UNIVERSITY OF PORTLAND. INDEPENDENT AUDITOR S REPORT AND FINANCIAL STATEMENTS (with supplemental information)

Transcription

1 INDEPENDENT AUDITOR S REPORT AND FINANCIAL STATEMENTS (with supplemental information) MAY 31, 2008 AND 2007

2 CONTENTS PAGE INDEPENDENT AUDITOR S REPORT 1 FINANCIAL STATEMENTS Statements of financial position 2 3 Statement of activities May 31, Statement of activities May 31, Statements of cash flows 8 9 Notes to financial statements INDEPENDENT AUDITOR S 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 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A SCHEDULE OF FINDINGS AND QUESTIONED COSTS SUPPLEMENTAL INFORMATION Schedule of expenditures of federal awards Notes to schedule of expenditures of federal awards 32

3 INDEPENDENT AUDITOR S REPORT To the Board of Regents University of Portland We have audited the accompanying statements of financial position of the University of Portland (a not-for-profit institution) as of May 31, 2008 and 2007, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the University of Portland s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Portland as of May 31, 2008 and 2007, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated September 17, 2008, on our consideration of the University of Portland s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. Portland, Oregon September 17,

4 STATEMENTS OF FINANCIAL POSITION ASSETS May 31, (dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 8,029 $ 8,156 Accounts and interest receivable, net of allowance for uncollectible accounts of $ 62,000 at May 31, 2008 and ,236 1,013 Investments deposited in bond sinking funds 6,134 4,916 Prepaid expenses and other Pledges receivable, net 2,645 2,643 Student accounts and loans receivable, net Total current assets 18,861 17,944 LONG-TERM RECEIVABLES Pledges receivable, net 12,057 10,917 Student loans receivable, net 4,612 4,482 Total long-term receivables 16,669 15,399 LONG-TERM INVESTMENTS 158, ,202 PROPERTY, PLANT, AND EQUIPMENT, net 115, ,918 OTHER LONG-TERM ASSETS 2,502 1,150 TOTAL ASSETS $ 311,998 $ 257,613 2

5 STATEMENTS OF FINANCIAL POSITION LIABILITIES AND NET ASSETS May 31, (dollars in thousands) CURRENT LIABILITIES Accounts payable and accrued liabilities $ 8,295 $ 6,111 Deferred revenues and deposits 3,177 2,617 Current portion of bonds payable 1,996 1,880 Total current liabilities 13,468 10,608 OTHER LIABILITIES Advances from federal government for student loans 3,509 3,536 Annuities payable 6,580 6,678 Bonds payable, net of current portion 83,053 32,915 Total other liabilities 93,142 43,129 Total liabilities 106,610 53,737 NET ASSETS Unrestricted: Designated for current operations 36,778 38,679 Designated for other specific purposes 24,276 26,515 Invested in property, plant, and equipment 72,056 70,351 Total unrestricted 133, ,545 Temporarily restricted 16,812 15,855 Permanently restricted 55,466 52,476 Total net assets 205, ,876 TOTAL LIABILITIES AND NET ASSETS $ 311,998 $ 257,613 See accompanying notes. 3

6 STATEMENT OF ACTIVITIES YEAR ENDED MAY 31, 2008 Temporarily Permanently Unrestricted Restricted Restricted Total (dollars in thousands) OPERATING ACTIVITIES Revenues and gains Student charges: Regular degree programs $ 89,023 $ - $ - $ 89,023 Less scholarships (38,732) - - (38,732) Net regular degree programs 50, ,291 Room and board 12, ,685 Off-campus programs 4, ,587 Government grants 1, ,613 Grants and contracts 1, ,020 Gifts and contributions 3, ,300 Investment return on endowment, distributed 4, ,495 Other investment income 1, ,232 Other revenues and support 3, ,414 Total revenues and gains 82, ,637 Net assets released from restrictions 4,218 (4,218) - - Total revenues, gains, and other support 86,687 (4,206) ,637 Expenses Instruction 29, ,269 Off-campus programs 3, ,195 Research 1, ,466 Libraries and instruction media 2, ,787 Student services 7, ,583 General institutional expense 18, ,685 Auxiliary enterprises 18, ,518 Total operating expenses 81,503 81,503 Increase (decrease) in net assets from operating activities 5,184 (4,206) 156 1,134 4

7 STATEMENT OF ACTIVITIES YEAR ENDED MAY 31, 2008 Temporarily Permanently Unrestricted Restricted Restricted Total (dollars in thousands) NONOPERATING ACTIVITIES Endowment losses, net of amounts distributed $ (6,961) $ - $ - $ (6,961) Change in value of split interest agreements (151) (221) (372) Capital gifts 854 4,770 3,598 9,222 Other (1,512) 544 (543) (1,511) Increase (decrease) in net assets from nonoperating activities (7,619) 5,163 2, INCREASE ( DECREASE ) IN NET ASSETS (2,435) 957 2,990 1,512 NET ASSETS, beginning of year 135,545 15,855 52, ,876 NET ASSETS, end of year $ 133,110 $ 16,812 $ 55,466 $ 205,388 See accompanying notes. 5

8 STATEMENT OF ACTIVITIES YEAR ENDED MAY 31, 2007 Temporarily Permanently Unrestricted Restricted Restricted Total (dollars in thousands) OPERATING ACTIVITIES Revenues and gains Student charges: Regular degree programs $ 80,944 $ - $ - $ 80,944 Less scholarships (33,976) - - (33,976) Net regular degree programs 46, ,968 Room and board 11, ,513 Off-campus programs 3, ,992 Government grants 1, ,744 Grants and contracts Gifts and contributions 2, ,604 Investment return on endowment, distributed 4, ,254 Other investment income ,803 Other revenues and support 3, ,044 Total revenues and gains 75, ,905 Net assets released from restrictions 980 (980) - - Total revenues, gains, and other support 76,741 (804) ,905 Expenses Instruction 26, ,781 Off-campus programs 2, ,820 Research 1, ,683 Libraries and instruction media 2, ,680 Student services 6, ,892 General institutional expense 15, ,349 Auxiliary enterprises 16, ,036 Total operating expenses 72, ,241 Increase (decrease) in net assets from operating activities 4,500 (804) 968 4,664 6

9 STATEMENT OF ACTIVITIES YEAR ENDED MAY 31, 2007 Temporarily Permanently Unrestricted Restricted Restricted Total (dollars in thousands) NONOPERATING ACTIVITIES Endowment gains, net of amounts distributed $ 11,948 $ - $ - $ 11,948 Change in value of split interest agreements Capital gifts 355 9,396 3,259 13,010 Other (58) - (2,343) (2,401) Increase in net assets from nonoperating activities 12,245 9,406 1,211 22,862 INCREASE IN NET ASSETS 16,745 8,602 2,179 27,526 NET ASSETS, beginning of year 118,800 7,253 50, ,350 NET ASSETS, end of year $ 135,545 $ 15,855 $ 52,476 $ 203,876 See accompanying notes. 7

10 STATEMENTS OF CASH FLOWS Years Ended May 31, (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Increase in net assets $ 1,512 $ 27,526 Adjustments to reconcile increase in net assets to net cash from operating activities: Depreciation 4,617 4,378 Provision for doubtful pledges receivable (594) 2,371 Increase (decrease) in pledges receivable discount 424 1,706 Contributions restricted for long-term investment (7,323) (5,883) Contributions subject to annuity and unitrust agreements (295) (990) Change in value of assets held in charitable trusts 372 (305) Net unrealized and realized gains (losses) on investments 2,338 (17,363) Increase (decrease) in cash due to changes in assets and liabilities: Accounts, interest, student accounts and loans receivable 77 (415) Prepaid expenses and other (31) 141 Pledges receivable (972) (7,606) Other long-term assets (1,352) (73) Accounts payable, accrued liabilities, deferred revenues, and deposits 2, Annuities payable (98) 1,345 Net cash from operating activities 1,419 4,862 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments (252,018) (112,824) Proceeds from sale of investments 206, ,235 Purchases of property, plant, and equipment (13,926) (7,253) Net cash used in investing activities (59,759) (7,842) 8

11 STATEMENTS OF CASH FLOWS Years Ended May 31, (dollars in thousands) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from contributions restricted for: Investment in endowment $ 4,586 $ 3,003 Investment in plant 2,737 2,880 Investment subject to annuity and unitrust agreements Increase in advances from federal government for student loans (27) (10) Proceeds (payments) on bonds payable 50,254 (1,795) Net cash from financing activities 57,845 5,068 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (495) 2,088 CASH AND CASH EQUIVALENTS, beginning of year 8,156 6,068 CASH AND CASH EQUIVALENTS, end of year $ 7,661 $ 8,156 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest $ 2,604 $ 2,142 See accompanying notes. 9

12 NOTES TO FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization The University of Portland (the University) is a private institution of higher education accredited by the Northwest Commission on Colleges and Universities (NWCCU). The University offers students a number of graduate and undergraduate degrees in programs covering a wide variety of scholastic disciplines. The University is a not-for-profit organization funded by student tuition revenue as well as outside contributions. Basis of presentation These financial statements, which are presented on the accrual basis of accounting, have been prepared to focus on the University as a whole and to present transactions according to the existence or absence of donor-imposed restrictions. This has been accomplished by classification of net asset balances and transactions into three classes of net assets unrestricted, temporarily restricted, and permanently restricted net assets. Unrestricted net assets Net assets not subject to donor-imposed stipulations. Temporarily restricted net assets Net assets subject to donor-imposed stipulations that may or will be met by actions of the University and/or the passage of time. Permanently restricted net assets Net assets subject to donor-imposed stipulations that require they be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income earned on related investments for general or specific purposes. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Expirations of temporary restrictions on net assets (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as reclassifications between the applicable classes of net assets. Contributions and promises to give Contributions, including unconditional promises to give, are recognized as revenues in the period in which the unconditional promise is received. Contributions received with restrictions that are met within the same reporting period are classified as unrestricted revenues. Conditional promises to give are not recognized until they become unconditional; that is, when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value. Contributions to be received after one year are discounted at an appropriate discount rate commensurate with the risks involved. Amortization of the discount is recorded as additional contribution revenue. An allowance for uncollectible contributions receivable is provided based upon management s judgment including such factors as prior collection history, type of contribution, and nature of the fund-raising activity. 10

13 NOTES TO FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Contributed services are reported when specialized services are performed, or would otherwise be purchased or performed by salaried personnel, and when the University exercises control over the duties of the donor s services. These services totaling approximately $503,000 and $509,000 at May 31, 2008 and 2007, respectively, have been recorded as gifts and contributions revenue and instruction expense on the accompanying statements of activities. Income and realized and unrealized net gains on investments of endowment and similar funds are reported as follows: As increases in permanently restricted net assets if the terms of the gift require that they be added to the principal of a permanent endowment fund As increases in temporarily restricted net assets if the terms of the gift impose restrictions on the use of the income As increases in unrestricted net assets in all other cases Gifts contributed for the purchase of property, plant, and equipment are reported as temporarily restricted and are released when spent. Cash and cash equivalents Cash and cash equivalents consist primarily of demand deposits, certificates of deposit, and U.S. government securities with original maturity dates of 90 days or less. Use of estimates The preparation of these financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. Assets held in charitable trusts The University serves as the trustee for various charitable trusts. Under the terms of these trust agreements, the University makes distributions to income beneficiaries for a given term or for the life of the beneficiaries. Assets remaining in the trust will be transferred to the University at the end of the term or upon death of the beneficiaries. The University classifies the assets held in charitable trusts as investments, which are recorded at their fair value. The related liability is recorded at the estimated discounted value of the amounts due to the income beneficiaries. Investments Investments in marketable securities consist primarily of corporate stocks, bonds, and government obligations which are valued at fair value as determined by quoted market prices. The net realized and unrealized appreciation (depreciation) in fair value of investments is reflected in the statements of activities as investment return on endowment. Investments received by gift are recorded at fair value at the date of contribution. 11

14 NOTES TO FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair values of certain private equity and real estate investments held through limited partnerships or commingled funds are estimated by the respective external investment managers if market values are not readily ascertainable. These valuations necessarily involve assumptions and methods that are reviewed by the University s Investment Committee. The University believes the carrying amount of these financial instruments is a reasonable estimate of fair value. Because alternative investments are not readily marketable, their estimated value is subject to uncertainty and therefore may differ from the value that would have been used had a ready market for such investments existed. Such differences could be material. Receivables Accounts receivable represent amounts due from various organizations and are recorded at the invoiced amount. Student accounts and loans receivable are recorded at the invoiced amount. Student account receivables do not bear interest. Loans receivable include amounts currently receivable (see Note 3). The allowance for doubtful accounts for all receivables represents the University s best estimate of the amount of probable credit losses in the University s existing accounts receivable and student loans receivable. The University determines the allowance by performing on-going evaluations of its creditors and students, and their ability to make payments. The University determines the adequacy of the allowance based on length of time past due, historical experience, and judgment of economic conditions. Account and loan balances are charged off against the allowance after all means of collection have been exhausted and potential recovery is considered remote. Property, plant, and equipment Property, plant, and equipment are recorded at cost on the date of acquisition or fair value at the date of donation in the case of gifts. The University computes depreciation using the straight-line method over the estimated useful lives of fixed assets as follows: Land improvements Buildings Library holdings Real estate holdings Furniture, fixtures, and equipment Computer equipment 60 years 60 years 20 years 20 years 10 years 5 years Additions and betterments of $5,000 or more are capitalized except for furniture and fixtures, data handling equipment, and library acquisitions which are capitalized at any value. Repairs and maintenance that do not extend the useful lives of the respective assets are expensed currently. Deferred revenues and deposits Deferred revenues and deposits consist primarily of tuition fees and housing deposits related to future academic periods. 12

15 NOTES TO FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair value of financial instruments At May 31, 2008 and 2007, the carrying values of cash, accounts and notes receivable, accounts payable, and accrued liabilities approximate fair value due to the short-term nature of these instruments. Income taxes The University is a tax-exempt organization and is not subject to federal or state income taxes, except for unrelated business income, in accordance with Section 501(c)(3) of the Internal Revenue Code. In addition, the University qualified for the charitable contribution deduction under Section 170(b)(1)(A) and has been classified as an organization that is not a private foundation under Section 509(a)(2). Unrelated business income tax, if any, is insignificant and no tax provision has been made in the accompanying financial statements. The University adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on June 1, The University had no unrecognized tax benefits which would require an adjustment to the June 1, 2007 beginning balance of net assets. The University had no unrecognized tax benefits at June 1, 2007 and at May 31, The University recognizes interest accrued and penalties related to unrecognized tax benefits in administrative expense. During the years ended May 31, 2008 and 2007 the University recognized no interest and penalties. The University files an exempt organization income tax return, and an unrelated business income tax return in the U.S. federal jurisdiction and a copy with the state charities division. The appropriate state returns are also filed for any unrelated business income. With few exceptions, the University is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before Reclassifications Certain reclassifications have been made to the 2007 financial statements to conform to current year presentations. These reclassifications do not impact the change in net assets. 13

16 NOTES TO FINANCIAL STATEMENTS NOTE 2 PLEDGES RECEIVABLE The University calculates pledges receivable at the present value of estimated future cash flows using a 6% discount rate. The annual payments are scheduled to be received as follows (in thousands): Less than one year $ 2,945 $ 2,908 One to five years 8,773 7,846 More than five years 12,133 10,937 23,851 21,691 Less discount (7,883) (7,459) Less reserve for uncollectible accounts (1,266) (672) Pledges receivable, net $ 14,702 $ 13,560 Pledges due from 3 donors represent 88% of pledges receivable outstanding at May 31, NOTE 3 STUDENT LOANS RECEIVABLE Student loans receivable represents primarily Federal Perkins and Nursing Student loans that are generally payable with interest at 3% and 5% over approximately 11 years following university attendance. Principal payments, interest, and losses due to cancellation are shared by the University and the U.S. government in proportion to their share of funds provided. The program provides for cancellation of loans if the student is employed in certain occupations following graduation (employment cancellations). Employment cancellations are absorbed in full by the U.S. government. Student loans are considered past due if payment is not received by the 15th day of the month. After 60 days, the loan is sent to a collection agency. As of May 31, 2008 and 2007, Perkins loans receivable totaled approximately $4,140,000 and $3,963,000, respectively. As of May 31, 2008 and 2007, nursing loans receivable totaled approximately $510,000 and $545,000, respectively. 14

17 NOTES TO FINANCIAL STATEMENTS NOTE 4 INVESTMENTS The fair value of investments is as follows (in thousands): Money market funds $ 3,694 $ 13,250 Equity holdings 79,828 78,842 U.S. government securities 57,229 9,547 Alternative Investments 20,245 13,842 Bonds and notes 3,532 6,255 Cash surrender value of life insurance $ 164,873 $ 122,118 The following schedule summarizes the investment return and its presentation in the statements of activities (in thousands): Dividends and interest $ 1,104 $ 642 Net realized and unrealized gains ( losses) (2,338) 17,363 Total return on investments $ (1,234) $ 18,005 The University follows a spending rule for its endowment funds, including funds functioning as endowment, which provides for regular increases in spending, while preserving the long-term purchasing power of the endowment. Earnings available for spending are shown in operating income, and the balance as nonoperating income. The University may employ derivatives and other strategies to hedge against market risks, arbitrage mispricings of related securities, and to replicate long or short positions more cost effectively. Accordingly, derivatives in the investment portfolio may include currency forward contracts, interest rate and currency swaps, call and put options, debt and equity futures contracts, equity swaps and other vehicles that may be appropriate in certain circumstances. The University did not directly hold any derivative securities as detailed above, but held shares of commingled investment vehicles, such as hedge fund of funds, which held such investments. Derivatives held by limited partnerships and commingled investment trusts in which the University invests, involve varying degrees of off-balance sheet risk, and may result in loss due to changes in the market. 15

18 NOTES TO FINANCIAL STATEMENTS NOTE 5 PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consist of the following (in thousands): Land and improvements $ 6,644 $ 6,376 Buildings 106, ,209 Furniture, fixtures, and equipment 35,889 33,663 Library holdings 15,047 14,408 Rental properties 7,062 6, , ,647 Less accumulated depreciation (65,038) (60,425) 106, ,222 Construction in progress 8,663 1,696 Property, plant, and equipment, net $ 115,227 $ 105,918 Depreciation expense totaled approximately $4,617,000 and $4,378,000 at May 31, 2008 and 2007, respectively. NOTE 6 COMMITMENTS The University leases certain office equipment under an operating lease agreement. Future minimum payments under this lease are as follows (in thousands): Years ending May 31, 2009 $ $ 969 The University incurred operating lease expenses of approximately $277,000 and $266,000 for the years ended May 31, 2008 and 2007 respectively. NOTE 7 NOTE PAYABLE TO BANK The University has an annually renewable line of credit on which it can borrow up to a maximum of $10,000,000. The line of credit is payable on demand, or on October 31, 2008, if no demand, and bears interest at either the bank s prime rate or at LIBOR plus 1.5% at the time of borrowing. There was no outstanding balance on the line of credit as of May 31, 2008 or

19 NOTES TO FINANCIAL STATEMENTS NOTE 8 BONDS PAYABLE In 2008, the University issued the University of Portland Projects 2007 Series A bonds for $86,570,000. A portion of the proceeds were used to payoff the 1997 series bonds and to defease legally and in substance the 2000 series bonds. The remaining proceeds will be used for various building improvement and expansion projects. Bonds payable consist of the following (in thousands): Bonds payable, 2007 series, in annual principal installments of between $1,675 and $5,275, interest payable semiannually at 4.25% to 5.50%, secured by real property and revenues, due 2030 $ 85,049 $ - Bonds payable, 2000 series, in annual principal installments of between $410 and $1,250, interest payable semiannually at 4.75% to 6.00%, secured by real property and revenues, due 2025, - 14,415 legally defeased in 2008 Bonds payable, 1997 series, in annual principal installments of between $1,025 and $2,340, interest payable semiannually at 3.90% to 5.75%, secured by real property and revenues, due 2018, - 20,380 redeemed in 2008 Total bonds payable $ 85,049 $ 34,795 The following is a summary of scheduled maturities of bonds payable (in thousands): Years ending May 31, 2009 $ 1, , , ,276 Thereafter 76,528 $ 85,049 The fair value of the University s debt obligations is approximately $83,700,000 and $35,800,000 at May 31, 2008 and 2007, respectively. 17

20 NOTES TO FINANCIAL STATEMENTS NOTE 8 BONDS PAYABLE (continued) The University is required to maintain deposits in bond sinking funds in accordance with terms of the bond indentures. These deposits, which are included in investments, were approximately $6,134,000 and $4,916,000 at May 31, 2008 and 2007, respectively, and are held in a reserve account with the Bank of New York. Interest expense for the years ended May 31, 2008 and 2007, was approximately $2,973,000 and $2,113,000, respectively. NOTE 9 PENSION PLAN The University has a defined contribution retirement plan covering substantially all employees under arrangements with Teachers Insurance and Annuity Association (TIAA), the College Retirement Equities Fund (CREF), and Scudder 403(b) plans. Retirement plan expense was approximately $2,829,000 and $2,528,000 for the years ended May 31, 2008 and 2007, respectively. NOTE 10 NET ASSETS RELEASED FROM RESTRICTIONS During 2008 and 2007, net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors, as follows: Capital projects $ 4,218 $ 980 NOTE 11 TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets are restricted for the following purposes (in thousands): Investments restricted for payments to annuity and trust beneficiaries $ 1,271 $ 1,285 Gifts and bequests restricted for investment in land, buildings, and equipment 15,541 14,570 Total temporarily restricted net assets $ 16,812 $ 15,855 18

21 NOTES TO FINANCIAL STATEMENTS NOTE 12 PERMANENTLY RESTRICTED NET ASSETS Permanently restricted net assets consist of the following (in thousands): Endowment funds $ 46,683 $ 42,897 Annuities and trusts 5,279 6,184 Loan fund 3,504 3,395 Total permanently restricted net assets $ 55,466 $ 52,476 The investment objectives for the endowment funds are to preserve the principal value of these funds in both absolute as well as real terms and to maximize, over the long-term, the total rate of return (cash income plus market appreciation) earned by the endowment funds, without assuming an unreasonable degree of risk. In connection with these investment objectives, the Board of Regents has adopted a spending policy for determining that part of the total return which can be expended annually. The current formula provides that the annual rate of spending from the endowment funds shall not exceed 5.0%, net of fees, of the average market value of the endowment funds. The annual rate of spending for the fiscal year will be 4.5%. The average market value is defined as the average of the market values on December 31 of the three previous years. Earnings in excess of the spending policy are classified on the statements of financial position as unrestricted net assets designated for current operations. 19

22 NOTES TO FINANCIAL STATEMENTS NOTE 13 OPERATING EXPENSES Operating expenses consist of the following (in thousands): Salaries and wages $ 36,964 $ 34,103 Employee benefits 11,232 10,236 Services purchased 10,828 8,709 Travel, membership, and entertainment 5,398 4,586 Depreciation 4,618 4,378 Interest 2,973 2,113 Utilities 2,410 2,353 Maintenance and equipment rental 1,653 1,453 Supplies 1,207 1,181 Insurance Postage Paper Advertising Rent foreign Miscellaneous 2,127 1,232 Total operating expenses $ 81,503 $ 72,241 NOTE 14 UNIVERSITY SUPPORT FUND-RAISING EXPENSE Included in General Institutional Expense for the years ended May 31, 2008 and 2007 was approximately $1,964,000 and $1,583,000, respectively, of expenses related to fund-raising, exclusive of expenditures for alumni relations and news and publications. 20

23 NOTES TO FINANCIAL STATEMENTS NOTE 15 LEGAL CONTINGENCIES The University is subject to other legal proceedings generally incidental to its business. Although the final outcome of any legal proceeding is subject to many variables and cannot be predicted with any degree of certainty, the University presently believes that the ultimate outcome resulting from these proceedings would not have a material effect on the University s financial position or changes in its net assets. NOTE 16 CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the University to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and other investments, and accounts and loans receivable. The University places substantially all of its cash and liquid investments with high-quality financial institutions; however, cash balances may periodically exceed federally insured limits. Marketable securities, consisting of both debt and equity instruments, are generally placed in a variety of managed funds administered by an investment manager. Student loans and receivables are due from a variety of sources. As of May 31, 2008 and 2007, management considers the University to have no significant concentration of credit risk. NOTE 17 SUBSEQUENT EVENT Subsequent to May 31, 2008, the University entered into an agreement to purchase a 35 acre parcel of property adjacent to its campus for $5.9 million. 21

24 INDEPENDENT AUDITOR S 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 To the Board of Regents University of Portland We have audited the financial statements of the University of Portland as of and for the year ended May 31, 2008, and have issued our report thereon dated September 17, We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit, we considered the University of Portland s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the University of Portland s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the University of Portland s internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity s financial statements that is more than inconsequential will not be prevented or detected by the entity s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity s internal control. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. 22

25 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS (continued) COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the University of Portland s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted certain matters that we reported to management of The University of Portland in a separate letter dated September 17, 2008 This report is intended solely for the information and use of the Board of Regents, management, Department of Education, and federal awarding agencies and passthrough entities, and is not intended to be and should not be used by anyone other than these specified parties. Portland, Oregon September 17,

26 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 To the Board of Regents University of Portland COMPLIANCE We have audited the compliance of the University of Portland with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that are applicable to each of its major federal programs for the year ended May 31, The University of Portland s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of the University of Portland s management. Our responsibility is to express an opinion on the University of Portland s compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the University of Portland s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the University of Portland s compliance with those requirements. In our opinion, the University of Portland complied, in all material respects, with the requirements referred to above that are applicable to each of its major federal programs for the year ended May 31, However, the results of our auditing procedures disclosed instances of noncompliance with those requirements, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs as item , , and INTERNAL CONTROL OVER COMPLIANCE The management of the University of Portland is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the University of Portland s internal control over compliance with the requirements that could have a direct and material effect on a major federal program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance, 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 the University of Portland s internal control over compliance. 24

27 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 (continued) Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in the University of Portland s internal control that might be significant deficiencies or material weaknesses as defined below. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be significant deficiencies. A control deficiency in an entity s internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect noncompliance with a type of compliance requirement of a federal program on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity s ability to administer a federal program such that there is more than a remote likelihood that noncompliance with a type of compliance requirement of a federal program that is more than inconsequential will not be prevented or detected by the entity s internal control. We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs as items , , and to be significant deficiencies. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected by the entity s internal control. We did not consider any of the deficiencies described in the accompanying schedule of findings and questioned costs to be material weaknesses. The University of Portland s responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. We did not audit the University of Portland s responses and, accordingly, we express no opinion on it. This report is intended solely for the information of the Board of Regents, management, Department of Education, and federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other then these specified parties. Portland, Oregon September 17,

28 SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED MAY 31, 2008 Section I Summary of auditor s results Financial statements The auditor s report expresses an unqualified opinion on the financial statements of the University of Portland as of May 31, 2008, and for the year then ended. Internal control over financial reporting: Material weakness(es) identified? yes no Significant deficiency(ies) identified that are not considered to be material weaknesses? yes none reported Noncompliance material to financial statements noted? yes no Federal awards Internal control over major programs: Material weakness(es) identified? yes no Significant deficiency(ies) identified that are not considered to be material weaknesses? yes none reported The independent auditor s report on compliance with requirements applicable to each major program and on internal control over compliance in accordance with OMB Circular A-133 for the University of Portland expresses an unqualified opinion as of May 31, 2008, and for the year then ended. Any audit findings disclosed that are required to be reported in accordance with section 510(a) of OMB Circular A-133? yes no 26

29 SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED MAY 31, 2008 Identification of major programs: CFDA Number Name of Federal Program or Cluster Student Financial Aid Cluster: Federal Supplemental Educational Opportunity Grant Federal College Work Study Program Federal Pell Grant Program Federal Family Education Loan Program National Science and Mathematics Access to Retain Talent Academic Competitiveness Grant Federal Perkins Loans Program Nursing Student Loan Program Dollar threshold used to distinguish between type A and type B programs? $300,000 Auditee qualified as low-risk auditee? yes no Section II Financial statement findings No matters were reported. Section III Federal award findings and questioned costs Item (Repeated from ) SFA cluster: Unofficial withdrawal Procedures, Significant deficiency in internal controls over compliance requirements and instance of non-compliance. Criteria: According to federal regulation 34CFR (j)(2), the University is required to determine the earned and unearned Title IV aid a student has earned as of the date the student withdraws based on the amount of time the student spent in attendance. Condition: During our audit of return of Title IV funds, we found that the University does not have a procedure to identify those students who withdraw from the school without proper notification. In our testing of financial aid recipients, we reviewed those students with zero credits earned and found that the University is unable to determine whether or not the student completed classes or withdrew from the University. This is a repeat finding from our 2007 audit. Cause: Management has not designed adequate internal controls to identify students who unofficially withdraw from the University. 27

30 SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED MAY 31, 2008 Effect: The Financial Aid Office is unable to calculate and return Title IV funds to the Department of Education as required by federal regulations. Questioned Costs: Unknown. Recommendation: We recommend management develop policies and procedures to identify students who withdraw from the University without notification to ensure Title IV financial aid is appropriately returned to the Department of Education. Management s Response: Prior to the enrollment of students for the academic year, the University s policies and procedures concerning student withdrawals were revised. Responsibility was assigned to specific individuals to ensure the identification of withdrawn students and the return Title IV funds. Item (Repeated from ) SFA cluster: Pell Grant Disbursement Notification, Significant deficiency in internal controls over compliance requirements and instance of non-compliance. Criteria: According to the Federal Regulations, all disbursement changes must be submitted to the Common Origination & Disbursement (COD) System within 30 days of the date the University becomes aware of a Pell Grant change. Condition: During our audit, we found that Pell Grant disbursements were not reported on a timely basis to the COD. We reviewed all University Pell Grant disbursements made during the academic year, and of the 1,096 disbursements, 586 were not reported within the required timeframe. In addition there were another 102 disbursements were that were not accepted by COD. This is a repeat finding from the prior year. Cause: Management has not implemented a system of controls to ensure Pell Grant disbursements are reported to the COD in a timely manner. Effect: The noncompliance and associated lack of oversight by the University resulted in incomplete student data available for the Department of Education and other COD users. Questioned Costs: None. Recommendation: We recommend the University implement policies and procedures to ensure Pell Grant disbursement changes are updated in the COD and reported to the Department of Education within the required time frame. 28

31 SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED MAY 31, 2008 Management s Response: Prior to the enrollment of students for the academic year, the University s policies and procedures were revised to improve control over Pell Grants compliance requirements associated with them. Responsibility was assigned to specific individuals to ensure a timely review and notification process. Item SFA cluster: Return of Title IV Funds, Significant deficiency in internal controls over compliance requirements and instance of non-compliance. Criteria: According to the Financial Aid Student Handbook (Volume 5, Chapter 2), an institution must return any unearned funds within 45 days of the date of the institution s determination that the student withdrew. Condition: During our review of Title IV fund calculations, we found one instance in which a student withdrawal was not adequately monitored and therefore the return of Title IV funds was not paid within 45 days after the college determined the student withdrew. Cause: The late payment was due in part to turnover in the student financial aid office. Effect: The College did not comply with the U.S. Department of Education s return of Title IV funds regulations. Questioned Cost: None Recommendation: Management should perform the return of Title IV funds calculation concurrently with student withdrawals to ensure funds are returned in compliance with federal requirements. Management s response: The University recently hired a new Financial Aid Director who is well aware of this requirement. The Director for Financial Aid will monitor periodically for compliance. 29