Finances reviewed for two fiscal years St. Thomas Newsroom December 4, 2002 I want to take this opportunity to report on the results of fiscal year 2002 and the outlook for fiscal year 2003, which will end on June 30. For comparison purposes, the information here will be exclusive of the law school because its start-up costs are funded out of our quasi-endowment (our savings account).FY ’02 actual As background, during the late 1990s and in 2000 the university’s growth in expenses exceeded its increase in revenues. As a result, a round of budget reductions took place in late fiscal year 2001 to reverse that trend. At the same time the university was cutting costs, the administration recognized the need to pay competitive salaries. As a result, special equity dollars were allocated for faculty and staff totaling $1.7 million and $1.1 million, respectively, over the period of 2002-2006. The results for fiscal year 2002, due primarily to the budget reductions and good fiscal stewardship across the university, are as follows:($ in millions)FY ’02FY ’01Increase <Decrease> Revenues$140.0$136.4$3.6 Expenses130.1131.2<1.1> Operating margin$9.9$5.2$4.7 Percent of margin7.1%3.8%Overall, FY ’02 revenues increased 3 percent. Both undergraduate and graduate tuition increased 6 percent and financial aid was up 4 percent. Partially offsetting was an 8 percent reduction in other revenues due primarily to seminars and workshops, which were impacted by the economy, interest income resulting from the drop in interest rates, and fewer unrestricted gifts.Total expenses for FY ’02 actually decreased by $1.1 million from the previous year. Overall employee-related costs increased 2.3 percent, led by an increase in faculty compensation of 6 percent. Administrative and hourly compensation costs each were down 3 percent as a result of the previously mentioned budget reductions. Benefit costs were flat compared to the prior year due to the lower base.Another key driver to the improved results was a 5 percent reduction in non-compensation costs, led by lower expenses for supplies, travel and facilities. In addition, computer lease expense was down 10 percent.As a result of the overall expense reduction, the university’s operating margin improved to $9.9 million, or 7.1 percent of revenue, from $5.2 million, or 3.8 percent, a year earlier. Again, I want to thank all of you for practicing good fiscal stewardship in helping to achieve these results.The positive results for FY ’02 were achieved despite significant challenges. Undergraduate credit hours were essentially flat versus a growth projection of 2 percent. Add that to the impact of the 9/11 tragedy, the downturn in the economy and lower investment returns, and the results appear even better.Many of you have heard me say that the university needs to focus on “operating margins” to internally generate funds to support operations and capital needs. The university, like all of us, has a limit to the amount it can borrow and still maintain a favorable credit rating. In addition, we can’t continually draw down our savings account to support operations.How did we use the $9.9 million operating margin? It was used for the university’s capital needs, such as building projects, equipment and library books, and for principal and interest on our debt obligations. After meeting these needs, despite the improved margins generated during the year, the university was able to return only $65,000 to its savings account.Before turning to FY ’03, I want to make a few comments about our law school. The university’s goal is to develop a top-tier law school with an endowment of $100 million (plus $36 million for a building and library books), a maximum of 450 students and a building commensurate with such an endeavor. I am pleased to report the financial scenario is tracking to our target. The $34.6 million building is under construction in downtown Minneapolis and will be ready in August 2003 for the beginning of its third year of operation.FY ’03 projection Next I would like to focus on the current year – fiscal 2003. As we progress through the year, we continually update the outlook and compare it to the budget approved by the board of trustees last February. In summary, the projection is as follows:($ in Millions)FY ’03 OutlookFY ’03 BudgetIncrease/ <Decrease& gt;Revenues – Net tuition and fees$106.3$108.2$<1.9> – Other39.542.5<3.0>- Total $145.8$150.7<4.9>Expenses – Compensation$99.0$99.9$<.9> – Non-compensation39.641.1<1.5>- Total $138.6$141.0$<2.4>Operating margin$7.2$9.7$<2.5> Percent of margin4.9%6.4%Total revenues for FY ’03 are projected to be $4.9 million below budget. Of that total, tuition and fees are $1.9 million below budget and other revenues are $3.0 million under the forecast. Undergraduate tuition, net of financial aid, is 1 percent ahead of budget. Graduate programs overall are 7 percent below budget primarily due to the impact of the economy and a reduction in international students following the events of 9/11. The shortfall in other revenues is driven by several factors, including:• Lower government grants due to the elimination of state work study funds.• Lower interest income due to the continuous drop in rates.• Lower seminar and workshop fees due to the economy and business cutbacks in training dollars.• A lower projection for unrestricted gifts, due again to the economy.Total expenses for the year are projected to be $2.4 million favorable to budget, partially offsetting the revenue shortfall. Compensation costs are projected to be $900,000 favorable to budget while non-compensation expenses are forecasted to be $1.5 million below budget, again due to lower costs for supplies, travel and facilities.As a result, the operating margin for fiscal year 2003 is projected to be $7.2 million, or 4.9 percent of revenue, versus the budget of $9.7 million, or 6.4 percent. We expect our capital expenditures and principal and interest on our debt obligations will total $13.3 million. This amount, when combined with our planned draw from reserves for a portion of the debt, will leave the university with a $2.5 million shortfall for the year; this translates to 1.8 percent of our operating expense budget. It is important to resolve this issue now because it also will impact the university as it prepares the fiscal 2004 budget and forecast for subsequent years.The President’s Staff, the Executive Vice President’s Cabinet and the deans and directors have begun to address the $2.5 million challenge. As we look for budget improvement opportunities, all of us request your assistance in helping solve this issue by, again, practicing good stewardship and spending university dollars prudently. If we all band together, we can resolve this issue.