UW Medicine s Response to Request for Proposal

UW Medicine s Response to Request for Proposal Executive Summary UW Medicine is the largest and most comprehensive health system in the Puget Sound region. 1 In Fiscal Year (FY) 2012, we had over 64,000 inpatient admissions at our four hospitals and over 1.5 million visits at our clinics and other ambulatory sites. Our hospitals, clinics and other facilities are broadly distributed throughout King County and South Snohomish County. UW Medicine serves as the only health system in a four-state region to provide the complete continuum of care (primary, secondary, tertiary and complex quaternary care). UW Medicine holds one-third of the ownership of the Seattle Cancer Care Alliance (SCCA) and fifty percent ownership of Children s University Medical Group (CUMG) that staffs Seattle Children s. Cancer care is delivered through the UW Medicine/SCCA model. Pediatric and neonatal care is also coordinated between UW Medicine and Seattle Children s. UW Medicine has performed well financially, producing a positive bottom line and operating cash flow. For decades, UW Medicine has served as a national leader in healthcare innovation and in applying the newest and most efficacious diagnostic, treatment and prevention approaches that directly benefit our patients. UW Medicine is committed to and has a proven track record in successfully partnering with community hospitals in a variety of ways to help these hospitals meet the needs of their community. We would offer these same resources to support the service offerings of Cascade Valley Hospital and Clinics (CVH), Island Hospital (IH) and Skagit Regional Health (SRH) (collectively, the Interlocals ) with our tertiary and quaternary care while at the same time assisting the Interlocals to evaluate and enhance their existing programs to best meet the needs of their communities. We believe that to improve the health of the public there must be affordable, high-quality healthcare in our communities, both urban and rural. Like the Interlocals, we have a demonstrated culture of quality and accountability, and commitment to the uninsured and underinsured in our community. Our mission, vision and values are an excellent fit with the mission, vision and values of the Interlocals, and we share a commitment to lead the transformation of healthcare while reducing overall healthcare costs and improving the value of services provided to the community. As described in the following response, we are transforming our clinical delivery model and developing efficient enhancements to our infrastructure to be an accountable care organization (ACO). We believe we would add value to the Interlocals through an affiliation, partnership or other relationship (collectively, the Affiliation ). We are prepared to discuss an array of options to best meet the needs identified, depending on the Interlocals interests, but have highlighted two Affiliation options in particular in the enclosed response. 1 UW Medicine includes the following eight entities: Harborview Medical Center (Harborview) as managed by the UW pursuant to a Management and Operations Contract; UW Medicine Northwest d/b/a Northwest Hospital & Medical Center (Northwest Hospital), Public Hospital District No. 1 d/b/a Valley Medical Center; University of Washington Medical Center (UW Medical Center); UW Physicians Network d/b/a UW Neighborhood Clinics (UWNC); The Association of University Physicians d/b/a UW Physicians (UWP); University of Washington School of Medicine (UW SoM); and Airlift Northwest (Airlift). 1 P age

A. Strategic Vision for the Interlocals Describe your 3-year strategic plan for your organization and for the Interlocals 1. Describe your organization s strategic vision. UW Medicine s mission is to improve the health of the public, which aligns with the missions of the Interlocals. As a tertiary and quaternary resource for the WWAMI region (Washington, Wyoming, Alaska, Montana and Idaho), we value and work with our community partners in a fivestate region and are committed to supporting the ability of patients to receive excellent care in their local communities. At the same time, ongoing healthcare reform highlights the importance of building health systems and networks for the delivery of care to avoid all entities building costly infrastructure in every location. Strategic Goals and Objectives The UW Medicine strategic plan recognizes the importance of healthcare being delivered in the lowest cost setting possible. Identified strategic goals and objectives include: Review and strengthen Centers of Excellence and other core clinical programs; Deliver consistent, excellent service and improve patient access; Improve UW Medicine s strategic outreach to patients and healthcare professionals throughout the WWAMI region; Identify or develop additional primary and secondary care services in strategically placed locations that align with UW Medicine s tertiary and quaternary care activities; Enhance the quality, cost-effectiveness and integration of UW Medicine s educational programs to address the region s healthcare workforce needs and to maximize the focus of future healthcare professionals on quality, safety, efficiency and reduction of per capita cost; Enhance the integration of UW Medicine s research programs to promote rapid and effective translation of research from laboratory to clinical settings; and Incorporate strategic financial modeling with sophisticated analyses and long range plans as a component of all major initiatives. Five Priority Areas For FY 2013 (July 1, 2012 through June 30, 2013), we are focused on five priority areas to support our strategic goals and objectives to optimize our ability to perform as an Accountable Care Organization (ACO): Build key clinical programs. Improve existing patient care programs that are central to UW Medicine s ongoing success in improving health and develop new programs suited to UW Medicine s preeminence in specialized tertiary and quaternary care. 2 P age

Build networks and affiliations. Develop strategic affiliations and alliances locally and throughout the region that support our ability to improve health; broaden clinical programs in primary and secondary care to support the needs of our patients, sustain patient access, and secure our ability to serve as an ACO with a strong focus on reducing per capita cost. Deliver excellent service. Enhance UW Medicine s ability to deliver excellent care by ensuring that all care and service provided are outstanding, compassionate, timely, coordinated and complete. Deliver high-quality, safe and effective patient care. Implement initiatives to maintain the highest quality care and safety standards that support UW Medicine s mission of improving health. Enhance the integration of research, teaching and patient care. Increase the efficiency and effectiveness of services that support UW Medicine s core activities of research, teaching and patient care on behalf of improving health through workforce development, human resources, facilities growth and renovation, and information technology advances. 2. How you do you envision positioning the Interlocals to remain competitive in their respective markets? UW Medicine consistently supports the delivery of primary and specialty care being provided in the local community, close to patients homes. As noted above, it is a strategic objective to partner with primary and specialty care in markets that align with and benefit from UW Medicine s tertiary and quaternary expertise. UW Medicine would be prepared to collaborate and assist with the development of key programs at the Interlocals that meet the needs of the community and achieve the overall mission. The addition of Northwest Hospital & Medical Center (Northwest Hospital) and Valley Medical Center to UW Medicine reflects our commitment to primary and specialty care being provided locally in the community in the lowest cost setting possible, and we have realigned, and continue to realign, care within UW Medicine accordingly. We envision positioning the Interlocals as the primary locations for primary and secondary care for patients in their communities and we will commit to providing access to UW Medicine s tertiary and quaternary care expertise when needed. This will increase the confidence of patients in the local community in choosing the Interlocals for care, knowing that the facilities have direct access whenever needed to more complex consultation or care. UW Medicine operates a 24 hour a day, 7 day a week MedCon physician consultation line to further assist community physicians with care. In addition to tertiary and quaternary expertise, an Affiliation with UW Medicine brings increased linkage to our teaching and research activities, including access to clinical applications of cutting edge research. We would position the Interlocals as the destination of care for the Interlocals existing and growing service areas. We envision that as we redesign our delivery of care to be an ACO capable of caring for populations, the Interlocals would play an important role in the network of entities necessary to provide comprehensive integrated care for a population with primary, secondary, tertiary and quaternary needs. 3 P age

3. To position the Interlocals for growth, what services or programs do you envision growing or adding? Key areas for expansion of specialty services would be planned jointly with the Interlocals based on their desires to expand services to meet the needs of the community. UW Medicine is open to considering expansion of any clinical programs that support the mission of improving health. Our initial assessment would include opportunities for cardiac, stroke, neurosciences, obstetrics, orthopedics, sports medicine, emergency medicine, cancer care, rehabilitation medicine, pain relief services, vascular and thoracic surgery, pediatrics, behavioral health, primary care and telemedicine. 4. How do the services and geographies of the Interlocals support or augment your organization s current capabilities? How do they align with your organization s strategic plan? UW Medicine is committed to achieving the Triple Aim of better care for individuals, better health for populations, and lower per capita costs. Achievement of the Triple Aim requires close coordination of clinical care and transitions among different healthcare professionals. Supporting the delivery of and access to high quality, cost-effective care in the community is in everyone s best interest. The geographies of the Interlocals present an opportunity to align more fully to provide the full range of primary, secondary, tertiary and quaternary care to patients in your communities and as noted above, to meet the goals and promise of ACOs. A strategic Affiliation also presents an opportunity for increased access and coordination with nationally and internationally known clinicians who are on the cutting edge of discovery and know how to move those discoveries to the bedside quickly. UW Medicine s mission is to improve health not just in Seattle but throughout the region, nation and world. With the Interlocals significant role in North Puget Sound, an Affiliation among us would provide an opportunity to build on our existing relationship. Benefits would include making available the high-level tertiary and quaternary care that is appropriately provided in an academic health setting while also building programs in the community to assure community access to quality care. On average, UW Medicine currently accepts more than 400 inpatient transfers a year referred from the Interlocals when patients require complex tertiary and quaternary care. We would work with the Interlocals to educate healthcare professionals on our ability to meet their patients needs by providing a continuum of care and real-time access to electronic health information through our U-Link program, which allows referring providers to follow their patients when admitted and supports the resumption of care when returning patients to their communities for any ongoing or follow-up care that can be best met in that setting. 5. What marketing initiatives would you intend to implement? UW Medicine would work with the Interlocals to develop a marketing plan tailored to meet the objectives and needs of each Interlocal. An affiliation with UW Medicine lends tremendous brand strength to the Interlocals that is of benefit in patients choosing those sites for care. We 4 P age

have had success over the past two years in increasing market share for Northwest Hospital and Valley Medical Center through our brand campaign initiatives. 6. How does your organization intend to brand the three Interlocal hospitals? The nature of any branding would depend on the Affiliation structure. To the extent the Interlocals remain separate and individual entities, branding protocols would need to take into account the individual identities of each entity. In any Affiliation, we would carefully consider the potential for branding or co-branding depending on the nature of the relationship. The strong brand recognition and reputation for excellence in the UW Medicine name is a valuable asset. Each Interlocal also has brand strength and recognition in the community. The ability to leverage existing brands, through co-branding or other models, is important to patient and physician recruitment. For example, the eight entities of UW Medicine participate in a coordinated marketing and branding strategy. The marketing strategy of entities with which UW Medicine shares in the ownership and governance (such as SCCA) is coordinated with the goals and strategic priorities of that entity consistent with the governance structure. In an Affiliation, we would work with Interlocals to develop a strategy to further our collective business objectives. 7. How do you envision supporting the Interlocals efforts to become more integrated? UW Medicine would support the Interlocals efforts to become more integrated but also recognize the significant role each Interlocal s Board of Commissioners plays in determining the scope of desired integration. We would work with the Interlocals to evaluate opportunities for integration with each other and with UW Medicine to achieve the goals of the Interlocals boards and the ultimate goals of the Triple Aim. Our integration successes to date will be helpful in providing guidance to the Interlocals on strategies for areas to integrate and approaches that lead to positive outcomes. 8. How would you support/enhance current GME and teaching efforts at the Interlocals? UW Medicine has significant experience in graduate medical education (GME) and teaching in multiple settings. We support continuation of the relationship between SRH and the Pacific Northwest University of the Health Sciences and, at the same time, we could provide additional opportunities for inclusion in other GME and teaching activities through UW Medicine. UW Medicine, through the UW School of Medicine, is the largest sponsor of GME programs in the five-state WWAMI region. Approximately 1,200 trainees participate in 27 residency and 66 clinical fellowship programs accredited by the Accreditation Council for Graduate Medical Education (ACGME) and two fellowships approved by the American Board of Obstetrics and Gynecology. We accept trainees with both M.D. and D.O. undergraduate medical degrees into many of our programs. In addition, more than 300 trainees participate in non-accredited fellowship programs, many of which are approved by national specialty societies. GME programs are essential to the creation and maintenance of the physician workforce population and play a vital role in reducing regional and national physician shortages. With research showing that the 5 P age

site of residency training is one of the strongest predictors of where physicians will practice after training, GME programs are strong drivers of regional physician workforce supply. Current accredited residency programs (with the number of subspecialty fellowship programs in parentheses) sponsored by the UW School of Medicine include: Anesthesiology (4) Orthopedic Surgery (1) Dermatology (1) Otolaryngology Emergency Medicine Pathology (10) Family Medicine (1) Pediatrics (13) Internal Medicine Boise Physical Medicine/Rehabilitation (3) Internal Medicine Seattle (16) Plastic Surgery Medical Genetics Psychiatry (4) Neurological Surgery Radiation Oncology Neurology (3) Diagnostic Radiology (4) Nuclear Medicine General Surgery (3) Obstetrics & Gynecology (2) Thoracic Surgery (1) Occupational & Environmental Medicine Vascular Surgery (1) Ophthalmology Urology (1) GME Training sites. Among nearly 700 sponsoring institutions nationally, UW School of Medicine ranks fifth in the number of ACGME-accredited programs and tenth in the number of trainees. Trainees are located at four primary teaching sites in Seattle: UW Medical Center, Harborview Medical Center (Harborview), Seattle Children s and the VA Puget Sound Health Care System. Numerous (>250) other community hospitals and clinics, such as some of your Interlocals facilities, also serve as important training sites for UW residents and fellows. The four UW Medicine hospitals all serve as clinical training sites for a variety of healthcare professionals (for example, nursing, physician assistants, social work, pharmacy and therapists). We would envision working with the Interlocals to support, and expand if necessary, existing training opportunities for our trainees and the Interlocals trainees in appropriate geographic locations. 9. Are there any services provided by your organization or an affiliate that conflict or overlap with the Interlocals service offerings? If so, how do you plan to address this issue? There are three entities that provide services in the Interlocals service areas. PeaceHealth: UW Medicine has a long and valued relationship with PeaceHealth, whereby UW Medicine has served for decades as a complex tertiary, quaternary and teaching resource for Peacehealth hospitals and professional practices. We share a common commitment to primary, secondary, and tertiary care being delivered in the community. We would support PeaceHealth s continued activities in that regard and would continue to be a complex tertiary, quaternary and teaching resource when needed for PeaceHealth. 6 P age

Seattle Children's: UW Medicine has been closely affiliated with Seattle Children s for many years. Seattle Children s is ranked as one of the top 10 children's hospitals in the nation by U.S. News & World Report and provides subspecialty care in nearly 60 areas, from adolescent medicine to virology. UW Medicine would support the continuation of services that Seattle Children s currently provides in the Interlocals service areas. These services are provided, in general, by UW faculty who are members of CUMG owned by UW Medicine and Seattle Children s. Seattle Cancer Care Alliance (SCCA): In 1998, UW Medicine, the Fred Hutchinson Cancer Research Center (FHCRC), and Seattle Children s made an investment of more than $100 million to launch SCCA. SCCA is a not-for-profit corporation, and UW Medicine, FHCRC and Seattle Children s share equally in its ownership and governance. Clinical services are provided for adults by UW faculty who are members of the UW Physicians practice plan, and care for children is provided by UW faculty who are members of the CUMG practice plan. SCCA has regional network members in Alaska, Montana and Washington. Because of their relationship to SCCA, these network members can provide their patients with the latest cancer diagnostic and treatment information as well as access to SCCA clinical trials. We support the continuation of existing network relationships with SCCA. B. Health Reform and Related Strategies 1. Explain your organization s strategic visions for how it plans to participate in new payment models, population health management, etc. Like many organizations locally and nationally, UW Medicine is redesigning its delivery of care to be an ACO. To realize our ACO vision, we are engaged in the immediate strategies below: Increasing our ability to deliver value through improved cost, quality and service performance that exceeds best practice standards; Designing and implementing models of care and supporting infrastructure required to meet the value-based expectations of our patients; Re-engineering interprofessional healthcare teams and infrastructure to reduce practice variation; Implementing decision support-guided physician and healthcare professional order entry; Implementing rapid process improvement methodologies that reduce waste, eliminate duplication and improve efficiency; Providing patient care in the most appropriate and cost-effective setting; Expanding the medical home model in primary care to reduce emergency department visits and inpatient hospitalizations while maximizing quality; Using our 24/7 Community Care Line to provide nurses advice directly to patients for urgent care management and to reduce unnecessary emergency department visits; Establishing new partnerships with payers and healthcare professionals on innovative approaches to care delivery; and 7 P age

Actively piloting, refining and implementing new approaches to care delivery and care management. UW Medicine ACO services will involve a network of healthcare entities, including but not limited to our eight component entities, entities in which we have an ownership interest, and closely affiliated organizations. In addition, we will selectively partner with entities whose services and/or geographic presence is necessary to provide the full spectrum of care for identified populations. We would be very interested in further discussing the role of the Interlocals in the UW Medicine ACO network. 2. How would the Interlocals fit into this vision and help your organization to achieve its goals? UW Medicine s northernmost hospital is approximately 40 miles from the nearest Interlocal hospital. At the same time, UW Medicine treats more than 400 inpatients a year from your geographic region and many more on an outpatient basis. We fully support primary and specialty care being provided in the local community, close to patients homes. It is a strategic objective to partner with primary and specialty care in markets that align with and benefit from our tertiary and quaternary expertise. We also strategically evaluate the expansion of more complex specialty care in those locations, and in an Affiliation with Interlocals, we would do the same analysis as part of strategic planning. 3. Explain your organization s current initiatives related to payment reform. UW Medicine is actively redesigning its delivery of care to be a healthcare organization that provides accountable care via contracts with payers. In order to do so, UW Medicine is enhancing its infrastructure to deploy evidence-based clinical care protocols system-wide; increase care management coordination; engage in high-risk patient population management; and implement system-wide quality benchmarking, including patient satisfaction metrics. To the extent that we contract with other healthcare entities to participate as part of the UW Medicine ACO, this same infrastructure will need to exist in each as well as the shared commitment to achieve ACO quality of care, patient satisfaction, cost objectives, implementation of agreed-upon performance metrics, and coordination with other UW Medicine ACO network entities in the delivery of care. These activities are foundational to full participation and success in ongoing payment reform. 4. Does your organization have any risk-sharing contracts with payers? If so, please explain what types of arrangements you have developed. UW Medicine has strong relationships with key payers in the area and we are working in partnership to implement innovative approaches to care that reduce the total cost of care while improving our service to patients and the quality of care patients receive. We are also working with third party payers and others to transition to value-based reimbursement models. UW Medicine has experience with risk arrangements, including bundled payments for specific clinical services, types of patients, and types of payers and is willing to engage with payers and others in such 8 P age

discussions. We have substantial experience with a variety of organizational arrangements and would carefully analyze and structure any Affiliation with the Interlocals with the regulatory environment in mind to assure we could achieve mutually-agreed upon strategies and objectives. C. Affiliation Structure 1. Describe, in as much detail as possible, your proposed affiliation structure (e.g., joint operating agreement, joint venture, long-term lease) for achieving the mutual objectives of the Interlocals and your organization, including implications related to debt restructuring. As noted in our response to the request for indications of interest, there are many models we could consider. The driving strategic priority for UW Medicine in selecting a structure is the ability of the structure to support and sustain the Interlocals inclusion in the UW Medicine ACO network. Our ideal model would enable a shared commitment to achieve ACO quality of care standards, patient satisfaction, cost objectives, implementation of agreed-upon performance metrics, and coordination with other UW Medicine ACO network entities in the delivery of care. This ideal model could take the form of one of two options which vary in depth but not in the overall substance of the participation. The first structure is a contractual clinical programming affiliation agreement in which the overarching affiliation agreement would form the basis of our working relationship with programspecific collaborations entered into as the Interlocals and UW Medicine agree. Any such programspecific collaboration would require commitment to ACO goals and objectives. Such a structure would not require changes in the existing governance of the Interlocals or UW Medicine. One strength of such a model is that it allows for targeted collaboration in the areas that make the most sense in light of each organization s strategic goals. An example of this type of relationship is the relationship Northwest Hospital entered with UW Medicine in the late 1990s in which there was an overarching affiliation agreement and program-specific collaborations such as cardiac surgery services. The second preferred structure is also a contractual affiliation agreement. In this model, the affiliation is not limited to program-specific collaborations but instead reflects a full commitment to being part of the UW Medicine ACO and commitment to the ACO goals and objectives for all services provided. One strength of such an affiliation is that it would promote the appropriate delivery of primary and secondary care in the patient s community by the Interlocals and their affiliated healthcare professionals, and would enhance, to the degree clinically warranted, the ability for the Interlocals to provide additional tertiary care in the community. We would focus on supporting community-based healthcare professionals in rural areas and their unique needs, while leveraging all our collective strengths. Like the first structure, this model would not require a change in the governance of the Interlocals or UW Medicine. 9 P age

In both models, we would work together to achieve the promise of ACOs, such as increased efficiency and reduced costs of healthcare; achieving improved clinical outcomes and patient satisfaction through shared clinical protocols and evidence-based medicine guidelines; joint physician recruitment; shared metrics to assess improvement related to adoption of clinical protocols; increased telemedicine capabilities to provide cost effective specialty consultations; and access to participation in clinically-focused multi-disciplinary continuing education. 2. In addition, indicate your openness to evaluating alternative models or structures, and identify the potential alternatives your organization would be willing to consider. UW Medicine is open to evaluating alternative models, including models with third parties that leverage UW Medicine s strengths as a tertiary and quaternary partner. For example, should the Interlocals desire a partnership with a health system that does not have our tertiary and quaternary expertise, we would be willing to consider an Affiliation with the Interlocals that included another health system. 3. The Interlocals desire to create a high degree of integration among the three hospitals; please describe how your organization s proposed affiliation structure will support this initiative. In our proposed Affiliation models, UW Medicine would closely coordinate with the three hospitals to avoid duplication of unnecessary services and leveraging shared business infrastructure to reduce costs. 4. List any specific concerns or opportunities related to creating a partnership with the Interlocals that may have differing levels of integration and separate agreements. To the extent the Interlocals are not coordinated and integrated on key business objectives and do not have a shared vision, there may be inefficiency for all involved as each Interlocal engages in separate discussions and negotiations with UW Medicine. 5. Please identify whether you believe that there are any potential antitrust concerns with the proposed affiliation model. What are your plans to mitigate any potential antitrust issues? In the current regulatory environment, antitrust is always an important consideration. Any Affiliation will need careful review and a shared understanding of the parameters for collaboration. D. Commitment to Future Capital Investment in the Region 1. Describe your organization s willingness/ability to commit capital for both routine and strategic purposes. What is the process that your organization would use to arrive at a decision surrounding capital investment for each facility? 10 P age

UW Medicine is a significant component of the University of Washington s (UW) financial profile. UW received an Aaa stable rating from Moody s Investors Service for a recent debt offering. The nature of any Affiliation would drive how bond rating agencies, lenders and others view the Affiliation for purposes of cost of capital, credit rating and other aspects of capital formation. UW Medicine has an annual capital budgeting process at each UW Medicine site, as well as a five year long-range strategic and capital plan. The nature of the Affiliation would determine whether the Interlocals are part of the UW Medicine strategic planning process in which we engage in budget planning to determine needs, ability for the entity to fund its own needs, and any opportunities for leveraging capital assets to support system-wide goals. In any model, just as we expect our eight entities to do, we would expect each Interlocal to determine and support the necessary capital for routine and strategic purposes at the Interlocal within its local budget. We are willing to work with the Interlocals in a multi-party transaction that leverages our clinical programming strength. 2. How much capital does your organization intend to invest in each Interlocal hospital over the next 5 years? How would this vary by hospital? As noted above, UW Medicine would not directly invest capital dollars in each Interlocal hospital. Rather, we would work to create revenue-generating programs and activities that would support the Interlocal hospital s ability to fund its own capital needs. 3. What portion of the cash flow (before management fees or comparable corporate overhead expenses) generated by the relationship would your organization be willing to reinvest in the Interlocals? UW Medicine would expect that the liabilities and assets of each Interlocal would remain in the local community for reinvestment in the local community. E. Local Governance 1. Describe how your proposed affiliation structure(s) would offer accountability to and input from the community and public hospital districts. Our proposed affiliation structures would maintain accountability and input from the community and public hospital districts while leveraging the strength of UW Medicine to collaborate and develop strong clinical programs and position the Interlocals for success as payment models move to accountable care contracts. 2. Provide a current organizational chart, including a description of the management structure and reporting relationship for any campus administrators. We have provided a current organizational chart (see Attachment A). UW Medicine has one chief executive officer (CEO) who also serves as executive vice president for medical affairs and dean of the School of Medicine for the University of Washington. The majority of the lead executives for 11 P age

each of our clinical entities hold the title executive director and report to the chief health system officer (CHSO). At the time Valley Medical Center joined UW Medicine, the existing title for its lead executive was chief executive officer and that individual retained the title, consistent with the strategic alliance agreement developed with Valley Medical Center. All the leaders of the clinical entities report into the CHSO, who reports to the CEO of UW Medicine, with the exception of the CEO of Valley Medical Center who reports to the CEO of UW Medicine but also works directly with the CHSO on a day-to-day basis on all operational and clinical integration efforts at Valley Medical Center. These reporting relationships reflect that the clinical entities are all component entities of UW Medicine. In an Affiliation with a different structure (i.e., not a component entity of UW Medicine) we would discuss appropriate reporting relationships based on the agreed-upon structure. 3. Indicate your organization s willingness to allow the public hospital district boards the following reserve powers: a. Approval of any significant change in clinical services. b. Approval of local administrators appointed by your organization. c. Reduction in off-campus clinics. The nature of reserve powers in an Affiliation would depend on the nature of the Affiliation. In the two models described in Section C, we would anticipate that the above reserve powers would be retained by the public hospital district. 4. Indicate your organization s willingness to receive input from the public hospital district boards regarding the following a. Annual physician recruitment plans. b. Plans to expand/enhance clinical services. c. Annual capital and operating budgets. d. Strategic plans for the region and campuses. In any Affiliation, we would view the input from the public hospital districts to be vital and welcome. 5. Describe your organization s process for providing updates to the public hospital district boards regarding: a. Quarterly financial performance. b. Clinical quality performance. c. Plans to join another organization or participate in other strategic affiliations. Again, the nature of the Affiliation would determine the process for providing updates but it is important from UW Medicine s perspective that, in any affiliation arrangement, the public hospital district boards are fully aware of current financial performance, clinical quality performance and other aspects of the hospitals operations. 12 P age

6. How would the local board have influence on and provide input to your organization s board on matters that affect the local community? In any Affiliation, a key governance principle for UW Medicine is that any governance structure should include and continue local participation while facilitating the mission of improving health in the community. Each entity within UW Medicine has a slightly different arrangement, tailored to its unique local needs, history and legal structure. In a non-component entity Affiliation, we would work with Interlocals to develop a governance structure that meets the needs of the community. F. Clinical Excellence 1. The Interlocals are evaluating options with regard to the formation of Centers of Excellence to increase specialization within their hospitals. If these centers are formed, how would your organization support these models? Does your organization have any history of developing Centers of Excellence? UW Medicine operates multiple hospital-based and ambulatory centers and comprehensive programs providing primary, secondary, tertiary and quaternary care. We have considerable experience with Centers of Excellence. UW Medicine is the site of nationally and internationally recognized Centers of Excellence in the following areas, described further in Attachment B: Level I Adult and Pediatric Trauma Regional Burn Center Neurosciences Institute Comprehensive Acute Rehabilitation and Reconstruction Limb Viability and Re-implantation Solid Organ Transplantation Liver, Kidney, Lung, Heart, Pancreas and Intestine Oncology and Stem Cell/Marrow Transplantation High Risk Obstetrics & Neonatal Intensive Care/Level III Regional Heart Center including Left Ventricular Assist Device and Heart Failure Program Regional Vascular Center (including minimally invasive repairs for aortic dissection) Multiple Sclerosis Center Spine, Sports Medicine & Orthopedics Eye Institute & Vision Science Center Center for AIDS/HIV Behavioral Health/Mentally Ill and Medically Vulnerable Following a strategic planning process, we would envision working with Interlocals to develop additional Centers of Excellence. 2. Does your organization currently operate any regional or multi-campus service lines? If so, please describe these services. How would the Interlocals be incorporated into the service lines? How would this impact the services offered at the Interlocals? 13 P age

UW Medicine currently operates multi-campus service lines and would evaluate the inclusion of Interlocals into such service lines through a strategic planning process. One well-known example, described further in Attachment B, is the UW Medicine Regional Heart Center. Another successful multi-campus service line is orthopedics. Across four hospitals, UW Medicine provides orthopedic services that leverage the strengths of each hospital and their associated physicians. At Valley Medical Center, there is a top-ranked joint center offered in collaboration with a longstanding private physician group in the community. At Northwest Hospital, UW Physicians have joined forces with Bone and Joint Center of Seattle to expand the orthopedic services available in North Seattle. UW Medical Center and Harborview both offer highly specialized orthopedic services. Patients are triaged to the four locations based on their clinical needs and anticipated care. 3. How would the relationship enhance measureable levels of clinical quality and patient satisfaction, including successful patient outcomes? What resources and processes can your organization contribute to clinical performance improvement? UW Medicine has engaged in sustained work to achieve the Triple Aim of better care for individuals, better health for populations, and reduction of per-capita costs. As a key element of our strategic plan, we focus on implementing a culture of mutual accountability, including implementing effective processes and monitoring outcomes. The UW Medicine workforce strives to deliver high-quality care in a cost-effective manner. Our programs foster accountability at all levels, within all departments, and across all clinical disciplines. The status of the UW Medicine quality metrics and the initiatives in progress to enhance our quality are viewed monthly by each entity s board of trustees. In addition, the overall program is reviewed and discussed by the UW Medicine Board s Patient Safety and Quality Committee. Data transparency is valued throughout our system and numerous tools have been developed to provide the data needed to enhance workflow and achieve our quality and cost containment goals. UW Medicine quality and safety initiatives are built on the foundation of Patients Are First, TeamSTEPPS and the formation of a Just Culture. Each is described below and are key initiatives to improve successful patient outcomes and patient satisfaction that we would consider involving Interlocals in depending on the nature of the Affiliation. Also described are some key decision support activities that we have deployed to improve patient care. Patients Are First Our Patients Are First service and quality initiative has been implemented throughout UW Medicine as the organizational framework for delivering consistent service excellence to every patient, every time. In support of this initiative, UW Medicine has engaged the Studer Group, LLC, a national expert consultant group on implementing evidence-based practices that improve service, satisfaction, quality and safety while reducing costs. Through Patients Are First, UW Medicine is creating greater consistency and team performance across our hospitals and clinics, refining our metrics to support systems of accountability, and providing staff, managers, physicians and senior leaders with the tools, tactics and reports to achieve our strategic outcomes. 14 P age

UW Medicine has established four pillars as the foundation for building a Patients Are First culture: Focus on Serving the Patient and Family: serve all patients and family members with compassion, respect and excellence. Provide the Highest Quality Care: provide the highest quality, safest and most effective care to every patient, every time. Become the Employer of Choice: recruit and retain a competent, professional workforce focused on serving our patients and their families. Practice Fiscal Responsibility: ensure effective financial planning and the economic performance necessary to invest in strategies that improve the health of our patients. Each pillar has measurable core goals that, when cascaded throughout the hospitals and clinics and teamed with the other evidence-based leadership tactics, reinforces our commitment to Patients Are First. The Patients Are First dashboards contain quality metrics system-wide so each entity can view its performance and the system s performance as a whole. Specific results achieved by the Patients Are First program that support the Triple Aim include improvement in quality indicators, such as achieving a 5.8 percent increase in the Medicare core measure composite score; a 14.1 percent increase in patient access to specialty clinics; and a greater than 17 percent increase in percentile ranking over the 2010 baseline for inpatient satisfaction. Just Culture and TeamSTEPPS In 2009, UW Medicine embarked on the journey to become a Just Culture. The UW Medicine Just Culture focuses on creating a learning culture, designing and implementing safety systems, and managing behavioral choices that promote and improve patient safety. The Just Culture approach emphasizes the importance of training and systems to support personal accountability and incorporate self-regulation in safety matters. Faculty and staff are encouraged to provide essential safety-related information based on establishing a clear line between acceptable and unacceptable behavior. UW Medicine began deployment of Team Strategies and Tools to Enhance Performance and Patient Safety (TeamSTEPPS) in 2008 to improve patient safety by improving communication and teamwork skills among its healthcare professionals. UW Medicine is a national training site for TeamSTEPPS, with 127 master trainers on staff. Over 1,000 UW Medicine faculty and staff have trained in TeamSTEPPS, including operating room, intensive care unit, emergency room and labor and delivery personnel. Since 2010, all incoming residents and fellows (over 200 per year) have been trained in TeamSTEPPS during orientation. Transforming Care with Real-Time Decision Support Tools for Quality Care UW Medicine strives to deliver high-quality care in a cost-effective manner. The following tools have been developed internally by UW Medicine faculty and staff. These tools provide the data 15 P age

needed to enhance workflow and achieve our quality and cost-containment goals. The tools have been integrated into the UW Medicine electronic health record (EHR) to support essential functions of patient care at the point of care. As real-time decision support tools, they directly benefit patient care and improve quality. CORES. CORES (Computerized Rounding and Signout) is a product developed by a team of UW Medicine developers and clinicians that was originally a stand-alone web tool used to communicate patient information from one clinician to another. Because of the tool s value, it was re-formatted as a live link and has been made available to all clinicians using the inpatient EHR. CORES is included for rounding reports, call schedules, and current medication and lab data, among other domains. Most recently, a feature has been added to track the name, pager and role of each member of the team active in each patient s care on a 24/7 basis. This permits a bedside nurse to open the tool in the EHR, quickly locate the name and role of the covering physician, and page the physician with a single mouse click. The tool has been highly successful. Intensive Care Unit (ICU) Quality and Safety (Q/S) Dashboard. The ICU Q/S Dashboard was initially developed as a tool to track major quality and safety parameters in the ICU. Over time it was further enhanced to reflect real-time measures for glycemic control, deep venous thrombosis prophylaxis, ventilator-associated pneumonia prevention, ventilator parameters and gastrointestinal prophylaxis. The dashboard was also mapped to a screen that is visible to all medical personnel at ICU work stations. With one glance, the status of all time-sensitive quality and safety parameters is visible for each patient in each ICU. Electronic White Boards. The first white board was developed as a product of the Radiology/IT development team. This is an extra-large screen set up in the operating room (OR) to track all activities in and out of the OR rooms (linked to the EHR), with icons noting an array of information relevant to each case. Examples include OR start-time, participant names, interval time in-room, special equipment needs, and other unique features. The white board in the OR is highly visible, helping all team members receive prompt, accurate and important data at all times. The success of the tool led to the development of white boards with similar functionality in the acute care units and the ICUs. Rapid Response Team (RRT) Trigger Tools. The inpatient EHR has been enhanced to query clinical data on a real-time basis in order to screen for parameters that would trigger a RRT. In the event of a clinical RRT-initiating event, the chart alert is triggered and pages are sent to the team responsible for responding to RRT events. With this tool, prompter care can be provided to patients who exhibit signs of a clinical compromise. Deep Vein Thrombosis/Pulmonary Embolism (DVT/PE) Identification Tool. All vascular lab reports and CT angiogram reports are monitored electronically on a continuous basis. When the criteria are reached for a new hospital-acquired thrombotic event, the event is flagged. These results are linked to the pharmacy data and other nurse-entered fields. The product is an online tool to view every newly acquired DVT or PE in the hospital, with the ability to determine rapidly 16 P age

if guideline-directed DVT prophylaxis was in place from admission until the time of the DVT event. Institute for Simulation and Interprofessional Studies (ISIS). Simulation labs and training centers to enhance team learning and patient safety and quality are available at three of our hospital sites. These centers provide education for UW Medicine physicians and staff as well as community healthcare professionals. ISIS training has resulted in improved quality of care and reduced cost in clinical services such as the insertion of central venous catheters. Peri-Operative Antibiotic Assessment Tool. Centers for Medicare & Medicaid Services (CMS) and the Surgical Care Improvement Project (SCIP) Core Measures define appropriate preoperative prophylactic antibiotics for selected groups of patients, such as those with hip replacement or colectomy. UW Medicine physicians at Harborview have developed a similar set of guidelines for all 1,200 types of surgery cases performed at the hospital. All surgery cases are tracked electronically to determine if an appropriate antibiotic was given, as represented by the Surgical CPT code. Other Tools. Additional real-time tools linked to the EHR include a wide array of infection control reports made available to medical teams, nursing managers, bedside nurses and infection control professionals. These tools have helped achieve substantial reductions in transmission of nosocomial infections. Similar tools are in place for fall risk assessment, glycemic control and vaccine triggers. Many additional new products are currently under development. 4. How is your organization equipped to deal with management of clinical measures from organizations such as CMS, TJC, DNV, and AHA? What are your publicly reported clinical results, and how do they compare with regional, state, and national norms? UW Medicine monitors patient safety, quality and satisfaction scores in all hospitals and clinics and has a unified Patients Are First dashboard and intranet website to view quality and safety data transparently. These measures include measures defined and tracked by the organizations noted above. Both Harborview and UW Medical Center currently score in the top third among academic medical centers on the University Healthcare Consortium Quality and Accountability scorecard, which includes assessments of risk-adjusted mortality, Core Measures, Patient Safety Indicator (potentially preventable adverse events), patient satisfaction, and cost efficiency. UW Medicine s Northwest Hospital and Valley Medical Center have continued to improve HCAHPS scores and other measures post affiliation. Northwest Hospital and Valley Medical Center both exceed the national average on their current HCAHPS scores in the area of patients who said "yes" they would definitely recommend the hospital. Northwest Hospital s score is at 78 percent and Valley Medical Center s score is at 73 percent. The national average is currently 70 percent and the Washington State average is 73 percent. Northwest Hospital and Valley Medical Center also both received Excellence Awards from Healthgrades in 2012. Northwest Hospital received the Distinguished Award for Clinical Excellence, being in the top 5 percent of hospitals in the nation for the lowest mortality and complication rates among 26 common conditions and procedures. Valley Medical 17 P age

Center received the Distinguished Clinical Care Excellence Award from Healthgrades for Orthopedic Joint Surgery, Spine Surgery and Pulmonary Care. 5. Describe and give specific examples of how you provide continuing education and staff development within your organization. UW Medicine provides continuing education and staff development in many venues. Through our Departments of Clinical Education and Organizational Training and Development, UW Medicine provides a comprehensive array of clinical courses and organizational development offerings. These courses and offerings would also be made available to the Interlocals depending on the nature of the Affiliation. UW Medicine believes that consistent messaging from our leadership team is vital to ensure alignment with our staff and physicians. Each quarter, UW Medicine hosts a full day Leadership Development Institute for over 450 of our combined hospital, physician, and health system leaders. These formal educational and training institutes are convened in partnership with the Studer Group, LLC to provide leaders with the tools and strategies needed for leadership development related to meeting our UW Medicine pillar goals. In addition, there are opportunities for staff development through topic-specific training and education, skills-based advancement opportunities and ongoing mentoring. Another critical aspect of leadership and development is continuing professional education. The health science schools of the UW provide continuing education programs for the various healthcare professional needs. For example, the UW School of Medicine provides a robust continuing medical education (CME) program to meet the postgraduate educational needs of physicians and allied healthcare professionals on a local, regional, national and international level. The UW School of Medicine is accredited by the Accreditation Council for Continuing Medical Education (ACCME). The CME Program includes a broad range of AMA-PRA Category 1 activities including departmental grand rounds, lecture series, live courses ranging from one to ten days and online self-study activities. The CME Program continually strives to improve the quality and variety of activities offered, including a major focus on simulation-based and telemedicine facilitated active learning. We would welcome the opportunity to partner with the Interlocals to understand your needs further and to coordinate on implementation of successful strategies to meet your workforce needs. Telemedicine consultation offers an excellent platform for meeting accountable care needs and provision of continuing interprofessional education at the same time. G. Local and Regional Services 1. How would the relationship improve local access to care and attraction of patients to locally provided services? What specialty clinical services would you proposed adding or augmenting? We believe that an Affiliation with UW Medicine would bolster the Interlocals position in the market through our engagement in building specific clinical programs in the community, 18 P age

providing streamlined access and continuity of care when tertiary and quaternary resources are necessary, and through the many other positive attributes of a world renowned academic health center. As noted previously, we would work with the Interlocals to evaluate expansion of clinical programs that support the mission to improve health and our initial assessment would include cardiac, stroke, neurosciences, obstetrics, orthopedics, sports medicine, emergency medicine, cancer care, rehabilitation medicine, pain relief services, vascular and thoracic surgery, pediatrics, behavioral health, primary care and telemedicine. 2. How would the relationship enhance the position of the Interlocals as community hospitals? In a relationship with UW Medicine, a key business objective is to enhance, strengthen and promote the Interlocals as community hospitals able to meet the needs of their thriving communities. UW Medicine s activities would be in furtherance of those objectives and in providing continuity of care when a level of care is needed that is not available in the community. We believe strategies to further these objectives will strengthen the Interlocals. 3. How will you help the Interlocals educate the community regarding the value of the affiliation? There are a variety of outreach mechanisms that can help to educate the community regarding the value of the affiliation, and we would discuss all such outreach opportunities. At the same time, we have found that one of the most effective strategies is putting patients first each and every time and having local patients and their physicians share their stories. 4. What type and level of services do you believe are essential to the regions the Interlocals serve? UW Medicine believes thriving communities need access to high quality primary and secondary care in their communities. UW Medicine would also support, to the extent a community can financially support, tertiary care services that are consistent with the goals of accountable care. 5. How will you commit to substantially sustaining and enhancing the same types and level of services as currently offered? UW Medicine would seek to sustain and enhance the same types and levels of services currently offered in an Affiliation provided there are mechanisms in place to discuss and reevaluate such services when there are significant demographic shifts, changes in financial support, emerging replacement technologies and so forth that dictate a reevaluation. 6. Please describe how your organization would augment or support the Interlocals as they move forward with consolidating services. 19 P age

UW Medicine would leverage its existing experience in consolidating services across four hospitals to engage in transparent discussions with the Interlocals about how to maximize services in the communities but also reduce costs through eliminating unnecessary duplication of services. 7. In addition, how would your organization support the Interlocals in making decisions about clinical consolidation? UW Medicine recognizes how challenging discussions of clinical consolidation can be in the current environment. We would support the Interlocals in creating transparency and shared understandings of how to maintain financial viability of the Interlocals while reducing unnecessary duplication. H. Physician Recruitment and Alignment 1. How would the relationship support the Interlocals ability to align effectively with members of their medical staffs and improve their ability to recruit physicians? 2. Describe your experience with and strategy for physician recruitment and employment/other physician integration models. 3. How would this relationship result in an increase in the nucleus of North Puget Soundbased physicians? Provide your organization s experience and success in physician recruitment and retention. 4. Describe the physician management resources your organization would make available to the Interlocals. UW Medicine has the ability to attract leading physician specialists from all over the country to work in our nationally recognized hospitals, clinics and affiliated sites. In addition, because we are the only allopathic medical school in a five-state region, we train physicians in every specialty, and each year many residents and fellows who finish our programs are interested in working in our practice plans or the region. In any Affiliation, UW Medicine would work with the Interlocals on strategic physician recruitments to meet critical community needs, both through national recruiting and through recruiting from our trainee population. Over the past 30 years, over 60 percent of graduating students have chosen to remain within the five-state area to practice. Over the course of the past 20 years, almost 50 percent of graduating students have chosen to pursue careers in primary care. These retention rates are significantly better than national averages. For example, the national retention rate for other public medical schools is 39 percent. UW Medicine has experience with a variety of physician recruitment and deployment models, including but not limited to group practice models, employed (non-group practice) physician models, such as at Valley Medical Center and Northwest Hospital, and contracting with private physician groups for necessary services. UW Medicine recognizes the importance of working with non-employed members of the medical staff to achieve access to high-quality healthcare. As part of 20 P age

any Affiliation model, UW Medicine is prepared to discuss how best to build upon the existing network of physicians employed by the Interlocals or within the community, including but not limited to recruiting physicians to meet critical shortages of key specialties, co-branding or practice plan integration. In addition to our leadership development activities described above, healthcare professional retention is aided by access to outstanding training. Following the example of the aerospace industry training model that uses simulation for training and testing, UW Medicine has led the nation in the use of simulation technology training for healthcare. Since 2006, UW Medicine s Institute for Simulation and Interprofessional Studies (ISIS) has pioneered simulation training and retraining for healthcare professionals to improve healthcare through increased patient safety. UW Medicine s ISIS was the first simulation center in the country to be accredited by the American College of Surgeons. ISIS trains healthcare professionals to be effective, efficient clinicians and adept team communicators. Training occurs on sophisticated mannequins, through virtual electronic cases, and on machines that simulate clinical settings; all include metrics by which trainees skills and progress are measured. 5. What is your organization s vision for the Interlocals medical groups? What opportunities would the Interlocals medical groups have to participate in clinical leadership, training, or other provider development activities? Each physician community is unique and we would need additional information in order to tailor an approach. However, in any Affiliation model we view the Interlocals medical groups as a key participant in the success of any Affiliation and as a source of knowledge and experience on the needs of the community and physicians who practice there. In our arrangements with the two community hospitals that are part of UW Medicine we have maintained existing relationships with long-standing medical groups who have practiced in those hospitals and would envision such a pathway with Interlocals as a starting point. I. Support Services 1. What, if any, support services would you envision consolidating? 2. If support services are consolidated, what services would be consolidated regionally (within the Interlocals) versus within the larger health system? 3. Describe the process that you would propose using to identify and select the services to be consolidated. 4. What would the proposed timeline be to actualize the consolidation? We envision that we would engage in collaborative discussions with Interlocals to explore opportunities together and then jointly decide what services to consolidate. When Valley Medical Center joined UW Medicine we formed an operational integration oversight committee as the 21 P age

primary venue in which UW Medicine senior leadership and Valley Medical Center leadership have frank conversations about possible opportunities, oversee the work of the various teams engaged in the detailed business analysis and then reach a decision. This process has worked well and we would envision something similar with the Interlocals. Any proposed timeline is dependent on the specific opportunity. J. Information Systems 1. The Interlocals are looking for a partner that will provide integration services to migrate to a leading-edge, shared IT platform. Is your organizational willing to provide that as part of the partnership strategy? UW Medicine has robust information technology (IT) services to support the delivery and management of quality patient care throughout our health system. UW Medicine employs approximately 300 highly trained FTE s in IT services to maintain our systems 24/7 and provide all the training, project planning, implementation and maintenance including all technical support required to keep systems operating, updated and efficiently functioning. State-of-the-art information systems, electronic medical records and data warehouses are supported by high speed, stable networks, HIPAA-compliant physical and network security, disaster recovery, and multiple data centers. The IT strategic plan guides the deployment and integration of the systems above, with a strong focus on programs required to meet the federal Meaningful Use criteria and to prepare for changes in the reimbursement landscape. UW Medicine will meet this federal mandate. UW Medicine is able and prepared to discuss IT and electronic medical records strategies that best align with the preferred Affiliation approach and with the Interlocals goals. Understanding the current status of the Interlocals IT systems particularly with respect to Meaningful Use goals will be important in any Affiliation discussions. Our integration strategies within UW Medicine reflect the reality that entirely replacing existing systems to create one IT platform is sometimes not financially feasible in the short term. We have focused on connecting diverse systems using new data integration strategies and systems. Our ability to combine IT services for all entities has allowed us to establish a model of maintenance and support with a highly expert staff. At the same time, it is important to note that each entity that participates in these IT interfaces and services self-funds its participation. 2. Please provide an estimated timeline to transition to a shared IT platform. See above. 3. Provide a description of your current and planned IT systems and your strategy for integrating with other healthcare providers. 22 P age

UW Medicine uses three vendors for clinical applications: 1) Cerner for inpatients at UW Medical Center and Harborview and for inpatients and outpatients at SCCA; 2) Epic for inpatients and outpatients at Valley Medical Center and outpatients for UW Medical Center and Harborview; and 3) Sorian for inpatients at Northwest Hospital. EpicCare, one application in Epic, is the longitudinal outpatient EHR and patient portal. The transition to inpatient physician and practitioner order entry is complete. Outpatient physician and practitioner order entry will be complete in June 2014. Other systems in place include MINDscape, a web summary view of patient information (developed by UW Medicine); Docusys anesthesia system; McKesson surgery suite; Theradoc Infection Control; and GE Radiology/PACS. Business systems include Epic modules for patient access, facility billing and professional billing; and McKesson financial systems. Our decision support infrastructure includes Amalga, a flexible tool to integrate data from clinical and financial systems, as our primary data warehouse, along with McKesson HBI and the Epic reporting infrastructure. 4. Indicate how the Interlocals and their physician communities could be integrated with your IT systems. UW Medicine offers U-Link access to treating healthcare professionals to be able to follow their patients while being treated in our facilities and in order to facilitate a rapid return to the community setting. In addition, UW Medicine would work with the Interlocals to provide a seamless patient experience with system support for connectivity of electronic health information. We would work to provide the Interlocals with access to the ICU Q/S Dashboard tools regardless of the structure of the proposed affiliation. CORES is a tool specific to the Cerner application and can be shared if the Interlocals use Cerner as their inpatient EHR. UW Medicine would also be prepared to deploy TeamSTEPPS depending on the depth of the Affiliation and make available our ISIS Simulation training sites to the Interlocals. 5. Provide any experience integrating other organizations with your IT system. UW Medicine has IT platforms that are integrated through interfaces that provide a seamless EHR. UW Medicine has the ability to work with the Interlocals to help integrate the existing investments with an overall IT strategic road map to make the best cost-effective decisions that support high quality and efficient patient care delivery. The level of capital spent to assure connectivity and seamless information would need to be evaluated and projected based on a business plan analysis of the existing systems in use at the Interlocals facilities and the costs allocated accordingly. The addition of Northwest Hospital and Valley Medical Center to UW Medicine provided us a variety of experiences in integrating free-standing hospitals with our IT system. 6. What decision support or other business systems would be available to the Interlocals? We would envision that we would engage in collaborative discussions with Interlocals to explore opportunities together and then jointly decide. 23 P age

K. Financial Resources and Revenue Enhancement 1. Please provide a copy of your most recent 3 years of audited financial statements and the most recent rating agency reports, if applicable. Please see Attachment C. 2. Describe the ability and capacity of your organization to access capital through cash flow, debt, and/or equity. UW Medicine is financially stable and is a significant component of UW s financial profile. UW received an Aaa stable rating from Moody s Investors Service for a recent debt offering. UW Medicine revenues were $3.8 billion in FY 2012 (July 1, 2011 to June 30, 2012). The following charts summarize the sources of revenue for UW Medicine. Over the last five years, total UW Medicine revenue has increased at an average rate of 11 percent per year. These increases have occurred in the setting of a competitive local healthcare market, significant reductions in statefunded programs, and a very competitive process for peer reviewed research grant funding. Fiscal Year 2012 Revenue by source State, 2% Grants & Contracts, 16% Other, 11% Patient care, 71% (Other includes support from Wyoming, Alaska, Montana, and Idaho, and revenue from endowments and gifts.) Fiscal Year 2012 Revenue by entity Physician Practices, 6% SOM, 26% Other, 2% Hospitals, 66% 24 P age

UW Medicine revenues come predominantly from patient care revenues (71 percent) and research grants and contracts (16 percent). Long-range financial planning for UW Medicine is done at the entity level and is updated annually. These five year financial plans illustrate how each organization will generate sufficient cash to meet operational needs and strategic investments. The operating assumptions for the entity plans are based on current strategic directives and operational initiatives, combined with near term market and industry forces. External benchmarks are also used to help inform the assumptions. 3. How will your organization assist the Interlocals in negotiating third-party contracts, including for both the hospitals and their employed physicians? UW Medicine has strong relationships with key payers in the area and we are working in partnership to implement innovative approaches to care that reduce the total cost of care while improving our service to patients and the quality of care patients receive. We are also working with payers and others to transition to value-based reimbursement models. UW Medicine has experience with risk arrangements, including bundled payments for specific clinical services, types of patients, and types of payers and is willing to engage with payers and others in such discussions. Whether UW Medicine would assist the Interlocals in negotiating third-party contracts would be dependent on the nature of the Affiliation and informed by regulatory considerations such as antitrust review. In the two Affiliation models described in this response to request for proposal, we would not envision negotiating third-party payer contracts for hospitals or employed physicians unless such physicians were also members of UW Physicians, our non-pediatric group practice for healthcare professionals. 4. What resources will your organization bring to improve revenue and operating efficiency and enhance the profitability of the Interlocals? (Address payer contracts specifically.) See our answer to the above and previous answers regarding building sustainable community programs. 5. The Interlocals have aggressively pursued several financial initiatives such as 340B Drug Pricing Program and Medicare Dependent Hospital status. How do you imagine furthering these initiatives to create additional value for the Interlocals and/or with hospitals that you currently operate? UW Medicine supports efforts to sustain the 340B Drug Pricing Program. Several of the UW Medicine hospitals participate in the 340B Drug Pricing Program and we are very familiar with the important role it plays in the financial viability of the hospital. We would work to continue Interlocals participation in this critical program. In an Affiliation with Interlocals we would also carefully evaluate any program that assists hospitals with large Medicare populations in rural areas, such as the Medicare Dependent Hospital Program. UW Medicine has extremely knowledgeable staff who manage our participation and advocacy at the federal and state levels in publicly-funded reimbursement programs. For example, we have the infrastructure and expertise to maximize the 25 P age

Interlocals participation in the Professional Services Supplemental Payment Program, a program that the Interlocals are eligible for today but do not participate in. L. Commitment to Employees 1. Describe your organization s human resources (HR) philosophy. One of UW Medicine s most valuable assets is its employees. UW Medicine s mission is improving the health of the public, and we do that worldwide, from the neighborhoods of Seattle to the remote areas of Africa. Working at the bedside or at the research bench, in the clinic or in the Emergency Department, we are on the leading edge of healthcare. Human Resources supports this mission by providing high quality and responsive human resources support to foster an exceptional work environment that encourages, nurtures, and recognizes the professional development of our employees. Our guiding principles are integrity, diversity, excellence, collaboration, innovation, and respect. Further information on human resources at each of the entities of UW Medicine can be found at: www.uwmedicine.org/global/employment/pages/default.aspx. 2. Please describe your working relationship with organized labor. UW Medicine has extensive experience with the collective bargaining process and currently has implemented contracts covering various healthcare classified staff. The majority of represented employees in the hospitals and clinics are members of the Service Employees International Union (SEIU) 1199, SEIU 925, Washington State Nurses Association (WSNA) or Washington Federation of State Employees (WFSE). Joint Labor Management (JLM) committees are in place to provide a venue for employee, labor union and management dialogue and input into decision-making as appropriate and as specified by any terms of the contracts. The JLM committees include representatives from the labor union, staff, management and UW Human Resources and Labor Relations specialists. In addition, numerous hospital and clinic-based committees that establish clinical care policies, design clinical care delivery systems, and review staffing and resource plans include staff who are represented employees. The ongoing JLM process and other routine forums and venues to involve employees at every level foster a highly positive labor management culture at UW Medicine. M. Experience 1. Indicated your organization s affiliation partnerships with other community hospitals. Provide the following details regarding each of these affiliations: a. Name of the hospital and year that the formal affiliation was initiated. b. Affiliation structure. c. Level of clinical integration/relationship. d. Level of financial integration/relationship. e. Accomplishments. 26 P age

f. Challenges and opportunities for improvement. Northwest Hospital joined UW Medicine effective January 1, 2010 and is operated as a component entity of UW Medicine. Northwest Hospital is a 501(c)(3) not-for-profit corporation and the UW is the sole corporate member. As sole corporate member, UW has certain reserve powers and authority to appoint and remove trustees who serve on the Northwest Hospital Board of Trustees. While assets and liabilities of Northwest Hospital belong to Northwest Hospital, its financial status is reported in the UW financials. Since 2010, we have been integrating the Northwest Hospital clinical activities into UW Medicine and growing key clinical programs on the Northwest Hospital campus. Public Hospital District No. 1 dba Valley Medical Center joined UW Medicine effective July 1, 2011 and is operated as a component entity of UW Medicine. Valley Medical Center and UW Medicine entered into a strategic alliance pursuant to the authority of the Interlocal Cooperation Act and the Public Hospital District statute. Through the strategic alliance agreement, Valley Medical Center is governed by a board of trustees, consisting of five elected commissioners, five community members appointed by UW Medicine, two current or former members of the board of a component entity of UW Medicine or the UW Medicine Board and the CEO of UW Medicine or designee. While assets and liabilities of Valley Medical Center belong to Public Hospital District No. 1, its financial status is reported in the UW financials. Since July 1, 2011, we have been integrating key Valley Medical Center clinical and business activities into UW Medicine as described above. Seattle Children's is the pediatric and adolescent referral center for Washington, Alaska, Montana and Idaho. UW Medicine has been closely affiliated with Seattle Children s for many years. Seattle Children s is ranked as one of the top 10 children's hospitals in the nation by U.S. News & World Report and UW faculty provide subspecialty care in nearly 60 areas, from adolescent medicine to virology. The affiliation encompasses teaching, research and clinical care. Seattle Children s and UW Medicine share in the ownership of the pediatric faculty practice plan, CUMG. 2. Please describe the experience of your senior management in developing, implementing, and managing new affiliation relationships. The senior leadership of UW Medicine has significant experience in developing, implementing and managing new affiliation relationships. The existing senior leadership of three vice presidents and a CEO has worked for years in building the affiliation and relationship with Harborview, a county hospital managed by the UW pursuant to a long-standing management contract. In addition, the existing senior leadership has been responsible for the integration of Northwest Hospital and Valley Medical Center as component entities of UW Medicine. In addition, they have substantial hands-on experience with integrating community hospitals and in supporting rural areas of the state and region through the WWAMI program. 3. Identify, based on your organization s experience, the most critical factors or obstacles in successfully developing new affiliation relationships. 27 P age

We do not see any barriers or impediments. UW Medicine consists of state entities, not-for-profit entities, a county entity and a public hospital district. We are familiar with the opportunities and constraints of different legal arrangements and are well positioned to work with the Interlocals to explore existing models we have created or new models tailored to the Interlocals interests and needs. Bringing organizations together with different cultures, histories and legal structure requires dedication and attention to many items but has not presented insurmountable obstacles in our experience. 4. Describe your specific experiences and understanding of success factors for working with public hospital districts. Public hospital districts are a unique and statutory form of public hospitals which are created by their community and accountable to their community. Through our relationship with Valley Medical Center, we understand the nature of incorporating a public hospital district into a larger healthcare organization. N. Access Regardless of Ability to Pay 1. Please describe your organization s current policy and programs regarding access to care for indigent and uninsured residents, including your organization s specific experience. UW Medicine provides community benefits in alignment with our mission to improve the health of our community through patient care, teaching, research and community service. Community benefits include charity care policies that enable access to medical services to the uninsured and those in financial need. In FY 2012, UW Medicine provided over $325 million in charity care, of which approximately $210 million was provided at Harborview. Our commitment to the underserved populations in the community is unwavering. UW Medicine hospitals provide charity care for any patient whose gross family income is at or below 200 percent of the current federal poverty guidelines. Our charity care policies are intended to ensure that residents of Washington State who are at or near the federal poverty level receive appropriate hospital-based medical services at a cost based on their ability to pay, up to and including care without charge. Charity care is provided to all eligible persons regardless of race, color, religion, sex, sexual orientation or national origin. The charity care policies apply to both inpatient and outpatient services, which include both facility and professional fees billed. UW Medicine provides notice of its charity care program and makes a good faith effort to provide every patient with information regarding its availability. UW Medicine, within its sole discretion, may extend its charity care policy to encompass additional services, such as preventive services or other services for which we have specialized expertise (for example, burn care). UW Medicine hospitals may waive requirements, documentation and verification if charity care eligibility is obvious. Staff discretion is exercised in situations where factors such as social or health issues exist. In such cases, the hospital relies upon written and signed statements from the responsible party for 28 P age

making a final determination of eligibility. UW Medicine works with patients to enroll them in any available public program that would assist in meeting the patient s healthcare needs. UW Medicine teaching and research programs are integrated with the clinical programs and provide substantial benefits to improving the health of the community. UW Medicine hospitals and clinics provide training sites for healthcare professionals so they can better understand the healthcare needs of the community. 2. Describe how you determine charity care as opposed to bad debt. Consistent with RCW 70.170.060, UW Medicine entities provide care without charge or at amounts less than established rates to patients who meet certain criteria under its charity care policy. Patients must apply for charity care and meet certain income thresholds to qualify. Unpaid balances are written off to bad debt in circumstances when patients have insurance and fail to pay their co-pay or deductible, or are self-pay and do not qualify or have not applied for charity care. 3. Describe your organization s current efforts to monitor and improve community health in your service area. UW Medicine provides community benefits though community education, partnerships and direct services that are aimed at addressing community health needs. UW Medicine also works strategically with key partners throughout the region, including the Washington State Hospital Association (WSHA) to assess community health needs at a state and regional level. Education on health and wellness is offered throughout UW Medicine to the general public. Offerings include: Health classes and support groups at all UW Medicine hospitals; A community Mini-Medical School offered by the School of Medicine; Patient and family resource centers with information on health conditions and wellness strategies that is open to the general public; Education and preventive health screenings offered at community health fairs; and Injury Prevention and Research Center that produces materials and information for the public and works to establish safety standards needed to reduce injury and burns. UW Medicine works closely with community partners to address community health needs. Some examples of our partnerships are: Operating the Pioneer Square Clinic to serve the homeless population in downtown Seattle; Collaborations with groups like the National Alliance on Mental Illness to provide support groups for the public; Providing leadership in community disaster preparedness; 29 P age

Participating in the Healthcare to the Homeless network that includes clinics within shelters and a respite care program for the homeless; Leading Safe Kids Seattle that has developed safe walking routes to school and provided workshops on sports safety to youth coaches; Partnering with the Seattle Housing Authority to provide supervised mental health housing units; and Providing a Community House Calls program for non-english speaking patient populations. In addition, the UW School of Medicine has an active service learning program that allows medical students the opportunity to provide community service. UW Medicine healthcare professionals and staff are dedicated to community service and offer thousands of hours of volunteer service to the community every year in their personal capacity. The UW Institute for Health Metrics and Evaluation (IHME), administratively based in the UW School of Medicine, is a world renowned resource for assessment and analysis of population health. IHME was funded initially by a $105 million grant from the Bill & Melinda Gates Foundation and now provides population health analyses that are critical for guiding development of healthcare programs to improve the health of communities. O. Religious Issues (if applicable) Not applicable. P. Summary Benefits Give a brief summary of the benefits to the Interlocals of affiliation with your organization. Throughout the response to the request for proposal we have highlighted the benefits of an Affiliation with UW Medicine. Briefly, we bring the strength of a local, regional and nationally known brand that stands for excellence in the delivery of patient care and a global leader in improving the health of the public. We have a strong history of partnering with community hospitals throughout the WWAMI region to provide access and support for patient care. We have worked closely with the Interlocals for the past decade in providing access through our Transfer Center, MedCon and other educational offerings. We are experienced at building clinical programs in both the community and in an academic setting. We value the work that the Interlocals do to improve health in their communities and would welcome the opportunity support their ongoing efforts and further discuss Affiliation models that best meet their needs. 30 P age

ATTACHMENT A Organizational Charts

Chief of Staff, Associate Vice President (AVP) Office of the Chief Executive Officer, UW Medicine 1 CEO, UW Medicine Executive Vice President for Medical Affairs and Dean of the School of Medicine, University of Washington UW Medicine UW School of Medicine Chief Compliance Officer, AVP Chief Financial Officer, Vice President President, CEO, UW Physicians* Valley Medical Center Chief Health System Officer, Vice President * Dual report to the CHSO, UW Medicine Chief Business Officer, Vice President Chief Advancement Officer, AVP Vice Deans Academic Affairs Research & Graduate Education Clinical Affairs and GME Regional Affairs Department Chairs Clinical Departments (18) Basic Science Departments (12) Medex NW

Office of the Chief Health System Officer, UW Medicine 2 Chief Health System Officer, UW Medicine Vice President for Medical Affairs, University of Washington Clinical Entities Executive Director s UWMC HMC UWNC ALNW President, NWH UW Medicine IT Chief Information Officer Senior Associate Administrator Clinical Integration UW Medicine Pharmacy Chief Pharmacy Officer UW Medicine Strategic Marketing & Communications Officer Senior Associate Administrator Patients Are First & Business Strategy Shared Services Consolidated Laundry Human Resources Labor Relations UW Medicine Contact Center UW Medicine Transfer Center UWP President* * Dual report to the CEO, UW Medicine

Office of the Chief Business Officer, UW Medicine 3 Chief Business Officer, UW Medicine Vice President for Medical Affairs, University of Washington UW Medicine UW School of Medicine Director, Medical Affairs Policy, UW Medicine Executive Director, UWP* Director of Legal and Business Matters, UW Medicine Associate Dean for Administration and Finance, School of Medicine Associate Dean for Business, School of Medicine * Dual report to the President of UW Physicians

Office of the Chief Financial Officer, UW Medicine 4 Chief Financial Officer, UW Medicine Vice President for Medical Affairs, University of Washington Director Government Financial Relations Director Contracting and Payer Relations Director Supply Chain Management Director Health Information Management AVPMA Medical Centers Finance and Accounting AVPMA Enterprise Financial Reporting and Analysis Associate Administrator Revenue Cycle Management Associate Dean for Finance and Administration* UW Medicine CIO ** * Position Reports to Chief Business Officer ** Position Reports to Chief Health System Officer

ATTACHMENT B Clinical Focus and Centers of Excellence

Attachment B Clinical Focus and Centers of Excellence UW Medicine operates a comprehensive health system providing primary, secondary, tertiary and quaternary care. UW Medicine is the site of nationally and internationally recognized Centers of Excellence in the following areas: Level I Adult and Pediatric Trauma Center Harborview is the only designated Level I adult and pediatric trauma and burn center in the state of Washington and serves as the regional trauma and burn referral center for Alaska, Montana and Idaho. More than 6,000 major trauma patients are admitted each year, many of whom have been transferred from outlying hospitals. Emergency physicians, surgeons, surgical specialists, nurses, anesthesiologists and other professionals are always in-house and available to give immediate care. Regional Burn Center Since opening in 1974, the UW Medicine Regional Burn Center at Harborview has treated nearly 20,000 patients, representing the vast majority of all major burn patients in Washington, Alaska, Montana and Idaho. One-third of these patients have been children. UW Medicine physicians at Harborview were first in the nation to adopt the approach of early removal of burned tissue. It was also the first site of a major clinical trial for a temporary artificial skin graft, a technology that helps some burn survivors recover faster with fewer surgeries. Neurosciences Institute UW Medicine has developed a comprehensive, multidisciplinary team of neurological surgeons, neurologists, neuro-radiologists, neuro-oncologists and neuro-pathologists to diagnose and treat complex conditions of the brain. This team is complemented by a highly trained team of nurses, therapists, social workers and cases managers with neuroscience expertise. The center is nationally and internationally recognized for expertise in cerebral vascular, stroke, trauma, pituitary and brain tumors. In collaboration with orthopedic surgeons, the center also provides care for patients with complex, high-risk spinal problems, such as deformities, injuries and degenerative diseases and deploys state-of-the-art technology including minimally invasive surgical techniques for repair. The Neurosciences Institute includes the following services: UW Medicine Regional Epilepsy Center, Gamma Knife Center, Comprehensive Pituitary Center and Designated Level I Stroke Center, which is also accredited by The Joint Commission.

Comprehensive Acute Rehabilitation and Reconstruction UW Medicine s orthopedic and rehabilitation specialists work to reconstruct the lives of patients with problems caused by injury, illness, infection, tumors and congenital conditions. They are known for providing treatment and consultation for the most complex orthopedic injuries. The center also encompasses ophthalmology, otolaryngology, plastic and reconstructive surgery, rehabilitation medicine and social work. Limb Viability and Re-implantation As the region s Level 1 Trauma Center, Harborview has developed expertise in preserving limbs through emergency medical care, microsurgery and vessel grafts. Harborview hosts an Amputee Support Group where participants learn tips for daily living without a limb, learn about various prosthetic components, share challenges and successes, and discover ways of coping with limb loss. A complete service for custom designed orthotics and prosthetics is provided on site to provide patients with optimum recovery and rehabilitation needs. Solid Organ Transplantation Liver, Kidney, Lung, Heart, Pancreas and Intestine UW Medicine offers the most advanced tertiary and quaternary medical care in our region for patients needing heart, heart/lung, lung, liver, kidney/pancreas and intestinal transplants. UW Medical Center provides state-of-the-art care for patients receiving solid organ transplants. UW Medicine also offers a comprehensive and compassionate living kidney donor program for those who desire to donate a kidney to a loved one. Solid-organ transplants are complex because of the multiple medical issues that must be managed simultaneously, including: the cause of organ failure, other medical conditions such as diabetes and high blood pressure, the potential for infection and tissue rejection, the health of the donor organ, narrow windows of organ viability and other related issues. UW Medicine brings together experts in a variety of medical and surgical disciplines and healthcare professionals to effectively and efficiently manage the care of these complicated patients and provide optimum outcomes. UW Medicine performed the first kidney transplant in the Pacific Northwest at UW Medical Center in 1968 and the first heart transplant in 1985. While surgical expertise is crucial to the success of organ transplants, so too is the depth of experience of the entire team that cares for patients before and after their operations. Currently, more than 500 lung and 500 heart transplants have been performed at UW Medical Center. UW Medical Center has been awarded two of only ten silver medals distributed nationally by the U.S. Department of Health and Human Services for outstanding outcomes in kidney and liver transplantation. Oncology and Stem Cell/Marrow Transplantation UW Medicine shares in the ownership and governance of the Seattle Cancer Care Alliance (SCCA). Established in 1997, this world-class cancer treatment center unites programs from

Fred Hutchinson Cancer Research Center, UW Medicine and Seattle Children's. In addition, this collaboration has earned the only National Cancer Institute (NCI) comprehensive cancer center designation in the region. Healthcare professionals throughout UW Medicine and SCCA diagnose and treat all types of cancers including breast, lung, ovarian, colorectal, prostate and much more. SCCA is an international destination cancer treatment center for bone marrow transplantations, a technique that was developed by UW School of Medicine faculty, and has been consistently recognized in the top two in the U.S. for survival outcomes. Depending on the specific type of cancer, the majority of adult outpatient care is delivered at SCCA, while surgical and inpatient care is provided at UW Medical Center. Pediatric patients receive care at Seattle Children s. High Risk Obstetrics & Neonatal Intensive Care/Level III B UW Medical Center has been delivering the highest level of care to mothers and babies at risk of complications, prenatally and post-delivery, for more than half a century. A partnership with Seattle Children s also assures the best care when babies need surgery for congenital problems or other issues that develop soon after birth. An expanded Level IIIB Neonatal Intensive Care Unit will open in October 2012. This unit will have space for as many as 50 babies. Rooms will be private and quiet with lighting that can be customized based on each baby s needs important qualities that are crucial to preterm babies development. As an added amenity, new parents will be able to stay overnight at their babies bedsides more comfortably. Regional Heart Center The UW Medicine Regional Heart Center provides the highest level of cardiac care available in the region and includes comprehensive programs for all types of cardiac conditions and diseases. A highly experienced team of cardiologists, cardiothoracic surgeons, cardiac anesthesiologists, cardiac nurses and other highly trained clinicians are internationally recognized for their expertise in diagnosing and treating advanced heart failure, coronary artery disease, cardiac valve disease, heart rhythm disturbances such as atrial fibrillation, and adult congenital heart disease. The Regional Heart Center is a national leader in advanced procedures and complex surgeries such as total artificial heart implantation, heart transplantation, adult congenital heart disease repairs, and ablations for the correction of heart rhythm disturbances. UW Medicine is certified by The Joint Commission as a Center of Excellence for Ventricular Assist Device Destination Therapy, is the most experienced center in the Northwest for catheter-based structural heart interventions and is designated as the only site in a five-state region for the highly-successful ongoing PARTNERS Trial for percutaneous (minimally invasive) heart valve replacement. Focus is maintained on returning patients to the community as soon as recovery

permits, through follow-up communication and education of colleagues throughout the regional community, to ensure best possible quality of life as a patient outcome. Regional Vascular Center UW Medicine s Regional Vascular Center cares for patients with a broad spectrum of circulatory problems involving arteries, veins and the lymphatic system. In addition to treating patients with varicose veins and unusual vascular malformations, the center frequently manages more urgent conditions such as aortic ruptures. It treats more aortic aneurysms than any other health system in the nation and has achieved a patient survival rate approaching 90 percent, compared to the national average of 60-70 percent. Multiple Sclerosis Center UW Medical Center opened one of the first comprehensive centers for patients with multiple sclerosis in the country in 1977. In July 2012, the UW Medicine Multiple Sclerosis Center moved to the campus of Northwest Hospital. It offers a full range of services, ranging from research and diagnosis to treatment and rehabilitation. Additionally, the center is a member of the Consortium of Multiple Sclerosis Centers and affiliated with the National Multiple Sclerosis Society. Spine, Sports Medicine & Orthopedics The UW Medicine Sports & Spine Center brings together a group of specialists with expertise in conditions such as sports injuries, spinal pain, musculoskeletal pain, sports concussions, and injuries resulting from automobile and work accidents. They focus on rehabilitation through exercise and activity, as well as medication management, injections and other interventions. When surgical care is appropriate, they work closely with patients and surgeons to offer a smooth and comfortable transfer of care. Eye Institute & Vision Science Center The UW Medicine Eye Institute is one of the nation s premier eye and vision science centers for clinical care, research and teaching. Its physicians and surgeons are known for providing expert care and finding new ways to treat eye diseases and vision disorders. They see more than 40,000 patients and perform approximately 2,500 surgical procedures annually. Center for AIDS/HIV Since 1985, Harborview has provided optimal medical care, nursing care and social work services to men and women with HIV/AIDS. The Madison Clinic, Harborview s outpatient facility, is the single largest provider of HIV/AIDS care in King County and also operates satellite clinics in Everett and Bremerton.

Behavioral Health/Mentally Ill and Medically Vulnerable UW Medicine established the Center for Healthcare Improvement for Addictions, Mental Illness, and Medically Vulnerable Populations (CHAMMP) at Harborview in 2006. Its mission is to improve the lives of people with chronic medical and mental conditions and substance abuse by providing innovative and practical services in the areas of intervention development, testing, dissemination and implementation, and outcome assessment.

ATTACHMENT C Audited Financial Statements for Fiscal Years 2010, 2011 and 2012

Table of Contents INSIDE BACK COVER 1 MESSAGE FROM THE INTERIM PRESIDENT 2 MESSAGE FROM THE SENIOR VICE PRESIDENT 4 FINANCIAL HIGHLIGHTS 8 FINANCIAL STATEMENTS AND REQUIRED SUPPLEMENTARY INFORMATION BOARD OF REGENTS AND ADMINISTRATIVE OFFICERS University Facts 2009 2010 2004 2005 1999 2000 STUDENTS Autumn Enrollment Undergraduate 34,523 30,790 28,125 Graduate 11,592 10,309 8,606 Professional 1,907 1,808 1,709 TOTAL 48,022 42,907 38,440 Extension course registrations 63,178 41,550 26,277 Number of Degrees Awarded Bachelor s 8,458 8,517 6,923 Master s 2,988 2,797 2,151 Doctoral 686 530 486 Professional 495 475 428 TOTAL 12,627 12,319 9,988 INSTRUCTIONAL FACULTY 3,974 3,623 3,271 FACULTY AND STAFF 1 29,804 27,695 22,646 RESEARCH FUNDING ALL SOURCES (in thousands of dollars) $ 1,337,000 $ 996,000 $ 652,000 SELECTED REVENUES (in thousands of dollars) Gifts, Grants and Contracts $ 1,277,129 $ 1,021,565 $ 643,545 Auxiliary Enterprises 2 and Other Revenues 1,693,040 1,230,813 775,518 State Appropriations (Operating) 347,425 323,417 322,079 Tuition and Fees 3 527,958 331,978 246,895 SELECTED EXPENSES (in thousands of dollars) Instruction, Academic Support and Student Services $ 1,198,015 $ 888,499 $ 596,317 Research and Public Service 733,769 605,433 456,040 Auxiliary Enterprises 2 942,379 755,959 621,354 Institutional Support and Physical Plant 296,559 261,174 168,287 CONSOLIDATED ENDOWMENT FUNDS 4 (in thousands of dollars) $ 1,830,000 $ 1,366,000 $ 859,000 SQUARE FOOTAGE 5 (in thousands of square feet) 18,827 17,504 15,800 1 Full-time equivalents 2 Includes UW Medical Center 3 Net of scholarship allowances of $82,461,000 in 2009 2010 and $48,123,000 in 2004 2005 4 Stated at fair value 5 Gross square footage, all campuses

Message from the Interim President WHILE I SERVED AS PROVOST, RATHER THAN president, during the year covered in this report, what stands out to me about 2009-10 at the University of Washington is the same theme that has stood out in previous years and no doubt will stand out in years to come: the remarkable capacity of the UW community to create opportunities for Washington s citizens. At the UW, we embrace our role as a public university. We are deeply proud to carry out our responsibility to provide the people of our state with the very best learning opportunities, transforming their lives through experiences in the classrooms and outside the classrooms, through community and global experiences, through firsthand research and discovery, and through engagement in the broadest sense. Our commitment to being public will never waver. PHYLLIS WISE, INTERIM PRESIDENT I know of no other university where the faculty, staff, and students are more collaborative, more passionate about our shared values, or more committed to making the world a better place than they are at the UW. With student tuition dollars now exceeding taxpayer support for the UW and with the loss of one third of the University s state support, however, our relationship with the state has changed. It s more critical than ever that we find ways to be flexible, creative, and innovative more self-sufficient in managing our resources. We must ensure the University s capacity to continue serving our state for both the short term and the long term. There s no question in my mind that our UW community, working with our partners, can overcome this and any other challenge that might arise. I know of no other university where the faculty, staff, and students are more collaborative, more passionate about our shared values, or more committed to making the world a better place than they are at the UW. When the economy turns around, I predict that there will be a handful of public research universities that will come out better and stronger because they have thought ahead, planned ahead, and managed ahead. I am completely confident that the University of Washington will be one of them. PHYLLIS WISE INTERIM PRESIDENT ANNUAL REPORT 2010 > 1

Message from the Senior Vice President THE UNIVERSITY OF WASHINGTON IS A STRONG, vibrant and financially healthy organization. Our 48,000 undergraduate, graduate and professional students, along with 29,000 faculty and staff across three campuses and three medical centers remain more committed than ever to our missions to educate our citizens, advance cutting edge discovery and provide world-class patient care and other services to our community. Our finances, while pressured by continued reductions in our instructional funding from the state of Washington, are strong. Notable examples include our recent upgrade to a Aaa bond rating and our continued growth in research buoyed by over $327 million for projects supported by the American Recovery and Reinvestment Act (ARRA). Although our Consolidated Endowment Fund has not fully recovered from 2008, it stands at $1.8 billion as of June 30, 2010, recording a 12.5% return. V ELLA WARREN, SENIOR VICE PRESIDENT Our leadership continues to work with state and legislative officials to maintain affordable access to our University. Instruction While the University s overall financial position is strong, supported by a well-diversified funding base, we will be, for the third consecutive year, carefully and deliberately taking additional budget cuts to our instructional core. The investment from our state is a critical component to ensuring our students continue to receive the highest quality learning experience. And, it s a good investment. For every $1 invested by the state, the UW returns $23. Activities at the UW generate more state and local tax revenue than received in state appropriation $1.56 for every $1.00 invested. Our graduates, many from diverse backgrounds, stay in Washington at a higher rate than other states. However, affording tuition is a struggle for many students and families due to the drop in state investment. Our leadership continues to work with state and legislative officials to maintain affordable access to our University. UNIVERSITY OF WASHINGTON > 2

Research The University s research volume increased to $1.3 billion in fiscal year 2010. Our faculty received more National Institutes of Health ARRA awards than any other university in the country. ARRA funding will support projects focused on prevention of infectious diseases, protection of the environment and training in high demand areas of study, such as mathematics and science. This funding has resulted in more than 2,000 jobs for the state of Washington. Patient Care During 2010, Northwest Hospital, a full-service 281-bed medical facility in northwest Seattle, joined UW Medicine. Expansion and consolidation is a common phenomenon across the industry, where stand-alone hospitals are joining larger systems to better manage the pipeline of primary, secondary, tertiary and quaternary care. UW Medicine is no exception to this evolution and is actively taking steps to build clinical programs and achieve administrative savings as a result of this affiliation. One such initiative allows Northwest Hospital s employed physicians to be covered under the UW s self-insurance program, which is expected to result in over $1.5 million in annual premium savings. Sustainable Academic Business Plan With the ongoing fiscal pressures to our academic enterprise, we continue to streamline our support operations to incorporate best practices and innovative approaches in effectively managing our resources. As part of an initiative launched by Interim President Phyllis Wise, Interim Provost Mary Lidstrom and I announced an institution-wide effort designed to target improvements in all aspects of our administration at the UW. The objective of this effort, the Organizational Effectiveness Initiative (OEI), is that administrative units provide efficient, flexible, and sustainable services. Examples of projects supporting the OEI initiative include: Establishing a shared administrative service unit in the College of Arts & Sciences Humanities Division; Rethinking post-award grants management using LEAN analysis; Completing feasibility and needs assessments for administrative system replacements. Conclusion The financial accountability for these important initiatives, as well as the University s ongoing work is detailed in our 2010 financial statements. Once again, I am pleased with the unqualified opinion from our independent auditor. The Annual Report also includes Management s Discussion and Analysis which describes the University s financial strength, our policies and procedures, and overall commitment to sustaining excellence now and into the future. I believe that we are as well positioned as possible to address these difficult times and to thrive in the future. V ELLA WARREN SENIOR VICE PRESIDENT ANNUAL REPORT 2010 > 3

5 FUNDING AND OPERATIONS 6 DEBT FINANCING 7 INVESTMENTS UNIVERSITY OF WASHINGTON > 4

Funding and Operations The University has a diversified revenue base. No single source generated more than 31% of the total fiscal year 2010 revenues of $4.0 billion. State operating appropriations were $303 million, or 8% of total revenues. The University relies heavily on such funding for instructional activities. Grants and contracts (31%) generated $1,256 million of current year revenue, a 12% increase over fiscal year 2009. Federal stimulus funding for research contributed $86 million to this increase. Grants and contracts provided the opportunity for graduate and undergraduate students to work with nationally recognized faculty in research as part of their educational experience. Income from gifts totaled $118 million (3%). Two primary functions of the University, instruction and research, comprised 46% of total operating expenses. These dollars provided instruction to more than 48,000 students and funded 5,300 research awards. The University provided students with scholarships and fellowships of $93 million (3%), in addition to $86 million of scholarship allowances. Scholarship allowances are University resources that are applied to students accounts to satisfy charges for tuition and fees. These resources have previously been recognized as revenue by the University, for example, as scholarship grants. Sources of Funds 8% INVESTMENT INCOME 3% SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 4% AUXILIARY 1% FEDERAL ARRA* EDUCATION FUNDING 3% GIFTS 2% OTHER 13% TUITION 8% STATE FUNDING FOR OPERATIONS 1% STATE FUNDING FOR CAPITAL EXPENDITURES 31% GRANTS AND CONTRACTS 26% PATIENT SERVICES Uses of Funds 7% DEPRECIATION 2% OTHER 22% MEDICAL RELATED 26% INSTRUCTION 5% AUXILIARY 3% SCHOLARSHIPS & FELLOWSHIPS 4% EACH: OPERATION & MAINTENANCE OF PLANT; INSTITUTIONAL SUPPORT 20% RESEARCH 7% ACADEMIC SUPPORT *American Recovery and Reinvestment Act ANNUAL REPORT 2010 > 5

Debt Financing The University s general revenue borrowing platform, established in 2003, has been used to fund buildings that support the educational, research and service missions of the institution. On November 17, 2009 the University issued $77.7 million in General Revenue Build America Bonds at a net interest cost of 3.63%. These bonds will fund ongoing capital expenditures for PACCAR Hall, a pediatric dentistry clinic, UW Medical Center expansion, student housing and Molecular Engineering building. On October 5th, 2010 the University issued $165 million in General Revenue Build America Bonds at a net interest cost of 3.22%. These bonds will fund ongoing capital expenditures on approved projects as well as refunding Housing Revenue Bonds and funding the Balmer Hall and Tacoma Phase 3 projects. Moody's Investors Service recalibrated the University s bond rating to Aaa from Aa1 in May 2010, affirming its recognition of the financial strength of the University's general revenue platform. This recalibrated rating puts the University in elite company only seven other public universities share this rating from Moody's. Strong ratings carry substantial advantages for the University: continued and wider access to capital markets when the University issues debt, lower interest rates on bonds and the ability to negotiate favorable bond terms. The University takes its role of financial stewardship seriously and works hard to manage its financial resources effectively. Continued high debt ratings are important indicators of the University s success in this area. Moody s Fiscal Year 2009 Public College and University Rating Distribution (Issued in August 2010) Aaa 8 The University s rating was recalibrated to Aaa by Moody s in May 2010. Aa1 15 Aa2 44 Aa3 40 A1 65 A2 31 A3 14 Baa1 2 8 Baa3 1 0 10 20 30 40 50 60 70 NUMBER OF INSTITUTIONS UNIVERSITY OF WASHINGTON > 6

Investments Investment returns provide an important source of revenue for the University s programs. Among the funds invested by the University are endowments, operating cash, life income trusts and annuities, outright gifts and reserves. Endowed gifts supply permanent capital and an ongoing stream of current earnings to the University. Most endowments are commingled in the Consolidated Endowment Fund (CEF), a diversified investment fund. As in a mutual fund, each individual endowment maintains a separate identity and owns units in the fund. The CEF experienced considerable growth over the past 10 years. The number of endowments in the CEF increased from 1,540 to 3,334, and the market value increased to $1.8 billion as of June 30, 2010. The impact to program support has been substantial with $648 million distributed over the past 10 years. Programs supported by the endowment include academic support, scholarships, fellowships, professorships, chairs and research activities. For the 10 years ended June 30, 2010, the average annual total return on the CEF was 4.5%, while a comparable blended benchmark (S&P 60% and Barclay Government Bond 40%) returned 1.5%. For the year ended June 30, 2010, the CEF returned 12.5%, up markedly from the CEF s fiscal year 2009 negative return of 23.3%. The University continues to defensively position the portfolio, actively reduce risk and ensure liquidity. The CEF interim spending policy, adopted in fiscal year 2009 in response to the financial crisis and the decline in the CEF market value, continued during fiscal year 2010. Valuations improved significantly since the implementation of the interim policy, and while not fully restored, the Board of Regents considered it appropriate to increase program support and return to a long-term spending policy. At their October 21, 2010 meeting, the Board of Regents adopted a new spending policy. Quarterly distributions to programs will be made based on an annual percentage rate of 4%, applied to the five-year rolling average of the CEF s market valuation. The new policy is effective with the December 2010 quarterly distributions with the five-year averaging period implemented incrementally. The administrative fee of 1% supporting fundraising and stewardship activities (0.80%) and investment management (0.20%) continues. Similar to program distributions, the fee will be based on the endowment s five-year average market value. A portion of the University s operating funds is invested in the CEF. As of June 30, 2010, these funds comprise $355 million of the CEF market value. $2,200 $2,000 $2,098 $2,161 $1,800 $1,830 IN MILLIONS $1,600 $1,400 $1,700 $1,649 $1,366 $1,200 $1,208 $1,000 $998 $1,000 $800 $839 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ANNUAL REPORT 2010 > 7

AND REQUIRED SUPPLEMENTARY INFORMATION 9 INDEPENDENT AUDITORS REPORT 10 MANAGEMENT S DISCUSSION AND ANALYSIS 16 BALANCE SHEETS 17 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS 18 STATEMENTS OF CASH FLOWS 20 NOTES TO FINANCIAL STATEMENTS

KPMG LLP Suite 900 801 Second Avenue Seattle, WA 98104 Independent Auditors Report The Board of Regents University of Washington: We have audited the accompanying financial statements of the business-type activities of the University of Washington (the University), an agency of the state of Washington, as of and for the years ended June 30, 2010 and 2009, and its discretely presented component unit as of and for the 18-month period ended June 30, 2010. These financial statements are the responsibility of the University s management. Our responsibility is to express opinions on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions. As discussed in note 1, the financial statements of the University of Washington, an agency of the state of Washington, are intended to present the financial position, and the changes in financial position and cash flows of only that portion of the activities of the state of Washington that is attributable to the transactions of the University of Washington. They do not purport to, and do not, present fairly the financial position of the state of Washington as of June 30, 2010 and 2009, the changes in its financial position or its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Washington as of June 30, 2010 and 2009, and the changes in its financial position and its cash flows for the years then ended, and the financial position of its discretely presented component unit as of June 30, 2010, and the changes in its financial position and its cash flows for the 18-month period then ended in conformity with U.S. generally accepted accounting principles. The management s discussion and analysis on pages 10 through 15 is not a required part of the basic financial statements but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplemental information. However, we did not audit the information and express no opinion on it. December 15, 2010 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity. ANNUAL REPORT 2010 > 9

Management s Discussion and Analysis The discussion and analysis below provides an overview of the financial position and activities of the University of Washington ( University ) for the years ended June 30, 2010 and 2009. This discussion has been prepared by management and should be read in conjunction with the financial statements and accompanying notes which follow this section. Financial Highlights for Fiscal Year 2010 The University recorded net income of $431 million in fiscal year 2010, compared to a net loss in fiscal year 2009 of $374 million: a bottom line improvement of $805 million. This is directly related to an increase in investment income of $778 million, a result of market value increases in the value of investments in fiscal year 2010. The University adjusts the carrying value of investments to market value each year, with the change recorded as investment income or loss. Other significant, but offsetting, factors in the 2010 financial performance included a $150 million decline in operating and capital state support, a $70 million increase in tuition revenues, increased federal funding of research and instruction, and continued strong performance by the University of Washington Medical Center (UWMC). Key Financial Results for Fiscal Years 2010, 2009 and 2008: (in millions) 2010 2009 2008 Total operating revenues $ 3,124 $ 2,902 $ 2,730 Operating expenses 3,493 3,429 3,284 Operating loss (369) (527) (554) State appropriations 303 385 388 Federal ARRA Education Funding 44 - - Investment income (loss) 309 (469) 77 Gifts 119 143 177 Other nonoperating revenue, net 25 94 75 Increase (decrease) in net assets 431 (374) 163 Net assets, beginning of year 4,763 5,137 4,974 Net assets, end of year $ 5,194 $ 4,763 $ 5,137 Operating revenues minus operating expenses typically result in an operating loss in the University s financial statements. Nonoperating items, including state support, investment income, and gifts have brought each year s results to a modest increase in the net assets, or equity of the University, with the exception of 2009. This surplus has been reinvested within the University to add a margin of educational excellence, upgrade the University s facilities, and provide a prudent reserve for contingencies such as the current period of economic instability. Economic Factors Affecting the Future A number of contingencies face the University over the next few years. The continuing economic downturn is a primary source of uncertainty. This economic downturn has already impacted the University directly through revenue reductions in state support, investment income, and contributions from donors. The state of Washington, which provided 8% of the University s total revenues in fiscal year 2010, compared to 10% in fiscal year 2009, and 11% in fiscal year 2008, continues to face declining tax revenues. As a result, the state s funding of higher education will continue to erode in 2011. To help alleviate the effects of this educational shortfall, the legislature has granted the University the flexibility to increase undergraduate resident tuition rates up to 14% per year, but only through fiscal year 2011. In 2010, the sharp decline in state funding was partially offset by $44 million of federal education funding under the American Recovery and Reinvestment Act of 2009 (ARRA); these funds were passed through to the University by the state of Washington. Funding for research activities was temporarily boosted in 2010 by $86 million of Federal ARRA funding for basic research and activities in the health sciences. In addition, the University has $241 million of unspent ARRA research awards that will be completed in fiscal year 2011 and later. Rising benefit costs, particularly for health care and pensions, continue to impact the University. In March 2010, health care reform was passed by the U.S. Congress and signed into law by President Obama. The financial effects of this legislation may have significant financial impacts to health care providers. Thus, the environment in which health care organizations currently operate is dynamic and uncertain. While 2010 remained relatively stable for UWMC compared with 2009 due to stable volumes and increasing surgical activity, the economic downturn continues to put pressure on operating results. Operating results of UW Medicine/Northwest (formerly Northwest Hospital & Medical Center) reflect a volume reduction in outpatient and inpatient activities; however, their recent affiliation with the University of Washington provides significant opportunities for joint program development and growth, facilities development and efficiencies. State budget changes to hospital reimbursement rates and medical assistance eligibility, as well as increased charity care and bad debts, have reduced hospital margins. UNIVERSITY OF WASHINGTON > 10

Using the Financial Statements The University s financial statements include the Balance Sheets, the Statements of Revenues, Expenses, and Changes in Net Assets, the Statements of Cash Flows and the Notes to the Financial Statements. These financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) principles, which establish standards for external financial reporting for public colleges and universities. GASB standards require that financial statements be presented on a consolidated basis in order to focus on the University as a whole. On January 1, 2010, the University affiliated with Northwest Hospital & Medical Center. GASB standards require that this affiliation be presented discretely; therefore, a separate column displays its financial position at June 30, 2010 and the results of its operations for the 18 months ended June 30, 2010. (See Note 1 to the Financial Statements.) The analysis presented below includes the consolidated balances of the University of Washington and its blended component units, but excludes the financial position and results of operations of UW Medicine/Northwest, unless otherwise noted. Financial Health BALANCE SHEETS The Balance Sheets present the financial condition of the University at the end of the last two fiscal years and report all assets and liabilities of the University. A summarized comparison of the University s assets, liabilities and net assets as of June 30, 2010, 2009, and 2008, follows: (in millions) 2010 2009 2008 Current assets $ 851 $ 907 $ 1,406 Noncurrent assets: Capital assets, net 2,958 2,840 2,714 Other 3,191 2,788 3,323 Total assets 7,000 6,535 7,443 Current liabilities 548 579 1,170 Noncurrent liabilities 1,258 1,193 1,136 Total liabilities 1,806 1,772 2,306 Net assets $ 5,194 $ 4,763 $ 5,137 The excess of current assets over current liabilities of $303 million in 2010 reflects the continuing ability of the University to meet its short-term obligations. Current assets consist primarily of cash, short-term investments, collateral from securities lending (2008 only) and accounts receivable. The June 30, 2010 current asset balance of $851 million was a decrease of $56 million from 2009, due to changes in cash and short-term investments. The short-term portion of the University s investment portfolio can fluctuate based upon changes in investment mix and the expected short-term needs for University funds. Long-term investments as of June 30, 2010 increased by $390 million from 2009, as a result of significant market gains during the year in the value of the University s investments. Realized and unrealized gains in fiscal year 2010 totaled $224 million, versus realized and unrealized losses of $544 million in 2009. The difference between total assets and total liabilities, referred to as net assets or equity, is one indicator of the current financial condition of the University. The change in net assets measures whether the overall financial condition has improved or deteriorated during the year. The University reports its equity in four categories: Invested in Capital Assets, net of related debt This is the University s total investment in capital assets, net of accumulated depreciation and amortization and outstanding debt obligations related to those capital assets; Restricted Net Assets: Nonexpendable net assets, primarily endowments, consist of funds on which the donor or other external party has imposed the restriction that the corpus is not available for expenditures but rather for investment purposes only; Expendable net assets are resources which the University is legally or contractually obligated to spend in accordance with time or purpose restrictions placed by donors and/or other external parties; Unrestricted Net Assets are all other funds available to the institution for any purpose associated with its mission. Unrestricted assets are often internally designated for specific purposes. The University s net assets at June 30, 2010, 2009, and 2008 are summarized as follows: (in millions) 2010 2009 2008 Invested in capital assets, net of related debt $ 1,982 $ 1,944 $ 1,816 Restricted: Nonexpendable 959 884 902 Expendable 1,090 1,005 1,396 Unrestricted 1,163 930 1,023 Total net assets $ 5,194 $ 4,763 $ 5,137 Net investment in capital assets increased $38 million, or 2%, in 2010, and increased $128 million, or 7%, in 2009. This balance increases as debt is paid off or when the University funds fixed asset purchases without financing. This balance decreases as assets are depreciated. Restricted nonexpendable net assets increased $75 million, or 8%, in 2010, due to new endowment gifts and a significant increase in the value of investments in the Consolidated Endowment Fund (CEF). The 2009 decrease of $18 million, or 2%, was a result of declines in the value of investments, partially offset by donor support. ANNUAL REPORT 2010 > 11

Management s Discussion and Analysis (CONTINUED) Expendable Financial Resources to Operations 1 Restricted expendable net assets increased $85 million, or 8%, in 2010, and decreased $391 million, or 28%, in 2009. This category is primarily affected by new operating and capital gifts, and earnings or losses in restricted investments, including endowments. The sharp decline in the market value of investments, which began in fiscal year 2008, had a significant effect in 2009; the University partially recovered its investment losses in 2010. Operating Margin Percentage Unrestricted Net Assets increased in 2010 by $233 3 million, or 25%, primarily due to an increase in tuition and patient services revenue, 6 together with 5an increase in the market value of investments related 5.50% to unrestricted 4 funds. The Unrestricted Net Asset decrease in 2009 of $93 million, 3 or 9%, was driven by the decline in the market value 2 of investments related to unrestricted funds, offset by increases in 1 tuition revenue 1.12% 1.11% 0 and patient services margins. PERCENTAGE The ratio of expendable 2010 financial 2009 resources 2008to operations (as defined by Moody s) measures the strength of net assets. This ratio, illustrated in the chart below, shows that in 2010 the University had enough expendable resources from various sources to fund operations for a period of 7.9 months. Endowment and Other Investments MONTHS OF COVERAGE Expendable Financial Resources to Operations 1 10.0 8.0 6.0 4.0 2.0 0 7.9 6.8 8.9 2010 2009 2008 10.0 Capital Improvements and Related Debt 8.9 During 2010, 8.0 capital expenditures included $54 million on Phase 1 of PACCAR 7.9 Hall for the business school, $43 million for the expansion 6.0 6.8 of UWMC, $16 million for the new Molecular Engineering building and $13 million for Phase 3 of the UW 4.0 Tacoma campus. MONTHS OF COVERAGE In 2009, capital 2.0 expenditures included $47 million for renovation of Clark and Savery Halls, $22 million on Phase 1 of PACCAR Hall for the business school, $17 million for upgrading the 0 Communications 2010 Data Center, 2009 and $14 2008million for the expansion of UWMC. The 2010 ratio of expendable financial resources to debt (as defined by Moody s) shows that the University has sufficient expendable resources to pay its long-term debt obligations 2.1 times over. RATIO 3.0 2.0 1.0 0 Expendable Financial Resources to Direct Debt 2 2.1 1.9 2.5 2010 2009 2008 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS The Statements of Revenues, Expenses, and Changes in Net Assets present the University s results of operations and nonoperating items that result in the changes in net assets for the year. In accordance with GASB reporting principles, revenues and expenses are classified as either operating or nonoperating. A condensed comparison of the University s revenues, expenses and changes in net assets for the years ended June 30, 2010, 2009, and 2008 follows: The CEF returned 12.5% in fiscal year 2010, ending the year at $1.8 billion, compared to a negative return of 23.3% in the prior year. Over the past 10 years, the CEF has averaged a 4.5% annual return. The Invested Funds (IF), invested operating monies of the University, are held Expendable in three pools: Financial cash, liquidity, and the CEF. The IF (including Resources the portion to invested Direct Debt in the 2 CEF) returned a positive 6.3% in fiscal year 2010, and a negative 5.0% in fiscal 3.0 year 2009. The market value of the cash and liquidity pools was 2.0 2.5 Net assets, end of year $ 5,194 $ 4,763 $ 5,137 $1.1 billion at June 30, 2010. 2.1 1.9 1.0 1. The sum of Unrestricted Net Assets and Restricted Expendable Net Assets, divided by Total Operating Expenses (Operating Expenses plus interest expense). The result is multiplied by 12 to arrive at months of coverage. Does not include results for UW Medicine/Northwest. 0 2. The sum of Unrestricted Net 2010 Assets and Restricted 2009 Expendable 2008 Net Assets, divided by total capital lease obligations, bonds and notes payable outstanding. Does not include results for UW Medicine/Northwest. RATIO (in millions) 2010 2009 2008 Total operating revenues $ 3,124 $ 2,902 $ 2,730 Operating expenses 3,493 3,429 3,284 Operating loss (369) (527) (554) Nonoperating revenues, net of expenses 707 (62) 523 Other revenues 93 215 194 Increase (decrease) in net assets 431 (374) 163 Net assets, beginning of year 4,763 5,137 4,974 UNIVERSITY OF WASHINGTON > 12

The University has a diversified revenue base. The following table summarizes revenues from all sources for the years ended June 30, 2010, 2009, and 2008: (in millions) 2010 2009 2008 Tuition and fees $ 528 $ 458 $ 420 Patient services 1,029 988 924 Grants and contracts 1,256 1,120 1,063 Sales and services of educational departments 116 111 111 Auxiliary Enterprises 155 150 146 State funding for operations 303 385 388 Federal ARRA education funding 44 - - Gifts 119 143 177 Investment income (loss) 309 (469) 77 State funding for capital projects 33 101 71 Other 74 112 112 Total revenue all sources $ 3,966 $ 3,099 $ 3,489 Grant Revenue The largest source of revenues continues to be grants and contracts. This revenue increased $136 million, or 12%, in 2010, compared to an increase of $57 million, or 5%, in 2009 over 2008. The University received 15% more individual research awards in fiscal year 2010 than in 2009. The increase is primarily due to federal ARRA research funding, which generated revenues of $86 million in fiscal year 2010. Grant and contract revenue is earned when direct expenditures (such as researchers compensation or purchases of goods and services) are made; therefore, there is little effect on the University s operating margin as a result of this direct expense reimbursement process. Facility and administrative expenses necessary to support grants and contracts are reimbursed by an indirect cost recovery. The current indirect cost recovery for research grants is approximately 29 cents on every direct expenditure dollar. Primary Nongrant Funding Sources The University relies primarily on student tuition and fees and state appropriations as revenue sources to support its nongrant funded educational operating expenses. State support for education has declined since fiscal year 2008, with a sharp cut in fiscal year 2010, although part of the reduction in state support was offset by federal ARRA education funding in 2010, as reflected in the table, above right: Operating Support for Instruction (in millions) 2010 2009 2008 State operating appropriations $ 303 35% $ 385 46% $ 388 48% Federal ARRA education funding 44 5% - - - - Operating tuition and fees 351 40% 296 35% 271 34% Fees for self-sustaining education programs 177 20% 162 19% 149 18% Total educational support $ 875 100% $ 843 100% $ 808 100% Noncapital state appropriations are considered nonoperating revenue under GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities, and are reflected in the nonoperating section of the Statements of Revenues, Expenses and Changes in Net Assets; however, they are used solely for operating purposes. Tuition and fees, net of scholarship allowances, increased from $420 million in 2008 to $458 million in 2009, and to $528 million in 2010. The increases were primarily due to a 7% increase in average undergraduate resident tuition rates in 2008 and 2009, and a 14% increase in 2010, as permitted by the state legislature. The University also has flexibility in its ability to set non-undergraduate resident tuition rates, which helps to compensate for shortfalls in state funding. The impact of these tuition increases was partially offset by the increase in scholarships and scholarship allowances of $21 million in 2010, $15 million in 2009, and $16 million in 2008. Self-sustaining educational programs include $63 million for UW Educational Outreach (the continuing education branch of the University), $33 million for summer quarter, and $28 million for Business School and School of Medicine programs. Patient Services UW Medicine The financial statements of the University include the operations of the School of Medicine, two hospitals, associated physicians and clinics, and the University s share of two joint ventures. These entities, plus a third hospital, Harborview Medical Center (activities not included in the University s financial statements see Footnote 14) and Airlift Northwest (affiliated as of July 1, 2010), comprise UW Medicine, an umbrella organization serving to coordinate these activities and promote quality health care in the Pacific Northwest and beyond, and to conduct cutting edge medical research with worldwide benefit. Patient care activities included in the University s financial statements include: University of Washington Medical Center (UWMC) is a 450- bed hospital that provides comprehensive health care services to the Puget Sound community and patients from throughout the Pacific Northwest. UWMC also serves as the major clinical, teaching and research site for students and faculty in the Health Sciences at the ANNUAL REPORT 2010 > 13

Management s Discussion and Analysis (CONTINUED) University. Over 19,000 patients receive inpatient care at UWMC each year. Specialized inpatient care needs are met by the Cancer Center, the Regional Heart Center, Neonatal ICU and Organ Transplantation program. During fiscal year 2010, work was in progress on Phase 1 of a new five-story UWMC tower, which will create significant space for expansion of patient care activities with an emphasis on neonatal and oncology patients. UW Medicine/Northwest (Northwest) is a full-service medical facility with 281 beds, and treats approximately 11,000 inpatients per year. Northwest joined UW Medicine in January 2010. Northwest s Balance Sheet as of June 30, 2010 and Statement of Revenues, Expenses and Changes in Net Assets for the 18 months ended June 30, 2010 are presented in a discrete column on the financial statements of the University. UW Physicians Network (UWPN) operates seven neighborhood clinics throughout the greater Seattle area, providing primary and selected speciality care with a staff of nearly 70 health care providers. University of Washington Physicians (UWP) is the physician practice group for more than 1,500 faculty physicians and health care providers associated with UW Medicine. The revenues, expenses, assets and liabilities of UWP are included in the University s financial statements. The University is also a participant in two joint ventures: Seattle Cancer Care Alliance and Children s University Medical Group. The University s share in these activities is reflected in the University s financial statements. In combination, these organizations (not including Northwest) contributed $1,029 million in patient service revenues in fiscal year 2010, $988 million in fiscal year 2009, and $924 million in 2008. UWMC generated 74% of this revenue in 2010, 71% in 2009, and 70% in 2008. UWMC admissions remained stable in 2010 compared to 2009, and increased 2% in 2009 over 2008. Patient length of stay (shorter average length of stay, or higher turnover, is financially favorable) remained relatively constant at 5.9 days in 2010 and 2009, and decreased from 6.1 days in 2008. Other factors contributing to the increase in hospital revenue over the period have been the increased acuity of patients and improved documentation and coding. Gifts, Endowments and Investment Revenues Net investment returns for the years ended June 30, 2010, 2009, and 2008 consisted of the following: (in millions) 2010 2009 2008 Interest and dividends $ 78 $ 66 $ 70 Metropolitan Tract net income 8 6 7 Investment in Seattle Cancer Care Alliance 7 8 5 Net appreciation (depreciation) of fair value of investments 224 (544) 3 Investment expenses (8) (5) (8) Net investment income (loss) $ 309 $ (469) $ 77 Net appreciation includes both realized and unrealized gains and losses; however, the unrealized gains are not expendable until the underlying securities have been sold. Net investment income increased by $778 million in 2010 over 2009, and decreased by $546 million in 2009 from 2008. The change in unrealized gain or loss was the major factor in the variance each year. The sharp decline in the University s investment performance in 2009 and 2008 was related to market declines which began in the latter part of fiscal year 2008. Donor support declined in 2010 and 2009 after years of dramatic growth a direct result of the worsening economy during that period. Gifts are a key, necessary source of support for a variety of purposes including capital improvements, scholarships, research and endowments for various academic and research positions. Expenses A comparative summary of the University s expenses by functional classification (purpose for which the costs are incurred) for the years ended June 30, 2010, 2009, and 2008 follows: (in millions) 2010 2009 2008 Operating expenses: Educational and general instruction $ 905 $ 908 $ 824 Research 700 640 623 Public service 34 33 31 Academic support 259 265 265 Student services 34 34 34 Institutional support 141 143 156 Operation and maintenance of plant 155 178 169 Scholarships and fellowships 93 71 71 Auxiliary enterprises 166 171 162 Medical-related 777 779 749 Depreciation/amortization 229 207 200 Total operating expenses $ 3,493 $ 3,429 $ 3,284 Research expenditures, which represent sponsored research, increased $60 million, or 9%, from the prior year, reflective of the increase in grant and contract revenue. Operation and maintenance of plant decreased $23 million, or 13%, compared to 2009. The state of Washington appropriated $12 million for operations and maintenance and $4 million for the Guggenheim renovation in the prior fiscal year. These appropriations were not continued in fiscal year 2010. Scholarships and fellowships increased $22 million, or 31%, primarily due to an increase in federal funding for Pell Grants. UNIVERSITY OF WASHINGTON > 14

Depreciation/amortization increased $22 million, or 11%, during fiscal year 2010 compared to 2009. This increase was due to asset additions of $106 million for equipment and intangibles, and $149 million for buildings. Operating expenses increased $63.7 million, or 1.9%, in fiscal year 2010. Salaries decreased $20.7 million, or 1.2%, due to reductions in staffing and restrictions on rate increases; however, the decrease was moderated by increased activities on grants, due to ARRA, and by federal funding for education. Expenses associated with the rental of office space also decreased, due to increasing utilization of the University Tower for housing administrative offices. Supplies and purchased services expense increased $44.3 million, or 5.9%, due to ARRA research activities and benefits expense increased $12.8 million, or 2.5%, due to increases in health care and retirement costs. In 2009, the University s operating expenses increased $145 million, or 4%, over 2008, primarily driven by increased salaries and benefits expense. Salary rate increases ranging from 2% to 4% had an impact on salary costs, but were moderated by a one-time decrease in health care rates related to favorable claims experience. would be as follows for 2010, 2009, and 2008, respectively: $21 million, $142 million, and $166 million. The University continues to rely on nonoperating revenues, in addition to state appropriations, to fund its operations including operating gift revenues and investment income distributions. OPERATING MARGIN Moody s measures the net result of revenue and expense activity by including several nonoperating revenues in the margin. The 2010 operating margin increased to 5.50% from 1.12% in 2009; increases in tuition, patient services revenue and operating gifts, as well as conservative spending, accounted for much of the higher margin. The 2009 margin was a slight increase over 2008. Operating margin calculations include an estimated return on the University s investments rather than actual investment income. Therefore, variances in investment performance in a given year will not impact the operating margin. Operating Margin Percentage 3 OPERATING LOSS The University s operating loss decreased to $369 million in 2010 from $527 million in 2009. The 2009 operating loss was a decrease from $554 million in 2008. State appropriations have declined; however, they are shown as nonoperating, pursuant to GASB standards. If state appropriations were classified as operating, the operating loss PERCENTAGE 6 5 4 3 2 1 0 5.50% 1.12% 1.11% 2010 2009 2008 3. Operating loss, (including interest expense, operating appropriations, nonoperating federal grants, an assumed 5% spending rate on investments and nonpermanent endowment gifts), divided by operating revenues (less scholarship expenses, and including operating appropriations, nonoperating federal grants, an assumed 2.0 5% return on investments and nonpermanent endowment gifts). Does not include results for UW Medicine/Northwest. MONTHS OF COVERAGE Expendable Financial Resources to Operations 1 10.0 8.0 6.0 4.0 7.9 6.8 8.9 ANNUAL REPORT 2010 > 15 0 2010 2009 2008

UNIVERSITY OF WASHINGTON Balance Sheets UNIVERSITY OF WASHINGTON UW MEDICINE / NORTHWEST 1 June 30, June 30, ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS (NOTE 2) $ 2010 31,902 $ 2009 35,754 $ 2010 15,018 INVESTMENTS (NOTE 6) 314,721 376,787 2,159 ACCOUNTS RECEIVABLE (NET OF $92,341 AND $82,873 ALLOWANCE) (NOTE 5) 470,194 461,936 31,031 INVENTORIES 29,934 28,066 4,328 OTHER CURRENT ASSETS 4,536 4,185 5,579 TOTAL CURRENT ASSETS 851,287 906,728 58,115 NONCURRENT ASSETS: DEPOSIT WITH STATE OF WASHINGTON (NOTE 3) 72,170 72,002 - INVESTMENTS, NET OF CURRENT PORTION (NOTE 6) 2,847,279 2,456,877 51,427 METROPOLITAN TRACT (NOTE 7) 115,902 117,759 - STUDENT LOANS RECEIVABLE (NET OF $9,136 AND $9,499 ALLOWANCE) (NOTE 4) 70,507 68,467 - OTHER ASSETS 85,393 72,759 2,887 CAPITAL ASSETS (NET OF $2,530,064 AND $2,352,246 ACCUMULATED DEPRECIATION) (NOTE 8) 2,957,777 2,839,901 132,715 TOTAL NONCURRENT ASSETS 6,149,028 5,627,765 187,029 TOTAL ASSETS $ 7,000,315 $ 6,534,493 $ 245,144 LIABILITIES CURRENT LIABILITIES: ACCOUNTS PAYABLE $ 93,705 $ 109,938 $ 12,128 ACCRUED LIABILITIES 221,587 223,440 25,896 COMMERCIAL PAPER (NOTE 11) 30,000 30,000 - DEFERRED REVENUES 121,486 143,000 - FUNDS HELD FOR OTHERS 16,752 11,469 - LONG-TERM LIABILITIES, CURRENT PORTION (NOTES 9-12) 64,857 61,135 6,068 TOTAL CURRENT LIABILITIES 548,387 578,982 44,092 NONCURRENT LIABILITIES: DEFERRED REVENUES, NET OF CURRENT PORTION 18,055 21,799 - U.S. GOVERNMENT GRANTS REFUNDABLE 50,873 51,618 - LONG-TERM LIABILITIES, NET OF CURRENT PORTION (NOTES 9-12) 1,189,331 1,119,324 106,765 TOTAL NONCURRENT LIABILITIES 1,258,259 1,192,741 106,765 TOTAL LIABILITIES 1,806,646 1,771,723 150,857 NET ASSETS INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT 1,981,797 1,943,511 50,089 RESTRICTED: NONEXPENDABLE 959,442 883,942 1,715 EXPENDABLE 1,089,464 1,005,154 967 UNRESTRICTED 1,162,966 930,163 41,516 TOTAL NET ASSETS 5,193,669 4,762,770 94,287 TOTAL LIABILITIES AND NET ASSETS $ 7,000,315 $ 6,534,493 $ 245,144 1 A component unit of the University of Washington (NOTE 1) See accompanying notes to basic financial statements. Dollars in thousands UNIVERSITY OF WASHINGTON > 16

UNIVERSITY OF WASHINGTON Statements of Revenues, Expenses and Changes in Net Assets REVENUES UNIVERSITY OF WASHINGTON Year Ended June 30, UW MEDICINE / NORTHWEST 1 18-Month Period Ended June 30, 2010 2009 2010 OPERATING REVENUES: STUDENT TUITION AND FEES (NET OF SCHOLARSHIP ALLOWANCES OF $82,461 AND $82,813) $ 527,958 $ 458,061 $ - PATIENT SERVICES (NET OF CHARITY CARE OF $46,945 AND $33,058) 1,029,057 988,370 389,838 FEDERAL GRANTS AND CONTRACTS 982,413 865,053 - STATE AND LOCAL GRANTS AND CONTRACTS 73,540 69,002 - NONGOVERNMENTAL GRANTS AND CONTRACTS 155,876 150,943 - SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 115,999 111,405 - AUXILIARY ENTERPRISES: HOUSING AND FOOD SERVICES 58,508 54,486 - PARKING SERVICES 10,764 9,661 - SPORTS PROGRAMS (NET OF SCHOLARSHIP ALLOWANCES OF $3,858 AND $3,977) 39,445 37,041 - OTHER AUXILIARY ENTERPRISES 46,592 48,946 - OTHER MEDICAL-RELATED REVENUE 39,868 47,361 15,016 OTHER OPERATING REVENUE 44,055 62,093 - TOTAL OPERATING REVENUES 3,124,075 2,902,422 404,854 EXPENSES OPERATING EXPENSES (NOTE 13) SALARIES 1,710,227 1,730,957 175,816 BENEFITS 513,855 501,091 40,881 SCHOLARSHIPS AND FELLOWSHIPS 93,219 71,394 - UTILITIES 51,190 55,434 4,204 SUPPLIES AND MATERIALS 324,133 308,736 82,755 PURCHASED SERVICES 468,717 439,852 69,506 DEPRECIATION/AMORTIZATION 228,714 206,978 26,444 OTHER 102,600 114,518 - TOTAL OPERATING EXPENSES 3,492,655 3,428,960 399,606 OPERATING INCOME (LOSS) (368,580) (526,538) 5,248 NONOPERATING REVENUES (EXPENSES) STATE APPROPRIATIONS 303,454 384,810 - FEDERAL ARRA EDUCATION FUNDING (NOTE 1) 43,971 - - GIFTS 65,300 38,753 1,199 INVESTMENT INCOME (LOSS) (NET OF INVESTMENT EXPENSE OF $7,788 AND $5,759) 308,752 (469,492) 2,792 INTEREST ON CAPITAL ASSET-RELATED DEBT (42,980) (44,732) (5,263) PELL GRANT REVENUE 37,356 25,332 - OTHER NONOPERATING REVENUES (EXPENSES) (8,861) 2,486 499 NET NONOPERATING REVENUES (EXPENSES) 706,992 (62,843) (773) INCOME (LOSS) BEFORE OTHER REVENUES 338,412 (589,381) 4,475 CAPITAL APPROPRIATIONS 32,539 101,304 - CAPITAL GRANTS AND GIFTS 16,005 27,453 580 GIFTS TO PERMANENT ENDOWMENTS 43,943 86,084 - TOTAL OTHER REVENUES 92,487 214,841 580 INCREASE (DECREASE) IN NET ASSETS 430,899 (374,540) 5,055 NET ASSETS NET ASSETS BEGINNING OF YEAR 4,762,770 5,137,310 89,232 NET ASSETS END OF YEAR $ 5,193,669 $ 4,762,770 $ 94,287 1 A component unit of the University of Washington (NOTE 1) See accompanying notes to basic financial statements. Dollars in thousands ANNUAL REPORT 2010 > 17

UNIVERSITY OF WASHINGTON Statements of Cash Flows CASH FLOWS FROM OPERATING ACTIVITIES STUDENT TUITION AND FEES $ 531,730 $ 432,411 PATIENT SERVICES 963,710 978,666 GRANTS AND CONTRACTS 1,171,348 1,064,735 PAYMENTS TO SUPPLIERS (320,184) (310,333) PAYMENTS FOR UTILITIES (51,522) (55,373) PURCHASED SERVICES (464,839) (441,676) OTHER OPERATING DISBURSEMENTS (103,653) (125,057) PAYMENTS TO EMPLOYEES (1,707,863) (1,727,376) PAYMENTS FOR BENEFITS (467,299) (497,527) PAYMENTS FOR SCHOLARSHIPS AND FELLOWSHIPS (93,219) (71,394) LOANS ISSUED TO STUDENTS (29,102) (26,541) COLLECTION OF LOANS TO STUDENTS 26,317 24,966 OTHER MEDICAL-RELATED RECEIPTS 39,868 47,361 AUXILIARY ENTERPRISE RECEIPTS 167,322 133,013 SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 115,472 114,051 OTHER RECEIPTS 84,403 79,588 NET CASH USED BY OPERATING ACTIVITIES (137,511) (380,486) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES STATE APPROPRIATIONS 286,098 385,097 FEDERAL ARRA EDUCATION FUNDING 43,971 - GIFTS AND GRANTS FOR OTHER THAN CAPITAL PURPOSES 37,356 25,332 PRIVATE GIFTS 55,600 29,279 PERMANENT ENDOWMENT RECEIPTS 43,942 86,084 DIRECT LENDING RECEIPTS 227,033 189,153 DIRECT LENDING DISBURSEMENTS (217,575) (187,752) RECEIPTS FROM OUTSIDE AFFILIATED AGENCIES 600,562 562,573 DISBURSEMENTS TO OUTSIDE AFFILIATED AGENCIES (611,240) (568,805) OTHER (8,730) 1,791 NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES 457,017 522,752 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES PROCEEDS FROM CAPITAL DEBT 121,461 109,162 STATE CAPITAL APPROPRIATIONS 42,559 95,864 CAPITAL GRANTS AND GIFTS RECEIVED 15,302 27,453 ACQUISITION AND CONSTRUCTION OF CAPITAL ASSETS (353,206) (323,274) PRINCIPAL PAYMENTS ON CAPITAL-RELATED DEBT AND LEASES (77,098) (49,512) INTEREST PAYMENTS ON CAPITAL-RELATED DEBT AND LEASES (47,538) (47,237) OTHER 1,474 (5,277) NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES (297,046) (192,821) UNIVERSITY OF WASHINGTON > 18

UNIVERSITY OF WASHINGTON CASH FLOWS FROM INVESTING ACTIVITIES PROCEEDS FROM SALES OF INVESTMENTS 3,987,515 5,873,091 PURCHASES OF INVESTMENTS (4,091,814) (5,878,173) INVESTMENT INCOME 77,987 74,684 NET CASH PROVIDED BY INVESTING ACTIVITIES (26,312) 69,602 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,852) 19,047 CASH AND CASH EQUIVALENTS BEGINNING OF THE YEAR 35,754 16,707 CASH AND CASH EQUIVALENTS END OF THE YEAR $ 31,902 $ 35,754 RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES OPERATING LOSS $ (368,580) $ (526,538) ADJUSTMENTS TO RECONCILE OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES: DEPRECIATION/AMORTIZATION EXPENSE 228,714 206,978 CHANGES IN ASSETS AND LIABILITIES: RECEIVABLES 3,920 (35,532) INVENTORIES (1,868) 1,139 OTHER ASSETS (12,982) 806 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 12,364 (688) DEFERRED REVENUE (25,258) 277 OTHER LONG-TERM LIABILITIES 28,964 (25,353) U.S. GOVERNMENTAL GRANTS REFUNDABLE (745) 366 LOANS TO STUDENTS (2,040) (1,941) NET CASH USED BY OPERATING ACTIVITIES $ (137,511) $ (380,486) See accompanying notes to basic financial statements. Dollars in thousands ANNUAL REPORT 2010 > 19

Notes to Financial Statements (CONTINUED) NOTE 1: Summary of Significant Accounting Policies FINANCIAL REPORTING ENTITY The University of Washington (University), an agency of the state of Washington, is governed by a 10-member Board of Regents, appointed by the Governor and confirmed by the state Senate. The financial statements include the individual schools, colleges and departments of the University, the University of Washington Medical Center (UWMC), Portage Bay Insurance (a wholly-owned subsidiary of the University) and certain affiliated operations determined to be a part of the University s financial reporting entity. Affiliated organizations are evaluated for inclusion in the reporting entity as component units based on the significance of their relationship with the University. Component units are legally separate organizations for which the University is financially accountable. These entities may be reported in the financial statements of the primary government in one of two ways: the component units amounts may be blended with the amounts reported by the primary government, or they may be shown in a separate column, depending on the application of the criteria of Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity as amended by GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units, an amendment of GASB Statement No. 14. All component units of the University meet the criteria for blending except UW Medicine/ Northwest. It is reported discretely since it has a separate board of directors and it does not provide services exclusively to the University. BLENDED COMPONENT UNITS The following entities are presented as blended component units because they provide service exclusively or almost exclusively to the University. Financial information for these affiliated organizations is available from their respective administrative offices. The University of Washington Alumni Association was established as a tax-exempt entity to connect and celebrate alumni and to support the University s mission. The Alumni Association had operating revenues of $5,304,000 and $5,644,000 in 2010 and 2009, respectively. The Association of University Physicians dba UW Physicians (UWP) was established as a tax-exempt entity for the exclusive benefit of the University of Washington School of Medicine (UWSOM). UWP employs UWSOM faculty and bills and collects for their clinical services as an agent for UWSOM. UWP had operating revenues of $174,998,000 and $173,572,000 in 2010 and 2009, respectively. UW Physicians Network (UWPN) was established as a tax-exempt entity for the benefit of UWSOM, UWP and its affiliated medical centers, Harborview Medical Center (HMC) and UWMC, exclusively for charitable, scientific and educational purposes. UWPN was organized to coordinate and develop patient care in a community clinical setting. It enhances the academic environment of UWSOM by providing additional sites of primary care practice and training for faculty, residents and students. UWPN had operating revenues of $10,928,000 and $10,187,000 in 2010 and 2009, respectively. Real estate financing entities The entities listed below are nonprofit corporations that were formed to acquire, construct or renovate certain real properties for the benefit of the University in fulfilling its educational, medical or scientific research missions. These entities issue tax-exempt and taxable bonds to finance these activities. Community Development Properties C-D Educational Research Properties Radford Court Properties TSB Properties Twenty-Fifth Avenue Properties Washington Biomedical Research Properties I Washington Biomedical Research Properties II Washington Biomedical Research Facilities 3 These entities collectively have net capital assets of $262,577,000 and $273,836,000 in 2010 and 2009, respectively. They collectively have longterm debt of $300,325,000 and $307,358,000 in 2010 and 2009, respectively. These amounts are reflected in the University s financial statements. DISCRETELY PRESENTED COMPONENT UNIT UW Medicine and Northwest Hospital & Medical Center, a 281-bed full-service acute care hospital, entered into an affiliation agreement effective January 1, 2010. Northwest Hospital & Medical Center has been reorganized and renamed UW Medicine/Northwest (Northwest). The University is the sole corporate member of Northwest. The change in the reporting entity was retrospectively applied to the combined University and Northwest financial statements. The 2010 Northwest financial information is presented to show activity starting January 1, 2009, the beginning of its most recent fiscal year. In conjunction with this change in entity, Northwest changed its fiscal year-end from December 31 to June 30, in order to be consistent with the University. Accordingly, the discretely presented component unit reports activity for the 18 months ended June 30, 2010 in the Statements of Revenues, Expenses and Changes in Net Assets. The audited financial statements of Northwest are available by contacting UW Medicine/ Northwest at 1550 N. 115th Street, Seattle, WA 98133-9733, Mailstop X-112. JOINT VENTURES In 1998, the University entered into an agreement with Seattle Children s Hospital and Fred Hutchinson Cancer Research Center to establish the Seattle Cancer Care Alliance (SCCA). The SCCA integrates the cancer research, teaching and clinical cancer programs of all three institutions to provide state-of-the-art cancer care. Each member of the SCCA has a one-third interest. The University accounts for its interest in SCCA under the equity method and has recorded $63,390,000 and $55,998,000 in Other Assets, together with $7,392,000 and $7,755,000 in Investment Income, for its share of the joint venture in 2010 and 2009, respectively. In 1986, the University entered into an agreement with Seattle Children s Hospital to establish Children s University Medical Group (CUMG) to assist the organizations in carrying out their pediatric patient care, charitable, educational, and scientific missions. CUMG employs UWSOM faculty physicians, and bills and collects for their services as an agent for UWSOM. The University records revenue from CUMG based on the income distribution plan effective December 31, 2008. The University s patient services receivable (Note 5) includes amounts due from CUMG of $15,229,000 and $13,408,000 in 2010 and 2009, respectively. BASIS OF ACCOUNTING The financial statements of the University have been prepared in accordance with GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, as amended by GASB Statemnet No.35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. The University is reporting as a special-purpose government engaged in business-type activities (BTA). In accordance with BTA reporting, the University presents management s discussion and analysis, balance sheets, statements of revenues, expenses and changes in net assets, statements of cash flows and notes to the financial statements. The financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. UNIVERSITY OF WASHINGTON > 20

Under the accrual basis of accounting, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All intra-agency transactions have been eliminated. The University has elected not to apply any Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989. The University reports capital assets net of accumulated depreciation/amortization (as applicable), and reports depreciation/amortization expense in the Statements of Revenues, Expenses and Changes in Net Assets. On July 1, 2008, the University adopted GASB Statement No. 52, Land and Other Real Estate Held as Investments by Endowments. This Statement requires endowments to report their land and other real estate held for investment at fair value. The University increased the carrying value of real estate held for investment in its endowment by $1,040,000 during 2009. On July 1, 2009, the University adopted GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets. This Statement requires that all intangible assets not specifically excluded by its scope be classified as capital assets. The University recognized $2,707,000 in new intangible assets and $2,540,000 in intangible projects in process in the fiscal year ended June 30, 2010. On July 1, 2009, the University adopted GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. This Statement prescribes rules for the recognition, measurement, and disclosure of information regarding derivative instruments entered into by state and local governments. A key provision is that derivative instruments are to be reported at fair value. Changes in the fair value of derivative instruments that are used for investment purposes, or that are reported as investment derivative instruments because of ineffectiveness, are reported as investment income. Changes in the fair value of derivative instruments that are classified as hedging derivative instruments are reported in the Balance Sheets as deferrals. There was no financial statement impact to the University as a result of the implementation. Additional disclosure is included in Note 6. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. GAAP involves management estimates that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates; however, in each case, the University believes that allowances, reserves and estimates of expected liabilities are adequate. The University estimates the pollution remediation liability by reviewing the current status of known polluted sites and developing estimates of cleanup costs. These estimates are subject to change due to improvements in technology, inflation, changes in the scope of work and the pursuit of reimbursement from other responsible parties. Allowances for doubtful accounts (Notes 4 and 5) are estimates based on the historical experience of the University and current economic circumstances with respect to the collectability of accounts and loans receivable. The liability and expense related to the supplemental component of the University of Washington Retirement Plan (UWRP) (Note 16) is based on an actuarial valuation. The results of an actuarial valuation are estimates based on historical data and the demographics of the employee population. The self-insurance reserve (Note 17) is estimated through an actuarial calculation using individual case-basis valuations and statistical analyses. Considerable variability is inherent in such estimates. OTHER ACCOUNTING POLICIES Investments. Investments, other than miscellaneous investments, are stated at fair value. Miscellaneous investments are stated at cost or, in the case of gifts, at fair values at the date of donation. The fair value of all debt and equity securities with a readily determinable fair value is based on quotations from national securities exchanges. The alternative investments, which are not readily marketable, are carried at the estimated fair values provided by the investment managers. The University reviews and evaluates the values provided by the investment managers and agrees with the valuation methods and assumptions used in determining the fair value of the alternative investments. Those estimated fair values may differ significantly from the values that would have been used had a ready market for these securities existed. Investments under long-term strategies are considered noncurrent. Short-term investments consist primarily of cash equivalents and fixed income vehicles with maturities of less than one year. Inventories. Inventories are carried at the lower of cost or market value. Consumable inventories, consisting of expendable materials and supplies held for consumption, are generally valued using the weighted-average method. Merchandise inventories are generally valued using the first-in, firstout method. Capital Assets. Land, buildings, equipment, library books and intangibles are stated at cost or, if acquired by gift, at fair market value at the date of the gift. Additions, replacements, major repairs and renovations are capitalized. Depreciation and amortization are computed using the straightline method over the estimated useful lives of the assets, generally 15 to 50 years for building components, 20 to 50 years for infrastructure and land improvements, 5 to 7 years for equipment, 15 years for library books, and 3 to 15 years for intangibles. Capitalized construction-related interest was $5,848,000 and $1,960,000 during 2010 and 2009, respectively. Deferred Revenues. Deferred revenues occur when funds have been collected in advance of an event, such as advance ticket sales, summer quarter tuition and unspent cash advances on certain grants. Deferred Giving Split-Interest Agreements. Under these agreements, donors make initial gifts to trusts or directly to the University. The University has beneficial interest, but is not necessarily the sole beneficiary. The University records an asset related to these agreements at fair market value at year-end. The University also records a liability related to the split-interest agreements equal to the present value of expected future distributions; the discount rates applied range from 5.1% to 8.0%. Compensated Absences. University employees accrue annual leave at rates based on length of service and for sick leave at the rate of one day per month. Annual leave accrued at June 30, 2010 and 2009 was $72,797,000 and $73,163,000, respectively, and is included in Accrued Liabilities. Sick leave accrued as of June 30, 2010 and 2009 was $29,014,000 and $29,991,000, respectively, and is included in Long-Term Liabilities. Scholarship Allowances. Tuition and Fees are reported net of scholarship allowances that are applied to students accounts from external funds that have already been recognized as revenue by the University. Student aid paid directly to students is reported as scholarships and fellowships expense. State Appropriations. The state of Washington appropriates funds to the University on both annual and biennial bases. These revenues are reported as nonoperating revenues in the Statements of Revenues, Expenses, and Changes in Net Assets. Federal ARRA Education Funding. As a result of the American Recovery and Reinvestment Act of 2009 (ARRA), the federal government granted funds to the state of Washington to support K-12 and higher education. Accordingly, the state of Washington passed through $43,971,000 to the University in fiscal year 2010. These revenues are reported ANNUAL REPORT 2010 > 21

Notes to Financial Statements (CONTINUED) as nonoperating revenues in the Statements of Revenues, Expenses and Changes in Net Assets. Operating Activities. The University s policy for reporting operating activities in the Statements of Revenues, Expenses, and Changes in Net Assets is to include activities that generally result from exchange transactions. Examples of exchange transactions are payments received for tuition, patient services or grants under which services are performed, as well as payments made for the delivery of goods or services. Certain other significant revenue streams used for operations, such as state appropriations, Pell grants, gifts and investment income are recorded as nonoperating revenues, as prescribed by GASB Statement No. 35. Net Assets. The University s net assets are classified as follows: Invested in capital assets, net of related debt: The University s investments in capital assets, less accumulated depreciation/amortization, net of outstanding debt obligations related to capital assets; Restricted net assets nonexpendable: Net assets subject to externally-imposed requirements that they be maintained permanently by the University, including permanent endowment funds and annuity and life income funds; Restricted net assets expendable: Net assets which the University is obligated to spend in accordance with restrictions imposed by external parties, generally scholarships, research and department uses; Unrestricted net assets: Net assets not subject to externally imposed restrictions and which may be designated for specific purposes by management, or the Board of Regents. Tax Exemption. The University, as an agency of the state of Washington, is not subject to federal income tax pursuant to Section 115 of the Internal Revenue Code, except for tax on unrelated business income. NOTE 2: Cash and Cash Equivalents Cash includes cash on hand, petty cash and bank deposits. Most cash, except for cash held at the University, is covered by federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (PDPC). At June 30, 2010 and 2009, bank balances of $4,770,000 and $2,917,000, respectively, were insured by the FDIC and balances of $30,020,000 and $33,395,000, respectively, were collateralized under the PDPC. NOTE 3: Deposit with State of Washington State law requires the University to deposit certain funds with the State Treasurer, who holds and invests the funds. The deposits include amounts held for the University s permanent land grant funds, the University of Washington building fee collected from students and certain general obligation bond reserve funds. The fair value of these funds approximates the carrying value. NOTE 4: Student Loans Receivable Net student loans of $70,507,000 and $68,467,000 at June 30, 2010 and 2009, respectively, consist of $50,873,000 and $51,618,000 from federal programs and $19,634,000 and $16,849,000 from University programs. Interest income from student loans for the years ended June 30, 2010 and 2009 was $1,306,000 and $1,225,000, respectively. These unsecured loans are made primarily to students who reside in the state of Washington. NOTE 6: Investments NOTE 5: Accounts Receivable The major components of accounts receivable as of June 30, 2010 and 2009 were: INVESTMENTS GENERAL The Board of Regents of the University of Washington is responsible for the management of the University s investments. The Board establishes investment policy, which is carried out by the Chief Investment Officer. The University of Washington Investment Committee, comprising Board members and investment professionals, advises on matters relating to the management of the University s investment portfolios. The composition of the carrying amounts of investments by type at June 30, 2010 and 2009 is listed in Table 1. TABLE 1 UNIVERSITY INVESTMENTS (Dollars in thousands) (Dollars in thousands) 2010 2009 PATIENT SERVICES $ 267,083 $ 241,342 GRANTS AND CONTRACTS 151,380 152,528 SALES AND SERVICES 10,406 9,880 TUITION 12,094 32,957 DUE FROM OTHER AGENCIES 35,135 28,361 ROYALTIES 14,839 20,863 STATE APPROPRIATIONS 19,852 12,516 OTHER 51,746 46,362 562,535 544,809 LESS: ALLOWANCE FOR DOUBTFUL ACCOUNTS (92,341) (82,873) TOTAL $ 470,194 $ 461,936 Carrying Value Investment Type 2010 2009 CASH EQUIVALENTS $ 337,842 $ 440,742 DOMESTIC FIXED INCOME 1,105,961 968,847 FOREIGN FIXED INCOME 18,909 12,272 DOMESTIC EQUITY 421,489 279,589 FOREIGN EQUITY 479,014 399,056 NONMARKETABLE ALTERNATIVES 407,847 377,946 ABSOLUTE RETURN 376,730 341,032 REAL ASSETS 9,737 8,463 MISCELLANEOUS 4,471 5,717 TOTAL INVESTMENTS $ 3,162,000 $ 2,833,664 INVESTMENT POOLS The University combines most short-term cash balances into the Invested Funds Pool. At June 30, 2010, the Invested Funds Pool totaled $1,068,762,000 compared to $884,680,000 at June 30, 2009. The fund also owns units in the Consolidated Endowment Fund valued at $354,942,000 on June 30, 2010 and $322,324,000 on June 30, 2009. By University policy, departments with qualifying funds in the Invested Funds Pool receive distributions based on their average balances and on the type of balance. Campus depositors received 2.0% in fiscal years 2010 and 2009. Endowment operating and gift accounts received 3% in both fiscal years 2010 and 2009. The difference between the actual earnings of the Invested Funds Pool and the calculated distributions is used to support activities benefiting all University departments. UNIVERSITY OF WASHINGTON > 22

The majority of the endowed funds are invested in a pooled fund called the Consolidated Endowment Fund (CEF). Individual endowments purchase units in the pool on the basis of a per unit valuation of the CEF at fair value on the last business day of the calendar quarter. Income is distributed based on the number of units held. RCW 24.55 of the Washington State Code allows for the spending of appreciation in the CEF. During fiscal year 2009, in light of the 2008-2009 financial crises and the decline in the CEF market value, the Board of Regents implemented an interim spending policy. Under the interim policy, year-over-year CEF distributions decreased from the fiscal year 2008 level by 25% in fiscal year 2009 and again in fiscal year 2010. At their October 21, 2010 meeting, the Board of Regents adopted a new spending policy for the CEF replacing the interim spending policy. Under the new policy, quarterly distributions to programs will be made based on an annual percentage rate of 4%, applied to the five-year rolling average of the CEF s market valuation. The new policy is effective with the December 2010 quarterly distributions with the five-year averaging period implemented incrementally. The administrative fee of 1% supporting campus-wide fundraising and stewardship activities (0.80%) and offsetting the internal cost of managing endowment assets (0.20%) continues but will now be based on a five-year average value similar to program distributions. The University records its permanent endowments at the lower of original gift value or current market value in the Restricted Nonexpendable Net Assets category. Of the total $1,122,974,000 and $1,003,451,000 permanent endowment funds (at fair value) as of June 30, 2010 and 2009, the aggregate amount of the deficiencies where the fair value of the assets is less than the original gifts is $53,318,000 and $80,694,000 at June 30, 2010 and 2009, respectively. Funds in irrevocable trusts managed by trustees other than the University are not reported in the financial statements. The fair value of these funds was $45,580,000 at June 30, 2010 compared to $43,365,000 at June 30, 2009. Income received from these trusts, which is included in Investment Income, was $2,215,000 for the year ended June 30, 2010 and $2,329,000 for the year ended June 30, 2009. Net appreciation (depreciation) in the fair value of investments includes both realized and unrealized gains and losses on investments. The University realized net gains of $138,053,000 in 2010 and losses of $67,054,000 in 2009 from the sale of investments. The calculation of realized gains and losses is independent of the net appreciation of the fair value of investments. Realized gains and losses on investments that have been held in more than one fiscal year and are sold in the current year include the net appreciation of these investments reported in the prior year(s). The net appreciation (depreciation) in the fair value of investments during the years ended June 30, 2010 and 2009 was $223,803,000 and $(544,175,000), respectively. FUNDING COMMITMENTS The University enters into contracts with investment managers to fund alternative investments. As of June 30, 2010 and 2009, the University had outstanding commitments to fund alternative investments of $215,300,000 and $254,228,000, respectively. SECURITIES LENDING The University s investment policies permit it to lend its securities to broker dealers and other entities. Due to market conditions, the University terminated this program in September 2008. As of June 30, 2010 and 2009 the University had no securities on loan. DERIVATIVES Table 2 outlines the University s participation in investment derivative activity in total return swaps during the year ended June 30, 2010: TABLE 2 INVESTMENT DERIVATIVES (Dollars in thousands) Changes in Fair Value Fair Value Classification Amount Classification Amount Notional Amount Counterparty Credit Rating EQUITY SWAP Investment Revenue $ (5,110) Investments $ (5,110) $ 92,940 A-1 Values are based on quoted market prices. Credit exposure represents exposure to counterparties relating to financial instruments where gains exceed collateral held by the University or losses are less than the collateral posted by the University. There was no credit exposure as of June 30, 2010. An increase in the London Interbank Offered Rate (LIBOR) could affect the University s net payment on the swap. No derivative instruments have been reclassified from a hedging instrument to an investment instrument. Details on foreign currency derivatives are disclosed under Foreign Currency Risk. INTEREST RATE RISK The University manages interest rate risk through its investment policies and the investment guidelines established with each manager. Each fixed-income manager is assigned a maximum boundary for duration as compared to the manager's relevant benchmark index. The goal is to allow ample freedom for the manager to perform, while controlling the interest rate risk in the portfolio. Modified duration, which estimates the sensitivity of a bond's price to interest rate changes, is based on a calculation entitled Macaulay duration. Macaulay is an accepted calculation developed for a portfolio of bonds assembled to fund a fixed liability. Macaulay duration is calculated as follows: sum of discounted time-weighted cash flows divided by the bond price. Modified duration is calculated using the following formula: Macaulay duration divided by (one plus yield-to-maturity divided by the number of coupon payments per year). As of June 30, 2010 and 2009, modified duration of the University's investments for which duration is measured is as follows: ANNUAL REPORT 2010 > 23

Notes to Financial Statements (CONTINUED) TABLE 3 INVESTMENTS MANAGED BY THE UNIVERSITY (Dollars in thousands; duration in years) Consolidated Endowment Fund Duration as of June 30, 2010 Duration as of June 30, 2009 Invested Funds Consolidated Endowment Fund Invested Funds Asset Category Asset Value Duration Asset Value Duration Asset Value Duration Asset Value Duration DOMESTIC FIXED INCOME ASSET-BACKED SECURITIES $ 28,716 2.11 $ 33,336 1.87 $ 9,442 2.96 $ 29,263 2.96 CASH EQUIVALENTS 54,932 0.17 252,486 0.02 128,033 0.36 106,190 0.36 CORPORATE BONDS 84,748 2.84 37,797 1.55 31,789 3.95 47,116 3.95 GOVERNMENT & AGENCIES 143,467 1.99 692,698 3.26 117,966 2.43 660,920 2.43 MORTGAGE-RELATED 16,052 2.53 45,230 2.91 22,441 3.44 33,976 3.44 SUBTOTAL 327,915 1.94 1,061,547 2.37 309,671 1.82 877,465 1.82 FOREIGN FIXED INCOME CASH EQUIVALENTS 3 - - - 300 - - - INTERNATIONAL FIXED 5,620 3.89 7,215 2.21 1,365 6.15 7,215 3.00 SUBTOTAL 5,623 3.89 7,215 2.21 1,665 5.04 7,215 3.00 TOTAL $ 333,538 2.14 $ 1,068,762 2.36 $ 311,336 1.84 $ 884,680 2.61 CREDIT RISK Fixed income securities are subject to credit risk, which is the risk that the issuer or other counterparty to a financial instrument will not fulfill its obligations, or that negative perceptions of the issuer s ability to make these payments will cause prices to decline. Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The University Investment Policies limit fixed income exposure to investment grade assets. The Investment Policy for the Invested Funds cash pool requires each manager to maintain an average quality rating of AA as issued by a nationally recognized rating organization. The Invested Funds liquidity pool requires each manager to maintain an average quality rating of A and to hold 50% of their portfolios in government and government agency issues. The Investment Policy for the CEF reflects its long-term nature by specifying average quality rating levels by individual manager, but still restricting investment to investmentgrade credits. Investments subject to credit risk are presented in the table below: TABLE 4 INVESTMENTS CREDIT RATING (Dollars in thousands) Consolidated Endowment Fund Credit rating as of June 30, 2010 Credit rating as of June 30, 2009 Invested Funds Consolidated Endowment Fund Invested Funds Asset Value % Asset Value % Asset Value % Asset Value % TRSY $ 19,346 5.8% $ 414,678 38.8% $ 17,777 5.7% $ 333,049 37.6% AGY 140,414 42.1% 424,331 39.7% 218,583 70.2% 382,531 43.2% AAA 81,363 24.4% 179,212 16.8% 39,984 12.8% 36,456 4.1% AA 38,473 11.5% 20,504 1.9% 6,935 2.2% 4,868 0.6% A 30,979 9.3% 5,062 0.5% 9,568 3.1% 4,419 0.5% BBB 8,384 2.5% 2,930 0.3% - - 2,897 0.3% BB 188 0.1% 1,514 0.1% 11,070 3.6% - - B 449 0.1% 1,564 0.1% 1,488 0.5% - - CCC 485 0.1% 7,936 0.7% 2,295 0.7% - - CC 203 0.1% 1,612 0.2% 590 0.2% 2,493 0.3% NONE 13,254 4.0% 9,419 0.9% 3,046 1.0% 117,967 13.4% TOTAL $ 333,538 100.0% $ 1,068,762 100.0% $ 311,336 100.0% $ 884,680 100.0% Duration and credit risk figures at June 30, 2010 and 2009 exclude $60,412 and $225,845, respectively, of fixed-income securities held outside the CEF and the Invested Funds Pool. These amounts make up 1.91% and 7.97%, respectively, of the University s investments, and are not included in the duration figures detailed in Tables 3 and 4. FOREIGN CURRENCY RISK The University s Investment Policies permit investments in international equity and other asset classes which can include foreign currency exposure. The University also enters into foreign currency forward contracts, futures contracts, and options to manage the foreign currency exposure. At June 30, 2010 and 2009, the University had net outstanding forward commitments to sell foreign currency with a total fair value of $4,701,000 and $40,164,000, respectively, which equals 0.15% and 1.42% of the total portfolio. Table 5 details the market value of foreign denominated securities by currency type in the CEF at June 30, 2010 and 2009. UNIVERSITY OF WASHINGTON > 24

TABLE 5 INVESTMENTS DENOMINATED IN FOREIGN CURRENCY (Dollars in thousands) June 30, 2010 Foreign Currency Foreign Fixed Income Foreign Equity Alternatives and Other Investments EURO (EUR) $ 1,681 $ 52,258 $ 59,432 JAPANESE YEN (JPY) - 40,845 13,273 INDIAN RUPEE (INR) - 30,865 22,170 BRITISH POUND (GBP) 4,134 34,199 16,970 CHINESE RENMINBI (CNY) - 43,613 7,511 BRAZILIAN REAL (BRL) - 43,553 306 HONG KONG DOLLAR (HKD) - 31,300 4,804 RUSSIAN RUBLE (RUB) - 27,717 2,070 CANADIAN DOLLAR (CAD) 1,224 9,023 15,353 SWISS FRANC (CHF) 1,600 18,971 3,431 TAIWANESE DOLLAR (TWD) 3 19,845 2,648 SOUTH KOREAN WON (KRW) - 18,897 867 SINGAPORE DOLLAR (SGD) - 10,641 1,946 AUSTRALIAN DOLLAR (AUD) - 7,159 4,436 25 OTHERS (<1.8% EXPOSURE) - 77,545 20,999 TOTAL $ 8,642 $ 466,431 $ 176,216 The above schedule does not include $6,252 thousand of foreign investments held in the Invested Funds Pool or $16,598 thousand of U.S. Dollar denominated foreign mutual funds. Foreign Currency Foreign Fixed Income June 30, 2009 Foreign Equity Alternatives and Other Investments EURO (EUR) $ 397 $ 40,985 $ 42,239 JAPANESE YEN (JPY) - 48,803 14,984 CHINESE RENMINBI (CNY) - 37,546 3,851 BRITISH POUND (GBP) 113 29,405 8,726 BRAZILIAN REAL (BRL) - 25,017 9,100 INDIAN RUPEE (INR) - 18,215 13,160 HONG KONG DOLLAR (HKD) - 25,110 2,079 CANADIAN DOLLAR (CAD) 780 7,263 12,868 RUSSIAN RUBLE (RUB) - 16,925 126 SINGAPORE DOLLAR (SGD) - 14,551 1,133 SOUTH KOREAN WON (KRW) - 15,164 (391) TAIWANESE DOLLAR (TWD) - 12,985 573 SWISS FRANC (CHF) 201 12,070 479 30 OTHERS (<2.0% EXPOSURE) 175 81,279 7,296 TOTAL $ 1,666 $ 385,318 $ 116,223 The above schedule does not include $7,117 thousand of foreign investments held in the Invested Funds Pool or $17,227 thousand of U.S. Dollar denominated foreign mutual funds. NOTE 7: Metropolitan Tract The Metropolitan Tract, located in downtown Seattle, comprises approximately 11 acres of developed property, including office space, retail space, parking and a luxury hotel. This land was the original site of the University from 1861 until 1895 when the University moved to its present location. Since the early 1900 s, the Metropolitan Tract has been leased by the University to entities responsible for developing and operating the property. On July 18, 1953, the Board of Regents of the University and the entity now known as Unico Properties, Inc. entered into a lease agreement for office, retail and parking facilities which will expire in 2014. On January 19, 1980, the Board of Regents of the University entered into a lease with the Urban/ Four Seasons Hotel Venture for the Olympic Hotel property, which will expire in 2040. The hotel was operated as the Four Seasons Olympic Hotel until July 31, 2003. On August 1, 2003, the remaining lease term was assigned to LHCS Hotel Holding (2002) LLC. The hotel was renamed the Fairmont Olympic Hotel and is now managed by Fairmont Hotels & Resorts. The balances as of June 30, 2010 and 2009 represent operating assets, net of liabilities, and land, buildings and improvements stated at appraised value as of November 1, 1954. The balances also include subsequent capital additions and improvements at cost, less retirements and accumulated depreciation of $125,861,000 and $117,606,000, respectively, and are net of the outstanding balance of the line of credit described below. In July 2004, the University obtained a 10-year term, variable rate revolving credit line for the Metropolitan Tract of up to $25,000,000 for capital repairs and improvements. The credit line is secured by future revenues of the Metropolitan Tract. As of June 30, 2010 and 2009, $8,500,000 was outstanding on the credit line. NOTE 8: Capital Assets Capital asset activity for the two-year period ended June 30, 2010 is summarized as follows: (Dollars in thousands) Balance at June 30, 2008 Additions/ Transfers Retirements Balance at June 30, 2009 Additions/ Transfers Retirements Balance at June 30, 2010 LAND $ 106,280 $ 6,405 $ - $ 112,685 $ 1,959 $ - $ 114,644 INFRASTRUCTURE 173,487 2,650-176,137 1,722-177,859 BUILDINGS 3,248,164 157,686-3,405,850 149,333-3,555,183 FURNITURE, FIXTURES AND EQUIPMENT 982,365 93,712 66,329 1,009,748 86,196 50,483 1,045,461 LIBRARY MATERIALS 260,827 16,685 1,401 276,111 13,808 1,479 288,440 CAPITALIZED COLLECTIONS 5,517 - - 5,517 182-5,699 INTANGIBLE ASSETS - - - - 20,035-20,035 INTANGIBLES IN PROCESS - - - - 2,540-2,540 CONSTRUCTION IN PROGRESS 145,448 60,651-206,099 71,881-277,980 TOTAL 4,922,088 337,789 67,730 5,192,147 347,656 51,962 5,487,841 LESS ACCUMULATED DEPRECIATION/ AMORTIZATION INFRASTRUCTURE 69,794 3,980-73,774 4,054-77,828 BUILDINGS 1,194,050 106,914-1,300,964 115,128-1,416,092 FURNITURE, FIXTURES AND EQUIPMENT 773,962 83,840 61,439 796,363 80,813 49,901 827,275 LIBRARY MATERIALS 169,853 12,244 952 181,145 12,465 995 192,615 INTANGIBLE ASSETS - - - - 16,254-16,254 TOTAL ACCUMULATED 2,207,659 206,978 62,391 2,352,246 228,714 50,896 2,530,064 DEPRECIATION/AMORTIZATION CAPITAL ASSETS, NET $ 2,714,429 $ 130,811 $ 5,339 $ 2,839,901 $ 118,942 $ 1,066 $ 2,957,777 ANNUAL REPORT 2010 > 25

Notes to Financial Statements (CONTINUED) NOTE 9: Long-Term Liabilities Long-term liability activity for the two-year period ended June 30, 2010 is summarized as follows: (Dollars in thousands) BONDS PAYABLE: Balance at June 30, 2008 Additions Reductions Balance at June 30, 2009 Additions Reductions Balance at June 30, 2010 Current Portion 2009 Current Portion 2010 GENERAL OBLIGATION BONDS PAYABLE (NOTE 11) $ 254,404 $ - $ 14,418 $ 239,986 $ 31,040 $ 45,124 $ 225,902 $ 11,719 $ 12,433 REVENUE BONDS PAYABLE (NOTE 11) 652,800 75,835 16,195 712,440 77,710 16,835 773,315 17,335 19,000 UNAMORTIZED PREMIUM ON BONDS 15,433-1,647 13,786 2,271 1,799 14,258 1,608 1,808 TOTAL BONDS PAYABLE 922,637 75,835 32,260 966,212 111,021 63,758 1,013,475 30,662 33,241 NOTES PAYABLE AND CAPITAL LEASES: NOTES PAYABLE & OTHER CAPITAL ASSET RELATED (NOTE 11) 34,861 2,625 3,090 34,396 3,049 3,185 34,260 3,229 4,499 NOTES PAYABLE & OTHER NONCAPITAL ASSET RELATED (NOTE 11) 2,173 420 1,117 1,476 213 83 1,606 742 1,353 CAPITAL LEASE OBLIGATIONS (NOTE 10) 24,482 702 11,162 14,022 5,391 8,155 11,258 6,952 6,019 TOTAL NOTES PAYABLE AND CAPITAL LEASES 61,516 3,747 15,369 49,894 8,653 11,423 47,124 10,923 11,871 OTHER LONG-TERM LIABILITIES: CHARITABLE AND DEFERRED GIFT ANNUITY LIABILITY 38,080 1,023 9,783 29,320 956-30,276 8,965 4,891 POLLUTION REMEDIATION LIABILITY (NOTE 1) 6,000 580-6,580-580 6,000 580 - SICK LEAVE (NOTE 1) 25,965 4,026-29,991-977 29,014 1,054 488 SELF-INSURANCE (NOTE 17) 47,515 14,606 10,471 51,650 21,272 15,298 57,624 8,188 12,885 NET PENSION OBLIGATION (NOTE 16) 21,477 26,080 745 46,812 26,080 2,217 70,675 763 1,481 TOTAL OTHER LIABILITIES 139,037 46,315 20,999 164,353 48,308 19,072 193,589 19,550 19,745 TOTAL LONG-TERM LIABILITIES $ 1,123,190 $ 125,897 $ 68,628 $ 1,180,459 $ 167,982 $ 94,253 $ 1,254,188 $ 61,135 $ 64,857 NOTE 10: Leases Future minimum lease payments under capital leases, and the present value of the net minimum lease payments, as of June 30, 2010, are as follows: CAPITAL LEASES Year (Dollars in thousands) Future Payments 2011 $ 6,372 2012 3,273 2013 1,781 2014 400 TOTAL MINIMUM LEASE PAYMENTS 11,826 LESS: AMOUNT REPRESENTING INTEREST COSTS 568 PRESENT VALUE OF MINIMUM PAYMENTS $ 11,258 Buildings and equipment under capital lease were as follows: (Dollars in thousands) Balance at June 30, 2008 Additions Retirements Balance at June 30, 2009 Additions Retirements Balance at June 30, 2010 EQUIPMENT $ 63,467 $ 702 $ 12,177 $ 51,992 $ 5,391 $ 23,197 $ 34,186 REAL ESTATE 9,987 - - 9,987 - - 9,987 TOTAL 73,454 702 12,177 61,979 5,391 23,197 44,173 LESS ACCUMULATED DEPRECIATION EQUIPMENT 57,171 6,128 12,177 51,122 1,552 23,197 29,477 REAL ESTATE 7,990 999-8,989 998-9,987 TOTAL ACCUMULATED DEPRECIATION 65,161 7,127 12,177 60,111 2,550 23,197 39,464 LEASED CAPITAL ASSETS, NET $ 8,293 $ (6,425) $ - $ 1,868 $ 2,841 $ - $ 4,709 UNIVERSITY OF WASHINGTON > 26

OPERATING LEASES The University has certain lease agreements in effect that are considered operating leases, primarily for leased building space. During the years ended June 30, 2010 and 2009, the University recorded rent expenses of $27,169,000 and $29,024,000, respectively, for these leases. Future lease payments under these leases as of June 30, 2010 are as follows: Year (Dollars in Thousands) 2011 $ 22,629 2012 20,287 2013 18,466 2014 16,761 2015 14,124 2016 2020 44,801 2021 2025 26,672 2026 2030 27,547 2031 2052 42,924 TOTAL MINIMUM LEASE PAYMENTS $ 234,211 NOTE 11: Bonds and Notes Payable The bonds and notes payable at June 30, 2010 consist of state of Washington General Obligation and Refunding Bonds, University Revenue Bonds, and Notes Payable. These obligations have fixed interest rates ranging from 3.00% to 7.38%. Debt service requirements at June 30, 2010 were as follows: BONDS AND NOTES PAYABLE (Dollars in thousands) STATE OF WASHINGTON GENERAL OBLIGATION BONDS UNIVERSITY OF WASHINGTON REVENUE BONDS NOTES PAYABLE AND OTHER Year Principal Interest Principal Interest Principal Interest 2011 $ 12,433 $ 11,346 $ 19,000 $ 36,443 $ 5,852 $ 1,395 2012 13,435 10,670 19,440 35,555 5,084 1,227 2013 14,415 9,928 20,720 34,667 3,420 1,060 2014 15,105 9,223 21,880 33,641 2,031 931 2015 15,725 8,455 23,340 32,561 2,057 851 2016 2020 77,370 28,993 117,335 147,499 11,393 2,865 2021 2025 60,610 12,111 103,050 122,220 5,660 582 2026 2030 16,809 1,344 85,225 97,830 369 14 2031 2035 - - 51,350 75,804 - - 2036 2040 - - 311,975 31,922 - - TOTAL PAYMENTS $ 225,902 $ 92,070 $ 773,315 $ 648,142 $ 35,866 $ 8,925 State law requires that the University reimburse the state for debt service payments relating to its portion of the state of Washington General Obligation and Refunding Bonds from Medical Center patient revenues, tuition, timber sales and other revenues. The University has pledged the net revenues from the Housing and Dining System, the Parking System and a special student fee to retire the related revenue bonds. REFUNDING ACTIVITY On July 8, 2009, the state of Washington refunded General Obligation Bonds totaling $29,780,000 (UW portion) with new bond issuances with a par value of $27,430,000 and premium of $2,637,000. The refunded bonds had coupon rates ranging from 3.50% to 5.00%; the new bonds have an average interest rate of 4.871%. The refunding decreased the total debt service payments to be made over the next 14.5 years by $3,318,000 and resulted in a total economic gain of $2,582,000. On October 28, 2009, the state of Washington refunded General Obligation Bonds totaling $3,715,000 (UW portion) with new bond issuances with a par value of $3,610,000 and premium of $394,000. The refunded bonds had a coupon rate of 5.25%; the new bonds have an average interest rate of 5.00%. The refunding decreased the total debt service payments to be made over the next 16 years by $319,000 and resulted in a total economic gain of $252,000. On June 15, 2010, the state of Washington refunded Certificates of Participation (COP) totaling $4,455,000 with new COP issuances with a par value of $4,485,000 and premium of $39,000. The refunding decreased the total debt service payments to be made over the next 11 years by $671,000 and resulted in a total economic gain of $609,000. SUBSEQUENT DEBT OFFERING On August 10, 2010, the state of Washington partially refunded series 2002A & Series 2002B General Obligation Bonds totaling $32,975,000 (UW portion) with new bond issuances with a par value of $29,840,000 and premium of $4,894,000. The refunded bonds had a coupon rate of 5.00%; the new bonds have an average interest rate of 5.00%. The refunding decreased the total debt service payments to be made over the next 14.5 years by $4,008,000 and resulted in a total economic gain of $3,621,000. On September 28, 2010, the state of Washington refunded General Obligation Bonds totaling $19,795,000 (UW portion) with new bond issuances with a par value of $18,865,000 and premium of $2,869,000. The refunded bonds had coupon rates ranging from 4.00% to 5.00%; the new bonds have an average interest rate of 4.802%. The refunding decreased the total debt service payments to be made over the next 16.3 years by $2,539,000 and resulted in a total economic gain of $1,891,000. ANNUAL REPORT 2010 > 27

Notes to Financial Statements (CONTINUED) On October 5, 2010, the University issued $165,005,000 in General Revenue & Refunding Bonds, 2010 A&B. Part of the proceeds were used to partially refund the 2002 Housing and Dining Revenue & Refunding bonds. The amount refunded was $10,890,000; the new par value was $10,400,000 with a premium of $605,000. The refunded bonds had coupon rates ranging from 4.75% to 5.375%; the new bonds have an average interest rate of 3.943%. The refunding decreased the total debt service payments to be made over the next 21 years by $991,000 and resulted in a total economic gain of 640,000. In addition, proceeds were used to pay off $35,000,000 in commercial paper. The remainder of the proceeds will be used to fund a variety of projects including Tacoma Phase 3, Balmer Hall Renovation, UWMC Expansion, and Housing & Dining Phase 1 Master Plan. The average life of the 2010 A&B bonds (new money only) is 23.8 years with final maturity on October 1, 2040. The average coupon of these bonds is 4.91%. In December, 2010, Washington Biomedical Research Facilities 3 has committed to issue approximately $165 million in lease revenue bonds. The bond proceeds will fund construction of a research facility that the University will occupy through a long-term lease arrangement. COMMERCIAL PAPER PROGRAM In July 2006, the Board of Regents authorized a commercial paper program with a maximum borrowing limit of $250,000,000, payable from University General Revenues. This short-term borrowing program is primarily used to fund capital expenditures. As of June 30, 2010 and 2009, there was $30,000,000 and $30,000,000, respectively, in outstanding commercial paper. On September 3, 2009, the University issued $2,000,000 in short-term commercial paper. The commercial paper was paid off with proceeds from the General Revenue Bond, 2009B, issued on December 22, 2009. Between July 1, 2010 and September 30, 2010, the University issued $35,000,000 in shortterm commercial paper. The commercial paper was paid off with proceeds from the issuance of General Revenue & Refunding Bonds, 2010 A&B. NOTE 12: Pledged Revenues The University has pledged specific revenues, net of specified operating expenses, to repay the principal and interest of revenue bonds. The following is a schedule of the pledged revenues and related debt: (Dollars in thousands) Source of Revenue Pledged Total Future Revenues Pledged* Description of Debt Purpose of Debt Term of Commitment Proportion of Debt Service to Pledged Revenues (current year) Housing and Dining Revenues, net of operating expenses $43,680 Housing and Dining Bonds, issued in 2002 and 2004 Construction and renovation of student housing 2032 15.8% Student Housing gross rent from Component Unit Entities, net of permitted operating expenses $149,653 Student Housing Revenue Bonds (Component Unit Entities), issued in 1996, 2000, and 2002 Construction and renovation of student housing 2033 78.4% Student Facilities Fees and earnings on invested fees $68,419 Student Facilities Refunding Revenue Bonds, issued in 2005 Construction of student facilities 2030 20.0% Parking Revenues from the University Parking System, net of operating expenses reported as Auxiliary Revenues $26,770 University of Washington Parking System and Refunding Bonds, issued in 2004 Construction of improvements and additions to the University's parking system 2030 14.0% * Total future principal and interest payments on the debt NOTE 13: Operating Expenses by Function Operating expenses by functional classification for the years ended June 30, 2010 and 2009 are summarized as follows: (Dollars in thousands) Operating Expenses 2010 2009 EDUCATIONAL AND GENERAL INSTRUCTION $ 904,812 $ 908,394 RESEARCH 699,955 640,261 PUBLIC SERVICE 33,814 33,061 ACADEMIC SUPPORT 259,388 264,507 STUDENT SERVICES 33,815 34,160 INSTITUTIONAL SUPPORT 141,371 142,889 OPERATION & MAINTENANCE OF PLANT 155,188 178,131 SCHOLARSHIPS & FELLOWSHIPS 93,219 71,394 AUXILIARY ENTERPRISES 165,612 170,602 MEDICAL-RELATED 776,767 778,583 DEPRECIATION/AMORTIZATION 228,714 206,978 TOTAL OPERATING EXPENSES $ 3,492,655 $ 3,428,960 NOTE 14: Related Parties Harborview Medical Center (HMC), a hospital and Level I adult and pediatric trauma center in Seattle, is a component unit of King County, Washington. It has been managed by the University under a management contract between King County and the University since 1967. The current management contract will be in force through June 30, 2015. Under the contract, the HMC Board of Trustees determines major institutional policies and retains control of programs and fiscal matters, while King County retains ultimate control over capital programs and capital budgets. The University is responsible for the operations of HMC, including the provision of medical, dental and management services. All of the individuals employed at HMC, including physicians, are employees of the University of UNIVERSITY OF WASHINGTON > 28

Washington. HMC expenses, including payroll, are reimbursed to the University from HMC fund sources. HMC revenues and expenses are not recognized in the University's financial statements. The University's financial statements do, however, include accounts receivable from HMC of $24,501,000 in 2010 and $21,715,000 in 2009, as well as HMC investments of $2,411,000 and $2,125,000, respectively, and accrued liabilities of $17,288,000 and $16,012,000, respectively. The University of Washington Foundation (UWF) is a nonprofit organization that performs fundraising activities on behalf of the University of Washington. The UWF is not included in the University's financial statements as a component unit because gifts and grants that are made to the UWF are immediately transferred to the University. In 2010 and 2009, the UWF transferred $43,831,000 and $46,393,000, respectively, to the University in gifts and grants received on its behalf; these are included in the financial statements of the University. The remaining amounts retained by the UWF are not significant to the University's financial statements. AIRLIFT NORTHWEST SUBSEQUENT EVENT On July 1, 2010, Airlift Northwest, a preeminent provider of air medical services in the Pacific Northwest, dissolved its separate 501(c)(3) status and became a self-sustaining unit of the University of Washington. NOTE 15: Other Post Employment Benefits (OPEB) Health care and life insurance programs for employees of the state of Washington are administered by the Washington State Health Care Authority (HCA). The HCA calculates the premium amounts each year that are sufficient to fund the statewide health and life insurance programs on a pay-as-you-go basis. These costs are passed through to individual state agencies based upon active employee headcount; the agencies pay the premiums for active employees to the HCA. The agencies may also charge employees for certain higher cost options elected by the employee. State of Washington retirees may elect coverage through state health and life insurance plans, for which they pay less than the full cost of the benefits, based on their age and other demographic factors. The health care premiums for active employees, which are paid by the agency during employees working careers, subsidize the underpayments of retirees. An additional factor in the OPEB obligation is a payment that is required by the State Legislature to reduce the premiums for retirees covered by Medicare (an explicit subsidy). For calendar year 2009, this amount was $183 per retiree eligible for parts A and B of Medicare. This is also passed through to state agencies via active employee rates charged to the agency. There is no formal state or University plan that underlies the subsidy of retiree health and life insurance. Actuarial Study Actuarial studies performed by the Washington Office of the State Actuary calculated that the total OPEB obligation of the state of Washington at January 1, 2009 and 2008 was $3.8 billion and $4.0 billion, respectively. The annual cost was $349 million and $332 million for 2010 and 2009, respectively. The actuary calculated the OPEB obligation based on individual state employee data, including age, retirement eligibility and length of service. The probability of an employee of a given age and length of service retiring and receiving OPEB benefits is based on statewide historical data. The actuary s allocation of the cumulative statewide liability related to the University, including its unconsolidated affiliates, was estimated at approximately $636 million and $590 million for 2010 and 2009, respectively. These amounts are not included in the University s financial statements. The University paid $250 million and $186 million for healthcare expenses in 2010 and 2009, respectively, which included its pay-asyou-go portion of the OPEB liability, calculated by the actuary at $6.5 million and $6.9 million in 2010 and 2009, respectively. The State Actuary's report is available at: http://osa.leg.wa.gov/actuarial_services/opeb/ OPEB.htm NOTE 16: Pension Plans The University offers two contributory plans: the Washington State Public Employees Retirement System (PERS) plan, a definedbenefit retirement plan; and the University of Washington Retirement Plan (UWRP), a defined-contribution plan with supplemental payments to beneficiaries, when required. PUBLIC EMPLOYEES RETIREMENT SYSTEM Plan Description: The University of Washington contributes to PERS, a cost sharing, multiple-employer, defined-benefit pension plan administered by the state of Washington Department of Retirement Systems. PERS Plan 1 provides retirement and disability benefits and minimum benefit increases beginning at age 66 to eligible nonacademic plan members hired prior to October 1, 1977. PERS Plans 2 and 3 provide retirement and disability benefits and a cost-of-living allowance to eligible nonacademic plan members hired on or after October 1, 1977. In addition, PERS Plan 3 has a defined-contribution component, which is fully funded by employee contributions. The authority to establish and amend benefit provisions resides with the legislature. The Washington State Public Employees Retirement System issues a publicly available financial report that includes financial statements and required supplementary information for PERS. The report may be obtained by writing to the Department of Retirement Systems, P.O. Box 48380, Olympia, WA 98504-8380, or visiting http://www.drs.wa.gov/administration/ Funding Policy: The Office of the State Actuary, using funding methods prescribed by statute, determines actuarially required contribution rates for PERS. Plan 1 members were required to contribute 6% of their annual covered salary in both fiscal years 2010 and 2009. Contributions for Plan 2 members are determined by the aggregate method, and may vary over time. The contribution rate for Plan 2 employees at June 30, 2010 and 2009 was 3.9% and 5.45% respectively. Plan 3 members can choose contributions ranging from 5% to 15% of salary, based on the age of the member. The defined-contribution benefit for PERS 3 will depend on the member's contributions, the investment earnings on those contributions, and if an annuity is taken, the age at which the member receives payment. The contribution rate for the University at June 30, 2010 and 2009, for each of PERS Plans 1, 2, and 3 was 5.31% and 8.31%, for the respective years. The University's contributions to PERS for the years ended June 30, 2010, 2009, and 2008 were $41,680,000, $64,169,000, and $45,351,000, respectively, which were equal to the annual required contributions for each year. ANNUAL REPORT 2010 > 29

Notes to Financial Statements (CONTINUED) UNIVERSITY OF WASHINGTON RETIREMENT PLAN (403(B)) & UNIVERSITY OF WASHINGTON SUPPLEMENTAL RETIREMENT PLAN (401(A)) Faculty, librarians and professional staff are eligible to participate in the University of Washington Retirement Plan, a 403(b) definedcontribution plan and the UW Supplemental Retirement Plan, a 401(a) defined-benefit retirement plan which operates in tandem with the 403(b) plan. Both plans are administered by the University. 403(b) Plan Description: Contributions to the plan are invested by participants in annuity contracts or mutual fund accounts offered by one or more fund sponsors. Employees have at all times a 100% vested interest in their accumulations. Benefits from fund sponsors are available upon separation or retirement at the member's option. RCW 28B.10.400 et. seq. assigns the authority to the University of Washington Board of Regents to establish and amend benefit provisions. 403(b) Funding Policy: Employee contribution rates, based on age, are 5%, 7.5% or 10% of salary. The University matches the contributions of employees. Within parameters established by the legislature, contribution requirements may be established or amended by the University of Washington Board of Regents. Employee and employer contributions for the years ended June 30, 2010 and 2009 were $80,018,000 and $76,878,000, respectively. 401(a) Plan Description: This plan provides for a supplemental payment component, which guarantees a minimum retirement benefit based upon a one-time calculation at each eligible participant's retirement date. The University makes direct payments to qualifying retirees when the retirement benefits provided by the 403(b) plan do not meet the benefit goals. 401(a) Plan Funding: The supplemental component of the UWRP is financed on a pay-as-you-go basis. The University received an actuarial valuation of the supplemental payment component of the UWRP with a valuation date of July 1, 2009. The previous evaluations were performed in 2007 and 2004. The Unfunded Actuarial Accrued Liability (UAL) and Annual Required Contribution (ARC) as of July 1 of the respective year were: (Dollars in thousands) 2009 2007 2004 UAL $ 218,036 $ 64,215 $ 32,454 NORMAL COST 8,860 3,369 1,370 AMORTIZATION OF UAL, INCLUDING INTEREST 17,220 4,374 1,993 ARC $ 26,080 $ 7,743 $ 3,363 (Dollars in thousands) Actuarial assumptions 2009 2007 2004 PAYROLL COVERED BY PLAN $ 976,000 $ 771,000 $ 640,000 RATE OF RETURN ASSUMPTION 5% 5% 4% SALARY INCREASES FOR YEARS 1 AND 2 2% 4% 2% SALARY INCREASE FOR THIRD YEAR 4% 4% 2% SALARY INCREASES THEREAFTER 4% 4% 4% The UAL and ARC were established using the entry age normal cost method. The following table reflects the activity in the Net Pension Obligation for the years ended June 30, 2010, 2009, and 2008: (Dollars in thousands) 2010 2009 2008 BALANCE AT BEGINNING OF FISCAL YEAR $ 46,812 $ 21,477 $ 14,515 ANNUAL REQUIRED CONTRIBUTION 26,080 26,080 7,743 PAYMENTS TO BENEFICIARIES (2,217) (745) (781) BALANCE AT END OF FISCAL YEAR $ 70,675 $ 46,812 $ 21,477 NOTE 17: Commitments and Contingencies Authorized expenditures for construction projects unexpended as of June 30, 2010 and 2009, were $263,779,000 and $158,014,000, respectively. These expenditures will be funded from local funds and state appropriations. The University receives and expends substantial amounts under federal and state grants, contracts and programs such as Medicare. This funding is used for research, student aid, Medical Center operations and other programs, and is subject to audit by governmental granting agencies. Certain grant and contract costs billed to the federal government are subject to audit under OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. The University is also involved in various other claims and legal actions arising in the ordinary course of business. University management believes that any liabilities arising from these matters will not have a material effect on the University's financial statements. The University is exposed to risk of loss related to tort liability, injuries to employees and loss of property. The University purchases insurance protection for workers' compensation as well as marine, aviation and certain other risks. The University also purchases insurance protection for loss of property at self-sustaining units, bond-financed buildings and where otherwise required by contract; otherwise, the risk of property loss is retained, unfunded. For professional, general, employment and automobile liability, the University maintains a program of self-insurance reserves and excess insurance coverage. The self-insurance reserve represents the estimated ultimate cost of settling claims resulting from events that have occurred on or before the balance sheet date. The reserve includes the amount that will be required for future payments of claims that have been reported and claims related to events that have occurred but have not been reported. The reserve is discounted at 4% and 4.25% in the years ended June 30, 2010 and 2009, respectively. The self-insurance reserve is estimated through an actuarial calculation. Changes in the selfinsurance reserve for the years ended June 30, 2010, 2009 and 2008 are noted below: (Dollars in thousands) 2010 2009 2008 RESERVE AT BEGINNING OF FISCAL YEAR $ 51,650 $ 47,515 $ 40,133 INCURRED CLAIMS AND CHANGES IN ESTIMATES 21,272 14,606 13,286 CLAIM PAYMENTS (15,298) (10,471) (5,904) RESERVE AT END OF FISCAL YEAR $ 57,624 $ 51,650 $ 47,515 UNIVERSITY OF WASHINGTON > 30

ANNUAL REPORT 2010 > 31

BOARD OF REGENTS* Herb Simon, Chair Kristianne Blake, Vice Chair Stanley H. Barer Jeffrey H. Brotman Craig W. Cole William H. Gates Ben Golden Joanne R. Harrell Sally Jewell Orin Smith ADMINISTRATIVE OFFICERS* Mark A. Emmert President Phyllis M. Wise Provost and Executive Vice President Eric Godfrey Vice President and Vice Provost for Student Life Randy Hodgins Vice President for External Affairs Mindy Kornberg Vice President for Human Resources Connie Kravas Vice President for University Advancement Sheila Edwards Lange Vice President for Minority Affairs and Vice Provost for Diversity Paul G. Ramsey CEO, UW Medicine, Executive Vice President for Medical Affairs and Dean of the School of Medicine Doug Wadden Executive Vice Provost V Ella Warren Senior Vice President * As of June 30, 2010 This publication was prepared jointly by Financial Management and UW Office of External Affairs. Published December 2010. The 2010 UW Annual Report and reports from previous years are available at annualreport.uw.edu. For more information, contact Financial Accounting at 206.221.7845 or accountg@uw.edu PHOTOGRAPHY: Mary Levin, Doug Plummer, Dennis Wise DESIGN, PRODUCTION, AND PRINT COORDINATION: UW Creative Communications, UW Marketing VISIT OUR WEBSITE: www.uw.edu 2010 University of Washington Printed on recycled paper containing 30% post-consumer fiber

2011 FINANCIAL REPORT

Table of Contents INSIDE BACK COVER 1 INDEPENDENT AUDITORS REPORT 2 MANAGEMENT S DISCUSSION AND ANALYSIS 10 FINANCIAL STATEMENTS 14 NOTES TO FINANCIAL STATEMENTS BOARD OF REGENTS AND ADMINISTRATIVE OFFICERS University Facts 2010-2011 2005-2006 2000-2001 STUDENTS Autumn Enrollment Undergraduate 35,201 31,086 28,691 Graduate 11,911 10,540 8,835 Professional 1,934 1,802 1,724 TOTAL 49,046 43,428 39,250 Extension course registrations 64,961 44,823 26,444 Number of Degrees Awarded Bachelor s 9,325 8,296 7,505 Master s 3,524 2,866 2,489 Doctoral 723 631 456 Professional 528 496 476 TOTAL 14,100 12,289 10,926 INSTRUCTIONAL FACULTY 4,141 3,650 3,360 FACULTY AND STAFF 1 30,616 27,897 23,462 RESEARCH FUNDING ALL SOURCES (in thousands of dollars) $ 1,513,000 $ 990,000 $ 708,000 SELECTED REVENUES (in thousands of dollars) Gifts, Grants and Contracts $ 1,401,584 $ 1,094,023 $ 695,320 Auxiliary Enterprises 2 and Other Revenues 1,875,275 1,366,751 848,767 State Appropriations (Operating) 296,769 339,117 341,451 Tuition and Fees 3 594,915 358,130 266,223 SELECTED EXPENSES (in thousands of dollars) Instruction, Academic Support and Student Services $ 1,233,770 $ 956,517 $ 676,852 Research and Public Service 821,081 632,007 483,720 Auxiliary Enterprises 2 1,043,661 780,359 687,003 Institutional Support and Physical Plant 325,980 260,926 201,124 CONSOLIDATED ENDOWMENT FUNDS 4 (in thousands of dollars) $ 2,168,000 $ 1,700,000 $ 839,000 SQUARE FOOTAGE 5 (in thousands of square feet) 22,099 17,239 15,900 1 Full-time equivalents 2 Includes UW Medical Center 3 Net of scholarship allowances of $91,403,000 in 2010-2011 and $53,780,000 in 2005-2006 4 Stated at fair value 5 Gross square footage, all campuses

KPMG LLP Suite 900 801 Second Avenue Seattle, WA 98104 Independent Auditors Report The Board of Regents University of Washington: We have audited the accompanying financial statements of the business-type activities of the University of Washington (the University), an agency of the state of Washington, as of and for the years ended June 30, 2011 and 2010, and its discretely presented component unit as of and for the year ended June 30, 2011. These financial statements are the responsibility of the University s management. Our responsibility is to express opinions on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions. As discussed in note 1, the financial statements of the University of Washington, an agency of the state of Washington, are intended to present the financial position, and the changes in financial position and, where applicable, cash flows of only that portion of the activities of the state of Washington that is attributable to the transactions of the University of Washington and its discretely presented component unit. They do not purport to, and do not, present fairly the financial position of the state of Washington as of June 30, 2011 and 2010, the changes in its financial position or, where applicable, its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Washington as of June 30, 2011 and 2010, and the changes in its financial position and its cash flows for the years then ended, and the financial position of its discretely presented component unit as of June 30, 2011, and the changes in its financial position for the year then ended in conformity with U.S. generally accepted accounting principles. The management s discussion and analysis on pages 2 through 8 is not a required part of the basic financial statements but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplemental information. However, we did not audit the information and express no opinion on it. December 9, 2011 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity. FINANCIAL REPORT 2011 > 1

Management s Discussion and Analysis The discussion and analysis below provides an overview of the financial position and activities of the University of Washington ( University ) for the years ended June 30, 2011 and 2010. This discussion has been prepared by management and should be read in conjunction with the financial statements and accompanying notes which follow this section. Financial Highlights for Fiscal Year 2011 The University recorded an increase in net assets of $534 million in fiscal year 2011, compared to an increase in net assets of $431 million in fiscal year 2010: a bottom line improvement of $103 million. This is primarily related to an increase in investment income of $86 million, a result of increased market values during fiscal year 2011. The University adjusts the carrying value of investments to market value each year, with the change recorded as investment income or loss. Gift revenue was also strong during 2011, increasing over the prior year by $58 million. However, federal education funding of $44 million received in 2010 under the American Recovery and Reinvestment Act of 2009 (ARRA) was a one-time event, and partially offsets these increases in revenue. Key Financial Results for Fiscal Years 2011, 2010 and 2009: (in millions) 2011 2010 2009 Total operating revenues $ 3,390 $ 3,124 $ 2,902 Operating expenses 3,769 3,493 3,429 Operating loss (379) (369) (527) State appropriations 297 303 385 Federal ARRA Education Funding 44 Investment income (loss) 395 309 (469) Gifts 177 119 143 Other nonoperating revenue, net 44 25 94 Increase (decrease) in net assets 534 431 (374) Net assets, beginning of year 5,194 4,763 5,137 Net assets, end of year $ 5,728 $ 5,194 $ 4,763 Operating revenues minus operating expenses typically result in an operating loss in the University s financial statements. Nonoperating items, including state support, investment income, and gifts have brought each year s results to a modest increase in the net assets, or equity of the University, with the exception of 2009. This surplus has been reinvested within the University to add a margin of educational excellence, upgrade the University s facilities, and provide a prudent reserve for contingencies such as the current period of economic instability. Economic factors affecting the future A number of contingencies face the University over the next few years. The continuing economic downturn is a primary source of uncertainty. The state of Washington, which provided 7% of the University s total revenues in fiscal year 2011, continues to face declining tax revenues. The University s 2012 operating appropriation from the state is roughly $200 million, a 33% decline from 2011. A projected deficit in state revenue in 2012 will likely result in additional funding pressure in the upcoming years, in both operating and capital appropriations. To help alleviate the effects of this educational funding shortfall, the Legislature extended the University s Board of Regent s tuition setting authority to include undergraduate in-state tuition. Funding for research activities was temporarily boosted in 2011 and 2010 by $163 million and $86 million, respectively, of Federal ARRA funding for basic research and activities in the health sciences. The University has $73 million of unspent ARRA awards that will be exhausted in fiscal year 2012 or later. As the federal budget remains under pressure, federal funding for research could also be impacted. Rising benefit costs, particularly for health care and pensions, continue to impact the University. Pension funding rates for the state pension plans are likely to increase over the next few years. State support for benefit expenses continues to shrink along with the University s state funding subsidy. In March 2010, health care reform was passed by the U.S. Congress and signed into law by President Obama. While the major changes in coverage will take effect beginning in 2014, there may be significant changes by the state and federal government to implementation plans for health care reform between now and 2014. Thus, the environment in which health care organizations currently operate is dynamic and uncertain. While the economic downturn continues to put pressure on operating results, 2011 remained relatively stable for the University of Washington Medical Center compared with 2010 due to the complex level of care provided. Operating results of Northwest Hospital & Medical Center (Northwest Hospital) reflect a volume reduction in outpatient and inpatient activities; however, many initiatives are underway that should improve Northwest Hospital s performance in the future. Using the Financial Statements The University s financial statements include the Balance Sheets, the Statements of Revenues, Expenses, and Changes in Net Assets, the Statements of Cash Flows and the Notes to the Financial Statements. These financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) principles, which establish standards for external financial reporting for public colleges and universities. GASB standards require that financial statements be presented on a consolidated basis in order to focus on the University as a whole. UNIVERSITY OF WASHINGTON > 2

On January 1, 2010, the University affiliated with Northwest Hospital & Medical Center (Northwest Hospital). GASB standards require that this affiliation be presented discretely; therefore, a separate column displays its financial position at June 30, 2011 and the results of its operations for the year ended June 30, 2011. (See Note 1 to the Financial Statements.) On July 1, 2010, Airlift Northwest, a preeminent provider of air medical services in the Pacific Northwest, dissolved its separate 501(c)(3) status and became a self-sustaining unit of the University of Washington. Effective July 1, 2011, the University affiliated with Valley Medical Center, a Washington public hospital district which owns and operates a 303-bed full-service acute care hospital and 22 clinics located throughout southeast King County. The strategic alliance provides opportunities to combine efforts on important initiatives that will benefit patients and the community. For the fiscal year ending June 30, 2012, Valley Medical Center will be a discretely presented component unit of the University, similar to Northwest Hospital. The analysis presented below includes the consolidated balances of the University of Washington and its blended component units, but excludes the financial position and results of operations of Northwest Hospital, unless otherwise noted. Financial Health BALANCE SHEETS The Balance Sheets present the financial condition of the University at the end of the last two fiscal years and report all assets and liabilities of the University. A summarized comparison of the University s assets, liabilities and net assets as of June 30, 2011, 2010, and 2009, follows: (in millions) 2011 2010 2009 Current assets $ 924 $ 851 $ 907 Noncurrent assets: Capital assets, net 3,246 2,958 2,840 Other 3,843 3,191 2,788 Total assets 8,013 7,000 6,535 Current liabilities 651 548 579 Noncurrent liabilities 1,634 1,258 1,193 Total liabilities 2,285 1,806 1,772 Net assets $ 5,728 $ 5,194 $ 4,763 investment portfolio can fluctuate based upon changes in investment mix and the expected short-term needs for University funds. Long-term investments as of June 30, 2011 increased by $658 million from 2010, as a result of market gains during the year in the value of the University s investments. Realized and unrealized gains in fiscal year 2011 totaled $324 million, versus $224 million in 2010. The difference between total assets and total liabilities, referred to as net assets or equity, is one indicator of the current financial condition of the University. The change in net assets measures whether the overall financial condition has improved or deteriorated during the year. The University reports its equity in four categories: Invested in Capital Assets, net of related debt This is the University s total investment in capital assets, net of accumulated depreciation and amortization and outstanding debt obligations related to those capital assets; Restricted Net Assets: Nonexpendable net assets, primarily endowments, consist of funds on which the donor or other external party has imposed the restriction that the corpus is not available for expenditures but rather for investment purposes only; Expendable net assets are resources which the University is legally or contractually obligated to spend in accordance with time or purpose restrictions placed by donors and/or other external parties; Unrestricted Net Assets are all other funds available to the institution for any purpose associated with its mission. Unrestricted assets are often internally designated for specific purposes. The University s net assets at June 30, 2011, 2010, and 2009 are summarized as follows: (in millions) 2011 2010 2009 Invested in capital assets, net of related debt $ 2,060 $ 1,982 $ 1,944 Restricted: Nonexpendable 1,075 959 884 Expendable 1,227 1,090 1,005 Unrestricted 1,366 1,163 930 Total net assets $ 5,728 $ 5,194 $ 4,763 The excess of current assets over current liabilities of $273 million in 2011 reflects the continuing ability of the University to meet its short-term obligations. Current assets consist primarily of cash, short-term investments and accounts receivable. The June 30, 2011 current asset balance of $924 million was an increase of $73 million from 2010, due to increases in the value of cash and short-term investments. The short-term portion of the University s Net investment in capital assets increased $78 million, or 4%, in 2011, and increased $38 million, or 2%, in 2010. This balance increases as debt is paid off or when the University funds fixed asset purchases without financing. This balance decreases as assets are depreciated. FINANCIAL REPORT 2011 > 3

Management s Discussion and Analysis (CONTINUED) Restricted nonexpendable net assets increased $116 million, or 12%, in 2011, and $75 million, or 8% in 2010. For both years the increase was the result of new endowment gifts, and recovery of the value of underwater investments in the Consolidated Endowment Fund. Restricted expendable net assets increased $137 million, or 13%, in 2011, and increased $85 million, or 8%, in 2010. This 9.5 category is primarily affected by new operating and capital gifts, and earnings Operating Margin or losses in restricted investments, 3 including endowments. The sharp decline in the market value of investments, which had a significant 6 effect on 5 the University s investments in 2009, was partially 5.50% 5.40% recovered 4 during 2010 and 2011. 3 3.63% Unrestricted 2 net assets increased by $203 million, or 17%, in 2011, and by $233 1 million, or 25%, in 1.12% 2010. For both years the increase 0 was driven by an increase in tuition and patient services revenue, 2011 2010 2009 Moody s Public conservative spending, and an increase in Universities the market value of (Aaa median 2010) investments related to unrestricted funds. PERCENTAGE The ratio of expendable financial resources to operations (as defined by Moody s) measures the strength of net assets. This ratio, illustrated in the chart below, shows that in 2011 the University had enough expendable resources from various sources to fund operations for a period of 7.9 months. MONTHS OF COVERAGE 10.0 8.0 6.0 4.0 2.0 Expendable Financial Resources to Operations 1 7.9 7.9 6.8 9.5 The impact to program support has been substantial with $687 million distributed over the past 10 years. Programs supported by the endowment include academic support, scholarships, fellowships, professorships, chairs and research activities. For the 10 years ended June 30, 2011, investment returns remain solid, with the CEF returning an average of +6.7%, while a comparable blended benchmark (70% MSCI ACWI and 30% BC Government Bond) returned 5.7%. In fiscal year 2011, the CEF earned an investment return of +16%, the highest return since fiscal year 2007. While this is strong absolute performance, the CEF underperformed its policy benchmark. Longer-term performance is weighed down substantially by the 2008-2009 global financial crisis and recovery from the losses incurred over that period may take many years. The CEF remains conservatively positioned with the primary focus on risk-adjusted returns. During fiscal year 2011, the Board of Regents approved a new long-term spending policy for the CEF. Quarterly distributions to programs are made based on an annual percentage rate of 4%, applied to the five-year rolling average of the CEF s market valuation. The new policy was effective with the December 2010 quarterly distributions with the five-year averaging period implemented incrementally. The administrative fee of 1% supporting fundraising and stewardship activities (0.80%) and investment management (0.20%) continues. Similar to program distributions, the fee is based on the endowment s five-year average market value. The new policy replaces the interim policy which was in effect during fiscal years 2010 and 2009. A portion of the University s operating funds are invested in the CEF. As of June 30, 2011 these funds comprise $447 million of the CEF market value. Consolidated Endowment Fund Market Value (in millions) 0 2011 2010 2009 Moody s Public Universities (Aaa median 2010) $2,200 $2,000 $2,098 $2,161 $2,168 Endowment and Other Investments Investment returns provide an important source of revenue for the University s programs. Among the funds invested by the University are endowments, operating cash, life income trusts and annuities, outright gifts and reserves. Endowed gifts supply Expendable permanent Financial capital and an ongoing stream of current earnings Resources to the University. to Direct Most Debtendowments 2 are commingled 3.0 in the Consolidated Endowment Fund (CEF), a diversified investment fund. As in a mutual fund, each individual 2.0 endowment maintains a 2.1 separate identity 1.9 and 1.9 owns units in the fund. The CEF 1.7 1.0 experienced considerable growth over the past 10 years. The number of endowments in the CEF increased from 1,666 to 3,545, and 0 the market value rose to $2.2 billion as of June 30, 2011. 2011 2010 2009 Moody s Public Universities (Aaa median 2010) 1 The sum of Unrestricted Net Assets and Restricted Expendable Net Assets, divided by Total Operating Expenses (Operating Expenses plus interest expense). The result is multiplied by 12 to arrive at months of coverage. Includes results for Northwest Hospital in 2011 only. RATIO IN MILLIONS $1,800 $1,600 $1,400 $1,200 $1,000 $800 $1,830 $1,700 $1,649 $1,366 $1,208 $998 $1,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 UNIVERSITY OF WASHINGTON > 4

DEBT AND RELATED CAPITAL IMPROVEMENTS The University s general revenue borrowing platform, established in 2003, has been used to fund buildings that support the educational, research and service missions of the institution. For example, the $165 million UW General Revenue Bond issued in November 2010 is partially funding an expansion of the medical center, new student housing and a renovation of the Husky Union Building. In July 2011, Moody s Investors Service placed the University on credit watch based on its exposure to the federal government through research and clinical activities. In August 2011, Moody s reaffirmed the University s Aaa rating, with a negative outlook. Strong ratings carry substantial advantages for the University: continued and wider access to capital markets when the University issues debt, lower interest rates on bonds and the ability to negotiate favorable bond terms. The University takes its role of financial stewardship seriously and works hard to manage its financial resources effectively. Continued high debt ratings are important indicators of the University s success in this area. MONTHS OF COVERAGE During 2010, capital expenditures included $54 million on 2.0 Phase 1 of PACCAR Hall for the business school, $43 million for the expansion of UWMC, $16 million for the new Molecular 0 Engineering building 2011 and 2010$13 million 2009 for Moody s Phase Public 3 of the UW Universities Tacoma campus. (Aaa median 2010) The 2011 ratio of expendable financial resources to debt (as defined by Moody s) shows that the University has sufficient expendable resources to pay its long-term debt obligations 1.7 times over. RATIO 10.0 8.0 6.0 4.0 3.0 2.0 1.0 0 7.9 7.9 1.7 2.1 6.8 Expendable Financial Resources to Direct Debt 2 1.9 2011 2010 2009 9.5 1.9 Moody s Public Universities (Aaa median 2010) Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Moody s Fiscal Year 2010 Public College and University Rating Distribution (Issued in July 2011) 1 4 8 11 15 36 42 44 64 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS The Statements of Revenues, Expenses, and Changes in Net Assets present the University s results of operations and nonoperating items that result in the changes in net assets for the year. In accordance with GASB reporting principles, revenues and expenses are classified as either operating or nonoperating. A condensed comparison of the University s revenues, expenses and changes in net assets for the years ended June 30, 2011, 2010, and 2009 follows: (in millions) 2011 2010 2009 Total operating revenues $ 3,390 $ 3,124 $ 2,902 Operating expenses 3,769 3,493 3,429 Operating loss (379) (369) (527) Nonoperating revenues, net of expenses 766 707 (62) Other revenues 147 93 215 Increase (decrease) in net assets 534 431 (374) Net assets, beginning of year 5,194 4,763 5,137 Net assets, end of year $ 5,728 $ 5,194 $ 4,763 Baa3 1 0 10 20 30 40 50 60 70 NUMBER OF INSTITUTIONS During 2011, capital expenditures included $70 million for the construction of new student housing, $67 million for the expansion of the University of Washington Medical Center (UWMC), $31 million for the renovation of the Husky Union Building, $30 million for the new Molecular Engineering building, $21 million for Phase 3 of the UW Tacoma campus and $16 million for the renovation of Balmer Hall. 2 The sum of Unrestricted Net Assets and Restricted Expendable Net Assets, divided by total capital lease obligations, bonds and notes payable outstanding. Includes results for Northwest Hospital in 2011 only. FINANCIAL REPORT 2011 > 5

Management s Discussion and Analysis (CONTINUED) The University has a diversified revenue base. No single source generated more than 30% of the total fiscal year 2011 revenues of $4.6 billion. 9% INVESTMENT INCOME 3% SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 3% AUXILIARY 4% GIFTS 30% GRANTS AND CONTRACTS *Includes Northwest Hospital Sources Sources of of Funds Funds* * 2% OTHER 13% TUITION 6% STATE FUNDING FOR OPERATIONS 1% STATE FUNDING FOR CAPITAL EXPENDITURES 29% PATIENT SERVICES Primary Nongrant Funding Sources The University relies primarily on student tuition and fees and state appropriations as revenue sources to support its nongrant funded educational operating expenses. State support for education has declined since fiscal year 2008, with a sharp cut in fiscal year 2010, although part of the reduction in state support was offset by federal ARRA education funding in 2010, as reflected in the table below: Operating Support for Instruction (in millions) 2011 2010 2009 State operating appropriations $ 297 33% $ 303 35% $ 385 46% Federal ARRA education funding 44 5% Operating tuition and fees 410 46% 351 40% 296 35% Fees for self-sustaining education programs 185 21% 177 20% 162 19% Total educational support $ 892 100% $ 875 100% $ 843 100% Uses of Funds* The following table summarizes revenues from all sources for the years ended June 30, 2011, 2010, and 2009: 6% DEPRECIATION 2% OTHER (in millions) 2011 23% 2010 INSTRUCTION 2009 Tuition and fees $ 595 $ 528 $ 458 Patient 29% MEDICAL services RELATED 1,064 988 964 Grants and contracts 1,365 1,256 1,120 Sales and services of educational departments 165 167 152 19% RESEARCH Auxiliary Enterprises 4% 154 147 154 AUXILIARY 2% State SCHOLARSHIPS funding for & FELLOWSHIPS operations 297 7% 303 385 ACADEMIC SUPPORT Federal 5% OPERATION ARRA education AND MAINTENANCE funding 3% INSTITUTIONAL 44 SUPPORT Gifts OF PLANT 177 119 143 Investment income (loss) 395 309 (469) State funding for capital projects 37 33 101 Other 111 72 91 Total revenue all sources $ 4,360 $ 3,966 $ 3,099 Grant Revenue The largest source of revenues (30%) continues to be grants and contracts. This revenue increased $109 million, or 9%, in 2011, compared to an increase of $136 million, or 12%, in 2010. Federal ARRA research funding generated revenues of $163 million in fiscal year 2011, compared to $86 million in 2010. Grants and contracts provided the opportunity for graduate and undergraduate students to work with nationally recognized faculty in research as part of their educational experience. Grant and contract revenue is earned when direct expenditures (such as researchers compensation or purchases of goods and services) are made; therefore, there is little effect on the University s operating margin as a result of this direct expense reimbursement process. Facility and administrative expenses necessary to support grants and contracts are reimbursed by an indirect cost recovery. The current indirect cost recovery for research grants is approximately 29 cents on every direct expenditure dollar. Noncapital state appropriations are considered nonoperating revenue under GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities, and are reflected in the nonoperating section of the Statements of Revenues, Expenses and Changes in Net Assets; however, they are used solely for operating purposes. Tuition and fees, net of scholarship allowances, increased from $458 million in 2009 to $528 million in 2010, and to $595 million in 2011. The increases were primarily due to a 14% increase in average undergraduate resident tuition rates in 2010 and 2011. Tuition increases were partially offset by the increase in scholarships and fellowships, and scholarship allowances of $18 million in 2011, $21 million in 2010, and $15 million in 2009. Self-sustaining educational programs include $67 million for UW Educational Outreach (the continuing education branch of the University), $31 million for summer quarter, and $36 million for Business School and School of Medicine programs. Patient Services UW Medicine The financial statements of the University include the operations of the School of Medicine, two hospitals, associated physicians and clinics, Airlift Northwest, and the University s share of two joint ventures. These entities and Harborview Medical Center (activities not included in the University s financial statements - see footnote 14) comprise UW Medicine, an umbrella organization serving to coordinate these activities and promote quality health care in the Pacific Northwest and beyond, and to conduct cutting edge medical research with worldwide benefit. UNIVERSITY OF WASHINGTON > 6

Patient care activities included in the University s financial statements include: UW Medical Center (UWMC) is a 450-bed hospital that provides comprehensive health care services to the Puget Sound community and patients from throughout the Pacific Northwest. UWMC also serves as the major clinical, teaching and research site for students and faculty in the Health Sciences at the University. Over 18,000 patients receive inpatient care at UWMC each year. Specialized inpatient care needs are met by the Cancer Center, the Regional Heart Center, Neonatal ICU and Organ Transplantation program. During fiscal year 2011, work continued on Phase 1 of a new five-story UWMC tower, which will create space for expansion of patient care activities with an emphasis on neonatal and oncology patients. Northwest Hospital & Medical Center (Northwest Hospital) is a full-service medical facility with 281 beds, and treats approximately 11,000 inpatients each year. Northwest Hospital joined UW Medicine in January 2010. Northwest Hospital s Balance Sheet as of June 30, 2011 and Statement of Revenues, Expenses and Changes in Net Assets for the year ended June 30, 2011 are presented in a discrete column on the financial statements of the University. UW Neighborhood Clinics is a network of primary care clinics with eight neighborhood locations throughout the greater Seattle area, providing primary and selected specialty care with a staff of nearly 70 health care providers. UW Physicians (UWP) is the physician practice group for more than 1,500 faculty physicians and health care providers associated with UW Medicine. The revenues, expenses, assets and liabilities of UWP are included in the University s financial statements. Airlift Northwest is a preeminent provider of air medical services in the Pacific Northwest. The University is also a participant in two joint ventures: Seattle Cancer Care Alliance and Children s University Medical Group. The University s share in these activities is reflected in the University s financial statements. In combination, these organizations (not including Northwest Hospital) contributed $1,064 million in patient service revenues in fiscal year 2011, $988 million in fiscal year 2010, and $964 million in 2009. UWMC generated 77% of this revenue in 2011, 79% in 2010, and 74% in 2009. UWMC admissions decreased slightly in 2011 compared to 2010, and remained stable in 2010 compared to 2009. Patient length of stay increased to 6.1 days in 2011, and remained unchanged at 5.9 days in 2010 and 2009. Other factors contributing to the increase in hospital revenue over the period have been the increased acuity of patients and improved documentation and coding. Gifts, Endowments and Investment Revenues Net investment returns for the years ended June 30, 2011, 2010, and 2009 consisted of the following: (in millions) 2011 2010 2009 Interest and dividends $ 59 $ 78 $ 66 Metropolitan Tract net income 7 8 6 Investment in Seattle Cancer Care Alliance 12 7 8 Net appreciation (depreciation) of fair value of investments 324 224 (544) Investment expenses (7) (8) (5) Net investment income (loss) $ 395 $ 309 $ (469) Net appreciation includes both realized and unrealized gains and losses; however, the unrealized gains are not expendable until the underlying securities have been sold. Net investment income increased by $86 million in 2011 over 2010, and increased by $778 million in 2010 from 2009. The change in unrealized gain or loss was the major factor in the variance each year. The sharp decline in the University s investment performance in 2009 was related to market declines which began Sources in the of prior Funds* fiscal year. Donor 9% support INVESTMENT increased INCOME by $58 million, or 49%, 2% in OTHER 2011. Gifts are a key, necessary source of support for a variety of purposes 13% TUITION including 3% SALES AND capital SERVICES improvements, OF scholarships, research and EDUCATIONAL DEPARTMENTS endowments for various academic and research positions. 3% AUXILIARY 30% GRANTS AND CONTRACTS 6% DEPRECIATION 2% OTHER 29% MEDICAL RELATED 4% AUXILIARY 2% SCHOLARSHIPS & FELLOWSHIPS 5% OPERATION AND MAINTENANCE OF PLANT *Includes Northwest Hospital Uses Uses of of Funds Funds* * 6% STATE FUNDING FOR OPERATIONS 1% STATE FUNDING FOR CAPITAL EXPENDITURES Expenses 4% GIFTS Two primary functions of the University, instruction and research, comprised 42% of total operating expenses. These dollars provided instruction to more than 49,000 students and funded 5,400 research awards. 29% PATIENT SERVICES 23% INSTRUCTION 19% RESEARCH 7% ACADEMIC SUPPORT 3% INSTITUTIONAL SUPPORT FINANCIAL REPORT 2011 > 7

Management s Discussion and Analysis (CONTINUED) A comparative summary of the University s expenses by functional classification (purpose for which the costs are incurred) for the years ended June 30, 2011, 2010, and 2009 follows: (in millions) 2011 2010 2009 Operating expenses: Educational and general instruction $ 920 $ 905 $ 908 Research 791 700 640 Public service 30 34 33 Academic support 279 259 265 Student services 35 34 34 Institutional support 133 141 143 Operation and maintenance of plant 192 155 178 Scholarships and fellowships 101 93 71 Auxiliary enterprises 170 166 171 Medical-related 874 777 779 Depreciation/amortization 244 229 207 Total operating expenses $ 3,769 $ 3,493 $ 3,429 Research expenditures, which represent sponsored research, increased $91 million, or 13%, in 2011, reflective of the increase in grant and contract revenue, including ARRA funds. Operation and maintenance of plant increased $37 million, or 24%, in 2011 due primarily to an increase in capital project expenses that did not meet the criteria for capitalization as fixed assets. Medical-related expenses increased $97 million, or 12%, over 2010 due to the addition of Airlift Northwest during fiscal year 2011 and an increase in operating expenses for UWMC. Overall, the University s operating expenses increased by $276 million, or 8%, over 2010. Supplies and materials, and purchased services increased $148 million, or 19%, driven by equipment purchased for the National Science Foundation s Ocean Observatory Initiative (the University is the administrator, but not the owner, of these assets), increased medical supplies and pharmaceuticals for UWMC, the addition of Airlift Northwest, and increases driven by higher grant and contract revenue. Salaries expense increased $68 million, or 4%, during 2011, driven in part by a modest increase in staffing and the addition of Airlift Northwest. Benefits expense increased $48 million, or 9% during 2011, resulting mostly from a 14% increase in the health care premium per employee paid by the University. In 2010, the University s operating expenses increased by $64 million, or 2%, over 2009, primarily driven by increased activity on grants, due to ARRA, and by increased depreciation/ amortization expense due to 2010 asset additions. Expense associated with scholarships and fellowships also contributed to the increase, primarily due to an increase in federal funding for Pell Grants. OPERATING LOSS The University s operating loss increased to $379 million in 2011 from $369 million in 2010. The 2010 operating loss was a decrease from an operating loss of $527 million in 2009. State appropriations have declined; however, they are shown as nonoperating, pursuant to GASB standards. If state appropriations were classified as operating, the operating loss would be as follows for 2011, 2010 and 2009, respectively: $82 million, $21 million, and $142 million. The amount for 2010 includes $44 million of Federal ARRA education funding, a one-time event. The University continues to rely on nonoperating revenues, in addition to state appropriations, to fund its operations including operating gift revenues and investment income distributions. OPERATING MARGIN Moody s measures the net result of revenue and expense activity by including several nonoperating revenues in the margin. The 2011 operating margin decreased to 3.63% from 5.50% in 2010. Operating margin calculations include an estimated return on the University s investments rather than actual investment income. Therefore, variances in investment performance in a given year will not impact the operating margin. PERCENTAGE 6 5 4 3 2 1 0 Operating Margin 3 3.63% 5.50% 1.12% 2011 2010 2009 5.40% Moody s Public Universities (Aaa median 2010) 9.5 Expendable Financial Resources to Operations 1 3. Operating loss, (including interest expense, operating appropriations, nonoperating federal grants, an assumed 5% spending rate on investments and nonpermanent endowment gifts), 10.0 divided by operating revenues (less scholarship expenses, and including operating appropriations, nonoperating federal grants, an assumed 5% return on investments and nonpermanent endowment gifts). Includes results for Northwest Hospital in 2011 only. OF COVERAGE 8.0 UNIVERSITY OF WASHINGTON > 8 6.0 7.9 7.9 6.8 9.5

FINANCIAL REPORT 2011 > 9

UNIVERSITY OF WASHINGTON Balance Sheets UNIVERSITY OF WASHINGTON NORTHWEST HOSPITAL & MEDICAL CENTER 1 June 30, June 30, ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS (NOTE 2) $ 2011 42,715 $ 2010 31,902 $ 2011 11,579 INVESTMENTS (NOTE 6) 366,995 314,721 2,322 ACCOUNTS RECEIVABLE (NET OF $86,177 AND $92,341 ALLOWANCE) (NOTE 5) 480,637 470,194 34,142 INVENTORIES 28,710 29,934 4,350 OTHER CURRENT ASSETS 5,252 4,536 2,196 TOTAL CURRENT ASSETS 924,309 851,287 54,589 NONCURRENT ASSETS: DEPOSIT WITH STATE OF WASHINGTON (NOTE 3) 50,616 72,170 INVESTMENTS, NET OF CURRENT PORTION (NOTE 6) 3,505,273 2,847,279 48,127 METROPOLITAN TRACT (NOTE 7) 115,101 115,902 STUDENT LOANS RECEIVABLE (NET OF $9,207 AND $9,136 ALLOWANCE) (NOTE 4) 69,669 70,507 OTHER ASSETS 101,271 85,393 1,496 CAPITAL ASSETS (NET OF $2,722,752 AND $2,530,067 ACCUMULATED DEPRECIATION) (NOTE 8) 3,246,486 2,957,777 132,955 TOTAL NONCURRENT ASSETS 7,088,416 6,149,028 182,578 TOTAL ASSETS $ 8,012,725 $ 7,000,315 $ 237,167 LIABILITIES CURRENT LIABILITIES: ACCOUNTS PAYABLE $ 126,184 $ 93,705 $ 11,665 ACCRUED LIABILITIES 250,545 221,587 30,982 COMMERCIAL PAPER (NOTE 11) 50,000 30,000 DEFERRED REVENUES 134,143 121,486 FUNDS HELD FOR OTHERS 18,343 16,752 LONG-TERM LIABILITIES, CURRENT PORTION (NOTES 9-12) 71,721 64,857 4,643 TOTAL CURRENT LIABILITIES 650,936 548,387 47,290 NONCURRENT LIABILITIES: DEFERRED REVENUES, NET OF CURRENT PORTION 9,410 18,055 U.S. GOVERNMENT GRANTS REFUNDABLE 54,545 50,873 LONG-TERM LIABILITIES, NET OF CURRENT PORTION (NOTES 9-12) 1,569,469 1,189,331 103,770 TOTAL NONCURRENT LIABILITIES 1,633,424 1,258,259 103,770 TOTAL LIABILITIES 2,284,360 1,806,646 151,060 NET ASSETS INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT 2,059,911 1,981,797 44,702 RESTRICTED: NONEXPENDABLE 1,074,824 959,442 1,717 EXPENDABLE 1,226,792 1,089,464 1,468 UNRESTRICTED 1,366,838 1,162,966 38,220 TOTAL NET ASSETS 5,728,365 5,193,669 86,107 TOTAL LIABILITIES AND NET ASSETS $ 8,012,725 $ 7,000,315 $ 237,167 1 A component unit of the University of Washington (NOTE 1) See accompanying notes to basic financial statements. Dollars in thousands UNIVERSITY OF WASHINGTON > 10

UNIVERSITY OF WASHINGTON Statements of Revenues, Expenses and Changes in Net Assets UNIVERSITY OF WASHINGTON NORTHWEST HOSPITAL & MEDICAL CENTER 1 Year Ended June 30, Year Ended June 30, REVENUES OPERATING REVENUES: 2011 2010 2011 STUDENT TUITION AND FEES (NET OF SCHOLARSHIP ALLOWANCES OF $91,403 AND $82,461) $ 594,915 $ 527,958 $ PATIENT SERVICES (NET OF CHARITY CARE OF $54,761 AND $46,945) 1,063,827 987,917 265,329 FEDERAL GRANTS AND CONTRACTS 1,092,973 982,413 STATE AND LOCAL GRANTS AND CONTRACTS 70,188 73,540 NONGOVERNMENTAL GRANTS AND CONTRACTS 151,600 155,876 SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 165,475 166,810 AUXILIARY ENTERPRISES: HOUSING AND FOOD SERVICES 59,663 58,516 PARKING SERVICES 14,008 11,418 SPORTS PROGRAMS (NET OF SCHOLARSHIP ALLOWANCE OF $4,735 AND $3,858) 43,128 41,302 OTHER AUXILIARY ENTERPRISES 37,099 35,868 OTHER MEDICAL-RELATED REVENUE 22,928 27,325 10,510 OTHER OPERATING REVENUE 74,477 55,132 TOTAL OPERATING REVENUES 3,390,281 3,124,075 275,839 EXPENSES OPERATING EXPENSES (NOTE 13) SALARIES 1,776,699 1,708,798 123,794 BENEFITS 563,660 515,284 29,044 SCHOLARSHIPS AND FELLOWSHIPS 101,388 93,219 UTILITIES 54,406 51,190 3,076 SUPPLIES AND MATERIALS 384,530 324,133 69,742 PURCHASED SERVICES 556,643 468,717 40,941 DEPRECIATION / AMORTIZATION 243,638 228,714 20,213 OTHER 88,554 102,600 TOTAL OPERATING EXPENSES 3,769,518 3,492,655 286,810 OPERATING LOSS (379,237) (368,580) (10,971) NONOPERATING REVENUES (EXPENSES) STATE APPROPRIATIONS 296,769 303,454 FEDERAL ARRA EDUCATION FUNDING (NOTE 1) 43,971 GIFTS 86,823 65,300 505 INVESTMENT INCOME (NET OF INVESTMENT EXPENSE OF $6,419 AND $7,788) 394,670 308,752 6,095 INTEREST ON CAPITAL ASSET-RELATED DEBT (42,726) (42,980) (4,290) PELL GRANT REVENUE 44,044 37,356 OTHER NONOPERATING REVENUES (EXPENSES) (12,946) (8,861) 271 NET NONOPERATING REVENUES 766,634 706,992 2,581 INCOME (LOSS) BEFORE OTHER REVENUES 387,397 338,412 (8,390) CAPITAL APPROPRIATIONS 37,255 32,539 CAPITAL GRANTS, GIFTS, AND OTHER 35,622 16,005 210 GIFTS TO PERMANENT ENDOWMENTS 74,422 43,943 TOTAL OTHER REVENUES 147,299 92,487 210 INCREASE (DECREASE) IN NET ASSETS 534,696 430,899 (8,180) NET ASSETS NET ASSETS BEGINNING OF YEAR 5,193,669 4,762,770 94,287 NET ASSETS END OF YEAR $ 5,728,365 $ 5,193,669 $ 86,107 1 A component unit of the University of Washington (NOTE 1) See accompanying notes to basic financial statements. Dollars in thousands FINANCIAL REPORT 2011 > 11

UNIVERSITY OF WASHINGTON Statements of Cash Flows CASH FLOWS FROM OPERATING ACTIVITIES UNIVERSITY OF WASHINGTON Year Ended June 30, 2011 2010 STUDENT TUITION AND FEES $ 559,936 $ 531,730 PATIENT SERVICES 1,071,683 922,570 GRANTS AND CONTRACTS 1,328,507 1,171,348 PAYMENTS TO SUPPLIERS (369,292) (320,184) PAYMENTS FOR UTILITIES (53,619) (51,522) PURCHASED SERVICES (551,365) (464,839) OTHER OPERATING DISBURSEMENTS (89,572) (103,653) PAYMENTS TO EMPLOYEES (1,773,919) (1,707,863) PAYMENTS FOR BENEFITS (501,858) (467,299) PAYMENTS FOR SCHOLARSHIPS AND FELLOWSHIPS (101,388) (93,219) LOANS ISSUED TO STUDENTS (22,510) (29,102) COLLECTION OF LOANS TO STUDENTS 27,020 26,317 OTHER MEDICAL-RELATED RECEIPTS 22,928 27,325 AUXILIARY ENTERPRISE RECEIPTS 144,823 159,117 SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 165,685 166,283 OTHER RECEIPTS 39,512 95,480 NET CASH USED BY OPERATING ACTIVITIES (103,429) (137,511) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES STATE APPROPRIATIONS 314,371 286,098 FEDERAL ARRA EDUCATION FUNDING 43,971 GIFTS AND GRANTS FOR OTHER THAN CAPITAL PURPOSES 44,044 37,356 PRIVATE GIFTS 57,999 55,600 PERMANENT ENDOWMENTS RECEIPTS 74,422 43,942 DIRECT LENDING RECEIPTS 237,439 227,033 DIRECT LENDING DISBURSEMENTS (237,601) (217,575) RECEIPTS FROM OUTSIDE AFFILIATED AGENCIES 623,058 600,562 DISBURSEMENTS TO OUTSIDE AFFILIATED AGENCIES (621,873) (611,240) OTHER (11,395) (8,730) NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES 480,464 457,017 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES PROCEEDS FROM CAPITAL DEBT 525,856 121,461 STATE CAPITAL APPROPRIATIONS 36,864 42,559 CAPITAL GRANTS AND GIFTS RECEIVED 19,982 15,302 ACQUISITION AND CONSTRUCTION OF CAPITAL ASSETS (491,762) (353,206) PRINCIPAL PAYMENTS ON CAPITAL-RELATED DEBT AND LEASES (143,506) (77,098) INTEREST PAYMENTS ON CAPITAL-RELATED DEBT AND LEASES (57,379) (47,538) OTHER 21,796 1,474 NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES (88,149) (297,046) UNIVERSITY OF WASHINGTON > 12

CASH FLOWS FROM INVESTING ACTIVITIES UNIVERSITY OF WASHINGTON Year Ended June 30, 2011 2010 PROCEEDS FROM SALES OF INVESTMENTS 5,021,145 3,987,515 PURCHASES OF INVESTMENTS (5,358,025) (4,091,814) INVESTMENT INCOME 58,807 77,987 NET CASH USED BY INVESTING ACTIVITIES (278,073) (26,312) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,813 (3,852) CASH AND CASH EQUIVALENTS-BEGINNING OF THE YEAR 31,902 35,754 CASH AND CASH EQUIVALENTS-END OF THE YEAR $ 42,715 $ 31,902 RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES OPERATING LOSS $ (379,237) $ (368,580) ADJUSTMENTS TO RECONCILE OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES: DEPRECIATION EXPENSE / AMORTIZATION 243,638 228,714 CHANGES IN ASSETS AND LIABILITIES: RECEIVABLES (15,591) 3,920 INVENTORIES 1,224 (1,868) OTHER ASSETS (15,877) (12,982) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 29,418 12,364 DEFERRED REVENUE 3,625 (25,258) OTHER LONG-TERM LIABILITIES 24,861 28,964 U.S. GOVERNMENTAL GRANTS REFUNDABLE 3,672 (745) LOANS TO STUDENTS 838 (2,040) NET CASH USED BY OPERATING ACTIVITIES $ (103,429) $ (137,511) See accompanying notes to basic financial statements. Dollars in thousands FINANCIAL REPORT 2011 > 13

Notes to Financial Statements NOTE 1: Summary of Significant Accounting Policies FINANCIAL REPORTING ENTITY The University of Washington (University), an agency of the state of Washington, is governed by a 10-member Board of Regents, appointed by the Governor and confirmed by the state Senate. The financial statements include the individual schools, colleges and departments of the University, the University of Washington Medical Center (UWMC), Portage Bay Insurance (a wholly-owned subsidiary of the University) and certain affiliated operations determined to be a part of the University s financial reporting entity. Affiliated organizations are evaluated for inclusion in the reporting entity as component units based on the significance of their relationship with the University. On July 1, 2010, Airlift Northwest, (Airlift NW) a preeminent provider of air medical services in the Pacific Northwest, dissolved its separate 501(c)(3) status and became a self-sustaining unit of the University of Washington. The affiliation with Airlift NW resulted in a contribution of capital of $13,227,000 that is reflected in Capital Grants, Gifts, and Other on the Statement of Revenues, Expenses and Changes in Net Assets in the year ending June 30, 2011. Component units are legally separate organizations for which the University is financially accountable. These entities may be reported in the financial statements of the primary government in one of two ways: the component units amounts may be blended with the amounts reported by the primary government, or they may be shown in a separate column, depending on the application of the criteria of Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity as amended by GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units, an amendment of GASB Statement No. 14. All component units of the University meet the criteria for blending except Northwest Hospital & Medical Center. It is reported discretely since it has a separate board of directors and it does not provide services exclusively to the University. BLENDED COMPONENT UNITS The following entities are presented as blended component units because they provide service exclusively or almost exclusively to the University. Financial information for these affiliated organizations is available from their respective administrative offices. The University of Washington Alumni Association was established as a tax-exempt entity to connect and celebrate alumni and to support the University s mission. The Alumni Association had operating revenues of $4,303,000 and $5,304,000 in 2011 and 2010, respectively. The Association of University Physicians dba UW Physicians (UWP) was established as a tax-exempt entity for the exclusive benefit of the University of Washington School of Medicine (UWSOM). UWP employs UWSOM faculty and bills and collects for their clinical services as an agent for UWSOM. UWP had operating revenues of $145,524,000 and $174,998,000 in 2011 and 2010, respectively. UW Medicine Neighborhood Clinics (Neighborhood Clinics) was established as a tax-exempt entity for the benefit of UWSOM, UWP and its affiliated medical centers, Harborview Medical Center (HMC) and UWMC, exclusively for charitable, scientific and educational purposes. The Neighborhood Clinics were organized to coordinate and develop patient care in a community clinical setting. They enhance the academic environment of UWSOM by providing additional sites of primary care practice and training for faculty, residents and students. Neighborhood Clinics had operating revenues of $12,283,000 and $10,928,000 in 2011 and 2010, respectively. Real estate financing entities The entities listed below are nonprofit corporations that were formed to acquire, construct or renovate certain real properties for the benefit of the University in fulfilling its educational, medical or scientific research missions. These entities issue tax-exempt and taxable bonds to finance these activities. Community Development Properties C-D Educational Research Properties Radford Court Properties TSB Properties Twenty-Fifth Avenue Properties Washington Biomedical Research Properties I Washington Biomedical Research Properties II Washington Biomedical Research Facilities 3 These entities collectively have net capital assets of $268,936,000 and $262,577,000 in 2011 and 2010, respectively. They collectively have long-term debt of $456,577,000 and $300,325,000 in 2011 and 2010, respectively. These amounts are reflected in the University s financial statements. On July 28, 2011, the University refunded three series of lease-backed 63-20 bonds as part of the Series 2011A University of Washington General Revenue Bonds issue. The refunded bonds were Series 1996 Community Development Properties - Commodore Duchess, Series 1999A Educational Research Properties, and Series 2000 Radford Court Properties. As a result of this refunding, the three entities that issued the lease-backed 63-20 bonds have been dissolved. All net assets that belonged to these entities are now University net assets. DISCRETELY PRESENTED COMPONENT UNIT UW Medicine and Northwest Hospital & Medical Center (Northwest Hospital), a 281-bed full-service acute care hospital, entered into an affiliation agreement effective January 1, 2010. The University is the sole corporate member of Northwest Hospital. The audited financial statements of Northwest Hospital are available by contacting Northwest Hospital & Medical Center at 1550 N. 115th Street, Seattle, WA 98133-9733, Mailstop X-112. UNIVERSITY OF WASHINGTON > 14

Subsequent Affiliation with Valley Medical Center UW Medicine and Public Hospital District No. 1 of King County, a Washington public hospital district d/b/a Valley Medical Center, have entered into a strategic alliance, effective July 1, 2011. Valley Medical Center owns and operates a 303-bed full-service acute care hospital and 22 clinics located throughout southeast King County. The alliance will provide an opportunity to combine efforts on important initiatives that will benefit patients and the community. Beginning in the fiscal year ending June 30, 2012, Valley Medical Center will be a discretely presented component unit of the University, similar to Northwest Hospital. JOINT VENTURES In 1998, the University entered into an agreement with Seattle Children s Hospital and Fred Hutchinson Cancer Research Center to establish the Seattle Cancer Care Alliance (SCCA). The SCCA integrates the cancer research, teaching and clinical cancer programs of all three institutions to provide state-of-the-art cancer care. Each member of the SCCA has a one-third interest. The University accounts for its interest in SCCA under the equity method and has recorded $75,130,000 and $63,390,000 in Other Assets, together with $11,740,000 and $7,392,000 in Investment Income, for its share of the joint venture in 2011 and 2010, respectively. In 1986, the University entered into an agreement with Seattle Children s Hospital to establish Children s University Medical Group (CUMG) to assist the organizations in carrying out their pediatric patient care, charitable, educational, and scientific missions. CUMG employs UWSOM faculty physicians, and bills and collects for their services as an agent for UWSOM. The University records revenue from CUMG based on the income distribution plan effective December 31, 2008. The University s patient services receivable (Note 5) includes amounts due from CUMG of $19,704,000 and $15,229,000 in 2011 and 2010, respectively. BASIS OF ACCOUNTING The financial statements of the University have been prepared in accordance with GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, as amended by GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. The University is reporting as a special-purpose government engaged in business-type activities (BTA). In accordance with BTA reporting, the University presents management s discussion and analysis, balance sheets, statements of revenues, expenses and changes in net assets, statements of cash flows and notes to the financial statements. The financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All intra-agency transactions have been eliminated. The University reports capital assets net of accumulated depreciation/amortization (as applicable), and reports depreciation/amortization expense in the Statements of Revenues, Expenses and Changes in Net Assets. On July 1, 2009, the University adopted GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets. This Statement requires that all intangible assets not specifically excluded by its scope be classified as capital assets. The University recognized $2,707,000 in new intangible assets and $2,540,000 in intangible projects in process in the fiscal year ended June 30, 2010. On July 1, 2009, the University adopted GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. There was no financial statement impact to the University as a result of the implementation. Additional disclosure is included in Note 6. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. GAAP involves management estimates that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates; however, in each case, the University believes that allowances, reserves and estimates of expected liabilities are adequate. The University estimates the pollution remediation liability by reviewing the current status of known polluted sites and developing estimates of cleanup costs. These estimates are subject to change due to improvements in technology, inflation, changes in the scope of work and the pursuit of reimbursement from other responsible parties. Allowances for doubtful accounts (Notes 4 and 5) are estimates based on the historical experience of the University and current economic circumstances with respect to the collectability of accounts and loans receivable. The liability and expense related to the supplemental component of the University of Washington Retirement Plan (UWRP) (Note 16) is based on an actuarial valuation. The results of an actuarial valuation are estimates based on historical data and the demographics of the employee population. The self-insurance reserve (Note 17) is estimated through an actuarial calculation using individual case-basis valuations and statistical analyses. Considerable variability is inherent in such estimates. OTHER ACCOUNTING POLICIES Investments. Investments, other than miscellaneous investments, are stated at fair value. Miscellaneous investments are stated at cost or, in the case of gifts, at fair values at the date of donation. The fair value of all debt and equity securities with a readily determinable fair value is based on quotations from national securities exchanges. The alternative investments, which are not readily marketable, are carried at the estimated fair values provided by the investment managers. The University reviews and FINANCIAL REPORT 2011 > 15

Notes to Financial Statements (CONTINUED) evaluates the values provided by the investment managers and agrees with the valuation methods and assumptions used in determining the fair value of the alternative investments. Those estimated fair values may differ significantly from the values that would have been used had a ready market for these securities existed. Investments under long-term strategies are considered noncurrent. Short-term investments consist primarily of cash equivalents and fixed income vehicles with maturities of less than one year. Inventories. Inventories are carried at the lower of cost or market value. Consumable inventories, consisting of expendable materials and supplies held for consumption, are generally valued using the weighted-average method. Merchandise inventories are generally valued using the first-in, first-out method. Capital Assets. Land, buildings, equipment, library books and intangibles are stated at cost or, if acquired by gift, at fair market value at the date of the gift. Additions, replacements, major repairs and renovations are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, generally 15 to 50 years for building components, 20 to 50 years for infrastructure and land improvements, 5 to 7 years for equipment, 15 years for library books, and 3 to 15 years for intangibles. Capitalized construction-related interest was $17,187,000 and $5,848,000 during 2011 and 2010, respectively. Deferred Revenues. Deferred revenues occur when funds have been collected in advance of an event, such as advance ticket sales, summer quarter tuition and unspent cash advances on certain grants. Deferred Giving Split-Interest Agreements. Under these agreements, donors make initial gifts directly to the University. The University has beneficial interest, but is not necessarily the sole beneficiary. The University records an asset related to these agreements at fair market value at year-end. The University also records a liability related to the split-interest agreements equal to the present value of expected future distributions; the discount rates applied range from 5.1% to 8.0%. Compensated Absences. University employees accrue annual leave at rates based on length of service and for sick leave at the rate of one day per month. Annual leave accrued at June 30, 2011 and 2010 was $78,528,000 and $72,797,000, respectively, and is included in Accrued Liabilities. Sick leave accrued as of June 30, 2011 and 2010 was $31,491,000 and $29,014,000, respectively, and is included in Long-Term Liabilities. Scholarship Allowances. Tuition and Fees are reported net of scholarship allowances that are applied to students accounts from external funds that have already been recognized as revenue by the University. Student aid paid directly to students is reported as scholarships and fellowships expense. State Appropriations. The state of Washington appropriates funds to the University on both annual and biennial bases. These revenues are reported as nonoperating revenues in the Statements of Revenues, Expenses, and Changes in Net Assets. Federal ARRA Education Funding. As a result of the American Recovery and Reinvestment Act of 2009 (ARRA), the federal government granted funds to the state of Washington to support K-12 and higher education. Accordingly, the state of Washington passed through $43,971,000 to the University in fiscal year 2010. These revenues are reported as nonoperating revenues in the Statements of Revenues, Expenses and Changes in Net Assets. Operating Activities. The University s policy for reporting operating activities in the Statements of Revenues, Expenses, and Changes in Net Assets is to include activities that generally result from exchange transactions. Examples of exchange transactions are payments received for tuition, patient services or grants under which services are performed, as well as payments made for the delivery of goods or services. Certain other significant revenue streams used for operations, such as state appropriations, Pell grants, gifts and investment income are recorded as nonoperating revenues, as prescribed by GASB Statement No. 35. Net Assets. The University s net assets are classified as follows: Invested in capital assets, net of related debt: The University s investments in capital assets, less accumulated depreciation/amortization, net of outstanding debt obligations related to capital assets; Restricted net assets nonexpendable: Net assets subject to externally-imposed requirements that they be maintained permanently by the University, including permanent endowment funds and annuity and life income funds; Restricted net assets expendable: Net assets which the University is obligated to spend in accordance with restrictions imposed by external parties, generally scholarships, research and department uses; Unrestricted net assets: Net assets not subject to externally imposed restrictions and which may be designated for specific purposes by management, or the Board of Regents. Tax Exemption. The University, as an agency of the state of Washington, is not subject to federal income tax pursuant to Section 115 of the Internal Revenue Code, except for tax on unrelated business income. Reclassifications. Certain amounts in the 2010 financial statements have been reclassified for comparative purposes to conform to the presentation in the 2011 financial statements. NOTE 2: Cash and Cash Equivalents Cash includes cash on hand, petty cash and bank deposits. Most cash, except for cash held at the University, is covered by federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (PDPC). As of June 30, 2011, Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides for unlimited insurance of deposits in all noninterest-bearing accounts in FDIC insured depository institutions. At June 30, 2011 and 2010, bank balances of $54,439,000 and $4,770,000, respectively, were insured by the FDIC and balances of $9,046,000 and $30,020,000, respectively, were collateralized under the PDPC. UNIVERSITY OF WASHINGTON > 16

NOTE 3: Deposit with State of Washington State law requires the University to deposit certain funds with the State Treasurer, who holds and invests the funds. The deposits include amounts held for the University s permanent land grant funds, the University of Washington building fee collected from students and certain general obligation bond reserve funds. The fair value of these funds approximates the carrying value. NOTE 4: Student Loans Receivable Net student loans of $69,669,000 and $70,507,000 at June 30, 2011 and 2010, respectively, consist of $54,545,000 and $50,873,000 from federal programs and $15,124,000 and $19,634,000 from University programs. Interest income from student loans for the years ended June 30, 2011 and 2010 was $1,425,000 and $1,306,000, respectively. These unsecured loans are made primarily to students who reside in the state of Washington. NOTE 5: Accounts Receivable The major components of accounts receivable as of June 30, 2011 and 2010 were: (Dollars in thousands) 2011 2010 PATIENT SERVICES $ 262,101 $ 267,083 GRANTS AND CONTRACTS 163,524 151,380 SALES AND SERVICES 10,196 10,406 TUITION 10,742 12,094 DUE FROM OTHER AGENCIES 35,702 35,135 ROYALTIES 14,242 14,839 STATE APPROPRIATIONS 2,642 19,852 OTHER 67,665 51,746 566,814 562,535 LESS: ALLOWANCE FOR DOUBTFUL ACCOUNTS (86,177) (92,341) TOTAL $ 480,637 $ 470,194 NOTE 6: Investments INVESTMENTS GENERAL The Board of Regents of the University of Washington is responsible for the management of the University s investments. The Board establishes investment policy, which is carried out by the Chief Investment Officer. The University of Washington Investment Committee, comprising Board members and investment professionals, advises on matters relating to the management of the University s investment portfolios. The composition of the carrying amounts of investments by type at June 30, 2011 and 2010 are listed in Table 1. TABLE 1 UNIVERSITY INVESTMENTS (Dollars in thousands) Carrying Value Investment Type 2011 2010 CASH EQUIVALENTS $ 544,489 $ 337,842 DOMESTIC FIXED INCOME 1,311,329 1,105,961 FOREIGN FIXED INCOME 28,292 18,909 DOMESTIC EQUITY 414,524 421,489 FOREIGN EQUITY 614,061 479,014 NONMARKETABLE ALTERNATIVES 618,705 407,847 ABSOLUTE RETURN 329,723 376,730 REAL ASSETS 7,525 9,737 MISCELLANEOUS 3,620 4,471 TOTAL INVESTMENTS $ 3,872,268 $ 3,162,000 INVESTMENT POOLS The University combines most short-term cash balances into the Invested Funds Pool. At June 30, 2011, the Invested Funds Pool totaled $1,254,850,000 compared to $1,068,762,000 at June 30, 2010. The fund also owns units in the Consolidated Endowment Fund valued at $447,353,000 on June 30, 2011 and $354,942,000 on June 30, 2010. By University policy, departments with qualifying funds in the Invested Funds Pool receive distributions based on their average balances and on the type of balance. Campus depositors received 2.0% in fiscal years 2011 and 2010. Endowment operating and gift accounts received 3% in both fiscal years 2011 and 2010. The difference between the actual earnings of the Invested Funds Pool and the calculated distributions is used to support activities benefiting all University departments. The majority of the endowed funds are invested in a pooled fund called the Consolidated Endowment Fund (CEF). Individual endowments purchase units in the pool on the basis of a per unit valuation of the CEF at fair value on the last business day of the calendar quarter. Income is distributed based on the number of units held. RCW 24.55 of the Washington State Code allows for the spending of appreciation in the CEF. During fiscal year 2011, the Board of Regents adopted a new long-term spending policy for the CEF replacing the interim spending policy which was effective in fiscal years 2010 and 2009. Under the new policy, quarterly distributions to programs are based on an annual percentage rate of 4%, applied to the five-year rolling average of the CEF s market valuation. The new policy was effective with the December 2010 quarterly distributions with the five-year averaging period implemented incrementally. The administrative fee of 1% supporting campus-wide fundraising and stewardship activities (0.80%) and offsetting the internal cost of managing endowment assets (0.20%) continues but is now based on a five-year average value similar to program distributions. The University records its permanent endowments at the lower of original gift value or current market value in the Restricted Nonexpendable Net Assets category. Of the total $1,312,987,000 and $1,122,974,000 permanent endowment funds (at fair value) as of June 30, 2011 and 2010, the aggregate amount of FINANCIAL REPORT 2011 > 17

Notes to Financial Statements (CONTINUED) the deficiencies where the fair value of the assets is less than the original gifts is $21,892,000 and $53,318,000 at June 30, 2011 and 2010, respectively. Funds in irrevocable trusts managed by trustees other than the University are not reported in the financial statements. The fair value of these funds was $51,806,000 at June 30, 2011 compared to $45,580,000 at June 30, 2010. Income received from these trusts, which is included in Investment Income, was $2,029,000 for the year ended June 30, 2011 and $2,215,000 for the year ended June 30, 2010. Net appreciation (depreciation) in the fair value of investments includes both realized and unrealized gains and losses on investments. The University realized net gains of $128,089,000 and $138,053,000 in 2011 and 2010, respectively, from the sale of investments. The calculation of realized gains and losses is independent of the net appreciation of the fair value of investments. Realized gains and losses on investments that have been held in more than one fiscal year and are sold in the current year include the net appreciation of these investments reported in the prior year(s). The net appreciation in the fair value of investments during the years ended June 30, 2011 and 2010 was $324,123,000 and $223,803,000, respectively. FUNDING COMMITMENTS The University enters into contracts with investment managers to fund alternative investments. As of June 30, 2011 and 2010, the University had outstanding commitments to fund alternative investments of $241,967,000 and $215,300,000, respectively. SECURITIES LENDING The University s investment policies permit it to lend its securities to broker dealers and other entities. Due to market conditions, the University terminated this program in September 2008. As of June 30, 2011 and 2010 the University had no securities on loan. DERIVATIVES The University enters into total return swaps to manage its exposure to market fluctuations in various asset classes. Total return swaps involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. The fair value balances and notional amounts of derivative instruments outstanding at June 30, 2011 and 2010, categorized by type, the changes in fair value and the counterparty credit ratings of such derivatives for the years then ended are as follows: TABLE 2 INVESTMENT DERIVATIVES (Dollars in thousands) Notional amount Fair Value Changes in Fair Value Counterparty Credit Rating 2011 2010 ASSET CLASSIFICATION 2011 2010 INCOME CLASSIFICATION 2011 2010 2011 2010 EQUITY SWAP $92,940 INVESTMENTS ($5,110) INVESTMENT INCOME ($5,110) NA A-1 Values are based on quoted market prices. Credit exposure represents exposure to counterparties relating to financial instruments where gains exceed collateral held by the University or losses are less than the collateral posted by the University. There was no credit exposure as of June 30, 2011 or June 30, 2010. No derivative instruments have been reclassified from a hedging instrument to an investment instrument. Details on foreign currency derivatives are disclosed under Foreign Currency Risk. INTEREST RATE RISK The University manages interest rate risk through its investment policies and the investment guidelines established with each manager. Each fixed-income manager is assigned a maximum boundary for duration as compared to the manager s relevant benchmark index. The goal is to allow ample freedom for the manager to perform, while controlling the interest rate risk in the portfolio. Modified duration, which estimates the sensitivity of a bond s price to interest rate changes, is based on a calculation entitled Macaulay duration. Macaulay is an accepted calculation developed for a portfolio of bonds assembled to fund a fixed liability. Macaulay duration is calculated as follows: sum of discounted time-weighted cash flows divided by the bond price. Modified duration is calculated using the following formula: Macaulay duration divided by (one plus yield-to-maturity divided by the number of coupon payments per year). As of June 30, 2011 and 2010, modified duration of the University s investments for which duration is measured is as follows: TABLE 3 INVESTMENTS MANAGED BY THE UNIVERSITY (Dollars in thousands; duration in years) Consolidated Endowment Fund Duration as of June 30, 2011 Duration as of June 30, 2010 Invested Funds Consolidated Endowment Fund Invested Funds Asset Category Asset Value Duration Asset Value Duration Asset Value Duration Asset Value Duration DOMESTIC CASH AND CASH EQUIVALENTS $ 28,968 $ 332,658 $ 54,932 0.17 $ 252,486 0.02 FOREIGN CASH AND CASH EQUIVALENTS 1,877 3 DOMESTIC FIXED INCOME 265,455 1.90 916,485 3.50 272,983 2.30 809,061 3.10 FOREIGN FIXED INCOME 19,795 2.44 5,707 1.76 5,620 3.89 7,215 2.21 TOTAL $ 316,095 1.54 $ 1,254,850 2.56 $ 333,538 2.14 $ 1,068,762 2.36 UNIVERSITY OF WASHINGTON > 18

CREDIT RISK Fixed income securities are subject to credit risk, which is the risk that the issuer or other counterparty to a financial instrument will not fulfill its obligations, or that negative perceptions of the issuer s ability to make these payments will cause prices to decline. Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The University Investment Policies limit fixed income exposure to investment grade assets. The Investment Policy for the Invested Funds cash pool requires each manager to maintain an average quality rating of AA as issued by a nationally recognized rating organization. The Invested Funds liquidity pool requires each manager to maintain an average quality rating of A and to hold 25% of their portfolios in government and government agency issues. The Investment Policy for the CEF reflects its long-term nature by specifying average quality rating levels by individual manager, but still restricting investment to investment grade credits. Duration and credit risk figures at June 30, 2011 and 2010 exclude $313,165,000 and $60,412,000, respectively, of fixed-income securities held outside the CEF and the Invested Funds Pool. These amounts make up 8.09% and 1.91%, respectively, of the University s investments, and are not included in the duration figures detailed in Tables 3 and 4. Investments subject to credit risk are presented in the table below: TABLE 4 INVESTMENTS CREDIT RATING (Dollars in thousands) Credit rating as of June 30, 2011 Credit rating as of June 30, 2010 Consolidated Consolidated Endowment Fund Invested Funds Endowment Fund Invested Funds Credit Rating Asset Value % Asset Value % Asset Value % Asset Value % AAA $ 229,100 72.5% $ 1,172,898 93.5% $ 241,123 72.3% $ 1,018,221 95.3% AA 47,780 15.1% 42,629 3.4% 38,473 11.5% 20,504 1.9% A 29,331 9.3% 12,183 1.0% 30,979 9.3% 5,062 0.5% BBB 2,704 0.9% 2,696 0.2% 8,384 2.5% 2,930 0.3% BB 0.0% 4,691 0.4% 188 0.1% 1,514 0.1% B 0.0% 4,697 0.4% 449 0.1% 1,564 0.1% CCC 253 0.1% 8,863 0.7% 485 0.1% 7,936 0.7% CC 159 0.0% 386 0.0% 203 0.1% 1,612 0.2% C 152 0.0% 0.0% 0.0% 0.0% D 0.0% 863 0.0% 0.0% 0.0% NR 6,616 2.1% 4,944 0.4% 13,254 4.0% 9,419 0.9% TOTAL $ 316,095 100.0% $ 1,254,850 100.0% $ 333,538 100.0% $ 1,068,762 100.0% FOREIGN CURRENCY RISK The University s Investment Policies permit investments in international equity and other asset classes which can include foreign currency exposure. The University also enters into foreign currency forward contracts, futures contracts, and options to manage the foreign currency exposure. At June 30, 2011 and 2010, the University had net outstanding forward commitments to sell foreign currency with a total fair value of $7,085,000 and $4,701,000, respectively, which equals 0.18% and 0.15% of the total portfolio. Table 5 details the market value of foreign denominated securities by currency type in the CEF at June 30, 2011 and 2010. TABLE 5 INVESTMENTS DENOMINATED IN FOREIGN CURRENCY (Dollars in thousands) June 30, 2011 Foreign Currency Foreign Cash & Fixed Income Foreign Equity Alternatives and Other Investments EURO (EUR) $ 2,632 $ 72,863 $ 71,586 BRITISH POUND (GBP) 5,955 66,882 10,393 CHINESE RENMINBI (RMB) 54,054 9,888 JAPANESE YEN (JPY) 38,759 12,035 INDIAN RUPEE (INR) 56 29,543 23,601 BRAZILIAN REAL (BRL) 41 43,694 679 RUSSIAN RUBLE (RUB) 35,108 2,607 HONG KONG DOLLAR (HKD) 44 25,117 5,439 CANADIAN DOLLAR (CAD) 4,258 11,792 10,510 SWISS FRANC (CHF) 753 19,792 777 TAIWANESE DOLLAR (TWD) 567 17,294 3,286 AUSTRALIAN DOLLAR (AUD) 1,924 10,614 6,061 REMAINING CURRENCIES 5,442 174,785 26,274 TOTAL $ 21,672 $ 600,297 $ 183,136 The above schedule does not include $5,707 thousand of foreign investments held in the Invested Funds Pool or $15,337 thousand of U.S. Dollar denominated foreign mutual funds. Foreign Currency Foreign Cash & Fixed Income June 30, 2010 Foreign Equity Alternatives and Other Investments EURO (EUR) $ 1,681 $ 52,258 $ 59,432 BRITISH POUND (GBP) 4,134 34,199 16,970 CHINESE RENMINBI (RMB) 43,613 7,511 JAPANESE YEN (JPY) 40,845 13,273 INDIAN RUPEE (INR) 30,865 22,170 BRAZILIAN REAL (BRL) 43,553 306 RUSSIAN RUBLE (RUB) 27,717 2,070 HONG KONG DOLLAR (HKD) 31,300 4,804 CANADIAN DOLLAR (CAD) 1,224 9,023 15,353 SWISS FRANC (CHF) 1,600 18,971 3,431 TAIWANESE DOLLAR (TWD) 3 19,845 2,648 AUSTRALIAN DOLLAR (AUD) 7,159 4,436 REMAINING CURRENCIES 107,083 23,812 TOTAL $ 8,642 $ 466,431 $ 176,216 The above schedule does not include $6,252 thousand of foreign investments held in the Invested Funds Pool or $16,598 thousand of U.S. Dollar denominated foreign mutual funds. FINANCIAL REPORT 2011 > 19

Notes to Financial Statements (CONTINUED) NOTE 7: Metropolitan Tract The Metropolitan Tract, located in downtown Seattle, comprises approximately 11 acres of developed property, including office space, retail space, parking and a luxury hotel. This land was the original site of the University from 1861 until 1895 when the University moved to its present location. Since the early 1900 s, the Metropolitan Tract has been leased by the University to entities responsible for developing and operating the property. On July 18, 1953, the Board of Regents of the University and the entity now known as Unico Properties, Inc. entered into a lease agreement for office, retail and parking facilities which will expire in 2014. On January 19, 1980, the Board of Regents of the University entered into a lease with the Urban/ Four Seasons Hotel Venture for the Olympic Hotel property, which will expire in 2040. The hotel was operated as the Four Seasons Olympic Hotel until July 31, 2003. On August 1, 2003, the remaining lease term was assigned to LHCS Hotel Holding (2002) LLC. The hotel was renamed the Fairmont Olympic Hotel and is now managed by Fairmont Hotels & Resorts. The balances as of June 30, 2011 and 2010 represent operating assets, net of liabilities, and land, buildings and improvements stated at appraised value as of November 1, 1954. The balances also include subsequent capital additions and improvements at cost, less retirements and accumulated depreciation of $126,575,000 and $125,861,000, respectively, and are net of the outstanding balance of the line of credit described below. In July 2004, the University obtained a 10-year term, variable rate revolving credit line for the Metropolitan Tract of up to $25,000,000 for capital repairs and improvements. The credit line is secured by future revenues of the Metropolitan Tract. As of June 30, 2011 and 2010, $8,500,000 was outstanding on the credit line. NOTE 8 : Capital Assets Capital asset activity for the two-year period ended June 30, 2011 is summarized as follows: (Dollars in thousands) Balance at June 30, 2009 Additions/ Transfers Retirements Balance at June 30, 2010 Additions/ Transfers Retirements Balance at June 30, 2011 LAND $ 112,685 $ 1,959 $ $ 114,644 $ 7,133 $ $ 121,777 INFRASTRUCTURE 176,137 1,722 177,859 6,161 184,020 BUILDINGS 3,405,850 149,333 3,555,183 208,891 1,470 3,762,604 FURNITURE, FIXTURES, AND EQUIPMENT 1,009,748 86,196 50,483 1,045,461 115,118 57,856 1,102,723 LIBRARY MATERIALS 276,111 13,808 1,479 288,440 10,539 1,548 297,431 CAPITALIZED COLLECTIONS 5,517 182 5,699 5,699 INTANGIBLE ASSETS 20,035 20,035 21,248 41,283 INTANGIBLES IN PROCESS 2,540 2,540 2,616 260 4,896 CONSTRUCTION IN PROGRESS 206,099 71,881 277,980 170,825 448,805 TOTAL 5,192,147 347,656 51,962 5,487,841 542,531 61,134 5,969,238 LESS ACCUMULATED DEPRECIATION/ AMORTIZATION INFRASTRUCTURE 73,774 4,054 77,828 4,260 82,088 BUILDINGS 1,300,964 115,128 1,416,092 120,578 617 1,536,053 FURNITURE, FIXTURES, AND EQUIPMENT 796,363 80,813 49,901 827,275 101,023 49,281 879,017 LIBRARY MATERIALS 181,145 12,465 995 192,615 12,470 1,052 204,033 INTANGIBLE ASSETS 16,254 16,254 5,307 21,561 TOTAL ACCUMULATED 2,352,246 228,714 50,896 2,530,064 243,638 50,950 2,722,752 DEPRECIATION/AMORTIZATION CAPITAL ASSETS, NET $ 2,839,901 $ 118,942 $ 1,066 $ 2,957,777 $ 298,893 $ 10,184 $ 3,246,486 UNIVERSITY OF WASHINGTON > 20

NOTE 9 : Long-Term Liabilities Long-term liability activity for the two-year period ended June 30, 2011 is summarized as follows: (Dollars in thousands) BONDS PAYABLE: Balance at June 30, 2009 Additions Reductions Balance at June 30, 2010 Additions Reductions Balance at June 30, 2011 Current Portion 2010 Current Portion 2011 GENERAL OBLIGATION BONDS PAYABLE (NOTE 11) $ 239,986 $ 31,040 $ 45,124 $ 225,902 $ 48,705 $ 65,368 $ 209,239 $ 12,433 $ 13,435 REVENUE BONDS PAYABLE (NOTE 11) 712,440 77,710 16,835 773,315 329,955 29,900 1,073,370 19,000 20,565 UNAMORTIZED PREMIUM ON BONDS 13,786 2,271 1,799 14,258 9,336 2,290 21,304 1,808 3,206 TOTAL BONDS PAYABLE 966,212 111,021 63,758 1,013,475 387,996 97,558 1,303,913 33,241 37,206 NOTES PAYABLE AND CAPITAL LEASES: NOTES PAYABLE & OTHER CAPITAL ASSET RELATED (NOTE 11) 34,396 3,049 3,185 34,260 79,782 4,610 109,432 4,499 5,124 NOTES PAYABLE & OTHER NONCAPITAL ASSET RELATED (NOTE 11) 1,476 213 83 1,606 304 513 1,397 1,353 1,294 CAPITAL LEASE OBLIGATIONS (NOTE 10) 14,022 5,391 8,155 11,258 3,078 6,338 7,998 6,019 3,311 TOTAL NOTES PAYABLE AND CAPITAL LEASES 49,894 8,653 11,423 47,124 83,164 11,461 118,827 11,871 9,729 OTHER LONG-TERM LIABILITIES: CHARITABLE AND DEFERRED GIFT ANNUITY LIABILITY 29,320 956 30,276 1,467 31,743 4,891 4,176 POLLUTION REMEDIATION LIABILITY (NOTE 1) 6,580 580 6,000 6,000 SICK LEAVE (NOTE 1) 29,991 977 29,014 6,649 4,172 31,491 488 3,940 SELF-INSURANCE (NOTE 17) 51,650 21,272 15,298 57,624 6,361 13,893 50,092 12,885 14,596 NET PENSION OBLIGATION (NOTE 16) 46,812 26,080 2,217 70,675 30,381 1,932 99,124 1,481 2,074 TOTAL OTHER LIABILITIES 164,353 48,308 19,072 193,589 44,858 19,997 218,450 19,745 24,786 TOTAL LONG-TERM LIABILITIES $ 1,180,459 $ 167,982 $ 94,253 $ 1,254,188 $ 516,018 $ 129,016 $ 1,641,190 $ 64,857 $ 71,721 NOTE 10: Leases Future minimum lease payments under capital leases, and the present value of the net minimum lease payments, as of June 30, 2011, are as follows below: CAPITAL LEASES Year (Dollars in thousands) Future Payments 2012 $ 3,311 2013 2,291 2014 950 2015 627 2016 627 THEREAFTER 1,200 TOTAL MINIMUM LEASE PAYMENTS 9,006 LESS: AMOUNT REPRESENTING INTEREST COSTS 1,008 PRESENT VALUE OF MINIMUM PAYMENTS $ 7,998 Buildings and equipment under capital lease were as follows: (Dollars in thousands) Balance at June 30, 2009 Additions Retirements Balance at June 30, 2010 Additions Retirements Balance at June 30, 2011 EQUIPMENT $ 51,992 $ 5,391 $ 23,197 $ 34,186 $ 3,078 $ 9,081 $ 28,183 REAL ESTATE 9,987 9,987 9,987 TOTAL 61,979 5,391 23,197 44,173 3,078 9,081 38,170 LESS ACCUMULATED DEPRECIATION EQUIPMENT 51,122 1,552 23,197 29,477 1,808 9,081 22,204 REAL ESTATE 8,989 998 9,987 9,987 TOTAL ACCUMULATED DEPRECIATION 60,111 2,550 23,197 39,464 1,808 9,081 32,191 LEASED CAPITAL ASSETS, NET $ 1,868 $ 2,841 $ $ 4,709 $ 1,270 $ $ 5,979 FINANCIAL REPORT 2011 > 21

Notes to Financial Statements (CONTINUED) OPERATING LEASES The University has certain lease agreements in effect that are considered operating leases, primarily for leased building space. During the years ended June 30, 2011 and 2010, the University recorded rent expenses of $28,184,000 and $27,169,000, respectively, for these leases. Future lease payments under these leases as of June 30, 2011, are as follows at right: Year (Dollars in Thousands) 2012 $ 27,135 2013 24,764 2014 22,722 2015 19,939 2016 22,393 2017 2021 52,926 2022 2026 27,427 2027 2031 25,007 THEREAFTER 39,799 TOTAL MINIMUM LEASE PAYMENTS $ 262,112 NOTE 11: Bonds and Notes Payable The bonds and notes payable at June 30, 2011 consist of state of Washington General Obligation and Refunding Bonds, University Revenue Bonds, and Notes Payable. These obligations have fixed interest rates ranging from 3.00% to 7.38%. Debt service requirements at June 30, 2011 were as follows: BONDS AND NOTES PAYABLE (Dollars in thousands) STATE OF WASHINGTON GENERAL OBLIGATION BONDS UNNIVERSITY OF WASHINGTON REVENUE BONDS NOTES PAYABLE AND OTHER Year Principal Interest Principal Interest Principal Interest 2012 $ 13,435 $ 10,421 $ 20,565 $ 55,247 $ 6,418 $ 3,849 2013 14,240 9,719 21,875 53,902 3,837 4,850 2014 14,920 9,025 36,645 52,681 4,453 4,708 2015 15,470 8,270 30,325 51,301 4,585 4,513 2016 18,300 7,397 27,170 49,979 4,783 4,304 2017 2021 68,945 24,507 171,330 230,596 26,671 18,023 2022 2026 53,630 8,924 125,185 195,772 19,497 12,379 2027 2031 10,299 583 112,070 160,434 20,409 7,864 2032 2036 153,170 132,338 20,176 2,451 2037 Thereafter 375,035 43,941 TOTAL PAYMENTS $ 209,239 $ 78,846 $ 1,073,370 $1,026,191 $ 110,829 $ 62,941 State law requires that the University reimburse the state for debt service payments relating to its portion of the state of Washington General Obligation and Refunding Bonds from Medical Center patient revenues, tuition, timber sales and other revenues. The University has pledged the net revenues from the Housing and Dining System, the Parking System and a special student fee to retire the related revenue bonds. REFUNDING ACTIVITY On July 8, 2009, the state of Washington refunded General Obligation Bonds totaling $29,780,000 (UW portion) with new bond issuances with a par value of $27,430,000 and premium of $2,637,000. The refunded bonds had coupon rates ranging from 3.50% to 5.00%; the new bonds have an average interest rate of 4.871%. The refunding decreased the total debt service payments to be made over the next 14.5 years by $3,318,000 and resulted in a total economic gain of $2,582,000. On October 28, 2009, the state of Washington refunded General Obligation Bonds totaling $3,715,000 (UW portion) with new bond issuances with a par value of $3,610,000 and premium of $394,000. The refunded bonds had a coupon rate of 5.25%; the new bonds have an average interest rate of 5.00%. The refunding decreased the total debt service payments to be made over the next 16 years by $319,000 and resulted in a total economic gain of $252,000. On June 15, 2010, the state of Washington refunded Certificates of Participation (COP) totaling $4,455,000 with new COP issuances with a par value of $4,485,000 and premium of $39,000. The refunding decreased the total debt service payments to be made over the next 11 years by $671,000 and resulted in a total economic gain of $609,000. On August 10, 2010, the State of Washington refunded General Obligation Bonds totaling $28,710,000 (UW portion) with new bond issuances totaling $25,925,000 (plus premium of $4,231,000). The refunded bonds had coupon rates ranging from 3.50% to 5.00%; the new bonds have an average interest rate of 5.00%. The refunding decreased the total debt service UNIVERSITY OF WASHINGTON > 22

payments to be made over the next 14.5 years by $3,508,000 and resulted in a total economic gain of $3,195,000. On August 10, 2010, the State of Washington refunded General Obligation Bonds totaling $4,265,000 (UW portion) with new bond issuances totaling $3,915,000 (plus premium of $663,000). The refunded bonds had a coupon rate of 5.00%; the new bonds have an average interest rate of 5.00%. The refunding decreased the total debt service payments to be made over the next 11.5 years by $500,000 and resulted in a total economic gain of $426,000. On September 28, 2010, the state of Washington refunded General Obligation Bonds totaling $19,795,000 (UW portion) with new bond issuances with a par value of $18,865,000 and premium of $2,869,000. The refunded bonds had coupon rates ranging from 4.00% to 5.00%; the new bonds have an average interest rate of 4.802%. The refunding decreased the total debt service payments to be made over the next 16.3 years by $2,539,000 and resulted in a total economic gain of $1,891,000. On October 5, 2010, the University issued $165,005,000 in General Revenue & Refunding Bonds, 2010 A&B. Part of the proceeds were used to partially refund the 2002 Housing and Dining Revenue & Refunding bonds. The amount refunded was $10,890,000; the new par value was $10,400,000 with a premium of $605,000. The refunded bonds had coupon rates ranging from 4.75% to 5.375%; the new bonds have an average interest rate of 3.943%. The refunding decreased the total debt service payments to be made over the next 21 years by $991,000 and resulted in a total economic gain of $640,000. In addition, proceeds were used to pay off $35,000,000 in commercial paper. The remainder of the proceeds will be used to fund a variety of projects including Tacoma Phase 3, Balmer Hall Renovation, UWMC Expansion, and Housing & Dining Phase 1 Master Plan. The average life of the 2010 A&B bonds (new money only) is 23.8 years with final maturity on October 1, 2040. The average interest rate of these bonds is 4.91%. On December 14, 2010, Washington Biomedical Research Facilities 3 (a blended component unit of the University), issued $13,205,000 in taxable bonds and $154,745,000 in Build America Bonds with a true interest cost of 3.974% and average life of 16 years. The bond proceeds will be used to fund construction of a research facility that the University will occupy through a long-term lease arrangement. SUBSEQUENT DEBT OFFERING 2011A GRB Issuance: On July 28, 2011, the University issued $211,370,000 in General Revenue & Refunding Bonds, 2011A. Part of the proceeds were used to refund 63-20 financings issued through third parties. The amount refunded was $89,320,000; the new par was $74,515,000 (plus premium of $8,148,000 and debt service reserve contributions of $8,582,000). The refunded bonds had coupon rates ranging from 5.000 to 6.600%; the new bonds have an average interest rate of 4.623%. The refunding decreased the total debt service payments to be made over the next 20.68 years by $16,967,000 and resulted in a total economic gain of $13,703,000. In addition, proceeds were used to pay off $75,000,000 in commercial paper. The remainder of the proceeds will be used to fund a variety of projects including Tacoma Phase 3, Balmer Hall Renovation, UWMC Expansion, and Housing & Dining Phase 1 Master Plan. The average life of the 2011A General Revenue bonds (new money only) is 15.0 years with final maturity on April 1, 2035. The average interest rate of these bonds is 4.839%. Combined COP Refunding: On August 24, 2011, the State of Washington refunded Certificates of Participation (COP) totaling $11,370,000 with new COP issuances totaling $10,310,000 (plus premium of $1,352,000). The refunding decreased the total debt service payments to be made over the next 11 years by $1,625,000 and resulted in a total economic gain of $1,412,000. COMMERCIAL PAPER PROGRAM In July 2006, the Board of Regents authorized a commercial paper program with a maximum borrowing limit of $250,000,000, payable from University General Revenues. This short-term borrowing program is primarily used to fund capital expenditures. As of June 30, 2011 and 2010, there was $50,000,000 and $30,000,000, respectively, in outstanding commercial paper. On September 3, 2009, the University issued $2,000,000 in short-term commercial paper. The commercial paper was paid off with proceeds from the General Revenue Bond, 2009B, issued on December 22, 2009. Between July 1, 2010 and September 30, 2010, the University issued $35,000,000 in short-term commercial paper. The commercial paper was paid off with proceeds from the issuance of General Revenue & Refunding Bonds, 2010 A&B. FINANCIAL REPORT 2011 > 23

Notes to Financial Statements (CONTINUED) NOTE 12: Pledged Revenues The University has pledged specific revenues, net of specified operating expenses, to repay the principal and interest of revenue bonds. The following is a schedule of the pledged revenues and related debt: (Dollars in thousands) Source of Revenue Pledged Total Future Revenues Pledged* Description of Debt Purpose of Debt Term of Commitment Proportion of Debt Service to Pledged Revenues (Current Year) Housing and Dining Revenues, net of operating expenses $ 22,611 Housing and Dining Bonds, issued in 2002 and 2004 Contruction and renovation of student housing 2032 11.9% Student Housing gross rent from Component Unit Entities, net of permitted operating expenses $ 143,222 Student Housing Revenue Bonds (Component Unit Entities), issued in 1996, 2000, and 2002 Construction and renovation of student housing 2033 81.9% Student Facilities Fees and earnings on invested fees $ 65,000 Student Facilities Refunding Revenue Bonds, issued in 2005 Construction of student recreational sports facilities 2030 19.4% Parking Revenues from the University Parking System, net of operating expenses reported as Auxiliary Revenues $ 25,430 University of Washington Parking System and Refunding Bonds, issued in 2004 Construction of improvements and additions to the University's parking system 2030 11.4% * Total future principal and interest payments on the debt NOTE 13: Operating Expenses by Function Operating expenses by functional classification for the years ended June 30, 2011 and 2010 are summarized as follows: (Dollars in thousands) Operating Expenses 2011 2010 EDUCATIONAL AND GENERAL INSTRUCTION $ 920,169 $ 904,812 RESEARCH 791,507 699,955 PUBLIC SERVICE 29,574 33,814 ACADEMIC SUPPORT 278,693 259,388 STUDENT SERVICES 34,908 33,815 INSTITUTIONAL SUPPORT 133,547 141,371 OPERATION & MAINTENANCE OF PLANT 192,433 155,188 SCHOLARSHIPS & FELLOWSHIPS 101,388 93,219 AUXILIARY ENTERPRISES 169,876 165,612 MEDICAL-RELATED 873,785 776,767 DEPRECIATION/AMORTIZATION 243,638 228,714 TOTAL OPERATING EXPENSES $ 3,769,518 $ 3,492,655 UNIVERSITY OF WASHINGTON > 24

NOTE 14: Related Parties Harborview Medical Center (HMC), a hospital and Level I adult and pediatric trauma center in Seattle, is a component unit of King County, Washington. It has been managed by the University under a management contract between King County and the University since 1967. The current management contract will be in force through June 30, 2015. Under the contract, the HMC Board of Trustees determines major institutional policies and retains control of programs and fiscal matters, while King County retains ultimate control over capital programs and capital budgets. The University is responsible for the operations of HMC, including the provision of medical, dental and management services. All of the individuals employed at HMC, including physicians, are employees of the University of Washington. HMC expenses, including payroll, are reimbursed to the University from HMC fund sources. HMC revenues and expenses are not recognized in the University s financial statements. The University s financial statements do, however, include accounts receivable from HMC of $20,733,000 in 2011 and $24,501,000 in 2010, as well as HMC investments of $2,685,000 and $2,411,000, respectively, and accrued liabilities of $17,823,000 and $17,288,000, respectively. The University of Washington Foundation (UWF) is a nonprofit organization that performs fundraising activities on behalf of the University of Washington. The UWF is not included in the University s financial statements as a component unit because gifts and grants that are made to the UWF are immediately transferred to the University. In 2011 and 2010, the UWF transferred $48,491,000 and $43,831,000, respectively, to the University in gifts and grants received on its behalf; these are included in the financial statements of the University. The remaining amounts retained by the UWF are not significant to the University s financial statements. NOTE 15: Other Post Employment Benefits (OPEB) Health care and life insurance programs for employees of the state of Washington are administered by the Washington State Health Care Authority (HCA). The HCA calculates the premium amounts each year that are sufficient to fund the statewide health and life insurance programs on a pay-as-you-go basis. These costs are passed through to individual state agencies based upon active employee headcount; the agencies pay the premiums for active employees to the HCA. The agencies may also charge employees for certain higher cost options elected by the employee. State of Washington retirees may elect coverage through state health and life insurance plans, for which they pay less than the full cost of the benefits, based on their age and other demographic factors. The health care premiums for active employees, which are paid by the agency during employees working careers, subsidize the underpayments of retirees. An additional factor in the OPEB obligation is a payment that is required by the State Legislature to reduce the premiums for retirees covered by Medicare (an explicit subsidy). For calendar years 2011 and 2010, this amount was $183 per retiree eligible for parts A and B of Medicare. This is also passed through to state agencies via active employee rates charged to the agency. There is no formal state or University plan that underlies the subsidy of retiree health and life insurance. ACTUARIAL STUDY Actuarial studies performed by the Washington Office of the State Actuary calculated that the total OPEB obligation of the state of Washington at January 1, 2010 and 2009 was $3.5 billion and $3.8 billion, respectively. The annual cost was $321 million and $349 million for 2011 and 2010, respectively. The actuary calculated the OPEB obligation based on individual state employee data, including age, retirement eligibility and length of service. The probability of an employee of a given age and length of service retiring and receiving OPEB benefits is based on statewide historical data. The actuary s allocation of the cumulative statewide liability related to the University, including its unconsolidated affiliates, was estimated at approximately $605 million and $636 million for 2011 and 2010, respectively. These amounts are not included in the University s financial statements. The University paid $293 million and $250 million for healthcare expenses in 2011 and 2010, respectively, which included its payas-you-go portion of the OPEB liability, calculated by the actuary at $7.4 million and $6.5 million in 2011 and 2010, respectively. The State Actuary s report is available at: http://osa.leg.wa.gov/actuarial_services/ OPEB/OPEB.htm FINANCIAL REPORT 2011 > 25

Notes to Financial Statements (CONTINUED) NOTE 16: Pension Plans The University offers two contributory plans: the Washington State Public Employees Retirement System (PERS) plan, a defined-benefit retirement plan; and the University of Washington Retirement Plan (UWRP), a defined-contribution plan with supplemental payments to beneficiaries, when required. PUBLIC EMPLOYEES RETIREMENT SYSTEM Plan Description: The University of Washington contributes to PERS, a cost sharing, multiple-employer, defined-benefit pension plan administered by the state of Washington Department of Retirement Systems. PERS Plan 1 provides retirement and disability benefits and minimum benefit increases beginning at age 66 to eligible nonacademic plan members hired prior to October 1, 1977. PERS Plans 2 and 3 provide retirement and disability benefits and a cost-of-living allowance to eligible nonacademic plan members hired on or after October 1, 1977. In addition, PERS Plan 3 has a defined-contribution component, which is fully funded by employee contributions. The authority to establish and amend benefit provisions resides with the legislature. The Washington State Public Employees Retirement System issues a publicly available financial report that includes financial statements and required supplementary information for PERS. The report may be obtained by writing to the Department of Retirement Systems, P.O. Box 48380, Olympia, WA 98504-8380, or visiting http://www.drs.wa.gov/ administration/ Funding Policy: The Office of the State Actuary, using funding methods prescribed by statute, determines actuarially required contribution rates for PERS. Plan 1 members were required to contribute 6% of their annual covered salary in fiscal years 2011 and 2010. Contributions for Plan 2 members are determined by the aggregate method, and may vary over time. The contribution rate for Plan 2 employees at June 30, 2011 and 2010 was 3.9% in both years. Plan 3 members can choose The Unfunded Actuarial Accrued Liability (UAL) and Annual Required Contribution (ARC) as of July 1 of the respective year were: (Dollars in thousands) 2011 2009 2007 UAL $ 235,048 $ 218,036 $ 64,215 NORMAL COST 10,774 8,860 3,369 AMORTIZATION OF UAL, INCLUDING INTEREST 19,607 17,220 4,374 ARC $ 30,381 $ 26,080 $ 7,743 (Dollars in thousands) Actuarial assumptions 2011 2009 2007 PAYROLL COVERED BY PLAN $ 1,129,000 $ 976,000 $ 771,000 RATE OF RETURN ASSUMPTION 4.25% 5% 5% SALARY INCREASES FOR YEARS 1 AND 2 2% 2% 4% SALARY INCREASE FOR THIRD YEAR 4% 4% 4% SALARY INCREASES THEREAFTER 4% 4% 4% The UAL and ARC were established using the entry age normal cost method. The following table reflects the activity in the Net Pension Obligation for the years ended June 30, 2011, 2010, and 2009: (Dollars in thousands) 2011 2010 2009 BALANCE AT BEGINNING OF FISCAL YEAR $ 70,675 $ 46,812 $ 21,477 ANNUAL REQUIRED CONTRIBUTION 30,381 26,080 26,080 PAYMENTS TO BENEFICIARIES (1,932) (2,217) (745) BALANCE AT END OF FISCAL YEAR $ 99,124 $ 70,675 $ 46,812 contributions ranging from 5% to 15% of salary, based on the age of the member. The defined-contribution benefit for PERS 3 will depend on the member s contributions, the investment earnings on those contributions, and if an annuity is taken, the age at which the member receives payment. The contribution rate for the University at June 30, 2011 and 2010, for each of PERS Plans 1, 2, and 3 was 5.31% in both years. The University s contributions to PERS for the years ended June 30, 2011, 2010, and 2009 were $42,967,000, $41,680,000, and $64,169,000, respectively, as determined by rates established in accordance with RCW 41.45. UNIVERSITY OF WASHINGTON RETIREMENT PLAN (403(B)) & UNIVERSITY OF WASHINGTON SUPPLEMENTAL RETIREMENT PLAN (401(A)) Faculty, librarians and professional staff are eligible to participate in the University of Washington Retirement Plan, a 403(b) defined-contribution plan and the UW Supplemental Retirement Plan, a 401(a) defined-benefit retirement plan which operates in tandem with the 403(b) plan. Both plans are administered by the University. 403(b) Plan Description: Contributions to the plan are invested by participants in annuity contracts or mutual fund accounts offered by one or more fund sponsors. Employees have at all times a 100% vested interest in their accumulations. Benefits from fund sponsors are available upon separation or retirement at the member s option. RCW 28B.10.400 et. seq. assigns the authority to the University of Washington Board of Regents to establish and amend benefit provisions. 403(b) Funding Policy: Employee contribution rates, based on age, are 5%, 7.5% or 10% of salary. The University matches the contributions of employees. Within parameters established by the legislature, contribution requirements may be established or amended by the University of Washington Board of Regents. Employee and employer contributions for the years ended June 30, 2011 and 2010 were $83,358,000 and $80,018,000, respectively. UNIVERSITY OF WASHINGTON > 26

401(a) Plan Description: This plan provides for a supplemental payment component, which guarantees a minimum retirement benefit based upon a one-time calculation at each eligible participant s retirement date. The University makes direct payments to qualifying retirees when the retirement benefits provided by the 403(b) plan do not meet the benefit goals. During the fiscal year ending June 30, 2011 the University amended the supplemental retirement plan, limiting participation to those individuals who were active participants on February 28, 2011. 401(a) Plan Funding: The University received an actuarial valuation of the supplemental payment component of the UWRP with a valuation date of July 1, 2011. The previous evaluations were performed in 2009, 2007 and 2004. The University has set aside $75,132,000 as of June 30, 2011 for this liability. NOTE 17: Commitments and Contingencies Authorized expenditures for construction projects unexpended as of June 30, 2011 and 2010, were $537,924,000 and $263,779,000, respectively. These expenditures will be funded from local funds and state appropriations. The University receives and expends substantial amounts under federal and state grants, contracts and programs such as Medicare. This funding is used for research, student aid, Medical Center operations and other programs, and is subject to audit by governmental granting agencies. Certain grant and contract costs billed to the federal government are subject to audit under OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. The University is also involved in various other claims and legal actions arising in the ordinary course of business. University management believes that any liabilities arising from these matters will not have a material effect on the University s financial statements. The University is exposed to risk of loss related to tort liability, injuries to employees and loss of property. The University purchases insurance protection for workers compensation as well as marine, aviation and certain other risks. The University also purchases insurance protection for loss of property at self-sustaining units, bondfinanced buildings and where otherwise required by contract; otherwise, the risk of property loss is retained, unfunded. For professional, general, employment and automobile liability, the University maintains a program of self-insurance reserves and excess insurance coverage. The self-insurance reserve represents the estimated ultimate cost of settling claims resulting from events that have occurred on or before the balance sheet date. The reserve includes the amount that will be required for future payments of claims that have been reported and claims related to events that have occurred but have not been reported. The reserve is discounted at 4% in both years ended June 30, 2011 and 2010, and 4.25% in 2009. The self-insurance reserve is estimated through an actuarial calculation. Changes in the selfinsurance reserve for the years ended June 30, 2011, 2010, and 2009 are noted below: (Dollars in thousands) 2011 2010 2009 RESERVE AT BEGINNING OF FISCAL YEAR $ 57,624 $ 51,650 $ 47,515 INCURRED CLAIMS AND CHANGES IN ESTIMATES 6,361 21,272 14,606 CLAIM PAYMENTS (13,893) (15,298) (10,471) RESERVE AT END OF FISCAL YEAR $ 50,092 $ 57,624 $ 51,650 FINANCIAL REPORT 2011 > 27

BOARD OF REGENTS* Kristianne Blake, Chair Joanne R. Harrell, Vice Chair Stanley H. Barer Jeffrey H. Brotman Craig W. Cole William H. Gates Sally Jewell Herb Simon Orin Smith Frances Youn ADMINISTRATIVE OFFICERS* Phyllis M. Wise Interim President Mary Lidstrom Interim Provost and Executive Vice President Eric Godfrey Vice President and Vice Provost for Student Life Randy Hodgins Vice President for External Affairs Mindy Kornberg Vice President for Human Resources Connie Kravas Vice President for University Advancement Sheila Edwards Lange Vice President for Minority Affairs and Vice Provost for Diversity Paul G. Ramsey CEO, UW Medicine, Executive Vice President for Medical Affairs and Dean of the School of Medicine Doug Wadden Executive Vice Provost V Ella Warren Senior Vice President * As of June 30, 2011 This publication was prepared jointly by Financial Management. Published December 2011. The 2011 UW Annual Report and reports from previous years are available at annualreport.uw.edu. For more information, contact Financial Accounting at 206.221.7845 or accountg@uw.edu PHOTOGRAPHY: Doug Plummer DESIGN, PRODUCTION, AND PRINT COORDINATION: UW Creative Communications VISIT OUR WEBSITE: uw.edu 2011 University of Washington Printed on recycled paper containing 30% post-consumer fiber

2012 FINANCIAL REPORT

Table of Contents INSIDE BACK COVER 1 INDEPENDENT AUDITORS REPORT 2 MANAGEMENT S DISCUSSION AND ANALYSIS 10 FINANCIAL STATEMENTS 14 NOTES TO FINANCIAL STATEMENTS BOARD OF REGENTS AND ADMINISTRATIVE OFFICERS University Facts 2011-2012 2006-2007 2001-2002 STUDENTS Autumn Enrollment Undergraduate 35,732 31,135 30,005 Graduate 12,135 10,557 9,379 Professional 1,978 1,802 1,705 TOTAL 49,845 43,494 41,089 Extension course registrations 70,823 48,577 31,054 Number of Degrees Awarded Bachelor s 9,853 8,306 8,053 Master s 3,635 2,877 2,735 Doctoral 712 631 495 Professional 565 500 469 TOTAL 14,765 12,314 11,752 INSTRUCTIONAL FACULTY 4,071 3,742 3,443 FACULTY AND STAFF 1 30,972 28,188 23,680 RESEARCH FUNDING ALL SOURCES (in thousands of dollars) $ 1,471,309 $ 1,020,000 $ 809,000 SELECTED REVENUES (in thousands of dollars) Gifts, Grants, and Contracts $ 1,378,272 $ 1,079,926 $ 803,839 Patient Service and Other Medical-Related Revenues 2 1,862,557 900,266 587,623 Auxiliary Enterprises and Other Revenues 447,651 802,458 292,090 State Appropriations (Operating) 218,343 365,782 343,656 Tuition and Fees 3 681,227 396,895 249,861 SELECTED EXPENSES (in thousands of dollars) Instruction, Academic Support, and Student Services $ 1,254,118 $ 1,033,965 $ 728,501 Research and Public Service 806,566 630,460 471,681 Medical-Related 2 1,709,881 689,436 509,906 Auxiliary Enterprises 195,982 142,883 141,692 Institutional Support and Physical Plant 342,495 315,702 239,797 CONSOLIDATED ENDOWMENT FUNDS 4 (in thousands of dollars) $ 2,111,000 $ 2,098,000 $ 998,000 SQUARE FOOTAGE 5 (in thousands of square feet) 22,210 19,187 16,300 1 Full-time equivalents 2 Includes Valley Medical Center and Northwest Hospital (included in 2011-2012 only) 3 Net of scholarship allowances of $133,243,000 in 2011-2012 and $55,394,000 in 2006-2007 4 Stated at fair value 5 Gross square footage, all campuses

KPMG LLP Suite 2900 1918 Eighth Avenue Seattle, WA 98101 Independent Auditors Report The Board of Regents University of Washington: We have audited the accompanying financial statements of the business-type activities of the University of Washington (the University), an agency of the state of Washington, as of and for the years ended June 30, 2012 and 2011, and its discretely presented component units as of and for the year ended June 30, 2012. These financial statements are the responsibility of the University s management. Our responsibility is to express opinions on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note 1, the financial statements of the University of Washington, an agency of the state of Washington, are intended to present the financial position, and the changes in financial position and, where applicable, cash flows of only that portion of the activities of the State of Washington that is attributable to the transactions of the University of Washington and its discretely presented component units. They do not purport to, and do not, present fairly the financial position of the state of Washington as of June 30, 2012 and 2011, the changes in its financial position or, where applicable, its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Washington as of June 30, 2012 and 2011, and the changes in its financial position and its cash flows for the years then ended, and the financial position of its discretely presented component units as of June 30, 2012, and the changes in their financial position for the year then ended in conformity with U.S. generally accepted accounting principles. U.S. generally accepted accounting principles require that the management s discussion and analysis on pages 2 through 8 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. November 9, 2012 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity. FINANCIAL REPORT 2012 > 1

Management s Discussion and Analysis The discussion and analysis below provides an overview of the financial position and activities of the University of Washington ( University ) for the years ended June 30, 2012 and 2011. This discussion has been prepared by management and should be read in conjunction with the financial statements and accompanying notes which follow this section. Financial Highlights for Fiscal Year 2012 The University recorded an increase in net assets of $14 million in fiscal year 2012; $520 million less than the fiscal year 2011 increase of $534 million. This is primarily related to a decrease in investment income of $361 million in fiscal year 2012, a result of decreased market values during the year. The University adjusts the carrying value of investments to market value each year, with the change recorded as investment income or loss. Revenues from tuition and patient services continued to show growth during 2012, while revenues from research activities decreased slightly due to reductions in Federal ARRA funding. Key Financial Results for Fiscal Years 2012, 2011 and 2010: (in millions) 2012 2011 2010 Total operating revenues $ 3,522 $ 3,390 $ 3,124 Operating expenses 3,911 3,769 3,493 Operating loss (389) (379) (369) State appropriations 218 297 303 Federal ARRA Education Funding 44 Investment income 34 395 309 Gifts 152 177 119 Other nonoperating revenue (expense), net (1) 44 25 Increase in net assets 14 534 431 Net assets, beginning of year 5,728 5,194 4,763 Net assets, end of year $ 5,742 $ 5,728 $ 5,194 Operating revenues minus operating expenses typically result in an operating loss in the University s financial statements. Nonoperating items, including state support, investment income, and gifts have brought each year s results to a modest increase in the net assets, or equity of the University. This surplus has been reinvested within the University to add a margin of educational excellence, upgrade the University s facilities, and provide a prudent reserve for contingencies such as the current period of economic instability. Economic factors affecting the future A number of contingencies face the University over the next few years. The continuing economic downturn is a primary source of uncertainty. The state of Washington, which provided 5% of the University s total revenues in fiscal year 2012, continues to struggle with budget deficits. The University s 2013 operating appropriation from the state is approximately $209 million, roughly equal to the 2012 amount which was a 33% decrease from the prior year. Though state tax revenue collections show modest growth currently, required expenditures are significant in 2013 and beyond, which will likely result in additional funding pressure in the upcoming years in both operating and capital appropriations. To help alleviate the effects of this educational funding shortfall, the University s Board of Regents have broad tuition setting authority, including undergraduate resident tuition. Funding for research activities was temporarily boosted by Federal ARRA funding for basic research and activities in the health sciences; this contributed to a bump in research expenditures of $74 million in 2012 and $163 million in 2011. The University has $50 million of unspent ARRA awards that will be expended in fiscal year 2013 or later. The federal budget remains under significant pressure; federal funding for research could be impacted. Rising benefit costs, particularly for health care and pensions, continue to impact the University as well. Pension funding rates for the state pension plans are likely to increase over the next few years. State support for benefit expenses continues to shrink along with the University s state funding subsidy. In March 2010, health care reform was passed by the U.S. Congress and signed into law by President Obama. While the major changes in coverage will take effect beginning in 2014, there may be significant changes by the state and federal government to implementation plans for health care reform between now and 2014. Thus, the environment in which health care organizations currently operate is dynamic and uncertain. While the economic downturn continues to put pressure on operating results, 2012 remained relatively stable for the University of Washington Medical Center compared with 2011 due to the complex level of care provided. Operating results of Northwest Hospital & Medical Center (Northwest Hospital) were impacted by lower than expected volume, as well as one-time expenses related to relocation of services. Many initiatives are underway that should improve Northwest Hospital s performance in the future. Valley Medical Center operating results were negatively impacted by expenses associated with implementation of the Electronic Medical Record, and a reduction in tax levy revenues. Using the Financial Statements The University s financial statements include the Balance Sheets, the Statements of Revenues, Expenses, and Changes in Net Assets, the Statements of Cash Flows and the Notes to the Financial Statements. These financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) principles, which establish standards for external financial reporting for public colleges and universities. GASB standards require that financial statements be presented on a consolidated basis in order to focus on the University as a whole. On January 1, 2010, the University affiliated with Northwest Hospital & Medical Center (Northwest Hospital). GASB Unaudited see accompanying notes to basic financial statements UNIVERSITY OF WASHINGTON > 2

standards require that this affiliation be presented as a discrete component unit; therefore, its financial position at June 30, 2012 and the results of its operations for the year ended June 30, 2012 are included in a separate column for financial statement presentation purposes. (See Note 1 and Note 19 to the Financial Statements.) On July 1, 2011, the University affiliated with Valley Medical Center, a Washington public hospital district which owns and operates a 303-bed full-service acute care hospital and 22 clinics located throughout southeast King County. The affiliation with Valley Medical Center is also being reflected as a discrete component unit, therefore its financial position and the results of its operations are included together with Northwest Hospital in a separate column for financial statement presentation purposes. (See Note 1 and Note 19 to the Financial Statements.) The analysis presented below includes the consolidated balances of the University of Washington and its blended component units, but excludes the financial position and results of operations of its discrete component units (Northwest Hospital and Valley Medical Center), unless otherwise noted. Financial Health BALANCE SHEETS The Balance Sheets present the financial condition of the University at the end of the last two fiscal years and report all assets and liabilities of the University. A summarized comparison of the University s assets, liabilities and net assets as of June 30, 2012, 2011, and 2010, follows: (in millions) 2012 2011 2010 Current assets $ 1,161 $ 924 $ 851 Noncurrent assets: Capital assets, net 3,618 3,246 2,958 Other 3,624 3,843 3,191 Total assets 8,403 8,013 7,000 Current liabilities 722 651 548 Noncurrent liabilities 1,939 1,634 1,258 Total liabilities 2,661 2,285 1,806 Net assets $ 5,742 $ 5,728 $ 5,194 The excess of current assets over current liabilities of $439 million in 2012 reflects the continuing ability of the University to meet its short-term obligations. Current assets consist primarily of cash, shortterm investments and accounts receivable. The June 30, 2012 current asset balance of $1,161 million was an increase of $237 million from 2011, due mostly to increases in the value of short-term investments. The short-term portion of the University s investment portfolio can fluctuate based upon changes in investment mix and the expected short-term needs for University funds. Long-term investments as of June 30, 2012 decreased by $227 million from 2011 as a result of market declines during the year in the value of the University s investments. Realized and unrealized losses in fiscal year 2012 totaled $35 million, versus $324 million of realized and unrealized gains in 2011. The difference between total assets and total liabilities, referred to as net assets or equity, is one indicator of the current financial condition of the University. The change in net assets measures whether the overall financial condition has improved or deteriorated during the year. The University reports its equity in four categories: Invested in Capital Assets, net of related debt This is the University s total investment in capital assets, net of accumulated depreciation and amortization and outstanding debt obligations related to those capital assets; Restricted Net Assets: Nonexpendable net assets, primarily endowments, consist of funds on which the donor or other external party has imposed the restriction that the corpus is not available for expenditures but rather for investment purposes only; Expendable net assets are resources which the University is legally or contractually obligated to spend in accordance with time or purpose restrictions placed by donors and/or other external parties; Unrestricted Net Assets are all other funds available to the institution for any purpose associated with its mission. Unrestricted net assets are often internally designated for specific purposes. The University s net assets at June 30, 2012, 2011, and 2010 are summarized as follows: (in millions) 2012 2011 2010 Invested in capital assets, net of related debt $ 2,113 $ 2,060 $ 1,982 Restricted: Nonexpendable 1,116 1,075 959 Expendable 1,162 1,227 1,090 Unrestricted 1,351 1,366 1,163 Total net assets $ 5,742 $ 5,728 $ 5,194 Net investment in capital assets increased $53 million, or 3%, in 2012, and increased $78 million, or 4%, in 2011. This balance increases as debt is paid off or when the University funds fixed asset purchases without financing. This balance decreases as assets are depreciated. Restricted nonexpendable net assets increased $41 million, or 4%, in 2012, and $116 million, or 12%, in 2011. For both years the increase was the result of new endowment gifts. The fiscal year 2011 increase also reflected recovery of the value of underwater investments in the Consolidated Endowment Fund. Restricted expendable net assets decreased $65 million, or 5%, in 2012, and increased $137 million, or 13%, in 2011. This category is primarily affected by new operating and capital gifts, and Unaudited see accompanying notes to basic financial statements FINANCIAL REPORT 2012 > 3

Management s Discussion and Analysis (CONTINUED) earnings or losses in restricted investments, including endowments. The sharp decline in the market value of investments, which had a significant effect on the University s investments in 2009, was partially recovered during 2010 and 2011. Unrestricted net assets decreased by $15 million, or 1%, in 2012, 9.5 compared to an increase of $203 million, or 17%, in 2011. Funding pressure from the Operating state of Washington Margin 3 for the educational function, reduced ARRA research funding (and the associated indirect cost recoveries), 6 as well as flat returns on investments related to 5 5.50% 5.90% unrestricted funds, impacted the University s net assets. The 2011 4 increase was 4.27% 3 largely driven by increases in tuition and patient services revenue, and 2 an increase in the market value of investments related 2.09% to unrestricted 1 funds. 0 The ratio of expendable 2012 financial 2011 resources 2010 Moody s to operations Public (as Universities defined by Moody s) measures the strength (Aaa of median net assets. 2011) This ratio, illustrated in the chart below, shows that in 2012 the University had enough expendable resources from various sources to fund operations for a period of 7.8 months. PERCENTAGE MONTHS OF COVERAGE 12.0 10.0 8.0 6.0 4.0 2.0 Expendable Financial Resources to Operations 1 7.8 8.4 7.9 12.1 The impact to program support has been substantial with $716 million distributed over the past 10 years. Programs supported by the endowment include academic support, scholarships, fellowships, professorships, chairs and research activities. Under the long-term spending policy approved by the Board of Regents, CEF quarterly distributions to programs are made based on an annual percentage rate of 4% applied to the five-year rolling average of the CEF s market valuation. The administrative fee of 1% supporting fundraising and stewardship activities (0.80%) and investment management (0.20%) continues. Similar to program distributions, the fee is based on the endowment s five-year average market value. Endowment portfolios are commonly managed around a core set of objectives focused on the need to provide support for endowed programs in perpetuity. The Board of Regents, in conjunction with the University of Washington Investment Committee (UWINCO), establishes the strategic asset allocation judged to be most appropriate for the University from a long-term potential return and risk perspective. For the fiscal year ending June 30, 2012 the CEF earned an investment return of -0.9%, underperforming the policy benchmark but outperforming the blended benchmark (70% MSCI ACWI and 30% BC Government Bond). CEF returns over the past five years averaged +0.2%, weighed down substantially by the 2008-2009 global financial crisis. Performance over the ten-year period remains solid, with the CEF returning an annual average of +7.0%. A portion of the University s operating funds are invested in the CEF. As of June 30, 2012 these funds comprise $423 million of the CEF market value. Consolidated Endowment Fund Market Value (in millions) 0 Endowed gifts supply Expendable permanent capital Financial and an ongoing stream of current earnings Resources to the University. to Direct Most Debt endowments 2 are commingled in the Consolidated Endowment Fund (CEF), a 3.0 diversified investment fund. As in a mutual fund, each individual endowment 2.0 maintains a separate identity and owns units in the 2.1 2.1 fund. The CEF has experienced 1.8 considerable growth over the 1.0 1.5 RATIO 2012 2011 2010 Moody s Public Universities (Aaa median 2011) Endowment and Other Investments Investment returns provide an important source of revenue for the University s programs. Among the funds invested by the University are endowments, operating cash, life income trusts and annuities, outright gifts and reserves. past 10 years due to gifts and endowment returns. The number of endowments in the CEF increased from 1,691 to 3,782 and the 0 market value of 2012 the CEF rose 2011to $2.1 2010 billion Moody s as of Public June 30, 2012. Universities (Aaa median 2011) 1 The sum of Unrestricted Net Assets and Restricted Expendable Net Assets, divided by Total Operating Expenses (Operating Expenses plus interest expense). The result is multiplied by 12 to arrive at months of coverage. Excludes discrete component units. IN MILLIONS $2,200 $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $2,098 $2,161 $2,168 $2,111 $1,830 $1,700 $1,649 $1,366 $1,208 $1,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Unaudited see accompanying notes to basic financial statements UNIVERSITY OF WASHINGTON > 4

to Operations 1 12.0 12.1 10.0 Aaa Aa1 Aa2 Aa3 DEBT AND RELATED CAPITAL IMPROVEMENTS The University s general revenue borrowing platform, established in 2003, has been used to fund buildings that support the educational, research and service missions of the institution. For example, the $267.5 million UW General Revenue and Refunding Bonds, issued in March 2012, partially funded an expansion of the medical center, new student housing, renovation of the Husky Union Building and a renovation of Husky Stadium. Additionally, these bonds refunded $62 million of revenue bonds and paid off $100 million in outstanding commercial paper. In December 2011, Moody s Investors Service changed the University from an Aaa negative rating to an Aaa stable rating. Strong ratings carry substantial advantages for the University: continued and wider access to capital markets when the University issues debt, lower interest rates on bonds and the ability to negotiate favorable bond terms. The University takes its role of financial stewardship seriously and works hard to manage its financial resources effectively. Continued high debt ratings are important indicators of the University s success in this area. Moody s Fiscal Year 2011 Public College and University Rating Distribution (As of the September 2012 Moody s Median Report) 8 14 45 44 MONTHS OF COVERAGE 8.0 6.0 During 2011, capital expenditures included $70 million for the construction of new student housing, $67 million for the expansion 4.0 of UWMC, $31 million for the renovation of the Husky Union Building, $30 million for the new Molecular Engineering building, 2.0 $21 million for Phase 3 of the UW Tacoma campus, and $16 million for the renovation of Balmer Hall. 0 The 2012 ratio of expendable financial resources Universities to debt (as defined (Aaa median 2011) by Moody s) shows that the University has sufficient expendable resources to pay its long-term debt obligations 1.5 times over. The decrease from prior years relates primarily to the issuance of $479 million of additional revenue bonds during fiscal 2012 (includes refunding activity for debt and commercial paper already issued). RATIO 3.0 2.0 1.0 0 7.8 1.5 8.4 2012 2011 2010 Moody s Public Expendable Financial Resources to Direct Debt 2 1.8 2012 2011 2010 2.1 2.1 Moody s Public Universities (Aaa median 2011) STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS The Statements of Revenues, Expenses, and Changes in Net Assets present the University s results of operations and nonoperating items that result in the changes in net assets for the year. In accordance with GASB reporting principles, revenues and expenses are classified as either operating or nonoperating. A condensed comparison of the University s revenues, expenses and changes in net assets for the years ended June 30, 2012, 2011, and 2010 follows: 7.9 A1 A2 A3 Baa1 Baa2 64 35 14 3 2 0 10 20 30 40 50 60 70 NUMBER OF INSTITUTIONS (in millions) 2012 2011 2010 Total operating revenues $ 3,522 $ 3,390 $ 3,124 Operating expenses 3,911 3,769 3,493 Operating loss (389) (379) (369) Nonoperating revenues, net of expenses 317 766 707 Other revenues 86 147 93 Increase in net assets 14 534 431 Net assets, beginning of year 5,728 5,194 4,763 Net assets, end of year $ 5,742 $ 5,728 $ 5,194 During 2012, capital expenditures included $112 million for the construction of new student housing, $78 million for the renovation and expansion of Husky Stadium, $61 million for the expansion of the University of Washington Medical Center (UWMC), $57 million for the renovation of the Husky Union Building, $18 million for the new Molecular Engineering building, and $18 million for the renovation of Balmer Hall. 2 The sum of Unrestricted Net Assets and Restricted Expendable Net Assets, divided by total capital lease obligations, bonds and notes payable outstanding. Excludes discrete component units. Unaudited see accompanying notes to basic financial statements FINANCIAL REPORT 2012 > 5

Management s Discussion and Analysis (CONTINUED) The University has a diversified revenue base. No single source generated more than 38% of the total fiscal year 2012 revenues of $4.8 billion. 1% INVESTMENT INCOME 4% SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 3% AUXILIARY 3% GIFTS 29% GRANTS AND CONTRACTS Sources Sources of of Funds Funds* * *Includes discrete component units Uses of Funds* 3% OTHER 14% TUITION 5% STATE FUNDING FOR OPERATIONS AND CAPITAL EXPENDITURES 38% PATIENT SERVICES The 5% following DEPRECIATION table summarizes revenues 1% OTHERfrom all sources for the years ended June 30, 2012, 2011, and 2010: 20% INSTRUCTION (in millions) 2012 2011 2010 37% MEDICAL RELATED Tuition and fees $ 681 $ 595 $ 528 Patient services 1,098 1,064 988 Grants and contracts 1,353 17% RESEARCH 1,365 1,256 Sales and services of educational 186 165 167 departments 4% AUXILIARY 6% ACADEMIC SUPPORT 2% SCHOLARSHIPS & FELLOWSHIPS Auxiliary enterprises 161 154 147 4% OPERATION & MAINTENANCE 4% INSTITUTIONAL SUPPORT State funding for operations OF PLANT 218 297 303 Federal ARRA education funding 44 Gifts 152 177 119 Investment income 34 395 309 State funding for capital projects 6 37 33 Other 95 111 72 Total revenue all sources $ 3,984 $ 4,360 $ 3,966 Grant Revenue Excluding the discrete component units, the largest source of revenues (34%) continues to be grants and contracts. This revenue decreased $12 million, or 1%, in 2012, compared to an increase of $109 million, or 9%, in 2011. Revenues generated by Federal ARRA research funding decreased to $74 million in fiscal year 2012, compared to $163 million in 2011, but were mostly offset by increases in other federal programs. Grants and contracts provided the opportunity for graduate and undergraduate students to work with nationally recognized faculty in research as part of their educational experience. Grant and contract revenue is earned when direct expenditures (such as researchers compensation or purchases of goods and services) are made; therefore, there is little effect on the University s operating margin as a result of this direct expense reimbursement process. Facility and administrative expenses necessary to support grants and contracts are reimbursed by an indirect cost recovery. The current indirect cost recovery for research grants is approximately 29 cents on every direct expenditure dollar. Primary Nongrant Funding Sources The University relies primarily on student tuition and fees and state appropriations as revenue sources to support its nongrant funded educational operating expenses. State support for education has declined since fiscal year 2008, with a sharp cut in fiscal year 2010, although part of the reduction in state support was offset by federal ARRA education funding in 2010, as reflected in the table below: Operating Support for Instruction (in millions) 2012 2011 2010 State operating appropriations $ 218 24% $ 297 33% $ 303 35% Federal ARRA education funding 44 5% Operating tuition and fees 461 51% 410 46% 351 40% Fees for self-sustaining educational programs 220 25% 185 21% 177 20% Total educational support $ 899 100% $ 892 100% $ 875 100% Noncapital state appropriations are considered nonoperating revenue under GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities, and are reflected in the non operating section of the Statements of Revenues, Expenses and Changes in Net Assets; however, they are used solely for operating purposes. Tuition and fees, net of scholarship allowances, were $681 million in 2012, $595 million in 2011 and $528 million in 2010. The increases were primarily due to a 20% increase in average undergraduate resident tuition rates in 2012 and 14% in 2011. Tuition increases were partially offset by the increase in scholarships and fellowships, and scholarship allowances of $49 million in 2012, $18 million in 2011, and $21 million in 2010. Self-sustaining educational programs include the following amounts for each of the fiscal years 2012, 2011 and 2010: Educational Outreach (the continuing education branch of the University) $85 million, $67 million and $63 million, respectively, summer quarter tuition $47 million, $31 million and $33 million, respectively, and for Business School and School of Medicine programs $38 million, $36 million and $28 million, respectively. Patient Services UW Medicine The financial statements of the University include the operations of the School of Medicine, three hospitals, associated physicians and clinics, Airlift Northwest, and the University s share of two joint ventures. These entities and Harborview Medical Center (activities not included in the University s financial statements - see Footnote 14) comprise UW Medicine, an umbrella organization serving to coordinate these activities and promote quality health care in the Pacific Northwest and beyond, and to conduct cutting edge medical research with worldwide benefit. Unaudited see accompanying notes to basic financial statements UNIVERSITY OF WASHINGTON > 6

Patient care activities included in the University s financial statements include: UW Medical Center (UWMC) is a 450-bed hospital that provides comprehensive health care services to the Puget Sound community and patients from throughout the Pacific Northwest. UWMC also serves as the major clinical, teaching and research site for students and faculty in the Health Sciences at the University. Over 18,000 patients receive inpatient care at UWMC each year. Specialized inpatient care needs are met by the Cancer Center, the Regional Heart Center, Neonatal ICU and Organ Transplantation program. During fiscal year 2012, work continued on Phase 1 of a new eight-story UWMC tower, which will create space for expansion of patient care activities with an emphasis on neonatal and oncology patients. Valley Medical Center (VMC) is a 303-bed acute care hospital and network of clinics, treats approximately 17,000 inpatients per year, and is the oldest and largest public district hospital in the state of Washington. VMC joined UW Medicine in July 2011. VMC s Balance Sheet and Statement of Revenues, Expenses and Changes in Net Assets are presented in a discrete column together with Northwest Hospital on the financial statements of the University. Northwest Hospital & Medical Center (Northwest Hospital) is a full-service medical facility with 281 beds, and treats approximately 9,000 inpatients per year. Northwest Hospital joined UW Medicine in January 2010. Northwest Hospital s Balance Sheet and Statement of Revenues, Expenses and Changes in Net Assets are presented in a discrete column together with VMC on the financial statements of the University. UW Neighborhood Clinics is a network of primary care clinics with nine neighborhood locations throughout the greater Seattle area, providing primary and selected specialty care with a staff of nearly 70 health care providers. The revenues, expenses, assets and liabilities of the Neighborhood Clinics are included in the University s financial statements. UW Physicians (UWP) is the physician practice group for more than 1,800 faculty physicians and health care providers associated with UW Medicine. The revenues, expenses, assets and liabilities of UWP are included in the University s financial statements. Airlift Northwest is a preeminent provider of air medical transport services in the Pacific Northwest. The University is also a participant in two joint ventures: Seattle Cancer Care Alliance and Children s University Medical Group. The University s share in these activities is reflected in the University s financial statements. In combination, these organizations (not including Valley Medical Center and Northwest Hospital) contributed $1,098 million in patient service revenues in fiscal year 2012, $1,064 million in fiscal year 2011, and $988 million in 2010. UWMC generated 77% of this revenue in 2012 and 2011, and 79% in 2010. UWMC admissions were 18,000 in 2012, a slight decrease from 2011 and 2010. Average patient length of stay, however, increased to 6.7 days in 2012, up from 6.1 in 2011 and 5.9 in 2010. The operating margin for UWMC was 7.0% in 2012, an increase from 6.7% in 2011 but less than the 2010 result of 9.0%. Other factors contributing to the increase in hospital revenue over the period have been the increased acuity of patients and improved documentation and coding. Gifts, Endowments and Investment Revenues Net investment returns for the years ended June 30, 2012, 2011, and 2010 consisted of the following: (in millions) 2012 2011 2010 Interest and dividends $ 63 $ 59 $ 78 Metropolitan Tract net income 7 7 8 Investment in Seattle Cancer Care Alliance 7 12 7 Net appreciation (depreciation) of fair value of investments (35) 324 224 Investment expenses (8) (7) (8) Net investment income $ 34 $ 395 $ 309 Net appreciation includes both realized and unrealized gains and losses; however, the unrealized gains are not expendable until the underlying securities have been sold. Net investment income decreased by $361 million in 2012, compared to an increase of $86 million in 2011. The change in realized and unrealized gains and losses was the major factor in the variance each year. Donor support decreased by $25 million, or 14%, from $177 million in 2011 to $152 million in 2012. Gifts are a key, necessary source of support for a variety of purposes including capital Sources of Funds* improvements, scholarships, research and endowments for various academic and research positions. 1% INVESTMENT INCOME 4% SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 3% AUXILIARY 3% GIFTS 29% GRANTS AND CONTRACTS 4% AUXILIARY 2% SCHOLARSHIPS & FELLOWSHIPS 3% OTHER 5% DEPRECIATION 1% OTHER 37% MEDICAL RELATED 4% OPERATION & MAINTENANCE OF PLANT *Includes discrete component units Uses Uses of of Funds* Funds * 14% TUITION Expenses Two primary functions of the University, instruction and research, comprised 37% of total operating expenses. These dollars provided instruction to more than 49,000 students and funded 5,000 research awards. Medical-related expenses are the largest individual component, due to the inclusion of Northwest Hospital and Valley Medical Center. 5% STATE FUNDING FOR OPERATIONS AND CAPITAL EXPENDITURES 38% PATIENT SERVICES 20% INSTRUCTION 17% RESEARCH 6% ACADEMIC SUPPORT 4% INSTITUTIONAL SUPPORT Unaudited see accompanying notes to basic financial statements FINANCIAL REPORT 2012 > 7

Management s Discussion and Analysis (CONTINUED) A comparative summary of the University s expenses by functional classification (purpose for which the costs are incurred) for the years ended June 30, 2012, 2011, and 2010 follows: (in millions) 2012 2011 2010 Operating expenses: Educational and general instruction $ 926 $ 920 $ 905 Research 782 791 700 Public service 24 30 34 Academic support 292 279 259 Student services 37 35 34 Institutional support 162 133 141 Operation and maintenance of plant 181 192 155 Scholarships and fellowships 108 101 93 Auxiliary enterprises 196 170 166 Medical-related 961 874 777 Depreciation/amortization 242 244 229 Total operating expenses $ 3,911 $ 3,769 $ 3,493 Institutional Support increased $29 million, or 22%, in 2012. Much of this increase resulted from a rise in self-insurance expense during the year, due to a higher number of self-insured medical claims and no longer discounting the actuarial liability. Auxiliary Enterprises increased $26 million, or 15%, in 2012 due in part to non-capitalized costs related to the renovation of Husky Stadium, increased operating costs for new student housing added during the year, and one-time remediation charges resulting from construction of student housing. Medical-related expenses increased $87 million, or 10%, over 2011 due mostly to increases during the year in salaries and benefits, and increased expense for purchased services and supplies incurred by UWMC and the blended medical component units. Overall, the University s operating expenses increased by $142 million, or 4%, over 2011. Purchased Services increased by $28 million, or 5%, driven by increased service expense related to new and upgraded medical systems, and costs associated with the UWMC contact center. Salaries expense increased by $62 million, or 4%, during 2012, driven in part by a modest increase in staffing and contractually agreed wage increases. Benefits expense increased $33 million, or 6% during 2012, resulting from both the increase in FTE s and higher retirement plan contributions for PERS (the defined benefit pension plan administered by the state of Washington). In 2011, the University s operating expenses increased by $276 million, or 8%, over 2010, primarily driven by equipment purchased for the National Science Foundation s (NSF) Ocean Observatory Initiative (the University is the administrator, but not the owner, of these assets since they were funded by, and on behalf of, the NSF), increased medical supplies and pharmaceuticals for UWMC, the addition of Airlift Northwest, and increases driven by higher grant and contract revenue. Salaries expense increased by $68 million, or 4%, during 2011, driven in part by a modest increase in staffing and the addition of Airlift Northwest. Benefits expense increased $48 million, or 9% during 2011, resulting mostly from a 14% increase in the health care premium per employee paid by the University. OPERATING LOSS The University s operating loss increased slightly to $389 million in 2012 from $379 million in 2011. The 2011 operating loss was an increase from $369 million in 2010. State appropriations have declined; however, they are shown as nonoperating, pursuant to GASB standards. If state appropriations were classified as operating, the operating loss would be as follows for 2012, 2011 and 2010, respectively: $170 million, $82 million, and $21 million. The amount for 2010 includes $44 million of Federal ARRA education funding, a one-time event. The University continues to rely on nonoperating revenues, in addition to state appropriations, to fund its operations including operating gift revenues and investment income distributions. OPERATING MARGIN Moody s measures the net result of revenue and expense activity by including several nonoperating revenues in the margin. The 2012 operating margin decreased to 2.09% from 4.27% in 2011. Operating margin calculations include an estimated return on the University s investments rather than actual investment income. Therefore, variances in investment performance in a given year will not impact the operating margin. PERCENTAGE 6 5 4 3 2 1 0 Operating Margin 3 2.09% 4.27% 5.50% 2012 2011 2010 5.90% Moody s Public Universities (Aaa median 2011) 9.5 3. Operating loss, (including interest expense, operating appropriations, nonoperating federal grants, an assumed 5% spending rate on investments and nonpermanent endowment gifts), divided by operating revenues (less scholarship expenses, and including operating appropriations, federal grants, an assumed 5% return on investments and nonpermanent endowment gifts). Excludes discrete component units. Unaudited see accompanying notes to basic financial statements 12.0 UNIVERSITY OF WASHINGTON > 8 10.0 Expendable Financial Resources to Operations 1 12.1

Unaudited see accompanying notes to basic financial statements FINANCIAL REPORT 2012 > 9

UNIVERSITY OF WASHINGTON Balance Sheets UNIVERSITY OF WASHINGTON DISCRETE COMPONENT UNITS 1 June 30, June 30, ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS (NOTE 2) $ 2012 50,158 $ 2011 42,715 $ 2012 45,333 INVESTMENTS, CURRENT PORTION (NOTE 6) 577,962 366,995 63,121 ACCOUNTS RECEIVABLE (NET OF $81,299 AND $86,177 ALLOWANCE) (NOTE 5) 496,944 480,637 99,890 INVENTORIES 31,676 28,710 9,362 OTHER CURRENT ASSETS 4,366 5,252 12,394 TOTAL CURRENT ASSETS 1,161,106 924,309 230,100 NONCURRENT ASSETS: DEPOSIT WITH STATE OF WASHINGTON (NOTE 3) 50,418 50,616 INVESTMENTS, NET OF CURRENT PORTION (NOTE 6) 3,278,068 3,505,273 130,221 METROPOLITAN TRACT (NOTE 7) 114,211 115,101 STUDENT LOANS RECEIVABLE (NET OF $9,441 AND $9,207 ALLOWANCE) (NOTE 4) 69,039 69,669 OTHER NONCURRENT ASSETS 112,192 101,271 12,345 CAPITAL ASSETS (NET OF $2,908,441 AND $2,722,752 ACCUMULATED DEPRECIATION) (NOTE 8) 3,618,409 3,246,486 510,903 TOTAL NONCURRENT ASSETS 7,242,337 7,088,416 653,469 TOTAL ASSETS $ 8,403,443 $ 8,012,725 $ 883,569 LIABILITIES CURRENT LIABILITIES: ACCOUNTS PAYABLE $ 161,241 $ 126,184 $ 32,010 ACCRUED LIABILITIES 281,410 250,545 89,329 COMMERCIAL PAPER (NOTE 11) 25,000 50,000 DEFERRED REVENUES, CURRENT PORTION 148,984 134,143 FUNDS HELD FOR OTHERS 33,213 18,343 LONG-TERM LIABILITIES, CURRENT PORTION (NOTES 9-12) 72,311 71,721 11,855 TOTAL CURRENT LIABILITIES 722,159 650,936 133,194 NONCURRENT LIABILITIES: DEFERRED REVENUES, NET OF CURRENT PORTION 5,974 9,410 10,727 U.S. GOVERNMENT GRANTS REFUNDABLE 49,401 54,545 LONG-TERM LIABILITIES, NET OF CURRENT PORTION (NOTES 9-12) 1,884,301 1,569,469 424,406 TOTAL NONCURRENT LIABILITIES 1,939,676 1,633,424 435,133 TOTAL LIABILITIES 2,661,835 2,284,360 568,327 NET ASSETS INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT 2,113,238 2,059,911 99,131 RESTRICTED: NONEXPENDABLE 1,115,854 1,074,824 1,719 EXPENDABLE 1,161,583 1,226,792 8,673 UNRESTRICTED 1,350,933 1,366,838 205,719 TOTAL NET ASSETS 5,741,608 5,728,365 315,242 TOTAL LIABILITIES AND NET ASSETS $ 8,403,443 $ 8,012,725 $ 883,569 1 See Note 19 See accompanying notes to basic financial statements. Dollars in thousands UNIVERSITY OF WASHINGTON > 10

UNIVERSITY OF WASHINGTON Statements of Revenues, Expenses and Changes in Net Assets REVENUES OPERATING REVENUES: Year ended June 30, DISCRETE COMPONENT UNITS 1 Year ended June 30, 2012 2011 2012 STUDENT TUITION AND FEES (NET OF SCHOLARSHIP ALLOWANCES OF $133,243 AND $91,403) $ 681,227 $ 594,915 $ PATIENT SERVICES (NET OF CHARITY CARE OF $77,130 AND $54,761) 1,097,525 1,063,827 704,423 FEDERAL GRANTS AND CONTRACTS 1,070,901 1,092,973 STATE AND LOCAL GRANTS AND CONTRACTS 83,954 70,188 NONGOVERNMENTAL GRANTS AND CONTRACTS 146,699 151,600 SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 185,521 165,475 AUXILIARY ENTERPRISES: HOUSING AND FOOD SERVICES 67,357 59,663 PARKING SERVICES 11,465 10,462 SPORTS PROGRAMS (NET OF SCHOLARSHIP ALLOWANCE OF $5,757 AND $4,735) 46,714 43,128 OTHER AUXILIARY ENTERPRISES 35,760 40,645 OTHER MEDICAL-RELATED REVENUE 28,536 22,928 32,073 OTHER OPERATING REVENUE 66,711 74,477 EXPENSES TOTAL OPERATING REVENUES 3,522,370 3,390,281 736,496 OPERATING EXPENSES (NOTE 13) SALARIES 1,839,181 1,776,699 325,944 BENEFITS 596,525 563,660 92,065 SCHOLARSHIPS AND FELLOWSHIPS 107,729 101,388 UTILITIES 51,956 54,406 8,425 SUPPLIES AND MATERIALS 383,355 384,530 133,320 PURCHASED SERVICES 585,079 556,643 117,181 DEPRECIATION / AMORTIZATION 242,929 243,638 54,529 OTHER 104,271 88,554 17,211 TOTAL OPERATING EXPENSES 3,911,025 3,769,518 748,675 OPERATING LOSS (388,655) (379,237) (12,179) NONOPERATING REVENUES (EXPENSES) STATE APPROPRIATIONS 218,343 296,769 GIFTS 76,718 86,823 301 INVESTMENT INCOME (NET OF INVESTMENT EXPENSE OF $8,207 AND $6,419) 34,123 394,670 6,767 INTEREST ON CAPITAL ASSET-RELATED DEBT (41,182) (42,726) (22,689) PELL GRANT REVENUE 47,387 44,044 PROPERTY TAX REVENUE 17,818 OTHER NONOPERATING REVENUES (EXPENSES) (18,330) (12,946) 1,382 NET NONOPERATING REVENUES 317,059 766,634 3,579 INCOME (LOSS) BEFORE OTHER REVENUES (71,596) 387,397 (8,600) CAPITAL APPROPRIATIONS 6,066 37,255 CAPITAL GRANTS, GIFTS, AND OTHER 25,514 35,622 1,263 GIFTS TO PERMANENT ENDOWMENTS 53,259 74,422 TOTAL OTHER REVENUES 84,839 147,299 1,263 NET ASSETS UNIVERSITY OF WASHINGTON INCREASE (DECREASE) IN NET ASSETS 13,243 534,696 (7,337) NET ASSETS BEGINNING OF YEAR 5,728,365 5,193,669 322,579 NET ASSETS END OF YEAR $ 5,741,608 $ 5,728,365 $ 315,242 1 See Note 19 See accompanying notes to basic financial statements. Dollars in thousands FINANCIAL REPORT 2012 > 11

UNIVERSITY OF WASHINGTON Statements of Cash Flows CASH FLOWS FROM OPERATING ACTIVITIES UNIVERSITY OF WASHINGTON Year Ended June 30, 2012 2011 STUDENT TUITION AND FEES $ 665,192 $ 559,936 PATIENT SERVICES 1,081,711 1,071,683 GRANTS AND CONTRACTS 1,319,705 1,328,507 PAYMENTS TO SUPPLIERS (369,199) (369,292) PAYMENTS FOR UTILITIES (51,018) (53,619) PURCHASED SERVICES (573,664) (551,365) OTHER OPERATING DISBURSEMENTS (99,776) (89,572) PAYMENTS TO EMPLOYEES (1,835,546) (1,773,919) PAYMENTS FOR BENEFITS (530,790) (501,858) PAYMENTS FOR SCHOLARSHIPS AND FELLOWSHIPS (107,729) (101,388) LOANS ISSUED TO STUDENTS (28,965) (22,510) COLLECTION OF LOANS TO STUDENTS 24,451 27,020 OTHER MEDICAL-RELATED RECEIPTS 28,536 22,928 AUXILIARY ENTERPRISE RECEIPTS 161,858 144,823 SALES AND SERVICES OF EDUCATIONAL DEPARTMENTS 185,856 165,685 OTHER RECEIPTS 72,000 39,512 NET CASH USED BY OPERATING ACTIVITIES (57,378) (103,429) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES STATE APPROPRIATIONS 195,422 314,371 GIFTS AND GRANTS FOR OTHER THAN CAPITAL PURPOSES 47,387 44,044 PRIVATE GIFTS 65,400 57,999 PERMANENT ENDOWMENT RECEIPTS 53,259 74,422 DIRECT LENDING RECEIPTS 249,363 237,439 DIRECT LENDING DISBURSEMENTS (265,599) (237,601) RECEIPTS FROM OUTSIDE AFFILIATED AGENCIES 664,145 623,058 DISBURSEMENTS TO OUTSIDE AFFILIATED AGENCIES (626,859) (621,873) OTHER (18,762) (11,395) NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES 363,756 480,464 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES PROCEEDS FROM CAPITAL DEBT 652,752 525,856 STATE CAPITAL APPROPRIATIONS 6,982 36,864 CAPITAL GRANTS AND GIFTS RECEIVED 24,893 19,982 ACQUISITION AND CONSTRUCTION OF CAPITAL ASSETS (576,745) (491,762) PRINCIPAL PAYMENTS ON CAPITAL-RELATED DEBT AND LEASES (404,692) (143,506) INTEREST PAYMENTS ON CAPITAL-RELATED DEBT AND LEASES (63,449) (57,379) OTHER 1,402 21,796 NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES (358,857) (88,149) UNIVERSITY OF WASHINGTON > 12

CASH FLOWS FROM INVESTING ACTIVITIES UNIVERSITY OF WASHINGTON Year Ended June 30, 2012 2011 PROCEEDS FROM SALES OF INVESTMENTS 6,369,847 5,021,145 PURCHASES OF INVESTMENTS (6,372,671) (5,358,025) INVESTMENT INCOME 62,746 58,807 NET CASH PROVIDED BY (USED BY) INVESTING ACTIVITIES 59,922 (278,073) NET INCREASE IN CASH AND CASH EQUIVALENTS 7,443 10,813 CASH AND CASH EQUIVALENTS-BEGINNING OF THE YEAR 42,715 31,902 CASH AND CASH EQUIVALENTS-END OF THE YEAR $ 50,158 $ 42,715 RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES OPERATING LOSS $ (388,655) $ (379,237) ADJUSTMENTS TO RECONCILE OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES: DEPRECIATION / AMORTIZATION EXPENSE 242,929 243,638 CHANGES IN ASSETS AND LIABILITIES: RECEIVABLES 4,511 (15,591) INVENTORIES (2,966) 1,224 OTHER ASSETS (10,035) (15,877) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 47,153 29,418 DEFERRED REVENUE 11,405 3,625 OTHER LONG-TERM LIABILITIES 42,794 24,861 U.S. GOVERNMENTAL GRANTS REFUNDABLE (5,144) 3,672 LOANS TO STUDENTS 630 838 NET CASH USED BY OPERATING ACTIVITIES $ (57,378) $ (103,429) See accompanying notes to basic financial statements. Dollars in thousands FINANCIAL REPORT 2012 > 13

Notes to Financial Statements NOTE 1: Summary of Significant Accounting Policies FINANCIAL REPORTING ENTITY The University of Washington (University), an agency of the state of Washington, is governed by a 10-member Board of Regents, appointed by the Governor and confirmed by the state Senate. The financial statements include the individual schools, colleges and departments of the University, the University of Washington Medical Center (UWMC), Portage Bay Insurance (a wholly-owned subsidiary of the University) and certain affiliated operations determined to be a part of the University s financial reporting entity. Affiliated organizations are evaluated for inclusion in the reporting entity as component units based on the significance of their relationship with the University. On July 1, 2010, Airlift Northwest, (Airlift NW) a preeminent provider of air medical services in the Pacific Northwest, dissolved its separate 501(c)(3) status and became a self-sustaining unit of the University of Washington. The affiliation with Airlift NW resulted in a contribution of capital of $13,227,000 that is reflected in Capital Grants, Gifts, and Other on the Statement of Revenues, Expenses and Changes in Net Assets in the year ending June 30, 2011. Component units are legally separate organizations for which the University is financially accountable. These entities may be reported in the financial statements of the primary government in one of two ways: the component units amounts may be blended with the amounts reported by the primary government, or they may be shown in a separate column, depending on the application of the criteria of Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity as amended by GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units, an amendment of GASB Statement No. 14. All component units of the University meet the criteria for blending except Northwest Hospital & Medical Center and Valley Medical Center. They are reported discretely since they have separate boards of directors and they do not provide services exclusively to the University. BLENDED COMPONENT UNITS The following entities are presented as blended component units because they provide service exclusively or almost exclusively to the University. Financial information for these affiliated organizations is available from their respective administrative offices. The Association of University Physicians dba UW Physicians (UWP) was established as a tax-exempt entity for the exclusive benefit of the University of Washington School of Medicine (UWSOM). UWP employs UWSOM faculty and bills and collects for their clinical services as an agent for UWSOM. UWP had operating revenues of $157,312,000 and $145,524,000 in 2012 and 2011, respectively. UW Medicine Neighborhood Clinics (Neighborhood Clinics) was established as a tax-exempt entity for the benefit of UWSOM, UWP and its affiliated medical centers, Harborview Medical Center (HMC) and UWMC, exclusively for charitable, scientific and educational purposes. The Neighborhood Clinics were organized to coordinate and develop patient care in a community clinical setting. They enhance the academic environment of UWSOM by providing additional sites of primary care practice and training for faculty, residents and students. Neighborhood Clinics had operating revenues of $13,116,000 and $12,283,000 in 2012 and 2011, respectively. Real estate financing entities The entities listed below are nonprofit corporations that were formed to acquire, construct or renovate certain real properties for the benefit of the University in fulfilling its educational, medical or scientific research missions. These entities issue tax-exempt and taxable bonds to finance these activities. TSB Properties Twenty-Fifth Avenue Properties Washington Biomedical Research Properties I Washington Biomedical Research Properties II Washington Biomedical Research Facilities 3 These entities collectively have net capital assets of $285,108,000 and $268,936,000 in 2012 and 2011, respectively. They collectively have long-term debt of $371,230,000 and $456,577,000 in 2012 and 2011, respectively. These amounts are reflected in the University s financial statements. Fiscal year 2011 balances include component units that were dissolved during fiscal year 2012 as described in Changes in Reporting Entity. DISCRETELY PRESENTED COMPONENT UNITS Northwest Hospital UW Medicine and Northwest Hospital & Medical Center (Northwest Hospital), a 281-bed full-service acute care hospital, entered into an affiliation agreement effective January 1, 2010. The University is the sole corporate member of Northwest Hospital. The audited financial statements of Northwest Hospital are available by contacting Northwest Hospital & Medical Center at 1550 N. 115th Street, Seattle, WA 98133-9733, Mailstop X-112. Valley Medical Center UW Medicine and Public Hospital District No. 1 of King County, a Washington public hospital district d/b/a Valley Medical Center, entered into a strategic alliance, effective July 1, 2011. Valley Medical Center owns and operates a 303-bed full-service acute care hospital and 22 clinics located throughout southeast King County. The audited financial statements of Valley Medical Center are available by contacting Valley Medical Center at 400 S. 43rd Street, Renton, WA 98055 or online at the following address: http://www.valleymed. org/about-us/financial-information/ JOINT VENTURES The University, together with Seattle Children s Hospital and Fred Hutchinson Cancer Research Center established the Seattle Cancer Care Alliance (SCCA). The SCCA integrates the cancer research, teaching and clinical cancer programs of all three institutions to provide stateof-the-art cancer care. Each member of the SCCA has a one-third interest. The University accounts for its interest in SCCA under the equity method and has recorded UNIVERSITY OF WASHINGTON > 14

$81,638,000 and $75,130,000 in Other Assets, together with $6,509,000 and $11,740,000 in Investment Income, for its share of the joint venture in 2012 and 2011, respectively. The University and Seattle Children s Hospital established Children s University Medical Group (CUMG) to assist the organizations in carrying out their pediatric patient care, charitable, educational, and scientific missions. CUMG employs UWSOM faculty physicians, and bills and collects for their services as an agent for UWSOM. The University records revenue from CUMG based on the income distribution plan effective December 31, 2008. The University s patient services receivable (Note 5) includes amounts due from CUMG of $15,767,000 and $19,704,000 in 2012 and 2011, respectively. CHANGES IN REPORTING ENTITY In fiscal year 2012, the University refunded three series of lease-backed 63-20 bonds as part of the Series 2011A University of Washington General Revenue Bonds issue. The refunded bonds were Series 1996 Community Development Properties Commodore Duchess, Series 1999A Educational Research Properties, and Series 2000 Radford Court Properties. As a result of this refunding, the three entities that issued the lease-backed 63-20 bonds have been dissolved and therefore are no longer component units of the University. Due to additional refundings during fiscal year 2012, capital assets and the associated debt which had been held by the University of Washington Alumni Association are now being carried by the University. The remaining assets and liabilities are not material to the University, therefore this entity is no longer reflected as a blended component unit of the University. As a result of this change, $10,693,000 of Alumni Association net assets were removed from the University s Balance Sheet and reflected as Other Nonoperating Revenues (Expenses) on the Statement of Revenues, Expenses and Changes in Net Assets for the fiscal year ended June 30, 2012. EVENTS SUBSEQUENT TO YEAR END On August 5, 2012 the University completed the refunding of the lease-backed 63-20 bonds, Series 2002 Twenty-Fifth Avenue Properties. As a result of this refunding the entity has been dissolved and will not be a component unit of the University in fiscal year 2013. With regard to the strategic alliance with Valley Medical Center, on October 26, 2012, the commissioners of Public Hospital District No. 1 filed a lawsuit in King County Superior Court against the University. The lawsuit alleges the District lacked the authority to assent to the strategic alliance agreement and seeks to prevent the Board of Trustees formed by the strategic alliance agreement from exercising legislative responsibilities of the District s elected commissioners. While the University is a defendant in the lawsuit, University management believes that the lawsuit will not have a significant adverse impact upon the financial position of the University. BASIS OF ACCOUNTING The financial statements of the University have been prepared in accordance with GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, as amended by GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. The University is reporting as a special-purpose government engaged in business-type activities (BTA). In accordance with BTA reporting, the University presents management s discussion and analysis, balance sheets, statements of revenues, expenses and changes in net assets, statements of cash flows and notes to the financial statements. The financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All intra-agency transactions have been eliminated. The University reports capital assets net of accumulated depreciation/ amortization (as applicable), and reports depreciation/amortization expense in the Statements of Revenues, Expenses and Changes in Net Assets. On July 1, 2011, the University adopted GASB Statement No. 61, The Financial Reporting Entity: Omnibus, an amendment of GASB Statements No. 14 and No. 34. This Statement modifies existing requirements for the assessment of potential component units and their inclusion in the financial reporting entity, and requirements regarding financial statement presentation and disclosure. There was no impact to the University s definition of the reporting entity as a result of the implementation of this standard. The University reports its BTA activities in a single column for financial statement presentation purposes, which includes the data for its blended component units. This Statement includes a requirement to present condensed combining information in the notes to the financial statements regarding these component units in such cases. This information can be found in Note 18. Combining information for the University s discretely presented component units can be found in Note 19. In June 2012, the GASB approved Statement No. 68, Accounting and Financial Reporting for Pensions, which will take effect in the fiscal year ending June 30, 2015. It requires governments providing defined benefit pensions to their employees to recognize their long-term obligation for pension benefits as a liability for the first time, along with the associated assets which have been set aside to fund the plan. Since the University participates in several cost sharing pension plans which are administered by the state of Washington, this statement will require the University to recognize its proportionate share of the state-wide net liability for each of these plans. The statement also eliminates the method of amortizing the liability balances over several years, and instead requires full recognition of the net liability upon implementation. The University is currently analyzing the impact of this statement. FINANCIAL REPORT 2012 > 15

Notes to Financial Statements (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with U.S. GAAP involves management estimates that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates; however, in each case, the University believes that allowances, reserves and estimates of expected liabilities are adequate. The University estimates the pollution remediation liability by reviewing the current status of known polluted sites and developing estimates of cleanup costs. These estimates are subject to change due to improvements in technology, inflation, changes in the scope of work and the pursuit of reimbursement from other responsible parties. Allowances for doubtful accounts (Notes 4 and 5) are estimates based on the historical experience of the University and current economic circumstances with respect to the collectability of accounts and loans receivable. The liability and expense related to the supplemental component of the University of Washington Retirement Plan (UWRP) (Note 16) is based on an actuarial valuation. The results of an actuarial valuation are estimates based on historical data and the demographics of the employee population. The self-insurance reserve (Note 17) is estimated through an actuarial calculation using individual case-basis valuations and statistical analyses. Considerable variability is inherent in such estimates. OTHER ACCOUNTING POLICIES Investments. Investments, other than miscellaneous investments, are stated at fair value. Miscellaneous investments are stated at cost or, in the case of gifts, at fair values at the date of donation. The fair value of all debt and equity securities with a readily determinable fair value is based on quotations from national securities exchanges. The alternative investments, which are not readily marketable, are carried at the estimated fair values provided by the investment managers. The University reviews and evaluates the values provided by the investment managers and agrees with the valuation methods and assumptions used in determining the fair value of the alternative investments. Those estimated fair values may differ significantly from the values that would have been used had a ready market for these securities existed. Investments under long-term strategies are considered noncurrent. Short-term investments consist primarily of cash equivalents and fixed income vehicles which management has identified as available to meet the day-to-day obligations of the University. Inventories. Inventories are carried at the lower of cost or market value. Consumable inventories, consisting of expendable materials and supplies held for consumption, are generally valued using the weighted-average method. Merchandise inventories are generally valued using the first-in, first-out method. Capital Assets. Land, buildings, equipment, library books and intangibles are stated at cost or, if acquired by gift, at fair market value at the date of the gift. Additions, replacements, major repairs and renovations are capitalized. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, generally 15 to 50 years for building components, 20 to 50 years for infrastructure and land improvements, 5 to 7 years for equipment, 15 years for library books, and 3 to 15 years for intangibles. Capitalized construction-related interest was $28,117,000 and $17,187,000 during 2012 and 2011, respectively. Deferred Revenues. Deferred revenues occur when funds have been collected in advance of an event, such as advance ticket sales, summer quarter tuition and unspent cash advances on certain grants. Deferred Giving Split-Interest Agreements. Under these agreements, donors make initial gifts directly to the University. The University has beneficial interest, but is not necessarily the sole beneficiary. The University records an asset related to these agreements at fair market value at year-end. The University also records a liability related to the split-interest agreements equal to the present value of expected future distributions; the discount rates applied range from 5.0 % to 8.0%. Compensated Absences. University employees accrue annual leave at rates based on length of service and for sick leave at the rate of one day per month. Annual leave accrued at June 30, 2012 and 2011 was $86,290,000 and $78,528,000, respectively, and is included in Accrued Liabilities. Sick leave accrued as of June 30, 2012 and 2011 was $34,630,000 and $31,491,000, respectively, and is included in Long-Term Liabilities. Scholarship Allowances. Tuition and Fees are reported net of scholarship allowances that are applied to students accounts from external funds that have already been recognized as revenue by the University. Student aid paid directly to students is reported as scholarships and fellowships expense. State Appropriations. The state of Washington appropriates funds to the University on both annual and biennial bases. These revenues are reported as nonoperating revenues in the Statements of Revenues, Expenses, and Changes in Net Assets. Operating Activities. The University s policy for reporting operating activities in the Statements of Revenues, Expenses, and Changes in Net Assets is to include activities that generally result from exchange transactions. Examples of exchange transactions are payments received for tuition, patient services or grants under which services are performed, as well as payments made for the delivery of goods or services. Certain other significant revenue streams used for operations, such as state appropriations, Pell grants, gifts and investment income are recorded as nonoperating revenues, as prescribed by GASB Statement No. 35. Net Assets. The University s net assets are classified as follows: Invested in capital assets, net of related debt: The University s investments in capital assets, less accumulated depreciation/amortization, net of outstanding debt obligations related to capital assets; Restricted net assets nonexpendable: Net assets subject to externally-imposed requirements that they be maintained permanently by the University, including permanent endowment funds and annuity and life income funds; Restricted net assets expendable: Net assets which the University is obligated to spend in accordance with restrictions imposed by external parties, generally scholarships, research and department uses; UNIVERSITY OF WASHINGTON > 16

Unrestricted net assets: Net assets not subject to externally imposed restrictions and which may be designated for specific purposes by management, or the Board of Regents. Tax Exemption. The University, as an agency of the state of Washington, is not subject to federal income tax pursuant to Section 115 of the Internal Revenue Code, except for tax on unrelated business income. Reclassifications. Certain amounts in the 2011 financial statements have been reclassified for comparative purposes to conform to the presentation in the 2012 financial statements. NOTE 2: Cash and Cash Equivalents Cash includes cash on hand, petty cash and bank deposits. Most cash, except for cash held at the University, is covered by federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (PDPC). As of June 30, 2011, Section 343 of the Dodd- Frank Wall Street Reform and Consumer Protection Act provides for unlimited insurance of deposits in all noninterestbearing accounts in FDIC insured depository institutions. This deposit insurance provision expires December 31, 2012. As of January 1, 2013 balances in excess of FDIC limits will be covered by the collateral of the PDPC. At June 30, 2012 and 2011, bank balances of $54,656,000 and $54,439,000, respectively, were insured by the FDIC and balances of $0 and $9,046,000, respectively, were collateralized under the PDPC. NOTE 3: Deposit with State of Washington State law requires the University to deposit certain funds with the State Treasurer, who holds and invests the funds. The deposits include amounts held for the University s permanent land grant funds, the University of Washington building fee collected from students and certain general obligation bond reserve funds. The fair value of these funds approximates the carrying value. NOTE 4: Student Loans Receivable Net student loans of $69,039,000 and $69,669,000 at June 30, 2012 and 2011, respectively, consist of $54,670,000 and $54,545,000 from federal programs and $14,369,000 and $15,124,000 from University programs. Interest income from student loans for the years ended June 30, 2012 and 2011 was $1,781,000 and $1,425,000, respectively. These unsecured loans are made primarily to students who reside in the state of Washington. NOTE 6: Investments TABLE 1 UNIVERSITY INVESTMENTS (Dollars in thousands) NOTE 5: Accounts Receivable The major components of accounts receivable as of June 30, 2012 and 2011 were: (Dollars in thousands) 2012 2011 PATIENT SERVICES $ 272,166 $ 262,101 GRANTS AND CONTRACTS 165,391 179,105 SALES AND SERVICES 22,051 22,387 TUITION 13,951 15,879 DUE FROM OTHER AGENCIES 29,521 35,702 ROYALTIES 12,591 14,242 INVESTMENTS 19,368 14,375 FIELD ADVANCES 7,132 8,973 STATE APPROPRIATIONS 24,647 2,642 OTHER 11,425 11,408 578,243 566,814 LESS: ALLOWANCE FOR DOUBTFUL ACCOUNTS (81,299) (86,177) TOTAL $ 496,944 $ 480,637 INVESTMENTS GENERAL The Board of Regents of the University of Washington is responsible for the management of the University s investments. The Board establishes investment policies, which are carried out by the Chief Investment Officer. The University of Washington Investment Committee, comprising Board members and investment professionals, advises on matters relating to the management of the University s investment portfolios. The composition of the carrying amounts of investments by type at June 30, 2012 and 2011 are listed in Table 1. Carrying Value Investment Type 2012 2011 CASH EQUIVALENTS $ 243,017 $ 544,489 FIXED INCOME 1,726,157 1,339,621 EQUITY 974,827 1,028,585 NONMARKETABLE ALTERNATIVES* 405,866 618,705 ABSOLUTE RETURN* 332,359 329,723 REAL ASSETS* 166,461 7,525 MISCELLANEOUS 7,343 3,620 TOTAL INVESTMENTS $ 3,856,030 $ 3,872,268 * Investment type includes private and other illiquid investments held in the Consolidated Endowment Fund INVESTMENT POOLS The University combines most short-term cash balances into the Invested Funds Pool. At June 30, 2012, the Invested Funds Pool totaled $1,386,561,000 compared to $1,254,850,000 at June 30, 2011. The fund also owns units in the Consolidated Endowment Fund valued at $422,861,000 on June 30, 2012 and $447,353,000 on June 30, 2011. By University policy, departments with qualifying funds in the Invested Funds Pool receive distributions based on their average balances and on the type of balance. Campus depositors received 2.0% in fiscal years 2012 and 2011. Endowment operating and gift accounts received 3% in both fiscal years 2012 and 2011. The difference between the actual earnings of the Invested Funds Pool and the calculated distributions is used to support activities benefiting all University departments. The majority of the endowed funds are invested in a pooled fund called the FINANCIAL REPORT 2012 > 17

Notes to Financial Statements (CONTINUED) Consolidated Endowment Fund (CEF). Individual endowments purchase units in the pool on the basis of a per unit valuation of the CEF at fair value on the last business day of the calendar quarter. Income is distributed based on the number of units held. RCW 24.55 of the Washington State Code and the Uniform Prudent Management of Institutional Funds Act allow for total return expenditure under comprehensive prudent standards. Under the CEF spending policy approved by the Board of Regents, quarterly distributions to programs are based on an annual percentage rate of 4%, applied to the five-year rolling average of the CEF s market valuation. Additionally, the policy allows for an administrative fee of 1% supporting campus-wide fundraising and steward-ship activities (0.80%) and offsetting the internal cost of managing endowment assets (0.20%). This policy was effective with the December 2010 quarterly distributions with the five-year averaging period implemented incrementally. The University records its permanent endowments at the lower of original gift value or current market value in the Restricted Nonexpendable Net Assets category. Of the total $1,313,262,000 and $1,312,987,000 permanent endowment funds (at fair value) as of June 30, 2012 and 2011, the aggregate amount of the deficiencies where the fair value of the assets is less than the original gifts is $41,598,000 and $21,892,000 at June 30, 2012 and 2011, respectively. Funds in irrevocable trusts managed by trustees other than the University are not reported in the financial statements. The fair value of these funds was $49,099,000 at June 30, 2012 compared to $51,806,000 at June 30, 2011. Income received from these trusts, which is included in Investment Income, was $2,328,000 for the year ended June 30, 2012 and $2,029,000 for the year ended June 30, 2011. Net appreciation (depreciation) in the fair value of investments includes both realized and unrealized gains and losses on investments. The University realized net gains of $7,902,000 and $128,089,000 in 2012 and 2011, respectively, from the sale of investments. The calculation of realized gains and losses is independent of the net appreciation of the fair value of investments. Realized gains and losses on investments that have been held in more than one fiscal year and are sold in the current year include the net appreciation of these investments reported in the prior year(s). The net appreciation (depreciation) in the fair value of investments during the years ended June 30, 2012 and 2011 was $(35,132,000) and $324,123,000, respectively. FUNDING COMMITMENTS The University enters into contracts with investment managers to fund alternative investments. As of June 30, 2012 and 2011, the University had outstanding commitments to fund alternative investments of $236,531,000 and $241,967,000, respectively. The University plans to continue to fund current and future commitments from distributions of current alternative investments, as well as from other existing liquid investments, if required. The majority of commitments will likely be funded within a five year period. SECURITIES LENDING The University s investment policies permit it to lend its securities to broker dealers and other entities. Due to market conditions, the University terminated this program in September 2008. As of June 30, 2012 and 2011 the University had no securities on loan. DERIVATIVES The University s investment policies allow investing in various derivative instruments, including futures, swaps and forwards, to manage its exposure to market fluctuations in various asset classes. Futures are financial contracts obligating the buyer to purchase an asset at a predetermined future date and price. Total return swaps involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. The fair value balances and notional amounts of derivative instruments outstanding at June 30, 2012 and 2011, categorized by type, the changes in fair value and the counterparty credit ratings of such derivatives for the years then ended are as follows: TABLE 2 INVESTMENT DERIVATIVES (Dollars in thousands) Notional Amount Fair Value as of June 30 Changes in Fair Value Counterparty Credit Rating CATEGORY 2012 2011 ASSET CLASSIFICATION 2012 2011 INCOME CLASSIFICATION 2012 2011 2012 2011 FUTURES CONTRACTS $86,732 $ INVESTMENTS $90,732 $ NET APPRECIATION $ 8,336 $ NA NA Values are based on quoted market prices. Credit exposure represents exposure to counterparties relating to financial instruments where gains exceed collateral held by the University or losses are less than the collateral posted by the University. There was no credit exposure as of June 30, 2012 or June 30, 2011. No derivative instruments have been reclassified from a hedging instrument to an investment instrument. Details on foreign currency derivatives are disclosed under Foreign Currency Risk. INTEREST RATE RISK The University manages interest rate risk through its investment policies and the investment guidelines established with each manager. Each fixed-income manager is assigned a maximum boundary for duration as compared to the manager s relevant benchmark index. The goal is to allow ample freedom for the manager to perform, while controlling the interest rate risk in the portfolio. The weighted average effective duration of the University s fixed income portfolio was 2.84 years at June 30, 2012 and 2.35 years, as of June 30, 2011, as demonstrated in Table 3. UNIVERSITY OF WASHINGTON > 18

CREDIT RISK Fixed income securities are subject to credit risk, which is the risk that the issuer or other counterparty to a financial instrument will not fulfill its obligations, or that negative perceptions of the issuer s ability to make these payments will cause prices to decline. Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The University Investment Policies limit fixed income exposure to investment grade assets. The Investment Policy for the Invested Funds cash pool requires each manager to maintain an average quality rating of AA as issued by a nationally recognized rating organization. The Invested Funds liquidity pool requires each manager to maintain an average quality rating of A and to hold 25% of their portfolios in government and government agency issues. The Investment Policy for the CEF reflects its long-term nature by specifying average quality rating levels by individual manager, but still restricting investment to investment grade credits. Duration and credit risk figures at June 30, 2012 and 2011 exclude $ 248,448,000 and $313,165,000, respectively, of fixedincome securities held outside the CEF and the Invested Funds Pool. These amounts make up 6.44% and 8.09%, respectively, of the University s investments, and are not included in the duration figures detailed in Table 3. The composition of the fixed income securities at June 30, 2012 and 2011, along with credit quality and effective duration measures is summarized below: TABLE 3 FIXED INCOME: CREDIT QUALITY AND EFFECTIVE DURATION (Dollars in thousands) 2012 Investments U.S. Government Investment Grade* Non-Investment Grade Not Rated Total Duration (in years) U.S. TREASURIES $ 825,433 $ $ $ $ 825,433 3.20 U.S. GOVERNMENT AGENCY 534,137 534,137 2.61 MORTGAGE BACKED 64,500 16,739 5,920 87,159 3.59 ASSET BACKED 122,815 3,757 126,572 2.02 CORPORATE AND OTHER 142,890 151 4,384 147,425 1.62 TOTAL $ 1,359,570 $ 330,205 $ 20,647 $ 10,304 $ 1,720,726 2.84 2011 Investments U.S. Government Investment Grade* Non-Investment Grade Not Rated Total Duration (in years) U.S. TREASURIES $ 667,854 $ $ $ $ 667,854 3.02 U.S. GOVERNMENT AGENCY 554,226 554,226 1.85 MORTGAGE BACKED 61,708 12,719 6,907 81,334 4.38 ASSET BACKED 103,094 7,343 184 110,621 1.43 CORPORATE AND OTHER 152,439 1 4,469 156,909 1.19 TOTAL $ 1,222,080 $ 317,241 $ 20,063 $ 11,560 $ 1,570,944 2.35 * Investment Grade securities are those that are rated BBB and higher by Standard and Poor s or Baa and higher by Moody s TABLE 4 INVESTMENTS DENOMINATED IN FOREIGN CURRENCY FOREIGN CURRENCY RISK The University s Investment Policies permit investments in international equity and other asset classes which can include foreign currency exposure. At June 30, 2012 and 2011, the University had net outstanding forward commitments to sell foreign currency with a total fair value of $11,845,000 and $7,085,000, respectively, which equals 0.31% and 0.18% of the total portfolio. (Dollars in thousands) June 30, 2012 June 30, 2011 EURO (EUR) $ 70,764 $ 147,081 BRITISH POUND (GBP) 67,889 83,230 CHINESE RENMINBI (RMB) 52,213 63,942 INDIAN RUPEE (INR) 49,802 53,200 JAPANESE YEN (JPY) 48,273 50,794 RUSSIAN RUBLE (RUB) 38,328 37,715 BRAZILIAN REAL (BRL) 36,451 44,414 CANADIAN DOLLAR (CAD) 28,153 26,560 HONG KONG DOLLAR (HKD) 24,181 30,600 SWISS FRANC (CHF) 22,876 21,321 SOUTH KOREAN WON (KRW) 22,465 15,217 AUSTRALIAN DOLLAR (AUD) 14,271 18,599 THAI BAHT (THB) 13,564 8,204 TAIWANESE DOLLAR (TWD) 13,159 21,147 INDONESIAN RUPIAH (IDR) 12,829 15,080 REMAINING CURRENCIES 122,296 168,001 TOTAL $ 637,514 $ 805,105 FINANCIAL REPORT 2012 > 19

Notes to Financial Statements (CONTINUED) NOTE 7: Metropolitan Tract The Metropolitan Tract, located in downtown Seattle, comprises approximately 11 acres of developed property, including office space, retail space, parking and a luxury hotel. This land was the original site of the University from 1861 until 1895 when the University moved to its present location. Since the early 1900 s, the Metropolitan Tract has been leased by the University to entities responsible for developing and operating the property. On July 18, 1953, the Board of Regents of the University and the entity now known as Unico Properties, Inc. entered into a lease agreement for office, retail and parking facilities which will expire in 2014. On January 19, 1980, the Board of Regents of the University entered into a lease with the Urban/ Four Seasons Hotel Venture for the Olympic Hotel property, which will expire in 2040. The hotel was operated as the Four Seasons Olympic Hotel until July 31, 2003. On August 1, 2003, the remaining lease term was assigned to LHCS Hotel Holding (2002) LLC. The hotel was renamed the Fairmont Olympic Hotel and is now managed by Fairmont Hotels & Resorts. The balances as of June 30, 2012 and 2011 represent operating assets, net of liabilities, and land, buildings and improvements stated at appraised value as of November 1, 1954. The balances also include subsequent capital additions and improvements at cost, less retirements and accumulated depreciation of $135,236,000 and $126,575,000, respectively, and are net of the outstanding balance of the line of credit described below. In July 2004, the University obtained a 10-year term, variable rate revolving credit line for the Metropolitan Tract of up to $25,000,000 for capital repairs and improvements. The credit line is secured by future revenues of the Metropolitan Tract. As of June 30, 2012 and 2011, $8,500,000 was outstanding on the credit line. NOTE 8 : Capital Assets Capital asset activity for the two-year period ended June 30, 2012 is summarized as follows: (Dollars in thousands) Balance at June 30, 2010 Additions/ Transfers Retirements Balance at June 30, 2011 Additions/ Transfers Retirements Balance at June 30, 2012 LAND $ 114,644 $ 7,133 $ $ 121,777 $ 1,893 $ 6,056 $ 117,614 INFRASTRUCTURE 177,859 6,161 184,020 7 184,027 BUILDINGS 3,555,183 208,891 1,470 3,762,604 242,763 38,679 3,966,688 FURNITURE, FIXTURES, AND EQUIPMENT 1,045,461 115,118 57,856 1,102,723 87,448 37,069 1,153,102 LIBRARY MATERIALS 288,440 10,539 1,548 297,431 8,937 1,600 304,768 CAPITALIZED COLLECTIONS 5,699 5,699 52 5,751 INTANGIBLE ASSETS 20,035 21,248 41,283 26,164 3 67,444 INTANGIBLES IN PROCESS 2,540 2,616 260 4,896 3,003 1,371 6,528 CONSTRUCTION IN PROGRESS 277,980 170,825 448,805 272,123 720,928 TOTAL 5,487,841 542,531 61,134 5,969,238 642,390 84,778 6,526,850 LESS ACCUMULATED DEPRECIATION/ AMORTIZATION INFRASTRUCTURE 77,828 4,260 82,088 4,199 86,287 BUILDINGS 1,416,092 120,578 617 1,536,053 130,682 32,401 1,634,334 FURNITURE, FIXTURES, AND EQUIPMENT 827,275 101,023 49,281 879,017 70,396 24,238 925,175 LIBRARY MATERIALS 192,615 12,470 1,052 204,033 12,482 598 215,917 INTANGIBLE ASSETS 16,254 5,307 21,561 25,170 3 46,728 TOTAL ACCUMULATED DEPRECIATION/AMORTIZATION 2,530,064 243,638 50,950 2,722,752 242,929 57,240 2,908,441 CAPITAL ASSETS, NET $ 2,957,777 $ 298,893 $ 10,184 $ 3,246,486 $ 399,461 $ 27,538 $ 3,618,409 UNIVERSITY OF WASHINGTON > 20

NOTE 9 : Long-Term Liabilities UNIVERSITY OF WASHINGTON Long-term liability activity for the two-year period ended June 30, 2012 is summarized as follows: (Dollars in thousands) BONDS PAYABLE: Balance at June 30, 2010 Additions Reductions Balance at June 30, 2011 Additions Reductions Balance at June 30, 2012 Current Portion 2011 Current Portion 2012 GENERAL OBLIGATION BONDS PAYABLE (NOTE 11) $ 225,902 $ 48,705 $ 65,368 $ 209,239 $ 15,935 $ 30,560 $ 194,614 $ 13,435 $ 14,240 REVENUE BONDS PAYABLE (NOTE 11) 773,315 329,955 29,900 1,073,370 478,945 171,650 1,380,665 20,565 19,975 UNAMORTIZED PREMIUM ON BONDS 14,258 9,336 2,290 21,304 66,032 6,631 80,705 3,206 7,480 TOTAL BONDS PAYABLE 1,013,475 387,996 97,558 1,303,913 560,912 208,841 1,655,984 37,206 41,695 NOTES PAYABLE AND CAPITAL LEASES: NOTES PAYABLE & OTHER CAPITAL ASSET RELATED (NOTE 11) 34,260 79,782 4,610 109,432 11,939 91,571 29,800 5,124 3,967 NOTES PAYABLE & OTHER NONCAPITAL ASSET RELATED (NOTE 11) 1,606 304 513 1,397 20 450 967 1,294 103 CAPITAL LEASE OBLIGATIONS (NOTE 10) 11,258 3,078 6,338 7,998 4,901 4,279 8,620 3,311 3,404 TOTAL NOTES PAYABLE AND CAPITAL LEASES 47,124 83,164 11,461 118,827 16,860 96,300 39,387 9,729 7,474 OTHER LONG-TERM LIABILITIES: CHARITABLE AND DEFERRED GIFT ANNUITY LIABILITY 30,276 1,467 31,743 1,516 30,227 4,176 3,866 POLLUTION REMEDIATION LIABILITY (NOTE 1) 6,000 6,000 6,000 SICK LEAVE (NOTE 1) 29,014 6,649 4,172 31,491 7,641 4,502 34,630 3,940 4,336 SELF-INSURANCE (NOTE 17) 57,624 6,361 13,893 50,092 24,839 12,012 62,919 14,596 12,953 NET PENSION OBLIGATION (NOTE 16) 70,675 30,381 1,932 99,124 30,381 2,040 127,465 2,074 1,987 TOTAL OTHER LIABILITIES 193,589 44,858 19,997 218,450 62,861 20,070 261,241 24,786 23,142 TOTAL LONG-TERM LIABILITIES $ 1,254,188 $ 516,018 $ 129,016 $ 1,641,190 $ 640,633 $ 325,211 $ 1,956,612 $ 71,721 $ 72,311 DISCRETE COMPONENT UNITS Long-term liability activity for the year ended June 30, 2012 is summarized as follows: (Dollars in thousands) VALLEY MEDICAL CENTER Balance at June 30, 2011 Additions Reductions Balance at June 30, 2012 Current Portion 2012 LIMITED TAX GENERAL OBLIGATION BONDS $ 262,021 $ 35,636 $ 42,195 $ 255,462 $ 5,995 REVENUE BONDS 22,460 1,072 21,388 1,445 BUILD AMERICA BONDS 61,155 61,155 NOTES PAYABLE & OTHER 3,593 1,728 1,865 765 TOTAL LONG-TERM LIABILITIES $ 349,229 $ 35,636 $ 44,995 $ 339,870 $ 8,205 NORTHWEST HOSPITAL REVENUE BONDS $ 79,900 $ $ 1,900 $ 78,000 $ 2,000 NOTES PAYABLE & CAPITAL LEASES 18,156 4,861 4,626 18,391 1,650 TOTAL LONG-TERM LIABILITIES $ 98,056 $ 4,861 $ 6,526 $ 96,391 $ 3,650 FINANCIAL REPORT 2012 > 21

Notes to Financial Statements (CONTINUED) NOTE 10: Leases Future minimum lease payments under capital leases, and the present value of the net minimum lease payments, as of June 30, 2012, are as follows below: CAPITAL LEASES Future Year (Dollars in thousands) Payments 2013 $ 3,404 2014 2,219 2015 1,896 2016 627 2017 534 THEREAFTER 667 TOTAL MINIMUM LEASE PAYMENTS 9,347 LESS: AMOUNT REPRESENTING INTEREST COSTS 727 PRESENT VALUE OF MINIMUM PAYMENTS $ 8,620 Buildings and equipment under capital lease were as follows: (Dollars in thousands) Balance at June 30, 2010 Additions Retirements Balance at June 30, 2011 Additions Retirements Balance at June 30, 2012 EQUIPMENT $ 34,186 $ 3,078 $ 9,081 $ 28,183 $ 4,901 $ 4,022 $ 29,062 REAL ESTATE 9,987 9,987 9,987 TOTAL 44,173 3,078 9,081 38,170 4,901 4,022 39,049 LESS ACCUMULATED DEPRECIATION EQUIPMENT 29,477 1,808 9,081 22,204 2,814 4,022 20,996 REAL ESTATE 9,987 9,987 9,987 TOTAL ACCUMULATED DEPRECIATION 39,464 1,808 9,081 32,191 2,814 4,022 30,983 LEASED CAPITAL ASSETS, NET $ 4,709 $ 1,270 $ $ 5,979 $ 2,087 $ $ 8,066 OPERATING LEASES The University has certain lease agreements in effect that are considered operating leases, primarily for leased building space. During the years ended June 30, 2012 and 2011, the University recorded rent expenses of $29,299,000 and $28,184,000, respectively, for these leases. Future lease payments under these leases as of June 30, 2012, are as follows: Year (Dollars in Thousands) 2013 $ 35,317 2014 32,744 2015 28,868 2016 24,253 2017 19,946 2018-2022 50,180 2023-2027 19,639 2028-2032 15,572 THEREAFTER 36,675 TOTAL MINIMUM LEASE PAYMENTS $ 263,194 NOTE 11: Bonds and Notes Payable The bonds and notes payable at June 30, 2012 consist of state of Washington General Obligation and Refunding Bonds, University Revenue Bonds, and Notes Payable. These obligations have fixed interest rates ranging from 3.00% to 7.38%. Debt service requirements at June 30, 2012 were as follows: BONDS AND NOTES PAYABLE (Dollars in thousands) STATE OF WASHINGTON GENERAL OBLIGATION BONDS UNIVERSITY OF WASHINGTON REVENUE BONDS NOTES PAYABLE AND OTHER Year Principal Interest Principal Interest Principal Interest 2013 $ 14,240 $ 8,985 $ 19,975 $ 72,413 $ 4,070 $ 1,145 2014 14,895 8,326 37,850 73,367 3,360 1,014 2015 15,460 7,573 32,045 71,660 2,619 933 2016 18,290 6,712 34,250 69,842 2,707 836 2017 17,735 5,794 35,550 68,179 2,811 735 2018 2022 62,995 17,927 184,940 314,625 12,766 1,930 2023 2027 47,155 4,260 192,235 261,959 1,653 151 2028 2032 3,844 12 194,480 203,132 343 4 2033 2037 346,395 148,893 438 2038 Thereafter 302,945 40,085 TOTAL PAYMENTS $ 194,614 $ 59,589 $1,380,665 $1,324,155 $ 30,767 $ 6,748 UNIVERSITY OF WASHINGTON > 22

State law requires that the University reimburse the state for debt service payments relating to its portion of the state of Washington General Obligation and Refunding Bonds from Medical Center patient revenues, tuition, timber sales and other revenues. The University has pledged the net revenues from a special student fee to retire the related revenue bonds. REFUNDING ACTIVITY On August 10, 2010, the state of Washington refunded General Obligation Bonds totaling $28,710,000 (UW portion) with new bond issuances totaling $25,925,000 (plus premium of $4,231,000). The refunded bonds had coupon rates ranging from 3.50% to 5.00%; the new bonds have an average interest rate of 5.00%. The refunding decreased the total debt service payments to be made over the next 14.5 years by $3,508,000 and resulted in a total economic gain of $3,195,000. On August 10, 2010, the state of Washington refunded General Obligation Bonds totaling $4,265,000 (UW portion) with new bond issuances totaling $3,915,000 (plus premium of $663,000). The refunded bonds had a coupon rate of 5.00%; the new bonds have an average interest rate of 5.00%. The refunding decreased the total debt service payments to be made over the next 11.5 years by $500,000 and resulted in a total economic gain of $426,000. On September 28, 2010, the state of Washington refunded General Obligation Bonds totaling $19,795,000 (UW portion) with new bond issuances totaling $18,865,000 (plus premium of $2,869,000). The refunded bonds had coupon rates ranging from 4.00% to 5.00%; the new bonds have an average interest rate of 4.802%. The refunding decreased the total debt service payments to be made over the next 16.3 years by $2,539,000 and resulted in a total economic gain of $1,891,000. On October 5, 2010, the University issued $165,005,000 in General Revenue & Refunding Bonds, 2010 A&B. Part of the proceeds were used to partially refund the 2002 Housing and Dining Revenue & Refunding bonds. The amount refunded was $10,890,000; the new par value was $10,400,000 with a premium of $605,000. The refunded bonds had coupon rates ranging from 4.75% to 5.375%; the new bonds have an average interest rate of 3.943%. The refunding decreased the total debt service payments to be made over the next 21 years by $991,000 and resulted in a total economic gain of $640,000. In addition, proceeds were used to pay off $35,000,000 in commercial paper. The remainder of the proceeds will be used to fund a variety of projects including Tacoma Phase 3, Balmer Hall Renovation, UWMC Expansion, and Housing & Dining Phase 1 Master Plan. The average life of the 2010 A&B bonds (new money only) is 23.8 years with final maturity on October 1, 2040. The average interest rate of these bonds is 4.91%. On December 14, 2010, Washington Biomedical Research Facilities 3 (a blended component unit of the University), issued $13,205,000 in taxable bonds and $154,745,000 in Build America Bonds with a true interest cost of 3.974% and an average life of 16 years. The bond proceeds will be used to fund construction of a research facility that the University will occupy through a long-term lease arrangement. On July 28, 2011, the University issued $211,370,000 in General Revenue & Refunding Bonds, 2011A. Part of the proceeds were used to refund 63-20 financings issued through third parties. The amount refunded was $89,320,000; the new par was $74,515,000 (plus premium of $8,148,000 and debt service reserve contributions of $8,582,000). The refunded bonds had coupon rates ranging from 5.00 to 6.60%; the new bonds have an average interest rate of 4.623%. The refunding decreased the total debt service payments to be made over the next 20.68 years by $16,967,000 and resulted in a total economic gain of $13,703,000. In addition, proceeds were used to pay off $75,000,000 in commercial paper. The remainder of the proceeds will be used to fund a variety of projects including Tacoma Phase 3, Balmer Hall Renovation, UWMC Expansion, and Housing & Dining Phase 1 Master Plan. The average life of the 2011A General Revenue bonds (new money only) is 15.0 years with final maturity on April 1, 2035. The average interest rate of these bonds is 4.839%. On November 9, 2011, the state of Washington refunded General Obligation Bonds totaling $7,420,000 (UW portion) with new bond issuances totaling $7,190,000 and premium of $1,030,000. The refunded bonds had a coupon rate of 5.00%; the new bonds have an average interest rate of 4.90%. The refunding decreased the total debt service payments to be made over the next 14 years by $649,000 and resulted in a total economic gain of $470,000. On February 21, 2012, the state of Washington refunded General Obligation Bonds totaling $9,600,000 (UW portion) with new bond issuances totaling $8,745,000 (plus premium of $1,631,000). The refunded bonds had a coupon rate of 5.00%; the new bonds have an average interest rate of 4.50%. The refunding decreased the total debt service payments to be made over the next 14 years by $2,722,000 and resulted in a total economic gain of $1,733,000. On March 7, 2012, the University issued $267,570,000 in General Revenue & Refunding Bonds, 2012 A&B, at a premium of $42,054,000. A portion of the proceeds were used to refund existing debt. The amount refunded was $62,035,000; the new par value was $50,335,000 (plus premium of $9,295,000). The refunded bonds had coupon rates ranging from 3.50% to 5.50% with an average interest rate of 4.99%; the new bonds have an average interest rate of 4.79%. The refunding decreased the total debt service payments to be made over the next 11.7 years by $8,221,000 and resulted in a total economic gain of $7,972,000. The remainder of the proceeds will be used to fund a variety of projects. The average life of the 2012 A&B General Revenue bonds is 20.0 years with final maturity on July 1, 2041. The average interest rate of these bonds is 4.99%. Combined COP Refunding: On August 24, 2011, the state of Washington refunded Certificates of Participation (COP) totaling $11,370,000 with new COP issuances totaling $10,310,000 (plus premium of FINANCIAL REPORT 2012 > 23

Notes to Financial Statements (CONTINUED) $1,352,000). The refunding decreased the total debt service payments to be made over the next 11 years by $1,625,000 and resulted in a total economic gain of $1,412,000. SUBSEQUENT DEBT OFFERING The University is planning to issue General Revenue Bonds Series 2012C, which are expected to price in November, 2012 and close in December, 2012. The University expects to realize proceeds of $330,000,000. The proceeds will be used to partially finance renovations to Husky Stadium, construct student residence halls and apartments, construct a science building at the Bothell campus, and pay off $50,000,000 in commercial paper. COMMERCIAL PAPER PROGRAM In July 2006, the Board of Regents authorized a commercial paper program with a maximum borrowing limit of $250,000,000, payable from University General Revenues. This short-term borrowing program is primarily used to manage cash flows for capital projects that are funded with long term debt. The use of commercial paper will typically increase prior to issuance of long term debt and be paid down with the proceeds from long term debt. As of June 30, 2012 and 2011, there was $25,000,000 and $50,000,000, respectively, in outstanding commercial paper. Between July 1, 2010 and September 30, 2010, the University issued $35,000,000 in short-term commercial paper. The commercial paper was paid off with proceeds from the issuance of General Revenue & Refunding Bonds, 2010 A&B. During fiscal year 2012, the University issued an additional $75,000,000 and retired $100,000,000 of commercial paper debt. On September 5, 2012, the University issued $50,000,000 in short-term commercial paper. The commercial paper will be paid off with proceeds from the issuance of General Revenue Bonds, 2012C. NOTE 12: Pledged Revenues The University has pledged specific revenues, net of specified operating expenses, to repay the principal and interest of revenue bonds. The following is a schedule of the pledged revenues and related debt: (Dollars in thousands) Source of Revenue Pledged Total Future Revenues Pledged* Description of Debt Purpose of Debt Term of Commitment Proportion of Debt Service to Pledged Revenues (Current Year) Student Facilities Fees and earnings on invested fees * Total future principal and interest payments on the debt $ 61,584 Student Facilities Refunding Revenue Bonds issued in 2005 Construction of student recreational sports facilities 2030 19.2% NOTE 13: Operating Expenses by Function Operating expenses by functional classification for the years ended June 30, 2012 and 2011 are summarized as follows: (Dollars in thousands) Operating Expenses 2012 2011 EDUCATIONAL AND GENERAL INSTRUCTION $ 925,724 $ 920,169 RESEARCH 782,458 791,507 PUBLIC SERVICE 24,108 29,574 ACADEMIC SUPPORT 291,647 278,693 STUDENT SERVICES 36,747 34,908 INSTITUTIONAL SUPPORT 161,579 133,547 OPERATION & MAINTENANCE OF PLANT 180,916 192,433 SCHOLARSHIPS & FELLOWSHIPS 107,729 101,388 AUXILIARY ENTERPRISES 195,982 169,876 MEDICAL-RELATED 961,206 873,785 DEPRECIATION/AMORTIZATION 242,929 243,638 TOTAL OPERATING EXPENSES $ 3,911,025 $ 3,769,518 UNIVERSITY OF WASHINGTON > 24

NOTE 14: Related Parties Harborview Medical Center (HMC), a hospital and Level I adult and pediatric trauma center in Seattle, is a component unit of King County, Washington. It has been managed by the University under a management contract between King County and the University since 1967. The current management contract will be in effect through June 30, 2015. Under the contract, the HMC Board of Trustees determines major institutional policies and retains control of programs and fiscal matters, while King County retains ultimate control over capital programs and capital budgets. The University is responsible for the operations of HMC, including the provision of medical, dental and management services. All of the individuals employed at HMC, including physicians, are employees of the University of Washington. HMC expenses, including payroll, are reimbursed to the University from HMC fund sources. HMC revenues and expenses are not recognized in the University s financial statements. The University s financial statements do, however, include accounts receivable from HMC of $25,365,000 in 2012 and $20,733,000 in 2011, as well as HMC investments of $2,659,000 and $2,685,000, respectively, and accrued liabilities of $17,951,880 and $17,823,000, respectively. The University of Washington Foundation (UWF) is a nonprofit organization that performs fundraising activities on behalf of the University of Washington. The UWF is not included in the University s financial statements as a component unit because gifts and grants that are made to the UWF are immediately transferred to the University. In 2012 and 2011, the UWF transferred $50,516,000 and $48,491,000, respectively, to the University in gifts and grants received on its behalf; these are included in the financial statements of the University. The remaining amounts retained by the UWF are not significant to the University s financial statements. The University of Washington Alumni Association is a tax-exempt entity that was established to connect and celebrate alumni and to support the University s mission. The Alumni Association received $2,456,000 from the University in support of their operations in fiscal year 2012. In 2011 the association received $2,092,000 from the University, which was eliminated in consolidation because the association was a blended component unit of the University in fiscal year 2011. During fiscal year 2012, the University of Washington Medical Center (UWMC) provided $4,100,000 to Northwest Hospital (NWH, a discrete component unit of the University) to mitigate the negative impact of several state program reductions including the hospital safety net funding. These amounts are presented in the Statements of Revenues, Expenses and Changes in Net Assets for the University as a reduction of Patient Services revenue and for NWH as an increase in Patient Services Revenue. In support of strategic program expansion, $6,400,000 of operational funding was provided by UWMC to NWH during 2012 which is reflected by the University in Other Nonoperating Revenues (Expenses), and by NWH in Other Operating Revenue ($2,000,000) and in Other Nonoperating Revenues ($4,400,000). $1,171,000 of capital funding was also provided by UWMC to NWH, and is reflected by the University in Other Nonoperating Revenues (Expenses) and by NWH in Capital Grants, Gifts and Other. NOTE 15: Other Post Employment Benefits (OPEB) Health care and life insurance programs for employees of the state of Washington are administered by the Washington State Health Care Authority (HCA). The HCA calculates the premium amounts each year that are sufficient to fund the statewide health and life insurance programs on a pay-as-you-go basis. These costs are passed through to individual state agencies based upon active employee headcount; the agencies pay the premiums for active employees to the HCA. The agencies may also charge employees for certain higher cost options elected by the employee. State of Washington retirees may elect coverage through state health and life insurance plans, for which they pay less than the full cost of the benefits, based on their age and other demographic factors. The health care premiums for active employees, which are paid by the agency during employees working careers, subsidize the underpayments of retirees. An additional factor in the OPEB obligation is a payment that is required by the State Legislature to reduce the premiums for retirees covered by Medicare (an explicit subsidy). For calendar years 2012 and 2011, this amount was $150 and $183 per retiree eligible for parts A and B of Medicare, respectively. This is also passed through to state agencies via active employee rates charged to the agency. There is no formal state or University plan that underlies the subsidy of retiree health and life insurance. ACTUARIAL STUDY Actuarial studies performed by the Washington Office of the State Actuary calculated that the total OPEB obligation of the state of Washington at January 1, 2011 was $3.5 billion. The annual cost was $321 million for 2011. The actuary calculated the OPEB obligation based on individual state employee data, including age, retirement eligibility and length of service. The probability of an employee of a given age and length of service retiring and receiving OPEB benefits is based on statewide historical data. The actuary s allocation of the cumulative statewide liability related to the University and its unconsolidated affiliates, based on the January 1, 2011 actuarial report, was estimated at approximately $605 million for 2011. Actuarial studies are currently being performed biennially, therefore the January 1, 2011 report is the latest that is available. These amounts are not included in the University s financial statements. FINANCIAL REPORT 2012 > 25

Notes to Financial Statements (CONTINUED) The University paid $297 million and $293 million for healthcare in 2012 and 2011, respectively, which included its pay-as-yougo portion of the OPEB liability, calculated by the actuary at $7.4 million in 2011. The actuary has not calculated the University s pay-as-you-go portion of the liability for 2012. The State Actuary s report is available at: http://osa.leg.wa.gov/actuarial_services/ OPEB/OPEB.htm NOTE 16: Pension Plans The University offers two contributory plans: the Washington State Public Employees Retirement System (PERS) plan, a defined-benefit retirement plan; and the University of Washington Retirement Plan (UWRP), a defined-contribution plan with supplemental payments to beneficiaries, when required. PUBLIC EMPLOYEES RETIREMENT SYSTEM Plan Description: The University of Washington contributes to PERS, a cost sharing, multiple-employer, defined-benefit pension plan administered by the state of Washington Department of Retirement Systems. PERS Plan 1 provides retirement and disability benefits and minimum benefit increases beginning at age 66 to eligible nonacademic plan members hired prior to October 1, 1977. PERS Plans 2 and 3 provide retirement and disability benefits and a cost-of-living allowance to eligible nonacademic plan members hired on or after October 1, 1977. In addition, PERS Plan 3 has a defined-contribution component, which is fully funded by employee contributions. The authority to establish and amend benefit provisions resides with the legislature. The Washington State Public Employees Retirement System issues a publicly available financial report that includes financial statements and required supplementary information for PERS. The report may be obtained by writing to the Department of Retirement Systems, P.O. Box 48380, Olympia, WA 98504-8380, or visiting http://www.drs.wa.gov/administration/ Funding Policy: The Office of the State Actuary, using funding methods prescribed by statute, determines actuarially required contribution rates for PERS. Plan 1 members were required to contribute 6% of their annual covered salary in fiscal years 2012 and 2011. Contributions for Plan 2 members are determined by the aggregate method, and may vary over time. The contribution rate for Plan 2 employees at June 30, 2012 and 2011 was 4.6% and 3.9%, respectively. Plan 3 members can choose contributions ranging from 5% to 15% of salary, based on the age of the member. The defined-contribution benefit for PERS 3 will depend on the member s contributions, the investment earnings on those contributions, and if an annuity is taken, the age at which the member receives payment. The blended contribution rate for the University at June 30, 2012 and 2011, for each of PERS Plans 1, 2, and 3 was 7.18% and 5.31% for the respective years. The University s contributions to PERS for the years ended June 30, 2012, 2011, and 2010 were $59,708,000, $42,967,000, $41,680,000, respectively, as determined by rates established in accordance with RCW 41.45. UNIVERSITY OF WASHINGTON RETIREMENT PLAN (403(B)) & UNIVERSITY OF WASHINGTON SUPPLEMENTAL RETIREMENT PLAN (401(A)) Faculty, librarians and professional staff are eligible to participate in the University of Washington Retirement Plan, a 403(b) defined- contribution plan and the UW Supplemental Retirement Plan, a 401(a) defined-benefit retirement plan which operates in tandem with the 403(b) plan. Both plans are administered by the University. 403(b) Plan Description: Contributions to the plan are invested by participants in annuity contracts or mutual fund accounts offered by one or more fund sponsors. Employees have at all times a 100% vested interest in their accumulations. Benefits from fund sponsors are available upon separation or retirement at the member s option. RCW 28B.10.400 et. seq. assigns the authority to the University of Washington Board of Regents to establish and amend benefit provisions. 403(b) Funding Policy: Employee contribution rates, based on age, are 5%, 7.5% or 10% of salary. The University matches the contributions of employees. Within parameters established by the legislature, contribution requirements may be established or amended by the University of Washington Board of Regents. Employee and employer contributions for the years ended June 30, 2012 and 2011 were $86,912,000 and $83,358,000, respectively. 401(a) Plan Description: This plan provides for a supplemental payment component, which guarantees a minimum retirement benefit based upon a one-time calculation at each eligible participant s retirement date. The University makes direct payments to qualifying retirees when the retirement benefits provided by the 403(b) plan do not meet the benefit goals. During the fiscal year ending June 30, 2011 the University amended the supplemental retirement plan, limiting participation to those individuals who were active participants on February 28, 2011. 401(a) Plan Funding: The University received an actuarial valuation of the supplemental payment component of the UWRP with a valuation date of July 1, 2011. The previous evaluations were performed in 2009 and 2007. The University has set aside $109,588,000 and $75,132,000 as of June 30, 2012 and 2011, respectively, for this liability. UNIVERSITY OF WASHINGTON > 26

UNIVERSITY OF WASHINGTON SUPPLEMENTAL RETIREMENT PLAN The Unfunded Actuarial Accrued Liability (UAL) and Annual Required Contribution (ARC) as of July 1 of the respective year were: (Dollars in thousands) 2011 2009 2007 UAL $ 235,048 $ 218,036 $ 64,215 NORMAL COST 10,774 8,860 3,369 AMORTIZATION OF UAL, INCLUDING INTEREST 19,607 17,220 4,374 ARC $ 30,381 $ 26,080 $ 7,743 (Dollars in thousands) Actuarial assumptions 2011 2009 2007 PAYROLL COVERED BY PLAN $ 1,129,000 $ 976,000 $ 771,000 RATE OF RETURN ASSUMPTION 4.25% 5% 5% SALARY INCREASES FOR YEARS 1 AND 2 2% 2% 4% SALARY INCREASE FOR THIRD YEAR 4% 4% 4% SALARY INCREASES THEREAFTER 4% 4% 4% The UAL and ARC were established using the entry age normal cost method. The following table reflects the activity in the Net Pension Obligation for the years ended June 30, 2012, 2011, and 2010: (Dollars in thousands) 2012 2011 2010 BALANCE AT BEGINNING OF FISCAL YEAR $ 99,124 $ 70,675 $ 46,812 ANNUAL REQUIRED CONTRIBUTION 30,381 30,381 26,080 PAYMENTS TO BENEFICIARIES (2,040) (1,932) (2,217) BALANCE AT END OF FISCAL YEAR $ 127,465 $ 99,124 $ 70,675 NOTE 17: Commitments and Contingencies Authorized expenditures for construction projects unexpended as of June 30, 2012 and 2011, were $568,337,000 and $537,924,000, respectively. These expenditures will be funded from local funds and state appropriations. The University receives and expends substantial amounts under federal and state grants, contracts and programs such as Medicare. This funding is used for research, student aid, Medical Center operations and other programs, and is subject to audit by governmental granting agencies. Certain grant and contract costs billed to the federal government are subject to audit under OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. The University is also involved in various other claims and legal actions arising in the ordinary course of business. University management believes that any liabilities arising from these matters will not have a material effect on the University s financial statements. The University is exposed to risk of loss related to tort liability, injuries to employees and loss of property. The University purchases insurance protection for workers compensation as well as marine, aviation and certain other risks. The University also purchases insurance protection for loss of property at self-sustaining units, bondfinanced buildings and where o therwise required by contract; otherwise, the risk of property loss is retained, unfunded. For professional, general, employment and automobile liability, the University maintains a program of self-insurance reserves and excess insurance coverage. The self-insurance reserve represents the estimated ultimate cost of settling claims resulting from events that have occurred on or before the balance sheet date. The reserve includes the amount that will be required for future payments of claims that have been reported and claims related to events that have occurred but have not been reported. The reserve was discounted at 4% in the year ended June 30, 2011. Beginning in fiscal year 2012 the University no longer discounts the reserve. The self-insurance reserve is estimated through an actuarial calculation and included in Long-Term Liabilities. Changes in the self-insurance reserve for the years ended June 30, 2012, 2011, and 2010 are noted below: (Dollars in thousands) 2012 2011 2010 RESERVE AT BEGINNING OF FISCAL YEAR $ 50,092 $ 57,624 $ 51,650 INCURRED CLAIMS AND CHANGES IN ESTIMATES 24,839 6,361 21,272 CLAIM PAYMENTS (12,012) (13,893) (15,298) RESERVE AT END OF FISCAL YEAR $ 62,919 $ 50,092 $ 57,624 FINANCIAL REPORT 2012 > 27

Notes to Financial Statements NOTE 18: Blended Component Units Condensed combining statements for the University and its blended component units are shown below: (Dollars in millions) Balance Sheets June 30, 2012 ASSETS CURRENT ASSETS: Combined Entities Eliminations University of Washington Total Blended Component Units Medical Entities Real Estate Entities TOTAL CURRENT ASSETS $ 1,161 $ (3) $ 1,084 $ 80 $ 61 $ 19 NONCURRENT ASSETS: TOTAL OTHER ASSETS 3,624 3,433 191 94 97 CAPITAL ASSETS, NET 3,618 3,322 296 12 284 TOTAL ASSETS 8,403 (3) 7,839 567 167 400 LIABILITIES TOTAL CURRENT LIABILITIES 722 (11) 656 77 39 38 TOTAL NONCURRENT LIABILITIES 1,939 1,575 364 364 TOTAL LIABILITIES 2,661 (11) 2,231 441 39 402 NET ASSETS INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT $ 2,113 2,186 (73) 13 (86) RESTRICTED: NONEXPENDABLE 1,116 1,116 EXPENDABLE 1,162 1,162 UNRESTRICTED 1,351 8 1,144 199 115 84 TOTAL NET ASSETS 5,742 8 5,608 126 128 (2) TOTAL LIABILITIES AND NET ASSETS $ 8,403 $ (3) $ 7,839 $ 567 $ 167 $ 400 (Dollars in millions) Statements of Revenues, Expenses and Changes in Net Assets Year ended June 30, 2012 REVENUES OPERATING REVENUES: Combined Entities Eliminations University of Washington Total Blended Component Units Medical Entities Real Estate Entities STUDENT TUITION AND FEES $ 681 $ $ 681 $ $ $ PATIENT SERVICES 1,097 (6) 933 170 170 GRANT REVENUE 1,302 1,302 OTHER OPERATING REVENUE 442 (23) 439 26 26 TOTAL OPERATING REVENUE 3,522 (29) 3,355 196 170 26 EXPENSES OPERATING EXPENSES: OTHER OPERATING EXPENSES 3,668 (51) 3,510 209 200 9 DEPRECIATION / AMORTIZATION 243 232 11 1 10 TOTAL OPERATING EXPENSES 3,911 (51) 3,742 220 201 19 OPERATING INCOME (LOSS) (389) 22 (387) (24) (31) 7 NONOPERATING REVENUES (EXPENSES) STATE APPROPRIATIONS 218 218 GIFTS 77 77 INVESTMENT INCOME 34 32 2 2 OTHER NONOPERATING REVENUES (EXPENSES) (11) (16) (8) 13 22 (9) NET NONOPERATING REVENUES (EXPENSES) 318 (16) 319 15 24 (9) INCOME (LOSS) BEFORE OTHER REVENUE, EXPENSE (71) 6 (68) (9) (7) (2) CAPITAL APPROPRIATIONS, GRANTS, GIFTS AND OTHER 32 32 GIFTS TO PERMANENT ENDOWMENTS 53 53 TOTAL OTHER REVENUE 85 85 INCREASE (DECREASE) IN NET ASSETS 14 6 17 (9) (7) (2) NET ASSETS NET ASSETS - BEGINNING OF YEAR 5,728 2 5,591 135 135 NET ASSETS - END OF YEAR $ 5,742 $ 8 $ 5,608 $ 126 $ 128 $ (2) UNIVERSITY OF WASHINGTON > 28

(Dollars in millions) Statements of Cash Flows Year ended June 30, 2012 NET CASH PROVIDED (USED) BY: Combined Entities Eliminations University of Washington Total Blended Component Units Medical Entities OPERATING ACTIVITIES $ (57) $ $ (51) $ (6) $ (14) $ 8 NONCAPITAL FINANCING ACTIVITIES 363 372 (9) (9) Real Estate Entities CAPITAL AND RELATED FINANCING ACTIVITIES (359) (290) (69) (2) (67) INVESTING ACTIVITIES 60 (28) 88 21 67 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7 3 4 (4) 8 CASH AND CASH EQUIVALENTS BEGINNING OF THE YEAR 43 26 17 13 4 CASH AND CASH EQUIVALENTS END OF THE YEAR $ 50 $ $ 29 21 $ 9 $ 12 FINANCIAL REPORT 2012 > 29

Notes to Financial Statements NOTE 19: Discrete Component Units Condensed combining statements for the University s discrete component units are shown below: June 30, 2012 (Dollars in millions) Balance Sheets Total Discrete Component Units Northwest Hospital Valley Medical Center ASSETS CURRENT ASSETS: TOTAL CURRENT ASSETS $ 230 $ 68 $ 162 NONCURRENT ASSETS: TOTAL OTHER ASSETS 142 47 95 CAPITAL ASSETS, NET 511 124 387 TOTAL ASSETS 883 239 644 LIABILITIES TOTAL CURRENT LIABILITIES 133 52 81 TOTAL NONCURRENT LIABILITIES 435 100 335 TOTAL LIABILITIES 568 152 416 NET ASSETS INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT 99 36 63 RESTRICTED: NONEXPENDABLE 2 2 EXPENDABLE 9 1 8 UNRESTRICTED 205 48 157 TOTAL NET ASSETS 315 87 228 TOTAL LIABILITIES AND NET ASSETS $ 883 $ 239 $ 644 (Dollars in millions) Year Ended June 30, 2012 Statements of Revenues, Expenses and Changes in Net Assets Total Discrete Component Units Northwest Hospital Valley Medical Center REVENUES OPERATING REVENUES: PATIENT SERVICES $ 704 $ 285 $ 419 OTHER OPERATING REVENUE 32 15 17 TOTAL OPERATING REVENUE 736 300 436 EXPENSES OPERATING EXPENSES: OTHER OPERATING EXPENSES 693 283 410 DEPRECIATION / AMORTIZATION 55 22 33 TOTAL OPERATING EXPENSES 748 305 443 OPERATING LOSS (12) (5) (7) NONOPERATING REVENUES (EXPENSES) PROPERTY TAX REVENUE 18 18 INVESTMENT INCOME 7 2 5 OTHER NONOPERATING EXPENSES (21) (21) NET NONOPERATING REVENUES 4 2 2 LOSS BEFORE CAPITAL CONTRIBUTIONS (8) (3) (5) CAPITAL CONTRIBUTIONS FROM PRIMARY GOVERNMENT 1 1 DECREASE IN NET ASSETS (7) (2) (5) NET ASSETS NET ASSETS - BEGINNING OF YEAR 322 89 233 NET ASSETS - END OF YEAR $ 315 $ 87 $ 228 UNIVERSITY OF WASHINGTON > 30

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BOARD OF REGENTS* Kristianne Blake, Chair Joanne R. Harrell, Vice Chair William S. Ayer Craig W. Cole William H. Gates Sally Jewell Kelsey Knowles Patrick M. Shanahan Herb Simon Orin Smith ADMINISTRATIVE OFFICERS* Michael K. Young President Ana Mari Cauce Provost and Executive Vice President Eric Godfrey Vice President and Vice Provost for Student Life Randy Hodgins Vice President for External Affairs Mindy Kornberg Vice President for Human Resources Connie Kravas Vice President for University Advancement Sheila Edwards Lange Vice President for Minority Affairs and Vice Provost for Diversity Paul G. Ramsey CEO, UW Medicine, Executive Vice President for Medical Affairs and Dean of the School of Medicine Doug Wadden Executive Vice Provost V Ella Warren Senior Vice President * As of June 30, 2012 This publication was prepared by Financial Management. Published December 2012. The 2012 UW Financial Report and reports from previous years are available at annualreport.uw.edu. For more information, contact Financial Accounting at 206.221.7845 or accountg@uw.edu PHOTOGRAPHY: Doug Plummer DESIGN, PRODUCTION, AND PRINT COORDINATION: UW Creative Communications VISIT OUR WEBSITE: uw.edu 2012 University of Washington Printed on recycled paper containing 30% post-consumer fiber