Midwestern University Years Ended June 30, 2016 and 2015 With Reports of Independent Auditors

Transcription

1 C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION Midwestern University Years Ended June 30, 2016 and 2015 With Reports of Independent Auditors Ernst & Young LLP

2 Consolidated Financial Statements and Supplementary Information Years Ended June 30, 2016 and 2015 Contents Report of Independent Auditors...1 Consolidated Financial Statements Consolidated Statements of Financial Position...3 Consolidated Statement of Activities, Year Ended June 30, Consolidated Statement of Activities, Year Ended June 30, Consolidated Statements of Cash Flows...7 Notes to Consolidated Financial Statements...9 Supplementary Information Report of Independent Auditors on Supplementary Information...39 Details of Consolidated Statements of Financial Position, June 30, 2016 and Details of Consolidated Statements of Activities, Years Ended June 30, 2016 and Details of Consolidated Statements of Cash Flows, Years Ended June 30, 2016 and Note to Supplementary Information

3 Ernst & Young LLP 155 North Wacker Drive Chicago, IL Tel: Fax: ey.com Report of Independent Auditors The Board of Trustees Midwestern University We have audited the accompanying financial statements of Midwestern University, which comprise the consolidated statements of financial position as of June 30, 2016 and 2015, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion A member firm of Ernst & Young Global Limited

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Midwestern University at June 30, 2016 and 2015, and the consolidated results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. October 11, 2016 ey A member firm of Ernst & Young Global Limited

5 Consolidated Statements of Financial Position Assets Current assets: Cash 215,055,495 June $ $ 159,944,629 Cash restricted 2,828,984 3,076,662 Accounts receivable, less allowances for uncollectible accounts of $614,000 and $404,000 as of June 30, 2016 and 2015, respectively 6,186,036 5,955,385 Student loans receivable current portion 3,854,823 2,982,051 Short-term investments 110,210, ,844,605 Other current assets 4,373,618 4,217,691 Total current assets 342,509, ,021,023 Other assets: Assets limited as to use investments restricted under debt agreements 28,163,248 50,570,789 Investments 118,798, ,629,527 Student loans receivable, less current portion, less allowances for uncollectible accounts of $219,000 and $115,000 as of June 30, 2016 and 2015, respectively 51,984,968 33,983,999 Self-insurance assets 10,520,037 9,299,669 Interest rate protection agreements 485,545 1,091,158 Other long-term assets 1,005, ,556 Total other assets 210,957, ,293,698 Land, buildings, and equipment, net 709,756, ,395,553 Total assets $ 1,263,223,437 $ 1,194,710,

6 Consolidated Statements of Financial Position (continued) Liabilities and net assets Current liabilities: Accounts payable 3,592,029 June $ $ 2,946,104 Employee compensation and amounts withheld from employees 27,241,479 25,731,357 Accrued expenses 10,072,415 14,847,459 Deferred tuition revenue and other 45,303,764 39,803,964 Accrued grant liability 5,474,204 6,572,893 Current portion of long-term debt 8,385,000 8,020,000 Other current liabilities 4,144,127 4,789,946 Total current liabilities 104,213, ,711,723 Long-term debt, less current portion and less deferred bond issuance cost 317,543, ,913,718 Refundable federal student loans 21,957,155 21,936,777 Self-insurance liabilities 7,806,072 7,225,614 Interest rate protection agreements 12,650,979 8,888,964 Other long-term liabilities 9,551,701 8,511,300 Total liabilities 473,722, ,188,096 Net assets: Unrestricted 776,576, ,411,332 Temporarily restricted 7,870,000 6,721,711 Permanently restricted 5,054,556 4,389,135 Total net assets 789,501, ,522,178 Total liabilities and net assets $ 1,263,223,437 $ 1,194,710,274 See accompanying notes

7 Consolidated Statement of Activities Year Ended June 30, 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Revenue and support University tuition and other fees $ 335,715,783 $ $ $ 335,715,783 Grant revenue 3,409,981 3,409,981 Postdoctoral program revenue 10,306,743 10,306,743 Contributions 363,934 1,931, ,421 2,961,061 Housing rental 5,933,884 5,933,884 Clinic revenue 18,548,955 18,548,955 Other 3,400,020 16,898 3,416,918 Net assets released from restrictions and used in operations 1,139,378 (1,139,378) Total revenue and support 378,818, , , ,293,325 Expenses Clinical faculty services 6,395,587 6,395,587 Salaries 149,085, ,085,505 Employee benefits 38,837,897 38,837,897 Supplies 12,609,997 12,609,997 Utilities 6,320,534 6,320,534 Maintenance and repairs 2,806,491 2,806,491 Depreciation 35,585,288 35,585,288 Insurance 3,611,346 3,611,346 Administrative services 32,962,972 32,962,972 Total expenses 288,215, ,215,617 Operating income 90,603, , ,421 92,077,708 Non-operating income (loss) Investment return (1,326,163) 339,063 (987,100) Interest expense (13,098,775) (13,098,775) Realized loss on termination of interest rate protection agreement (3,645,000) (3,645,000) Unrealized loss on interest rate protection agreements (4,367,628) (4,367,628) (22,437,566) 339,063 (22,098,503) Increase in net assets 68,165,495 1,148, ,421 69,979,205 Net assets at beginning of year 708,411,332 6,721,711 4,389, ,522,178 Net assets at end of year $ 776,576,827 $ 7,870,000 $ 5,054,556 $ 789,501,383 See accompanying notes

8 Consolidated Statement of Activities Year Ended June 30, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Revenue and support University tuition and other fees $ 319,223,567 $ $ $ 319,223,567 Grant revenue 2,900,100 2,900,100 Postdoctoral program revenue 10,074,966 10,074,966 Contributions 393,803 1,031, ,635 1,789,549 Housing rental 6,310,363 6,310,363 Clinic revenue 15,767,592 15,767,592 Other 2,485,956 14,033 2,499,989 Net assets released from restrictions and used in operations 932,631 (932,631) Total revenue and support 358,088, , , ,566,126 Expenses Clinical faculty services 6,628,115 6,628,115 Salaries 134,015, ,015,277 Employee benefits 35,852,690 35,852,690 Supplies 10,405,616 10,405,616 Utilities 6,250,414 6,250,414 Maintenance and repairs 3,003,612 3,003,612 Depreciation 30,667,154 30,667,154 Insurance 3,539,227 3,539,227 Administrative services 32,991,693 32,991,693 Total expenses 263,353, ,353,798 Operating income 94,735, , ,635 95,212,328 Non-operating income (loss) Investment return 3,351, ,093 3,669,588 Interest expense (10,639,532) (10,639,532) Realized loss on termination of interest rate protection agreement (1,335,000) (1,335,000) Unrealized loss on interest rate protection agreements (781,754) (781,754) (9,404,791) 318,093 (9,086,698) Increase in net assets 85,330, , ,635 86,125,630 Net assets at beginning of year 623,080,943 6,291,105 4,024, ,396,548 Net assets at end of year $ 708,411,332 $ 6,721,711 $ 4,389,135 $ 719,522,178 See accompanying notes

9 Consolidated Statements of Cash Flows Year Ended June Operating activities Increase in net assets $ 69,979,205 $ 86,125,630 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Depreciation 35,585,288 30,667,154 Amortization of bond issuance costs 265, ,902 Amortization of bond premiums and discounts (207,649) (220,600) Unrealized loss on investments 5,651,381 4,684,838 Realized gain on investments (504,008) (3,880,166) Unrealized loss on interest rate protection agreements 4,367, ,754 Proceeds from permanently restricted contributions (665,421) (364,635) Changes in operating assets and liabilities: Increase in accounts receivable (230,651) (418,697) Increase in other current assets (155,927) (827,576) Increase in self-insurance assets (115,183) (20,627) (Increase) decrease in other long-term assets (330,506) 21,402 (Decrease) increase in accounts payable, employee compensation, accrued expenses, and other current liabilities (88,543) 3,327,052 Increase in deferred tuition revenue and other 5,499,800 1,300,419 (Decrease) increase in accrued grant liability (1,098,689) 531,813 Increase in net restricted cash and refundable federal student loans 268,056 4,005,561 Increase in net self-insurance liabilities 580, ,482 Increase in other long-term liabilities 1,040, ,347 Net cash provided by operating activities 119,841, ,959,053 Investing activities Net purchases of buildings and equipment (55,122,528) (94,065,624) Purchases of investments (582,180,391) (500,163,789) Proceeds from sales of investments 598,800, ,482,135 Origination of institutional student loans (21,635,893) (12,926,451) Repayment of institutional student loans 2,762,152 1,712,979 Net cash used in investing activities (57,376,161) (137,960,750)

10 Consolidated Statements of Cash Flows (continued) Year Ended June Financing activities Proceeds from issuance of long-term debt $ $ 30,000,000 Repayment of long-term debt (8,020,000) (7,670,000) Bond issuance discount (234,095) Bond issuance costs (2,000,689) Proceeds from permanently restricted contributions 665, ,635 Net cash (used in) provided by financing activities (7,354,579) 20,459,851 Increase in cash 55,110,866 9,458,154 Cash at beginning of year 159,944, ,486,475 Cash at end of year $ 215,055,495 $ 159,944,629 Supplemental information Reclassification of cash flows between investing activities and operating activities for change in amounts due for buildings and equipment $ (3,176,273) $ (17,055,032) See accompanying notes

11 Notes to Consolidated Financial Statements June 30, Accounting Policies and Basis of Presentation Midwestern University (the University) is an Illinois not-for-profit corporation, organized through its various colleges to provide graduate and postgraduate education in the health sciences, including osteopathic medicine, pharmacy, physician s assistant studies, physical therapy, occupational therapy, biomedical sciences, podiatry, clinical psychology, cardiovascular science, nurse anesthesia, dentistry, optometry, veterinary medicine, speech-language pathology, and graduate education programs. There were 6,246 students enrolled at the University for the 2016 academic year. The University has three campuses: two located on 117 acres in Downers Grove, Illinois (the Downers Grove campus, which includes the Midwestern University Clinical Teaching Campus), and one located on 150 acres in Glendale, Arizona (the Glendale campus). Most programs are offered on both campuses. The University and its affiliates, excluding Osteopathic Management Enterprises, Inc., are separate not-for-profit corporations and are exempt from federal income taxes on related income under Section 501(c)(3) of the Internal Revenue Code for the University and Midwestern University Foundation (the Foundation), and under Section 501(c)(2) for MWU Properties Corp. Basis of Consolidation The consolidated financial statements of the University include the accounts and transactions of the University; MWU Properties Corp.; the Foundation; and Osteopathic Management Enterprises, Inc. All significant intercompany accounts and transactions are eliminated in consolidation. The details of the consolidated statements of financial position are shown on page 40 through 43. The details of the consolidated statements of activities are shown on pages 44 and 45. The Obligated Group includes the accounts and transactions of the University. The Nonobligated Group includes the accounts and transactions of the Foundation; MWU Properties Corp.; and Osteopathic Management Enterprises, Inc. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Although estimates are considered to be fairly stated at the time the estimates are made, actual results could differ from those estimates

12 1. Accounting Policies and Basis of Presentation (continued) Cash Cash includes money on deposit with one of the University s banking institutions. Cash Restricted Restricted cash is cash held by the University in a separate bank account that can only be used for the specific purpose of lending money to students under one of the University s federal refundable student loan programs. Short-Term Investments Short-term investments include highly liquid investments with a maturity of one year or less when purchased and money market funds. All securities are carried at fair value based on quoted market prices for those or similar instruments. Long-Term Investments Long-term investments include investments that the Board of Trustees has internally designated to spend on long-term projects, such as capital projects. Management has no intention of using these investments for operations. Investments are measured at fair value in the consolidated financial statements. Assets Limited as to Use Assets limited as to use include investments held by bond trustees under debt agreements. Investments are measured at fair value in the consolidated financial statements. The entire investment portfolio (short-term investments, long-term investments, and assets limited as to use) has been designated as trading. Accordingly, realized and unrealized gains and losses on investments are included as investment return in non-operating income (loss) on the accompanying consolidated statements of activities

13 1. Accounting Policies and Basis of Presentation (continued) Student Loans and Scholarships Student loans consist of loans from the University to its students, with the loan funds being provided by the University from cash, board-restricted funds, loan prepayments, or government sources. Prior to fiscal year 2011, student loans (and related assets and activities) reported in the consolidated financial statements also consisted of loans made to students by the University as lender under the School as Lender Model in the Federal Family Education Loan (FFEL) Program. These FFEL Program loans were funded with the proceeds from Foundation-issued bonds (Foundation Bonds) or by accessing funds available from the U.S. Department of Education (DOE) under its Master Participation Agreement. The Foundation entered into agreements (including a Master Loan Sale Agreement and Master Participation Agreement) with the DOE in June 2009, which enabled the Foundation to participate in the DOE s Loan Purchase Commitment Program (the Purchase Program) and Loan Participation Program (the Participation Program; together with the Purchase Program, the DOE Programs) for the fiscal/academic years. In March 2010, federal legislation was enacted that prohibits private sector companies from making new federal student loans after June 30, 2010, effectively eliminating the FFEL Program (and the Purchase and Participation Programs) and redirecting all loans to the Federal Direct Student Loan Program, under which the federal government funds loans directly to eligible students through eligible participating postsecondary education institutions. The University ceased making loans to students under the School as Lender Model in June Thereafter, University students are eligible for federal student loans made directly by the federal government through the Federal Direct Student Loan Program. Historically, at various times throughout the year, the Foundation would sell the loans to a loan purchaser at a premium. The proceeds from these sales were deposited with the trustee for the Foundation Bonds and made available for further loans to the University s students. In exiting the FFEL Program, the 2009A Foundation Bonds were effectively redeemed in June 2010 using the proceeds of the sale of $56,523,000 in student loans to the DOE on June 24, 2010, and other funds held in reserve by the bond trustee at that date. In addition, the amount owed to the DOE under the Participation Program was fully paid back using the funds from the sale of $56,472,000 in student loans to the DOE on June 24, In September 2010, the Foundation sold most of the remaining FFEL Program loans to the DOE. As of June 30, 2016, the Foundation sold all of its remaining FFEL student loans, which were serviced by Sallie Mae

14 1. Accounting Policies and Basis of Presentation (continued) Interest income on subsidized and unsubsidized federal student loans is recognized during the month it is earned. Costs associated with the origination of student loans are expensed in the period incurred. In fiscal year 2014, the Foundation created a new private loan program called the Midwestern University Private Loan Program (MPL Program) that has been and will continue to be funded through the combination of internal equity and the issuance of tax-exempt debt. The MPL Program functions like the FFEL Program loans in some respects (e.g., grace periods, deferment options, and interest capitalization at repayment) and like other private loan programs in other respects (e.g., credit underwriting, co-signers, and fixed interest rates). Unlike loans made under the FFEL Program, loans made under the MPL Program are made by the Foundation directly to students and are not guaranteed by the federal government. The outstanding loan balance for the MPL Program loans was $23,395,000 and $5,917,000 as of June 30, 2016 and 2015, respectively. The MPL Program student loans are serviced by ECSI, a third-party loan servicer. Foundation Bonds issued to fund the MPL Program are not obligations of the University or the Obligated Group (the University being the only member of the Obligated Group) and are limited obligations of the Foundation, secured by and payable solely and exclusively from the student loans and related revenues and other assets comprising the trust estates created by the Trust Indentures pursuant to which those Bonds have been issued. Assets of the University are not available to creditors of the Foundation, and assets of the Foundation are not available to creditors of the University. The accounts and transactions of the Foundation pertaining to the MPL Program are reflected in the consolidated financial statements, and are reflected under the Non-obligated Group in the Supplementary Information starting on page 41. The University s largest institutional loan programs, other than the MPL Program, are the Chicago College of Osteopathic Medicine (CCOM) Loan Program and the Arizona College of Osteopathic Medicine (AZCOM) Loan Program, for which loans were issued totaling $9,116,518 and loan repayments were $3,610,704 for the fiscal years 2003 through The net default rate for loans entering repayment during that period for the CCOM and AZCOM Loan Programs was 0.46%. Participants in the CCOM and AZCOM Loan Programs pay interest of 5% with no origination fees and the loans have a fixed term of eight years

15 1. Accounting Policies and Basis of Presentation (continued) Land, Buildings, and Equipment Land, buildings, and equipment are recorded at cost, less accumulated depreciation. Major renewals and improvements are capitalized; minor replacements, maintenance, and repairs are charged to expense when incurred. Provisions for depreciation have been made at rates calculated to amortize the cost of depreciable assets over their estimated useful lives, ranging from 3 to 40 years, principally using the straight-line method. Deferred Tuition Revenue and Other Deferred tuition revenue is tuition revenue that is received, but applies to future periods. The revenue is recorded as deferred tuition revenue until earned. In addition, deferred housing revenue and deferred patient revenue are recorded under this category. Interest Rate Protection Agreements The University uses derivative instruments (including interest rate and basis swaps and caps) to enhance interest rate sensitive asset-liability management and not for speculative or any purposes other than risk management. Accounting Standards Codification Topic (ASC) 815, Derivatives and Hedging, requires that all derivatives be recorded at their current fair value on the consolidated statements of financial position. Certain derivative transactions that meet specified criteria qualify for hedge accounting under ASC 815 if designated as such. The University has not designated (and is not required to designate) the use of hedge accounting for any of its derivative transactions; therefore, gains and losses resulting from changes in market interest rates are reported as nonoperating income (loss) on the consolidated statements of activities. Reported net assets may increase or decrease prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but there will be no direct effect on cash flows resulting from changes in the fair value of derivative instruments. The fair value of interest rate protection agreements was estimated by the counterparty in the transaction and verified by an independent third party. Payments exchanged as a result of interest rate protection agreements are recorded as adjustments to interest expense (see Note 5). The University also uses, at times, derivative instruments to hedge the interest payable on bonds that might be issued at a future date in order to reflect then-current market conditions. These are discussed further in Note

16 1. Accounting Policies and Basis of Presentation (continued) Temporarily Restricted Net Assets Temporarily restricted net assets are used to differentiate resources, the use of which is restricted by donors to a specific time period or purpose, from resources on which no restrictions have been placed or that arise from the general operations of the University. Temporarily restricted gifts and bequests are recorded as additions to temporarily restricted net assets in the period received. Resources restricted by donors for specific operating purposes are reported in unrestricted revenue and support to the extent expended within the period. Temporarily restricted net assets primarily comprise net assets restricted for student financial aid. Permanently Restricted Net Assets Permanently restricted net assets have been restricted by donors to be maintained by the University in perpetuity. The earnings associated with these net assets are to be used to provide for loans and scholarships. Accordingly, interest earned on those assets is temporarily restricted for this purpose. Tuition and Other Fees Student tuition rates are approved annually by the Board of Trustees for each of the colleges of the University. Tuition revenue is billed on a quarterly basis in advance of the academic quarter. Tuition is then recognized on a pro rata basis over the term of instruction, with the balance recorded as deferred tuition revenue. A reserve for the allowance for doubtful accounts is recorded for aged receivables based on historical experience and the age of the receivables. Grant Revenue and Accrued Grant Liability Revenue from grants is recognized as costs funded by the grants are incurred, with the balance recorded as accrued grant liability. Postdoctoral Program Revenue Colleges of Osteopathic Medicine The University s Colleges of Osteopathic Medicine sponsor intern and resident training programs. The University employs certain of these interns and residents and has contractual relationships with numerous academic teaching facilities for the clinical training of the house staff. Annually,

17 1. Accounting Policies and Basis of Presentation (continued) the University contracts with each of the teaching facilities for reimbursement of agreed-upon amounts of the University s costs associated with the intern/resident training program. Revenues are recorded based on contracted amounts as services are rendered. A reserve for the allowance for doubtful accounts is recorded for aged receivables based on historical experience and the age of the receivables. In addition to the revenue received from the training facilities, the University has provided the necessary resources to support the Osteopathic Postdoctoral Training Institute through which the training programs are operated. The University plans to continue to provide the needed financial support for this program in the future. Other Revenue Other revenue includes, but is not limited to, registration fees for continuing education programs, co-funded faculty reimbursement, library services, bookstore revenue, indirect cost reimbursement, and meal plan revenue. Contributions Unconditional pledges to give cash and other assets are reported at fair value at the date the pledge is received to the extent estimated to be collectible by the University. Pledges received with donor restrictions that limit the use of the donated assets are reported as temporarily restricted support. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted revenue and support and are reported on the consolidated statements of activities as net assets released from restrictions. Clinic Revenue Clinic revenue consists of revenue generated at the University s clinic facilities and is recorded when services are performed. The University has agreements with third-party payors that provide for payments to the University at amounts different from its established rates. Clinic revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered

18 1. Accounting Policies and Basis of Presentation (continued) Fair Value Measurements A financial instrument s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement determined using the hierarchy of valuation inputs as defined in ASC 820, Fair Value Measurement. The classification of Level 1, Level 2, and Level 3 financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and 2015 is disclosed in Note 10. The University has not elected fair value accounting for any assets or liabilities that were not previously required to be measured at fair value. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued guidance related to recognizing revenue from contracts with customers. This new guidance dictates that the standard be applied either retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the revenue recognition standard recognized as of the date of initial application. In August 2015, the FASB agreed to extend the effective date whereby the new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, The University is evaluating the effect this guidance will have on its consolidated financial statements. In April 2015, the FASB issued Accounting Standards Update No. (ASU) , Interest Imputation of Interest (Subtopic ); Simplifying the Presentation of Debt Issuance Costs, to simplify the presentation of debt issuance costs. This ASU requires that debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The guidance is effective for fiscal years beginning after December 15, Upon adoption, an entity must apply the new guidance retrospectively to all prior periods presented in the financial statements. The University early adopted this new standard in fiscal year

19 1. Accounting Policies and Basis of Presentation (continued) In May 2015, the FASB issued ASU , Fair Value Measurement (Topic 820); Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), to remove the requirement to categorize in the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The objective of this ASU is to address the diversity in practice. This guidance is effective for fiscal years beginning after December 15, 2015, and should be applied retrospectively for all prior periods presented in the financial statements. The University is evaluating the effect this guidance will have on its consolidated financial statements. In February 2016, the FASB issued guidance related to lease accounting. The guidance will require leases that are currently classified as operating leases under current guidance to be recognized on the balance sheet as lease assets and liabilities by lessees. This new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, The University is evaluating the effect this guidance will have on its consolidated financial statements. In August 2016, the FASB issued guidance that changes certain financial statement requirements for not-for-profit (NFP) entities. NFPs will no longer be required to distinguish between resources with temporary and permanent restrictions on the face of their financial statements, meaning they will present two classes of net assets (with donor restrictions and without donor restrictions) instead of three classes. The guidance also will change how NFPs report certain expenses and provide information about their available resources and liquidity. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods thereafter. The University is evaluating the effect this guidance will have on its consolidated financial statements. Reclassifications Certain reclassifications were made to the 2015 consolidated financial statements to conform to the classifications used in The reclassifications had no effect on increase in net assets or net assets as previously reported. The debt issuance costs in 2015 of $5,294,000 were reclassified from deferred bond issuance costs, less amortization to long-term debt, less current portion on the consolidated statements of financial position

20 2. Land, Buildings, and Equipment Land, buildings, and equipment are stated at cost and consist of the following: June Land $ 27,085,361 $ 27,085,361 Buildings and improvements 787,626, ,494,740 Equipment 102,712,910 89,829,346 Construction-in-progress 22,181,968 29,280, ,606, ,689,637 Less accumulated depreciation 229,849, ,294,084 $ 709,756,520 $ 693,395, Investments and Other Financial Instruments The composition of the University s investment portfolio at June 30 is as follows: Fair Value Cost Fair Value Cost Money market funds, certificates of deposit, and other short-term investments $ 72,697,739 $ 70,955,816 $ 58,201,326 $ 56,935,472 Equity securities 69,374,211 63,868,842 71,243,438 61,847,427 Equity mutual funds 16,372,324 17,861,745 22,257,573 22,178,656 Exchange-traded funds 3,356,232 3,240,916 3,425,612 3,371,475 Alternative investments 10,415,770 9,770,301 10,362,579 9,342,764 U.S. government notes and bonds 85,400,993 85,342, ,077, ,050,102 Corporate bond mutual funds 9,715,225 9,498,910 9,531,857 8,929,035 $ 267,332,494 $ 260,538,831 $ 289,099,975 $ 276,654,

21 3. Investments and Other Financial Instruments (continued) These investments above reflect a portion of assets limited as to use investments restricted under debt agreements on the accompanying consolidated statements of financial position. These balances are classified as long-term investments on the consolidated statements of financial position as trustee held assets under various debt agreements. See additional discussion of these obligations in Note 4. Investment return for the years ended June 30 is reported as such on the consolidated statements of activities and consists of the following: Interest and dividend income $ 4,160,273 $ 4,474,260 Realized gain on investments 504,008 3,880,166 Change in unrealized loss on investments (5,651,381) (4,684,838) $ (987,100) $ 3,669,588 The carrying amounts reported on the consolidated statements of financial position for all remaining financial instruments approximate their fair values at June 30, 2016 and See additional discussion of the fair value of the University s investment portfolio in Note

22 4. Long-Term Debt Long-term debt consists of the following at June 30: The Industrial Development Authority of the City of Glendale, Arizona, Graduate and Professional Student Loan Program Revenue Bonds (Midwestern University Foundation), Senior Series 2015A and Subordinate Series 2015B: Senior Series Bonds, interest at 2.20% to 4.25%, due in annual installments in amounts ranging from $700,000 in 2019 to $800,000 in 2031 $ 13,000,000 $ 13,000,000 Subordinate Series Bonds, interest at 5.00%, due in ,000,000 2,000,000 Illinois Finance Authority, Graduate and Professional Student Loan Program Revenue Bonds (Midwestern University Foundation), Senior Series 2015A and Subordinate Series 2015B: Senior Series Bonds, interest at 2.350% to 4.375%, due in annual installments in amounts ranging from $700,000 in 2019 to $800,000 in ,000,000 13,000,000 Subordinate Series Bonds, interest at 4.75%, due in ,000,000 2,000,000 The Industrial Development Authority of the City of Glendale, Arizona, Education Revenue Bonds, Series 2013A: Direct Purchase Bonds, due in 2043 in annual installments in amounts ranging from $595,000 in 2017 to $1,895,000 in 2043, interest at 0.81% and 0.62% at June 30, 2016 and 2015, respectively 28,565,000 29,150,000 The Industrial Development Authority of the City of Glendale, Arizona, Education Revenue Bonds, Series 2013B: Direct Purchase Bonds, due in 2041 in annual installments in amounts ranging from $1,095,000 in 2017 to $2,800,000 in 2041, interest at 0.81% and 0.62% at June 30, 2016 and 2015, respectively 45,495,000 46,545,000 The Industrial Development Authority of the City of Glendale, Arizona, Education Revenue Bonds, Series 2013C: Direct Purchase Bonds, due in 2028 in annual installments in amounts ranging from $740,000 in 2017 to $15,350,000 in 2028, interest at 0.81% and 0.62% at June 30, 2016 and 2015, respectively 25,900,000 26,605,000 The Industrial Development Authority of the City of Glendale, Arizona, Revenue Bonds, Series 2010: Term Bonds, interest at 5.000%, due ,335,000 17,335,000 Term Bonds, interest at 5.000%, due ,170,000 35,170,000 Term Bonds, interest at 5.125%, due ,990,000 44,990,000 Series Bonds, interest at 5.000%, due in annual installments in amounts ranging from $3,215,000 in 2017 to $5,235,000 in ,660,000 48,725,000 The Industrial Development Authority of the City of Glendale, Arizona, Revenue Refunding Bonds, Series 2007: Term Bonds, interest at 5.00%, due in ,580,000 20,580,000 Serial Bonds, interest at 5.00% to 5.25%, due in annual installments in amounts ranging from $2,740,000 in 2017 to $3,630,000 in ,125,000 36,740, ,820, ,840,000 Bond premiums/discounts 3,180,537 3,388,186 Less bond issuance cost 5,072,408 5,294,468 Less current portion 8,385,000 8,020,000 $ 317,543,129 $ 325,913,

23 4. Long-Term Debt (continued) In April 2007, the University issued $62,830,000 in The Industrial Development Authority of the City of Glendale, Arizona, Revenue Refunding Bonds, Series The proceeds from the sale of these bonds, together with other available funds, were used to (i) currently refund all of the Series 1996A Bonds ($3,310,000) and Series 1996B Bonds ($4,465,000) then outstanding; (ii) advance refund the $11,230,000, $26,310,000, and $18,625,000 principal amounts of the then-outstanding Series 1998B Bonds, Series 2001B Bonds, and Series 2001A Bonds, respectively; (iii) fund a debt service reserve fund for the benefit of the Series 2007 Bonds; and (iv) pay certain of the costs of issuance of the Series 2007 Bonds. In May 2008, the University issued $28,600,000 in The Industrial Development Authority of the City of Glendale, Arizona, Adjustable Rate Demand Revenue Refunding Bonds, Series 2008 (the Series 2008 Bonds). The proceeds from the sale of these bonds, together with other available funds, were used to currently refund all of the Series 1998A Bonds ($18,075,000) and Series 1998B Bonds ($13,945,000) and pay certain of the costs of issuance of the Series 2008 Bonds. Principal and interest on, and the purchase price of, the Series 2008 Bonds are payable from and secured by an irrevocable, direct-pay letter of credit issued on May 3, 2011, by JP Morgan Chase Bank, N.A. (the Bank), pursuant to its Reimbursement Agreement with the University. This letter of credit replaced the letter of credit issued by Bank of America, N.A., which previously supported the Series 2008 Bonds. The University is required to reimburse the Bank for draws on the letter of credit and may do so with the remarketing proceeds of bonds tendered for purchase. The Reimbursement Agreement requires the University to maintain certain ratios and places restrictions on various activities. The Series 2008 Bonds were redeemed on November 13, 2013, with the proceeds of the Series 2013C Bonds (see below). Prior to redemption, the Series 2008 Bonds bore interest at adjustable floating rates, set weekly. Bondholders could tender their bonds for purchase at any time at par, plus accrued interest to the purchase date. In the event tendered bonds were not remarketed, the purchase price would be provided through advances under the letter of credit issued by the Bank. The Reimbursement Agreement provided that the letter of credit advances for the purchase price of tendered bonds that have not been successfully remarketed must be repaid to the Bank in equal quarterly principal payments (interest would be payable monthly), commencing on the first day of the 12th month after the date of the advance until the earliest of certain events, but in general until the earlier of (i) the fourth anniversary of the advance and (ii) the fourth anniversary of the stated expiration date of the letter of credit, at which time all outstanding liquidity advance amounts would have to be paid in full. The letter of credit, Reimbursement Agreement, and various instruments and agreements pursuant to which the Series 2008 Bonds were issued terminated upon redemption of the Series 2008 Bonds

24 4. Long-Term Debt (continued) In May 2010, the University issued $159,580,000 in The Industrial Development Authority of the City of Glendale, Arizona, Revenue Bonds, Series The proceeds from the sale of the bonds, together with other available funds, were used to pay or reimburse the University for portions of the costs of acquiring, constructing, renovating, remodeling, and equipping certain of its educational facilities, and to fund a debt service reserve fund. In addition, the proceeds were used to pay all of the principal of, and interest on, all of The Industrial Development Authority of the City of Glendale, Arizona, Commercial Paper Revenue Notes, which had been outstanding in the principal amount of $68,800,000. On September 28, 2011, the University issued $50,000,000 in The Industrial Development Authority of the City of Glendale, Arizona, Adjustable Rate Demand Revenue Bonds, Series 2011 (the Series 2011 Bonds). The Series 2011 Bonds were redeemed on November 13, 2013, with the proceeds of the Series 2013B Bonds (see below). Prior to redemption, the Series 2011 Bonds would have matured on May 1, 2041, and were subject to mandatory sinking fund redemption reflecting approximately level debt service on May 1 of each year. The proceeds from the sale of these bonds were used to reimburse the University for portions of the costs of acquiring, constructing, expanding, and equipping certain of its educational and clinical facilities. Principal and interest on, and the purchase price of, the Series 2011 Bonds were payable from and secured by an irrevocable, direct-pay letter of credit issued by the Bank, pursuant to its Reimbursement Agreement with the University (the 2011 Reimbursement Agreement). The 2011 Reimbursement Agreement contained terms and provisions substantially the same as the Reimbursement Agreement between the Bank and the University for the letter of credit that supported the Series 2008 Bonds (the 2008 Reimbursement Agreement). The letter of credit supporting the Series 2011 Bonds was set to expire in September The Series 2011 Bonds bore interest at adjustable floating rates, set weekly. Bondholders could tender their bonds for purchase at any time at par, plus accrued interest to the purchase date. In the event tendered bonds were not remarketed, the purchase price would be provided through advances under the letter of credit issued by the Bank. The repayment provisions governing such advances were substantially the same under both the 2008 and 2011 Reimbursement Agreements. The 2011 Reimbursement Agreement, the letter of credit supporting the 2011 Bonds, and various instruments and agreements pursuant to which the Series 2011 Bonds were issued terminated upon redemption of the Series 2011 Bonds

25 4. Long-Term Debt (continued) In November 2013, the University issued $106,430,000 in The Industrial Development Authority of the City of Glendale, Arizona, Education Revenue Bonds, Series 2013A, Series 2013B, and Series 2013C (collectively, the Series 2013 Bonds). The proceeds from the sale of these bonds were used as follows: The Series 2013A Bonds ($30,000,000) to reimburse the University for portions of the costs of acquiring, constructing, expanding, and equipping certain of its educational and clinical facilities The Series 2013B Bonds ($48,525,000) to redeem all of the outstanding Series 2011 Bonds The Series 2013C Bonds ($27,905,000) to redeem all of the outstanding Series 2008 Bonds The Series 2013 Bonds were purchased directly by the Bank in a private placement transaction; bear interest currently at a bank rate mode that, during the initial interest rate period (five years from the date of issue), is at a floating rate of 67% of the one-month London Interbank Offered Rate (LIBOR) plus 50 basis points; amortize and mature per their terms (the Series 2013A Bonds amortize to achieve level annual debt service based on a projected interest rate of 5.150% with a final maturity of May 1, 2043; the Series 2013B Bonds maintain the same amortization as the Series 2011 Bonds, including the final maturity of May 1, 2041; the Series 2013C Bonds maintain the same amortization as the swaps for the Series 2008 Bonds, including the final maturity of May 1, 2028); and are subject to tender, for purchase by the University, at par plus accrued and unpaid interest, on a tender date, i.e., at the end of the initial interest rate period and each successive interest rate period thereafter as may be established. The University may seek an extension to a new five-year interest rate period on an annual basis. An eighteen-month term out may be available for amounts owed on a tender date. The University is in the process of finalizing (as of November 1, 2016) an extension of the initial interest rate period for seven years commencing November 1, 2016, at an interest rate with an applicable spread over LIBOR plus 70 basis points. In June 2015, the Foundation issued $15,000,000 in The Industrial Development Authority of the City of Glendale, Arizona, Graduate and Professional Student Loan Program Revenue Bonds, Senior Series 2015A ($13,000,000) and Subordinate Series 2015 B ($2,000,000). Also in June 2015, the Foundation issued $15,000,000 in Illinois Finance Authority Graduate and Professional Student Loan Program Revenue Bonds, Senior Series 2015A ($13,000,000) and Subordinate Series 2015 B ($2,000,000)

26 4. Long-Term Debt (continued) The proceeds from the sale of these bonds (collectively, the Series 2015 Foundation Bonds), together with other available funds, were or will be used to (i) finance student loans to be made, or made, by the Foundation to certain qualified graduate and professional students attending the University; (ii) fund a capitalized interest fund; (iii) fund a debt service reserve fund; (iv) fund a trustee contingency fund; and (v) pay the costs of issuing the bonds. In March 2015, the University entered into an agreement with Wells Fargo Bank (Wells Fargo) for a short-term revolving line of credit note with available funds of $35,000,000. There has been $0 drawn on the line of credit since entering into the agreement. Interest on any outstanding principal of the note is set at a floating rate per annum at 0.60% above LIBOR in effect on the first day of the applicable LIBOR period, as described further in the agreement. There was $0 interest incurred during fiscal years 2016 and The original maturity date of the note (March 22, 2016) is currently March 21, Upon mutual agreement of Wells Fargo and the University, the maturity date may be further extended for one or more periods of 364 days. Under the terms of various bond trust indentures, various amounts are held on deposit with a trustee for bond redemption and interest payments. A portion of these assets are short-term investments, as further discussed in Note 3. In addition, the various trust indentures and reimbursement agreements require the University to maintain certain financial ratios and place restrictions on various activities, such as the transfer of assets and incurrence of additional indebtedness. The trust indentures for the Foundation s Bonds contain numerous restrictions and requirements applicable to the MPL Program. The University s externally restricted investments consist of the following at June 30: Debt service reserve funds $ 17,337,091 $ 17,426,000 Sinking and interest funds 3,966,169 3,999,965 Cost of issuance funds 12, ,000 Contingency funds 250, ,000 Pledged revenue funds 123,171 Student loan funds 6,474,000 28,231,824 $ 28,163,248 $ 50,570,

27 4. Long-Term Debt (continued) Interest expense incurred during fiscal years 2016 and 2015, net of amounts capitalized, was $13,099,000 and $10,640,000, respectively. Interest paid, including amounts due in connection with the University s interest rate protection agreements, during fiscal years 2016 and 2015 was $13,785,000 and $13,629,000, respectively. The amount of interest capitalized during 2016 and 2015 was $1,339,000 and $2,925,000, respectively. Maturities (including mandatory prepayment, but excluding possible required purchases or repayments of long-term debt per the terms of the agreements with JP Morgan Chase Bank referred to above) of long-term debt for the next five fiscal years are as follows: 2017 $8,385,000; 2018 $8,775,000; 2019 $9,195,000; 2020 $11,035,000; and 2021 $11,905,000. The valuation for the estimated fair value of the University s long-term debt is completed by a third-party service and is primarily driven by the Municipal Market Data (MMD) index and current market credit spreads against the MMD index. MMD is an index that is updated daily and reflects current borrowing rates in the tax-exempt bond market. A number of factors including, but not limited to, any one or more of the following variables affect MMD and credit spreads against MMD: (i) general interest rate and market conditions; (ii) macroeconomic environment; (iii) underlying credit ratings on the University s outstanding debt; (iv) investor opinions about the University and its outstanding debt; (v) if applicable, third-party credit enhancement provided on the University s debt; and (vi) trades for comparable or similarly rated securities in the secondary market. Based on the inputs in determining the estimated fair value of the debt of the University, this liability would be considered Level 2. The estimated fair value of long-term debt based on current market conditions was $349,947,000 and $345,648,000 at June 30, 2016 and 2015, respectively. 5. Derivatives Interest Rate Protection Agreements The University has various types of interest-rate-related derivative instruments to manage its exposure to interest-rate-sensitive assets and liabilities and does not enter into derivative instruments for speculative or any purposes other than risk management. By using derivative financial instruments to manage the risk of changes in interest rates, the University exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the payment terms of the derivative contracts. When a termination event occurs and the fair value of a derivative contract is positive, the counterparty owes the University, which creates credit risk for the University; however, the University does not anticipate such non-performance. The amount of such exposure is generally limited to any payments due, but not yet received from the