DEFERRED INFLOWS OF RESOURCES 1,134,044 685,869 - - 30,653 NET POSITION Invested in capital assets, net of related debt 2,028,246 1,746,025 - - 224,314 Restricted: Nonexpendable: 24,152 Endowment corpus - - 448,298 407,163 Trusts-annuity and life income funds - - 3,710 2,309 Expendable: 29,201 Endowment 61,943 64,740 169,518 109,114 Quasi-endowments - - 277,880 236,003 Trusts-annuity and life income funds - - 13,551 11,555 Gifts 203,053 140,116 307,761 406,255 Loans 30,609 23,492 - - Capital projects 6,974 63,662 - - Debt service 7,183 13,229 - - Appropriations - 749 - - Unrestricted (347,427) (494,669) 433 538 153,487 Total net position $1,990,581 $1,557,344 $1,221,151 $1,172,937 $431,154
See accompanying Notes to Financial Statements
32 FINANCIAL STATEMENTS
UNIVERSITY OF CALIFORNIA, SAN FRANCISCO STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION UCSF UCSF FOUNDATION CHRCO Years ended June 30, 2014 and 2013 (in thousands of dollars) 2014 2013 2014 2013 2014 OPERATING REVENUES Student tuition and fees, net $ 56,095 $ 56,759 $ - $ - $ - Grants and contracts, net Federal 665,603 663,456 - - 31,280 State 65,654 66,603 - - 1,635 Private 256,523 235,559 - - 14,815 Local 156,087 148,287 - - 1,772 Sales and services: Medical Center, net 2,390,273 2,164,209 - - 357,823 Other clinical revenue and educational activities, net 235,912 224,706 - - - Auxiliary enterprises, net 48,338 48,604 - - - UCSF Foundation private gifts - - 283,049 188,374 - Other operating revenues, net 72,431 51,710 - - 20,851 Total operating revenues 3,946,916 3,659,893 283,049 188,374 428,176 OPERATING EXPENSES Salaries and wages 2,137,530 2,037,888 - - 228,001 Benefits 635,147 796,374 - - 63,654 Scholarships and fellowships 25,774 24,010 - - - Utilities 34,550 32,689 - - - Supplies and materials 486,750 477,565 - - 89,897 Depreciation and amortization 221,218 215,220 - - 29,940 UCSF Foundation grants - - 398,860 103,393 - Other operating expenses 671,832 608,903 274 356 72,514 Total operating expenses 4,212,801 4,192,649 399,134 103,749 484,006 Operating income (loss) (265,885) (532,756) (116,085) 84,625 (55,830) NONOPERATING REVENUES (EXPENSES) State educational appropriations for: UCSF educational mission 171,797 162,454 - - - Office of the President administration 26,349 26,349 - - - State financing appropriations 1,424 6,664 - - - State hospital fee program grants - 551 - - - Federal financing appropriations 23,139 21,512 - - - Private gifts, net 155,837 111,030 - - 8,966 Investment income 113,499 110,561 6,665 8,619 23,787 Increase in fair value of investments - - 119,167 63,861 2,734 Interest expense (77,329) (64,237) - - (1,444) Patent income 9,079 18,125 - - - Gain (loss) on disposal of capital assets 224 (6,872) - - - Other nonoperating revenues 3,881 19,743 - - (7,569) Total nonoperating revenues, net 427,900 405,880 125,832 72,480 26,474 Income (loss) before other changes 162,015 (126,876) 9,747 157,105 (29,356) in net position OTHER CHANGES IN NET POSITION State capital appropriations 2,079 73,435 - - - Capital gifts and contracts 262,881 23,291 - - 41,628 Additions to permanent endowment - - 38,467 23,922 - Changes in payable due to University 8,974 - - - - Transfers to University, net - (4,384) - - - Transfers to Regents' endowment (2,712) (12,346) - - - Total other changes in net position 271,222 79,996 38,467 23,922 41,628 Increase (decrease) in net position 433,237 (46,880) 48,214 181,027 12,272 NET POSITION Net position, beginning of year 3,674,472 3,464,360 1,172,937 994,327 418,882 Cumulative effect of change in accounting principle (2,117,128) (1,860,136) - (2,417) - Beginning of year, as restated 1,557,344 1,604,224 1,172,937 991,910 418,882 Net position, end of year $1,990,581 $1,557,344 $1,221,151 $1,172,937 $431,154
See accompanying Notes to Financial Statements
2014 UCSF ANNUAL FINANCIAL REPORT 33
UNIVERSITY OF CALIFORNIA, SAN FRANCISCO STATEMENTS OF CASH FLOWS UCSF UCSF FOUNDATION CHRCO Years ended June 30, 2014 and 2013 (in thousands of dollars) 2014 2013 2014 2013 2014 CASH FLOWS FROM OPERATING ACTIVITIES Student tuition and fees $ 55,363 $ 57,175 $ - $ - $ - Grants and contracts 1,146,920 1,141,849 - - 76,321 Medical Center 2,352,036 2,164,090 - - 375,273 Educational activities 235,912 224,706 - - - Auxiliary enterprises 46,025 48,578 - - - UCSF Foundation private gifts - - 155,407 157,423 - Payments to employees (2,132,333) (1,984,393) - - (196,996) Payments to suppliers and utilities (729,950) (533,570) - - (171,868) Payments for employee and retiree benefits (571,031) (532,266) - - (97,882) Payments for scholarships and fellowships (25,774) (24,010) - - - Other operating payments (364,714) (531,444) (377,897) (103,069) - Net cash provided (used) by operating activities 12,454 30,715 (222,490) 54,354 (15,152) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES State educational appropriations for: UCSF educational mission 172,422 162,454 - - - Office of the President administration 26,349 26,349 - - - State research appropriations - 551 - - - Private gifts for endowment purposes - - 33,572 18,375 - Other private gifts 157,035 104,750 - - 8,731 Receipt of patent income 9,079 18,125 - - - Other receipts (payments) 10,143 15,743 (25) (3,727) 463 Net cash provided by noncapital financing 375,028 327,972 33,547 14,648 9,194 activities
CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES State capital appropriations 1,516 73,871 - - - State and federal financing appropriations 24,501 28,269 - - - Capital gifts and grants 262,881 23,291 - - 43,475 Proceeds from debt issuance 225,155 338,102 - - 58,120 Proceeds from the sale of capital assets 1,047 103 - - 232 Proceeds from insurance recoveries - 4,000 - - - Purchase of capital assets (492,955) (480,190) - - (70,411) Refinancing or prepayment of outstanding debt (135,126) (281,045) - - - Principal paid on debt and financing obligations (68,317) (65,185) - - (66,651) Interest paid on debt and financing obligations (122,428) (101,135) - - (2,988) Net cash used by capital and related financing (303,726) (459,919) - - (38,223) activities
CASH FLOWS FROM INVESTING ACTIVITIES Investment income, net of investment expenses 113,499 110,561 7,134 8,739 19,534 Proceeds from sale of donated securities - - 29,400 50,080 - Proceeds from sales and maturities of investments 47,609 365,360 491,881 319,271 129,923 Purchase of investments, net (51,590) (50,000) (305,831) (410,262) (126,954) Net cash provided (used) by investing activities 109,518 425,921 222,584 (32,172) 22,503 Net increase (decrease) in cash and cash 193,274 324,689 33,641 36,830 (21,678) equivalents Cash and cash equivalents, beginning of year 2,128,809 1,804,120 99,099 62,269 33,352 Cash and cash equivalents, end of year $2,322,083 $2,128,809 $132,740 $99,099 $11,674
See accompanying Notes to Financial Statements
34 FINANCIAL STATEMENTS
UNIVERSITY OF CALIFORNIA, SAN FRANCISCO STATEMENTS OF CASH FLOWS continued UCSF UCSF FOUNDATION CHRCO Years ended June 30, 2014 and 2013 (in thousands of dollars) 2014 2013 2014 2013 2014 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating income (loss) $(265,885) $(532,756) $(116,085) $84,625 $(55,830) Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities: Depreciation and amortization expense 220,958 215,220 - - 29,940 Allowance for uncollectible accounts 78,549 78,549 780 (197) 7,973 Loss on impairment of capital assets - 9,030 - - - Donated securities, excluding permanent endowment - - (30,828) (11,604) - Change in unamortized discount on pledges - - 640 (404) - Change in assets and liabilities: Accounts receivable (93,354) (63,318) - - 6,503 Pledges receivable - - (78,600) 348 - Inventories 77 (1,626) - - (389) Other assets 34,435 (14,527) 1,603 (18,414) (521) Accounts payable 8,772 (3,696) - - (556) Accrued salaries 30,952 53,999 - - (227) Employee benefits and pension obligations 29,061 264,108 - - (9,704) Deferred revenue 10,788 20,815 - - - Other liabilities (41,899) 4,917 - - 7,659 Net cash provided (used) by operating activities $ 12,454 $ 30,715 $(222,490) $54,354 $(15,152)
SUPPLEMENTAL NONCASH ACTIVITIES INFORMATION Capital assets acquired with a liability at year-end $27,289 $27,118 $- $- $1,345 Capital assets acquired through capital lease at year-end 2,523 - - - - Gifts of marketable securities - - 35,722 50,080 - Change in fair value of interest-rate swaps classified 273 (5,608) - - - as hedging derivatives
Amortization of deferred financing costs 801 102 - - - Amortization of bond premiums 2,447 21 - - - See accompanying Notes to Financial Statements
2014 UCSF ANNUAL FINANCIAL REPORT 35 Notes to Financial Statements
Organization The University of California (the University) was founded in 1868 as a public, constitutionally empowered, state- supported institution. The California State Constitution provides that the University shall be a public trust administered by the corporation, “The Regents of the University of California” (the Regents), which is vested with full powers of organization and governance, subject only to very specific areas of legislative control necessary to ensure the security of its funds and compliance with certain statutory and administrative requirements. The majority of the 26-member independent governing board (the Regents) is appointed by the governor and approved by the state senate. Various University programs and capital-outlay projects are funded through appropriations from the state’s annual Budget Act. The University’s financial statements are presented as a discrete component of the state’s general purpose financial statements. Additionally, the University’s financial statements, which cover ten campuses, five medical schools and medical centers, four law schools, and a statewide Division of Agricultural and Natural Resources, along with a number of other fiduciary activities, are subjected to an independent annual audit. Financial Reporting Entity University of California, San Francisco The University of California, San Francisco (UCSF) was founded in 1874 and is one of the ten campuses that comprise the University. UCSF is a leading university dedicated to promoting health worldwide through advanced biomedical research, graduate-level education in the life sciences and health professions, and excellence in patient care. It consists of the schools of medicine, dentistry, nursing, and pharmacy, the graduate division (collectively, the Campus), as well as UCSF Faculty Practice Organization and UCSF Medical Center (collectively, the Medical Center). UCSF is the only campus of the University of California that is devoted exclusively to graduate and professional education and training in the health sciences. UCSF’s financial statements include the accounts of the Campus and Medical Center. The Campus includes the Campus Facilities Improvement Association (CFIA), a legally separate, not-for-profit public benefit corporation, established for charitable and educational purposes, including facilitating the development, financing, construction and management of buildings and facilities. All members of the Board of Directors of CFIA are appointed by and can be removed by the Regents. The Regents have the authority to approve the budget for CFIA. CFIA provides services almost entirely for the benefit of the Regents on behalf of UCSF. Accordingly, CFIA is included in UCSF’s financial reporting entity as a blended component unit. The operations of most student government or associated student organizations are also included in the reporting entity because UCSF has certain fiduciary responsibilities for these organizations. The University of California system is subjected to an annual audit of the consolidated financial statements. UCSF’s financial statements are included in the University of California’s consolidated financial statements. The financial statements for UCSF have not been separately audited.
The University of California, San Francisco Foundation Under University policies approved by the Regents, each individual campus may establish a separate foundation to provide valuable assistance in fundraising, public outreach and other support for the missions of the Campus and the University. The University of California, San Francisco Foundation (the Foundation) was incorporated in 1982 as a not-for-profit public benefit corporation organized for the purpose of accepting and administering the full range of private contributions to UCSF. Although governed by an independent board, the Foundation is affiliated with, and its assets are dedicated for, the sole benefit of UCSF. The financial activities of the separately incorporated Foundation are not recorded at UCSF until such time as gifts are transferred from the Foundation to the Campus or Medical Center. However, the Foundation activity is included in the UCSF financial statements and footnotes in separate columns as a discretely presented component unit. Additional information about the Foundation may be found in their stand-alone audited financial statements.
36 NOTES TO FINANCIAL STATEMENTS Children’s Hospital and Research Center Oakland On January 1, 2014, The Regents became the sole corporate and voting member of Children’s Hospital and Research Center Oakland (CHRCO), an existing legally separate 501(c)(3) corporation. A Board of Directors comprised primarily of independent directors serves as the governing body of CHRCO. Certain corporate powers are reserved to The Regents, including the power to appoint and remove directors and to approve CHRCO’s strategic plan and budget. Children’s Hospital & Research Center Foundation (“CHRCO Foundation”), a nonprofit public benefit corporation, is organized and operated for the purpose of supporting CHRCO. The Medical Center provides certain management services for CHRCO. Since UCSF has the ability to impose its will on CHRCO, under GASB requirements, CHRCO, combined with its foundation, is a discretely presented component unit of UCSF. Financial information for CHRCO is presented to retroactively apply this change in accounting entity and the activity is included in the UCSF financial statements and footnotes in separate columns as a discretely presented component unit for the year ending June 30, 2014. Additional information about CHRCO may be found in their stand-alone audited financial statements.
Significant Accounting Policies The financial statements of UCSF, the Foundation and CHRCO have been prepared in accordance with accounting principles generally accepted in the United States of America, using the economic resources measurement focus and the accrual basis of accounting. UCSF, the Foundation and CHRCO follow accounting principles issued by the Governmental Accounting Standards Board (GASB).
New accounting pronouncements In March 2012, the GASB issued Statement No. 65, Items Previously Reported as Assets and Liabilities, effective for UCSF’s fiscal year beginning July 1, 2013. This Statement reclassifies, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as expenses, certain items that were previously reported as assets and liabilities. In March 2012, the GASB issued Statement No. 66, Technical Corrections – 2012 – An Amendment of GASB Statements No. 10 and No. 62, effective for the University’s fiscal year beginning July 1, 2013. This Statement resolves conflicting guidance that resulted from the issuance of two pronouncements, Statements No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, and No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. In June 2012, the GASB issued Statement No. 67, Financial Reporting for Pension Plans, effective for UCSF’s fiscal year beginning July 1, 2013. This Statement revises existing standards for financial reporting for pension plans by changing the approach to measuring the net pension liability. The net pension liability is measured as the total pension liability, less the amount of the pension plan’s fiduciary net position. The total pension liability is determined based upon discounting projected benefit payments based on the benefit terms and legal agreements existing at the pension plan’s fiscal year end. Projected benefit payments are required to be discounted using a single rate that reflects the expected rate of return on investments, to the extent that plan assets are available to pay benefits, and a tax-exempt, high-quality municipal bond rate when plan assets are not available. Statement No. 67 affects the information presented in the footnotes to the financial statements and required supplementary information for UCRP. In June 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions, effective for the UCSF’s fiscal year beginning July 1, 2014. UCSF has elected to early implement this Statement, effective July 1, 2013. This Statement revises existing standards for employer financial statements relating to measuring and reporting pension liabilities for pension plans provided by UCSF to its employees. This Statement requires recognition of a liability equal to the net pension liability, which is measured as the total pension liability, less the amount of the
2014 UCSF ANNUAL FINANCIAL REPORT 37 pension plan’s fiduciary net position. The total pension liability is determined based upon discounting projected benefit payments based on the benefit terms and legal agreements existing at the pension plan’s fiscal year end. Projected benefit payments are required to be discounted using a single rate that reflects the expected rate of return on investments, to the extent that plan assets are available to pay benefits, and a tax-exempt, high-quality municipal bond rate when plan assets are not available. This Statement requires that most changes in the net pension liability be included in pension expense in the period of the change. In January 2013, the GASB issued Statement No. 69, Government Combinations and Disposals of Government Operations, effective for UCSF’s fiscal year beginning July 1, 2014. This Statement establishes standards for accounting and financial reporting of government combinations and disposals of government operations. Government combinations include mergers, acquisitions and transfers of operations of government or nongovernment entities to a continuing government. The Statement includes guidance for measuring the assets and liabilities that are acquired in a combination, either with or without consideration. The provisions of this Statement are applicable on a prospective basis to combinations that occur after the effective date. In April 2013, the GASB issued Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, effective for the UCSF’s fiscal year beginning July 1, 2013. This Statement establishes standards for recording a liability when a government extends a nonexchange financial guarantee for the obligations of another government, a not-for-profit organization, a private entity or an individual without receiving equal or nearly equal value in exchange. As part of the nonexchange financial guarantee, the government commits to indemnify the holder of the obligation if the entity or individual that issued the obligation does not fulfill its payment requirements. This standard requires the government that extends a nonexchange financial guarantee to record a liability when qualitative factors and historical data indicate that it is more likely than not that the government will be required to make a payment on the guarantee. In November 2013, the GASB issued Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date, effective for UCSF concurrently with the implementation of GASB Statement No. 68. This Statement addresses an issue in Statement No. 68 concerning transition provisions related to certain pension contributions made to defined benefit pension plans prior to the implementation of that Statement by employers and nonemployer contributing entities. Implementation of Statements Nos. 66, 67, 69, 70 and 71 had no effect on UCSF’s beginning net position. To implement Statement No. 65, UCSF reclassified losses on debt refundings to deferred outflows of resources and wrote-off unamortized bond issuance costs as of July 1, 2013. To implement Statement No. 68, UCSF recorded the net pension liabilities for its defined benefit plans. The CHRCO financial data is presented in accordance with the new accounting standards described above. The impact on the University’s net position as of June 30, 2013 of adopting Statements Nos. 65 and 68, as well as the change in reporting entity related to CHRCO, is as follows:
(in thousands of dollars) 1A Net position at June 30, 2014 UCSF CHRCO Cumulative effect on net position of: Adoption of Statement No. 65 $ (11,207) $ - Adoption of Statement No. 68 (2,105,921) -
Change in Reporting entity - 418,882 Total $(2,117,128) $418,882
The significant accounting policies of UCSF, the Foundation and CHRCO are as follows: Cash and cash equivalents. All balances in demand deposit accounts are considered to be cash. The University maximizes the return on its cash balances by investing in a short term investment pool (STIP) and total return investment pool (TRIP), both managed by the Treasurer of the Regents of the University.
38 NOTES TO FINANCIAL STATEMENTS The Regents, as the governing body, are responsible for the oversight of the University’s investments and establish investment policy, which is carried out by the Chief Investment Officer. Asset allocation guidelines are provided to the campus foundations by the Investment Committee of the Regents. STIP allows participants to maximize the returns on their short-term cash balances by taking advantage of the economies of scale of investing in a large pool with a broad range of maturities and is managed to maximize current earned income. Cash to provide for payroll, construction expenditures, and other operating expenses for campuses and medical centers is invested in STIP. Investments authorized by the Regents for STIP include fixed-income securities with a maximum maturity of 5.5 years. TRIP allows UCSF to maximize return on long-term working capital by taking advantage of the economies of scale of investing in a large pool across a broad range of asset classes. TRIP is managed to a total return objective and is intended to supplement STIP. Investments authorized by the Regents for TRIP include a diversified portfolio of equity and fixed-income securities. Substantially all of UCSF’s cash and cash equivalents are invested in STIP or TRIP. Investment income is reported as nonoperating revenue in the Statements of Revenues, Expenses and Changes in Net Position. Additional information on cash and investments can be obtained from the University’s Annual Financial Report of the University. Short-term investments. Foundation short-term investments consist of U.S. government and corporate obligations with a maturity date of less than one year. Investment securities are reported at a fair value. Marketable securities’ fair values are based on quoted market prices obtained from independent sources. Investments in alternative investments, including limited partnerships, private equity funds, absolute return funds, and certain hedge funds, are reported at a fair value as determined by the general partner of the respective funds, after considering factors such as the nature of the underlying portfolios, liquidity, and market conditions. Because they are not readily marketable, the fair values may significantly differ from the values that would have been used had a ready market for these investments existed. Direct investments in real estate are stated at a fair value as established by independent appraisals. Accounts receivable, net. Accounts receivable, net of allowance for uncollectible amounts, include reimbursements due from state and federal sponsors of externally funded research and patient billings. Other receivables include local government and private grants and contracts, amounts due from students, affiliation agreements, and other educational and auxiliary activities. Foundation receivable includes receivable related to investments sold. Pledges receivable, net. Written unconditional promises to make future payments of private gifts to UCSF, the Foundation, or CHRCO, net of allowance for uncollectible amounts, are recorded as pledges receivable and revenue in the year promised at the present value of expected cash flows. Conditional pledges, including all pledges of endowments and intentions to pledge, are recognized as receivables and revenues when the specified conditions are met. Notes and mortgages receivable, net. Loans to students, net of allowance for uncollectible amounts, are provided from federal student loan programs and from other sources. Home mortgage loans, primarily to faculty, are provided from the University’s STIP and from other UCSF sources, and are collateralized by deeds of trust on properties concentrated in the San Francisco Bay Area. Inventories. Inventories, consisting primarily of pharmaceuticals, medical supplies, and printed forms, are stated on a first-in, first-out basis at cost. Capital assets, net. UCSF’s land, infrastructure, buildings and improvements, equipment, libraries and collections, and special collections are recorded at cost at the date of acquisition, or at estimated fair value at the date of donation in the case of gifts. Estimates of fair value involve assumptions and estimation methods that are uncertain, and
2014 UCSF ANNUAL FINANCIAL REPORT 39 therefore, the estimates could differ from actual results. Capital leases are recorded at the present value of future minimum lease payments. Significant additions, replacements, major repairs, and renovations to infrastructure and buildings are generally capitalized if the cost exceeds $35,000 and if they have a useful life of more than one year. Minor renovations are charged to operations. Equipment with a cost in excess of $5,000 and a useful life of more than one year is capitalized. All costs of land, library collections, and special collections are capitalized. UCSF tests its capital assets annually for impairment. Depreciation is calculated using the straight-line method over the estimated economic life of the asset. Leasehold improvements are amortized using the straight-line method over the shorter of the life of the applicable lease or the economic life of the asset. Estimated economic lives are generally as follows:
1B Years UCSF CHRCO Infrastructure 25 - Land improvements - 5-20 Buildings and improvements 15-33 10-35 Equipment 2-20 2-10 Computer software 3-7 -
Intangible assets 2-indefinite - Library books and collections 15 - Capital assets acquired through federal grants and contracts where the federal government retains a reversionary interest are capitalized and depreciated. Inexhaustible capital assets, such as land or special collections that are protected, preserved, and held for public exhibition, education or research, including art, museum, scientific, and rare book collections, are not depreciated. Interest on borrowings to finance facilities is capitalized during construction, net of any investment income earned during the temporary investment of project-related borrowings. CHRCO’s land improvements, buildings and equipment are recorded at cost at the date of acquisition. Significant additions, replacements, major repairs, and renovations are generally capitalized if the cost exceeds $15,000, and if they have a useful life of two or more years. Minor renovations are recorded as expense. Equipment with a cost of $5,000 or more, and a useful life of two or more years is capitalized. CHRCO periodically evaluates the carrying value of its long-lived assets for impairment. Interest-rate swap agreements. UCSF’s Medical Center has entered into interest-rate swap agreements to limit the exposure of its variable-rate debt to changes in market interest rates. These derivative financial instruments are agreements that involve the exchange with a counterparty of fixed and variable-rate interest payments periodically over the life of the agreement without exchange of the underlying notional principal amounts. The difference to be paid or received is recognized over the life of the agreements as an adjustment to interest expense. Interest-rate swaps are recorded at fair value as either assets or liabilities in the Statements of Net Position. UCSF has determined the interest-rate swaps are hedging derivatives that hedge future cash flows. Under hedge accounting, changes in the fair value are considered to be deferred inflows, for hedging derivatives with positive fair values, or deferred outflows, for hedging derivatives with negative fair values. Obligations under life income agreements. Trusts include irrevocable gift annuity, annuity trust, and unitrust gifts made to the Foundation that a designated beneficiary retains an interest in the gift as specified in the trust agreement.
40 NOTES TO FINANCIAL STATEMENTS The Foundation is trustee and a remainderman for these trusts. For these funds, a liability for beneficiary payments is established representing the present value of estimated future beneficiary payments over the expected life of the beneficiaries. The liability is calculated using standard gift annuity tables and applicable IRS guidelines. The remaining amount is recognized as revenue in the period that the Foundation is notified that it is a remainderman or beneficiary. Deferred revenue. UCSF deferred revenue primarily includes amounts received from grant and contract sponsors that have not been earned under the terms of the agreement and other revenue billed in advance of the event, such as student tuition and fees, and clinical trials. Foundation deferred revenue comprises conditional pledge payments received from a donor where the conditions and milestone events specified by the donor have not yet been met by the University. Federal refundable loans. Certain loans to students are administered by UCSF, with funding primarily supported by the federal government. UCSF’s Statements of Net Position include both the notes receivable and the related federal refundable loan liability representing federal capital contributions owed upon termination of the program. Pollution remediation obligations. Upon an obligating event, UCSF estimates the components of any expected pollution remediation costs and recoveries from third parties. The costs, estimated using the expected cash flow technique, are accrued as other noncurrent liabilities. Deferred outflows of resources and deferred inflows of resources.UCSF classifies gains on retirement of debt as deferred inflows of resources and losses as deferred outflows of resources and amortizes such amounts as a component of interest expense over the remaining life of the old debt, or the new debt, whichever is shorter. UCSF classifies an increase in the fair value of the hedging derivatives as deferred inflows of resources, and a decrease as deferred outflows of resources. Payments received or to be received by UCSF from service concession arrangements are reported as deferred inflows of resources. Changes in net pension liability not included in pension expense are reported as deferred outflows of resources or deferred inflows of resources. Employer contributions subsequent to the measurement date of the net pension liability are reported as deferred outflows of resources. Net position. Net position is required to be classified for accounting and reporting purposes into the following categories: Invested in capital assets, net of related debt. This category includes all of UCSF’s capital assets, net of accumulated depreciation, reduced by outstanding principal balances of debt attributable to the acquisition, construction, or improvement of those assets. Restricted. UCSF and the Foundation classify net position resulting from transactions with purpose restrictions as restricted net position until the specific resources are used for the required purpose or for as long as the provider requires the resources to remain intact. This also includes Foundation permanent endowment funds. Restricted Expendable. The net position whose use by UCSF or the Foundation is subject to externally imposed restrictions that can be fulfilled by actions of UCSF or the Foundation, pursuant to those restrictions, or that expire by the passage of time, are classified as expendable net position. Unrestricted. Net position that is neither reserved, restricted, nor invested in capital assets, net of related debt, is classified as unrestricted net position. Unrestricted net position may be designated for specific purposes by management or the Regents. The Foundation’s unrestricted net position may be designated for specific purposes by their Board of Trustees. Substantially all of the unrestricted net position is allocated for academic and research initiatives or programs, for capital programs, or for other purposes.
2014 UCSF ANNUAL FINANCIAL REPORT 41 Revenues and expenses. Operating revenues include receipts from student tuition and fees, grants and contracts for specific operating activities, sales and services from the Medical Center and faculty physicians practicing as the UCSF Faculty Practice Organization, CHRCO sales and services, educational activities, and auxiliary enterprises. Operating expenses incurred in conducting the programs and services of UCSF are presented in the Statements of Revenues, Expenses and Changes in Net Position as operating activities. Medical Center revenue includes net patient service revenue reported at the estimated net realizable amounts from patients, third-party payors including Medicare and Medi-Cal, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Laws and regulations governing the Medicare and Medi-Cal programs are complex and subject to interpretation. It is reasonably possible that estimated amounts accrued could change significantly based upon settlement, or as additional information becomes available. Certain significant revenues relied upon and budgeted for fundamental operational support of the core instructional mission of UCSF are mandated by the GASB to be recorded as nonoperating revenues, including state educational appropriations, private gifts, and investment income. The Foundation was established to financially support UCSF. Private gifts to the Foundation are recognized as operating revenues as the revenues are fundamental to the core mission of the Foundation. When the gift or grant is transferred from the Foundation to UCSF, UCSF records the revenue as either nonoperating revenue, or a capital gift or grant. The Foundation records these transfers as an operating expense. Nonoperating revenues and expenses include state educational appropriations, for the support of UCSF operating expenses, state and federal financing appropriations, state research revenue, private gifts for other than capital purposes, investment income, interest expense, patent income, and gain or loss on the disposal of capital assets. State capital appropriations and capital gifts and grants are classified as other changes in net position. Student tuition and fees. Substantially all of the student tuition and fees provide for current operations of UCSF. Certain waivers of student tuition and fees, considered to be scholarship allowances, are recorded as an offset to revenue. State appropriations. The state of California provides appropriations to the University that are allocated to UCSF on an annual basis. State educational appropriations are recognized as nonoperating revenue; however, related expenses are incurred to support either educational operations or other specific operating purposes. State financing appropriations provide for principal and interest payments associated with lease-purchase agreements with the State Public Works Board and are also reported as nonoperating revenue. State appropriations for capital projects are recorded as revenue under other changes in net position when the related expenditures are incurred. Other special state appropriations such as those for AIDS, tobacco, and breast cancer research are reported as other nonoperating revenue. Grant and contract revenue. UCSF receives grant and contract revenue from governmental and private sources. UCSF recognizes revenue associated with the cost of sponsored programs as the related expenditures are incurred for cost reimbursable awards and when service milestones or level of effort are met for fixed-price awards. Recovery of facilities and administrative costs of federally sponsored programs is at cost reimbursement rates negotiated with UCSF’s federal cognizant agency, the U.S. Department of Health and Human Service. CHRCO receives grants from federal agencies and other third parties. Government grants are reimbursed and revenue from these grants is recognized based on actual expenses incurred or units of services provided. Revenue recognition depends on the grant award agreements.
42 NOTES TO FINANCIAL STATEMENTS Scholarship allowances. UCSF recognizes certain scholarship allowances, including financial aid and fee waivers, as the difference between the stated charge for tuition and fees and the amount that is paid by the student, as well as by third parties making payments on behalf of the student. Payments of financial aid made directly to students are classified as scholarship and fellowship expenses. Retiree benefits expense. The University of California Retirement Plan (UCRP) provides retirement benefits to retired employees of UCSF. Contributions from UCSF to the UCRP are effectively made to a cost-sharing single-employer defined benefit pension plan administered by the University. UCSF is required to contribute at a rate assessed each year by the University. As a result, UCSF’s required contributions are recognized as an expense in the Statements of Revenues, Expenses and Changes in Net Position. Additional information on the UCRP can be obtained from the University’s Annual Financial Report. Pension obligations. UCSF records pension obligations equal to the net pension liability for its defined benefit plans. The net pension liability is measured as the total pension liability, less the amount of the pension plan’s fiduciary net position. The fiduciary net position and changes in net position of the defined benefit plans has been measured consistent with the accounting policies used by the plans. The total pension liability is determined based upon discounting projected benefit payments based on the benefit terms and legal agreements existing at the pension plan’s fiscal year end. Projected benefit payments are discounted using a single rate that reflects the expected rate of return on investments, to the extent that plan assets are available to pay benefits, and a tax-exempt, high-quality municipal bond rate when plan assets are not available. Pension expense is recognized for benefits earned during the period, interest on the unfunded liability and changes in benefit terms. The differences between expected and actual experience and changes in assumptions about future economic or demographic factors are reported as deferred inflows or outflows and are recognized over the average expected remaining service period for employees eligible for pension benefits. The differences between expected and actual returns are reported as deferred inflows or outflows and are recognized over five years. Pension obligations also include the net pension liability for the Retirement Plan for Children’s Hospital & Research Center at Oakland (“CHRCO Plan”). The CHRCO Plan’s net pension liability, pension expense, and deferred inflows or outflows are measured and reported using methodologies consistent with those described above for UCSF’s pension obligations. Pension payable to University. Additional deposits in UCRP have been made using University resources to make up the gap between the approved contribution rates and the required contributions based on The Regents’ funding policy. These deposits, carried as internal loans by the University, are being repaid, plus accrued interest, over a thirty-year period through a supplemental pension assessment. Supplemental pension assessments are reported as pension expense. Additional deposits in UCRP by the University, and changes in the share of the internal loans, are reported as other changes in net assets. Retiree health benefits expense. The University established the University of California Retiree Health Benefits Trust (UCRHBT) to allow certain University locations and affiliates, including UCSF, to share the risks, rewards, and costs of providing for retiree health benefits and to accumulate funds on a tax-exempt basis under an arrangement segregated from University assets. The Regents serve as trustee of UCRHBT and have the authority to amend or terminate the Trust. The UCRHBT provides retiree health benefits to retired employees of UCSF. Contributions from UCSF to the UCRHBT are effectively made to a cost-sharing single-employer health plan administered by the University. UCSF is required to contribute at a rate assessed each year by the University. As a result, UCSF’s required contributions are recognized as an expense in the Statements of Revenues, Expenses and Changes in Net Position. Additional information on the UCRHBT can be obtained from the University’s Annual Financial Report.
2014 UCSF ANNUAL FINANCIAL REPORT 43 Charity Care. The Medical Center and CHRCO provide care to patients who meet certain criteria under their charity care policies without charge or at amounts less than their established rates. Amounts determined to qualify as charity care are not reported as net patient service revenue. The Medical Center also provides services to indigent patients under publicly sponsored programs, which may reimburse at amounts less than the cost of the services provided to the recipients. The difference between the cost of services provided to these indigent persons and the expected reimbursement is included in the estimated cost of charity care. Compensated absences. UCSF accrues annual leave for employees, including employer-related costs, at rates based upon length of service and job classification, and compensatory time based upon job classification and hours worked. Endowment spending. Under provisions of California law, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) allows for investment income, as well as a portion of realized and unrealized gains, to be expended for the operational requirements of UCSF programs. The spending policy for CHRCO Foundation’s endowment assets is a payout of 4 percent of the average market value of the prior 12 quarters. The average market value is calculated using the market value of the securities at the quarter end dates of September 30, December 31, March 31, and June 30. The endowment payout has been historically made annually to UCSF Benioff Children’s Hospital Oakland. Tax exemption. The University is recognized as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code (IRC). Because the University is a state institution, related income received by the University is also exempt from federal tax under IRC Section 115(a). In addition, the University is exempt from state income taxes imposed under the California Revenue and Taxation Code. University of California Retirement System plans are qualified under IRC Section 401(a) and the related trusts are tax-exempt under Section 501(c)(3). The Foundation is exempt under Section 501(c)(3). Income received by the UCRHBT is tax-exempt under Section 115(a). CHRCO and its component unit, the Children’s Hospital and Research Center Foundation, are exempt under Section 501(c)(3). Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reporting period. Although management believes the estimates and assumptions are reasonable, they are based upon information available at the time the estimate or judgment is made and actual amounts could differ from those estimates. Comparative information. UCSF reclassified certain items in the 2013 financial statements for purposes of presenting comparative information consistent with the presentation of 2014. Additionally, UCSF recorded adjustments to 2013 related to adopting Statements nos. 65 and 68.
44 NOTES TO FINANCIAL STATEMENTS The net effect of recording and reclassifying these changes on the Statement of Net Position, the Statement of Revenues, Expenses and Changes in Net Position, and the Statement of Cash Flows is as follows:
YEAR ENDED JUNE 30, 2013 (in thousands of dollars) 2 As Previously Reclassifying Reported Adjustments As Restated Statement of Net Position Assets $6,682,581 $(127,105) $6,555,476 Deferred outflows of resources 11,135 776,952 788,087 Liabilities 2,881,770 2,218,580 5,100,350 Deferred inflows of resources - 685,869 685,869 Net position 3,811,946 (2,254,602) 1,557,344
Statement of Revenues, Expenses and Changes in Net Position Total operating revenues 3,659,893 - 3,659,893 Total operating expenses 3,939,773 252,876 4,192,649 Operating loss (279,880) (252,876) (532,756) Nonoperating revenues, net 405,612 268 405,880 Income before other changes in net position 125,732 (252,608) (126,876) Total other changes in net position 84,380 (4,384) 79,996 Increase in net position 210,112 (256,992) (46,880)
Statement of Cash Flows Cash flows provided by operating activities 30,715 - 30,715 Cash flows provided by noncapital financing activities 327,972 - 327,972 Cash flows used by capital and related financing activities (459,919) - (459,919) Cash flows provided by investing activities 425,921 - 425,921 Net increase in cash and cash equivalents 324,689 - 324,689 Cash and cash equivalents, beginning of year 1,804,120 - 1,804,120 Cash and cash equivalents, end of year $2,128,809 $ - $2,128,809
1. Cash and Cash Equivalents The University maintains centralized management for substantially all of UCSF’s cash and cash equivalents. Cash in demand deposit accounts is minimized by sweeping available cash balances into University investment accounts on a daily basis. UCSF had depository bank balances of $2.6 million and $3.8 million at June 30, 2014 and 2013, respectively. At June 30, 2014 and 2013, the carrying amounts of UCSF’s equity in the University’s investment pools were $2.3 billion and $2.1 billion, respectively. UCSF’s investment income from the University’s investment pools, net of administrative fees, is recorded as it is distributed from the University, totaling $73.0 million in 2014 and $70.9 million in 2013. At June 20, 2014 and 2013, the carrying amount of the Foundation’s cash and cash equivalents held in nationally recognized banking institutions was $132.7 million and $99.1 million, respectively, compared with bank balances of $122.7 million and $99.0 million, respectively. Foundation uncollateralized cash balances totaling $1.7 million at June 30, 2014 are insured by the Federal Deposit Insurance Corporation. The Foundation does not have exposure to foreign currency risk in its demand deposit accounts. CHRCO’s cash and cash equivalents includes certain investments in highly liquid debt instruments with original maturities of three months or less as cash and cash equivalents. CHRCO also includes $10.9 million of restricted cash categorized as restricted assets on the Statement of Net Position.
2014 UCSF ANNUAL FINANCIAL REPORT 45 2. Investments Pursuant to the University’s policies on campus foundations, the Foundation’s Board of Directors has elected to oversee the management of its investments rather than delegate that function to the Treasurer of the University. The Board of Directors of the Foundation, as the governing board, is responsible for oversight of the Foundation’s investments. Establishment and implementation of investment policy, including the establishment of investment guidelines and the selection of investment managers, has been delegated by the Board of Directors of the Foundation to its Investment Committee. The unendowed investment portfolio is managed so as to maximize returns consistent with safety of principal and liquidity considerations necessary to meet UCSF’s cash flow requirements. Investments authorized by the Investment Committee include readily marketable money market and fixed-income securities; other types of investments may be made at the direction of the Investment Committee. The endowed portfolio is an investment pool in which a large number of individual endowments participate in order to benefit from diversification and economies of scale. The primary investment objective of the endowed investment portfolio is growth of principal sufficient to preserve purchasing power and to provide income to support current and future UCSF activities. Long term, the total return on the portfolio should equal the rate of inflation, plus the payout rate that is used to support current activities, plus an amount reinvested to support future activities. Investments authorized by the Investment Committee include high quality, readily marketable equity and fixed-income securities; other types of investment, including derivative instruments such as financial futures, may be made at the direction of the Investment Committee. The equity portion of the endowed portfolio may include domestic and foreign equities, including foreign currency denominated, common and preferred stocks, actively managed and passive (index) strategies, along with an exposure to private equities, including venture capital partnerships, buy-out, and international funds. The domestic equity portfolio is measured against the Russell 3000 Index. Foreign equities are measured against the MSCI All Country World Ex USA Index. The fixed-income portion of the endowed portfolio may include domestic and foreign securities, along with certain securitized investments, including mortgage-backed and asset-backed securities. The duration of fixed-income separate accounts is to be maintained within 70 –130 percent of the duration of the Barclay’s U.S. Aggregate Bond Index.
46 NOTES TO FINANCIAL STATEMENTS The composition of the Foundation’s investments at June 30, 2014 and 2013 is as follows:
(in thousands of dollars) 3 2014 2013 Fair Value Cost Fair Value Cost INVESTMENT TYPE Equity securities Domestic $ 154,015 $106,747 $ 95,996 $ 70,715 Foreign 6,184 4,269 5,342 4,268 Equity securities 160,199 111,016 101,338 74,983 Fixed-income securities U.S. Treasury bills, notes and bonds 59,019 59,139 232,828 232,844 U.S. government-backed securities 939 867 1,361 1,252 U.S. government-backed, asset-backed 78 70 92 83 U.S. government guaranteed 60,036 60,076 234,281 234,179 Other U.S. dollar denominated Corporate bonds 61,106 57,665 52,915 51,173 U.S. agencies, asset-backed 59,556 58,704 52,730 52,314 Corporate - asset-backed securities 20,174 20,120 9,167 9,207 Supranational/Foreign 4,386 4,316 979 980 Certificates of deposit 4,496 4,500 3,250 3,445 Other 5,760 5,158 10,055 9,716 Other U.S. dollar denominated 155,478 150,463 129,096 126,835 Foreign currency denominated Corporate - 601 - 601 Foreign currency denominated - 601 - 601 Commingled funds Absolute-return funds 172,232 115,148 138,087 97,500 Balanced funds 31,032 34,726 27,427 33,013 U.S. equity funds 57,537 32,409 84,212 54,437 Non-U.S. equity funds 220,081 143,024 189,766 147,215 Non-U.S. bond funds 40,896 35,000 38,311 35,000 Commingled funds 521,778 360,307 477,803 367,165 Private equity 48,318 44,851 45,212 42,542 Real estate 17,401 14,765 14,225 13,989 Other investments 57,463 58,041 55,419 67,885 Total investments 1,020,673 800,120 1,057,374 928,179 Less: Current portion (25,273) (25,190) (187,027) (187,120) Noncurrent portion $ 995,400 $ 774,930 $870,347 $741,059
The overall financial objective of CHRCO Foundation’s investment portfolio is to preserve the real (inflation-adjusted) purchasing power of CHRCO Foundation’s assets while maximizing real income and minimizing volatility of principal value. Real income is defined as the sum of dividends, interest, and realized gains/losses less the inflation rate as measured by CPI (Consumer Price Index) for the relevant time period. The primary investment target of CHRCO Foundation’s investment portfolio is to attain a real income return equal to at least CHRCO Foundation’s spending rate over trailing 12-month periods. While it is recognized that the real income return target may be difficult to attain, the objective is to minimize net realized losses and maximize income. The purpose is to maintain the principal value of CHRCO Foundation’s assets and provide a relatively predictable and constant stream of earnings in line with spending needs.
At all times, investment decisions take into consideration the impact on CHRCO Foundation’s financial statements which indirectly may impact CHRCO’s credit rating and debt ratio compliance with its lenders. The fact that CHRCO can access the CHRCO Foundation assets does not mean they need to liquidate those assets to meet their working capital needs as CHRCO has sufficient assets. In general, CHRCO Foundation’s equity assets are considered as long-term investments and cash and fixed income investments are considered as short-term investments.
2014 UCSF ANNUAL FINANCIAL REPORT 47 To achieve its investment objective, CHRCO Foundation’s investment portfolio is allocated between two broad asset classes: fixed-income investments (includes cash) and equity investments. The purpose of dividing the portfolio in this manner is to ensure an overall diversified asset allocation and it is expected that dividing the assets between these asset classes will have the most profound effect on the long-run investment results. The purpose of fixed-income investments (cash, cash equivalents and bonds) is to reduce the overall volatility of investment portfolio assets and to produce current income (to be added to dividend income from the equity portfolio) and to provide a source of cash flow to meet current spending needs.
The purpose of equity investments (U.S. stocks and international stocks) is to provide a total return that provides capital appreciation of principal and current dividend income sufficient to support spending requirements while at the same time preserving the purchasing power of CHRCO Foundation’s investment portfolio. It is recognized that this entails the assumption of greater market variability and risk compared with fixed-income investments. CHRCO Foundation’s investment portfolio is diversified both by broad asset class (e.g. fixed-income and equities) and within each asset class. Within fixed-income, the portfolio is diversified by maturity, duration, issuer, sector and credit quality. Within equities, the portfolio is diversified by economic sector, market capitalization and country. The purpose of diversification is to provide reasonable assurance that no single security will have a disproportionate impact on the total portfolio.
The composition of CHRCO’s and CHRCO Foundation’s investments at June 30, 2014 includes $42.5 million of restricted investments categorized as restricted assets on the Statement of Net Position and is as follows:
(in thousands of dollars) 3A 2014 INVESTMENT TYPE Equity securities Domestic $ 33,330 Equity securities 33,330 Fixed-income securities U.S. Treasury bills, notes and bonds 14,055 U.S. government guaranteed 14,055 Other U.S. dollar denominated Corporate bonds 24,823 U.S. agencies, asset-backed 6,987 Corporate - asset-backed securities 35,717 Supranational/Foreign 6,933 Other 46 Other U.S. dollar denominated 74,506 Commingled funds U.S. equity funds 2,861 Non-U.S. equity funds 81,311 U.S. bond funds 942 Non-U.S. bond funds 184 Money market funds 3,266 Commingled funds 88,564 Publicly traded real estate investment trusts 1,218 Total investments 211,673 Less: Current portion (10,695) Noncurrent portion $200,978
48 NOTES TO FINANCIAL STATEMENTS The components of the net change in fair value of Foundation investments for the years ended June 30, 2014 and 2013 are as follows:
(in thousands of dollars) 3B 2014 2013 Increase in net unrealized appreciation on investments $91,357 $46,396 Net realized gain on sale of investments 27,810 17,465 Net increase in fair value of investments $119,167 $63,861
CHRCO Foundation increase in fair value of investments of $2.7 million for the year ended June 30, 2014 relates primarily to net unrealized appreciation on investments.
3. Investment Risk Factors There are many factors that can affect the value of investments. Some, such as custodial credit risk, concentration of credit risk, and foreign currency risk, may affect equity and fixed-income securities. Equity securities respond to such investment behavioral factors as economic conditions, individual company earnings performance, and market liquidity, while fixed-income securities are particularly sensitive to credit risks and changes in interest rates.
Credit risk Fixed-income securities are subject to credit risk, that is the chance that a bond issuer will fail to pay interest or principal in a timely manner, or that negative perceptions of the issuer’s ability to make these payments will cause the security price to decline. The circumstances may arise due to a variety of factors, such as liquidity, financial weakness or bankruptcy. Certain fixed-income securities, including obligations of the U.S. government or those explicitly guaranteed by the U.S. government, are considered to have little or no credit risk. The credit risk profile for the UCSF Foundation’s fixed- or variable-income securities is as follows:
(in thousands of dollars) 4 2014 2013 FIXED- OR VARIABLE-INCOME SECURITIES U.S. government guaranteed $ 60,036 $234,281 Other U.S. dollar denominated AAA 9,436 6,676 AA 71,606 65,511 A 19,419 27,510 BBB 30,534 19,047 BB 9,474 7,139 B 529 949 Not rated 14,480 2,264 Total other U.S. dollar denominated 155,478 129,096 Commingled bond funds (not rated) Non-U.S. bond funds 40,896 38,311 Total bond commingled funds 40,896 38,311 Total fixed income securities $256,410 $401,688
2014 UCSF ANNUAL FINANCIAL REPORT 49 The credit risk profile for CHRCO’s fixed-or variable-income securities is as follows:
(in thousands of dollars) 4A 2014 FIXED- OR VARIABLE-INCOME SECURITIES U.S. government guaranteed $14,055 Other U.S. dollar denominated AAA 33,888 AA 16,237 A 15,993 BBB 7,357 Not rated 1,031 Total other U.S. dollar denominated 74,506 Commingled funds (not rated) U.S. bond funds 942 Non-U.S. bond funds 184 Money market funds 3,266 Total commingled funds 4,392 Total fixed income securities $92,953
Custodial credit risk Custodial credit risk is the risk that in the event of the failure of the custodian, the Foundation’s investments may not be returned. Substantially all of the Foundation’s investments are issued, registered, or held in the name of the Foundation by its master custodian bank, as agent for the Foundation. Substantially all of CHRCO’s securities are registered in the name of the University by the custodial bank as an agent for the University. Other types of investments represent ownership interests that do not exist in physical or book-entry form. As a result, custodial credit risk for such investments is remote.
Concentration of credit risk Concentration of credit risk is the risk associated with a lack of diversification, such as having substantial investments in a few individual issuers, thereby exposing the organization to greater risks resulting from adverse economic, political, regulatory, geographic, or credit developments. Financial instruments that potentially subject the Foundation to concentrations of credit risk consist primarily of cash equivalents, U.S. government and federal agency obligations, common stocks and corporate debt securities. Federal agency obligations consist primarily of collateralized mortgage obligations that are collateralized by diversified home mortgages. The remainder of the portfolio is diversified and issuers are dispersed throughout many industries and geographies. The equity portion of the Foundation’s portfolios may be managed passively or actively. For the portion managed passively, the concentration of individual securities is equal to their concentration in the relative benchmark. With respect to the actively managed portfolio, investment policy requires that the portfolio be adequately diversified to limit exposure to concentration of credit risk. With the unendowed portfolio, Foundation investment policy requires that at the time of purchase no more than 5 percent of the total market value of the portfolio be invested in any single issuer, with the exception of securities issued or guaranteed by the U.S. government, its agencies, or government sponsored enterprises, or collateralized by such securities or loans. Endowed portfolio investment policy requires that equity securities be diversified according to economic sector, industry, number of holdings and other investment characteristics, with no more than 10 percent at purchase or 20 percent at market in any one issuer.
50 NOTES TO FINANCIAL STATEMENTS Investments in issuers that represent 5 percent or more of total Foundation investments at June 30, 2014 and 2013 are as follows:
(in thousands of dollars) 4B 2014 2013 ISSUER Silchester International Value Equity Trust $56,700 N/A
Interest-rate risk Interest-rate risk is the risk that the value of fixed-income securities will decline because of changing interest rates. The prices of fixed-income securities with a longer time to maturity, measured by effective duration, tend to be more sensitive to changes in interest rates and, therefore, more volatile than those with shorter durations. Effective duration is the approximate change in price of a security resulting from a 100 basis point (one percentage point) change in the level of interest rates. It is not a measure of time. The effective duration of the Foundation’s fixed income securities at June 30, 2014 and 2013 follows. Information presented does not take into account the relative weighting of the portfolio components to the total portfolio.
4C 2014 2013 FIXED- OR VARIABLE-INCOME SECURITIES U.S. government U.S. Treasury notes 1.31 0.84 U.S. government backed securities 2.86 3.20 U.S. government-backed asset-backed securities 2.44 2.72 Other U.S. dollar denominated Corporate bonds 5.00 4.47 U.S. agencies 0.94 1.92 U.S. agencies - asset-backed securities 1.92 2.12 Corporate - asset-backed securities 1.09 1.66 Other 6.28 4.45 Commingled bond funds
Non-U.S. bond funds 5.02 4.96
The effective duration of CHRCO’s fixed income securities follows. CHRCO considers the effective durations for money market funds to be zero.
4D 2014 FIXED- OR VARIABLE-INCOME SECURITIES U.S. government guaranteed 2.3 U.S. Treasury bills, notes and bonds 2.4 Corporate bonds 2.8 U.S. agencies - asset-backed securities 1.6 Corporate - asset-backed securities 2.7 Supranational/foreign 4.3
In accordance with investment policies, investments may include mortgage pass-through securities, collateralized mortgage obligations, callable bonds, and corporate asset-backed securities that are considered to be highly sensitive to changes in interest rates.
Mortgage pass-through securities These securities are issued by the Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association (Ginnie Mae), and Federal Home Loan Mortgage Association (Freddie Mac), and include short embedded prepayment options. Unanticipated prepayments by the obligees of the underlying asset reduce the total expected rate of return.
2014 UCSF ANNUAL FINANCIAL REPORT 51 Collateralized mortgage obligations Collateralized mortgage obligations (CMOs) generate a return based upon either the payment of interest or principal on mortgages in an underlying pool. The relationship between interest rates and prepayments make the fair value highly sensitive to changes in interest rates. In falling interest-rate environments, the underlying mortgages are subject to a higher propensity of prepayments. For an interest-only CMO, the reduced cash flow associated with the prepayments reduces the expected rate of return and causes the fair value to decline. For a principal-only CMO, the increased cash flows associated with the prepayments increase the expected rate of return and cause the fair value to increase. In a rising interest-rate environment, the opposite is true for both the interest-only and principal-only CMO’s.The Foundation does not invest in principal-only or interest-only CMO’s.
Callable bonds Although bonds are issued with clearly defined maturities, an issuer may be able to redeem or call a bond earlier than its maturity date. The Foundation and CHRCO Foundation must then replace the called bond with a bond that may have a lower yield than the original bond. The call feature causes the fair value to be highly sensitive to changes in interest rates.
Corporate asset-backed securities Corporate asset-backed securities also generate a return based upon either the payment of interest or principal on obligations in an underlying pool, generally associated with auto loans or credit cards. The relationship between interest rates and prepayments make the fair value highly sensitive to changes in interest rates. The Foundation’s fair value of fixed income securities considered highly sensitive to changes in interest rates is as follows:
(in thousands of dollars) 4E 2014 2013 Mortgage pass-through securities $47,935 $47,551 Corporate asset-backed securities 20,174 9,168 Collaterized mortgage obligations 11,168 4,737 Callable bonds 727 551 Total $80,004 $62,007
The effective duration for the Foundation’s fixed income securities considered highly sensitive to changes in interest rates is as follows:
4F 2014 2013 Mortgage pass-through securities 2.05 2.04 Corporate asset-backed securities 1.46 2.91 Collaterized mortgage obligations 1.09 1.66 Callable bonds 1.26 2.13 CHRCO’s fair value of fixed income securities considered highly sensitive to changes in interest rates is as follows:
(in thousands of dollars) 4G 2014 Mortgage-backed securities $2,239 Collateralized mortgage oblicatioins 9,222 Other asset-backed securities 28,627 Callable bonds 4,921 Total $45,009
52 NOTES TO FINANCIAL STATEMENTS The effective duration for CHRCO’s fixed income securities considered highly sensitive to changes in interest rates is as follows:
(in thousands of dollars) 4H 2014 Mortgage-backed securities 3.3 Collateralized mortgage oblicatioins 2.2 Other asset-backed securities 3.9 Callable bonds 3.8
Foreign currency risk The Foundation’s asset allocation policy includes an allocation to non-U.S. equities. These investments may be hedged at the discretion of the investment manager. Foreign currency risk is an accepted risk of the investment strategy. Portfolio guidelines for fixed-income securities also allow exposure to non-U.S. dollar-denominated bonds. Exposure to foreign currency risk from these securities is permitted and it may be fully or partially hedged using forward foreign currency exchange contracts. Under the investment policies, such instruments are not permitted for speculative use or to create leverage. At June 30, 2014 and 2013, the Foundation is subject to foreign currency risk as a result of holding various currency denominations in the following investments:
(in thousands of dollars) 4I 2014 2013 EQUITY SECURITIES Swiss franc $ 4,326 $ 3,664 British pound 1,858 1,678 Total equity securities 6,184 5,342 Commingled funds (various currency denominations) Commingled funds - Non-U.S. equity 220,081 189,766 Commingled funds - Non-U.S. bonds 40,896 38,311 Total commingled funds 260,977 228,077 Total exposure to foreign currency risk $267,161 $233,419
At June 30, 2014, CHRCO is subject to foreign currency risk as a result of holding various currency denominations in the following investments:
(in thousands of dollars) 4J 2014 Commingled funds (various currency denominations) Commingled funds - Non-U.S. equity $81,311 Commingled funds - Non-U.S. bonds 184 Total exposure to foreign currency risk $81,495
Alternative investment risks Alternative investments include ownership interests in a wide variety of partnership and fund structures that may be domestic or offshore. Generally, there is little or no regulation of these investments by the Securities and Exchange Commission or U.S. state attorneys general. These investments employ a wide variety of strategies including absolute return, hedge, venture capital, private equity, and other strategies. Investments in this category may employ leverage to enhance the investment return. Underlying holdings can include financial assets such as marketable securities, non-marketable securities, derivatives, and synthetic and structured instruments; real assets; tangible and intangible assets; and other funds and partnerships. Generally, these investments do not have a ready market. Interest in these investments may not be traded without approval of the general partner or fund management.
2014 UCSF ANNUAL FINANCIAL REPORT 53 Alternative investments are subject to all of the risks described previously related to equities and fixed-income instruments. In addition, alternative strategies and their underlying assets and rights are subject to a broad array of economic and market vagaries that can limit or erode value. The underlying assets may not be held by a custodian either because they cannot be, or because the entity has chosen not to hold them in this form. Valuations determined by the investment manager, who has a conflict of interest in that he or she is compensated for performance are considered and reviewed by the Foundation management and Investment Committee. Real assets may be subject to physical damage from a variety of means, loss from natural causes, theft of assets, lawsuits involving rights and other loss and damage including mortgage foreclosure risk. These risks may not be insured or insurable. Tangible assets are subject to loss from theft and other criminal actions, and from natural causes. Intangible assets are subject to legal challenge and other possible impairment.
Derivative financial instruments: futures The Foundation has authorized some of its investment managers to use futures to manage market duration exposures in endowed managed portfolios. A futures contract is an agreement between the Foundation and a counterparty to buy or sell an asset at a set price on a future date. It is a standardized contract that can be easily bought and sold and is exchange-traded. Upon entering into such a contract, the Foundation is required to pledge to the broker an amount of cash or securities equal to the minimum initial margin requirements of the exchange on which the contract is traded. Pursuant to the contract, the Foundation agrees to receive from, or pay to, the counter-party an amount of cash equal to the daily fluctuation in the value of the contract known as variation margin. Such variation margin is accounted for as unrealized appreciation or depreciation until the contract is closed, at the time the gains or losses are realized. The Foundation considers its futures contracts to be investment derivatives. The fair value of futures held in separately managed accounts is included in the investments line item in the Statements of Net Position with the changes in fair value reflected as change in fair value of investments within the Statements of Revenue, Expenses and Changes in Net position. As of June 30, 2014, the Foundation had 28 outstanding futures contracts sold with gross derivative assets of less than $0.1 million; comparable amounts outstanding as of June 30, 2013 were 26 outstanding futures contracts with gross derivative assets of $0.1 million.
Endowment payout As a result of market volatility, the market value of some permanent endowments can be less than the historical gift value of such endowments. The Foundation underwater amount of such endowments was less than $0.1 million and $2.1 million at June 30, 2014 and 2013, respectively. Under UPMIFA, investment income and accumulated realized and unrealized gains may be expended in support of the operational requirements of UCSF programs. A portion of Foundation endowment payout may be reinvested if stipulated by agreement with the donor. Endowment payout is shown net of endowment administration cost recovery fees of $2.7 million and $2.4 million for 2014 and 2013, respectively.
54 NOTES TO FINANCIAL STATEMENTS 4. Investments Held by Trustee Investments held by trustee consist of bond proceeds that are held by the Treasurer of the Regents. Bond proceeds remain invested with the Treasurer until project costs are incurred.
5. Accounts Receivable Accounts receivable and the allowances for uncollectible amounts at June 30, 2014 and 2013 for UCSF are as follows:
(in thousands of dollars) 5 2014 2013 Campus Medical Center Total Total Federal government $ 30,981 $ - $ 30,981 $ 20,181 State government 18,856 - 18,856 17,621 Local and private 47,151 - 47,151 50,993 Patient receivables (11) 347,100 347,089 342,196 Student 4,781 - 4,781 3,673 Other 19,049 8,737 27,786 24,221 Total accounts receivable 120,807 355,837 476,644 458,885 Less: Allowance for uncollectible amounts (813) (21,370) (22,183) (18,693) Accounts receivable, net $119,994 $334,467 $454,461 $440,192
Foundation net accounts receivable primarily consists of a receivable for investments sold of $38.7 million and $3.5 million at June 30, 2014 and 2013, respectively.
CHRCO’s net accounts receivable consist of $68.3 million net patient accounts receivable and $26.9 million other net accounts receivable at June 30, 2014.
6. Pledges Receivable The composition of pledges receivable at June 30, 2014 and 2013 is as follows:
(in thousands of dollars) 6 UCSF UCSF Foundation CHRCO 2014 2013 2014 2013 2014 Total pledges outstanding $1,308 $2,627 $153,744 $75,144 $4,099 Less: Unamortized discount to fair value (32) (116) (4,435) (3,795) - Less: Allowance for uncollectible pledges (13) (50) (2,088) (1,308) (236) Total pledges receivable, net 1,263 2,461 147,221 70,041 3,863 Less: Current portion of pledges receivable (214) (324) (36,227) (24,730) (345) Noncurrent portion of pledges receivable, net $1,049 $2,137 $110,994 $45,311 $3,518
Future gross receipts under pledge agreements for each of the five fiscal years subsequent to June 30, 2014 are as follows:
(in thousands of dollars) 6A UCSF UCSF Foundation CHRCO
Year ended June 30, 2014 Pledges due in one year or less $ 216 $ 37,194 $2,109 Pledges due between one and five years 1,092 116,550 1,990 Total pledges outstanding $1,308 $153,744 $4,099
In addition to the pledge balances and revenue reflected in these financial statements, the Foundation has conditional pledges that will be recognized as conditions and milestone events specified by the donors are met by the University.
2014 UCSF ANNUAL FINANCIAL REPORT 55 7. Notes and Mortgages Receivable Notes and mortgages receivable at June 30, 2014 and 2013, along with the allowances for uncollectible amounts for UCSF, are as follows:
(in thousands of dollars) 7 2014 2013 Notes and mortgages receivable $41,152 $40,326 Less: Allowance for uncollectible amounts (352) (333) Total notes and mortgages receivable, net 40,800 39,993 Less: Current portion of notes and mortgages receivable (2,736) (2,866) Noncurrent portion of notes and mortgages receivable, net $38,064 $37,127
8. Land, Infrastructure, Buildings, Equipment, Libraries and Collections UCSF’s capital asset activity for the years ended June 30, 2014 and 2013 is as follows:
(in thousands of dollars) 8A 2012 Additions Disposals 2013 Additions Disposals 2014 ORIGINAL COST Land $ 255,524 $ 307 $ - $ 255,831 $ 36 $ - $ 255,867 Infrastructure 51,310 - (127) 51,183 994 - 52,177 Buildings and improvements 3,554,977 147,863 (9,499) 3,693,341 88,754 (1,120) 3,780,975 Equipment 671,830 73,088 (36,775) 708,143 46,971 (28,561) 726,553 Software 198,723 36,351 (6,869) 228,205 1,955 (26,415) 203,745 Libraries and collections 86,743 187 (4,610) 82,320 144 (62) 82,402 Special collections 24,423 - (8) 24,415 - (71) 24,344 Construction in progress 654,602 325,296 (60,180) 919,718 376,619 - 1,296,337 Capital assets, at original cost $5,498,132 $583,092 $(118,068) $5,963,156 $515,473 $(56,229) $6,422,400
(in thousands of dollars) 8B Depreciation Disposals Depreciation Disposals and and and and 2012 Amortization Transfers 2013 Amortization Transfers 2014 ACCUMULATED DEPRECIATION AND AMORTIZATION Infrastructure $ 16,990 $ 2,000 $ - $ 18,990 $ 1,996 $ - $ 20,986 Buildings and improvements 1,464,997 125,175 (690) 1,589,482 125,452 (437) 1,714,497 Equipment 442,779 54,037 (33,568) 463,248 56,301 (24,559) 494,990 Software 64,876 33,239 (6,581) 91,534 29,898 (26,271) 95,161 Libraries and collections 82,716 769 (60) 83,425 703 (4,610) 79,518 Accumulated depreciation and amortization 2,072,358 215,220 (40,899) 2,246,679 214,350 (55,877) 2,405,152 Capital assets, net $3,425,774 $367,872 $(77,169) $3,716,477 $301,123 $ (352) $4,017,248
CHRCO’s capital asset activity for the year ended June 30, 2014 is as follows:
(in thousands of dollars) 8C 2013 Additions Disposals 2014 ORIGINAL COST Land $ 16,290 $ - $ - $ 16,290 Buildings and improvements 255,317 15,320 (70) 270,567 Equipment 141,973 104,947 (4,191) 242,729 Construction in progress 74,215 (48,332) - 25,883 Capital assets, at original cost $487,795 $71,935 $(4,261) $555,469
(in thousands of dollars) 8D 2013 Depreciation Disposals 2014 ACCUMULATED DEPRECIATION Buildings and improvements $142,483 $ 7,940 $ (50) $150,373 Equipment 103,439 22,000 (3,975) 121,464 Accumulated depreciation 245,922 29,940 (4,025) 271,837 Capital assets, net $241,873 $41,995 $ (236) $283,632
56 NOTES TO FINANCIAL STATEMENTS 9. Debt The University directly finances the construction, renovation, and acquisition of certain facilities and equipment through the issuance of debt obligations. Commercial paper and bank loans provide for interim financing. Long-term financing includes revenue bonds, capital lease obligations, and other borrowings.
Outstanding debt UCSF’s outstanding debt at June 30, 2014 and 2013 is as follows:
(in thousands of dollars) 9 Interest Rate Ranges Maturity Years 2014 2013 INTERIM FINANCING: Commercial paper 0.1-0.4% 2014-2015 $ 13,688 $ 40,199 Bank loans 0.7-0.72% 2014-2015 6,722 9,723 LONG-TERM FINANCING: University of California General Revenue Bonds .02-7.5% 2014-2050 828,088 656,173 University of California Limited Project Revenue Bonds 0.4-6.3% 2013-2050 126,522 127,950 University of California Medical Center Pooled Revenue Bonds 2.9-6.6% 2013-2049 840,654 843,749 State Public Works Board capital lease obligations 3.5-5.0% 2013-2047 - 77,400 Other capital lease obligations 1.75-10.0% 2013-2019 9,513 51,835 CFIA third-party obligations 5%-6.5% 2049 207,670 207,670 Unamortized premiums, net - - 34,483 30,706 Total outstanding debt 2,067,340 2,045,405 Less: Current portion of outstanding debt (42,952) (116,886) Total long-term debt $2,024,388 $1,928,519
Interest expense associated with financing projects during construction, net of any investment income earned on tax-exempt bond proceeds during construction, is capitalized. Total interest expense during the years ended June 30, 2014 and 2013 was $125.5 million and $101.1 million, respectively. Interest expense, net of investment income, totaling $48.2 million and $36.9 million, was capitalized during the years ended June 30, 2014 and 2013, respectively. The remaining $77.3 million in 2014 and $64.2 million in 2013 are reported as interest expense in the Statements of Revenues, Expenses and Changes in Net Position.
Outstanding debt activity The activity with respect to UCSF’s current and noncurrent debt for the years ended June 30, 2014 and 2013 is as follows:
YEAR ENDED JUNE 30, 2014 (in thousands of dollars) 10A Capital Leases University Commercial Revenue State Public Third Party - Paper Bank Loans Bonds Works Board Other CFIA Total Debt, beginning of year $40,199 $ 9,723 $1,657,236 $77,400 $51,835 $209,012 $2,045,405 New obligations 33,115 - 174,946 - 2,523 - 210,584 Refinancing (58,126) - - (77,400) - - (135,526) Principal payments (1,500) (3,001) - - (44,845) - (49,346) Amortization of premiums - - (3,640) - - (137) (3,777) Total debt, end of year 13,688 6,722 1,828,542 - 9,513 208,875 2,067,340 Less: Current portion (13,688) (6,722) (17,607) - (4,798) (137) (42,952) Total noncurrent debt, end of year $ - $ - $1,810,935 $ - $ 4,715 $208,738 $2,024,388
2014 UCSF ANNUAL FINANCIAL REPORT 57 YEAR ENDED JUNE 30, 2013 (in thousands of dollars) 10B Capital Leases University Commercial Revenue State Public Third Party - Paper Bank Loans Bonds Works Board Other CFIA Total Debt, beginning of year $50,210 $12,672 $1,629,550 $80,125 $75,548 $209,149 $2,057,254 New obligations 21,846 - 315,509 - 746 - 338,101 Refinancing (15,768) - (265,277) - - - (281,045) Principal payments (16,089) (2,949) (18,906) (2,725) (24,459) - (65,128) Amortization of deferred financing costs - - (3,640) - - (137) (3,777) and premiums Total debt, end of year 40,199 9,723 1,657,236 77,400 51,835 209,012 2,045,405 Less: Current portion (40,199) (9,723) (19,374) (2,845) (44,608) (137) (116,886) Total noncurrent debt, end of year $ - $ - $1,637,862 $74,555 $ 7,227 $208,875 $1,928,519
Commercial paper The commercial paper program is issued in two series with tax-exempt and taxable components. Commercial paper may be issued for interim/permanent financing for capital projects, interim financing of equipment, financing of working capital for the Medical Center and other working capital needs, and standby or interim financing for gift- financed projects. The program’s liquidity is supported by available investments in STIP and TRIP. Commercial paper is collateralized by a pledge of the revenues derived from the ownership or operations of the projects financed and constitute limited obligations. There is no encumbrance, mortgage, or other pledge of property securing commercial paper and the paper does not constitute general obligations of UCSF.
Bank loans UCSF may use uncollateralized bank lines of credit with commercial banks to supplement commercial paper and to provide interim financing for buildings and equipment. Line of credit commitments have various expiration dates through June 2015.
University of California Revenue Bonds Revenue bonds have financed various auxiliary, administrative, academic, medical center, and research facilities of UCSF. They generally have annual principal and semiannual interest payments, serial and term maturities, contain sinking fund requirements, and may have optional redemption provisions. Revenue bonds are not collateralized by any encumbrance, mortgage, or other pledge of property, except pledged revenues, and do not constitute a general obligation of UCSF. Revenue bond indentures require use of the facilities in a way which will not cause the interest on the tax-exempt bonds to be included in the gross income of the bondholders for federal tax purposes. General Revenue Bonds are collateralized solely by general revenues as defined in the indenture. General revenues are certain operating and nonoperating revenues of UCSF consisting of gross student tuition and fees, facilities and administrative cost recovery from contracts and grants, revenues from educational, auxiliary and other activities, and other revenues, including unrestricted investment income. The General Revenue Bond indentures require UCSF to set rates, charges, and fees each year sufficient for general revenues to pay for the annual principal and interest on the bonds and certain other financial covenants. General revenues, as defined in the indenture, have been amended to include certain state appropriations as to secure payment of the General Revenue Bonds. Limited Project Revenue Bonds are issued to finance auxiliary enterprises and are collateralized by a pledge consisting of the sum of the gross revenues of the specific projects. The indenture requires the University to achieve the sum of gross project revenues equal to 1.1 times debt service and to maintain certain other financial covenants. The pledge
58 NOTES TO FINANCIAL STATEMENTS of revenues under Limited Project Revenue Bonds is subordinate to the pledge of revenues associated with General Revenue Bonds, but senior to pledges under commercial paper agreements or bank loans. Pledged revenues for the years ended June 30, 2014 and 2013 were $33.0 million and $31.4 million, respectively. Medical Center Pooled Revenue Bonds are issued to finance the University’s medical center facilities and are collateralized by a joint and several pledge of the gross revenues of all five of the University’s medical centers. Medical center gross revenues are excluded from General Revenues. The Medical Center Pooled Revenue Bond indenture requires the medical centers to set rates, charges, and fees each year sufficient for the medical center gross revenues to pay for the annual principal and interest on the bonds and certain other financial covenants. Medical Center gross revenues are not pledged for any purpose other than under the indentures for the Medical Center Pooled Revenue Bonds and interest-rate swap agreements.
2014 activity In October 2013, General Revenue Bonds were issued to refinance debt issued by the State of California or for such other purposes as authorized by the Regents. Proceeds were used to pay $77.4 million in lease revenue bonds issued by the State Public Works Board of the State of California, which are reported as lease-purchase agreements by UCSF. The fixed rate bonds mature at various dates through 2048 and the variable rate demand bonds mature at 2048. The tax-exempt bonds have a stated weighted average interest rate of 3.5 percent. The taxable bonds have a stated weighted average interest rate of 4.3 percent. The interest rates on the variable rate demand bonds reset weekly and, in the event of failed remarketing, can be put back to the Regents for tender. Interest rate swap agreements were executed to limit exposure to changes in market interest rates. General revenues, as defined in the indenture, have been amended to include certain state appropriations to secure payment for General Revenue Bonds. In April 2014, General Revenue Bonds totaling $103.5 million were used to refinance certain facilities and projects of UCSF. The bonds mature at various dates through 2049. The bonds have a stated average interest rate of 4.9 percent. The deferred premium will be amortized as a reduction of interest expense over the term of the bonds.
2013 activity In July 2012, UCSF received bond proceeds of $91.4 million in tax-exempt Limited Project Revenue Bonds issued in July 2012 to finance and refinance construction on the Mission Bay Block Housing and parking structure projects and the purchase of Mount Zion Sutter Street Parking Garage. The bonds mature at various dates through 2042, and have a weighted average interest rate of 4.78 percent. The deferred premium will be amortized as a reduction to interest expense over the term of the bonds. In March 2013, UCSF received bond proceeds of $174.1 million in taxable General Revenue Bonds. Proceeds, including a bond premium of $15.2 million, were used to refinance outstanding General Revenue Bonds and commercial paper. The bonds mature at various dates through 2039, and have a stated weighted average interest rate of 3.5 percent. The deferred premium will be amortized as a reduction to interest expense over the term of the bonds. In May 2013, UCSF was approved for an allocation of $50.0 million in General Revenue Bonds issued by the University in February 2012 to finance or refinance capital projects. The bonds have a stated interest rate of 4.9 percent, maturing in 2112.
Capital leases UCSF entered into lease-purchase agreements with the state of California that were recorded as capital leases. The state sold these lease revenue bonds to finance construction of certain state-owned buildings to be used by UCSF. In October 2013, UCSF refinanced the lease revenue bonds in the amount of $77.4 million issued by the State Public Works Board of the State of California with General Revenue Bonds and ownership of all the properties transferred to UCSF.
2014 UCSF ANNUAL FINANCIAL REPORT 59 Capital leases outstanding with other lessors totaled $9.5 million and $51.8 million for the years ended June 30, 2014 and 2013, respectively.
CFIA third-party obligations UCSF and CFIA have entered into an operating agreement that governs the arrangement between the parties with respect to the Sandler Neurosciences Center. CFIA, through a conduit issuer, issued tax-exempt and taxable revenue bonds to finance the center. UCSF entered into a ground lease with CFIA and CFIA subleased the ground to the developer. Under the ground lease between UCSF and CFIA, the ground has been leased to CFIA in exchange for all federal interest subsidies that are received by CFIA for the “Build America Bonds” to the University. This ground lease expires May 2050. Under the ground sublease, CFIA has leased the ground to the developer in exchange for base rent payments that are due under the building lease between UCSF and the developer. The base rent payments are equal to the principal and interest payments on the bonds issued by CFIA to finance the construction of the building. The sublease for the land will terminate upon expiration of the building lease. The developer has assigned the building lease payments to CFIA’s trustee; therefore, UCSF makes payments directly to CFIA’s trustee to pay debt service for the revenue bonds.
Derivative financial instruments UCSF has entered into an interest-rate swap agreement to limit the exposure to changes in market interest rates in connection with certain variable rate Medical Center Pooled Revenue Bonds. The interest-rate swap agreement is a contractual agreement entered into between UCSF and a counterparty under which each agrees to exchange periodic fixed and variable payments for an agreed period of time based upon a notional amount of principal or value of the underlying contract. The payments correspond to an equity index, interest rate, or currency. The net differential to be paid or received is recognized over the life of the agreements as an adjustment to interest expense. UCSF’s counterparty is a major financial institution. Derivative financial instruments are recorded at fair value as either assets or liabilities in the Statements of Net Position. Certain derivative financial instruments are determined to be hedging derivatives and designated as either a fair value or cash flow hedge. Under hedge accounting, changes in the fair value of hedging derivatives are considered to be deferred inflows, for hedging derivatives with positive fair values, or deferred outflows, for hedging derivatives with negative fair values. Changes in the fair value of derivatives that are not hedging derivatives are recorded as net appreciation or depreciation of investments in the Statements of Revenues, Expenses and Changes in Net Position. The objectives and terms of the hedging derivative instruments outstanding at June 30, 2014 and 2013, along with the credit rating of the associated counterparty, are as follows:
(in thousands of dollars) 11 Notional Amount Fair Value Effective Maturity Cash Paid Counterparty Type Objective 2014 2013 Date Date or Received Terms Credit Rating 2014 2013 Pay fixed, receive Hedge of changes $77,220 $80,220 2007 2032 None Pay fixed 3.5897%; A2/A/A $(10,862) $(11,135) variable interest- in cash flows receive 58% of rate swap on variable-rate 1-month LIBOR Medical Center plus 0.48% Pooled Revenue Bonds
60 NOTES TO FINANCIAL STATEMENTS Hedging derivative financial instrument risk factors Credit risk UCSF could be exposed to credit risk if the interest-rate swap counterparties to the contracts are unable to meet the terms of the contracts. Contracts with positive fair values are exposed to credit risk. UCSF faces a maximum possible loss equivalent to the amount of the derivative’s fair value, less any collateral held by UCSF provided by the counterparty. Contracts with negative fair values are not exposed to credit risk. Although UCSF has entered into the interest-rate swap with a creditworthy financial institution to hedge its variable- rate debt, there is credit risk for losses in the event of non-performance by counterparties or unfavorable interest-rate movements. There are no collateral requirements. Interest-rate risk There is a risk the value of the interest-rate swaps will decline because of changing interest rates. The values of the interest-rate swaps with longer maturities tend to be more sensitive to changing interest rates and, therefore, more volatile than those with shorter maturities. Basis risk There is a risk that the basis for the variable payment received on interest-rate swaps will not match the variable payment on the bonds that expose UCSF to basis risk whenever the interest rates on the bonds are reset. The interest rate on the bonds is a tax-exempt interest rate, while the basis of the variable receipt on the interest-rate swaps is taxable. Tax-exempt interest rates can change without a corresponding change in LIBOR due to factors affecting the tax-exempt market that do not have a similar effect on the taxable market.
Termination risk There is termination risk for interest-rate swaps associated with variable rate bonds in the event of non-performance by counterparties in an adverse market, resulting in cancellation of the synthetic interest rate and returning the interest-rate payments to the variable interest rates on the bonds. In addition, depending on the agreement, interest- rate swaps may be terminated if the swap counterparty’s credit quality rating, as issued by Moody’s or Standard & Poor’s, falls below certain thresholds. The termination threshold is reached when the credit quality rating for either the underlying Medical Center Pooled Revenue Bonds or swap counterparty falls below Baa2 or BBB.
2014 UCSF ANNUAL FINANCIAL REPORT 61 Future debt service and hedging derivative interest-rate swaps Future debt service payments for each of the five fiscal years subsequent to June 30, 2014 and thereafter are shown below:
(in thousands of dollars) 12 University Commercial Capital Third Party - Total Principal Interest Bank Loans Revenue Paper Leases CFIA Payments Payments Payments Bonds Years ending June 30, 2015 $6,722 $13,688 $113,066 $4,983 $ 13,177 $ 151,636 $ 42,952 $ 108,684 2016 - - 114,440 1,835 13,177 129,452 21,919 107,533 2017 - - 114,903 1,435 13,177 129,515 22,708 106,807 2018 - - 119,828 1,146 13,177 134,151 28,153 105,998 2019 - - 119,971 482 13,177 133,630 28,613 105,017 2020-2024 - - 661,508 - 80,122 741,630 240,910 500,720 2025-2029 - - 654,387 - 83,564 737,951 305,987 431,964 2030-2034 - - 622,182 - 80,795 702,977 357,936 345,041 2035-2039 - - 509,580 - 77,093 586,673 341,181 245,492 2040-2044 - - 400,507 - 72,535 473,042 325,677 147,365 2045-2049 - - 254,545 - 66,926 321,471 266,844 54,627 2050-2112 - - 203,027 - - 203,027 50,000 153,027 Total future debt service 6,722 13,688 3,887,944 9,881 526,920 4,445,155 $2,032,880 $2,412,275 Less: Interest component (2,092,657) (368) (319,250) (2,412,275) of future payments Principal portion of future 6,722 13,688 1,795,287 9,513 207,670 2,032,880 payments Adjusted by: Unamortized bond premium 33,256 1,204 34,460 Total debt $6,722 $13,688 $1,828,543 $9,513 $208,874 $2,067,340
The Medical Center Pooled Revenue Bonds 2007 Series B, totaling $77.2 million, are variable-rate demand obligations subject to daily remarketing. The University has entered into a standby bond purchase agreement if a failed remarketing was to occur and the redemption of any of the bonds is required. The standby bond purchase agreement is scheduled to terminate on June 30, 2015. In addition, the Medical Center has access to the hospital’s working capital program from the University for any amounts that would be obligated for repayment to the University. As rates vary, variable-rate bond interest payments and net swap payments will vary. Although not a prediction by the University of the future interest cost of the variable-rate bonds or the impact of the interest-rate swaps, using rates as of June 30, 2014, combined debt service requirements of the variable-rate debt and net swap payments are as follows:
(in thousands of dollars) Variable-Rate Bond
Interest-Rate 13 Principal Interest Swap, Net Total Payments Years ending June 30, 2015 $ 3,110 $ 8 $ 2,324 $ 5,442 2016 3,230 7 2,230 5,467 2017 3,340 7 2,132 5,479 2018 3,465 7 2,031 5,503 2019 3,590 6 1,926 5,522 2020-2024 20,015 26 7,916 27,957 2025-2029 23,930 15 4,656 28,601 2030-2034 16,540 4 976 17,520 Total $77,220 $80 $24,191 $101,491
62 NOTES TO FINANCIAL STATEMENTS CHRCO debt activity CHRCO’s long-term debts were defeased or retired with advances from the University’s commercial paper program in June 2014. The advances are due to the University based on a repayment schedule or upon refinancing into long- term bonds. At June 30, 2014, this liability is reported with other current liabilities of $2.2 million and other non-current liabilities of $55.9 million. CHRCO’s debt activity for the year ended June 30, 2014 is as follows:
(in thousands of dollars) 14 2014 Debt, beginning of year $65,736 Principal payments and bond retirements (64,538) Total debt, end of year 1,198 Less: Current portion (1,198) Total noncurrent debt, end of year $ -
10. Self-Insurance and Other Liabilities
Self-insurance programs The University is self-insured for medical malpractice, workers’ compensation, employee health care and general liability claims. These risks are subject to various claim and aggregate limits, with excess liability coverage provided by an independent insurer. Liabilities are recorded by the University when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. These losses include an estimate for claims that have been incurred but not reported. The University charges UCSF predetermined premium rates applied to payroll and other expenses. These amounts are reflected as operating expenses in UCSF’s Statements of Revenues, Expenses and Changes in Net Position. UCSF’s financial statements do not reflect any liability amounts for self-insurance claims, as these estimated liabilities are recorded by the University. CHRCO is self-insured for medical malpractice, workers’ compensation and employee health care. Self-insurance liability of $16.1 million is included in other liabilities at June 30, 2014.
Other liabilities UCSF’s other liabilities at June 30, 2014 and 2013 are as follows:
(in thousands of dollars) 15 2014 2013 Current Noncurrent Current Noncurrent Vacation leave $ 79,035 $ 23,894 $ 80,248 $ 23,006 Medical Center third-party payor liability 713 - 2,025 58,547 Accrued interest 11,716 - 12,317 - Other 34,513 8,856 12,584 10,535 Total other liabilities $125,977 $32,750 $107,174 $92,088
Foundation’s other liabilities at June 30, 2014 and 2013 are as follows:
(in thousands of dollars) 16 2014 2013 Current Noncurrent Current Noncurrent Payable to UCSF $23,665 $ - $1,244 $ - Other - 920 - 920 Total other liabilities $23,665 $920 $1,244 $920
2014 UCSF ANNUAL FINANCIAL REPORT 63 CHRCO’s other liabilities at June 30, 2014 are as follows:
(in thousands of dollars) 16a 2014 Current Noncurrent Third-party payor settlements, net $ 1,654 $ - Self insurance - 16,091 Other 16,773 64,624 Total other liabilities $18,427 $80,715
11. Deferred Outflows and Inflows of Resources The composition of deferred outflows and inflows of resources at June 30, 2014 is summarized as follows:
(in thousands of dollars) 17 Interest Net Pension Loss on Debt Rate Swap Liability Refunding Agreements Total At June 30, 2014 Deferred outflows of resources $ 548,981 $994 $10,862 $ 560,837 Deferred inflows of resources $1,123,182 $ - $10,862 $1,134,044
12. Retirement Plans Substantially all full-time employees of UCSF participate in the University of California Retirement System (UCRS), which is administered by the University. The UCRS consists of The University of California Retirement Plan (UCRP), a single-employer defined benefit plan, and the University of California Retirement Savings Program (UCRSP), which includes four defined contribution plans with several investment portfolios generally funded with employee non- elective and elective contributions. The Regents have the authority to establish and amend the benefit plans.
University of California Retirement Plan UCRP provides lifetime retirement income, disability protection, and survivor benefits to eligible employees. Benefits are based on the average of the highest three years of compensation, age, and years of service and are subject to limited cost of living increases. Contributions to UCRP are currently made by both UCSF and the employees and are based upon rates determined by The Regents. The Regents’ funding policy provides for contributions at rates to maintain UCRP on an actuarially sound basis. While the University’s independent actuary annually determines the total funding policy contributions, the University is not required to contribute an amount equal to the total funding contribution. The actual contributions and the contribution rates of the University and employees are based on numerous factors, including the availability of funds to the University, the impact of employee contributions on the competitiveness of the University’s total remuneration package, and collective bargaining agreements. The Regents determine the portion of the total contribution to be made by UCSF and the employees. Employee contributions by represented employees are subject to collective bargaining agreements. UCSF contributions were 12 percent and 10 percent, and employee contributions were 6.5 percent and 5 percent, in 2014 and 2013, respectively. Member contributions for the employees in the new benefit tier applicable to employees hired on or after July 1, 2013 are 7 percent, and the employer rate is uniform across all members. The University’s membership in UCRP for the campuses and medical centers at June 30, 2014 was 235,610 total members consisting of 51,249 retirees and beneficiaries receiving benefits, 66,424 inactive members entitled to but not yet receiving benefits, 74,276 active vested members and 43,661 active nonvested members. The net position held in trust for pension benefits attributable to UCRP included in the UCRP Statement of Plan Fiduciary Net Position was $52.8 billion and $45.4 billion at June 30, 2014 and June 30, 2013, respectively. Total
64 NOTES TO FINANCIAL STATEMENTS pension liability was $60.5 billion and $57.7 billion, resulting in a net pension liability of $7.7 billion and $12.3 billion at June 30, 2014 and 2013 respectively.
Net Pension Liability The University’s net pension liability was measured as of June 30, 2014 based upon rolling forward the results of the actuarial valuations as of July 1, 2013. Actuarial valuations represent a long-term perspective and involve estimates of the value of reported benefits and assumptions about the probability of occurrence of events far into the future. The University’s net pension liability was calculated using the following methods and assumptions:
Inflation 18 3.5% Investment rate of return 7.5 Projected salary increases 4.3 - 6.8 Cost-of-living adjustments 2.0
For active members, inactive members and healthy retirees, the RP-2000 Combined Healthy Mortality Table, projected with scale AA to 2025, with ages set back two years is used. For disabled members, rates are based on the RP- 2000 Disabled Retiree Mortality Table, projected with Scale AA to 2025, with ages set back two years for males. Actuarial assumptions are subject to periodic revisions as actual results are compared with past expectations and new estimates are made about the future. The actuarial assumptions used in the July 1, 2013 valuations are based upon the results of an experience study conducted for the period of July 1, 2006 through June 30, 2010. The long-term expected investment rate of return assumption for UCRP was determined based on a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation adopted by The Regents and by adding expected inflation. The target allocation and projected arithmetic real rates of return, after deducting inflation, but before investment expenses, used in the derivation of the long-term expected investment rate of return assumption for each major asset class are as follows:
19 Long-Term Expected Target Allocation Real Rate of Return Asset class U.S. equity 23.0 % 6.8 % Developed international equity 24.0 6.9 Emerging market equity 5.0 9.3 Core fixed income 12.0 1.5 High yield bonds 2.5 3.7 Emerging market debt 2.5 4.0 TIPS 8.0 1.3 Real estate 7.0 5.4 Private equity 6.0 10.4 Absolute return/hedge funds/real assets 10.0 4.1 Total 100.0 %
Discount Rate The discount rate used to estimate the net pension liability as of June 30, 2014 was 7.5 percent. To calculate the discount rate, cash flows into and out of UCRP were projected in order to determine whether UCRS has sufficient cash in future periods for projected benefit payments for current members. For this purpose, University contributions that are intended to fund benefits of current plan members and their beneficiaries are included. Projected University contributions that are intended to fund the service costs of future plan members and their beneficiaries, as well as projected contributions of future plan members, are not included. UCRP was projected to have assets sufficient to make projected benefit payments for current members for all future years as of June 30, 2014.
2014 UCSF ANNUAL FINANCIAL REPORT 65 Sensitivity of the Net Pension Liability to the Discount Rate Assumption The following presents the current-period net pension liability of UCSF calculated using the current-period discount rate assumption of 7.5 percent, as well as what the net pension liability would be if it were calculated using a discount rate different than the current assumption:
(in thousands of dollars) 20 1% Decrease Current Discount 1% Increase (6.5%) (7.5%) (8.5%) Medical Center $1,005,391 $ 523,452 $118,805 Campus 1,308,151 681,083 154,582 Total $2,313,542 $1,204,535 $273,387
Deferred Outflows of Resources and Deferred Inflows of Resources Deferred outflows of resources and deferred inflows of resources for pensions were related to the following sources for the year ended June 30, 2014:
(in thousands of dollars) 21 Medical Center Campus Total Deferred outflows of resources Changes of assumptions or other inputs $153,751 $200,053 $353,804 Net difference between projected and actual 73,821 96,048 169,869 earnings on pension plan investments Changes in proportion and differences 17,159 1,728 18,887 between location’s contributions and proportionate share of contributions Total deferred outflows of resources $244,731 $297,829 $542,560 Deferred inflows of resources Difference between expected and actual $ 30,239 $ 39,347 $ 69,586 experience Changes of assumptions or other inputs 139,030 180,896 319,926 Net difference between projected and actual 295,769 384,835 680,604 earnings on pension plan investments Changes in proportion and differences 30,328 22,738 53,066 between location’s contributions and proportionate share of contributions Total deferred inflows of resources $495,366 $627,816 $1,123,182
The net amount of deferred outflows of resources and deferred inflows of resources related to pensions that will be recognized in pension expense during the next five years is as follows:
(in thousands of dollars) 22 Medical Center Campus Total Year ending June 30, 2015 $ (37,436) $ (51,217) $ (88,653) 2016 (37,433) (51,219) (88,652) 2017 (75,860) (101,193) (177,053) 2018 (94,614) (122,932) (217,546) 2019 (5,292) (3,426) (8,718) Total $(250,635) $(329,987) $(580,622)
CHRCO Pension Plan CHRCO has a noncontributory defined benefit plan subject to the single employer defined benefit under ERISA rules that substantially covers all full-time employees if they work 1,000 hours or more in a twelve-month eligibility period. Employer contributions are determined under IRC Section 430. Employees are not required or permitted to contribute to the plan. Membership in the CHRCO Plan at June 30, 2014 was 3,810 total members consisting of 671 retirees and beneficiaries receiving benefits, 1,033 inactive members entitled to but yet not receiving benefits, 1,820 active vested members and 286 active nonvested members.
66 NOTES TO FINANCIAL STATEMENTS The net position held in trust for pension benefits attributable to the CHRCO Pension Plan included in the Statement of Plan Fiduciary Net Position was $320.1 million at June 30, 2014. Total pension liability was $331.3 million, resulting in a net pension liability of $11.2 million at June 30, 2014.
CHRCO Net Pension Liability The net pension liability for the plan was calculated based upon the following assumptions: 3.0 percent inflation, 7.2 percent investment rate of return, 3.5 percent projected salary increases and no cost-of-living adjustments. The target allocation and projected arithmetic real rates of return, after deducting inflation, but before investment expenses, used in the derivation of the long-term expected investment rate of return assumption for each major asset class are as follows:
23 Projected Real Portfolio Percentage Rate of Return Asset class U.S. equity 58.5 % 5.3 % Developed international equity 9.4 5.4 Emerging market equity 8.5 6.6 Core fixed income 23.6 2.4 Total 100.0 %
CHRCO Discount rate The discount rate used to measure the total pension liability was 7.25 percent. To calculate the discount rate, the projection of cash flows into and out of the plan were used to determine whether there was sufficient cash available to make all projected future benefit payments of current active and inactive employees.
CHRCO Sensitivity of the Net Pension Liability to the Discount Rate Assumption The following presents the current-period net pension liability calculated using the current-period discount rate assumption of 7.25 percent, as well as what the net pension liability would be if it were calculated using a discount rate different than the current assumption:
(in thousands of dollars) 24 1% Decrease Current Discount 1% Increase (6.25%) (7.25%) (8.25%) Net pension liability (asset) $56,893 $11,212 $(26,643)
CHRCO Deferred Outflows of Resources and Deferred Inflows of Resources As of June 30, 2014, deferred outflows of resources of $5.4 million represents the difference between expected and actual experience. Deferred inflows of resources for pensions of $30.7 million represents changes in benefit terms and net difference between projected and actual earnings on pension plan investments. The net amount of deferred outflows of resources and deferred inflows of resources related to pensions that will be recognized in pension expense during the next five years is as follows:
(in thousands of dollars) 25 Year ending June 30, 2015 $ (7,192) 2016 (7,192) 2017 (7,192) 2018 (4,508) 2019 806 Total $(25,278)
2014 UCSF ANNUAL FINANCIAL REPORT 67 University of California Retirement Savings Program UCRSP includes four defined contribution plans providing savings incentives and additional retirement security for all eligible employees: • Defined Contribution Plans (Defined Contribution Plan and Supplemental Defined Contribution Plan) • Tax Deferred 403(b) Plan • 457(b) Deferred Compensation Plan • University of California Public Employees Retirement System-Voluntary Early Retirement Incentive Program Plan (PERS-VERIP) The Defined Contribution Plan accepts both pre-tax and after-tax employee contributions. The Supplemental Defined Contribution Plan accepts employer contributions on behalf of certain qualifying employees. The 403(b) and 457(b) plans accept pre-tax employee contributions, and UCSF may also make contributions on behalf of certain members of management. PERS-VERIP plan is a defined benefit plan providing lifetime supplemental retirement income and survivor benefits. Benefits from the plans are based on participants’ mandatory and voluntary contributions, plus earnings, and are immediately vested. Information related to plan assets and liabilities for UCSF is not readily available. Additional information on the retirement plans can be obtained from the 2013-2014 Annual Reports of the University of California Retirement Plan, the University of California Retirement Savings Program, and the University of California PERS-VERIP.
13. Retiree Health Plan The University administers single-employer health and welfare plans to provide health and welfare benefits, primarily medical, dental, and vision, to eligible retirees and their eligible family members (retirees) of the University and its affiliates. The Regents have the authority to establish and amend the plans. The contribution requirements of the eligible retirees and the participating University locations, such as UCSF, are established and may be amended by the University. Membership in the UCRP is required to become eligible for retiree health benefits. Contributions toward benefits are shared with retirees. The University determines the employer’s contribution. Retirees are required to pay the difference between the employer’s contribution and the full cost of the health insurance. Retirees who are employed by the University after July 1, 2013, and retire at the age of 56 or older, become eligible for a percentage of the University’s contribution based on age and years of service. Retirees are eligible for the maximum University contribution at age 65 with 20 or more years of service. Retirees employed by the University prior to 1990 and not rehired after that date are eligible for the University’s maximum contribution if they retire before age 55 and have at least 10 years of service, or if they retire at age 55 or later and have at least 5 years of service. Retirees employed by the University after 1989 are subject to graduated eligibility provisions that generally require 10 years of service before becoming eligible for 50 percent of the maximum University contribution, increasing to 100 percent after 20 years of service. Participating University locations, such as UCSF, are required to contribute at a rate assessed each year by the UCRHBT. The contribution requirements are based on projected pay-as-you-go financing requirements. The average assessment rates were $3.24 and $2.70 per $100 of UCRP-covered payroll, resulting in UCSF contributions of $50.3 million and $39.0 million for the years ended June 30, 2014 and 2013, respectively. The actuarial value of UCRHBT assets of $44.3 million and the actuarial accrued liability of $13.3 billion associated with the University’s campuses and medical centers were derived using the entry-age normal-cost method, including implicit subsidy of $2.6 billion as of July 1, 2013, the date of the latest actuarial valuation. For the years ended June 30, 2014 and 2013, combined contributions from the University’s campuses and medical centers were $380.1 million and $311.2 million, respectively, including implicit subsidy of $85.2 million and $86.2 million,
68 NOTES TO FINANCIAL STATEMENTS respectively. The University’s annual retiree health benefit expense for its campuses and medical centers was $1.2 billion and $1.4 billion for the years ended June 30, 2014 and 2013, respectively. As a result of contributions less than the retiree health benefit expense, the University’s obligation for retiree health benefits attributable to its campuses and medical centers totaling $8.2 billion at June 30, 2014, increased by $0.8 billion for the year ended June 30, 2014. Retiree health plan information related to plan assets and liabilities for UCSF is not readily available. Additional information can be obtained from the 2013-2014 Annual Report of the University of California Retiree Health Benefit Trust.
14. Endowments and Foundation Gifts Endowments are administered either by the University, Foundation or CHRCO Foundation. The book value and market value for Foundation endowments for the years ended June 30, 2014 and 2013 are as follows:
(in thousands of dollars) 26 2014 2013 Book Value Market Value Book Value Market Value Endowments - Regents $ 406,180 $1,082,487 $ 400,265 $ 946,912 Endowments - Foundation 675,943 895,696 619,172 752,280 Total endowments $1,082,123 $1,978,183 $1,019,437 $1,699,192
The Regents’ endowments The endowments held by the Regents are administered by the University and related investments are not reflected in UCSF’s financial statements. The portion of investment returns earned on endowments held by the Regents and distributed each year to support current operations is calculated based on a rate approved by the Regents, currently 4.75 percent, of the 60-month moving average of the GEP market value. The total distribution to UCSF from endowments held by the Regents was $36.7 million and $34.8 million for the years ended June 30, 2014 and 2013, respectively.
UCSF Foundation Under University policies approved by the Regents, each individual campus may establish a separate foundation to provide valuable assistance in fundraising, public outreach, and other support for the missions of the Campus and the University. Although governed by an independent board, the Foundation is affiliated with, and its assets are dedicated for, the sole benefit of UCSF. During the year ended June 30, 2014, gifts of $124.6 million comprised of $31.6 million from earnings on underlying endowment investments and $93.0 million from private gifts, were transferred to UCSF from the Foundation. This is comparable with $82.9 million comprised of $19.2 million from earnings on underlying endowment investments, $0.7 million from funds functioning as endowments and $63.0 million from private gifts transferred during 2013. Transfers of gifts for capital projects that are included in Other Changes in Net Position are excluded from these amounts.
CHRCO Foundation The book value and market value for CHRCO Foundation endowments for the year ended June 30, 2014 are as follows:
(in thousands of dollars) 27 2014 Book Value Market Value Endowments - Foundation $182,694 $196,051 Total endowments $182,694 $196,051
Endowment payouts are made on an annual basis unless otherwise agreed to by CHRCO Foundation, but not more frequently than quarterly. The transfer of endowment earnings to the hospital is designated to a specific program or is unrestricted based upon the donors’ stipulation.
2014 UCSF ANNUAL FINANCIAL REPORT 69 During the year ended June 30, 2014, gifts of $32.3 million, comprised of $20.3 million as unrestricted funds, $5.4 million for the capital campaign, and $6.6 million as restricted funds, were transferred to CHRCO from CHRCO’s Foundation.
15. Segment Information UCSF’s significant identifiable activities, for which revenue bonds are outstanding, are related to the Medical Center. The Medical Center’s operating revenues and expenses consist primarily of revenues associated with patient care and the related costs of providing that care. Condensed financial statement information is as follows:
(in thousands of dollars) 27 2014 2013 Revenue bonds outstanding $ 840,654 $ 843,749 Related debt service payments 54,214 54,212 Bonds due serially through 2049 2049 CONDENSED STATEMENTS OF NET POSITION ASSETS Current assets $ 894,050 $ 845,274 Capital assets, net 1,913,427 1,630,307 Other assets 16,703 30,213 Total assets 2,824,180 2,505,794 DEFERRED OUTFLOWS OF RESOURCES 256,587 365,001 LIABILITIES Current liabilities 283,370 288,900 Long-term debt 837,536 843,951 Pension obligations 523,452 822,056 Other noncurrent liabilities 158,374 226,168 Total liabilities 1,802,732 2,181,075 DEFERRED INFLOWS OF RESOURCES 495,366 291,078 NET POSITION Invested in capital assets, net of debt 1,075,700 748,754 Restricted 9,959 21,862 Unrestricted (302,990) (371,974) Total net position $ 782,669 $ 398,642
(in thousands of dollars) 28 2014 2013 CONDENSED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION Operating revenues $2,390,273 $2,164,309 Operating expenses (2,132,346) (2,056,939) Depreciation expense (98,523) (100,801) Operating income 159,404 6,569 Nonoperating revenue 22,400 12,146 Income before other changes in net position 181,804 18,715 Heath systems support (61,279) (58,224) Changes in allocation for pension payable to University 8,973 - Other, including donated assets 254,529 72,411 Increase in net position 384,027 32,902 Net position, beginning of year Beginning of year, as previously reported 1,322,592 1,169,160 Cumulative effect of accounting change (923,950) (803,420) Net position, beginning of year restated 398,642 365,740 Net position, end of year $ 782,669 $ 398,642
70 NOTES TO FINANCIAL STATEMENTS (in thousands of dollars) 28 cont. 2014 2013 CONDENSED STATEMENTS OF CASH FLOWS Net cash provided (used) by: Operating activities $287,903 $228,948 Noncapital financing activities (61,279) (57,673) Capital and related financing activities (170,831) (394,859) Investing activities 26,082 380,146 Net increase in cash 81,875 156,562 Cash and cash equivalents, beginning of year 413,486 256,924 Cash and cash equivalents, end of year $495,361 $413,486
16. Commitments and Contingencies
Commitments Amounts committed but unexpended for UCSF construction contracts totaled $350.5 million and $432.3 million at June 30, 2014 and 2013, respectively. Of the $350.5 million at June 30, 2014, $204.2 million relates to the Medical Center and $146.3 million relates to the Campus. UCSF and CHRCO lease land, buildings and equipment under agreements recorded as operating leases. Operating lease expenses for the year ended June 30, 2014 and 2013 were $67.2 million and $68.8 million, respectively. The terms of the leases extend through June 2047. Future minimum payments on operating leases with an initial or remaining non-cancelable term in excess of one year are as follows:
(in thousands of dollars) 29 UCSF CHRCO Year ending June 30, 2015 $ 46,225 $ 3,370 2016 39,378 2,640 2017 33,835 2,453 2018 27,222 1,328 2019 21,702 528 2020-2024 10,991 - Total $179,353 $10,319
As of June 30, 2014, the Foundation has contractual commitments to invest an additional $32.7 million in various endowment pool investments through December 31, 2025.
Amounts committed but unexpended for CHRCO construction contracts totaled $161.9 million at June 30, 2014 and are mostly related to seismic updates. As of June 30, 2014, CHRCO had no amounts outstanding under its revolving credit facility for $25.0 million. The interest rate on the credit is 1.4 percent as of June 30, 2014 and the facility expires on August 31, 2015.
Contingencies UCSF is contingently liable in connection with certain other claims and contracts, including those currently in litigation, arising in the normal course of its activities. Although there are inherent uncertainties in any litigation, UCSF management and general counsel are of the opinion that the outcome of such matters will not have a material effect on UCSF’s financial position.
2014 UCSF ANNUAL FINANCIAL REPORT 71 17. Operating Expenses by Function Operating expenses, by functional classification, for the years ended June 30, 2014 and 2013, are as follows:
(in thousands of dollars) 30 2014 2013 Instruction $ 316,717 $ 305,891 Research 799,802 794,407 Public service 114,205 133,836 Academic support 305,047 354,874 Student services 22,546 23,790 Institutional support 185,211 169,173 Operations and maintenance of plant 81,161 75,447 Student financial aid 7,445 23,796 Medical center 2,132,346 2,056,939 Auxiliary enterprises 26,709 30,246 Depreciation 221,218 215,220 Impairment of capital assets 394 9,030 Total operating expenses $4,212,801 $4,192,649
72 NOTES TO FINANCIAL STATEMENTS Celebrating 150 Years in Health and Science
“I can’t foresee what UCSF will look like in another 150 years, but I do know that our past has prepared us well to lead the next revolutions in health.” UCSF CHANCELLOR SAM HAWGOOD Photo Credits: Cindy Chew, Elisabeth Fall/www.fallfoto.com, Susan Merrell/UCSF. Image of Sandler Neurosciences Center: © Skidmore, Owings & Merrill LLP | Cesar Rubio, 2015. All rights reserved. Historical Images: UCSF Archives & Special Collections. The UCSF 2014 Annual Financial Report was prepared by the Controller’s Office of the University of California, San Francisco and is available online at: http://controller.ucsf.edu/fin_statements Consolidated Audited Financial Reports and A-133 Audit Reports for the University of California are located at: http://reportingtransparency.universityofcalifornia.edu
© University of California, San Francisco, 2015