Baker University. Accountants Report and Financial Statements. June 30, 2009 and 2008

Transcription

1 Accountants Report and Financial Statements

2 Contents Independent Accountants Report... 1 Financial Statements Statements of Financial Position... 2 Statements of Activities... 3 Statements of Cash Flows

3 120 W. 12 th Street, Suite 1200 Kansas City, MO Fax Independent Accountants Report Board of Trustees Baker University Baldwin City, Kansas We have audited the accompanying statements of financial position of Baker University as of June 30, 2009 and 2008, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the University s management. 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 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baker University as of, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 13, in 2009 Baker University changed its method of accounting for fair value measurements in accordance with Statement of Financial Accounting Standard No Kansas City, Missouri October 22, 2009

4 Statements of Financial Position Assets Current Assets Cash and cash equivalents $ 637,340 $ 532,057 Short-term investments 479, ,341 Accounts receivable Students, net of allowance; 2009 $305,000, 2008 $215,000 1,153, ,665 Grants and contracts 17,433 26,883 Pledges, trust and other receivables 366, ,344 Current portion of notes receivable 427, ,098 Inventories 1,069, ,319 Prepaid expenses 17, ,382 Total current assets 4,169,200 4,351,089 Other Assets Property and equipment Land and land improvements 4,224,011 3,868,586 Buildings 48,690,523 42,180,053 Equipment and library books 8,583,056 6,205,207 Construction in progress 8,736 8,358,045 61,506,326 60,611,891 Less accumulated depreciation 23,342,697 21,695,010 Property and equipment, net 38,163,629 38,916,881 Pledges, trust and other receivables, net of allowance; 2009 $14,500, 2008 $97, ,952 2,040,420 Long-term notes receivable, net of allowance; 2009 $105,250, 2008 $105,250 4,506,696 4,025,018 Long-term investments 30,173,577 37,971,656 Assets limited as to use bond proceeds 261,619 2,322,447 Total other assets 74,061,473 85,276,422 Total Assets $ 78,230,673 $ 89,627,511 See

5 Liabilities and Net Assets Current Liabilities Line of credit and notes payable $ 7,000,000 $ 5,700,000 Current portion of long-term debt 945, ,291 Accounts payable 1,081,049 2,099,164 Accrued liabilities 2,408,395 2,069,469 Students deposits 115, ,391 Deferred income 3,125,956 2,770,955 Total current liabilities 14,676,227 13,671,270 Other Liabilities Long-term debt, net 18,300,000 19,230,000 Refundable government loan programs 2,922,955 2,928,617 Present value of annuities payable 731, ,257 Other 113,623 Total other liabilities 22,068,452 23,003,874 Total Liabilities 36,744,679 36,675,144 Net Assets Unrestricted 8,420,058 20,245,693 Temporarily restricted 2,492,936 2,808,020 Permanently restricted 30,573,000 29,898,654 Total net assets 41,485,994 52,952,367 Total Liabilities and Net Assets $ 78,230,673 $ 89,627,511 2

6 Statement of Activities Year Ended June 30, 2009 Temporarily Restricted Permanently Restricted Unrestricted Total Revenues, Gains and Other Support Tuition and fees $ 39,913,204 $ 39,913,204 Less University-funded scholarships (9,140,145) (9,140,145) Net tuition and fees 30,773,059 30,773,059 Interest, dividends and other investment income 981,239 $ 35,202 1,016,441 Net realized gains on investments 136,198 12, ,705 Net unrealized losses on investments (6,852,810) (371,380) (7,224,190) Investment management fees (101,950) (3,353) (105,303) Government contracts and grants 85,355 85,355 Private gifts, grants and bequests 737,842 1,583,492 $ 674,346 2,995,680 Provision for pledge (910,304) (910,304) Auxiliary enterprises 3,977,640 3,977,640 Other 79,339 79,339 29,815, , ,346 30,836,422 Net assets released from restrictions 661,248 (661,248) Total Revenues, Gains and Other Support 30,477,160 (315,084) 674,346 30,836,422 Expenses and Losses Educational and general Instruction 15,316,566 15,316,566 Academic support 5,103,506 5,103,506 Fundraising 1,673,623 1,673,623 Student services 3,883,305 3,883,305 Student activities 2,579,110 2,579,110 General institution support 5,856,187 5,856,187 Operation and maintenance of plant 3,536,367 3,536,367 Funded student aid 685, ,309 Total educational and general 38,633,973 38,633,973 Auxiliary enterprises 3,668,822 3,668,822 Total Expenses and Losses 42,302,795 42,302,795 Increase (Decrease) in Net Assets (11,825,635) (315,084) 674,346 (11,466,373) Net Assets, Beginning of Year 20,245,693 2,808,020 29,898,654 52,952,367 Net Assets, End of Year $ 8,420,058 $ 2,492,936 $ 30,573,000 $ 41,485,994 See 3

7 Statement of Activities Year Ended June 30, 2008 Temporarily Restricted Permanently Restricted Unrestricted Total Revenues, Gains and Other Support Tuition and fees $ 37,536,671 $ 37,536,671 Less University-funded scholarships (8,384,366) (8,384,366) Net tuition and fees 29,152,305 29,152,305 Interest, dividends and other investment income 1,268,252 $ 27,046 1,295,298 Realized gains on investments 2,695, ,431 2,808,348 Net unrealized losses on investments (4,957,805) (199,974) (5,157,779) Investment management fees (179,966) (4,080) (184,046) Government contracts and grants 125, ,355 Private gifts, grants and bequests operations 653,415 1,743,988 $ 906,600 3,304,003 Auxiliary enterprises 3,491,280 3,491,280 Other 84,237 84,237 32,332,990 1,679, ,600 34,919,001 Net assets released from restrictions 1,091,092 (1,091,092) Total Revenues, Gains and Other Support 33,424, , ,600 34,919,001 Expenses and Losses Educational and general Instruction 14,998,791 14,998,791 Academic support 5,271,046 5,271,046 Fundraising 1,873,359 1,873,359 Student services 4,108,095 4,108,095 Student activities 2,297,259 2,297,259 General institution support 4,373,285 4,373,285 Operation and maintenance of plant 2,848,365 2,848,365 Funded student aid 554, ,933 Total educational and general 36,325,133 36,325,133 Auxiliary enterprises 3,529,455 3,529,455 Total Expenses and Losses 39,854,588 39,854,588 Increase (Decrease) in Net Assets (6,430,506) 588, ,600 (4,935,587) Net Assets, Beginning of Year 26,676,199 2,219,701 28,992,054 57,887,954 Net Assets, End of Year $ 20,245,693 $ 2,808,020 $ 29,898,654 $ 52,952,367 See 4

8 Statements of Cash Flows Years Ended Operating Activities Decrease in net assets $ (11,466,373) $ (4,935,587) Items not requiring (providing) cash Unrealized losses on investments 7,224,190 5,157,779 Net realized gains on investments (148,705) (2,808,348) Restricted contributions for long-term purposes (674,346) (1,230,525) Depreciation 1,727,852 1,440,808 Actuarial (gain) loss on annuity obligations (113,383) 118,213 Loss on sale of property, plant and equipment 35,364 Changes in Accounts and notes receivable (570,113) (787,129) Pledge, trust and other receivables 1,331,322 (551,469) Inventories (173,530) (162,047) Prepaid expenses 315,444 (75,460) Accounts payable (1,018,115) (208,890) Accrued liabilities 452, ,745 Student deposits (11,329) 3,569 Deferred income 355,001 (203,476) Net cash used in operating activities (2,734,172) (3,477,817) Investing Activities Purchase of equipment and building improvements, net (989,665) (6,476,401) Net sales (purchases) of investments 793,794 (10,775) Net (increase) decrease in assets limited as to use bond proceeds 2,060,828 (1,324,793) Payments on annuities (84,361) (91,112) Net cash provided by (used in) investing activities 1,780,596 (7,903,081) Financing Activities Restricted contributions for long-term purposes 674,346 1,230,525 Principal payments on long-term debt (909,825) (855,000) Issuance of bonds payable 10,000,000 Refund of bond obligation (2,469,709) Net proceeds under line-of-credit agreements and notes payable 1,300,000 3,450,000 Net increase in refundable government loan program (5,662) (13,790) Net cash provided by financing activities 1,058,859 11,342,026 Increase (Decrease) in Cash and Cash Equivalents 105,283 (38,872) Cash and Cash Equivalents, Beginning of Year 532, ,929 Cash and Cash Equivalents, End of Year $ 637,340 $ 532,057 Additional Cash Flows Information Cash paid for interest, net of capitalized interest $ 1,153,322 $ 353,282 Capital additions included in accounts payable 1,172,870 Capital additions acquired with long-term debt 20,299 See 5

9 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Baker University is a not-for-profit liberal arts university with its primary campus located in Baldwin City, Kansas. In addition, the University operates graduate programs in Johnson County, Kansas (metropolitan Kansas City), Topeka, Kansas, Wichita, Kansas and a nursing program in Topeka, Kansas. The University extends unsecured credit to its students. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues, expenses, gains, losses and other changes during the reporting period. Actual results could differ from those estimates. Net Assets The University reports gifts of cash and other assets as restricted support, if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires; that is, when a stipulated time restriction ends or purpose restriction is accomplished; temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Gifts having donor stipulations that are satisfied in the period the gift is received are reported as unrestricted revenue and net assets. Gifts of land, buildings, equipment and other long-lived assets are reported as unrestricted revenue and net assets unless explicit donor stipulations specify how such assets must be used, in which case the gifts are reported as temporarily or permanently restricted revenue and net assets. Absent explicit donor stipulations for the time long-lived assets must be held, expirations of restrictions resulting in reclassification of temporarily restricted net assets as unrestricted net assets are reported when the long-lived assets are placed in service. Cash Equivalents The University considers all liquid investments, other than those limited as to use, with original maturities of three months or less to be cash equivalents. At, cash equivalents consisted primarily of money market funds. The financial institutions holding the University s cash accounts are participating in the FDIC s Transaction Account Guarantee Program. Under that program, through December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. From time to time, the University maintains cash balances at financial institutions in excess of federally insured limits. However, management monitors the financial stability of these financial institutions and believes the risk of loss is minimal. 6

10 At June 30, 2009, the University maintained bank balances that exceeded FDIC insured limits by $1,128,000. Inventories Inventories are used by the University s nursing and graduate programs and consist of textbooks, computers and class materials held for resale. The inventories are recorded at the lower of cost or market, on the first-in, first-out method. Student Accounts, Notes and Receivables Student accounts receivable are stated at the amounts billed to students less applied scholarships and loan proceeds. The University provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Tuition is generally due at the beginning of the semester, unless the student has signed a payment plan. Charges that are past due and have had no response to the due diligence process are assigned to third-party collection agencies. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the student. Notes receivable consist of amounts due under the Federal Perkins Loan Program and institutional loan programs and are stated at their outstanding principal amount, net of an allowance for doubtful notes. Loans are made to students based on demonstrated financial need for both Perkins and institutional loans and satisfaction of federal eligibility requirements for the Federal Perkins Loan Program. Principal and interest payments on loans generally do not commence until after the borrower graduates or otherwise ceases enrollment. The University provides an allowance for doubtful notes, which is based upon a review of outstanding loans, historical collection information and existing conditions. Interest income is recorded as received, which is not materially different from the amount that would have been recognized on the accrual basis. Loans that are delinquent continue to accrue interest. Loans that are past due for at least one payment are considered delinquent. Delinquent loans are written off based on individual credit evaluation and specific circumstances of the student. Property and Equipment Property and equipment are depreciated over the estimated useful life of each asset, which ranges from three to 40 years. Annual depreciation is primarily computed using the straight-line method. Physical plant equipment has been substantially recorded at cost with the exception of gifts, which are recorded at market value at the date of acquisition. 7

11 The University capitalizes interest costs as a component of construction in progress, based on interest costs of borrowing specifically for the project, net of interest earned on investments acquired with the proceeds of the borrowing. Total interest capitalized was: Interest capitalized $ 98,698 $ 414,017 Interest charged to expense 1,153, ,392 Total interest incurred $ 1,252,020 $ 619,409 Investments Investments in equity securities having a readily determinable fair value and all debt securities are carried at a fair market value. All other investments are valued at the lower of cost (or fair value at the time of donation, if acquired by contribution) or market value. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair market value and realized gains and losses on other investments. Investment income and gains, that are initially restricted by donor stipulation and, if the restriction will be satisfied in the same year, are included in unrestricted net assets. Other investment income, gains and losses are reflected in the statement of activities as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. Asset Retirement Obligation The University adopted Financial Accounting Standards Board Interpretation No. 47 (FIN 47), Accounting for Conditional Asset Retirement Obligations, in the fiscal year ended June 30, FIN 47 requires that an Asset Retirement Obligation associated with the retirement of a tangible long-lived asset (such as remediation of asbestos) be recognized as a liability in the period in which it is incurred or becomes determinable (as defined by the standard) even when the timing and/or method of settlement may be conditional on a future event. Adoption of FIN 47 has not had a material effect on the results of operations, financial position or cash flows of the University. Deferred Revenues The University records tuition revenue and related expenses in the period in which the session is substantially completed. Accordingly, certain revenues have been deferred at June 30 and will be recognized as the courses are completed. Income Taxes The Internal Revenue Service has issued a determination letter that the University is a non-profit organization as defined under Section 501(c)(3) of the Internal Revenue Code and is exempt from income tax on related income. The University is subject to unrelated business income tax. 8

12 In accordance with Financial Accounting Standards Board (FASB) Staff No. FIN 48-3, the University has elected to defer the effective date of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, until its fiscal year ending June 30, The University has continued to account for any uncertain tax positions in accordance with literature that was authoritative immediately prior to the effective date of FIN 48, such as FASB Statement No. 109, Accounting for Income Taxes, and FASB Statement No. 5, Accounting for Contingencies. Reclassifications Certain reclassifications have been made to the 2008 financial statements to conform to the 2009 financial statement presentation. These reclassifications have no net effect on net assets. Note 2: Investments and Investment Return Investments at consisted of the following: Managed funds Cash equivalents $ 261,786 $ 985,106 Mutual funds 16,505,708 21,329,059 Equity securities 1,948,673 2,171,953 Fixed income securities 206, ,335 Limited partnerships 6,587,333 8,310,563 Annuity contracts Cash equivalents 97, ,140 Mutual funds 121, ,897 Equity securities 187, ,341 Fixed income securities 353, ,891 Real estate 495, ,744 Art and other collectibles 467, ,420 Deposits with bond trustees (restricted for debt service and escrow) 2,792,752 2,811,481 Certificates of deposit 479, ,341 Other investments 148, ,726 Total investments $ 30,653,079 $ 38,437,997 9

13 Investments are presented in the statements of financial position as follows: Short-term investments $ 479,502 $ 466,341 Long-term investment 30,173,577 37,971,656 $ 30,653,079 $ 38,437,997 Included in managed funds, at, are investments in limited partnerships totaling $6,587,333 and $8,310,563, respectively. The partnerships invest substantially all assets with independent managers employing various investment strategies. There is not a public market for these limited partnerships and the interest is transferable or redeemable only at the discretion of the partnership. A determination of net asset value per share is made and this partnership asset value is considered to be the fair value for these limited partnerships. The University owns approximately 140 tracts of property, which contain mineral rights. The University has elected to record these properties at cost amounting to approximately $22,000. The University obtained a report from a petroleum and financial consulting firm, which stated the discounted future net revenue for these mineral rights was approximately $2,200,000, as of June 30, Investment return during 2009 and 2008 consisted of the following: Interest and dividends $ 608,403 $ 770,993 Mineral rights 408, ,305 Net realized gains on investments 148,705 2,808,348 Net unrealized losses (7,224,190) (5,157,779) Total investment return $ (6,059,044) $ (1,054,133) Note 3: Line of Credit and Notes Payable The University has revolving lines of credit totaling $3,500,000, expiring from November 15, 2009 to May 5, At, $2,000,000 and $3,200,000, respectively, was borrowed against these lines. Interest rates on these lines of credit ranged from 4% to 6% at June 30, 2009; interest and outstanding amounts are payable at maturity. The mineral rights (discussed in Note 2) were pledged in the amount of $500,000 for one of the lines. 10

14 Notes payable consisted of the following as of : Notes payable, Revenue Anticipation Notes (A) $ $ 2,500,000 Notes payable, Revenue Anticipation Notes (B) 5,000,000 $ 5,000,000 $ 2,500,000 (A) Kansas Independent College Finance Authority Revenue Anticipation Notes (Private Education Short-Term Loan Program) Series 2008, due May 1, 2009, interest at 5%. (B) Kansas Independent College Finance Authority Revenue Anticipation Notes (Private Education Short-Term Loan Program) Series 2009, due May 1, 2009, interest at 5%. Note 4: Long-term Debt Long-term debt consists of the following at : Bonds payable (A) $ 3,830,000 $ 4,230,000 Bonds payable (B) 3,020,000 3,180,000 Bonds payable (C) 2,410,000 2,705,000 Bonds payable (D) 9,970,000 10,000,000 Loans payable for automobiles 15,765 20,291 19,245,765 20,135,291 Less current maturities 945, ,291 $ 18,300,000 $ 19,230,000 (A) Educational Facilities Revenue Bonds, Series 2006, issued by the Kansas Independent College Association Pooled Educational Loan Program; maturing serially through 2016 in amounts ranging from $385,000 to $550,000 with interest ranging from 3.9% to 4.55%. The bonds are collateralized by certain real and personal property, including certain revenues. (B) Educational Facilities Revenue Bonds, Series 2001 issued by the Kansas Independent College Finance Authority. The bonds mature serially through October 2021 in amounts ranging from $140,000 to $315,000, per annum with interest ranging from 3.9% to 5.6%. The bonds are collateralized by certain real and personal property, including certain revenues. (C) Educational Facilities Revenue Bonds, Series 2004 issued by the Kansas Independent College Finance Authority. The bonds mature serially through April 2016 in amounts ranging from $230,000 to $385,000, per annum with interest ranging from 2.4% to 4.4%. The bonds are collateralized by certain real and personal property, including certain revenues. 11

15 (D) Educational Facilities Revenue Bonds, Series 2007 issued by the Kansas Independent College Finance Authority. The bonds mature serially through October 1, 2037 in amounts ranging from $30,000 to $660,000, per annum with interest ranging from 4.0% to 5.2%. The bonds are collateralized by certain real and personal property, including certain revenues. The Loan Agreement in connection with the series 2007 bonds contains covenants requiring the University to meet certain financial ratios including maintaining a rate covenant of 1.0. The University did not meet this covenant for the years ended. As a result of not meeting this covenant, the University retained a consultant during the fiscal year ending June 30, 2009, as required, to make recommendations regarding rates, fees, charges and operations to improve the University s financial position. As long as the University obtains the consultants report and follows its recommendations, the failure to meet the rate covenant will not constitute an event of default under the loan agreements, unless the University does not meet the required rate covenant of two years (fiscal year ending 2010) after retaining the services of the consultant or the University fails to pay debt service on the bonds. Aggregate annual maturities of long-term debt at June 30, 2009 are as follows: 2010 $ 945, , ,005, ,050, ,105,000 Thereafter 14,170,000 $ 19,245,765 Note 5: Pension Plans The University participates in a defined contribution plan in which it contributes 5% of salary to pension plans administered by Teachers Insurance Annuity Association, College Retirement Equities Fund, American Century Investors, Inc. and I.D.S. Financial Services for full-time academic, administrative and staff personnel. Employee benefits under these plans call for payments at retirement based on the accumulated values in the individual participant s accounts at date of retirement and, consequently, there are no prior service costs. Total contributions by the University aggregated $509,297 and $680,324 for the years ended, respectively. 12

16 Note 6: Temporarily Restricted Net Assets Temporarily restricted net assets are available for the following purposes: Buildings and equipment $ 1,102,468 $ 1,836,295 Other 1,390, ,725 $ 2,492,936 $ 2,808,020 Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors. The amounts released during the years ended are as follows: Expenses incurred $ 661,248 $ 711,686 Construction projects completed 379,406 $ 661,248 $ 1,091,092 Note 7: Permanently Restricted Net Assets Permanently restricted net assets are invested in perpetuity, the income from which is expendable to support various activities as follows: General purposes, including memorials $ 2,688,403 $ 2,631,947 Scholarships 19,425,996 18,895,513 Student loans 2,070,739 2,070,739 Library books 381, ,070 Buildings and equipment 418, ,211 Endowed chairs 5,005,116 5,003,991 Annuities payable 583, ,183 $ 30,573,000 $ 29,898,654 13

17 Note 8: Pledges Receivable Pledges receivable consist of the following unconditional promises to give at June 30: Due in less than one year $ 247,534 $ 238,650 Due in one to five years 494,949 1,644,248 Due in more than five years 427, ,500 1,169,981 2,310,398 Less unamortized discount 136, ,658 Less allowance for doubtful accounts 14,500 97,000 Total $ 1,018,589 $ 2,112,740 Approximately 60% of the outstanding pledges at June 30, 2009 was due from one donor. Additionally, approximately 78% of outstanding pledges are due from certain members of the Board of Trustees and employees of the University. Note 9: Tuition Sharing Obligation In September 2007, the University terminated its agreement with the Institute Professional Development (IPD), which provided administrative services and operational services for the University s off-campus learning centers. Upon termination of the agreement, the University assumed all responsibilities for the operations and administration of these facilities. In conjunction with the termination, the University agreed to pay IPD $620,400 for tuition revenue for the current school year generated at the Wichita Learning Center from the date of the agreement. The obligation is payable in 22 monthly installments beginning July 1, 2008 through tuition collections made on behalf of the University by IPD. The University has recorded $282,000 in accrued expenses for this obligation, as of June 30, 2009, for IPD s share of tuition revenue owed. The University also assumed all leasing obligations associated with the off-campus learning centers (see Note 10). Note 10: Operating Leases The University has non-cancelable operating leases for real estate expiring through The building leases require the University to pay operating costs along with base rental payments. 14

18 Future minimum lease payments at June 30, 2009 were: 2010 $ 1,598, ,620, ,638, ,639, ,624,343 Thereafter 5,868,766 $ 13,989,926 Rental expense for all operating leases were $1,774,444 and $1,303,712 for the years ended, respectively. In conjunction with the termination agreement between the University and IPD (see Note 9), the University agreed to provide administrative space for IPD at the off-campus learning facilities. The University receives $377,600 annually in monthly installments beginning September 1, 2007 through August Note 11: Litigation The University is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the financial position of the University. No accrual for any potential losses, if any, has been included in these financial statements. Note 12: Endowment The University s endowment consists of approximately 389 individual funds established for a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the governing body to function as endowments (board-designated endowment funds). As required by accounting principles generally accepted in the United States of America (GAAP), net assets associated with endowment funds, including board-designated endowment funds, are classified and reported based on the existence or absence of donor-imposed restrictions. The University s governing body has interpreted the State of Kansas Prudent Management of Institutional Funds Act (SPMIFA) as requiring preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the University classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. 15

19 The remaining portion of donor-restricted endowment funds is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, the University considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. Duration and preservation of the fund 2. Purposes of the University and the fund 3. General economic conditions 4. Possible effect of inflation and deflation 5. Expected total return from investment income and appreciation or depreciation of investments 6. Other resources of the University 7. Investment policies of the University The composition of net assets by type of endowment fund at June 30, 2009 was: Unrestricted Temporarily Restricted 2009 Permanently Restricted Total Donor-restricted endowment funds $ (5,692,234) $ $ 29,918,776 $ 24,226,542 Board-designated endowment funds 886, ,082 Total endowment funds $ (4,806,152) $ $ 29,918,776 $ 25,112,624 Changes in endowment net assets for the year ended June 30, 2009 were: Unrestricted Temporarily Restricted 2009 Permanently Restricted Total Endowment net assets, beginning of year $ 2,976,626 $ $ 29,244,430 $ 32,221,056 Net depreciation (7,782,778) (7,782,778) Contributions 674, ,346 Endowment net assets, end of year $ (4,806,152) $ $ 29,918,776 $ 25,112,624 16

20 Amounts of donor-restricted endowment funds classified as permanently restricted net assets at June 30, 2009 consisted of: Permanently restricted net assets - portion of perpetual endowment funds required to be retained permanently by explicit donor stipulation or SPMIFA $ 29,918,776 From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level the University is required to retain as a fund of perpetual duration pursuant to donor stipulation or SPMIFA. In accordance with GAAP, deficiencies of this nature are reported in unrestricted net assets and aggregated $5,692,234 at June 30, These deficiencies resulted from unfavorable market fluctuations that occurred shortly after investment of new permanently restricted contributions and continued appropriation for certain purposes that was deemed prudent by the governing body. The University has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs and other items supported by its endowment while seeking to maintain the purchasing power of the endowment. Endowment assets include those assets of donor-restricted endowment funds the University must hold in perpetuity or for donor-specified periods, as well as those of board-designated endowment funds. Under the University s policies, endowment assets are invested in a manner that is intended to produce results that mirror the market and assume a moderate level of investment risk. The University expects its endowment funds to provide an average rate of return of approximately 5% annually over time. Actual returns in any given year may vary from this amount. To satisfy its long-term rate of return objectives, the University relies on a total return strategy in which investment returns are achieved through both current yield (investment income such as dividends and interest) and capital appreciation (both realized and unrealized). The University targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. The University has a policy (the spending policy) of appropriating for expenditure each year, no more than 6.4% of its endowment fund s average fair value over the prior 12 quarters through the year end preceding the year in which expenditure is planned. The Board determines the actual spending rate annually. In establishing this policy, the University considered the long-term expected return on its endowment. Accordingly, over the long term, the University expects the current spending policy to allow its endowment to grow at an average of 3% annually. This is consistent with the University s objective to maintain the purchasing power of endowment assets held in perpetuity or for a specified term, as well as to provide additional real growth through new gifts and investment return. 17

21 Note 13: Disclosures about Fair Value of Assets and Liabilities Effective July 1, 2008, the University adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the year. FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying statement of financial position, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. Investments Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include cash equivalents, mutual funds and common stocks. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include various fixed income securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include limited partnerships. Cash Equivalents, Mutual Funds and Equity Securities Fair value is determined by quoted prices in the open market. As market quotations are readily available, these mutual funds, money market mutual funds and common stocks are classified within Level 1 of the hierarchy. 18

22 Fixed Income Securities Fair value is determined by quoted prices for similar instruments in the marketplace. These securities consisting of corporate bonds, U.S. government and agency bonds and annuities are classified within Level 2 of the hierarchy. Limited Partnerships Fair value is measured at the net asset value of the investee funds held under each partnership, as determined by management of the funds. Fair value represents the amount the partnership would expect to receive upon liquidation of its investments in the investee funds. As market quotations may not be readily available, these funds are classified within Level 3 of the hierarchy. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying statement of financial position measured at fair value on a recurring basis and level within the FAS 157 fair value hierarchy in which the fair value measurements fall at June 30, 2009: Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) Cash equivalents $ 359,101 $ 359,101 $ - $ - Mutual funds 16,626,760 16,626, Equity securities 2,135,763 2,135, Fixed income securities 560, ,440 - Limited partnerships 6,587, ,587,333 $ 26,269,397 $ 19,121,624 $ 560,440 $ 6,587,333 The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying statement of financial position using significant unobservable (Level 3) inputs: Limited Partnerships Balance, July 1, 2008 $ 8,310,563 Total realized and unrealized losses included in change in net assets (1,723,230) Purchase of Level 3 securities 3,273,407 Sale of Level 3 securities (3,273,407) Balance, June 30, 2009 $ 6,587,333 Total losses for the period included in change in net assets attributable to the change in unrealized losses related to limited partnerships assets still held at the reporting date $ (1,901,488) 19

23 Note 14: Significant Estimates and Concentrations Current Economic Conditions The current economic environment presents Universities with unprecedented circumstances and challenges, which in some cases have resulted in large declines in the fair value of investments and other assets, declines in contributions, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the University. Current economic and financial market conditions could adversely affect the University s results from operations in future periods. The current instability in the financial markets may make it difficult for donors and students, which could have an adverse impact on the University s future operating results. In addition, given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in investment values, allowances for contributions and student receivables that could negatively impact the University s ability to meet debt covenants or maintain sufficient liquidity. Note 15: Subsequent Events On July 24, 2009, the University received a loan in the amount of $307,500, maturing in on July 24, The interest rate on this loan is fixed at 6.375%, and the loan is collateralized by real estate. 20