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Financial Update 2008

Loyola University Chicago Financial Update
Questions and Answers
October 8, 2008


Given the current financial market situation, how is Loyola University Chicago's financial health?

Loyola's financial condition is stable and in good shape because the University uses conservative budget assumptions, builds contingencies into the operating budget, and has strong operating and capital budgeting controls. Our academic operations are sound and we have more than adequate liquidity to fund operations. A major credit rating agency upgraded our credit rating this summer. Our sound financial strategies have enabled us to generate significant reserves, while at the same time making investments in areas of need.

Are the University's cash reserves safe?

Yes. Our primary operating funds are secure, with operations generating cash and the University having access to external funds. At the end of September, the University had over $125 million in cash and short-term investments. We have taken a conservative approach to managing the University's cash to ensure funds are available to fund operations and capital needs. For diversification, University assets have been invested by multiple institutions. JPMorgan Chase, viewed as one of the nation's strongest banks, holds $80 million and $45 million is currently invested in the Commonfund Short-Term Fund. The University is evaluating options to further diversify the investment of cash.

The Commonfund Short-Term Fund is used by approximately 1,000 tax-exempt institutions with over $9 billion invested. On September 29th, the trustee (Wachovia) announced its intent to terminate the fund to ensure an orderly and fair distribution of assets. At this time, we have been able to withdraw from the fund all of the University's operating funds. Additional reserves of $45 million, which we don't need today, will be distributed to the University as underlying securities mature or are sold. We don't expect this situation to cause cash flow problems.

With the problems in the credit markets, can the University borrow funds if/when it needs to?

Despite the market turmoil, the quality of our investment banking relationships with JPMorgan Chase and Northern Trust and our own improving credit is such that we have not had any failed or disrupted transactions. The University has a fully available $50 million revolving line of credit from JPMorgan Chase that does not expire until July 2009 (and may be extended), and we can expand the University's credit facilities if needed. The University also issues short-term debt in the commercial paper market, which rolls over periodically at prevailing market interest rates.

What is our exposure to companies that have failed or are at risk, such as Lehman Brothers, AIG, etc.?

The University's exposure has been minimal as we have had no direct involvement with Lehman Brothers, Merrill Lynch, Bear Stearns, Washington Mutual, Wachovia (other than the Commonfund connection), Fannie Mae, Freddie Mac, GE, and Goldman Sachs.

AIG provides director and officer insurance policies, the University invests a small part of its endowment in investment funds managed by AIG's investment subsidiary, and some employee retirement savings accounts are invested by AIG/VALIC. AIG's insurance units are subject to regulatory controls and are financially healthy. The investments managed by AIG and AIG/VALIC are not affected by the problems of the parent company. However, these units may be sold by AIG.

The University has a relationship with Morgan Stanley in the management of its endowment and the pension investment portfolio, but there is no material economic exposure associated with this arrangement.

Is Loyola's endowment at risk?

The endowment fund is not in danger, though it is smaller today than it was at the end of the fiscal year when it was valued at $373 million. Losses incurred in the current fiscal year have reduced the endowment portfolio to approximately $340 million as of September. The endowment fund investment portfolio is diversified with stocks, bonds, real estate, and private investments managed by professional external investment firms. The endowment portfolio is not immune to market volatility and the endowment, like most financial portfolios, has experienced investment losses over the last year. The University is a tuition dependent institution meaning that the operating budget is funded almost completely by tuition revenue. The endowment fund contributes only about 2 percent of the operating budget. The endowment fund has ample liquidity to fund the small budgeted payout and is in a position to maintain its long-term strategy and make opportune, well-timed investments.

No. Payroll is one of our highest priorities. The University's current monthly payroll is about $22.5 million for approximately 5,000 faculty, staff, and student workers. With current enrollments, tuition collected, and financial reserves, funds are available to process our payroll each month. If necessary, we would postpone other discretionary spending in order to make payroll.

Are employee retirement funds secure?

The employee defined benefit pension funds, known as LUERP, are held in trust by The Northern Trust Company. Trust assets are not part of the bank's balance sheet, and these assets are secure from anything that happens to the bank. Trust assets are accounted for and invested separately at the direction of the University, and are invested in a diversified portfolio of stocks, bonds, real estate and private equity. The value of the LUERP trust is approximately $240 million, and there is no difficulty in making approximately 1,230 payments of about $1.5 million per month because of liquidity built into the investment strategy.

Faculty and staff also participate in the University's Defined Contribution Plan, which directs University funds and their own savings each payroll to one of three retirement plan providers: TIAA-CREF, Fidelity Investments, or AIG-VALIC. These funds, held in separate accounts for each participant, are invested at the participant's direction in a multitude of investment vehicles. These assets should be invested for future retirement, and, in the face of current declines in the stock market, keeping a long-term perspective is important. Employees are encouraged to consult with retirement plan advisors.

One of our retirement plan providers, AIG-VALIC, is under additional scrutiny because of the financial troubles with their parent company, AIG. Our participants' funds are in separate account assets, which are held for the exclusive benefit of the participant and their beneficiaries. This insulation provides safety for each participant and ensures that the account is not subject to claims from any person or entity other than a plan participant or beneficiary.

How do these events affect students?

The biggest challenge for students and their families is accessing to cash to pay for tuition and living expenses. As banks struggle, lines of credit are harder to obtain. For the fall term, we did not see an impact on our enrollment or any specific issues regarding students' ability to get loans. In fact, the number of alternative loans taken by students is actually higher than in the previous academic year. The key lenders from whom the University receives the majority of loan funds all remain active in both the Federal Family Education Loan Program (FFELP) and private loans. If the student loan market closes, we may evaluate setting up a small loan program, if we determine that a large number of students have no other option and are in need.

Does the crisis have an impact on the present budget?

We do not anticipate a significant effect on our current FY 2009 budget because of our conservative budget assumptions, contingencies built into the budget base, our strong operating and capital budgeting controls, and accumulated reserves.

How is Loyola preparing for next year's budget should the current situation continue, or if enrollment declines?

In this economic environment, we will be cautious about our own spending plans for at least the remainder of this year and next. We are preparing multiple scenarios for an FY 2010 budget. The first budget option is based on a 4 percent tuition increase, a 3 percent increase in faculty and staff salaries, and a small increase in spending. The second budget option is the same as the first budget option with a 5 percent decrease in tuition revenue and a corresponding reduction in expenses. The third budget option is based on holding tuition at the FY2009 level accompanied by expense reductions ranging from 5 percent to 10 percent.

Given the current economic crisis, why is Loyola launching a comprehensive capital campaign now?

On September 20, Loyola announced the "public phase" of our $500M capital campaign, but the actual campaign ("quiet phase") began in December 2004. To date, we have raised approximately $270M in gifts and commitments, or 54 percent of the total goal. With a projected duration through 2013, the campaign's goal is to secure funds for critical needs such as endowments for scholarships and professorships and major capital improvements such as the new Klarchek Information Commons, as well as to provide necessary funding for current operations and programs. A successful campaign will help protect the University from the vagaries of the financial markets and ensure a stable and vibrant future for our students, faculty, and the greater University community.

Will the University stop any capital projects (e.g. construction and renovations) because of the difficult financial markets?

Funding for the capital projects underway has already been allocated from this year's budget. So, any project that has begun will continue through its conclusion. Capital for future projects will continue to be available through the University's discipline of fully funding depreciation. We will, of course, continue to plan smartly and prioritize those projects that are necessary to our academic mission and student experience, and we could potentially slow or defer some projects to future years if necessary. Our capital planning process is fluid and our priorities are reviewed on a continuing basis.

Date Posted: 10/13/2008