Chief Financial Officer’s Report

As the University of Michigan enters its third century, it is widely recognized as a global leader in higher education. A significant factor in this remarkable success is U-M’s exceptionally strong financial position, which enables the university to provide students from around the world with an outstanding education, perform leading-edge research that benefits society and deliver excellent health care services.

The university’s incredible work, contributions and highly regarded reputation are largely due to the unyielding dedication that our nearly 50,000 employees demonstrate every day in enabling U-M to focus on its core missions of education, research and patient care. In doing so, our employees go to great lengths to be responsible stewards of the university’s resources — financial and otherwise.

Maintaining a Strong Financial Position

The university’s financial position continues to be strong. Net position increased $920 million in FY 2018 to $14.3 billion. Key drivers of this growth were generous gifts for endowment of $169 million and returns from our endowment investments net of spending rate distributions, which added $784 million. Endowment funds, which are invested principally in the university’s Long Term Portfolio, totaled $11.9 billion at June 30, 2018. Distributions from more than 11,000 individual endowments provide ongoing support for specific academic, health-related and other needs across the university’s many disciplines, including student scholarships, educational programs, professorships, clinical operations and research.

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

Investment Performance

Return for the 12-month period ended June 30, 2018 Annualized 5-year return Annualized 10-year return
Long Term Portfolio 10.7% 8.8% 6.0%
U-M’s Benchmark 9.6% 8.0% 6.2%
Blended Passive Index 8.1% 7.5% 5.7%

With a 10-year annualized return of 6.0 percent, the investment performance of the university’s Long Term Portfolio ranks in the top quartile of performance relative to those of other college and university endowment portfolios. The university’s 10-year annualized return is slightly under its custom U-M Benchmark and above the Blended Passive Index, while its five-year and 12-month annualized returns exceeded those of the custom U-M Benchmark and Blended Passive Index.

We expect net investment income to be volatile from year to year. However, our endowment distribution policy and long-term investment strategy combine 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 of $339 million to support university operations in FY 2018, for a total of $1.5 billion over the past five years.

Diversification in Revenue Streams

The university has employed a revenue diversification strategy for many years. This approach has been a significant factor in helping U-M remain financially stable through various economic cycles and avoid unnecessary dependence on student tuition and fee increases. The components of the university’s sources of revenue are depicted in the following charts.

Funding for the university from the state of Michigan continues to be a key source of financial support. State educational appropriations grew by 2.0 percent in FY 2018, to $363 million. The university is extremely appreciative that the people of our state remain committed in their support of 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. Tuition rate increases for FY 2018 were 2.9 percent for resident undergraduate students, 4.5 percent for nonresident undergraduate students and 4.1 percent for most graduate students on the Ann Arbor campus, with 3.7 and 4.1 percent tuition rate increases for most resident undergraduate students on the Dearborn and Flint campuses, respectively. The FY 2018 budget also included a 9.5 percent increase in financial aid for undergraduates on the Ann Arbor campus, with 9.4 and 12.7 percent increases in institutionally awarded financial aid on the Dearborn and Flint campuses, respectively. U-M continues to experience strong growth in non-tuition revenue and maintains its commitment to controlling costs, improving efficiencies and maximizing its resources. These efforts combine to help limit increases in tuition as well as enable the university to maintain its focus on prioritizing affordability for its students.

The demand for a University of Michigan education remains at an all-time high. In FY 2018, the university again received a record number of undergraduate applications — which totaled more than 70,000 for its three campuses. This is the 11th consecutive year that applications have increased. The university’s stellar national and international reputation, along with its great value, makes it a top destination for outstanding students from Michigan and all over the world.

U-M continues to experience strong growth in non-tuition revenue and maintains its commitment to controlling costs, improving efficiencies and maximizing its resources. These efforts combine to help limit increases in tuition as well as enable the university to maintain its focus on prioritizing affordability for its students.

A Robust Research Enterprise

U-M has conducted the largest volume of research of any public university in the nation for the last eight years. During FY 2018, the university’s research expenditures totaled $1.55 billion, a record high and 4 percent more than FY 2017.

A student uses a microscope for research

The university’s growth in research expenditures is due in part to continued investment from the federal government, which provides public funds to support research aimed at improving our nation’s safety, security, health, economic vitality and quality of life. In FY 2018, the university received support from a number of federal agencies, highlighted by $538 million from the National Institutes of Health. Additionally, as the university continues to expand its partnerships, industry has increased its investment in U-M research, totaling a record $109 million in FY 2018.

External funding sources combined with university resources for research are key to our ability to generate new ideas and insights, as well as prepare our students to be leaders and innovators in a wide range of disciplines as they engage in research throughout their academic experience. In addition to the large volume of research conducted within its schools and colleges, the university has more than a dozen large-scale research institutes. These institutes collaborate with our schools and colleges to conduct full-time specialized research for a broad range of societal needs.

Drawing on the university’s interdisciplinary culture and its partnerships with government and industry, new efforts include a focus on precision health, which brings together biomedical and genomic expertise with big data and social science to create personalized approaches to the health challenges of individuals.

U-M research also continues to generate new ideas with commercial potential. The Office of Technology Transfer and U-M researchers set new records this year, as they launched 21 startup companies, signed 218 licenses with industry and reported 484 new inventions. The number of startups launched experienced significant growth, nearly doubling in FY 2018, with a broad array of discoveries ranging from autonomous shuttles to a post-surgery warning system that alerts doctors to patient distress well ahead of traditional methods. The majority of this year’s startups have headquarters in Southeast Michigan, where they are creating jobs and helping to diversify the economy.

A Comprehensive Academic Medical Center

Michigan Medicine — which includes the University of Michigan Hospitals, University of Michigan Medical School, Michigan Health Corporation and UM Health — continues to be a nationally recognized leader in advanced patient care, innovative research to improve human health and comprehensive education of physicians and medical scientists.

UM Hospital campus

The University of Michigan Hospitals had positive results in FY 2018, with an operating margin of $143 million, or 4.2 percent, on operating revenues of $3.4 billion. These results reflect the ongoing commitment of dedicated faculty and staff to providing excellent health care, improving the patient experience and elevating the quality and efficiency of service.

Several FY 2018 initiatives were designed to improve patient access and alleviate capacity issues. Michigan Medicine and St. Joseph Mercy Health System announced a joint venture for the 133-bed St. Joseph Mercy Chelsea Hospital. This joint venture will expand the surgical procedures that Michigan Medicine provides at St. Joseph Mercy Chelsea Hospital as well as increase access to Michigan Medicine physicians for patients in Chelsea and across western Washtenaw County. Trinity Health owns and operates St. Joseph Mercy Chelsea Hospital as part of St. Joseph Mercy Health System.

Relocating many of Michigan Medicine’s clinical pathology laboratories into newly refurbished space at the university’s North Campus Research Complex helped improve efficiency and collaboration as well as open up space in patient care locations such as University Hospital. Michigan Medicine also opened a new West Ann Arbor Health Center, which houses 27 adult and pediatric primary and specialty care services. As FY 2018 concluded, Michigan Medicine was preparing to open the Brighton Center for Specialty Care, which will house more than 40 specialty services for pediatric and adult health care.

A Strong Foundation For The Future

To ensure the university remains financially healthy in the coming years, we continue to maintain a keen emphasis on institutionwide fiscal discipline and efficiency by continuously focusing our resources on U-M’s core missions. Against that backdrop, the university has achieved $380 million in recurrent general fund savings since 2004.

Through ongoing strategic cost containment efforts, U-M has avoided reductions in critical programs and ensured tuition increases have been modest throughout difficult economic periods. The university was proud to launch the “Go Blue Guarantee” in FY 2018, which provides free tuition for resident undergraduate students from families at — or below — the state median income. In FY 2019, U-M will enroll its first new freshmen who applied to the Ann Arbor campus under this program.

A wide range of university facilities is necessary to maintain excellence in education, research and patient care as well as provide opportunities for collaboration among multiple disciplines. With that in mind, FY 2018 was yet another significant year of construction and capital renewal. A summary of capital projects completed, in progress and in planning during FY 2018 appears in the Major Projects section. 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 2018, the university’s long-term debt again earned the highest possible credit ratings from S&P Global (AAA) and Moody’s (Aaa). The University of Michigan continues to be one of only seven public universities in the country to earn these outstanding ratings. It is noteworthy that we have received these top ratings for many years — a clear indication of the university’s strong financial health and positive outlook for the future.

I encourage you to review Management’s Discussion and Analysis (PDF), in conjunction with the audited financial statements. This illuminating section of the annual report includes additional details about the University of Michigan’s financial strength, prudent financial policies and commitment to excellence. These critical elements — combined with our committed and dedicated employees — provide a strong foundation that enables the university to continue enriching the global community as U-M moves into its third century.

Sincerely,

Kevin P. Hegarty
Executive Vice President and Chief Financial Officer