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November 22, 2006

Pitt's financial health continues, official says

Pitt continues to enjoy healthy financial status, according to a senior administrator who summarized the University’s annual audit report at last week’s meeting of the Senate budget policies committee (BPC).

“Our consolidated financial statements show that the University began fiscal year 2006 in a very solid financial position and ended the fiscal year in the same fashion,” said Arthur G. Ramicone, vice chancellor for Budget and Controller.

Pitt’s audit report was completed in August, approved by the Board of Trustees audit committee in September and by the full board Oct. 27.

“The outside auditors, in this case Deloitte & Touche, issued what is called an ‘unqualified’ or ‘clean’ opinion,” said Ramicone.

Pitt’s total net assets as of June 30 were nearly $3.9 billion, up from approximately $3.5 billion at the close of FY05, he said.

“You can see, in comparing FY06 to FY05, tuition revenue increased by 6.5 percent (to $335 million),” he said.

Also noteworthy, Ramicone said, is that for the first time in memory, Pitt’s research grants and contracts essentially flattened out, from $602.7 million in FY05 to $601.6 million in FY06. That was expected, he said, due to a slowdown in National Institutes of Health (NIH) funding.

“We’re still over $600 million and still the 7th in NIH funding nationally,” Ramicone noted. “We’re expecting a modest increase of a couple percent this year, and we’re on track for that based on what we know through October of this year.”

Pitt’s audit statements reported $81.2 million in gifts and pledges in FY06, about $25 million less than what Institutional Advancement reports for Pitt’s capital campaign, Ramicone pointed out.

That’s because financial accounting standards require institutions to report gifts and pledges one way, while those reported for capital campaigns are tallied in a different manner.

“Neither way is wrong, both are right, they’re just different sets of guidelines,” he said. Institutional Advancement considers a gift earmarked to a Parkinson’s foundation a capital campaign gift, for example, while auditors consider it to be a grant, Ramicone explained. “There’s still an expectation from the funder that we will use that gift for Parkinson’s research, so we consider it a grant,” he said.

Employee salaries rose by 4 percent, but employee fringe benefit costs actually declined, Ramicone said. “So we had an overall increase in compensation of 2.7 percent. And, as is fairly typical across the land, our total compensation ($827 million) represents about 60 percent of our expenses.”

The decline in benefit costs was due to a combination of factors, he said. “Our pension expense, as determined by the actuaries, decreased slightly for the defined benefit plan, and our post-retirement expenses also decreased by a modest amount,” Ramicone said. “What [auditors] do is they say, ‘What’s your future benefit obligation for all your employees working toward retirement? What will you have to pay in the future for the retiree medical plan?’ Then they discount it back to the present day. When that discount rate, which is tied to interest rates, increases, those future obligations become less and reduce the liability that we have to account for. It’s not really cash flow.”

Pitt’s total operating revenue in FY06 was $1.49 billion; Pitt’s expenses totaled $1.41 billion, Ramicone said. “So you see we come to a subtotal of excess operating revenues over expenses of about $88 million verses $80 million last year. Both years were outstanding, but you have to keep it in perspective,” he said.

“Some people look at that and say that you’re not for profit, you shouldn’t be running those surpluses. But these are monies that will all be plowed back into the three-pronged mission of the institution. So, if you break that down, the auxiliary funds get a piece of that and we’ll be putting that back into auxiliary operations, be it for parking garages or the dormitories or the food service,” Ramicone said. “For example, the board’s property and facilities committee just approved a $12.5 million project to refurbish Eddie’s. So the auxiliary monies are being re-invested in that.”

Pitt’s School of Medicine also runs a surplus, but needs those funds to maintain facilities, he added.

“And some of the surplus is simply due to timing. We record a pledge as revenue. That’s the financial accounting requirements. If somebody says, ‘I’m going to give you $1 million over five years,’ we discount that to a present value of, let’s say, $900,000, and record it as revenue. But there’s no corresponding expense yet. We haven’t received the money yet, let alone spent it,” Ramicone pointed out.

Pitt’s non-operating revenues ($237 million in FY06) largely are tied to the endowment investments, which had a very strong year, returning 14.4 percent, he said. “It out-performed our expectations. We have a portfolio that we hope over the long run will return about 9.7 percent. We’ve done better than that in the last several years, but in the years before that it did not do so well.”

Ramicone said a new investment technique in FY06, initiated by treasurer Amy Marsh, resulted in a savings of roughly $1.8 million, or 5 percent, on $36 million in cash transactions.

“We generate a lot of cash from tuition, especially in August and September, and December and January,” he said. “And our lowest point each year is June and July. There’s not much being billed then, and money is still going out the door. So we would keep fairly high cash balances throughout the year.”

Under Marsh’s direction, Pitt entered into “repurchase agreements” whereby University-owned securities in the form of U.S. Treasury notes are used as collateral in exchange for cash. The short-term agreements allow Pitt to raise cash for limited periods of time rather than fully liquidating investment holdings, Ramicone said. “When Amy came up with this, it looked like it was too good to be true. It’s a very cost-effective way of borrowing money.”

Other highlights of the FY06 audit report include:

• Pitt’s net assets include a $1.8 billion endowment up, from $1.54 billion in FY05.

• Total utility expenses went up by almost 25 percent in FY06 to $33.4 million, although a large chunk of that is tied to new expenses for the Biomedical Science Tower 3 (BST3) and Pennsylvania Hall, according to Ramicone.

• Pitt spent $168 million and the commonwealth funded $30.3 million for property, plant and equipment in FY06. Among the projects those combined amounts funded included: $50.8 million for construction of the BST3; $25 million for building Panther Hall; $23.5 million for operating equipment; $12.6 million for construction of a regional biocontainment lab in the BST3; $11.3 million for library acquisitions; $9 million for the Clapp/Langley/Crawford addition; $3.2 million for a new electrical vault on the upper campus, and $1.5 million for Hillman Library renovations.

Following Ramicone’s report, BPC veteran Philip Wion commented, “This report shows a lot has changed in the last 10 years and that Pitt has got its financial house in order. Art and his people really know what they’re doing and they should be congratulated. It’s comforting to know for those of us who care about the institution’s financial health.”

—Peter Hart

Filed under: Feature,Volume 39 Issue 7

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