Chief Financial Officer’s Report

Throughout 2017, the University of Michigan celebrated its bicentennial with a variety of events and exhibits, many of which acknowledged the incredible contributions the university has made to society over its 200 years, in everything from science to the arts. And one factor has been constant in the university’s growth and success through the decades — the commitment of our extraordinary faculty and staff to this institution.

Their unyielding dedication to the university has allowed it to prosper in countless ways, including its financial health. On that note, it is a pleasure to once again report that the University of Michigan remains financially healthy and well positioned for the coming years.

The university’s focused and disciplined budget approach balances our need to compete for outstanding students and talent against a challenging economic environment where financial efficiencies must be achieved. And that’s where our 48,000 faculty and staff have an incredible impact on the university. They have long maintained an unwavering focus on the university’s core commitment to education, research and patient care and worked tirelessly to provide outstanding stewardship for U-M’s financial resources.

Maintaining a Strong Financial Position

The university’s financial position continues to be strong, with total assets and deferred outflows of $20.8 billion and total liabilities and deferred inflows of $7.4 billion at June 30, 2017. Net position, which represents the residual interest in the university’s total assets and deferred outflows after total liabilities and deferred inflows are deducted, totaled $13.4 billion at June 30, 2017.

The university adopted Governmental Accounting Standards Board (GASB) Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, in FY 2017. Adoption of this statement, which establishes new actuarial methods and discount rate standards for the measurement and recognition of the cost of postemployment benefits, resulted in a decrease in net position of $930 million at the beginning of the fiscal year.

An affiliation with Metropolitan Health Corporation (Metro Health) — a community health care provider in West Michigan was completed in FY 2017 — pursuant to which U-M Health became the sole corporate member of Metro Health. In accordance with GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, this combination is included in the university’s financial statements as if it occurred at the beginning of the fiscal year, which resulted in an increase of net position of $80 million.

I am very pleased to say that the University of Michigan continues to prioritize student affordability.

Endowment funds, which are invested principally in the university’s Long Term Portfolio, totaled $10.9 billion at June 30, 2017. Distributions from nearly 10,500 individual endowments provide ongoing support for specific academic and health-related needs across the university’s many disciplines, including student scholarships, educational programs, professorships, clinical operations and research.

The table below summarizes the university’s investment performance of its Long Term Portfolio in relation to relevant comparative benchmark portfolio returns.

Investment Performance

Return for the 12-month period ended June 30, 2017 Annualized 5-year return Annualized 10-year return
Long Term Portfolio 13.8% 8.9% 5.6%
U-M’s Benchmark 10.3% 8.4% 5.2%
Blended Passive Index 11.5% 8.1% 4.0%

With a 10-year annualized return of 5.6 percent, the investment performance of the university’s Long Term Portfolio ranks in the top quartile of performance relative to those of other large endowment portfolios. The university’s annualized 10-year return also continued to exceed those of its custom U-M Benchmark and Blended Passive Index.

We expect net investment income to be volatile from year to year. Our endowment distribution policy, together with our long-term investment strategy, helps to insulate the university from this volatility and provide dependable annual support for operations. The university’s endowment distribution policy smooths the impact of volatile capital markets by providing for annual distributions of 4.5 percent of the seven-year moving average fair value of the endowment. This distribution policy, along with the growth of the endowment, allowed for distributions to support operations of $318 million in FY 2017, for a total of $1.4 billion over the past five years.

Diversification in Revenue Streams

The university has employed a revenue diversification strategy for many years to maintain financial stability. This strategy has been an integral element in enabling the institution to be financially stable through different economic cycles as well as avoiding unnecessary dependence on student tuition and fee increases. The components of the university’s sources of revenue are depicted in the following charts.

Financial support from the state of Michigan remains an important source of funding for the university. State appropriations grew by 2.9 percent in FY 2017 to $356 million. The contribution from the state will increase by 2.1 percent in FY 2018 to $363 million. We are pleased and thankful that the people of Michigan continue to support higher education and the University of Michigan.

The academic operating budget continues to balance academic excellence and investment in the future with student affordability and economic efficiency. The Ann Arbor campus budget for FY 2018 includes an in-state undergraduate tuition rate increase of 2.9 percent. It also includes an increase of 4.1 percent for most graduate and professional programs as well as a 4.5 percent increase in nonresident undergraduate tuition. In addition, the budget has a 9.5 percent increase in undergraduate financial aid, for a total of nearly $180 million. The undergraduate financial aid budget has increased 11.3 percent per year, on average, over the past decade. This compares to an annual growth rate of 4.0 percent for in-state undergraduate tuition. Most noteworthy, perhaps, is U-M’s new financial aid program for in-state students that offers a “Go Blue Guarantee” of free tuition for up to four years on the Ann Arbor campus for students with an annual family income of up to $65,000.

As the University of Michigan prepares to enter its third century, it is reassuring to know that it will continue to thrive and have a positive impact on the world.

At UM-Dearborn, the FY 2018 budget includes a 3.7 percent increase in tuition rates for in-state undergraduate and graduate tuition rates as well as a 9.4 percent increase in institutionally awarded financial aid. The FY 2018 budget for UM-Flint includes a 4.1 percent increase in in-state undergraduate tuition rates, a 4.4 percent increase in most graduate tuition rates and a 12.7 percent increase in institutionally awarded financial aid.

The university continues to see strong growth in non-tuition revenue and remains focused on controlling costs, improving efficiencies and maximizing use of its resources, all of which contributed toward limiting increases in student tuition. I am very pleased to say that the University of Michigan continues to prioritize student affordability.

The demand for a University of Michigan education continues to be at an all-time high. The university again received a record number of undergraduate applications — which totaled 70,000 for its three campuses. This is the 10th consecutive year that applications have increased. The institution — thanks to its stellar global reputation and great value — remains a top destination for outstanding students from Michigan and all over the world as well as faculty, researchers and clinicians.

A Robust Research Enterprise

U-M’s total research expenditures rose to a record $1.48 billion in FY 2017, up 6.4 percent from the previous year. Much of this gain resulted from a 5.0 percent increase in funding from the federal government, the main sponsor of university research. Although U-M receives funding from a variety of federal agencies, the National Institutes of Health and the National Science Foundation were principally responsible for this year’s increase. The university’s expanding partnerships with industry also contributed to this growth, as total industry-sponsored research rose by 14 percent to a record $106 million.

The pipeline of future projects also remains strong. The number of new external research contracts awarded in FY 2017 grew by 2.6 percent, with a growth in total dollar value of 12 percent. In addition, the number of proposals submitted by faculty increased by 23 percent as compared to the previous year and totaled $5.8 billion.

U-M researchers continue to produce new ideas with commercial promise and potential public benefit. The Office of Technology Transfer reported a record 444 new inventions in FY 2017, up 3.7 percent from the previous year. It also started 12 new companies based on technology developed at U-M, maintaining an average of one new start-up a month over the last 10 years.

A Comprehensive Academic Medical Center

The University of Michigan’s academic medical center was renamed Michigan Medicine in FY 2017 to better reflect its missions of patient care, education and research. Michigan Medicine includes the University of Michigan Hospitals, University of Michigan Medical School, Michigan Health Corporation, a wholly-owned corporation created for joint venture and managed care initiatives, and U-M Health, a wholly-owned corporation created to hold and develop Michigan Medicine’s statewide network of hospitals, hospital joint ventures and other hospital affiliations.

The University of Michigan Hospitals continued its strong financial performance during the year, with an operating margin of 7.9 percent, or $255.3 million, on operating revenues of $3.2 billion. These results reflect strong patient volume in its hospitals and clinics as well as an ongoing focus on achieving economic efficiency by tightly controlling costs and improving patient access, quality and safety.

A number of projects improved patient access in FY 2017, including the addition of four operating rooms and five new inpatient rooms in the University Hospital and six new patient rooms in the C.S. Mott Children’s Hospital newborn intensive care unit. Construction also continues on two new health centers that will increase patient access to ambulatory care services. The West Ann Arbor Health Center is set to open in fall 2017 and the Brighton Center for Specialty Care is expected to open in summer 2018.

The affiliation with Metro Health, which was completed in FY 2017, enables the university to serve more than 250,000 patients annually from across West Michigan and beyond, through its 208-bed hospital, neighborhood outpatient clinics and offices.

Michigan Medicine is well positioned to continue to be a nationally recognized leader in advanced patient care, innovative research to improve human health and comprehensive education of physicians and medical scientists.

A Look Ahead

An essential element in maintaining the university’s financial health is cost containment and ensuring that its resources are focused on its core academic, research and health missions. To that end, U-M has reduced or avoided $356 million in general fund expenditures since 2004. This uncompromising focus on strategic cost containment has enabled U-M to avoid critical program reductions and keep tuition increases modest throughout difficult economic periods.

A wide variety of university facilities are necessary for collaboration among multiple disciplines and skill sets to maintain excellence in education, research and patient care. In this regard, our campus experienced another significant year of construction and capital renewal. A summary of capital projects completed, in progress and in planning during FY 2017 appears in the Major Projects section. I am pleased to report that we continue to balance investments in new facilities with those to renew existing facilities, thereby avoiding an excessive accumulation of deferred facility maintenance.

In FY 2017, U-M’s long-term debt again earned the highest credit ratings possible from Standard & Poor’s (AAA) and Moody’s Investor Services (Aaa). We remain one of only seven public universities in the country to earn these stellar ratings. U-M has received these top ratings for many years, which clearly demonstrates the institution’s strong financial health and positive outlook for the future.

The University of Michigan’s bicentennial was a monumental event and a great source of pride for our community and beyond. And now, as the University of Michigan prepares to enter its third century, it is reassuring to know that it will continue to thrive and have a positive impact on the world. Our future is bright, exciting and full of promise.

Please review Management’s Discussion and Analysis (PDF), in conjunction with the audited financial statements. In this enlightening section, you’ll find additional details about the University of Michigan’s financial strength, prudent financial policies and commitment to excellence, all of which are critical elements in maintaining a robust foundation that will help fulfill the university’s mission in the coming years.


Kevin P. Hegarty
Executive Vice President and Chief Financial Officer