OLIVET NAZARENE UNIVERSITY BOURBONNAIS, ILLINOIS CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2016

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1 BOURBONNAIS, ILLINOIS CONSOLIDATED FINANCIAL STATEMENTS

2 TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS REPORT... 1 FINANCIAL STATEMENTS Consolidated Statement of Financial Condition... 3 Consolidated Statement of Activities and Changes in Net Assets... 4 Consolidated Statement of Cash Flows... 5 Notes to Financial Statements

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5 CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (with comparative totals for 2015) ASSETS Cash and cash equivalents $ 4,657,681 $ 12,360,130 Accounts receivable, net 5,530,833 3,277,414 Prepaid expense 1,193, ,363 Student loans 3,446,170 3,455,681 Pledges receivable, net 2,946, ,336 Investments 36,428,969 35,951,416 Other assets 2,225,068 2,230,428 Land and buildings, net 183,268, ,816,057 Equipment, net 16,214,976 15,778,738 Construction in process 476,089 3,623,357 Assets held under charitable trusts 10,716,724 11,336,479 TOTAL ASSETS $ 267,105,218 $ 272,478,399 LIABILITIES AND NET ASSETS LIABILITIES Accounts payable $ 1,592,071 $ 2,092,273 Accrued expenses 3,780,774 3,466,904 Deposits and other liabilities 6,229,903 5,821,224 Notes and bonds payable 102,154, ,287,104 Gift annuity obligations 1,539,818 1,561,281 Liability under trust agreements 8,276,453 8,926,647 Advances from Federal government for student loans 3,119,180 3,136,874 Total Liabilities 126,692, ,292,307 NET ASSETS Unrestricted 110,152, ,760,654 Temporarily restricted 9,470,220 11,212,981 Permanently restricted 20,790,024 18,212,457 Total Net Assets 140,412, ,186,092 TOTAL LIABILITIES AND NET ASSETS $ 267,105,218 $ 272,478,399 The accompanying notes are an integral part of the consolidated financial statements. 3

6 CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED (with comparative totals for 2015) Operating Activities: Revenues and Other Support: Unrestricted Net Assets Temporarily Permanently Totals University Foundation Total Restricted Restricted Tuition and fees $ 114,765,829 $ - $ 114,765,829 $ - $ - $ 114,765,829 $ 109,883,393 Less: Scholarships 53,488,823 1,276,941 54,765, ,765,764 50,925,228 Net tuition revenue 61,277,006 (1,276,941) 60,000, ,000,065 58,958,165 Auxiliary enterprises 19,652,519-19,652, ,652,519 20,082,653 Gifts and grants - educational budgets 2,296,939-2,296, ,296,939 2,071,806 Gifts and grants - other 7,461,925 35,127 7,497, ,498 2,579,132 10,644,682 8,433,562 Investment income 86,747 11,422 98, ,292 1, , ,451 Other income 1,095,493-1,095, ,095,493 1,280,672 Government grants 391, , ,629 2,370,930 Transfers between University and Foundation 309,998 (309,998) Net assets released from restrictions 331,140 1,801,474 2,132,614 (2,132,614) Total revenues and other support 92,903, ,084 93,164,480 (964,824) 2,581,071 94,780,727 94,110,239 Expenses Instructional 32,562,243-32,562, ,562,243 30,474,772 Academic support & public service 9,741,890 30,311 9,772, ,772,201 9,716,855 Student services 22,878,249-22,878, ,878,249 22,383,058 Student aid 205, , , ,342 Auxiliary enterprises 13,977,927-13,977, ,977,927 14,217,281 Total program expenses 79,365,727 30,311 79,396, ,396,038 77,052,308 Institutional support 15,014, ,516 15,193, ,193,952 11,886,929 Fundraising 3,163,869-3,163, ,163,869 3,189,361 Total expenses 97,544, ,827 97,753, ,753,859 92,128,598 Change in net assets from operating activities (4,640,636) 51,257 (4,589,379) (964,824) 2,581,071 (2,973,132) 1,981,641 Non-Operating Activities: Net realized & unrealized gains (losses) on investments (3,418) (14,828) (18,246) (777,937) (3,504) (799,687) (182,019) Capital campaign and major gifts ,791 Present value adjustment to annuities payable - (30,886) (30,886) - - (30,886) (18,574) Market/actuarial adjustment to trust liability 59,457 (29,018) 30, ,439 8,151 Change in net assets from non-operating activities 56,039 (74,732) (18,693) (777,937) (3,504) (800,134) (140,651) CHANGE IN NET ASSETS (4,584,597) (23,475) (4,608,072) (1,742,761) 2,577,567 (3,773,266) 1,840,990 NET ASSETS - BEGINNING OF YEAR 114,569, , ,760,654 11,212,981 18,212, ,186, ,345,102 NET ASSETS - END OF YEAR $ 109,984,994 $ 167,588 $ 110,152,582 $ 9,470,220 $ 20,790,024 $ 140,412,826 $ 144,186,092 The accompanying notes are an integral part of the consolidated financial statements. 4

7 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED (with comparative totals for 2015) CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ (3,773,266) $ 1,840,990 Adjustments to reconcile change in net assets to net cash provided by operating activities: Non-cash items included in net assets - Depreciation 6,932,592 6,537,921 Amortization of loan costs 80,703 71,045 Perkins loan adjustment (1,763) 3,282 Net (gain) loss on sale of assets 337, ,961 Net (gain) loss on investments 799, ,455 Present value adjustment to annuities payable 30,886 18,574 Noncash gift of property (833,775) (537,269) Decrease (increase) in net value of charitable remainder trusts (30,439) 21,625 Changes in assets and liabilities - (Increase) decrease in assets: Accounts receivable (2,253,419) 641,419 Pledges receivable (2,005,839) 57,805 Prepaid expense and other assets (485,275) 532,408 Increase (decrease) in liabilities: Accounts payable (500,202) (2,711,722) Accrued expenses and other payables 722,549 (735,382) Contributions restricted for long-term purposes Cash contributions (2,579,132) (828,730) Net Cash Provided by (Used in) Operating Activities (3,559,767) 5,210,382 CASH FLOWS FROM INVESTING ACTIVITIES Collection on student loans 617, ,756 Loans made to students (624,400) (695,600) Proceeds from sale of investments 17,046,074 30,140,661 Purchase of investments (18,323,143) (31,245,417) Purchase of other assets (75,343) - Proceeds from sale of assets 712,184 36,290 Purchase of land, buildings and equipment (3,889,906) (12,454,834) Net Cash Provided by (Used in) Investing Activities (4,536,554) (13,531,144) CASH FLOWS FROM FINANCING ACTIVITIES Contributions restricted for permanent endowment 2,579, ,730 Repayment of long-term debt (2,132,911) (1,979,256) Payments on annuities payable (176,474) (198,229) Increase to annuities payable resulting from new gifts 124,125 48,432 Net Cash Provided by (Used in) Financing Activities 393,872 (1,300,323) NET INCREASE IN CASH & CASH EQUIVALENTS (7,702,449) (9,621,085) CASH & CASH EQUIVALENTS - BEGINNING OF YEAR 12,360,130 21,981,215 CASH & CASH EQUIVALENTS - END OF YEAR $ 4,657,681 $ 12,360,130 SUPPLEMENTAL INFORMATION Interest paid (net of capitalized interest) $ 5,198,663 $ 5,259,333 SUPPLEMENTAL NONCASH INVESTING AND FINANCING TRANSACTIONS Property donated to the University $ 833,775 $ 537,269 Notes issued for new property and equipment $ 1,000,000 $ 1,133,333 The accompanying notes are an integal part of the consolidated financial statements. 5

8 NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The financial statements have been prepared on the accrual basis and include the accounts of Olivet Nazarene University (the "University") and Olivet Nazarene University Foundation (the "Foundation"). The University has caused the Foundation to be formed and operated exclusively for religious, educational, charitable and scientific purposes by promoting and assisting the educational services of the University. All material transactions between the University and the Foundation have been eliminated. Basis of Presentation The University presents its financial statements in accordance with the FASB Accounting Standards Codification topic 958 which requires that resources be classified for accounting and reporting purposes into three net asset categories according to externally (donor) imposed restrictions. This standard also requires unconditional promises to give (pledges) to be recorded as receivables and revenues and requires the University/Foundation to distinguish between contributions received for each net asset category in accordance with donor imposed restrictions. A description of the three net asset categories follows: Unrestricted Net Assets Net assets that are not subject to donor-imposed stipulations. Temporarily Restricted Net Assets Net assets subject to donor-imposed stipulations that may or will be met either by the actions of the University/Foundation and/or the passage of time. Permanently Restricted Net Assets Net assets subject to donor-imposed stipulations that they be maintained permanently by the University/Foundation. Generally, the donors of these assets permit the University/Foundation to use all or part of the income earned on related investments for general or specific purposes. Cash and Cash Equivalents The University maintains its cash and cash equivalents at various banks/investment companies. Accounts at each bank are insured by the Federal Deposit Insurance Corporation up to $250,000. For investment companies, the Security Investor Protection Corporation insures up to $500,000 per client, of which $250,000 may be cash. At certain banks/investment companies, the balance exceeded these limits at times during the year. For purposes of the statement of cash flows, the University considers all unrestricted highly liquid investments with an initial maturity of three months or less to be cash equivalents. 6

9 NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investments Investment return designated for operations is defined as investment income which consists of interest and dividend income. All other investment returns consisting of gains (losses) on investments are categorized as non-operating. Net unrealized gains (losses) on investments for 2016 and 2015 includes unrealized appreciation or depreciation in fair market value and adjustments for realized gains and losses. Realized gains are computed using original amortized cost. Alternative investments are reported at net asset value, as a practical expedient for estimated fair value, as provided by the investment managers of the respective funds. All other investments are stated at fair value. The net realized and unrealized gains (losses) on investments are reflected in the statements of activities. Property and Equipment Property and equipment are stated at cost when purchased or fair value at the date of gift, less accumulated depreciation, computed on a straight-line basis over the estimated useful lives of buildings ( years) and equipment (3-50 years). Maintenance and repairs of property and equipment are charged to expense as incurred. Major renewals and improvements are capitalized. Upon retirement or other disposition of property, the cost and accumulated depreciation is removed from the accounts; any resulting gain or loss is reflected in the year of disposal. Impairment of Long-Lived Assets The University assesses potential impairment to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset s carrying value unlikely. An impairment loss would be recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the asset over the asset s fair value. Student Loans Student loans consist of federal and institutional funds loaned to students. Federal funds are recorded as a liability. In accordance with the Federal Perkins loan agreements, the University contributes a portion of its operating fund to the Federal loan programs. Presently, an allowance for uncollectible amounts is not considered necessary. Accrued Compensation and Fringe Benefits The University's academic personnel are employed under contracts through July. All academic salary payments for July have been accrued as liabilities of the preceding year. Accrued compensated absences for non-academic personnel are also included in accrued expenses. 7

10 NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Gift Annuities The net present value of guaranteed payments to donors under gift annuity contracts is based upon donor life expectancies and a discount rate. The calculated amount is recorded as a liability of the Foundation. The excess of the annuity gift asset received over the recorded liability is recorded as support in the year of receipt. The Foundation annually revalues the gift annuity liability for each donor, based on the change in the donor s life expectancy to determine the present value of the annuity. The resulting change in the liability is recorded as a present value adjustment to gift annuity obligations in the statement of activities. The Foundation is required to comply with the regulations of various State governments. The related departments of insurance impose certain asset retainage restrictions. The Foundation meets or exceeds the reserve requirements for the applicable States. Included in the Gift Annuity Obligation on the financial statements is a liability in the amount of $33,499 for the California annuity. The Foundation has reserves for the State of California in the amount of $75,634. Liability Under Trust Agreements The Foundation is the trustee of charitable remainder trusts in which the University or the Foundation has a future interest. Charitable remainder trusts provide for the payment of distributions to the grantor or other designated beneficiaries over the trust s term (usually the designated beneficiary s lifetime). At the end of the trust s term, the remaining assets are available for their use. The full market value of the trusts assets are included with assets of the University with an offsetting liability (liability under trust agreements) for the net present value of the expected payments to be made to the income beneficiary. On an annual basis, the University revalues the liability based on actuarial assumptions. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. The University s significant accounting estimates include the allowance for pledges receivable and the allowance for student accounts receivable. Comparative Information The financial statements include certain prior year summarized comparative information in total but not by net asset category. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the University's financial statements for the year ended June 30, 2015, from which the summarized financial information was derived. Certain reclassifications have been made to summarized financial information for comparative purposes. 8

11 NOTES TO FINANCIAL STATEMENTS NOTE 2 - ORGANIZATION OF THE UNIVERSITY AND TAX-EXEMPT STATUS The University is incorporated in the State of Illinois and has received a tax determination letter from the Internal Revenue Service stating that it qualifies under the provisions of Section 501(c)(3) of the Internal Revenue Code and is exempt from federal income taxes. The Foundation is incorporated in the State of Illinois to operate exclusively for religious, educational, charitable and scientific purposes by promoting and assisting the educational services of the University with policies and programs consistent with and in harmony with the general ordinances of the Church of the Nazarene as outlined by the Board of Trustees of the University. It is exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code. The existence of the organization may be terminated upon the action of the Board of Trustees of the University or by the action of the General Board of the Church of the Nazarene, in the event that the University shall cease to be an educational institution owned and controlled by said Church of the Nazarene. NOTE 3 - ACCOUNTS RECEIVABLE Accounts receivable consist of the following as of June 30: Student accounts undergraduate $ 706,381 $ 456,672 Student accounts School of Graduate and Continuing Studies 3,146,491 2,512,591 Employee salary advances 27,779 13,346 Other miscellaneous 2,089, ,805 Total 5,969,739 3,677,414 Less allowance for doubtful accounts 438, ,000 Accounts Receivable, Net $ 5,530,833 $ 3,277,414 The allowance for doubtful accounts is estimated based on the University s historical losses and specific identification of slow paying accounts. An analysis of the allowance for doubtful accounts is as follows: Balance - beginning of year $ 400,000 $ 610,000 Provision 160, ,152 Write-off s (406,989) (650,547) Recoveries 285, ,395 Balance end of year $ 438,906 $ 400,000 Tuition and fees consist of the following for the years ended June 30: Traditional students $ 91,911,087 $ 88,777,723 Non-traditional students 22,854,742 21,105,670 Total Tuition and Fees $ 114,765,829 $ 109,883,393

12 NOTES TO FINANCIAL STATEMENTS NOTE 4 - INVESTMENTS Investments were as follows as of June 30: Cost Market Cost Market Equities and mutual funds $ 25,631,286 $ 25,823,618 $ 24,043,522 $ 25,656,138 Bonds U.S. Government 846, , , ,969 Corporate 1,324,656 1,340, , ,653 Assets held by other trustees 8,227,335 8,375,885 7,924,552 8,084,391 Alternative investments 3,646,763 3,600,581 4,037,505 4,469,887 $ 39,676,421 $ 40,013,057 $ 37,623,772 $ 39,820,038 The statements of activities reflect net realized and unrealized gains (losses) on investments. The net realized gains (losses) computed on the cost method are $711,231 in 2016 and $2,805,275 in The above investments as of June 30, 2016 consist of the following: Investments per Statement of Financial Position $ 36,428,969 Investments held under charitable remainder trusts 3,584,088 $ 40,013,057 The University is the beneficiary of trusts created by donors, the assets of which are not in the possession of the University. These funds are included with investments and are identified above as "Assets held by other trustees." Assets held by other trustees also include Reserve Funds for the Industrial Revenue Bond Series 2007, for the Industrial Revenue Bond Series 2010, and for the Industrial Revenue Bond Series The market value of these funds is included in the financial statements. Fair Value Measurements The three levels of the fair value hierarchy are: Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the assets or liability. Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (that is, the inputs are supported by little or no market activity). 10

13 NOTES TO FINANCIAL STATEMENTS NOTE 4 INVESTMENTS (continued) Fair Value Measurements (continued) The fair value as of June 30, 2016 was determined using: Description Market Quoted Market Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Equities and mutual funds $ 25,823,618 $ 25,823,618 $ - $ - Bonds: U.S. Government 872, ,958 - Corporate 1,340,015-1,340,015 - Assets held by other trustees 8,375,885 7,950, ,713 - Alternative investments 3,600, ,600,581 $ 40,013,057 $ 33,773,790 $ 2,638,686 $ 3,600,581 The following table summarizes the changes in the investments classified by the Foundation in Level 3 of the fair value hierarchy: Fair Value 6/30/2015 Purchases Sales Realized Gain (Loss) Unrealized Gain (Loss) Fair Value 6/30/2016 Orion MGD Futures $ 1,721,833 $ - $ (700,470) $ 110,207 $ 30,844 $ 1,162,414 Skybridge-Multi Strat Hedge 2,748, ,518 (363,405) 2,438,167 $ 4,469,887 $ - $ ( ) $ 163,725 $ (332,561) $ 3,600,581 NOTE 5 - PLEDGES RECEIVABLE Pledges receivable consist of the following as of June 30: Receivable $ 2,971,982 $ 1,091,650 Less allowance for uncollectible pledges 25, ,314 Pledges Receivable, Net $ 2,946,175 $ 940,336 Pledges receivable are pledges over $10,000 made in the annual fund drives and in the capital campaign Receivable within one year $ 2,566,289 $ 327,000 Receivable in one to five years 405, ,650 $ 2,971,982 $ 1,091,650 The present value discount for the receivables in one to five years is not significant and has been included in the allowance for uncollectible pledges. 11

14 NOTES TO FINANCIAL STATEMENTS NOTE 6 - GOVERNMENTAL LOAN PROGRAM LOANS TO STUDENTS These funds are subject to employment, disability and death cancellations. Furthermore, the reported amount does not include a provision for unclaimed cancellations or uncollectible loans which is in accordance with the loan program guidelines. Management has not estimated any of these amounts. NOTE 7 - PROPERTY AND EQUIPMENT Property and equipment consists of the following at June 30: Land and buildings $ 237,161,701 $ 233,101,883 Less accumulated depreciation 53,892,806 50,285,826 Land and Buildings, Net $ 183,268,895 $ 182,816,057 Construction in process $ 476,089 $ 3,623,357 Equipment $ 46,612,785 $ 43,255,673 Less accumulated depreciation 30,397,809 27,476,935 Equipment, Net $ 16,214,976 $ 15,778,738 Depreciation expense is as follows: Building $ 3,785,900 $ 3,593,704 Equipment and vehicles 3,146,692 2,944,217 Total $ 6,932,592 $ 6,537,921 NOTE 8 - RETIREMENT PROGRAMS The University has established a retirement program for all eligible full-time employees. The University will contribute 3-10 percent of the employees' regular gross pay (not overtime or other contracted services) to this defined contribution plan based on years of service. Employee participation is voluntary. The University's contribution was $2,085,891 in 2016 and $1,974,300 in

15 NOTES TO FINANCIAL STATEMENTS NOTE 9 - NOTES AND BONDS PAYABLE These obligations were incurred for the financing of the Weber Center, properties on Main Street, the Leslie Parrott Athletic Convocation Center, Campus Life and Recreation Center, Radio Station expansion, infrastructure and other remodeling on campus. The individual balances as of June 30 were as follows: Maturity Interest Rate Armour Road $ 150,172 $ 223, % Stadium Place ,826 1,007, % Villa Brook , , % Charitable Remainder Trust , % Charitable Remainder Trust , % College Church ,133,333 1,133, % Gemini Main , , % Horizon Indianapolis Radio , , % Municipal Trust & Savings , , % Robert Frost School ,000, % Stratford Apartments ,967,788 5,108, % Village of Bourbonnais: Industrial Revenue Bond ,650,000 40,650, % Industrial Revenue Bond ,010,000 33,440, % Industrial Revenue Bond ,000,000 20,000, % Total $ 102,154,193 $ 103,287,104 Each Industrial Revenue Bond (2007, 2010 and 2013) requires a Bond Reserve Fund. At June 30, 2016, the Bond Reserve Funds have a balance of $7,950,172 and are included in assets held by other trustees (see Note 4 Investments). Principal payments due in the next five years on long-term debt are as follows: $ 3,476, ,750, ,009, ,030, ,128,148 Thereafter 89,759,447 Total $ 102,154,193 NOTE 10 - GIFTS AND GRANTS The University records as revenue the gifts and grants available to it when such items are received and released for their intended uses. At June 30, 2016, the University had in its possession, copies of a substantial number of wills with a bequest to Olivet Nazarene University, as well as corporate matching gifts. There has been no recognition of this in the financial statements because it is not practicable to estimate the value of such items due to the impossibility of determining what value will be received as well as when they will be received. 13

16 NOTES TO FINANCIAL STATEMENTS NOTE 11 - OPERATING EXPENSES Operating expenses, by natural classification, for the years ended June 30 were: Salaries and wages $ 39,733,354 $ 37,696,401 Fringe benefits 14,978,187 13,620,372 Advertising 4,293,839 2,381,345 Conventions and meetings 181, ,272 Depreciation expense 6,932,592 6,537,921 Fees for services 2,067,638 2,085,942 Food service 4,279,471 4,174,571 Information Technology 1,963,132 2,336,403 Insurance 1,057,020 1,043,119 Interest 5,239,044 5,295,678 Leases 1,511,897 1,476,825 Maintenance 1,705,982 1,347,149 Occupancy 3,377,912 3,656,328 Printing and postage 1,460,820 1,329,352 Student aid 1,172,294 1,143,169 Supplies 2,598,341 3,029,849 Telephone 84,631 66,205 Travel 1,876,108 1,263,018 Other expenses 3,239,880 3,093,679 Total $ 97,753,859 $ 92,128,598 NOTE 12 - EMPLOYEE BENEFIT TRUST In the year ended June 30, 1983, the University had caused an insurance trust to be formed to provide health and life insurance for the staff and faculty of the University. Monthly, the University funds the insurance trust and has transferred $7,224,008 to the trust accounts during the fiscal year ended June 30, The trust purchases excess health claims reinsurance for claims exceeding $125,000 per person and purchases term life insurance coverage. The University s consolidated financial statements include the assets, liabilities and net assets of the trust. In addition, the trust expenditures, net of employee contributions, investment income and insurance recoveries are reported in the statement of activities. The trust has a net cash balance of $17,778 at June 30, 2016 and had expenditures of $7,599,099 during fiscal year ended June 30,

17 NOTES TO FINANCIAL STATEMENTS NOTE 13 - CHARITABLE REMAINDER TRUSTS Totals for charitable remainder trusts are as follows as of June 30: Assets held under charitable remainder trusts $ 10,716,724 $ 11,336,479 Liability under trust agreements $ 8,276,453 $ 8,926,647 NOTE 14 - ENDOWMENT FUNDS The Foundation s endowment consists of approximately 400 individual funds established for a variety of purposes. Its endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. As required by Generally Accepted Accounting Principles (GAAP), net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of Relevant Law The Foundation has interpreted The Uniform Prudent Management of Institutional Funds Act (UPMIFA) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Foundation classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Foundation in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Foundation considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1) The duration and preservation of the fund 2) The purposes of the organization and the donor-restricted endowment fund 3) General economic conditions 4) The possible effect of inflation and deflation 5) The expected total return from income and the appreciation of investments 6) Other resources of the organization 7) The investment policies of the organization 15

18 NOTES TO FINANCIAL STATEMENTS NOTE 14 - ENDOWMENT FUNDS (continued) Changes in the Foundation s Endowment Net Assets for the Fiscal Year Ended June 30, 2016: Temporarily Restricted Permanently Restricted Unrestricted Total Endowment net assets, beginning of year $ 191,063 $ 10,023,501 $ 18,212,457 $ 28,427,021 Investment return: Investment income 11, ,257 1, ,618 Net realized appreciation 13, ,307 2, ,810 Net unrealized depreciation (28,082) (1,473,244) (5,753) (1,507,079) Total investment return (3,406) (178,680) (1,565) (183,651) Contributions 35, ,506 2,579,132 3,105,765 Release of donor restriction 1,801,474 (1,801,474) - - Expenditures of endowment assets (1,856,670) - - (1,856,670) Endowment net assets, end of year $ 167,588 $ 8,534,853 $ 20,790,024 $ 29,492,465 Permanently Restricted Net Assets and Temporarily Restricted Net Assets of the Foundation s endowments consist of the following as of June 30, 2016: Permanently Restricted Net Assets (1) The portion of perpetual endowment funds that is required to be retained permanently either by explicit donor stipulation or by UPMIFA $ 20,790,024 Total endowment funds classified as permanently restricted net assets $ 20,790,024 Temporarily Restricted Net Assets (1) Term endowment funds $ 4,616,084 (2) The portion of perpetual endowment funds subject to a time restriction under UPMIFA: Without purpose restrictions - With purpose restrictions 3,918,769 Total endowment funds classified as temporarily restricted net assets $ 8,534,853 16

19 NOTES TO FINANCIAL STATEMENTS NOTE 14 - ENDOWMENT FUNDS (continued) Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the Foundation to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature that are reported in unrestricted net assets were $54,817 as of June 30, These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions and continued appropriation for certain programs that was deemed prudent by the Foundation. Return Objectives and Risk Parameters The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the organization must hold in perpetuity or for a donorspecified period as well as board-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to have growth equal to or greater than the spending rate, plus inflation, plus the cost of management over a reasonable time period of three to five years. The Foundation expects its endowment funds, over time, to provide an average rate of return of approximately 10 percent annually. Actual returns in any given year may vary from this amount. Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, the Foundation relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Foundation targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Spending Policy and How the Investment Objectives Relate to Spending Policy The Foundation has a policy of appropriating for distribution each year 5 percent of its endowment fund s average fair value over the prior 3 years through the fiscal year-end preceding the fiscal year in which the distribution is planned. In establishing this policy, the Foundation considered the long-term expected return on its endowment. Accordingly, over the long term, the Foundation expects the current spending policy to allow its endowment to grow at an average of 5 percent annually. This is consistent with the Foundation s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return. For the current fiscal year, the payout rate was 5 percent (4% for those funds whose year end value is more than 5% below the permanently restricted corpus value). For the fiscal year, the Board of Directors approved a target payout of $1,638,

20 NOTES TO FINANCIAL STATEMENTS NOTE 15 - TEMPORARILY AND PERMANENTLY RESTRICTED NET ASSETS Temporarily and permanently restricted net assets consisted of the following as of June 30: Temporarily restricted: Student Aid (Foundation) $ 8,534,853 $ 10,023,501 Miscellaneous restricted operating 935,367 1,189,480 Total temporarily restricted funds $ 9,470,220 $ 11,212,981 Permanently restricted: Endowed funds scholarships and others $ 20,790,024 $ 18,212,457 Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors. The amounts released during the years ended June 30 are as follows: Purpose Student Aid (Foundation) $ 1,801,474 $ 1,145,020 Miscellaneous restricted operating 331,140 3,812,485 Total $ 2,132,614 $ 4,957,505 NOTE 16 - CONTINGENCIES Certain federally funded financial aid programs are routinely subject to special audit. The reports on the examinations, which are conducted pursuant to specific regulatory requirements by the auditors for the University, are required to be submitted to both the University and the U.S. Department of Education. Such agency has the authority to determine liabilities as well as to limit, suspend or terminate Federal student aid programs. NOTE 17 OPERATING LEASES The University has several operating leases for various equipment, vehicles, and office space. Annual payments are approximately $1,512,000. Minimum future lease payments required under the operating lease agreements as of June 30, 2016 were as follows: $ 1,649, ,348, ,323, ,291, ,080,454 Thereafter 956,684 Total $ 7,650,424 18

21 NOTES TO FINANCIAL STATEMENTS NOTE 18 - SUBSEQUENT EVENTS The University has evaluated its June 30, 2016 financial statements for subsequent events through September 27, 2016, the date the financial statements were available to be issued. The University is not aware of any subsequent events that would require recognition or disclosure in the financial statements. 19

22 BOURBONNAIS, ILLINOIS UNIFORM GUIDANCE REPORT

23 TABLE OF CONTENTS PAGE FINANCIAL STATEMENT REPORT (Has been issued under a separate cover) INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS... 1 INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE... 3 Schedule of Findings and Questioned Costs... 6 Schedule of Expenditures of Federal Awards... 8 Notes to Schedule of Expenditures of Federal Awards... 9 Summary Schedule of Prior Audit Findings... 10

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27 requirement in accordance with the Student Financial Assistance Cluster: Federal Direct Student Loan and Federal Family Education Loan programs as described in the Compliance Supplement. Those requirements govern functions performed by Xerox Education Services, LLC, dba ACS Education Services, Inc. (ACS) and National Student Clearinghouse (NSC). Since we did not apply auditing procedures to satisfy ourselves as to compliance with those requirements, the scope of the work was not sufficient to enable us to express, and we do not express, an opinion on compliance with those requirements. ACS s compliance with the requirements governing the functions that it performs for Olivet Nazarene University for the year ended June 30, 2016 was examined by the accountants for the servicer in accordance with the U.S. Department of Education s Audit Guide, Audits of Federal Student Assistance Programs at Participating Institutions and Institution Servicers. NSC s compliance with the requirements governing the functions that it performs for Olivet Nazarene University for the year ended June 30, 2016 was examined by the accountants for the servicer in accordance with U.S. Department of Education s Audit Guide, Audits of Federal Student Assistance Programs at Participating Institutions and Institution Servicers. Our report does not include the results of the accountants for the servicer examinations of ACS s and NSC s compliance with such requirements. Opinion on Each Major Federal Program In our opinion, Olivet Nazarene University complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, Other Matters The results of our auditing procedures disclosed instances of noncompliance, which are required to be reported in accordance with the Uniform Guidance and which are described in the accompanying schedule of findings and questioned costs as item Our opinion on each major federal program is not modified with respect to this matter. Olivet Nazarene University's response to the noncompliance finding identified in our audit is described in the accompanying schedule of findings and questioned costs. Olivet Nazarene University's response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control over Compliance Management of Olivet Nazarene University is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered Olivet Nazarene University's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of Olivet Nazarene University's internal control over compliance. Requirements governing student loan repayments special tests and provisions compliance requirement of the Student Financial Assistance Cluster: Federal Perkins Loan program as described in the Compliance Supplement are performed by ACS. Requirements governing the enrollment reporting special tests and provisions compliance requirement of the Student Financial Assistance Cluster: Federal Direct Student Loan and Federal Family Education Loan programs as described in the Compliance Supplement are performed by NSC. Internal control over compliance related to such functions for the year ended June 30, 2016 was reported on by accountants for the servicers in accordance with the U.S. Department of Education s Audit Guide, Audits of Federal Student Assistance Programs at Participating Institutions and Institution 4

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29 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED I. SUMMARY OF AUDITORS RESULTS Financial Statements Type of auditors report issued: unmodified Internal control over financial reporting: Material weakness(es) identified? yes x no Significant deficiency(ies) identified that are not considered to be material weakness(es)? yes x none reported Noncompliance material to financial statements noted? yes x no Federal Awards Internal control over major programs: Material weakness(es) identified? yes x no Significant deficiency(ies) identified that are not considered to be material weakness(es)? x yes none reported Type of auditors report issued on compliance for major programs: unmodified Any audit findings disclosed that are required to be reported in accordance with section 510(a) of Uniform Guidance 2CFR ? x yes no Identification of major programs: U.S. Department of Education CFDA No. Student Financial Assistance Program Cluster Federal Perkins Loan Program Federal Work Study Program Federal Supplemental Educational Opportunity Grants Federal Pell Grant Program Federal Direct Student Loans Teacher Education Assistance for College and Higher Education Grants Dollar threshold used to distinguish between type A and type B programs: $ 750,000 Auditee qualified as low-risk auditee? x yes no II. FINANCIAL STATEMENTS FINDINGS None III. FEDERAL AWARD FINDINGS AND QUESTIONED COSTS See Finding

30 SCHEDULE OF FINDINGS AND QUESTIONED COSTS FEDERAL AWARD FINDING Finding Return of Title IV Funds not Returned Timely Federal Department: U.S. Department of Education CFDA Numbers: ; ; ; ; ; Program Name: Student Financial Assistance Program Cluster Questioned Cost: None known Olivet Nazarene University (University) did not timely return funds to the Department of Education (ED) for amounts calculated on the return of Title IV (R2T4) calculation. Our review of 40 students who withdrew from the University revealed the following (the sampling method was not statistically valid): 1 of the 40 students (3%) who had returns due to ED by the University were not returned timely. These funds were returned 76 days after the date of determination (31 days late). The Code of Federal Regulations states: (34 CFR (j)(1)) the University must return the amount of Title IV funds no later than 45 days after the date of determination. University officials stated the issue related to a professor inadvertently recording the student as present, even though the student had stopped attending without notifying the University of the intent to withdraw. When the grades for the course were processed, the failing grade was challenged by the student, and the Financial Aid Staff found that the faculty member had made the mistake. By the time this happened, it was a late calculation. There were no calculation errors and no questioned cost, but it was past the 45-day window for completing the calculation. Failure to return funds to ED on a timely basis may jeopardize future federal funding. Recommendation We recommend that the University improve procedures to ensure that funds are returned in a timely manner. University Response The University agrees with the finding. The University understands the importance of timely R2T4 calculations and will remind the faculty of the importance of accurate attendance notations. 7

31 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Federal Grantor/ Federal Pass-Through Grantor/ CFDA Disbursement/ Program Title Number Expenditure Student Financial Assistance Programs Cluster Department of Education Federal Perkins Loan Program ,137,161 Federal Work-Study Program ,189 Federal Supplemental Educational Opportunity Grant Program ,940 Federal Pell Grant Program ,434,059 Federal Direct Student Loans ,679,387 Teacher Education Assistance for College and Higher Education Grants ,462 Total Student Financial Assistance Programs Cluster 43,598,198 Total Expenditures of Federal Awards $ 43,598,198 See accompanying notes to this schedule. 8

32 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS NOTE A BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards (the Schedule ) includes the federal award activity of Olivet Nazarene University under programs of the federal government for the year ended June 30, The information in this Schedule is presented in accordance with information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a portion of the operations of Olivet Nazarene University, it is not intended to and does not present the financial position, changes in net assets, or cash flows of Olivet Nazarene University. NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Expenditures reported on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Olivet Nazarene University has elected not to use the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance. NOTE C FEDERAL STUDENT LOAN PROGRAMS The federal student loan program listed subsequently is administered directly by Olivet Nazarene University, and balances and transactions relating to these programs are included in Olivet Nazarene University s basic financial statements. Loans outstanding at the beginning of the year, the administrative cost allowance, and loans made during the year are included in the federal expenditures presented in the Schedule. The balance of loans outstanding at June 30, 2016 consists of: CFDA Number Program Name Outstanding Balance at June 30, Federal Perkins Loan $3,446,170 9

33 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS Finding Exit Counseling Federal Department: U.S. Department of Education CFDA Numbers: Program Name: Federal Direct Student Loans Questioned Cost: None Condition: Olivet Nazarene University (University) did not provide exit counseling for one student that left the University. Recommendation: We recommend that the University conduct exit counseling for all students who received student loans and exit the University. Current Status: Our sample testing of exit counseling did not reveal any exceptions relating to counseling not being performed for students who received loans and exited the University. 10

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