Management’s Discussion & Analysis

for the fiscal year ended June 30, 2019

The Management’s Discussion and Analysis (MD&A) provides an overview of the financial position and activities of the University of Florida (the University) for the fiscal year ended June 30, 2019, and should be read in conjunction with the financial statements and notes thereto.

THE UNIVERSITY OF FLORIDA (the University) is a component unit of the State of Florida and one of only 17 universities in the country to have the distinction of land, sea and space grant status. As the State’s flagship university, it is the only Florida institution to belong to the prestigious Association of American Universities. In addition, the University is one of only six in the country with colleges of law, medicine, agriculture, and veterinary medicine on one central campus, as well as undergraduate and graduate degrees available via distance and online learning. For the third year in a row, the University of Florida rose in the U.S. News & World Report rankings, based on up to fifteen key measures of quality, once again remaining the most highly ranked university in Florida and the only university in the state in the top 10. As the University continues to climb, it remains highly accessible to students, offering almost 100 undergraduate degrees and more than 250 graduate degrees, with an affordable tuition that allows nearly two-thirds of the University’s graduates to leave with no student loan debt.

The University of Florida’s student population of over 56,000 makes it an integral part of Gainesville, a town of approximately 140,000 residents and the University’s host city. The University of Florida has adopted a strategic development plan which seeks to shape the University and the surrounding community’s future over the next 40 to 50 years. The plan was developed with an exploration of key issues within the university community and the City of Gainesville, and will further the University’s goals of maintaining its status as a preeminent university and a leading research institution.

The financial reporting entity for the financial statements includes the University and its component units. Note 1 to the financial statements provides detailed information on the financial reporting entity and discretely presented component units.

This overview is required by Governmental Accounting Standards Board (GASB) Statement No. 35, Basic Financial Statements – and Management’s Discussion and Analysis – for Public Colleges and Universities, as amended by GASB Statements Nos. 37 and 38. The MD&A, financial statements, and notes thereto, are the responsibility of University management. The MD&A contains financial activity of the University for the fiscal years ended June 30, 2019, and June 30, 2018.

Financial Highlights

The University continues to maintain and protect its strong financial position, with assets of $4.3 billion at June 30, 2019. This reflects a $308.5 million, or 7.8%, increase from the 2017-18 fiscal year. This increase in assets had two main drivers. The first main driver was an increase in capital assets of $72.5 million, primarily due to additional work in progress, as the University continues to invest in updated facilities, including modern research laboratories and classrooms, in support of the University’s strategic plan.

The second main driver of the increase in assets was an increase in total investments of $167.5 million. The primary investment objective of the University is the safety of the University’s principal and liquidity. Secondary to this responsible financial stewardship is the optimization of investment income. The University succeeded in both objectives during the fiscal year, maximizing the use of available funds in a prudent manner.

While total assets increased, liabilities also increased by $83.4 million, or 3.6%, totaling $2.4 billion at June 30, 2019, primarily due to the issuance of capital improvement debt to fund the construction of a new parking facility on campus and additional amounts due to component units.

Net position represents the residual interest in the University’s assets and deferred outflows of resources after deducting liabilities and deferred inflows of resources. The University’s net position increased by $157.8 million, resulting in a yearend balance of $1.9 billion.

The University of Florida has a strong and diverse revenue base. Operating revenues, which are revenues generated by the University in fulfilling its instruction, research, and public service missions, totaled $2.0 billion for the 2018-19 fiscal year, representing a 3.6% increase over the 2017-18 fiscal year. Major components of operating revenues are Student Tuition and Fees and Grants and Contracts.

Student Tuition and Fees, net of Scholarship Allowances, decreased by $20.9 million, or 5.3%, primarily due to an increase in Scholarship Allowances of $16.6 million. The State of Florida increased the funding for the Florida Bright Futures Scholarship Program, a scholarship program based on high school achievement, to assist Florida students in obtaining an affordable education. There are over 24,000 Florida Bright Futures Scholars at the University of Florida, and 93% of incoming in-state Freshmen receive the award. The State’s increased funding, which led to the increase in Scholarship Allowances, continues to support the University’s commitment to provide the highest quality education at the best value for its students.

The University of Florida is recognized by U.S. News & World Report as one of the Top 10 public research universities in the United States and, as such, growth in Grants and Contracts revenue is essential to the University’s success in fulfilling its mission. The increase in revenues from Grants and Contracts of $91.1 million, or 6.7%, reflects the continued success of the University’s faculty in securing competitive research funding. As the University continues to execute the Faculty 500 hiring initiative, the addition of this new talent will enhance innovation, teaching and research, providing graduate and undergraduate students an opportunity to work with these top scholars and researchers as part of their educational experience.

Operating expenses totaled $3.2 billion for the 2018-19 fiscal year, representing a $174.6 million, or 5.7%, increase compared to the 2017-18 fiscal year. The largest category contributing to this increase was Employee Compensation and Benefits, underlining the University’s commitment toward recruiting and retaining exceptional faculty and staff to enable preeminence.

State Appropriations, Investment Income, Net, and Noncapital Grants, Contracts, and Gifts are all considered nonoperating revenues as they are not generated by the University’s primary, ongoing operations. Net nonoperating revenues and expenses in the 2018-19 fiscal year increased $134.9 million primarily due to increases in Noncapital Grants, Contracts, and Gifts ($58.1 million), reflecting strong support provided to the University by its direct support organizations, and Net Increase in the Fair Value of Investments ($31.7 million) resulting from favorable market conditions.

Overview of Financial Statements

Pursuant to GASB Statement No. 35, the University’s financial report includes three basic financial statements: the Statement of Net Position; the Statement of Revenues, Expenses, and Changes in Net Position; and the Statement of Cash Flows. The financial statements and notes thereto encompass the University and its component units.

The Statement of Net Position reflects the assets, deferred outflows of resources, liabilities, and deferred inflows of resources of the University by employing the accrual basis of accounting, and presents the financial position of the University at a specified time. Net position, the difference between total assets and deferred outflows of resources and total liabilities and deferred inflows of resources, is one indicator of the University’s current financial condition. The changes in net position that occur over time indicate improvement or deterioration in the University’s financial condition.

The Statement of Revenues, Expenses, and Changes in Net Position represents the University’s revenue and expense activity, categorized as operating and nonoperating. Revenues and expenses are recognized when earned or incurred, regardless of when cash is received or paid. GASB Statement No. 35 categorizes revenues and expenses as either operating or nonoperating. Operating revenues generally result from exchange transactions where each of the parties to the transaction either gives or receives something of equal or similar value.

The majority of the University’s expenses are operating expenses as defined by GASB Statement No. 35. GASB gives financial reporting entities the choice of reporting operating expenses in the functional or the natural classifications. The University has chosen to report the expenses in their natural classification on the Statement of Revenues, Expenses, and Changes in Net Position and has displayed the functional classification in the Operating Expenses table and in the notes to the financial statements.

Certain revenue sources that the University relies on to provide funding for operations, including State Noncapital Appropriations, certain gifts and grants, and investment income, are defined by GASB as nonoperating. Nonoperating expenses include capital financing costs and other costs related to capital assets.

Other Revenues are composed of State Capital Appropriations and Capital Grants, Contracts, and Donations.

The Statement of Cash Flows provides information about the University’s financial results by reporting the major sources and uses of Cash and Cash Equivalents. This statement assists in evaluating the University’s ability to generate net cash flows, its ability to meet its financial obligations as they come due, and its need for external financing. Cash flows from operating activities reflect the net cash used by the operating activities of the University. Cash flows from capital and related financing activities include activities of the capital funds and related long-term debt. Cash flows from investing activities reflect the net source and use of cash related to the purchases and sales of investments and income earned on those investments. Cash flows from noncapital financing activities include those activities not covered in the other sections.

The University’s basic financial statements include discretely presented component units categorized as follows:

Direct-Support Organizations are separate, not-forprofit corporations organized and operated exclusively to assist the University in achieving excellence by providing supplemental resources from private gifts, bequests, and valuable education support services.

Health Science Center Affiliates are the several corporations closely affiliated with the University of Florida J. Hillis Miller Health Science Center, including the Faculty Practice Plans.

Shands Hospital and Others includes Shands Teaching Hospital and Clinics, Inc., a not-for-profit corporation that is contractually obligated to manage, operate, maintain, and insure the hospital facilities in support of the programs of the Health Science Center at the University of Florida. In addition, this category includes the University of Florida Self-Insurance Program and the University of Florida Healthcare Education Insurance Company.

Statement of Net Position

The following table summarizes the University’s assets, deferred outflows of resources, liabilities, deferred inflows of resources,and net position at June 30:

Condensed Statement of Net Position (in millions)
2019 2018
Assets:
Current Assets $ 1,914.6 $ 1,723.1
Capital Assets, Net 2,020.0 1,947.5
Other Noncurrent Assets 352.4 307.9
Total Assets 4,287.0 3,978.5
Deferred Outflows of Resources 335.2 314.8
Total Assets and Deferred Outflows of Resources 4,622.2 4,293.3
Liabilities:
Current Liabilities 470.6 425.6
Noncurrent Liabilities 1,960.7 1,922.3
Total Liabilities 2,431.3 2,347.9
Deferred Inflows of Resources 277.2 189.5
Total Liabilities and Deferred Inflows of Resources 2,708.5 2,537.4
Net Position:
Net Investment in Capital Assets 1,883.9 1,800.3
Restricted 283.4 206.9
Unrestricted (253.6) (251.3)
Total Net Position $ 1,913.7 $ 1,755.9

The increase in assets resulted primarily from an increase in depreciable and nondepreciable capital assets as well as total investments, which increased by $72.5 million and $167.5 million, respectively. The increase in capital assets demonstrates the continued importance placed on providing modern facilities to enhance research and education. Investments grew as a result of the University’s increase in investment income driven by market performance, as well as broader investment of additional revenues from grants, contracts, and donations.

Due from State increased $11.9 million because of new construction commitments from the Department of Education, primarily in support of the University’s new Data Science and Information Technology Building, an interdisciplinary hub focused on the development and application of computing, communication, and cyber technologies toa broad spectrum of areas including health care, security, technology development, and fundamental science. This co-location of research and education activities from the basic sciences, engineering, and health sciences will facilitate cross-disciplinary data science solutions to a vast array of problems and opportunities.

The large increase in current liabilities is primarily due to an increase of $48.1 million in Due to Component Units/University. This is the result of a large investment held on behalf of the University of Florida Research Foundation Inc.

The increase in noncurrent liabilities is primarily due to an increase of $33.2 million in the noncurrent portion of Net Pension Liability. GASB Statement No. 68, Accounting and Financial Reporting for Pensions, requires employers participating in cost-sharing multiple-employer defined benefit pension plans to report the employers’ proportionate share of the net pension liabilities of the defined benefit pension plans. The change in the Net Pension Liability is driven in part by the market performance for the plan assets as of the measurement date for the plan liabilities. Also contributing to the increase in noncurrent liabilities is a $21.1 million increase in the noncurrent portion of Capital Improvement Debt Payable, resulting from the issuance of bonds by the University to finance the construction of a new parking facility on campus.

The reported deferred outflows of resources and deferred inflows of resources are also required under GASB Statements No. 68 and No. 75.

Statement of Revenues, Expenses, and Changes in Net Position

The following table summarizes the University’s activity for the 2018-19 and 2017-18 fiscal years:

Condensed Statement of Revenues, Expenses, and Changes in Net Position (in millions)
2018-19 2017-18
Operating Revenues $ 2,009.8 $ 1,939.3
Operating Expenses (3,233.5) (3,058.9)
Operating Loss (1,223.7) (1,119.6)
Net Nonoperating Revenues 1,282.6 1,147.7
Income (Loss) Before Other Revenues 58.9 28.1
Other Revenues 98.9 129.5
Increase in Net Position 157.8 157.6
Net Position, Beginning of Year 1,755.9 2,438.6
Adjustments to Beginning Net Position - (840.3)
Net Position, Beginning of Year, as Restated 1,755.9 1,598.3
Net Postion, End of Year $ 1,913.7 $ 1,755.9

The University continues to maintain and grow a diverse revenue stream which serves to protect the University from over-reliance on one source of revenues. This contributed to an increase in net position of $157.8 for the 2018-19 fiscal year despite an increase in operating expenses.

Operating Revenues

The following table summarizes the operating revenues by source that were used to fund operating activities during the 2018-19 and 2017-18 fiscal years:

Operating Revenues (in millions)
2018-19 2017-18
Grants and Contracts $ 1,442.0 $ 1,350.9
Student Tuition and Fees, Net of Scholarship Allowances 375.0 395.9
Sales and Services of Auxiliary Enterprises 131.4 130.0
Sales and Services of Educational Departments 55.9 57.2
Other 5.5 5.3
Total Operating Revenues $ 2,009.8 $ 1,939.3

Increases in operating revenues during the 2018-19 fiscal year resulted from increases in awards of Nongovernmental Grants and Contracts and Federal Grants and Contracts, which increased by $55.1 million and $38.1 million, respectively. This significant increase was largely due to increased funding from the federal government. The University secured increased funding from several prominent federal agencies, including the US Departments of Health and Human Services, Agriculture, and Defense. The growth in research funding, despite an increasingly competitive funding environment, continues to demonstrate the University’s success in creating and fostering links between researchers and funding opportunities as well as the growing prestige and reputation of the University’s researchcapabilities in the eyes of collaborators and funding agencies.

Operating Expenses

The following table summarizes the operating expenses for each method of classification for the 2018-19 and 2017-18 fiscal years:

Operating Expenses (in millions)
Natural Classification 2018-19 2017-18
Employee Compensation and Benefits $ 2,271.6 $ 2,150.2
Services and Supplies 577.4 552.2
Scholarships, Fellowships, and Waivers* 163.1 144.6
Depreciation 143.1 138.3
Utilities and Communications 78.3 73.6
Total Operating Expenses $ 3,233.5 $ 3,058.9
Functional Classification 2018-19 2017-18
Instruction $ 770.5 $ 734.6
Public Service 742.1 714.1
Research 707.2 676.6
Academic Support 213.7 185.9
Institutional Support 180.5 175.1
Scholarhsips, Fellowships and Waivers* 163.1 144.6
Depreciation 143.1 138.3
Auxiliary Operations 134.0 116.8
Operation and Maintenance of Plant 132.5 128.4
Student Services 46.8 44.5
Total Operating Expenses $ 3,233.5 $ 3,058.9
*Net of Scholarship Allowances of $224.7 million in the 2018-19 fiscal year and $208.0 million in the 2017-18 fiscal year.

Operating expenses grew primarily due to a $121.4 million increase in Employee Compensation and Benefits, which was driven by a rise in the number of faculty and staff working at the University as well as a one-time performance payment granted to University employees during the 2018-19 fiscal year. This increase is in direct alignment with the Faculty 500 hiring initiative and the University’s strategic plan, which includes attracting and retaining talented faculty and staff with a competitive compensation package.

Nonoperating Revenues and Expenses

The following table summarizes the University’s nonoperating revenues and expenses for the 2018-19 and 2017-18 fiscal years:

Nonoperating Revenues (Expenses) (in millions)
2018-19 2017-18
State Noncapital Appropriations $ 790.4 $ 766.1
Federal and State Student Financial Aid 231.2 208.2
Noncapital Grants, Contracts, and Gifts 184.5 126.4
Investment Income, Net of Expenses 49.8 55.2
Net Increase in Fair Value of Investments 32.6 0.9
Loss on Disposal of Capital Assets (0.2) (1.2)
Interest on Capital Asset-Related Debt (6.1) (6.8)
Other Net Nonoperating Expenses 0.4 (1.1)
Net Nonoperating Revenues $ 1,282.6 $ 1,147.7

The increase in Net Nonoperating Revenues of $134.9 million resulted primarily from increases in Noncapital Grants, Contracts, and Gifts, Federal and State Student Financial Aid, and Net Increase in the Fair Value of Investments. The increase in Noncapital Grants, Contracts, and Gifts reflects strong support provided to the University by its direct support organizations. The increase in Federal and State Student Financial Aid is due to the additional funding provided by the State for the Florida Bright Futures Scholarship Program. The Net Increase in the Fair Value of Investments is driven by the market performance of the University’s investments during the year, as compared to performance during the previous year.

Other Revenues

The following table summarizes the University’s other revenues for the 2018-19 and 2017-18 fiscal years:

Other Revenues (in millions)
2018-19 2017-18
State Capital Appropriations $ 73.4 $ 57.8
Capital Grants, Contracts, and Donations 25.5 71.7
Total Other Revenues $ 98.9 $ 129.5

The decrease of $30.6 million in Other Revenues is primarily related to a large lump sum of monies received in the prior year from Duke Energy in order to satisfy contractual obligations. No such lump sum payment was received during the 2018-19 fiscal year.

Statement of Cash Flows

The following table summarizes cash flows for the 2018-19 and 2017-18 fiscal years:

Condensed Statement of Cash Flows (in millions)
2018-19 2017-18
Cash Provided (Used) by:
Operating Activties $ (1,050.8) $ (874.3)
Noncapital Financing Activities 1,251.6 1,091.5
Capital and Related Financing Activities (107.7) (104.9)
Investing Activties (86.4) (112.8)
Net Increase (Decrease) in Cash and Cash Equivalents 6.7 (0.5)
Cash and Cash Equivalents, Beginning of Year 6.3 6.8
Cash and Cash Equivalents, End of Year $ 13.0 $ 6.3

Major sources of funds came from Grants and Contracts ($1,385.1 million), State Noncapital Appropriations ($790.4 million), Student Tuition and Fees, Net ($375.4 million), Federal and State Financial Aid ($231.2 million), and Noncapital Grants, Contracts, and Gifts ($184.5 million). Major uses of funds were for Payments to Employees ($2,185.5 million), Payments to Suppliers for Goods and Services ($660.4 million), and the Purchase or Construction of Capital Assets ($203.1 million).

Capital Assets, Capital Expenses and Commitments, and Debt Administration

Capital Assets

At June 30, 2019, the University had approximately $4.4 billion in capital assets, less accumulated depreciation of $2.4 billion, for net capital assets of $2.0 billion. Depreciation charges for the current fiscal year totaled $143.1 million. The following table summarizes the University’s capital assets, net of accumulated depreciation, at June 30:

Total Capital Assets, Net (in millions)
2019 2018
Land $ 12.5 $ 12.5
Buildings 1,525.4 1,522.3
Infrastructure and Other Improvements 47.9 51.5
Furniture and Equipment 210.6 204.4
Library Resources 46.4 49.2
Property Under Capital Lease and Leasehold Improvements 13.2 14.4
Other Capital Assets 43.1 36.1
Construction in Progress 120.9 57.1
Total Capital Assets (Nondepreciable and Depreciable, Net) $ 2,020.0 $ 1,947.5
Additional information about the University's capital assets is presented in Note 9 to the finanical statements.

Total Capital Assets increased in the 2018-19 fiscal year as major construction projects to advance the University’s mission, including the Career Resource Center addition and renovation, IFAS Lone Cabbage Oyster Reef Restoration, and Lacy Rabon Plant addition were all completed during the year. The increase in capital assets continues to reflect the University’s dedication to an infrastructure and learning environment that supports its mission and strategic plan.

Capital Expenses And Commitments

Major capital expenses were incurred during the fiscal year on the University’s largest ongoing projects, including the Herbert Wertheim Laboratory for Engineering Excellence ($22.3 million), Norman Hall Rehabilitation and College of Education Center Addition ($17.9 million), and Parking Garage XIV ($17.0 million), which are expected to transform the learning and research environments of the associated Colleges of Engineering and Education, and support the continued growth of the campus community.

The University’s construction commitments at June 30, 2019, are as follows:

Capital Commitments (in millions)
Amount
Total Commitments $ 439.8
Completed to Date 120.9
Balance Committed $ 318.9
Additional information about the University's construction commitments is presented in Note 15 to the finanical statements.
Debt Administration

The University is mindful of its financial stewardship and manages resources effectively, including the prudent use of debt to finance capital projects. At June 30, 2019, the University had $166.9 million in outstanding capital asset-related debt, representing an increase of $19.7 million, or 13.4%, from the prior fiscal year as a result of debt issued to fund construction of a new parking garage in order to make campus more accessible to students and faculty. The following table summarizes the outstanding capital asset-related debt by type of debt at June 30:

Capital Asset-Related Debt (in millions)
2019 2018
Capital Improvement Debt $ 159.5 $ 138.1
Loans and Notes 4.7 5.2
Installment Purchase Agreements 0.5 1.6
Capital Leases 2.2 2.3
Total Capital Asset-Related Debt $ 166.9 $ 147.2
Additional information about the University's capital asset-related debt is presented in Note 13 to the finanical statements.

Economic Factors That Will Affect the Future

The University of Florida remains financially secure and positioned to grow alongside the State of Florida’s economy, one of the strongest in the country. The forecast predicts overall stability for the Florida economy, with growth in several key economic indicators – personal income, job growth, employment, and tourism. With job growth and elevated success in the labor market, the State’s unemployment rate continues to improve, with a 3.4% rate in July 2019 that was lower than the nation as a whole.

Standard and Poor’s Global Ratings (S&P) issued the University an upgraded rating of AA+ from AA in the previous year and affirmed a stable outlook for the University. The rating’s rationale included stable financial trends, ongoing support from the State, an impressive enterprise profile with diverse programs, affordable tuition rates, and good regional state employment and population growth trends. Although the higher education industry is exposed to risk such as cyclical, competitive, and substitution risks, the industry represents a low credit risk when compared to others. In addition to this upgraded rating issued by S&P, the University maintains an Aa2 rating from Moody’s Investors Services. These strong ratings not only reflect the University’s financial strength and reputation as a leading provider of higher education in the State, but they also continue to allow the University to obtain competitive debt financing to support its mission and realize its strategic plan.

The positive economic conditions and strong State support are reflected in the University’s State Appropriations for the coming fiscal year. The General Revenue and Lottery allocation from the State budget totaled $775.7 million for the 2019-20 fiscal year. As part of that overall allocation,the University receives $16.4 million in National Ranking Operational Enhancement funds, $47.3 million in performance funds and $58.5 million in funding for the preeminence initiative. Furthermore, the budget includes $16.8 million in funding for the World Class Faculty & Scholar Program and $16.7 million in funding for the State University Professional and Graduate Degree Excellence Program. This funding will be used to support the University’s initiative to hire additional faculty in the 2019-20 fiscal year.

The 2019-20 fiscal year budget clearly reflects the sustained commitment of the Legislature and the Governor to support the University of Florida in its goal of becoming a top five public research university that the state, nation, and world look to for leadership.

Requests for Information

Questions concerning information provided in the MD&A, financial statements and notes thereto, and other required supplementary information, or requests for additional financial information should be addressed to Alan M. West, Assistant Vice President and University Controller, P.O. Box 113200, Gainesville, Florida 32611.