The University of Mississippi. Financial Statements. Fiscal Year 2009 Unaudited

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1 The University of Mississippi Financial Statements Fiscal Year 2009 Unaudited

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3 Table of Contents Management Discussion & Analysis 3 Financial Statements 13 Statement of Net Assets University of Mississippi 14 Statements of Financial Position University of Mississippi Foundation 15 Statement of Revenues, Expenses, and Changes in Net Assets University of Mississippi 16 Statements of Activities University of Mississippi Foundation 17 Statement of Cash Flows University of Mississippi 18 Statements of Cash Flows University of Mississippi Foundation 20 Notes to Financial Statements 21

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5 Management Discussion & Analysis Introduction This discussion and analysis provides an overview of the financial position and performance of the University for the fiscal year ended June 30, Totals are also provided for the fiscal year ended June 30, 2008 to provide a comparative perspective. This discussion and analysis was prepared by management and should be read in conjunction with the financial statements and accompanying note disclosures. The Institution The University of Mississippi is a comprehensive public institution of higher education that offers a broad range of undergraduate and graduate programs and opportunities for continuing study. The University is comprised of the main campus in Oxford, the Medical Center in Jackson, and degree granting centers in Southaven and Tupelo. These campuses serve a student population of 18,344 and employ approximately 10,000 individuals, including more than 1,500 faculty. The Oxford campus is comprised of nine colleges and schools offering 150 academic programs. These enrollment and employment totals include the University of Mississippi Medical Center; however, the financial information related to the Medical Center is not included in this report. It is treated as a separate entity for financial reporting purposes. MANAGEMENT DISCUSSION & ANALYSIS Statement of Net Assets The Statement of Net Assets presents the financial position of the University as of the end of the fiscal year. Presented below are condensed statements of net assets which compare the financial position of the university as of June 30, 2009 and June 30, The statement includes all institutional assets, liabilities, and net assets. Assets and liabilities are presented as current or noncurrent, giving the reader a sense of the availability of assets on both a short and long term basis. This presentation provides insight into the institution s ability to meet immediate and future obligations. The net assets (assets minus liabilities) section presents a snapshot of the University s overall net worth at a specific point in time. This section is categorized in a manner that communicates the degree of availability of these net assets to meet institutional obligations. Net assets are divided into three major categories: Invested in Capital Assets, Net of Related Debt; Restricted Net Assets; and Unrestricted Net Assets. Invested in Capital Assets, Net of Related Debt provides a snapshot of the University s net equity in property, plant, and equipment. Assets are classified as restricted when limitations or restrictions are placed on their use by external parties. Restricted net assets are sub-divided into two categories, expendable and nonexpendable. Expendable restricted net assets are available for expenditure by the University but must be used in accordance with the intent of the appropriate external parties. Nonexpendable restricted net assets are only available for investment purposes and must remain intact in perpetuity. Unrestricted net assets are available for use towards any lawful purpose of the institution. The University internally designates the majority of unrestricted assets to specific projects or departments. 3

6 Statement of Net Assets (thousands of dollars) June Current Assets $175,429 $149,999 Noncurrent Assets 675, ,881 Total Assets $850,494 $764,880 Current Liabilities $48,486 $48,690 Noncurrent Liabilities 142, ,012 Total Liabilities $191,213 $148,702 Invested in Capital Assets, Net of Related Debt $402,606 $367,384 Restricted, Nonexpendable 47,324 47,507 Restricted, Expendable 57,317 52,512 Unrestricted 152, ,775 Total Net Assets $659,281 $616,178 T he financial position of the University strengthened during fiscal year Total assets increased by $85.6 million and total liabilities increased by $42.5 million resulting in a $43.1 million increase in net assets. While a large portion of this improvement was due to an increase in capital assets, net of related debt, there were other positive factors involved. The growths of short and long-term investments along with the decrease in deferred revenues were contributors to the improvement in financial position. A portion of cash, cash equivalents, and short-term investments are categorized as restricted noncurrent assets. The uses of these assets are restricted by external parties. These funds are held by the University, trustees, and the State Treasury, and are primarily used for specific capital projects. The total of these accounts increased $9.41 million, due mainly to proceeds from the University of Mississippi Educational Building Corporation Series 2009A bond issue. June 30, 2009 current assets consisted primarily of receivables, cash, and short-term investments, with these three items comprising 99% of the total. Receivables constituted 26% of current assets. Most of these receivables represent amounts due from contracts and grants and other contribution and gifts. These contracts and grants are awarded by external parties and are almost always managed on a cost reimbursement basis. 4 MANAGEMENT DISCUSSION & ANALYSIS

7 Current Assets 60% 50% 40% % of Total 30% 20% 10% % Cash and Equivalents Short Term Investments Receivables Other Current Assets Current Liabilities 60% 50% % of Total 40% 30% 20% 10% 0% Accounts Payable & Accrued Liabilities Deferred Revenue The largest components of June 30, 2009 current liabilities are amounts due to vendors and employees (52%) and deferred revenues (32%). Deferred revenues include advance receipts for athletic ticket sales, tuition, fees, and student housing. The current accrued leave liability represents an estimate of total accrued compensation that is expected to be paid in the twelve months immediately following June 30, This liability account consists of unused personal and medical leave earned by employees. Disbursements from this liability account only occur upon termination of employment. Annual disbursements increased in fiscal years 2007 and 2008 but decreased slightly in We anticipate these disbursement levels will remain relatively stable longterm; however, slight declines are expected in the near term as economic and job markets remain challenging. Current Portion of Long Term Liabilities Other Current Liabilities Noncurrent liabilities are those liabilities due and payable more than twelve months from June 30, Most noncurrent liabilities (86%) were incurred through financing activities, which include bonds and notes payable. Additional detail on long-term indebtedness can be found in Note Eight of the Notes to Financial Statements. Total liabilities increased 29% largely due to the issuance of new long-term debt. MANAGEMENT DISCUSSION & ANALYSIS 5

8 As previously discussed, the June 30, 2009 net assets increased $43.1 million over the June 30, 2008 level. The portion of unrestricted net assets categorized as capital assets increased over the prior year due to a continuing commitment to the renovation and improvement of buildings and infrastructure. The charts below depict the components of these net assets at June 30, 2009 and Unrestricted 23% Net Assets June 30, 2009 June 30, 2008 Unrestricted 24% Restricted, Expendable 9% Restricted, Expendable 9% Restricted, Nonexpendable 7% Invested in Capital Assets, Net of Related Debt 61% Restricted, Nonexpendable 8% Invested in Capital Assets, Net of Related Debt 59% Unrestricted net assets consist of all assets except capital assets and those restricted by external parties. The University has chosen to designate or reserve portions of these net assets as part of its fiscal management and longterm strategic planning. The unrestricted net asset designations and reservations in place at June 30, 2009 are depicted in the chart below. Unrestricted Net Assets June 30, 2009 Designated Projects 32% Other 8% Departmental Working Capital 13% Auxiliary Working Capital 5% Capital Projects 23% Debt Retirement 2% Auxiliary Renewals & Replacements 11% Quasi Endowments 6% 6 MANAGEMENT DISCUSSION & ANALYSIS

9 Statement of Revenues, Expenses, and Changes in Net Assets The changes in total assets presented in the Statement of Net Assets are a result of the activity included in the Statement of Revenues, Expenses, and Changes in Net Assets. The purpose of this statement is to present all revenues received and expenses incurred, and all other gains and losses for the fiscal year. These activities are categorized as either operating or nonoperating. In general terms, operating revenues are revenues earned as a result of providing goods or services. Operating expenses are those expenses incurred to acquire or produce goods and services, or to support the mission of the University. The net result of operating activities is presented as operating income or loss. The University will always report an operating loss due to the types and nature of revenues classified as nonoperating. For example, state appropriations, a material and continuing source of revenues for any public university, are classified as nonoperating. Therefore, increase in net assets is more indicative of the overall financial results for the fiscal year. Statement of Revenues, Expenses, and Changes in Net Assets (thousands of dollars) Operating Revenues $261,232 $252,325 Operating Expenses 353, ,706 Operating Loss (91,825) (93,381) Nonoperating Revenues and Expenses 99, ,622 Income Before Other Revenues, Expenses, 7,391 14,241 Gains, or Losses Other Revenues, Expenses, Gains, or Losses 35,712 18,169 Increase in Net Assets 43,103 32,410 Net Assets Beginning of Year, as 616, ,768 Originally Reported Net Assets Beginning of Year - Restated 616, ,768 Net Assets End of Year $659,281 $616,178 MANAGEMENT DISCUSSION & ANALYSIS 7

10 While a broad range of revenues are necessary to support the University, significant shifts among these sources occur over time. The most significant shift involves state appropriations which was the largest single source of institutional revenues for the University s first 140 years of existence. This shift began to change in the 1980s as state budgets began to weaken and the university continued to grow. As a result, student tuition and fees now provide the largest source of institutional revenue while the level of state support is more comparable to contract and grants revenue. In fiscal year 2009 the gap between state support and student tuition and fees expanded farther with gross tuition and fees ($134.6 million) exceeding state appropriations ($86.7 million) by 55%. As illustrated in the chart below, revenues from state support and private gifts experienced declines in fiscal year The following chart depicts the breakdown of operating revenues and state appropriations. Operating Revenues & State Appropriations (thousands) Net Tuition & Fees governmental Contracts & grants State Appropriations Net Auxiliary Revenues Private gifts, grants, & Contracts other Sources ,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90, , , ,000 Operating expenses are presented below using two classifications: Operating expenses categorized according to the types of goods or services purchased. This is the format depicted in the Statement of Revenues, Expenses, and Changes in Net Assets. Operating expenses categorized according to the functional area of campus activity. This classification is presented with additional detail in Note Ten of the Notes to Financial Statements. Compensation & Benefits 57% Fiscal Year 2009 Operating Expenses By Type of Use Supplies & Services 28% Institutional Support 6% By Function All Others 11% Instruction 33% Student Aid 7% Depreciation Expense 6% Scholarships 9% Academic Support 8% Operation of Plant 8% Research 13% Auxiliary Enterprises 14% 8 MANAGEMENT DISCUSSION & ANALYSIS

11 Statement of Cash Flows The Statement of Cash Flows presents the financial activities and results of the University on a cash basis utilizing four categories. The first section, Cash Flows from Operating Activities, summarizes cash generated and used through operating activities. Cash Flows from Noncapital Financing Activities, contains cash transactions that do not involve operations, investment activities, or capital financing activities. The third section, Cash Flows from Capital Financing Activities, summarizes the cash used for the acquisition, construction, renovation, and improvement of capital and related assets. The fourth section, Cash Flows from Investing Activities, displays the cash used to purchase investments, cash returns on these investments, and cash proceeds from the sale or maturity of investments. A condensed Statement of Cash Flows is presented below. Statement of Cash Flows (thousands of dollars) Cash Provided (Used) By: Operating Activities ($77,143) ($54,747) Noncapital Financing Activities 106, ,094 Capital & Related Financing Activities (29,155) (39,347) Investing Activities 4,827 (2,965) Net Change in Cash 5,331 9,035 Cash, Beginning of Year 49,852 40,817 Cash, End of Year $55,183 $49,852 The University experienced a $5.3 million positive net cash flow for the fiscal year ended June 30, The condensed statement illustrates the composition of sources and uses for fiscal years 2009 and Major sources of funds in operating activities for fiscal year 2009 were $106.2 million from student tuition and fees, $92.2 million from grants and contracts and $44.8 million from auxiliary enterprises. Major uses of funds included in operating activities were $201.1 million in payments for employee s salaries and benefits and $80.1 million for payments to suppliers. Major sources of funds included in the non-capital financing activities for fiscal year 2009 include $85.9 million from state appropriations and $20.7 million in gifts and grants received for purposes other than capital projects. Major sources of funds included in the capital and related financing activities section for fiscal year 2009 include $74 million of proceeds from capital debt issuances and $14.6 million received from capital grants and contracts. Major uses of funds in this section include $83 million in cash payments made for capital assets and $35 million in principal and interest payments made on capital debt. Major sources of funds included in the investing activities section for fiscal year 2009 included $65.7 million from sales, maturities and interest received on investments. Major uses of funds in this section included $60.1 million used for purchases of investments. MANAGEMENT DISCUSSION & ANALYSIS 9

12 Significant Long-Term Liability and Debt Activities critical component of institutional success is a strong A and continuing commitment to infrastructure. The University must provide, equip, and operate adequate facilities to support instruction, research, public service, and related support programs. A balance must be sustained between the maintenance and renovation of existing structures and the planning and construction of new ones. The University has completed over $101 million in capital improvements over the last three fiscal years. A significant portion of these improvements was funded million was issued in June 2009 to partially fund the law school building. Notes Eight and Eighteen of the Notes to Financial Statements provide more information on current and future long-term debt. through the use of long-term financing. New debt of $ million was issued in August 2008 to partially fund the construction of a residential college and $19.87 Operational Highlights T he University s financial position remained strong throughout the two fiscal year periods. Despite tuition rate increases, enrollment increased each fall semester from 1994 to In fall 2007, enrollment declined slightly, but in fall 2009 enrollment increased to an alltime high of 15,932 students. Management expects and is planning for moderate and consistent enrollment increases to continue in the near term. We continue to see a strong student demand from Mississippi residents and throughout the southeastern United States. The chart below depicts fall headcount enrollments, exclusive of the Medical Center in Jackson. Fall Headcount Enrollment 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, , , , , , , , , , , , , MANAGEMENT DISCUSSION & ANALYSIS

13 Subsequent Events and Other Operational Factors The University began construction of the Luckyday Residential College facility in July The budget for this residential college is approximately $25 million and will consist of academic, recreational and dining spaces. Project funding will consist of bonded indebtedness plus $4.6 million from private sources and $5.7 million of internal capital project funds. In November 2009, the UMEBC plans to issue its Series 2009C bonds totaling $14,770,000. These bonds will carry a final maturity of November Management s Outlook The overall financial position of the University remains strong. University management continues to adapt to changing economic conditions and to search for new revenue sources to compliment state support and for increases in operational efficiencies. State support is expected to continue declining in fiscal years 2010 through This will be compounded by the expiration of federal stimulus funding in fiscal year At this time it is impossible to accurately predict the depth or duration of this economic crisis. Management will continue to monitor these changing economic factors, assess potential impacts on the institution and proactively put plans into action so the university can continue to deliver quality education and extraordinary services to our students and constituents while maintaining financial integrity. Larry D. Sparks Vice Chancellor for Administration and Finance All outstanding UMEBC Series 2006B-2 coupons ($4,075,000) were retired on September 22, This series was an FSA insured variable rate issue. As a result of credit related issues with this insurer the coupons were tendered to Regions Bank, the liquidity provider, on October 8, Because remarketing of the bonds was not successful, an accelerated 60 month amortization schedule with an effective date of October 1, 2009 was scheduled to commence. Fall 2009 enrollment (fiscal year 2010) exceeded fall 2008 (fiscal year 2009) enrollment by 4.2%. University endowment investments are exposed to both equity and fixed income markets. The University maintains a diversified portfolio managed by professional money managers and employs conservative spending and investing policies that should minimize the reduction in cash flows from these revenue sources. MANAGEMENT DISCUSSION & ANALYSIS 11

14 12 FINANCIAL STATEMENTS

15 Financial Statements FINANCIAL STATEMENTS 13

16 University of Mississippi Statement of Net Assets June 30, Assets Current Assets: Cash and Cash Equivalents $ 40,172,579 $ 33,262,244 Short Term Investments 87,730,605 79,641,891 Accounts Receivables, Net 42,367,032 32,282,535 Student Notes Receivables 4,004,282 3,489,479 Inventories 1,007,006 1,133,334 Prepaid Expenses 147, ,760 Total Current Assets 175,428, ,999,243 Noncurrent Assets: Restricted Cash and Cash Equivalents 15,010,495 16,590,183 Restricted Short Term Investments 10,996,553 - Endowment Investments 56,343,427 67,648,154 Other Long Term Investments 42,254,244 59,174,929 Student Notes Receivable, Net 19,115,457 18,600,230 Capital Assets, Net of Accumulated Depreciation 531,345, ,866,962 Total Non-Current Assets 675,065, ,880,458 Total Assets $ 850,494,000 $ 764,879,701 Liabilities and Net Assets Current Liabilities: Accounts Payable and Accrued Liabilities $ 25,172,225 $ 19,745,201 Deferred Revenues 15,538,599 22,461,480 Accrued Leave Liabilities - Current Portion 964, ,000 Long Term Liabilities - Current Portion 6,326,778 5,279,259 Other Current Liabilities 484, ,310 Total Current Liabilities 48,485,669 48,690,250 Noncurrent Liabilities: Deposits Refundable 107, ,305 Accrued Leave Liabilities 10,948,726 10,438,126 Long Term Liabilities 122,412,086 80,203,864 Other Non-Current Liabilities 9,259,000 9,264,000 Total Non-Current Liabilities 142,727, ,011,295 Total Liabilities $ 191,213,136 $ 148,701,545 Net Assets: Invested in Capital Assets, Net of Related Debt $ 402,606,193 $ 367,383,840 Restricted for: Nonexpendable - Scholarships and Fellowships 4,253,602 4,281,882 Research 119, ,660 Other Purposes 42,951,128 43,075,025 Expendable - Scholarships and Fellowships 3,873,541 5,529,034 Research 7,489,741 7,382,925 Capital Projects 27,982,438 13,654,179 Debt Service 138, ,857 Loans 14,968,364 13,900,162 Other Purposes 2,864,573 11,811,205 Unrestricted 152,033, ,775,387 Total Net Assets $ 659,280,864 $ 616,178,156 The accompanying notes are an integral part of the financial statements. Total Liabilities and Net Assets $ 850,494,000 $ 764,879, FINANCIAL STATEMENTS

17 University of Mississippi Foundation Statements of Financial Position June 30, 2009 and 2008 Assets Cash and cash equivalents $ 3,671,027 8,778,262 Pledges receivable, less allowance for doubtful pledges of $1,771,452 in 2009 and $7,481,928 in ,273,648 22,882,931 Investments 250,547, ,801,578 Beneficial interest in remainder trust 3,730,226 3,417,765 Other assets 1,642,405 1,530,963 Property and equipment, net 2,087,430 2,944,631 Total assets $ 283,952, ,356,130 Liabilities and Net Assets Funds held for others $ 15,686,378 16,282,368 Liabilities under remainder trusts 4,352,873 5,978,882 Other liabilities 2,858,813 5,265,766 Total liabilities 22,898,064 27,527,016 Net assets (deficit): Unrestricted (2,231,842) 6,192,311 Temporarily restricted 123,853, ,793,676 Permanently restricted 139,432, ,843,127 Total net assets 261,054, ,829,114 Total liabilities and net assets $ 283,952, ,356,130 See accompanying notes to financial statements. FINANCIAL STATEMENTS 15

18 University of Mississippi Statement of Net Revenues, Expenses and Changes in Net Assets June 30, Operating Revenues: Tuition and Fees $ 134,602,973 $ 124,137,378 Less: Scholarship Allowances (27,836,764) (23,582,400) Net Tuition and Fees 106,766, ,554,978 Federal Grants and Contracts 59,636,888 57,035,404 State Grants and Contracts 7,372,658 9,003,432 Nongovernmental Grants and Contracts 27,919,074 29,985,545 Sales and Services of Educational Departments 8,589,700 9,163,122 Auxiliary Enterprises: Student Housing 11,923,807 11,930,168 Food Services 1,793,196 1,392,325 Bookstore 644, ,807 Athletics 29,236,982 25,167,900 Other Auxiliary revenues 2,965,506 3,417,819 Less: Auxiliary Enterprise Scholarship Allowances (2,322,244) (2,050,644) Interest Earned on Loans to Students 370, ,591 Other Operating Revenues 6,334,925 5,671,297 Total Operating Revenues 261,231, ,324,744 Operating Expenses: Salaries and Wages 160,984, ,770,758 Fringe Benefits 39,997,890 38,098,324 Travel 10,175,783 9,704,351 Contractual Services 58,611,224 62,772,382 Utilities 10,909,936 9,860,612 Scholarships and Fellowships 31,098,215 27,821,636 Commodities 20,424,545 24,651,639 Depreciation Expense 19,948,345 20,192,555 Other Operating Expense 906, ,661 Total Operating Expenses 353,056, ,705,918 Operating Loss (91,825,416) (93,381,174) Nonoperating Revenues (Expenses): State Appropriations 86,676,703 88,378,677 Gifts and Grants 22,066,674 19,094,245 Investment Income (Loss), Net of Investment Expense (4,712,369) 3,813,541 Interest Expense on Capital Asset-Related Debt (4,591,594) (3,664,967) Other Nonoperating Revenues - - Other Nonoperating Expenses (223,246) 272 Total Net Nonoperating Revenues (Expenses) 99,216, ,621,768 Income (Loss) Before Other Revenues, Expenses, Gains and Losses 7,390,752 14,240,594 Capital Grants and Gifts 19,340,635 9,955,657 State Appropriations Restricted for Capital Purposes 17,018,646 8,977,006 Additions to Permanent Endowments 42,309 5,766 Other Additions 308, ,447 Other Deletions (998,187) (900,591) Net Increase in Net Assets 43,102,708 32,409,879 Net Assets Net Assets - Beginning of Year, As Originally Reported 616,178, ,768,277 Prior Period Adjustments - - Net Assets - Beginning of Year, Restated 616,178, ,768,277 Net Assets - End of Year $ 659,280,864 $ 616,178,156 The accompanying notes are an integral part of the financial statements. 16 FINANCIAL STATEMENTS

19 University of Mississippi Foundation Statement of Activities Year ended June 30, 2009 Temporarily Permanently Unrestricted restricted restricted Total Revenues, gains, and other support: Contributions, gifts, and bequests $ 20,400,351 8,316,897 28,717,248 Dividend and interest income 1,029,492 8,636,791 9,666,283 Net unrealized and realized losses on investments (9,785,640) (35,708,466) (45,494,106) Change in value of split interest agreements 312, , ,538 Other income 1,685,620 1,942,597 8,588 3,636,805 Total revenues, gains, and other support (7,070,528) (4,416,266) 8,905,562 (2,581,232) Net assets released from restrictions/ redesignated by donor 38,840,006 (39,524,248) 684,242 Expenses: Support for University activities 37,484,939 37,484,939 General and administrative expenses 1,708,053 1,708,053 Fund-raising expenses 1,000,639 1,000,639 Total expenses 40,193,631 40,193,631 Change in net assets (8,424,153) (43,940,514) 9,589,804 (42,774,863) Net assets, beginning of year 6,192, ,793, ,843, ,829,114 Net assets (deficit), end of year $ (2,231,842) 123,853, ,432, ,054,251 See accompanying notes to financial statements. Year ended June 30, 2008 Temporarily Permanently Unrestricted restricted restricted Total Revenues, gains, and other support: Contributions, gifts, and bequests $ 27,793,553 2,443,112 30,236,665 Dividend and interest income 1,538,908 11,814,635 13,353,543 Net unrealized and realized losses on investments (1,108,907) (28,297,412) (29,406,319) Change in value of split interest agreements 206,364 (359,375) (153,011) Other income 1,830,495 1,669,125 5,839 3,505,459 Total revenues, gains, and other support 2,260,496 13,186,265 2,089,576 17,536,337 Net assets released from restrictions/ redesignated by donor 27,053,747 (27,416,374) 362,627 Expenses: Support for University activities 29,222,192 29,222,192 General and administrative expenses 1,691,055 1,691,055 Fund-raising expenses 1,415,417 1,415,417 Total expenses 32,328,664 32,328,664 Change in net assets (3,014,421) (14,230,109) 2,452,203 (14,792,327) Net assets, beginning of year 9,206, ,023, ,390, ,621,441 Net assets, end of year $ 6,192, ,793, ,843, ,829,114 See accompanying notes to financial statements. FINANCIAL STATEMENTS 17

20 University of Mississippi Statement of Cash Flows STATEMENT OF CASH FLOWS June 30, Cash Flows from Operating Activities: Tuition and Fees $ 106,179,765 $ 100,562,808 Grants and Contracts 92,186, ,257,873 Sales and Services of Educational Departments 8,591,039 9,838,154 Payments to Suppliers (80,050,723) (88,087,882) Payments to Employees for Salaries and Benefits (201,092,366) (186,676,431) Payments for Utilities (10,995,604) (9,663,053) Payments for Scholarships and Fellowships (31,101,683) (27,786,884) Loans Issued to Students (3,296,495) (5,465,106) Collection of Loans to Students 1,865,044 2,060,881 Auxiliary Enterprise Charges: Student Housing 9,039,974 9,711,521 Food Services 1,696,271 1,214,670 Bookstore 644, ,603 Athletics 29,995,975 24,719,222 Other Auxiliary Enterprises 3,063,305 3,550,939 Interest Earned on Loans to Students 369, ,302 Other Receipts 6,351,954 5,614,982 Other Payments (10,589,228) (9,683,170) Net Cash Used by Operating Activities (77,142,993) (54,746,571) Cash Flows from Noncapital Financing Activities: State Appropriations 85,905,801 88,015,637 Gifts and Grants for Other Than Capital Purposes 20,711,278 18,474,292 Private Gifts for Endowment Purposes 42,309 5,766 Federal Loan Program Receipts 71,490,838 56,707,077 Federal Loan Program Disbursements (71,490,838) (56,707,077) Other Sources 217, ,550 Other Uses (74,463) (548,305) Net Cash Provided by Noncapital Financing Activities 106,802, ,093,940 Cash Flows from Capital And Related Financing Activities: Proceeds from Capital Debt 73,991,462 - Cash Paid for Capital Assets (82,974,953) (55,286,736) Capital Appropriations Received - 17,414,239 Capital Grants and Contracts Received 14,580,467 6,130,341 Proceeds from Sales of Capital Assets - - Principal Paid on Capital Debt and Leases (30,564,259) (4,953,978) Interest Paid on Capital Debt and Leases (4,466,726) (3,705,874) Other Sources 964,974 1,178,188 Other Uses (686,447) (123,501) Net Cash Used by Capital and Related Financing Activities (29,155,482) (39,347,321) Cash Flows from Investing Activities: Proceeds from Sales and Maturities of Investments 58,159,913 47,767,595 Interest Received on Investments 7,508,292 9,326,187 Purchases of Investments (60,841,448) (60,058,821) Net Cash Used by Investing Activities 4,826,757 (2,965,039) Net Increase (Decrease) in Cash and Cash Equivalents 5,330,647 9,035,009 Cash and Cash Equivalents - Beginning of the Year 49,852,427 40,817,418 Cash and Cash Equivalents - End of the Year $ 55,183,074 $ 49,852,427 The accompanying notes are an integral part of the financial statements. 18 FINANCIAL STATEMENTS

21 June 30, RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES Operating Loss $ (91,825,416) $ (93,381,174) Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities: Depreciation Expense 19,948,345 20,192,555 Bad Debt Expense 476, ,622 Changes in Assets and Liabilities: (Increase) Decrease in Assets: Receivables, net (4,232,191) 18,208,851 Inventories 126,328 (122,791) Prepaid Expenses 42, ,101 Other Assets - - Increase (Decrease) in Liabilities: Accounts Payables and Accrued Liabilities (1,450,666) 1,770,215 Deferred Revenues 1,475, ,673 Accrued Leave Liability (271,845) 1,125,602 Loans to Students (1,431,451) (3,404,225) Total Adjustments 14,682,423 38,634,603 Net Cash Used by Operating Activities: $ (77,142,993) $ (54,746,571) Noncash Capital Related Financing and Investing Activities: Donations of Capital Assets $ 167,541 $ 626,222 Change in the Fair Value of Investments Recognized as a Component of Investment Income $ (11,807,845) $ (5,694,081) State Appropriations Restricted for Capital Purposes $ 8,702,083 $ 8,977,006 The accompanying notes are an integral part of the financial statements. FINANCIAL STATEMENTS 19

22 University of Mississippi Foundation Statements of Cash Flows Years ended June 30, 2009 and Cash flows from operating activities: Decrease in net assets $ (42,774,863) (14,792,327) Adjustments to reconcile decrease in net assets to net cash provided by (used in) operating activities: Depreciation 159, ,929 Permanently restricted contributions (8,316,897) (1,378,649) Contributions of real estate (2,727,500) Net realized and unrealized losses on investments 45,494,106 29,406,319 Changes in operating assets and liabilities: Other assets (111,442) 43,910 Pledges receivable 1,828,335 (599,715) Funds held for others 3,604,486 (3,326,239) Beneficial interest in remainder trust (312,461) (206,364) Liabilities under remainder trusts (402,030) 3,817,616 Other liabilities (2,406,953) (6,969,208) Net cash (used in) provided by operating activities (3,238,253) 3,473,772 Cash flows from investing activities: Purchases of property and equipment (43,543) (220,667) Proceeds from sale of property and equipment 741,278 Purchases of Foundation investments (42,249,828) (42,239,815) Proceeds from sales and maturities of Foundation investments 32,855,543 38,532,273 Net cash used in investing activities (8,696,550) (3,928,209) Cash flows from financing activities: Permanently restricted contributions 7,097,845 5,598,760 Receipts under split interest agreements 200,000 1,000,000 Payments to beneficiaries under remainder trusts (470,277) (432,934) Net cash provided by financing activities 6,827,568 6,165,826 Net increase (decrease) in cash and cash equivalents (5,107,235) 5,711,389 Cash and cash equivalents: Beginning of year 8,778,262 3,066,873 End of year $ 3,671,027 8,778,262 See accompanying notes to financial statements. 20 FINANCIAL STATEMENTS

23 Notes to Financial Statements NOTES TO FINANCIAL STATEMENTS 21

24 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The University of Mississippi is a public, comprehensive, research institution that exists to enhance the educational, economic, healthcare, social and cultural foundations of the state, region, and nation. As the oldest public institution of higher learning in the state and as a Carnegie Research University (high research activity), the institution s primary functions are the creation, dissemination, and application of knowledge through a variety of undergraduate, graduate and professional programs and public service activities. The University of Mississippi has established an educational building corporation (UMEBC) (a nonprofit Mississippi corporation) in accordance with Section of the Mississippi Code Annotated, The purpose of this corporation is the acquisition of land and the construction, improvement, and equipping of facilities for the University. In accordance with Governmental Accounting Standards Board (GASB) Statement No. 14, this educational building corporation is deemed a component unit of the University and is included as a blended component unit in the general purpose financial statements. The University of Mississippi Foundation is a legally separate, tax-exempt organization. The Foundation raises and manages funds that predominantly act to supplement the resources that are available to the University in support of its programs. The Board of the Foundation consists of graduates and friends of the University. Although the University does not control the timing or amount of receipts from the Foundation, the majority of resources, or incomes thereon, which the Foundation holds and invests, are restricted to the activities of the University by donors. Because the majority of these restricted resources held by Reporting Entity The Mississippi Constitution was amended in 1943 to create a Board of Trustees of State Institutions of Higher Learning (IHL). This constitutional Board provides management and control of the senior Mississippi public higher education institutions. These Board members are to be appointed by the Governor with the approval of the Senate. The IHL is considered a component unit of the State of Mississippi reporting entity. The current twelve Board members were appointed by the Governor and approved by the Senate for twelve year terms as follows: one from each of the seven congressional districts, one from each of the three Supreme Court Districts, and two appointed from the state-at-large. The Mississippi Constitution was amended in 2003 to change the length of terms and appointment districts for Board members. New appointments will occur from the three current Supreme Court Districts for terms of nine years. The amendment provides for these new appointments and tenures to be gradually implemented. Full implementation occurs in the Foundation can only be used by, or for the benefit of, the University, the Foundation is considered a component unit of the University and is discretely presented in the University s financial statements. Although the University is the primary beneficiary of the Foundation, the Foundation is independent of the University in all respects. The Foundation is not a subsidiary of the University and is not directly or indirectly controlled by the University. Moreover, the assets of the Foundation are the exclusive property of the Foundation and do not belong to the University. The University is not accountable for, and does not have ownership of, any of the financial and capital resources of the Foundation. The University does not have the power or authorities to mortgage, pledge, or encumber the assets of the Foundation. The Board of Directors of the Foundation is entitled to make 22 NOTES TO FINANCIAL STATEMENTS

25 all decisions regarding the business and affairs of the Foundation, including, without limitation, distributions made to the University. Third parties dealing with the University, the IHL, and the State of Mississippi (or any agency thereof) should not rely upon the financial statements of the Foundation for any purpose without consideration of all the foregoing conditions and limitations. During the year ended June 30, 2009, the Foundation distributed $36.2 million to the University for both restricted and unrestricted purposes. Separate financial statements for the Foundation can be obtained at Brandt Memory House, Post Office Box 249, University, MS Basis of Presentation These financial statements have been prepared in accordance with Generally Accepted Accounting Principles as prescribed by GASB, including Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, and Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis of Public Colleges and Universities, issued in June and November, 1999, respectively. The University follows the business type activities reporting requirements of GASB Statement No. 34 that provides a comprehensive presentation of the University s financial activities. The Foundation is a private nonprofit corporation that reports under the Financial Accounting Standards Board (FASB) Statement No. 117, Financial Reporting for Not-for- Profit Organizations. As such, certain revenue recognition criteria and presentation features are different from GASB revenue recognition criteria and presentation features. No modifications have been made to the Foundation s financial statement information in the University s financial reporting entity for these differences. Basis of Accounting The financial statements of the University have been prepared on the accrual basis whereby all revenues are recorded when earned and all expenses are recorded when reduced to a legal or contractual obligation to pay. All significant intra-institutional transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from those estimates. The University s investments are invested in various types of investment securities and in various companies within various markets. Investment securities are exposed to several risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and those changes could materially affect the amounts reported in the University s financial statements. Significant estimates also include the determination of the allowances for uncollectible accounts and notes receivable. As a result, there is at least a reasonable possibility that recorded estimates associated with these assets could change by a material amount in the near term. Cash Equivalents For purposes of the Statement of Cash Flows, the University considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Short Term Investments Short term investments are investments that are not cash equivalents but mature within the next fiscal year. NOTES TO FINANCIAL STATEMENTS 23

26 Accounts Receivable, Net Accounts receivable consist mainly of tuition and fee charges to students, as well as amounts due from federal and state governments and nongovernmental sources, in connection with reimbursement of allowable expenses made pursuant to university grants and contracts. Accounts receivable are recorded net of an allowance for doubtful accounts. Restricted Cash and Cash Equivalents and Restricted Short Term Investments Cash, cash equivalents and short term investments that are externally restricted to make debt service payments, to maintain sinking or reserve funds, or to purchase or construct capital or noncurrent assets, are classified as noncurrent assets in the Statement of Net Assets. Endowment Investments The majority of endowment investments is pooled and operates on the total-return concept (interest, dividends, and appreciation). Distributions on these endowments are based on an adopted spending policy. The annual spending rate is 5 percent of the three-year moving average market value. Accumulated appreciation is used to make up any difference between current year income (interest and dividends) and the distribution permitted under the spending rate policy. At June 30, 2009 and 2008, accumulated appreciation of $2,580,990 and $13,267,840, respectively, was available in the pooled endowment funds. This entire total was restricted to specific purposes. Student Notes Receivable, Net Student notes receivable consist of federal, state, and institutional loans made to students for the purpose of paying tuition and fee charges. Loan balances that are expected to be paid during the next fiscal year are presented on the Statement of Net Assets as current assets. Those balances that are either in deferment status or expected to be paid back beyond the next fiscal year are presented as noncurrent assets on the Statement of Net Assets. Inventories Inventories consist of items stocked for repairs, maintenance, and retail operations. These inventories are generally valued at the lower of cost or market, on either the first-in, first-out ( FIFO ) or average cost basis. Prepaid Expenses Prepaid expenses consist of expenditures that are related to projects, programs, activities or revenues of future fiscal periods. Other Long Term Investments The University accounts for its investments at fair value in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. Changes in unrealized gain (loss) on the carrying value of investments are reported as a component of investment income in the Statement of Revenues, Expenses, and Changes in Net Assets. Investments for which there are no quoted market prices are not material. Capital Assets Capital assets are recorded at cost at the date of acquisition, or, if donated, at fair market value at the date of donation. Renovations to buildings and improvements other than buildings that significantly increase the value or extend the useful life of the structure are capitalized. Routine repairs and maintenance are charged to operating expense in the year in which the expense is incurred. Depreciation is computed using the straight-line method over the estimated useful life of the asset and is not allocated to the functional categories. Note Five contains additional details concerning useful lives, salvage values, and capitalization thresholds. Expenditures for construction in progress are capitalized as incurred. Interest expense relating to construction is capitalized net of interest income earned on resources set aside for this purpose. 24 NOTES TO FINANCIAL STATEMENTS

27 Certain maintenance and replacement reserves have been established to fund costs relating to auxiliary facilities. Collections On occasion, the University may obtain collections of art or historical treasures (usually as private donations to the institution). These collections are usually held for public exhibition, education or research. The University is not required to capitalize these collections and in practice generally does not capitalize their value in the financial presentation. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of amounts owed to vendors, contractors, or accrued items such as interest, wages, and salaries. Deferred Revenues Deferred revenues include amounts received for tuition, fees, and certain auxiliary activities prior to the end of the fiscal year, but related to the subsequent accounting period. Income Taxes The University of Mississippi is considered an agency of the State and is treated as a governmental entity for tax purposes. As such, the University generally is not subject to federal and state income taxes under Section 501(c)(3) of the Internal Revenue Code. However, the University does remain subject to income taxes on any income that is derived from a trade or business regularly carried on and not in furtherance of the purpose for which it was granted exemption. No income tax provision has been recorded because, in the opinion of management, there is no significant amount of taxes on such unrelated business income. Compensated Absences Twelve-month employees earn annual personal leave at a rate of 12 hours per month for zero to three years of service; 14 hours per month for three to eight years of service; 16 hours per month for 8 to 15 years of service; and from 15 years of service and over, 18 hours per month are earned. There is no requirement that annual leave be taken, and there is no maximum accumulation. At termination, these employees are paid for up to 240 hours of accumulated leave. Deposits Refundable Deposits Refundable represent good faith deposits from students to secure admission to various programs and to reserve housing assignments. Noncurrent Liabilities Noncurrent liabilities include (1) principal amounts of revenue bonds payable and notes payable; (2) estimated amounts for accrued compensated absences and other liabilities that will not be paid within the next fiscal year; and (3) other liabilities that, although payable within one year, are to be paid from funds that are classified as noncurrent assets. Nine-month employees earn major medical leave at a rate of 13 1/3 hours per month for one month to three years of service; 14 1/5 hours per month for three to eight years of service; 15 2/5 hours per month for eight to 15 years of service; and from 15 years of service and over, 16 hours per month are earned. There is no limit on the accumulation of major medical leave. At retirement, these employees are paid for up to 240 hours of accumulated major medical leave. Classification of Revenues and Expenditures The University has classified its revenues and expenses as either operating or non-operating according to the following criteria: Operating revenues and expenses have the characteristics of exchange transactions. These transactions can be defined as an exchange in which two or more entities both receive and sacrifice value, such as purchases and sales of goods or services. Examples of operating revenues included (1) student tuition and fees, net of scholarship discounts and allowances, (2) sales and services of auxiliary enterprises, net of scholarship discounts and allowances, (3) most federal, state, and local grants and contracts, (4) interest on institutional student loans, and (5) other operating revenues. Examples of operating expenses include (1) employee compensation, benefits and related expenses, (2) NOTES TO FINANCIAL STATEMENTS 25

28 scholarships and fellowships, net of scholarship discounts and allowances, (3) utilities, supplies, and other services, (4) professional fees, and (5) depreciation expense related to certain capital assets. Non-operating revenues and expenses have the characteristics of non-exchange transactions, such as gifts and contributions, state appropriations, investment income, and other revenue sources that are defined as non-operating revenues by GASB Statement No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, and GASB Statement No. 34. Gifts (pledges) that are received on an installment basis are recorded at net present value. Examples of non-operating expenses include interest on capital asset related debt and bond expenses. Auxiliary Enterprise Activities Auxiliary enterprises typically exist to furnish goods or services to students, faculty, or staff, and that charge a fee directly related to, although not necessarily equal to, the cost of the goods or services. One distinguishing characteristic of auxiliary enterprises is that they are managed as essentially self-supporting activities. Examples are residence halls, food services, and intercollegiate athletic programs (only if they essentially self-supporting). The general public may be served incidentally by auxiliary enterprises. Scholarship Discounts and Allowances Student tuition and fee revenues, and certain other revenues from students, are reported net of scholarship discounts and allowances in the statements of revenues, expenses and changes in net assets. Financial aid to students is reported in the financial statements under the alternative method as prescribed by the National Association of College and University Business Officers (NACUBO). Aid is reflected in the financial statements as operating expenses or scholarship allowances, which reduce revenues. The amount reported as operating expenses represents the portion of aid that was provided to the student in the form of cash. Scholarship allowances represent the portion of aid provided to the student in the form of reduced tuition. Under the alternative method, these amounts are computed on a Universitywide basis by allocating the cash payments to students, excluding payments for services, on the ratio of total aid versus non-third party aid. Net Assets GASB Statement No. 34 reports equity as net assets rather than fund balance. Net assets are classified according to external donor restrictions or availability of assets for satisfaction of university obligations. Nonexpendable restricted net assets are gifts that have been received for endowment purposes, the corpus of which cannot be expended. Expendable restricted net assets represent funds that have been gifted for specific purposes and funds held in federal loan programs. The unrestricted net asset balance of $152,033,745 and $148,775,387 at June 30, 2009 and 2008, respectively, includes $24,561,015 and $25,009,727 reserved for auxiliary operations, renewals, and replacements; $19,825,223 and $17,099,125 reserved for departmental working capital; $35,071,377 and $35,000,125 reserved for capital projects; $9,226,243 and $10,396,218 reserved for quasi-endowments; $2,657,116 and $1,546,520 reserved for debt service; $48,278,343 and $47,461,865 reserved for designated projects; and $12,414,428 and $12,261,807 for other purposes. Reclassifications Certain amounts for 2008 in the 2008 financial statements have been reclassified in order to conform to classifications in the 2009 financial statements. Future Accounting Pronouncements In November 2007, the GASB issued GASB Statement No. 52, Land and Other Real Estate Held as Investments by Endowments. This statement establishes consistent standards for the reporting of land and other real estate held as investments by requiring endowments to report their land and other real estate investments at fair value. Governments also are required to report the changes in fair value as investment income and to disclose the methods and significant assumptions employed to determine fair value, and other information that they currently present for other investments reported at fair value. GASB No. 52 is effective for the University for the fiscal year beginning July 1, 2009 with any changes made to comply with this statement treated as an adjustment of prior periods, and financial statements presented for the periods affected should be restated. If restatement of the financial statements for prior periods is not practical, the cumulative effect of applying this statement should be reported as a restatement of beginning net assets. 26 NOTES TO FINANCIAL STATEMENTS

29 In June 2008, the GASB issued GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instrument. This statement addresses the recognition, measurement, and disclosure of information regarding derivative instruments entered into by state and local governments and specifically requires governments to measure most derivative instruments at fair value in their financial statements that are prepared using the economic resources measurement focus and the accrual basis of accounting. The new standard provides specific criteria that governments will use to determine whether a derivative instrument will result in an effective hedge. Changes in fair value for effective hedges that are achieved with derivative instruments will be recognized in the reporting period to which they relate. The changes in fair value of these hedging derivative instruments do not affect current investment revenue, but are instead reported as deferrals in the statement of net assets or the balance sheet. Derivative instruments that either do not meet the criteria for an effective hedge or are associated with investments that are already reported at fair value are classified as investment derivative instruments for financial reporting purposes. Changes in fair value of those derivative instruments are reported as part of investment revenue in the current reporting period. The requirements of GASB No. 53 are effective for the University for the fiscal year beginning July 1, Management has not completed its evaluations to determine the effect, if any; the adoption of these future statements will have on the University s financial condition or results of operations. NOTE 2 CASH AND INVESTMENTS Cash, Cash Equivalents and Short Term Investments Investment policies as set forth by the IHL Board of Trustees policy and state statute, authorize the University to invest in demand deposits and interest-bearing time deposits such as savings accounts, certificates of deposit, money market funds, U.S. Treasury bills and notes, U.S. Government agency and sponsored enterprise obligations, and repurchase agreements. For purposes of the Statement of Cash Flows, the University considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and short-term investments include $30,049,376 in money market mutual funds with underlying portfolios with credit ratings of Aaa. Custodial Credit Risk Deposits Custodial credit risk for deposits is the risk that in the event of the failure of a financial institution, the University would not be able to recover deposits or collateral securities that are in the possession of an outside party. The IHL System does not have a formal policy for custodial credit risk. However, the Mississippi State Treasurer managers risk on behalf of the universities. Deposits above Federal Depository Insurance Corporation (FDIC) coverage are collateralized by the pledging financial institution s trust department or agent in the name of the Mississippi State Treasurer on behalf of the IHL System. The collateral for public deposits in financial institutions is now held in the name of the State Treasurer under a program established by the Mississippi State Legislature and governed by Section of the Mississippi Code Annotated, Under this program, the University s funds are protected through a collateral pool administered by the State Treasurer. Financial institutions holding deposits of public funds must pledge securities as collateral against these deposits. In the event of failure of a financial institution, securities pledged by that institution would be liquidated by the State Treasurer to replace the public deposits not covered by the FDIC. NOTES TO FINANCIAL STATEMENTS 27

30 Investments Investment policies at the University are governed by State statute (Section , Mississippi Code Annotated, 1972) and the Uniform Management of Institutional Funds Act of The University has adopted investment and spending policies for endowments as recommended by the University s Joint Committee on Investments. Active domestic equity investment managers must assure that no position of any one company exceeds 8% of the manager s total portfolio as measured at market, a minimum of 20 positions is maintained in the portfolio to provide adequate diversification, and adequate diversification among industries is maintained by investing no more than 25% of the portfolio in any one industry as defined by the relevant benchmark. International equities are held to the same standards with the exception of maintaining adequate diversification among economic sectors by investing the portfolio in no more than 100% of the relevant benchmark s weighting in any one sector, being subject to a maximum exposure of 50% in any one economic sector, maintaining adequate diversification with respect to currency and country, and investing no more than 20% of the international portfolio in emerging markets. Investment categories are also limited and managed by a cap, a floor, and specified targets in relation to the total market value of the portfolio. The following table summarizes the fair values of investments at June 30: Investments Current Assets: Short-Term Investments $ 87,730,605 $ 79,641,891 Noncurrent Assets: Restricted Short-Term Investments 10,996,553 - Endowment Investments 56,343,427 67,648,154 Other Long-Term Investments 42,254,244 59,174,929 Total $ 197,324,829 $ 206,464,974 The following table presents the fair value of investments by type at June 30: Investment Type U.S. Government Agency Obligations $ 30,751,954 $ 40,989,589 U.S. Treasury Obligations 10,996,553 - State of Mississippi General Obligation Bonds - 100,296 Certificates of Deposit 98,795,518 97,726,934 Collateralized Mortgage Obligations 437,377 - Bond Mutual Funds 18,886,322 19,073,221 Domestic Equity Mutual Funds 12,223,214 17,040,990 Domestic Equity Securities 10,276,193 12,998,446 International Equity Mutual Funds 8,096,355 11,570,332 Hedge Funds 5,018,319 5,428,910 Private Equity 503, ,448 Natural Resources Timber 605, ,000 Land Grant Seminary Fund 733, ,808 Total $197,324,829 $206,464, NOTES TO FINANCIAL STATEMENTS

31 Custodial Credit Risk Per GASB Statement No. 40, custodial credit risk is defined as the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of the investment or collateral securities that are in the possession of an outside party. The University does not presently have a formal policy for custodial credit risk. Investments are exposed to custodial credit risk if the securities are uninsured and unregistered with securities held by the counterparty s trust department or agent, but not held in the government s name. As of June 30, 2009, no investments were exposed to custodial credit risk. Interest Rate Risk Per GASB Statement No. 40 interest rate risk is defined as the risk a government may face should interest rate variances affect the fair value of investments. According to University investment policy, the average weighted maturity of the interest bearing portfolio may not exceed 2.5 years in order to limit interest rate risk. As of June 30, 2009 and 2008, respectively, the University had the following investments subject to interest rate risk: As of June 30, 2009 Investment Maturities (In Years) Investment Type Fair Value Less than More than 10 U.S. Government Agency Obligations $ 30,751,954 $ - $ 30,150,238 $ 601,716 $ - U.S. Treasury Obligations 10,996,553 10,996, Collaterialized Mortgages 437, ,377 Bond Mutual Funds 18,886,323-4,053,733 14,832,590 - Total $ 61,072,207 $ 10,996,553 $ 34,203,971 $15,434,306 $ 437,377 As of June 30, 2008 Investment Maturities (In Years) Investment Type Fair Value Less than More than 10 U.S. Government Agency Obligations $ 40,989,589 $ 15,282,262 $ 24,893,200 $ 814,127 $ - State of Mississippi General Obligation Bonds 100, ,296 - Bond Mutual Funds 19,073,221 1,542,142 7,718,828 9,472, ,177 Total $ 60,163,106 $ 16,824,404 $ 32,612,028 $10,386,497 $ 340,177 Credit Risk Per GASB Statement No. 40, credit risk is the risk that an insurer or other counterparty to an investment will not fulfill it obligations. According to University investment policy, core fixed income investments must maintain an overall weighted average credit rating of A or better by Moody s and Standard & Poor s. An overall weighted average credit rating of B or better must be maintained by high yield fixed income investments. The University had the following investment credit risk at June 30: NOTES TO FINANCIAL STATEMENTS Credit Rating Fair Value June 30, 2009 Fair Value June 30, 2008 AAA $ 30,751,954 $ 40,989,589 A - 100,296 Not Rated 18,886,322 19,073,221 Total $ 49,638,276 $ 60,163,106 29

32 Bond mutual funds in the amount of $18,886,322 and $19,073,221 are included in the securities not rated at June 30, 2009 and 2008, respectively, and are invested in funds with underlying portfolios with average credit ratings as follows: The credit risk ratings listed to the right are issued upon standards set by Standard and Poor s. Average Credit Rating June 30, 2009 June 30, 2008 AA $ 5,597,826 $ 12,988,145 AA+ 2,348,030 3,999,599 A 6,823,993 - BB/B 4,053,733 2,085,477 BB- 62,740 - Total $ 18,886,322 $ 19,073,221 Concentration of Credit Risk Per GASB Statement No. 40, concentration of credit risk is defined as the risk of loss attributed to the magnitude of a government s investment in a single issuer. According to University investment policy, investments in certificates of deposit issued by one bank may not exceed 50% of the total cash management portfolio and investments in obligations of the United States government or its agencies may not exceed 75% of this portfolio. The University had the following investments that represent more than 5 percent of net investments at June 30: Fair Value % of Total Fair Value % of Total Issuer June 30, 2009 Investments June 30, 2008 Investments Federal Home Loan Mortgage Corporation 10,506, % 15,744, % Federal Home Loan Bank 10,174, % 15,393, % Federal Farm Credit Bank 9,971, % - - Federal National Mortgage Association 99,906.05% 13,192, % Foreign Currency Risk Per GASB Statement No. 40, the foreign currency risk is defined as the risk that changes in exchange rates will adversely affect the fair value of an investment. The University does not presently have a formal policy that addresses foreign currency risk. The University s exposure to foreign currency risk is limited to $8,096,355 and $11,570,332 invested in international equity mutual funds at June 30, 2009 and 2008, respectively. NOTE 3 ACCOUNTS RECEIVABLE Accounts receivable consisted of the following at June 30: Student Tuition $ 6,463,657 $ 5,572,018 Auxiliary Enterprises and Other Operating Activities 4,636,708 3,587,128 Contributions and Gifts 15,791,590 10,239,060 Federal, State, and Private Grants and Contracts 14,276,372 12,092,659 State Appropriations 2,174,210 1,403,307 Accrued Interest 1,441,710 1,849,813 Other 1,468,645 1,068,061 Total Accounts Receivable $ 46,252,892 $ 35,812,046 Less Allowance for Doubtful Accounts 3,885,860 3,529,511 Accounts Receivable, Net $ 42,367,032 $ 32,282, NOTES TO FINANCIAL STATEMENTS

33 NOTE 4 NOTES RECEIVABLE FROM STUDENTS Notes receivable from students are payable in installments over a period of up to ten years and may commence immediately from the date of disbursement up to twelve months from the date that the enrollment status of the student drops below half-time. The following are schedules of interest rates and outstanding balances for the different types of notes receivable held by the University at June 30: Interest June 30, 2009 Current Noncurrent Rates Balance Portion Portion Perkins Student Loans 3% to 5% $ 9,561,317 $ 1,456,066 $ 8,105,251 Other Federal Loans 5% 1,616, ,809 1,510,307 Institutional Loans 3% to 5% 12,930,206 3,039,307 9,890,899 Total Notes Receivable $ 24,107,639 $ 4,601,182 $ 19,506,457 Less Allowance for Doubtful Accounts 987, , ,000 Net Notes Receivable $ 23,119,739 $ 4,004,282 $ 19,115,457 Interest June 30, 2008 Current Noncurrent Rates Balance Portion Portion Perkins Student Loans 3% to 5% $ 9,510,182 $ 1,265,705 $ 8,244,477 Other Federal Loans 5% 1,555, ,403 1,454,414 Institutional Loans 3% to 5% 11,891,610 2,640,271 9,251,339 Total Notes Receivable $ 22,957,609 $ 4,007,379 $ 18,950,230 Less Allowance for Doubtful Accounts 867, , ,000 Net Notes Receivable $ 22,089,709 $ 3,489,479 $ 18,600,230 NOTES TO FINANCIAL STATEMENTS 31

34 NOTE 5 CAPITAL ASSETS A summary of changes in capital assets for the years ended June 30, 2009 and 2008, respectively, is presented as follows: July 1, 2008 Additions Deletions June 30, 2009 Capital Assets, Non-depreciable: Land $ 14,870,370 $ - $ 6,820 $ 14,863,550 Construction in Progress 56,384,812 83,683,136 65,264,515 74,803,433 Total Capital Assets, Non-depreciable $ 71,255,182 $ 83,683,136 $ 65,271,335 $ 89,666,983 Capital Assets, Depreciable: Improvements Other Than Buildings 51,665,552 25,909,157-77,574,709 Buildings 384,744,845 39,296, ,041,501 Equipment 88,610,135 10,621,415 3,746,255 95,485,295 Library Books 80,686,984 4,759,697 33,385 85,413,296 Total Capital Assets, Depreciable $ 605,707,516 $ 80,586,925 $ 3,779,640 $ 682,514,801 Less Accumulated Depreciation: Improvements Other Than Buildings 17,230,515 1,994,067-19,224,582 Buildings 86,727,986 7,284,649-94,012,635 Equipment 58,019,601 6,577,751 3,173,969 61,423,383 Library Books 62,117,634 4,091,878 33,385 66,176,127 Total Accumulated Depreciation $ 224,095,736 $ 19,948,345 $ 3,207,354 $ 240,836,727 Capital Assets, Net of Depreciation $ 452,866,962 $ 144,321,716 $ 65,843,621 $ 531,345,057 July 1, 2007 Additions Deletions June 30, 2008 Capital Assets, Non-depreciable: Land $ 9,959,281 $ 4,911,089 $ - $ 14,870,370 Construction in Progress 30,051,509 39,426,429 13,093,126 56,384,812 Total Capital Assets, Non-depreciable $ 40,010,790 $ 44,337,518 $ 13,093,126 $ 71,255,182 Capital Assets, Depreciable: Improvements Other Than Buildings 50,367,523 1,506, ,355 51,665,552 Buildings 375,938,839 11,248,846 2,442, ,744,845 Equipment 83,760,052 7,398,439 2,548,356 88,610,135 Library Books 76,472,716 4,223,552 9,284 80,686,984 Total Capital Assets, Depreciable $ 586,539,130 $ 24,377,221 $ 5,208,835 $ 605,707,516 Less Accumulated Depreciation: Improvements Other Than Buildings 15,522,678 1,874, ,684 17,230,515 Buildings 81,183,276 7,064,803 1,520,093 86,727,986 Equipment 53,126,963 7,242,716 2,350,078 58,019,601 Library Books 58,116,404 4,010,515 9,285 62,117,634 Total Accumulated Depreciation $ 207,949,321 $ 20,192,555 $ 4,046,140 $ 224,095,736 Capital Assets, Net of Depreciation $ 418,600,599 $ 48,522,184 $ 14,255,821 $ 452,866, NOTES TO FINANCIAL STATEMENTS

35 Depreciation is computed on a straight-line basis with the exception of library books, which is computed using a composite method. The following useful lives, salvage values, and capitalization thresholds are used to compute depreciation: Estimated Salvage Capitalization Useful Life Value Threshold Buildings 40 years 20% $50,000 Improvements Other Than Buildings 20 years 20% $25,000 Equipment 3-15 years 1 10% $5,000 Library books 10 years 0% $0 NOTE 6 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following at June 30: Vendors and contractors $ 15,672,975 $ 9,320,558 Accrued salaries, wages and employee withholdings 8,100,111 8,990,502 Other 1,399,139 1,434,141 Total $ 25,172,225 $ 19,745,201 NOTE 7 DEFERRED REVENUES Deferred Revenues consisted of the following at June 30: Tuition and fees $ 5,733,359 $ 5,544,612 State appropriations restricted for capital purposes 120,669 8,437,233 Auxiliary Services 9,684,571 8,479,635 Total $ 15,538,599 $ 22,461,480 NOTES TO FINANCIAL STATEMENTS 33

36 NOTE 8 LONG-TERM LIABILITIES Long-term liabilities include bonds, notes, compensated absences, refundable deposits, and a federal loan fund contingency. This contingency represents the federal portion of the Perkins Loan program that would be due and payable to the U.S. government if the University ceased to participate in this program. Information regarding original issue amounts, interest rates and maturity dates for bonds and notes payable at June 30, 2009 and 2008 is listed in the following schedules: Annual Original Interest Maturity Due Within Description and Purpose Issue Rates (Fiscal Year) July 1, 2008 Additions Deletions June 30, 2009 One Year Bonded Debt Housing Revenue Bonds Series 1968 E $3,000, % 2009 $ 70,000 $ - $ 70,000 $ - $ Series ,220,000 Series ,090,000 Series ,965,000 Series 2006A 17,985,000 Series 2006B-1 17,290,000 Series 2008A 29,785,000 Series 2009A 19,870,000 Series 2009B 24,165,000 Variable Rate Demand Bonds Series 2000A 34,700,000 Series 2006B-2 4,075, % % % % % % % % % % ,200, , , ,000 7,795,000-1,000,000 6,795,000 1,040,000 10,285, ,000 9,720, ,000 16,655, ,000 16,050, ,000 16,695, ,000 15,910, ,000-29,785,000-29,785, ,000-19,870,000-19,870, ,165,000-24,165,000 1,685,000 26,825,000-26,825, ,075, ,075,000 - Total Bonded Debt 83,600,000 73,820,000 30,435, ,985,000 6,075,000 Notes Payable Buford Land Purchase 8.20% , , ,000 NWCC Desoto Center Expansion 3.50% ,757-81, ,420 84,184 Federal Housing Loan of % ,133,366-47,922 1,085,444 50,594 Total Notes Payable 1,883, ,259 1,753, ,778 Other Long Term Liabilities Accrued Leave Liabilities 11,359,126 1,529, ,531 11,912, ,000 Deposits Refundable 105,305 2, ,655 - Other 9,264,000-5,000 9,259,000 - Total Other Long Term Liabilities 20,728,431 1,531, ,531 21,279, ,000 Total $ 106,211,554 $ 75,351,481 $ 31,544, ,018,245 $ 7,290,778 Due Within One Year 7,290,778 Total Long Term Liabilities $ 142,727, NOTES TO FINANCIAL STATEMENTS

37 Annual Original Interest Maturity Due Within Description and Purpose Issue Rates (Fiscal Year) July 1, 2007 Additions Deletions June 30, 2008 One Year Bonded Debt Housing Revenue Bonds Series 1968 E $ 3,000, % 2009 $ 195,000 $ - $ 125,000 $ 70,000 $ 70,000 Series 1997A 11,135, % , , Series ,220, % ,760, ,000 1,200, ,000 Series ,090,000 Series ,965,000 Series 2006A 17,985,000 Series 2006B-1 17,290,000 Variable Rate Demand Bonds % ,745, ,000 7,795,000 1,000, % ,585, ,000 10,285, , % ,240, ,000 16,655, , % ,290, ,000 16,695, , Series 2000A 34,700, % ,295,000-1,470,000 26,825,000 1,540,000 Series 2006B-2 4,075, % ,075, ,075,000 - Total Bonded Debt 88,430,000-4,830,000 83,600,000 5,150,000 Notes Payable Buford Land Purchase 8.20% , ,000 - NWCC Desoto Center Expansion 3.50% ,344-78, ,757 81,337 Federal Housing Loan of % ,178,757-45,391 1,133,366 47,922 Total Notes Payable 2,007, ,978 1,883, ,259 Other Long Term Liabilities Accrued Leave Liabilities 10,233,524 2,129,513 1,003,911 11,359, ,000 Deposits Refundable 803, , ,305 - Other 9,174,400 89,600-9,264,000 - Total Other Long Term Liabilities 20,211,372 2,219,113 $ 1,702,054 20,728, ,000 Total $ 110,648,473 $ 2,219,113 $ 6,656, ,211,554 $ 6,200,259 Due Within One Year 6,200,259 Total Long Term Liabilities $ 100,011,295 NOTES TO FINANCIAL STATEMENTS 35

38 BONDS PAYABLE The University has issued bonds to construct, renovate, and improve various campus facilities. As noted in the summary of significant accounting policies, the University established UMEBC, an educational building corporation. This nonprofit Mississippi corporation was established in accordance with Section of the Mississippi Code Annotated, 1972, for the purpose of acquiring, constructing, renovating, improving, and equipping University facilities. In accordance with GASB Statement No. 14, UMEBC is considered a blended component unit of the university and is included in the general purpose financial statements. Series E: Housing revenue bonds of 1968, Series E, totaling $3,000,000 were issued in July 1968 to construct a women s dormitory. These bonds bear an interest rate of 3.00% payable annually and matured July Series 1999: UMEBC issued bonds totaling $12,220,000 in August 1999 (Series 1999) for the construction and equipping of the Gertrude Castellow Ford Center for the Performing Arts. The rates of interest on the original issue range from 4.50% to 5.25% payable semiannually and mature August All coupons maturing on and after August 2010 were advance refunded as part of the April 2006 (Series 2006A) issue. The interest rate on the remaining coupon is 5.00% with final maturity in August Series 2000A: UMEBC issued bonds totaling $34,700,000 in October 2000 for the purpose of purchasing, erecting, equipping, repairing, renovating, reconstructing, remodeling, or enlarging (i) the south end zone portion of Vaught-Hemingway Stadium, (ii) the Gertrude Castellow Ford Center for the Performing Arts, (iii) a new electrical power generating facility, and (iv) existing student housing facilities. During FY 2008 and 2009, all $ million of outstanding coupons were tendered to Regions Bank, the liquidity provider for this issue. All of these outstanding coupons were refunded in the June 2009 (Series 2009B) issue. Series 2002: UMEBC issued bonds totaling $13,090,000 in June 2002 (Series 2002) for (i) the construction, repair, renovation, equipping, or other improvements to student housing facilities, (ii) the refunding of portions of UM- EBC bonds issued June 1995 (Series 1995) and July 1996 (Series 1996B), and (iii) the advanced refunding of portions of UMEBC bonds issued December 1993 (Series 1993) and July 1996 (1996A). Outstanding coupons bear interest rates ranging from 4.00% to 5.00% payable semiannually and mature June Series 2005: UMEBC issued bonds totaling $10,965,000 in February 2005 (Series 2005) for the refunding of portions of UMEBC bonds issued July 1996 (Series 1996A) and December 1997 (Series 1997A). Outstanding coupons bear interest at rates ranging from 3.00% to 4.375% payable semiannually with final maturity in December Series 2006A: UMEBC issued bonds totaling $17,985,000 in April 2006 (Series 2006A) for the construction and improvement of athletic facilities and the refunding of portions of UMEBC bonds issued August 1999 (Series 1999). These bonds bear interest at rates ranging from 4.00% to 5.00% payable semiannually with final maturity in August Series 2006B-1: UMEBC issued bonds totaling $17,290,000 in December 2006 (Series 2006B-1) for (i) expansion and related infrastructure improvements to Oxford-University Stadium/Swayze Field, (ii) renovation of the University golf course clubhouse/pro shop, expansion and upgrading of golf course irrigation, and improvements to cart paths, landscaping, and other necessary golf course infrastructure, and (iii) a portion of the construction, equipping, and expansion of the Inn at Ole Miss, including external infrastructure improvements. These bonds bear interest at rates ranging from 3.50% to 5.00% payable semiannually with final maturity in October Series 2006B-2: UMEBC issued bonds totaling $4,075,000 in December 2006 (Series 2006B-2) for the construction, equipping, landscaping, and expansion of the Inn at Ole Miss, including external infrastructure improvements. These bonds bear interest at a variable weekly rate payable quarterly and mature October This issue was insured to AAA status through FSA. On October 8, 2008, all $4,075,000 of outstanding UM- EBC Series 2006B-2 coupons were tendered to its liquidity provider, Regions Bank, and interest rates reset to prime (3.25% at June 30, 2009). As a result of credit rating downgrade announcements, the market for FSA insured variable rate demand obligations dramatically contracted. While Morgan Keegan attempts to remarket these bonds, University management believes remarketing is improbable in the near term. The accelerated 60 month amortization requirements of the liquidity facility activate if remarketing does not occur with 180 days and the first payment would be due October 1, See Note 18 Subsequent Events for further information on this series. 36 NOTES TO FINANCIAL STATEMENTS

39 Series 2008A: UMEBC issued bonds totaling $29,785,000 in August 2008 (Series 2008A) for the construction, equipping and landscaping of residential colleges, dormitories and academic facilities, including external infrastructure improvements. These bonds bear interest at rates ranging from 3.00% to 5.00% payable semiannually with final maturity in October Series 2009A: UMEBC issued bonds totaling $19,870,000 in June 2009 (Series 2009A) for the construction, equipping and landscaping of a new school of law, including external infrastructure improvements. These bonds bear interest at rates ranging from 2.125% to 4.50% payable semiannually with final maturity in October Series 2009B: UMEBC issued bonds totaling $24,165,000 in June 2009 (Series 2009B) for the refunding of all outstanding UMEBC bonds issued October 2000 (Series 2000A). Outstanding coupons bear interest at rates ranging from 3.00% to 5.00% payable semiannually with final maturity in October INTEREST RATE AND BASIS SWAPS In connection with the $34.7 million UMEBC Series 2000A variable-rate issue, UMEBC entered into an interest rate swap agreement and basis swap agreement during a historically low interest rate environment to reduce exposure to rising interest rates. These agreements were subject to credit and market risks that were not reflected on the Statement of Net Assets. Credit risk represents the maximum potential loss due to possible nonperformance by obligors and counter-parties under the terms of the agreement. Market risk represents the potential loss due to the decrease in value of a swap caused primarily by decreases in interest rates. Interest Rate Swap: UMEBC was party to a derivative in the form of a variable-to-fixed interest rate swap agreement. This agreement was used by the UMEBC to reduce exposure to variability in cash flows generally associated with variable rate debt. Exposure to losses and gains on interest rate agreements will vary as market interest rates fluctuate. This swap was for a notional principal amount that declined over the 18-year term of the contract. At June 30, 2008, the notional amount of the swap was $16,000,000. The June 30, 2008 calculated fair value of the interest rate swap agreement was a liability of $230,799. The interest rate swap agreement was terminated May 1, 2009, with UMEBC paying termination costs of $1,248,934. Basis Swap: UMEBC was party to a derivative in the form of a basis swap agreement which overlaid the original interest rate swap agreement to modify the interest rate on a portion of the Series 2000A bonds. This agreement was used by the UMEBC to further reduce the exposure to interest rate fluctuations over the remaining term of the original notional amount. This swap was for a notional principal amount that declined over the 18-year term of the contract. At June 30, 2008, the notional amount of the swap was $16,000,000. The June 30, 2008 calculated fair value of the basis swap was an asset of $59,853. The basis swap agreement was terminated March 16, 2009, with UMEBC receiving proceeds from the termination of $243,415. The resulting net termination costs of $1,005,519 were recorded in the Statement of Revenues, Expenses and Changes in Net Assets. BOND DEFEASANCE Series 1999: UMEBC advance defeased $7,175,000 of the UMEBC Series 1999 issue. Net Series 2006A proceeds were deposited into an irrevocable trust to provide all future debt service payments in connection with these advance defeased coupons. No assets, liabilities, or other financial information associated with this trust are included in the University s financial statements. This trust held assets with a market value of $7,205,353 at June 30, NOTES PAYABLE The University has entered into note agreements for the purchase of land adjoining the Oxford campus, the improvement and construction of student housing facilities, and the expansion and renovation of facilities utilized at the Desoto Center. Buford Land Note: A note was issued to Robert Buford in the amount of $117,000 on January 10, 1990, for the acquisition of land adjoining the Oxford campus on the northwest side. This note is payable in 239 monthly interest payments of $800 and a final principal and interest payment of $117,800. This note bears interest at a rate of 8.20%. Federal Housing Loan of 1994: This loan totaled $1,601,500 and was issued March 8, 1994, for the purpose of renovation, construction, and improvements to student housing facilities. The loan bears interest at a rate of 5.50% and is payable in fixed semi-annual installments of $54,803 until November 1, NOTES TO FINANCIAL STATEMENTS 37

40 NWCC Desoto Center Note: This note is payable to Northwest Mississippi Community College (NWCC) for the expansion of facilities wholly owned by NWCC. This facility is utilized by both parties for instructional purposes and is located in Desoto County, Mississippi, a part of the Memphis, Tennessee, metropolitan area. The future annual requirements necessary to pay principal and interest associated with long-term debt at June 30, 2009, are as follows: Bonds Notes Fiscal Year(s) Payable Payable Interest Total 2010 $ 6,075,000 $ 251,778 $ 4,991,088 $ 11,317, ,110, ,545 5,032,327 11,282, ,360, ,573 4,815,199 11,321, ,620, ,873 4,566,565 11,339, ,735, ,460 4,305,903 11,200, ,090, ,911 17,149,083 52,709, ,385, ,723 10,454,416 36,271, ,215,000-5,086,547 29,301, ,395,000-1,199,337 11,594,337 Totals $ 126,985,000 $ 1,753,863 $ 57,600,465 $ 186,339,328 NOTE 9 OPERATING LEASES Property under operating leases is composed of office rent, computer and office equipment. The following is a schedule by years of the future minimum rental payments required under those operating leases: The total rental expense for all operating leases, except those with terms of a month or less that were not renewed, for the fiscal year ending June 30, 2009 was $1,037,688. Year Ending June 30, Amount 2010 $ 981, , , , ,174 Total Minimum Payments Required $ 2,787, NOTES TO FINANCIAL STATEMENTS

41 NOTE 10 OPERATING EXPENSES BY NATURAL AND FUNCTIONAL CLASSIFICATIONS The University s operating expenses by functional classification were as follows for the year ended June 30, 2009 and 2008: Functional Classification Compensation & Benefits Travel Year Ended June 30, 2009 Contractual Services Utilities Scholarships Commodities Depreciation Other Total Instruction $ 94,681,153 $ 3,744,762 $ 13,450,779 $ 42,909 $ - $ 5,998,698 $ - $ - $ 117,918,301 Research 27,446,292 1,338,415 13,503,633 13,983-2,766, ,068,766 Public Service 2,226, ,600 2,590,776 8, , ,412,431 Academic Support 19,556, ,143 4,744, ,834, ,702,620 Student Services 8,778, ,887 2,592,883 16,152-1,458, ,134,485 Institutional Support 15,551, ,007 5,180,847 15,435-1,605, ,772,615 Operation of Plant 14,864,800 27,697 2,845,278 7,993,999-1,098, ,830,134 Student Aid 47, ,577-25,492,441 1, ,724,283 Auxiliary Enterprises 17,830,159 3,670,272 13,519,406 2,818,814 5,605,774 5,194, ,638,867 Depreciation ,948,345-19,948,345 Loan Fund Expenses , ,737 Other , ,349 Total Operating Expenses $ 200,982,799 $10,175,783 $ 58,611,224 $ 10,909,936 $ 31,098,215 $ 20,424,545 $ 19,948,345 $ 906,086 $ 353,056,933 NOTES TO FINANCIAL STATEMENTS 39

42 Functional Classification Compensation & Benefits Travel Year Ended June 30, 2008 Contractual Services Utilities Scholarships Commodities Depreciation Other Total Instruction $ 88,646,921 $ 3,878,485 $ 11,958,421 $ 37,438 $ - $ 6,512,118 $ - $ - $ 111,033,383 Research 26,948,512 1,277,430 15,882,063 21,557-4,640, ,770,090 Public Service 2,100, ,080 1,441,210 5, , ,845,474 Academic Support 18,604, ,727 4,597,528 1,058-4,001, ,843,823 Student Services 8,460, ,160 2,220,749 11,970-1,577, ,602,688 Institutional Support 15,814, ,441 6,484,714 10,954-1,406, ,197,604 Operation of Plant 13,243,598 82,190 5,689,630 7,100,467-1,540, ,656,253 Student Aid 42,218 6, ,734-23,061, ,290,935 Auxiliary Enterprises 16,007,929 2,890,120 14,318,333 2,671,791 4,760,104 4,791, ,439,452 Depreciation ,192,555-20,192,555 Loan Fund Expenses , ,539 Other , ,122 Total Operating Expenses $ 189,869,082 $ 9,704,351 $ 62,772,382 $ 9,860,612 $ 27,821,636 $ 24,651,639 $ 20,192,555 $ 833,661 $ 345,705, NOTES TO FINANCIAL STATEMENTS

43 NOTE 11 CONSTRUCTION COMMITMENTS AND FINANCING The University has contracted or made commitments for various construction projects as of June 30, Estimated costs to complete the various projects and the sources of anticipated funding are presented below: Estimated Costs Funding Sources To Complete Federal State University Other Buildings Coulter Hall - Phase 1B $4,190,000 $4,125,000 $65,000 Carrier Hall Renovation 4,400,000 4,400,000 Faser Hall 1,180,000 1,180,000 Guyton Hall 2,100,000 2,000,000 60,000 $40,000 Hill Hall 1,500, , , ,000 New Law School 32,500,000 $2,500,000 13,800,000 16,200,000 Old Chemistry 3,000, ,000 2,300,000 Pharmacy Building - Jackson Campus 9,700,000 7,800,000 1,900,000 Peabody Hall 180, ,000 George Street House 83,000 83,000 Former Law School 3,000,000 3,000,000 Research Natural Products Center Phase II 13,000,000 13,000,000 Medicinal Gardens 2,000,000 2,000,000 Center for Manufacturing Excellence 13,000,000 13,000,000 Other Brown Hall Sprinklers 430, ,000 Luckyday Residential College 25,000,000 20,200,000 4,800,000 Residential College - South 1,500,000 1,500,000 Johnson Commons - ID Center 355, ,000 Central Mechanical Plant - Law 500, ,000 Central Mechanical Plant - Res College 400, ,000 Meek Hall 300, ,000 Roofing Projects 1,000,000 1,000,000 Improvements Other Than Buildings Electrical System Upgrade 500, ,000 Data Center - Backup Generation 600, ,000 Backup Generation Facilities 355, ,000 18,000 Golf Course Streets and Parking 490, ,000 Airport Parallel Taxiway 1,440,000 1,400,000 20,000 20,000 Totals $122,703,000 $27,037,000 $28,485,000 $43,386,000 $23,795,000 NOTES TO FINANCIAL STATEMENTS 41

44 NOTE 12 PENSION PLAN Plan Description: The IHL participates in the Public Employees Retirement System of Mississippi (PERS), a costsharing multiple-employer defined benefit pension plan. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by state law and may be amended only by the Mississippi Legislature. PERS issues a publicly available financial report that includes financial statements and required supplementary information which may be obtained by writing to the Public Employees Retirement System, PERS Building, 429 Mississippi Street, Jackson, MS , or by calling (601) or PERS. Funding Policy: PERS members are required to contribute 7.25% of their annual salary, and the institution is required to contribute at an actuarially determined rate. This rate was 10.75% of covered payroll for fiscal year 2006; however, the Mississippi Legislature provided funds to cover approximately 89% of the increase during that year. The rate increased to 11.30% for fiscal year 2007, increased to 11.85% for fiscal years 2008 and 2009, and effective July 1, 2009, the institutional rate increased to 12.00%. The maximum reportable annual earned compensation per employee increased from $150,000 for fiscal years 2007 and 2008 to $230,000 for fiscal year 2009 and increased to $245,000 effective July 1, The contribution requirement of PERS members are established and may be amended only by the Mississippi Legislature. The institutional contributions to PERS for the years ending June 30, 2009, 2008, and 2007, were $11,457,497, $10,920,411, and $9,772,519, respectively, and were equal to the required contributions for each year. PERS also administers an Optional Retirement Plan (ORP) whereby new faculty members may select from three investment companies. ORP contribution rates are identical to the PERS rates. University contributions for the years ending June 30, 2009, 2008, and 2007 were $5,796,790, $5,129,337, and $4,528,309, respectively. NOTE 13 DONOR-RESTRICTED ENDOWMENTS The net appreciation on investments of donor-restricted endowments that is available for expenditure authorization was $2,580,990 at June 30, 2009 and $13,267,841 at June 30, This amount is included on the Statement of Net Assets as follows: Net Assets - Expendable for Scholarships and Fellowships $ 3,873,541 $ 5,529,034 Net Assets - Expendable for Other Purposes (1,292,551) 7,738,807 $ 2,580,990 $ 13,267,841 Vesting Period: In 2007, the Mississippi Legislature amended the PERS Plan to change the vesting period from four to eight years for members who entered the System after July 1, A member who entered the System prior to July 1, 2007 is still subject to the four year vesting period provided that the member does not subsequently refund their account balance. Most endowments operate on the total-return concept as permitted by the Uniform Management of Institutional Funds Act (Sections through , Mississippi Code Annotated, 1972) as enacted in The annual spending rate for these endowments is 5% of the three-year moving average market value. 42 NOTES TO FINANCIAL STATEMENTS

45 NOTE 14 FEDERAL DIRECT LENDING AND FFEL PROGRAMS The University distributed $71,490,838 and $56,707,077 for the years ended June 30, 2009 and 2008, respectively, for student loans through the U.S. Department of Education lending programs. These distributions and their related funding sources are included as Noncapital Financing distributions and receipts in the Cash Flow Statement. NOTE 15 RISK MANAGEMENT Several types of risk are inherent in the operation of an institution of higher learning. The University deals with these risks in several manners. One of these methods is the pooling of resources among institutions. The eight public Mississippi universities have pooled their resources to establish professional and general liability trust funds. Funds have been established for Workers Compensation, Unemployment, and Tort Liability. The Workers Compensation program provides a mechanism for the University to fund and budget for the costs of providing worker compensation benefits to eligible employees. The Program does not pay benefits directly to employees. Funds are set aside in trust, and a thirdparty administrator is utilized to distribute the benefits to eligible employees. University payments to the Workers Compensation fund for the fiscal years ended June 30, 2009 and 2008, was $768,838 and $763,459, respectively. NOTES TO FINANCIAL STATEMENTS The Unemployment Trust Fund operates in the same manner as the Workers Compensation Fund. The Fund does not pay benefits directly to former employees. The Fund reimburses the Mississippi Employment Security Commission for benefits the Commission pays directly to former employees. University payments to the Unemployment Trust Fund for the fiscal years ended June 30, 2009 and 2008, was $42,534 and $20,976, respectively. The Tort Liability Fund was established in accordance with Section of Mississippi State Law. The Mississippi Tort Claims Board authorized the IHL to establish a fund in order to self-insure a certain portion of its liability under the Mississippi Tort Claims Act. Effective July 1, 1993, Mississippi statute permitted tort claims to be filed against public universities. A maximum liability limit of $500,000 per occurrence is currently permissible. During the year ended June 30, 2003, the IHL Board authorized the Tort Fund and subsequently acquired an educator s legal liability policy with a deductible of $1,000,000. The IHL Board designated $1,000,000 of IHL Tort Fund net assets towards any future payment of this deductible. The Tort Claims Pool also purchases a fleet automobile policy. The University was not assessed any payments to the Tort Liability Fund for fiscal years 2009 or The University s payments for the fleet automobile policy and a blanket public official bond for fiscal years 2009 and 2008 were as follows: Fleet Automobile Policy $ 110,945 $ 134,636 Blanket Public Official Bond 2,450 2,450 NOTE 16 FOUNDATIONS AND AFFILIATED PARTIES Five separately incorporated nonprofit organizations are associated with the University. These organizations were formed exclusively for the benefit of the University and serve to promote, encourage, and assist with educational, scientific, literary, research, athletic, facility improvement, and service activities of the University and its affiliates. These organizations include the University of Mississippi Foundation, the UMEBC, the University of Mississippi Athletic Association (UMAA) Foundation, the University of Mississippi Research Foundation, and the University of Mississippi Alumni Association. These affiliated parties are separately audited and, with the exception of the University of 43

46 Mississippi Foundation and UMEBC, have not been included in these financial statements. Additional information regarding the University reporting entity is included in Note One, Summary of Significant Accounting Policies. NOTE 17 CONTINGENT LIABILITIES The University is party to various lawsuits arising out of the normal course of operations. In the opinion of University management, the ultimate resolution of these matters will not have a material adverse impact on the financial position of the University. The University also participates in certain Federal sponsored programs. These programs are subject to financial and compliance audits by the grantors or their representatives. Such audits could lead to requests for reimbursement from the granting agency for expenditures disallowed under the terms of the grant. Management believes disallowances, if any, will not have a material adverse impact on the financial position of the University. NOTE 18 SUBSEQUENT EVENTS Series 2006B-2: All outstanding UMEBC Series 2006B-2 coupons were retired on September 22, This series was an FSA insured variable rate issue. As a result of credit related issues with this insurer the coupons were tendered to Regions Bank, the liquidity provider, on October 8, Because remarketing of the bonds was not successful, an accelerated 60 month amortization schedule with an effective date of October 1, 2009 was scheduled to commence. Luckyday Residential College: Construction of the $25 million Luckyday Residential College facility began July 1, The facility consists of academic, recreational and dining spaces along with traditional dormitory areas that will accommodate 323 students. The project will be funded through private gifts, internal capital funds, and proceeds from UMEBC Series 2009C sold in November 2009 for $14,770,000. Economic Outlook: Higher education has not escaped the financial challenges presented by the current worldwide economic downturn. Public institutions are struggling with cuts in appropriations and the threat of more to come. The University experienced a 5% reduction in fiscal year 2009 state appropriations and an equal reduction in fiscal year In addition to declining state appropriations, the expectation that other revenue streams such as endowment income, private giving, and interest income may decline or not grow at recently experienced rates must be managed. There is also growing concern of inflationary pressures. While the depth and breadth of the current economic weakness is unknown, the university is proactively managing current finances and long range planning. We hold true to the conviction that reassessing our needs, priorities and weaknesses and making appropriate operational adjustments will make us a stronger institution in the long term. 44 NOTES TO FINANCIAL STATEMENTS

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