Balance Sheet Risk Management

M A R C H 2 0 0 8
C R E A T I N G S U P E R I O R B A L A N C E S H E E T R I S K M A N A G E M E N T S O L U T I O N S
2008 EACUBO Annual Workshop
S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L

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Agenda
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Treasury Management at University of Pennsylvania
Internal Bank Management at University of Virginia
Overview of Risk Management Principles
Introduction
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Today’s panelists
Helen Kreider, University of Pennsylvania
 INSERT BRIEF BIO
Jim Matteo, University of Virginia
 Director of Treasury Operations since August 2005, responsible for debt
management, banking & cash management, investment portfolio oversight, liquidity
& interest rate management
Charlie Giffin, JPMorgan
 Co-Head of Issuer Solutions group within Tax Exempt Capital Markets, with specialty
in enterprise risk management, market analytics, and integrated solutions across
different markets
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I N T R O D U C T I O N

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What do we mean by “Balance Sheet Risk Management?”
 Identify risk exposures
 Financing risks
 Investment risks
 Operational risks
 Construction risks
 Quantify risk exposures (where possible)
 Expected outcome
 Volatility
 Correlation
 Manage risk vs. return
 Accept appropriate amounts of risk
 Maximize net financial performance
 Anticipate “worst case” outcomes
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The danger of what we don’t yet know
“With these advances in technology, lenders have taken advantage of credit-scoring
models and other techniques for efficiently extending credit to a broader spectrum
of consumers. …Where once more-marginal applicants would simply have been
denied credit, lenders are now able to quite efficiently judge the risk posed by
individual applicants and to price that risk appropriately. These improvements
have led to rapid growth in subprime mortgage lending; indeed, today subprime
mortgages account for roughly 10 percent of the number of all mortgages
outstanding, up from just 1 or 2 percent in the early 1990s.”
- Alan Greenspan, April 5, 2005
“We are all wrong so often that it amazes me that we can have any conviction at all
over the direction of things to come. But we must.”
- Jim Cramer, CNBC
“It's tough to make predictions, especially about the future.”
- Yogi Berra
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Agenda
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Introduction
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Much of risk management can be simplified to averages
and standard deviations (volatility)
 There are a number of common risk factors within investment management…
Investment Factors
Average Return Annual Volatility
S&P 500 7.50% 14.0%
Russell 2000 9.00% 18.0%
MSCI EAFE 10.00% 14.0%
Lehman Bros. Agg 6.00% 3.5%
US Treasury Bills 3.75% 0.5%
HFR FOF Strategic 8.00% 9.0%
HFR FOF Conserv 6.50% 3.5%
Yield Factors
Average Rate Annual Volatility
LIBOR 5.00% 25.0%
BMA 3.40% 25.0%
BMA/LIBOR 68.00% 9.0%
CPI 3.25% 40.0%
 … as well as within debt management
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O V E R V I E W O F R I S K M A N A G E M E N T P R I N C I P L E S

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Correlations between risk factors is what drives the
benefits of portfolio diversification
Correlation Matrix
LIBOR BMA/LIB 5Y LIB S&P 500 Russell 2000 MSCI EAFE Lehman Agg T-Bills HFR FOF A HFR FOF B
LIBOR 1.00 (0.35) 0.65 0.06 0.01 0.20 (0.05) (0.02) 0.09 0.08
BMA/LIB (0.35) 1.00 (0.20) 0.07 (0.01) 0.00 0.08 0.01 (0.10) (0.07)
5Y LIB 0.65 (0.20) 1.00 0.24 0.23 0.20 (0.88) (0.09) 0.16 0.12
S&P 500 0.06 0.07 0.24 1.00 0.74 0.82 (0.22) (0.00) 0.57 0.46
Russell 2000 0.01 (0.01) 0.23 0.74 1.00 0.72 (0.18) (0.08) 0.77 0.56
MSCI EAFE 0.20 0.00 0.20 0.82 0.72 1.00 (0.20) (0.08) 0.67 0.58
Lehman Agg (0.05) 0.08 (0.88) (0.22) (0.18) (0.20) 1.00 0.10 (0.15) (0.12)
T-Bills (0.02) 0.01 (0.09) (0.00) (0.08) (0.08) 0.10 1.00 (0.03) 0.02
HFR FOF A 0.09 (0.10) 0.16 0.57 0.77 0.67 (0.15) (0.03) 1.00 0.89
HFR FOF B 0.08 (0.07) 0.12 0.46 0.56 0.58 (0.12) 0.02 0.89 1.00
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For investment portfolio management, the “efficient
frontier” is a common representation of risk vs. return
Potential Investment Allocation Alternatives1Potential Investment Allocation Alternatives1
1
Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements on financial market trends, which are based on current
market conditions. We believe the information provided herein is reliable, but it should not be assumed to be either accurate or complete. Actual cash flows may vary
substantially from figures shown based upon changes in market condition, our judgment or the underlying assumptions or methodology employed. Past performance should
not be taken as a guarantee of future results. Analysis includes assumptions for initial and average interest rates, correlations, volatility and reversion speed, among others.
Volatility is defined here as standard deviation of annual changes in an exposure, and not necessarily a cross section of potential future cumulative outcomes.
Current Portfolio
Efficient Frontier of
investment alternatives
Current Portfolio Allocation
Balance
S&P 500 25,000,000
Russell 2000 25,000,000
MSCI EAFE 25,000,000
Lehman Bros. Agg 25,000,000
US Treasury Bills 200,000,000
HFR FOF Strategic 100,000,000
HFR FOF Conserv 100,000,000
Total 500,000,000
 Institutions can choose an
efficient portfolio of
investment alternatives,
subject to individual risk
tolerance constraints
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Debt managers can benefit from adopting risk management
principles developed through the investment community
Investment Management Debt Management
Sensitivity Total Return (Mark to Market) Cost (Cash Flow)
Risk Measures Value at Risk (VaR); Price Volatility Cash Flow at Risk (CFaR); Cost
Volatility
Objective Maximize Return; Minimize Risk Minimize Cost; Minimize Risk
Analytics Capture Correlations of Returns Capture Correlations of Carry
Diversification Uncorrelated Sources of Return Uncorrelated Sources of Carry
Market
Constraints
Value at Risk Important Both VaR and CFaR Important
Market
Opportunities
Hedge Funds, Energy, Weather BMA, LIBOR, CPI, CMS, ???
Investment Management Compared to Debt Management
Investment Management Compared to Debt Management
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We can also create an “efficient frontier” for various debt
management strategies in the current market
Potential Investment Allocation Alternatives1Potential Investment Allocation Alternatives1
1
Current Portfolio
debt alternatives
Current Portfolio Allocation
Balance
Fixed 150,000,000
% Libor Synthetic Fixed 150,000,000
Floating 100,000,000
BMA Basis Swap -
CMS Swap -
Total 400,000,000
 Institutions can choose an
efficient portfolio of debt
instruments, again subject to
individual risk tolerance
constraints
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Finally, we can also incorporate operational exposures that
are specific to each institution
 Institutions have a number of potential operational risk exposures:
 Changes in top line revenue
 Changes in expenses
 Changes in Endowment distribution
 Other potential sources of risk:
 Healthcare related income / expenses
 Royalties
 State contributions
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The Central Treasury function manages a number of
different risks for the University
Internal
Loans
Internal
Deposits
Return: 4.5%
Volatility: 0.5%
Cost: 5.0%
Volatility: 0.0%
Capital
Projects
Operations
$250mm
Central
Treasury
External
Assets
External
Debt
Return: 6.5%
Volatility: 4.5%
Cost: 4.25%
Volatility: 0.4%
$500mm
$400mm
$350mm
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With this framework, institutions can choose an appropriate
level of risk, and maximize related net returns
Potential Net Risk/Return Alternatives1Potential Net Risk/Return Alternatives1
Current Portfolio
Central Treasury
1
$354
$455
$556
$657
$758
$859
$960
$1,061
$1,162
$1,263
5Y Ending Balance
Current Solution
Ending Balance Distribution ($mm)Ending Balance Distribution ($mm)
Solution
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Better understanding of risk exposures leads to superior
balance sheet risk management
 Measures of annual risk exposure
 Annual external debt portfolio volatility of $4 million
 Annual external investment volatility of $22 million
 Annual net balance sheet volatility of $23 million
 Size appropriate reserves
 95% confidence level reserve: $55 million
 Determine appropriate liquidity requirements
 A liquidity strategy is essential to anticipate sources of risk that cannot
be wholly quantified
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Agenda
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Introduction
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University of Virginia Overview
 Public University Founded by Thomas Jefferson in 1819
 Ranked #2 among public universities and #23 among all universities in U.S. News and
World Report’s 2008 Rankings
 Fall 2007 - 20,834 students enrolled in 10 Schools on Main Grounds
 FY 2007 Financial Data
 Net Assets = $5.4b
 Total Revenue = $2.8b
 Debt Outstanding = $573m
 Endowment Value = $4.4b
 AAA ratings from Moody’s, S&P, and Fitch
 Operates the University of Virginia Medical Center
 Recognized among Solucient’s Top 100 Hospitals every year since 1998
 Responsible for 31% of University’s FY07 Total Revenue
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I N T E R N A L B A N K M A N A G E M E N T A T U N I V E R S I T Y O F V I R G I N I A

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University of Virginia Treasury Department Overview
 Debt Management
 Fixed and Variable Rate Bonds
 Commercial Paper
 Interest Rate Derivatives
 Investment Management
 ST Investment Management
 Oversight of LT Investments in Endowment
 Oversight of Other Financial Assets (Securities, Trusts, etc.)
 Cash Management
 Bank Account Management
 Cash Forecasting
 Internal Bank Management
 Internal Loan Program
 Internal Investment Program
 Quasi-endowment Administration
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Dual Goals of Treasury
 University-wide Goals
 Optimize risk/return profile for financial assets and liabilities
 Provide for sufficient liquidity
 Manage the cash flow volatility
 Treasury Internal Bank Goals
 Manage Budgetary Volatility
 Manage Allocation of Financial Resources
 Manage Margins
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Internal Bank Model
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Scope of Identified Risk Exposures
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University-wide Internal Bank
Investment
Activities
External Investments External Investments
Internal Loans to Units
Financing Activities External Borrowing External Borrowing
Internal Investments by
Units
Operating Activities University Operating Cash Flow
University Non-Financial Capital
Flows
Cash Flow Managed by
Treasury

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Treasury Internal Bank Balance Sheet
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Assets
Cash 27,232
Short Term Investments 98,393
Internal Borrowing Program Receivable 321,521
Long Term Investments (LTP) 539,822
Total Assets 986,968
Liabilities
Short Term Debt - Commercial Paper and Other 84,900
Long Term Debt - Bonds 505,151
Bond Premium/Discount 17,779
Internal Investment Program (IIP) Deposits 358,859
Deposits Due To/(From) Departments (9,218)
Total Liabilities 957,471
Retained Earnings 29,868
Net Assets Designated to Budget Office (372)
Net Assets 29,496
Total Net Assets and Liabilities 986,968
Internal Bank Balance Sheet – December 31, 2007 ($000’s)
Internal Bank Balance Sheet – December 31, 2007 ($000’s)

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Initial Internal Bank risk assessment
Internal Bank Risk Factors ($ in mm) – FYE 12/30
Internal Bank Risk Factors ($ in mm) – FYE 12/30
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Pursuing the Efficient Frontier
Potential Internal Bank Alternatives1Potential Internal Bank Alternatives1
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 UVA can choose a desirable risk level and implement changes to any number of the
underlying risk factors
 External investments
 External debt
 Internal debt
 Internal deposits
Current Portfolio
Efficient Frontier of portfolio
combinations
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Developing a Planning Horizon
 INSERT
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Optimizing the Portfolio
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Next Steps on Balance Sheet Management
 Education and Buy-in
 Drawing from the Endowment Model
 Making it manageable
 Setting Priorities between External and Internal Goals
 Implementation
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Introduction
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University overview & background
 Academic Component
 12 Schools
 Health System
 3 Hospitals
 19 Clinical Practices
 Revenues of $4.8 billion
 55% Health System
 15% Research; 13% Tuition; 6% Investment income; 10% Other
 Expenses of $4.4 Billion
 53% Health System
 47% Academic
 $7.3 Billion Investments
 $6.6 billion Endowment
 $1.3 Billion Debt
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T R E A S U R Y M A N A G E M E N T A T U N I V E R S I T Y O F P E N N S Y L V A N I A

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Overview of treasury structure
 $705 Million Working Capital at December 31,2007
 $340 Million money market investment
— Recent in depth review of all money market funds in conjunction with our
Investment Office
 $320 Million invested in the University’s endowment
 $45 Million in Stafford loans
 $570 Million Debt
 $228 Million variable rate
— $123 Million in auction market
— $62 Million in VRDO market
— $43 Million in private placements, bank loans
 $342 Million fixed rate debt
 $200 Million Projected Borrowing Needs
 $100 Million forward starting fixed rate swap
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Management goals & objectives
 Optimize investment return within acceptable risk parameters
 Primary object for working capital is preservation of capital
 Competitive real return
— Cash return (benchmarked at tbill) supports operating budget
— Excess return funds a reserve and supports President’s initiatives
 Stable return
— Reserve fund created
— Currently 5% of equity fund
— Target 10% of equities
 Optimize debt service cost within acceptable risk parameters
 Debt policy
— Consider the hedge between cash and variable debt
— May choose to issue fixed rate in historically low environments to preserve
variable capacity
 Derivatives policy
— May be used to reduce costs or hedge exposures
— Review broker exposures relative to market value of derivatives
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Scope of identified risk exposures
 Investment activities
 Return volatility
 Call on cash from schools
 Capital expenditures
 Financing activities
 Variable Rate exposure
— SIFMA vs LIBOR
— Health System risk
 Operational activities
 Business continuity
— Identified critical procedures
— Contract for off campus facilities in emergency
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Sample analysis of alternative investment portfolios for
working capital
Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements on financial market
trends, which are based on current market conditions. We believe the information provided herein is reliable, but it should not be assumed
to be either accurate or complete. Actual cash flows may vary substantially from figures shown based upon changes in market condition,
our judgment or the underlying assumptions or methodology employed. Past performance should not be taken as a guarantee of future
results.
Alternative Investment Analysis ($inMM)
Current
Portfolio
More
Endowment
More Fixed
Income
More
Alternatives
Cash         430         310         100           80
ML 1-3           -              -            180           75
Lehman Agg           -              -            150           50
S&P 500           -              -              -              -
Russell 2000           -              -              -              -
HFR FOF
Conserv.           -              -              -            150
HFR FOF
Strategic           -              -              -              75
Penn Endowment         330         450         330         330
        760         760         760         760
Expected Return 6.30% 7.15% 6.93% 7.59%
Volatility 3.63% 4.92% 4.02% 4.12%
Average Annual
NFI        56.0        66.4        57.3        67.4
95% Worst Case
NFI       (38.0)       (64.9)       (47.0)       (43.5)
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In closing…
 INSERT
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Balance Sheet Risk Management

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