Unrestricted Net Assets Peter J. Taylor Chief Financial Officer, UCOP

“Unrestricted” Net Assets UC does not have billions of dollars in uncommitted funds that it can use to make up for massive reductions in state support. UC’s June 2008 financial statements reference $5.3 billion in "unrestricted net assets" — terminology required to be used under requirements of the Government Accounting Standards Board (“GASB”). The definition of “unrestricted” must be used for any funds that are not subject to externally imposed restrictions. “Unrestricted assets” does not mean uncommitted assets. Funds are kept in over 76,000 funds and accounts that each individual campus controls for very specific uses including: some of UC’s endowment capital project funding medical centers operating funds to support academic programs and research initiatives on a multiple-year basis liening funds for authorized equipment purchases and services that have not been expended by the end of the fiscal year Want to address a myth that somehow, somewhere UC is sitting on billions of dollars of unused and unclaimed cash that can be used to blunt the current financial crisis besetting our campuses and allow us to get through unscathed, unlike virtually every other institution in the State. I understand that the term, Unrestricted is a misnomer and is misleading. We are, however, required to use the term by the Government Accounting Standards Board. It is not optional. It is not avoidable. In their definition – under GASB Rule 34 and 35 – Unrestricted means everything not restricted by external parties: primarily federal government, restrictive endowments established by outside donors. Everything else is unrestricted. But let’s be clear: Unrestricted does not mean uncommitted. Our UNA’s are kept in over 76,000 fund/account combinations that include: Endowments Etc… In a nutshell, our UNA balances – which of course include some substantial cash balances which I will illustrate shortly – are somewhat akin to your interest checking account out of which you pay your household expenses You may get paid on the 15th of the month, and on that day have a pretty healthy looking balance in the bank, but you know that the mortgage is coming due on the 1st, and there is a VISA bill payable on the 6th, and don’t forget the tuition… In short, you have cash, but it is fully spoken for.

“Unrestricted” Net Assets, cont’d As illustrated on the next page, the upcoming issuance of our audited financial statements summarizing UC’s financial condition as of June 30, 2009 will show a substantial drop in our unrestricted net assets to an amount below $4 billion. Some of this drop is attributable to the growth in our unfunded retiree health care obligations and investment losses. The financial statements will also show a decrease in operating cash balances at our campuses. These accounts are used by campuses to meet a variety of expenses throughout the year for core instructional needs. The substantial budget cuts from the State – including those in the middle-and-end of the 2008-09 fiscal year – hit our campus programs so late that all available funds had to be tapped to help bridge over to the current fiscal year. The trend line is negative: June 30, 2007 our UNA was $6.5 billion, then $5.3 billion at end of FY 2008 and will be below $4 billion for FY 2009 when we report the results from our final audit to this Board in November. Down nearly $3 billion in 2 years. Approximately 2/3rds of this drop is attributable to the growth in our unfunded retiree health care, which is on track to grow so large as to overwhelm our financial position in the next 9 years. As an illustrative example of the size of this problem, by 2013, our pension & OPEB obligation will equal the entirety of what we currently spend on direct faculty research (18% of our budget). By 2015, these obligations will equal what we currently spend on instruction on all 10 campuses combined (approx. 20% of our budget). By 2018, the amount will equal the same percentage that our medical center operations in today’s budget. So it is appropriate and responsible from a fiduciary point-of-view – and required by GASB policy – to reflect these substantial obligations in our financial statements. Additionally, a portion of this drop is due to market losses, although it is relative small, approximately $200 million or so. And a large portion is due to a decrease in our operating cash balances, again, our interest checking account.

“Unrestricted” Net Assets, cont’d * Approximate, pending finalization of financial statements B $6.5B 6/30/07 <$4B* 6/30/09

Preview of Unrestricted Net Assets for FY 2008-09 Total to be reported: Below $4 billion Highlights:* Capital Projects $ 820 M Medical Centers $ 700 M Endowment Income/FFEs $1,084 M Debt Service Funds $ 35 M Misc. Student Fee & Auxiliary Payments $ 640 M * amounts are approximates What makes up the UNA. A few highlights of major categories: Capital Projects: the vast majority of these are funds set aside for projects that are already begun or for projects that have already been before this Board and where ground breaking is expected soon. Please remember: UC policy dictates that campuses must have all funds necessary to complete the design and construction of a capital project be on deposit at the time a contract is awarded so that full funding is available to complete the project once it is underway; in this way, campuses don’t have projects partially completed without the funds to finish them. In addition to new facilities and infrastructure, the capital projects address seismic safety upgrades, capital renewal and deferred maintenance. Next we have approximately $400 million total in operating monies for each of UC’s five hospitals to use as their cushion against the substantial variability in their cash flows. It should be noted that, according to the Moody’s rating agency, the appropriate amount of cash reserves for hospitals at the rating category currently assigned to UC is 190 days of cash, which equals more than $3 billion. Hospital cash reserves are substantially below that level, but through the strength of the university’s systemwide revenue pledge structure that recognizes UC’s critical position in California’s health care industry, the hospitals have shown that they can operate successfully with a lesser amount. Approximately $1.1 billion invested in the university’s endowment. These are monies that annually pay out approximately $50 million to support valuable campus programs, ranging from undergraduate student scholarships, faculty research, alumni fundraising programs and the Education Abroad Program, among other expenditures. Approximately half of these programs are located at campuses, and half controlled by University of California Office of the President. At the President’s request, staff is looking into whether there is flexibility to change or reallocate these monies into programs that reflect the changing priorities of the university. This would of course require cutting some current programs. Debt service funds Almost $700 million collected from students and their families in the form of fee income, housing and parking payments, in undergraduate programs and graduate and professional schools. It is important to note that student and faculty housing and parking are required to be self-supporting, although campuses are afforded flexibility to charge these enterprise operations a fee for ground rent and other services. Rates for housing and parking are set so they are sufficient to meet debt indenture covenants and near-term capital and maintenance requirements.