USF Board of Trustees Finance & Audit Workgroup NOTES Thursday, November 7, 2013 USF Sarasota-Manatee, Selby Auditorium

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1 USF Board of Trustees Finance & Audit Workgroup NOTES Thursday, November 7, 2013 USF Sarasota-Manatee, Selby Auditorium I. Call to Order and Comments The meeting of the Finance and Audit Workgroup was called to order by Chair John Ramil at 9:05am. The following members and liaisons were present: John Ramil, Hal Mullis, Stephanie Goforth, Scott Hopes, Brian Lamb, Judy Genshaft, Alan Bomstein, and Jim Fellows. Trustee Byron Shinn was also present and welcomed the Workgroup to USF Sarasota-Manatee. Trustee Shinn introduced two new USFSM Campus board members who were in attendance as well. Chair Ramil reported on USF s bi-annual credit ratings review process with the credit rating agencies. Yesterday, USF representatives met with Moody s and Standard & Poor s in New York. The agencies have concerns with the higher education sector - worried about government involvement and enrollment dropping off. We went to add additional information to the numbers being reviewed strong demand for the USF product; additional funding from the Legislature; funding taken away has been restored; and transfer of FPU. They were good meetings the agencies appreciated the information and valued meeting USF leadership. President Genshaft noted that the analysts were knowledgeable about USF and asked relevant questions; they listened and took notes. The President stated that our visit can only help, not hurt. Chair Ramil welcomed Alan Bomstein, new Foundation liaison. II. Public Comments Subject to USF Procedure Steve Prevaux, General Counsel, gave an overview of the USF Procedure for Appearances before the Board of Trustees. This is the first meeting with this process in place. On October 1, 2013, the Public Meeting Notice was amended to include public comments at committee meetings before the board meeting. This provides open access and transparency. The request to comment should specify: (1) the agenda item upon which the requester wishes to comment; and (2) whether the comment will be offered in support, opposition or neutrality to the agenda item. Such a request, along with any supporting documentation, must be submitted at least three (3) business days (i.e. Monday-Friday excluding legal holidays) prior to the start of the Board Workgroup meeting in which the agenda item will be considered. There will be a three minute time limit on any presentation. The total time allotted for all comments shall not exceed a reasonable period of time of fifteen minutes, unless approved by the Chair. Mr. Prevaux recommended the procedure to the Workgroup for action.

2 A motion was made to adopt the procedure. The motion was seconded. The motion passed. III. New Business - Action Items a. Approval of August 15, 2013 Meeting Notes Upon request and receiving no changes to the draft meeting notes, Chair Ramil requested a motion for approval, it was seconded and the August 15th meeting notes were approved as submitted. IV. New Business - Information Items John Long, Chief Operating Officer and Senior Vice President, introduced the information items. The presentation of these next agenda items will be in a different format than we ve done before, will include more detail. a. Financial Information 1. Financial Statement Trends Nick Trivunovich, Vice President and CFO, presented the financial statement trends. The graph of key financial statement indicators shows where we have been, where we are now, and where we are going. Book is operating income or loss based on financial statements (does not include capital operations). There was a drop in 2012, most of which was planned (spending of carry forward funds). In FY 2014, we see an upward trend due to restored state appropriations and cost containment measures. We expect to be above the breakeven line in Chair Ramil noted that information was presented to the rating agencies. Trustee Lamb stated that the trajectory looks good going into 2014 and 2015 from where we ve been to where we re headed. Chair Ramil added that that we ve maintained quality throughout this period. 2. Preliminary University 2013 Annual Financial Reports Mr. Trivunovich presented highlights of the 2013 Financial Statements in the form of a stoplight chart (green = good, yellow = neutral, red = not good). The USF System had a net operating loss of $47M. Major variances from prior year include: change in state appropriations of $55M; tuition and fees up $26M ($12.8M is differential increase; $5M is out of state increase; the rest is medical school programs); contracts and grants up $21M; expenses stable with less than 1% increase (when adjusted for FPU transition); compensation and employee benefits show no material change year over year; and depreciation up $4.6M (new buildings on the books).

3 The total transfer to FPU was $118.8M. $28.8 was cash which included $18.9M for construction in process. President Genshaft noted that this was one of the most important items we spoke to yesterday to the rating agencies. On the balance sheet, cash and investments are down $59M; capital assets are down $79M; and net position (i.e. equity ) overall decreased $154M. Most of these items were affected by the FPU transfer. Unrestricted net assets are down $35M, but should be positive next year. Rating agencies are interested in unrestricted net assets. We will be adding capital assets in the next couple years. Cash spent to support operations will be restored in the coming years. Next year, some of the yellows on the stoplight chart will be green. Chair Ramil explained that the FPU transfer on top of a bad year didn t help. If last year had not been a bad year, we wouldn t have been so hurt by the FPU transfer. b Operating Budget Mr. Long presented an overview of the USF System operating budget. The budget was broken down by funding source, fungibility, and expenditure category. 78% of the system expenditures are people costs (salaries and benefits). USF is a people-intensive business which makes it difficult to make changes to our spending quickly. The budget was presented for the System as well as for each campus. USF Health has a strong contracts & grants portfolio. USFSP and USFSM have smaller amounts of contracts & grants. The unallocated expenditure category includes reserves and tuition over collection authority. Mr. Long stated that we need to reduce our tuition budget authority over the actual collection amount. Chair Ramil remarked that this is a good layout for presentation of this material. Trustee Lamb asked if the 80% of our spend on talent is aligned with our strategic plan and student success. c. Annual Foundation Investment Report Chip Newton, Chair of the USF Foundation Investment Committee, and Mark Brubaker, Wilshire Consulting, presented the Annual Foundation Investment Report. The USF Foundation Investment Committee oversees assets in endowment and operating portfolios (over $474M in total assets under management). The endowment provided University programs and scholarships with about $15M in dividends in FY ; over $140M over the last ten years. The dividend rate is 4%. The administrative fee (2%) pays for the Foundation s operations. Returns rank favorable versus peers 5 th percentile ranking in 10-year performance versus $ M peers. We have performed better than our Florida peers and they are trying to catch up. We have beaten our policy benchmarks over the past 10 years. Attribution factors for continued top quartile performance results include the endowment abstaining from investing in hedge funds (a detractor for many peer endowments); fixed income overweight versus peers (roughly half in high yield bonds, the top performing asset class for the last five years); and prudent manager selection and implementation.

4 Recent investment committee initiatives include the replacement of struggling small cap growth manager and continued oversight of the Foundation Operating Portfolio, including a decision to reduce overall portfolio duration in response to the threat of rising interest rates; replaced passive long-bond index fund with short duration high yield bond fund. Looking forward, we need to generate returns to cover 6% spending, cover inflation, and grow the endowment. Trustee Goforth asked if our 2% administrative fee is in line with other foundations. Mr. Newton responded yes, it is in line with peer institutions. d. University Audit & Compliance Annual Report Debra Gula presented the 2012/13 Annual Report for University Audit & Compliance (UAC). UAC currently has 12 staff members including 8 internal auditors and 2 compliance officers. The staff includes many USF graduates and has a wide breadth of experience and subject matter experts. UAC successfully completed their Quality Assurance Review in compliance with IIA standards. This occurs every five years. UAC does a self-assessment first. It was a good year for USF no major fraud investigations. In , UAC completed 7 audits, 6 consulting projects, and 16 investigations, and managed 62 EthicsPoint reports. USF Tampa Library Resources was a good audit and good result. 33 of the EthicsPoint reports were HR related (not the office, just the type of issue) usually employee/supervisor issues. This tracks with the trend over the last three years and is comparable to other higher ed institutions. Chair Ramil asked Ms. Gula if she was comfortable that everyone is aware of EthicsPoint. Ms. Gula responded yes, UAC does two major marketing efforts a year and it is also part of new employee orientation. Chair Ramil asked if the Board needs to be doing anything else in setting the tone for compliance. Ms. Gula suggested the Code of Conduct. Provost Wilcox stated that with all the emphasis on performance measures, we should be looking at data integrity. e. USF Proposed Land Purchase USFSP Regional Chancellor Sophia Wisniewska introduced new USFSP Regional Vice Chancellor for Administrative & Financial Services Joe Trubacz. Mr. Trubacz presented the plan for acquisition of building and parcel of land known as Gulfcoast Legal Services. USFSP has seen enrollment growth and the need for additional academic and student space. This property abuts USFSP and includes.31 acres with a building of 10,000 net square feet of space and 17 parking spaces. While the building has 20 years of remaining useful life, there are issues safety issues, not ADA compliant, asbestos abatement, soil improvements for parking. USFSP has done due diligence and made a purchase offer and is still negotiating.

5 If the Purchase and Sale Agreement is accepted by Gulfcoast Legal Services, USFSP will bring this to the BOT in December as an action item requesting approval to purchase the property. Trustee Lamb asked about the operating costs for occupying the property and can USFSP cover the costs. Mr. Trubacz indicated that USFSP Facilities Planning has the costs and USFSP can cover them in their budget. President Genshaft stated that the existing building is in poor shape and should be torn down. Trustee Goforth added that the parcel of land is important to USFSP. Trustee Lamb told USFSP that when they bring this issue back, they will need to state specifically the intended use of the land and building, not multiple options. Mr. Bomstein stated that urban campuses must take advantage of acquiring continuous property. The question/issue here is the usage. f. USF System Housing Redevelopment Mr. Long gave an update on the USF System Housing Redevelopment Project. An ITN for Consulting Services Student Housing Redevelopment Project (the Project) was issued on August 21, 2013, with proposals due October 1, Three proposals from program development advisory firms with national experience were received. An ITN Selection Committee is reviewing the proposals and will conduct interviews. An award to initiate negotiations with the selected consultant is expected in early November. The USF System Project is intended to redevelop the Andros complex on the Tampa Campus. This will be a living/learning community for student success and will transform housing on the Tampa Campus. This will be a System contract, able to be used by all campuses. Trustee Lamb stated this is the essence of leveraging the System. The goal is to replicate this on the other Campuses. Mr. Long suggested having a Trustee oversight group for this Project, to take advantage of the Trustees expertise. Other Mr. Trivunovich noted that the Trustees should have received the audit findings report. There were no repeat findings on pcard or after-the-fact purchase orders. We did have a finding on the pcard rebate. We feel that we are doing it correctly, but the Florida Auditor General disagrees. All other SUS institutions who were audited in this time frame received the same finding. Having no further business, Chair Ramil adjourned the Finance and Audit Workgroup meeting at 11:19am.