B–1 BOARD OF REGENTS MEETING

B–1/205-20 5/13/20

Annual Borrower’s Reports: UW Medicine INFORMATION This item is being distributed for information only. It will not be presented because the reports are as of December 31, 2019, and therefore contain projections prior to the impact of the Novel Coronavirus. BACKGROUND Annual Borrower’s Reports are presented annually for major units participating in the Internal Lending Program (ILP). Annual Borrower’s Reports are a component of an overall credit framework that is used at the University to measure and manage financial performance from the origination of an internal loan to its final maturity. Annual Borrower’s Reports provide the Board of Regents with comparative information on the financial health of major borrowers. Actual results from Fiscal Year (FY) 2017 to FY19 are shown against the respective budget/forecast from that year. Projections from FY20 to FY25 compare the current budget/forecast to the prior budget/forecast. If an entity is in a Financial Stability Plan, this data will also be included in the comparison. Attachments report borrowing by individual UW Medicine entities (School of Medicine South Lake Union, UW Medical Center, and Northwest Hospital) and by the consolidated clinical enterprise as a whole. ANTICIPATED FUTURE ACTION To address the financial challenges presented by COVID-19 to the ILP, the Treasury Office will present an updated approach to monitoring and reporting on internal borrowers, including reporting frequency and content, to the Board of Regents in June. Attachments

1. Credit Framework for ILP Loans 2. School of Medicine South Lake Union (SLU): Annual Borrower’s Report –

Spring 2020 (as of December 31, 2019) 3. UW Medicine Clinical Enterprise (CCE): Annual Borrower’s Report – Spring

2020 (as of December 31, 2019) 4. University of Washington Medical Center (UWMC): Annual Borrower’s

Report – Spring 2020 (as of December 31, 2019) 5. Northwest Hospital (NWH): Annual Borrower’s Report – Spring 2020 (as of

December 31, 2019)

Credit Framework for ILP Loans

ORIGINATING OPERATING REPORTING MANAGING

Institutional / Project Risks & Opportunities

Timely Funding & Accurate Accounting

Transparency & “Early Warning”Loan Maintenance & Financial

Mitigation

Space Utilization 3

One Capital Plan 2,3

Institutional Debt Capacity Estimate 4

Financial Due Diligence 1,4

• Base Case• Key Risks• Stress Tests• Mitigation Plans

Funding Plan 1-4

• Draw schedule for projectby source (debt, gifts,reserves, state)

Financing Agreement 1,4

• Debt covenants• Reporting requirements

Annual disclosure 1,4

• Financial statement audits• Covenant requirements

Loan Servicing 1,4

• Amortization schedule• Recording of loan• Repayment budget

Dedicated staff specialist for each borrower 1,4

Regular borrower meetings 1,4

• Review covenant compliance

• Discuss upcomingchallenges

Capital Project Budget 1,3

Internal Loan 1,4

Annual Borrowers Report 1,4

Annual ILP Report 4

ILP Audit 4

Financial Stability Plan 1,2,4

BO

ARD

OF

REG

ENTS

APPROVE REVIEW APPROVE

UN

IVER

SITY

AD

MIN

ISTR

ATIO

N

Stakeholder1 – Borrower2 – Planning & Budgeting3 – Capital Planning and Development 4 – Treasury

ATTACHMENT 1B-1.1/205-20 5/13/20

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Note: CAGR = Compound Annual Growth Rate

School of Medicine South Lake Union (SLU)

Annual Borrower’s Report – Spring 2020 (as of December 31, 2019)

Summary South Lake Union (SLU) includes SLU I, SLU II, SLU 3.1, and SLU 3.2. SLU 3.2: All laboratory spaces on floors four through seven are now occupied and fully operational. The Retina Clinic opened in January 2019 and the UW

Neighborhood and Diabetes Clinics opened in July 2019. The 8th floor build-out is complete. The 8th floor occupancy certificate was issued in January 2020and move-ins have begun.

The FY20 margin forecast increased $4.3M from ($0.5M) in the last report to $3.8M in this report due mainly to increase in grant activity in the first half ofthe year higher than budget. The increase is due to increased density as well as new grants and renewals at the higher SLU rates. Additionally, some of theresearch was relocated from HMC R&T to SLU which increased FICR by $680K/year for the FY20 forecast. It is reduced in FY22 and future years forecast withresearch anticipated to move back to HMC R&T by FY22.

FY21-FY25 have been updated to reflect increased grant activity. FY21-FY23 margin is breakeven. FY24 shows positive $2.5M margin mainly due to SLII debtservice completion. The $5.9M decrease in margin from FY24 to FY25 is due mainly to the SLUI and II estimated rent reset.

FY21-FY25 margin has increased from large negative margin per the prior plan to breakeven in the current plan due to annual revenue increases of about $4.0M (10%) per year.

SOM expects future year improvement in FICR revenue as density continues to improve, however this will be offset by the anticipated return of someresearch from SLU to the R&T Building no later than FY22.

Risks, Mitigations and Opportunities Unknown impacts due to COVID-19 pandemic. Potential federal research funding cutbacks could result in delayed awards and/or reduced funding. Potential shift from federal research to non-federal research at SLU could result in lower Indirect Cost Recovery (ICR). Grant conversion to higher indirect cost rate at slower rate than forecast would move higher ICR into later years (assuming 25% of grants convert to new

rate each year). The build-out of the 8th floor will lead to increased ICR. The higher F&A rates negotiated in FY16 will lead to increasing ICR in future years (FY16: 74%, FY17: 75%, FY18–FY19: 76%, FY20: 76.5%). Reserves have increased over the last two years and if needed can manage some fluctuations in SLU grant activity.

(2.6)

0.2

(2.3)(0.5)

(6.9) (6.7) (6.6)(4.0) (4.5)

0.4 2.2

(1.2)

3.8

(0.5) (0.3) (0.1)

2.5

(3.4)($7)($5)($3)($1)$1$3$5

FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

SLU Operating Budget/Prior Year (PY) Plan vs SLU Actual/Current Year (CY) Forecast /CY Plan Total SLU ICR and Other Revenues vs Expenses - Surplus/(Deficit) by Year

Operating Budget & PY Plan: surplus/(deficit) Actual, CY fcst, CY Plan: surplus/(deficit)Note: FICR (Facilities Indirect Cost Recovery) included in SABRE has been reported by SoM based on negotiated rate consistent with historical proformas, but the University distributes funding to SoM based on calculated FICR rate. At this time, the difference between the negotiated and calculated rate is not material. ICR excludes central libraries and central administration.

($ Millions)

313.7 350.7 381.9

$0$100$200$300$400

FY17 FY18 FY19

Total SoM Reserves (Excluding grants/contracts)

CAGR10.4%

($ Millions)

66.1 67.2 77.4

454.0 499.8 473.4

520.1 567.0 550.8

$0

$200

$400

$600

FY17 FY18 FY19

SoM Direct Research Expenditures

South Lake Union SoM excluding South Lake Union

SLU CAGR 8.2%

($ Millions)

CAGR 2.9%

Non-SLUCAGR 2.1%

Note: Increase in reserves from FY17 to FY18 is due mainly to a change in the hospital funding model and gifts received but not spent in FY18. The increase from FY18 to FY19 is mainly due to restricted gifts received but not spent in FY19.

ATTACHMENT 2B-1.2/205-205/13/20

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(1) Calculations exclude the net impact of pension and post retirement obligations income (expense) which represents the difference between the actuarial expense andexpense recognized with cash funding of ($5,779,000) in 2018 and $34,136,000 in 2019(2) As of December 31, 2019, the payable balance due to the University was approximately $127 million

UW Medicine Clinical Enterprise

Annual Borrower’s Report – Spring 2020 (as of December 31, 2019)

Summary UW Medicine Clinical Enterprise includes UW Medical Center (UWMC), Northwest Hospital (NWH), UW Physicians, UW Neighborhood Clinics, Airlift Northwest,

and UW Medicine Shared Services. Effective January 1, 2020, Northwest Hospital ceased hospital operations as a corporation and was integrated into UWMedical Center.

UW Medicine Clinical Enterprise financial performance is currently behind budget as a result of Northwest Hospital and Airlift Northwest. Both entities arebehind budget in volumes. UWMC has seen strong contract pharmacy revenues, lower allocation of shared services expense and stronger than anticipatedequity earnings from Seattle Cancer Care Alliance (SCCA). Management continues to prioritize cash levels and monitors cash on a monthly basis.

For FY20 YTD:o Debt Service Coverage is 1.70x as compared to a budget of 3.35x.o Total Margin was -1.7% as compared to a budget margin of 0.3% due to lower than expected margin at NWH.o Unrestricted cash and investments are $381 million and Days Cash on Hand (footnote 2) was 60 days as compared to budget of 52 days.

NWH Total Margin has declined in FY20 due lower than anticipated volumes, additional expenses related to employee labor and benefits, physiciantransitions to UWP. Operating shortfalls have increased the accounts payable balance between NWH and the University.

Financial ratios for FY17-FY19 represent audited actuals, adjusted for the item in footnote (1). FY20 YTD represents actual results through December 2019. FY18 through FY23 projections represent the FSP approved by the Board of Regents, which included an investment and related debt for the Destination One

project which is funded by UWMC, HMC, NWH and SCCA. UW Medicine’s long-range financial plan for FY21-FY25 was completed and will be provided in May 2020 to the Board of Regents. UW Medicine Clinical Enterprise has experienced significant negative financial impact from COVID-19 beginning in March 2020 which will be reflected in

March and forward financial results for FY20.Risks, Mitigations and Opportunities UW Medicine Clinical Enterprise continues to monitor against internal and external benchmarks and seeks to achieve best practices. Deterioration in payer mix has significant impacts and is being monitored on a monthly basis. COVID-19 will impact payer mix. Impacts on net revenue from health care reform and activities of commercial and government payers continue to be incorporated into financial planning for

UW Medicine Clinical Enterprise. Transformation of care and strong expense management continue to be high priorities. Success at executing priorities in the strategic plan and implementing performance improvement initiatives is key to the achievement of financial objectives

going forward, however, COVID-19 will significantly impact financial performance and will be addressed during subsequent planning cycles. Additional risks include physician retention and recruitment in key strategic clinical areas, continuing increases in costs, specifically salaries, wages and

benefits, and access to capital, without which the UW Medicine Clinical Enterprise is unable to make strategic investments or address deferred maintenancerequirements.

Selected Indicators

FY17 Actuals FY18 Actuals FY19 Actuals FY20 Budget Admissions 28,909 29,285 28,715 30,142 Total Surgeries 26,827 28,100 28,141 29,297 Total Airlift Northwest Flights 3,639 3,669 3,746 3,958 Unrestricted Cash & Investments (‘000) $409,699 $392,057 $380,191 $360,624

2.95 3.87 3.86 3.64 3.37 3.40 3.62 3.80

2.95 3.70 3.35

1.09 2.00

3.05 1.70

0.00

2.00

4.00

FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Debt Service Coverage (1)

Net operating income as a multiple of debt service

FSP (FY18-FY20) / LRFP (FY21-FY25) Budgeted Actual (FY17-FY20 FYTD)

(0.4%)

1.4%2.4%

0.9%2.0% 2.2% 2.6% 3.0%

(0.4%)

0.7% 0.3%

(3.4%)(1.7%)

(0.0%)(1.7%)(4.0%)

(2.0%)

0.0%

2.0%

4.0%

FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Total Margin (1)

Operating income plus non-operating income expressed as a percentage of revenue

FSP (FY18-FY20) / LRFP (FY21-FY25) Budgeted Actual (FY17-FY20 FYTD)

68 67 6853 59 62 65 7268

54 5276 70 63 60

0

50

100

FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Days Cash On Hand (1)(2)

Unrestricted cash divided by daily operating expenses

FSP (FY18-FY20) / LRFP (FY21-FY25) Budgeted Actual (FY17-FY20 FYTD)

B-1.3/205-20 5/13/20

Page 1 of 1 ATTACHMENT 3

(1) FSP suspended ILP minimums of 1.25x DSC and 75 Days Cash through FY20(2) Calculations exclude the net impact of pension and post retirement obligations income (expense) which represents the difference between the actuarial expense andexpense recognized with cash funding of ($2,893,000) in 2018 and $30,724,000 in 2019(3) FY20 budget selected indicators represent 12 months of the Mortlake campus and 6 months of the Northwest campus

University of Washington Medical Center (UWMC)

Annual Borrower’s Report – Spring 2020 (as of December 31, 2019)

Summary Effective January 1, 2020, NWH ceased hospital operations as a corporation and was integrated into UW Medical Center. UWMC performance is favorable to

budget December YTD in FY20.o Debt Service Coverage was 3.73x which was favorable to budget and the Financial Stability Plan (FSP, aka Project FIT).o Total Margin was 2.7% which was favorable to budget and behind the FSP.o Unrestricted cash and investments are $14M and Days Cash on Hand was 38 days as compared to budget of 38 days.

Financial ratios for FY17-FY19 represent audited actuals, adjusted for the item in footnote (2). UWMC has experienced improvement in FY20 margin as compared to budget as a result of strong contract pharmacy revenues, lower shared services

allocations than budgeted and equity earnings from Seattle Cancer Care Alliance (SCCA). FY18 through FY20 projections represent the FSP approved by the Board of Regents, which included an investment and related debt for the Destination One

project which is funded by HMC, UWMC, NWH, and SCCA. FY20 budget includes NWH operations for January-June 2020. UWMC’s long-range financial plan for FY21-FY25 was completed and will be provided in May 2020 to the Board of Regents. UWMC has experienced significant negative financial impact from COVID-19 beginning in March 2020 which will be reflected in March and forward financial

results for FY20.

Risks, Mitigations and Opportunities UWMC continues to monitor against internal and external benchmarks and seeks to achieve best practices. Deterioration in payer mix has significant impacts and is being monitored on a monthly basis. COVID-19 will impact payer mix. Success at executing priorities in the strategic plan and implementing performance improvement initiatives is key to the achievement of financial objectives

going forward, however, COVID-19 will significantly impact financial performance and will be addressed during subsequent planning cycles. Impacts on net revenue related to activities of commercial and government payers continue to be incorporated into financial planning for

UWMC. Transformation of care and strong expense management continue to be high priorities. Additional risks include physician retention and recruitment in key strategic clinical areas, continuing increases in costs, specifically salaries, wages and

benefits, and access to capital, without which the UW Medicine Clinical Enterprise is unable to make strategic investments or address deferred maintenancerequirements.

Selected Indicators

FY17 Actuals FY18 Actuals FY19 Actuals FY20 Budget (3) Admissions 18,964 19,350 18,948 25,014 Total Surgeries 16,272 16,475 16,857 23,488 Occupancy 79% 79% 80% 70% Unrestricted Cash & Investments (‘000) $198,192 $152,858 $140,542 $188,559

2.47 3.45 3.09 2.91 3.20 3.27 3.52 3.79 3.39

2.47 3.09 3.09

0.85 1.78

3.93 3.73

0.00

2.00

4.00

6.00

FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Debt Service Coverage (1)(2)

Net operating income as a multiple of debt service

FSP (FY18-FY20) / LRFP (FY21-FY25) Budget Actual (FY17-FY20 FYTD)

0.0%2.0% 3.0%

1.0%2.5% 3.0% 3.5% 4.0%

1.6%0.0%

1.5% 1.4%

(3.7%)(1.1%)

3.1% 2.7%

(7.0%)(4.0%)(1.0%)

2.0%5.0%

FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Total Margin (2)

Operating income plus non-operating income expressed as a percentage of revenue

FSP (FY18-FY20) / LRFP (FY21-FY25) Budget Actual (FY17-FY20 FYTD)

48 55 5842

50 53 5767

76

4838 38

6245 39 38

020406080

FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Days Cash On Hand (1)(2)

Unrestricted cash divided by daily operating expenses

FSP (FY18-FY20) / LRFP (FY21-FY25) Budget Actual (FY17-FY20 FYTD)

ATTACHMENT 4B-1.4/205-20 5/13/20

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* Reflects final reporting of Northwest Hospital as stand-alone entity(1) FSP suspended ILP minimums of 1.25x DSC and 50 Days Cash through FY20(2) As of December 31, 2019, the payable balance due to the University was $127 million

Northwest Hospital (NWH)

Annual Borrower’s Report – Spring 2020 (as of December 31, 2019)*

Summary Effective January 1, 2020, NWH ceased hospital operations as a corporation and was integrated into UW Medical Center. NWH, a community hospital,

affiliated with UW Medicine in 2010. Lower than anticipated volumes and payer mix deterioration, additional expenses related to employee labor andbenefits, and physician transitions to UW Physicians (UWP) have resulted in unfavorable results compared to budget.

o Debt Service Coverage was below zero, which indicates that operating income was insufficient to pay debt service.o FY20 YTD total margin was -18.5% which was unfavorable to a budgeted margin of -9.1%.o Unrestricted cash and investments are $45M and Days Cash on Hand is 40 days.

As was previously projected, operating shortfalls have increased the accounts payable balance between NWH and the University. Financial ratios for FY17-FY19 represent audited actuals, and FY 20 represent December YTD actual results FY18 through FY20 projections represent the Financial Stability Plan (FSP) as approved by the Board of Regents.

o UW Medicine has included an investment and related debt for the Destination One project which is funded by HMC, UWMC, NWH, and SCCA.o NWH Financial Stability Plan includes a $25M borrowing for the Childbirth Center.

Selected Indicators

FY17 Actuals FY18 Actuals FY19 Actuals FY20 Budget (July – Dec)

Admissions 9,945 9,935 9,767 5,128 Total Surgeries 10,555 11,625 11,284 5,809 Births 1,166 1,078 1,049 552 Occupancy 73% 65% 66% 74% Unrestricted Cash & Investments (‘000) $48,720 $62,454 $58,305 $50,155

1.39 2.80

4.09 3.35 1.39 2.28

(2.27)(0.49) (0.19)

(2.98)

(7.05)(8.00)

(4.00)

0.00

4.00

8.00

FY17 FY18 FY19 FY20

Debt Service Coverage (1)(2)

Net operating income as a multiple of debt service

FSP (FY18-FY20) Budget Actuals (FY17-FY20 FYTD)

(2.9%)

0.5%3.0%1.2%

(2.9%) (0.8%)

(9.1%)(7.2%) (5.6%)(10.5%)

(18.5%)(20.0%)(15.0%)(10.0%)(5.0%)

0.0%5.0%

FY17 FY18 FY19 FY20

Total Margin (2)

Operating income plus non-operating income expressed as a percentage of revenue

FSP (FY18-FY20) Budget Actuals (FY17-FY20 FYTD)

2835

28

61

28 2837

4759

5240

0

20

40

60

80

FY17 FY18 FY19 FY20

Days Cash On Hand (1)(2)

Unrestricted cash divided by daily operating expenses

FSP (FY18-FY20) Budget Actuals (FY17-FY20 FYTD)

ATTACHMENT 5B-1.5/205-20 5/13/20

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