Meeting of the Finance Committee New Internal Financial Model November 8, 2012 Victoria Harker to open meeting. Pat Hogan: Pleased to be here with you in my role as EVP-COO for our first Board meeting together We have a strong agenda planned; our first topic is a report on our FY11-12 audited financial statements and first quarter FY12-13 sources and uses. Dave Boling, our comptroller, will present the audited financial statements. There are no material changes from the unaudited figures presented in September. This presentation, however, also includes some ten-year trend data. Before Dave starts, I will highlight that we shortly receive an audit opinion from the Auditor of Public Accounts, likely the beginning of next week. We expect it to be unqualified/clean. I understand that the Auditor of Public Accounts will attend the Audit Committee meeting in February, as is his custom, to share his review of the University’s financial statements. Thank you, Dave.

New Internal Financial Model Objectives: Align resources with activity Promote prudent stewardship of University resources Ensure transparent decision-making Colette & John

Tuition and State General Funds Current Model Central Admin. School A School B Service Center B Service Center A Tuition and State General Funds $$$ $$ $ Colette & John

Why Change? Concerns with Current Model Target budgets are historically based and do not reflect actual activity Does not provide consistent incentives for all units to be innovative in revenue creation Does not consider all available funds Does not link sources and uses Does not align authority, responsibility, accountability Desire for a more transparent decision-making process Colette & John

What Will Not Change? How we generate most revenue will not change State appropriation Tuition from students Federal funding Philanthropy Basic cost structure will remain the same Faculty and staff costs Facilities and support costs Financial aid Colette & John

What Will Change? Distribution of revenue will reward: Developing new programs Maximizing external opportunities Allocation of costs will: Increase awareness of consumption Make transparent institutional commitment Encourage efficient and competitive services Priorities will be set closer to where activity occurs Hiring will be aligned with priorities Colette & John

Tuition and State General Funds Central Admin. School A School B Service Center B Service Center A Tuition and State General Funds Proposed New Model $$ tax $ direct payment Colette & John Revenue centers (schools, auxiliaries) will generate revenues Revenue centers will pay direct, facilities, and indirect costs Service centers will be funded by charges/assessments to revenue centers Law & Darden live within this system under financial self-sufficiency agreements. $

Challenges Easier to implement in times of growing resources Encourage and fund strategic priorities and inter- disciplinary activities Do not incentivize unnecessary duplication of services – academic, student, and administrative Encourage collaboration, not competition Regularly assess performance of revenue centers and cost centers Colette & John Subventions: Appropriately subsidize areas of high strategic priority, but do not establish entitlements In early years, must balance significant re-allocations Duplication of services will be tempting as schools gain control of revenues --

New Financial Model Timeline FY14 – Phase I, units receive the same amount of funds as under the current model Attribute revenues based on agreed methods Allocate some costs based on agreed metrics Assess revenue centers for unallocated central costs Determine hold harmless/subvention provisions Colette & John Plan is to implement in two phases. Phase I will be implemented for the FY14 budget. At the end of the day each unit will get the same amount of funds as under the current budget allocation model. The manner in which they receive those funds will be different. Revenues will follow activity (e.g. tuition will be credited to the schools with a share following student credit hours and a share going to the school where the student is enrolled) A number of major cost centers will be allocated to revenue centers based on certain metrics (e.g. facilities costs will be allocated on a per square foot charge, human resources will be allocated based on number of employees) Revenue centers will be assessed an amount to cover unallocated central services. Certain hold harmless provisions will need to be in place which will lead to explicit subventions of certain schools or activities.

New Financial Model Timeline FY15 – Phase II Attribute revenues as in Phase I Allocate additional costs based on agreed metrics Assess revenue centers for unallocated central costs Begin to phase out hold harmless provisions Make subventions transparent FY16 and beyond – continue to mature the model Colette & John Plan is to implement in two phases. Phase II will be implemented for the FY15 budget. We will continue to attribute revenues to the activities that generate them (e.g. tuition will be credited to the schools with a share following student credit hours and a share going to the school where the student is enrolled) We will identify additional major service centers whose costs can be allocated on a reasonable basis. This will result in a smaller assessment to revenue centers in order to fund unallocated central services. We will begin to phase out the hold harmless provisions which will result in some explicit subventions that will be transparent to everyone. We recognize this is a model that will require continual assessment and fine tuning into the future.