KENTUCKY STATE UNIVERSITY. Financial Statements. As of and for the Years Ended June 30, 2012 and 2011 with Independent Auditors Report Thereon

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1 Financial Statements As of and for the Years Ended June 30, 2012 and 2011 with Independent Auditors Report Thereon

2 CONTENTS Pages Independent Auditorsʹ Report Managementʹs Discussion and Analysis Financial Statements: Kentucky State University Statements of Net Assets Kentucky State University Foundation, Inc. Statements of Financial Position Kentucky State University Statements of Revenues, Expenses and Changes in Net Assets Kentucky State University Foundation, Inc. Statements of Activities Kentucky State University Statements of Cash Flows Kentucky State University Notes to the Financial Statements Kentucky State University Foundation, Inc. Notes to the Financial Statements Schedule of Findings and Responses

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4 Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis on pages 3 through 19 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with managementʹs responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. October 25, 2012 Lexington, Kentucky 2

5 Management s Discussion and Analysis June 30, 2012 Introduction Management s Discussion and Analysis of Kentucky State University s (the University) financial statements provide an overview of the financial position and activities of the University for the year ended June 30, 2012, with comparative information for the year ended June 30, 2011 and selected information for the year ended June 30, This discussion has been prepared by management and should be read in conjunction with the financial statements and the notes thereto, which follow this section. The financial statements and related notes and this discussion and analysis are the responsibility of management. Kentucky State University is a Commonwealth of Kentucky coeducational institution for higher education. The University s mission is to build on its legacy of achievement as a historically black, liberal arts, and 1890 landgrant university, afford access to and prepare a diverse student population of traditional and non traditional students to compete in a multifaceted, ever changing global society by providing student centered learning while integrating teaching, research, and service through high quality undergraduate and select graduate programs. Kentucky State University is committed to keeping relevant its legacy of service by proactively engaging the community in partnerships on civic projects driven by the objective of positively impacting the quality of life of the citizens of the Commonwealth. Basis of Presentation The annual financial report and statements include the University and Kentucky State University Foundation, a component unit of the University. Kentucky State University Foundation, Inc. (the Foundation ) is a not forprofit Kentucky corporation which was established to receive, invest and expend funds to promote and implement educational and developmental activities at Kentucky State University (the University ). The Foundation is managed by a Board of Trustees independent from that of the University. The Foundation is supported primarily through contributions from alumni. Financial Highlights The University s financial position at June 30, 2012, reflected total assets of $134.7 million and total liabilities of $17.6 million. Total net assets were $117.1 million. Financial operations were in accordance with revenue expectations and the approved budget plan. Total assets increased $1.6 million or 1.2%, primarily due to increases in student accounts, grant and loans receivables, capital assets and investments. Total liabilities increased by $514 thousand or 3.0% primarily due to a decrease in bond and lease obligations, a decrease in compensated absences, and an increase in accounts payable and accrued liability. Total net assets increased $1.1 million. 3

6 Management s Discussion and Analysis, continued June 30, 2012 Financial Highlights, Continued Unrestricted net assets decreased $2.4 million, which the University reserves for spending in programs and other capital related contingencies. The University classifies amounts earned on endowments as spendable or non spendable in accordance with the endowment s donor stipulations. Nonexpendable restricted net assets represent amounts, which must be maintained in perpetuity. Expendable restricted net assets include endowment earnings that are spendable, consistent with the University s spending policy. Operating revenues were $43.5 million and operating expenditures were $75.7 million, resulting in a loss from operations of $32.2 million. Net non operating revenues were $33.3 million, including $24.7 million in state appropriations, which, when combined with the loss from operations and capital appropriations, resulted in an overall increase in net assets of $1.1 million. Using the Financial Statements The University s Financial Statements consist of three financial statements: a Statement of Net Assets (Balance Sheet); a Statement of Revenues, Expenses and Changes in Net Assets (Income Statement); and a Statement of Cash Flows, along with the accompanying Notes to the Financial Statements. These financial statements are prepared in accordance with Governmental Accounting Standards Board (GASB) Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. Kentucky State University is a component unit of the Commonwealth of Kentucky. Statement of Net Assets The Statement of Net Assets presents the financial position of the University at the end of the fiscal year and includes all assets and liabilities. Net assets, the difference between total assets and total liabilities, are an important indicator of the current financial condition, while the change in net assets is an indicator of whether the overall financial position has improved or worsened during the year. 4

7 Management s Discussion and Analysis, continued June 30, 2012 Condensed Statement of Net Assets ASSETS Current assets $ 38,295,793 $ 38,395,850 $ 30,819,820 Noncurrent assets 96,426,815 94,700,547 92,557,670 Total assets $ 134,722,608 $ 133,096,397 $ 123,377,490 LIABILITIES Current liabilities 8,763,719 7,449,319 7,588,173 Non current liabilities 8,867,398 9,667,863 10,393,089 Total liabilities 17,631,117 17,117,182 17,981,262 NET ASSETS Invested in capital assets, net of related debt 75,839,623 73,936,126 71,831,353 Restricted Nonexpendable 8,657,506 8,594,513 8,048,379 Expendable 6,668,365 5,119,673 5,063,026 Unrestricted 25,925,997 28,328,903 20,453,470 Total net assets $ 117,091,491 $ 115,979,215 $ 105,396,228 Assets: As of June 30, 2012, total assets amounted to $134.7 million. Of this amount, investment in capital assets (net of depreciation) of $84.5 million, or 62.7% of total assets, represented the largest asset class. Investments amounted to $11.2 million or 8.3% of total assets. During the year, total assets increased by $1.6 million, primarily due to increases in cash and cash equivalents, student accounts, grant and loans receivables, capital assets and investments. Liabilities:As of June 30, 2012, total liabilities amounted to $17.6 million. Long term debt includes bonds payable for housing and dining system and energy related equipment and technology equipment purchased under a Master Lease Agreement. During the year, total liabilities increased by $514 thousand, primarily due to an increase in accounts payable and a decrease in bonds and capital lease obligations. Net Assets: Net assets of the University were $117.1 million at June 30, 2012 and were reported in four net asset categories: invested in capital assets, net of related debt $75.8 million (64.7%), restricted nonexpendable $8.7 million (7.4%), restricted expendable $6.7 million (5.7%), and unrestricted $25.9 million (22.1%). 5

8 Management s Discussion and Analysis, continued June 30, versus Total assets amounted to $133.1million and $123.4million in fiscal year 2011 and 2010 respectively. Total liabilities amount to $17.1 million in fiscal year 2011 and $18 million in fiscal year When compared to fiscal year 2010, the University s total assets for fiscal year 2011increased $10.6million primarily in the current asset category due to an increase in student accounts, grant and loans receivables, investments, and capital assets. Statement of Revenues, Expenses and Changes in Net Assets The Statement of Revenues, Expenses and Changes in Net Assets is prepared on the accrual basis of accounting, whereby revenues and assets are recognized when the service is provided and expenses and liabilities are recognized when others provide the service, regardless of when cash is exchanged. All items that increase or decrease net assets must appear on the Statement of Revenues, Expenses and Changes in Net Assets as revenues, expenses, gains or losses. Financial activities are reported as either operating or nonoperating. GASB Statement No. 35 requires state appropriations, gifts, investment income and endowment income to be classified as nonoperating revenues. Accordingly, the University reports an operating loss prior to the addition of nonoperating revenues. The utilization of long lived capital assets is reflected in the financial statements as depreciation, which amortizes the cost of an asset over its expected useful life. Tuition revenue is reduced by gift scholarships and institutional aid, and is reported net of scholarship allowances in the financial statements. A summarized comparison of the University s revenues, expenses and changes in net assets for the years ended June 30, 2012, 2011 and 2010 is as follows. 6

9 Management s Discussion and Analysis, continued June 30, 2012 Condensed Statement of Revenues, Expenses and Changes in Net Assets OPERATING REVENUES Student tuition and fees, net $ 18,943,062 $ 18,200,942 $ 16,512,333 Grants and contracts 12,267,993 14,066,912 14,589,783 Federal appropriations 3,796,394 5,042,652 6,507,463 Auxiliary enterprises 6,838,829 6,618,704 6,745,546 Other operating revenue 1,653,909 1,103,669 1,006,390 Total operating revenues 43,500,187 45,032,879 45,361,515 OPERATING EXPENSES Educational and general 69,494,007 63,647,079 61,873,552 Auxiliary enterprises 6,208,366 5,511,984 5,764,044 Total operating expenses 75,702,373 69,159,063 67,637,596 OPERATING LOSS (32,202,186) (24,126,184) (22,276,081) NONOPERATING REVENUES (EXPENSES) State appropriations 24,660,001 25,363,422 24,630,377 Federal grants and contracts 7,373,490 7,062,876 6,556,989 Gifts and grants 251, , ,057 Investment income (loss) 849,729 1,789,055 1,158,756 Interest on capital asset related debt (373,738) (429,253) (483,085) Other 447,119 (46,632) (697,500) Total non operating revenues 33,207,910 34,709,171 31,778,594 Income before other revenues, expenses, gains (losses) 1,005,724 10,582,987 9,502,513 Endowment Gifts 106,552 Capital appropriations 1,760,427 Total net increase in net assets 1,112,276 10,582,987 11,262,940 Net assets, beginning of year 115,979, ,396,228 94,133,288 Net assets, end of year $ 117,091,491 $ 115,979,215 $105,396,228 7

10 KENTUCKY STATE UNIVERSITY Management s Discussion and Analysis, continued June 30, 2012 Figure 1 Operating Revenues As a Percentage of total Operating Revenue (3-year Trend) 45.0% 43.5% 40.4% 40.0% 35.0% 30.0% 25.0% 20.0% 36.4% 31.2% 28.2% 32.2% 14.3% 14.7% 15.7% 14.9% FY FY FY % 10.0% 5.0% 8.7% 11.2% 3.8% 2.5% 2.2% 0.0% Tuition & Fees, net Grants & Contracts Federal Appropriations Auxiliary Enterprise Other Operating Revenues $19,000 $17,000 $15,000 $13,000 $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 Operating Revenue by Category for FY12 thru FY10 3-Year Trend (in thousands) FY12 FY11 FY10 Total Operating Revenue Total Operating Revenue Total Operating Revenue $43,500,187 $45,032,879 $45,361,515 Tuition & Fees, net Grants & Contracts Federal Appropriations Auxiliary Enterprise 8

11 Management s Discussion and Analysis, continued June 30, 2012 Total operating revenues were $43.5 million for the year ended June 30, 2012, a decrease of $1.5 million compared to FY11. The primary components were federal, state and local grants and contracts of $12.3 million (28.3%) student tuition and fees, net of $18.9 million (43.5%), federal appropriations of $3.8 million (8.8%) and auxiliary services and other revenues of $8.5 million (19.5%). FY12 Student tuition and fees revenue increased $742,120 compared to FY11 due to increased tuition fees. FY12Grants and contracts revenue decreased $1,798,919 compared to FY11due to decreased awards and spending. FY12Federal appropriations decreased $1,246,258 compared to FY11. FY12Auxiliary enterprises revenue increased $220,125 compared to FY11. Refer to Figure 1 for the three year trend of the operating revenues as a percent to total operating revenues and revenue by category. 9

12 KENTUCKY STATE UNIVERSITY Management s Discussion and Analysis, continued June 30, 2012 Operating expenses totaled $75.7 million, an increase of $6,543,310 over last yearr due to an increase in federal grants pending and bad debt. Of this amount, $45.7 million (60.4%) was expended directly for the primary mission of the University instruction (19.0%), research (10.2%), student services (9.9%), student aid (13.3%), and public service ( 8.0%). Instruction is the main component of Primary Mission expenses amounting to $14..4 million in fiscal year 2012 or 19%. Refer to Figure 2 for the operating expenses categorized into the Primary Mission of the University. Figure 2 Fiscal Year Primary Mission Expenses as a % of Total Operating Expenses 13.6% 19.3% Instruction 8.2% Research 10.0% 10.3% Studentt Services Public Service Studentt Aid FY 2012 vs FY 2011 Comparison Primary Mission Expenses as % of Total Operating Expenses (in thousands) $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 FY 2012 FY 2011 $4,000 $2,000 $0 Instruction Research Student Services Public Service Student Aid 10

13 Management s Discussion and Analysis, continued June 30, 2012 The University continued to invest in student aid and support services to provide students with opportunities to be successful in fiscal For the year ended June 30, 2012, student aid related to tuition and fees totaled $14.6 million, with student aid expenses of $10.1million and scholarship allowances of $4.5 million. The University had an overall increase in institutional support of $1.3 million, along with an increase in auxiliary enterprises of $696,382. The large expenditures in the primary areas of instruction, research and student services, in conjunction with minimal increases to fixed cost areas, confirms the University resource allocations are clearly aligned with the University s strategic priorities to support academic and student excellence. The net loss from operations for the year amounted to $32.2 million. Nonoperating revenues, net of expenses, amounted to $33.2 million, resulting in an increase in income before other revenues, expenses, gains or loss of $1.0 million for the year. After capital appropriations and endowment gifts, the increase in net assets was $1.1 million. Nonoperating revenues include state appropriations of $24.7 million, federal grants and contracts of $7.4 million, gifts of $358 thousand and investment income of $850 thousand, and other non operating income net of revenue of $447, versus 2010 Operating revenues in fiscal year 2010 were $45.4 million and operating expenditures were $67.6 million, resulting in a loss from operations of $22.3 million. Net nonoperating revenues were $31.8 million, including $24.6 million in state appropriations. Compared to fiscal year 2011, revenue decrease has been due to decreases in grant and contracts and federal appropriations. Statement of Cash Flows The Statement of Cash Flows presents information related to the University s cash inflows and outflows summarized by operating activities, noncapital financing activities, capital financing activities and investing activities. The primary purpose of the Statement of Cash Flows is to provide information about the cash receipts and cash payments made by the University during the year, to allow financial statement readers to assess the University s ability to generate future net cash flows, its ability to meet obligations as they become due and its possible need for external financing. 11

14 Management s Discussion and Analysis, continued June 30, 2012 Condensed Statement of Cash Flows Cash (used) provided by: Operating activities $(32,221,163) $(20,655,496) $(17,461,609) Non capital financing activities 32,923,090 33,349,369 30,885,913 Capital and related financing activities (6,743,890) (7,375,948) (7,777,980) Investment activities 261,488 1,332, ,222 Net increase (decrease) in cash (5,780,475) 6,650,771 5,907,546 Cash and cash equivalents, beginning year 29,623,196 22,972,425 17,064,879 Cash and cash equivalents, end of year $ 23,842,721 $ 29,623,196 $ 22,972,425 Major sources of cash received from operating activities are student tuition and fees of $18.7 million and grants and contracts of $11.1 million. Major uses of cash for operating activities were payments to employees for salaries and benefits of $38.4 million and to vendors and contractors of $21.8 million. Noncapital financing activities included state appropriations from the Commonwealth of Kentucky of $24.7million. Capital and related financing activities include purchases and payments of $6.7 million expended for construction and acquisition of capital assets and for principal and interest payments on the retirement of the University s bonds and other capital related debt. Net cash of $261 thousand was received for conducting investing activities, including purchase and sales of investments, and interest and dividends earned on investments. Investment activity was primarily related to management of the University s endowments versus 2010 Compared to fiscal year 2010, the amount of cash used to fund operations has been reduced primarily due to operational efficiencies that have been implemented. Net cash for noncapital financing activities and investment activities remains constant. Capital and related financing has been reduced due to the completion of capital projects. 12

15 Management s Discussion and Analysis, continued June 30, 2012 State Appropriations State appropriations represent approximately 32.1% of all operating and non operating revenues. The level of state support is a key factor influencing the University s overall financial condition. State appropriation is unrestricted revenue and is included as non operating revenue. State appropriation is used to support payroll and benefits for University employees. The following details the net Commonwealth appropriations received by the University for fiscal years ending June 30, 2012, 2011 and Commonwealth appropriations $ 24,660,001 $ 25,363,422 $ 24,630,377 Federal appropriations 3,796,394 5,042,652 6,507,463 Total appropriations $ 28,456,395 $ 30,406,074 $ 31,137,840 Capital Appropriations for the Commonwealth The University faces financial challenges to maintain and upgrade its capital assets including its infrastructure, buildings and grounds. A combination of revenue sources funds the University s investment in capital improvements, including appropriations provided by the Commonwealth of Kentucky. In fiscal year 2012, the Commonwealth provided no capital appropriations to the University. State capital appropriations plus federal sources play an important role in the University s efforts to address deferred maintenance projects. Grant and Contract Revenue The following table details the University s operating grant and contract revenue for fiscal years ended June 30, 2012, 2011 and Federal grants and contracts $ 18,094,479 $ 18,818,044 $ 18,890,125 State grants and contracts 1,547,004 2,311,744 2,210,849 Nongovernmental grants and contracts 45,798 Total grants and contracts $ 19,641,483 $ 21,129,788 $ 21,146,772 13

16 Management s Discussion and Analysis, continued June 30, 2012 Capital Plan During fiscal year 2012, the Kentucky State University completed the work on the Rosenwald Center for Families and Children and the Aquaculture Production Technology Lab. The Rosenwald Center for Families and Children consists of a new child care facility. The 15,180 square foot, 1 story building consists of six classrooms (an Infant room, two Toddler rooms, one Preschool, one Afterschool and another classroom that can be assigned as enrollment changes), three Observation rooms for KSU student education purposes, three offices, a conference room, Sick Bay, a Multipurpose Room, a demonstration teaching kitchen, serving kitchen, and support spaces. The grounds consist of three separate playground areas with play structures for Toddler, Preschool and Afterschool age children. The entire playground plus lawn space is fenced for child protection. The Aquaculture Production Technology Lab was constructed for educational instruction and research facility. The building area is 6,953 gross square feet of floor space on one floor. Building height is 19 feet 2 inches. Spaces include 6 offices, one administration/reception, and open office grad student offices, one Lab Classroom, one Seminar Classroom, one video control room, one library, video storage, one Disease Diagnostic Lab, one Certified Processing Room, a Loading Dock, Mechanical Space, and circulation space. The building is located on KSU s main campus in proximity to existing research ponds and hatchery. The building is a one story, wood framed and metal panel exterior wall and roof system. In April 2011, the University submitted its Six Year Capital Plan to the Kentucky General Assembly to be acted upon during the 2012 regular session of the General Assembly. This plan included projects separated into three biennia beginning in 2012 and ending The execution of the University s capital plan is contingent upon sufficient funding from the Commonwealth. The $487.1 million request for the first biennium ( ) is comprised of new construction projects, maintenance projects and information technology projects. The University primarily funds its projects from four sources: state general fund appropriations, federal USDA funds, agency funds, and private funding. Universityissued bond funding is also available. New construction projects proposed include: $9,028,000 to expand or build a new Betty White Nursing Building, which will provide 24,000 square feet of new classroom space to accommodate enrollment into the nursing program; $46,382,000 to construct a centralized boiler plant to replace the existing seventy year old plant; $2,206,000 to construct a pedestrian bridge across U.S. 60 to allow students, faculty and staff safe passage across a heavily traveled highway which bisects campus; $31,528,000 to construct a Business & Technology Center to house the business school and the computer science program; $96,034,000 to build a Performing Arts Center to replace antiquated Bradford Hall. Maintenance projects include but are not limited to: Roof Repair & Maintenance Pool $6.5 million and a $2.1M Capital Renewal & Maintenance Pool. Information Technology projects include but are not limited to: Integrated Digital Campus $11.4 million; Expand Emergency Notification System $4.5 million; Upgrade Information Technology Infrastructure $6.2 million. 14

17 Management s Discussion and Analysis, continued June 30, 2012 Designated and Nondesignated Spending In the tables below, expenses have been categorized into designated or nondesignated spending categories. The designated spending category includes funds expended by function from contracts and grants, land grant, auxiliary and depreciation. These funds must be expended for the purposes for which the funds were received or budgeted. This category also includes funds for student aid. All other spending is categorized as nondesignated spending. Expenses for nondesignated fund categories in 2012increased for research, public service, and institutional support over the prior year and decreased for instruction, academic support, student services and plant operations and maintenance. Total spending for all functions in the nondesignated category increased by approximately $5.5 million in

18 Management s Discussion and Analysis, continued June 30, Designated Spending Nondesignated Spending Combined Spending Instruction $ 369,949 $ 14,011,648 $ 14,381,597 Research 5,522,265 2,146,725 7,668,990 Public service 4,429,836 1,683,409 6,113,245 Academic support 1,860,720 2,425,369 4,286,089 Student services 1,274,704 6,190,203 7,464,907 Institutional support 652,520 11,407,384 12,059,904 Operation and plant maintenance 3,297,562 3,297,562 Student aid 10,098,858 10,098,858 Auxiliary 5,864,567 5,864,567 Depreciation 4,466,654 4,466,654 Total $ 34,540,073 $ 41,162,300 $ 75,702, Designated Spending Nondesignated Spending Combined Spending Instruction $ 1,148,878 $ 12,941,594 $ 14,090,472 Research 3,318,645 1,500,901 4,819,546 Public service 4,431,031 1,025,014 5,456,045 Academic support 2,336,289 1,695,298 4,031,587 Student services 768,070 5,749,372 6,517,442 Institutional support 1,850,569 8,914,143 10,764,712 Operation and plant maintenance 3,428,856 3,428,856 Student aid 9,899, ,826 10,302,761 Auxiliary 4,905,720 4,905,720 Depreciation 4,841,922 4,841,922 Total $ 33,501,059 $ 35,658,004 $ 69,159,063 The graph in Figure 3 shows a three year trend of designated, nondesignated, and combined spending. Nondesignated spending is higher than designated spending in FY12. However, designated spending increased $1.6 million in 2011 and increased $1.0 million in Nondesignated spending decreased $87 thousand in 2011 and increased $5.5 million in Overall, the combined spending followed the same trend as designated spending with an increase of $1.5 million in 2011 and $6.5 million in

19 KENTUCKY STATE UNIVERSITY Management s Discussion and Analysis, continued June 30, 2012 Figure 3 Designated and Nondesignated Spending (3-Year Trend) 80,000 70,000 60,000 50,000 40,000 30,000 FY 2012 FY2011 FY ,000 10,000 Designated Spending Nondesignated Spending Combined Spending 17

20 Management s Discussion and Analysis, continued June 30, 2012 Capital Asset and Debt Administration Capital Assets Capital assets, net of accumulated depreciation, totaled $84.5million at June 30, 2012, an increase of $1.1 million. Capital assets as of June 30, 2012 and significant changes in capital assets during the year are as follows (in millions): June 30, 2010 Net Additions (Reductions) FY June 30, 2011 Net Additions (Reductions) FY June 30, 2012 Land and land improvements $ 5.6 $ $ 5.6 $ $ 5.6 Buildings, fixed equipment and infrastructure Equipment, vehicles and capitalized software Library materials and art Construction in progress (3.5) 1.6 Accumulated depreciation (105.7) (4.8) (110.5) (4.5) (115.0) Total $ 83.0 $ 0.4 $ 83.4 $ 1.1 $ 84.5 At June 30, 2012, the University has capital construction projects in progress totaling $1.6 million in scope. Long Term Debt At June 30, 2012, bonds and lease payable amounted to $8.7 million, as summarized below: Lease Obligations $ 4,565,078 $ 4,972,861 $ 5,402,330 Consolidated Educational Buildings Revenue Bonds 935,000 General Receipts Bonds 4,165,000 4,525,000 4,875,000 Bond discount and issue costs (57,460) (57,460) (70,720) Total $ 8,672,618 $ 9,440,401 $ 11,141,610 18

21 Management s Discussion and Analysis, continued June 30, 2012 Economic Factors Impacting Future Periods University management continues its strategic mission to uniquely position Kentucky State University as an institution of excellence for the citizens of the Commonwealth and for advancing higher education in Kentucky by inspiring innovation, growing leaders and advancing Kentucky. Executive management continues to work with the Council on Postsecondary Education to address the needs of the Commonwealth and believes that it has well positioned the University for becoming a strong, financially viable and efficient institution of higher learning as funding issues continue to be decided. Future economic factors impacting Kentucky State University include the following known facts: Tuition and costs of attendance Kentucky State University continues to weigh its costs of attendance with the funding provided by the General Assembly to successfully deliver its programs and remain one of the most affordable public institutions in the Commonwealth. Funding levels and methodologies used for institutions of higher education in the Commonwealth are developed and approved by the Council on Postsecondary Education. Quality Enhancement Plan Academics with Attitude in 2009, the University developed a plan to address student success. This initiative was part of the University s accreditation reaffirmation process as required by the Southern Association of Colleges and Schools. The plan focuses on student readiness for college level courses. A pilot phase was successfully conducted in summer2009 with full implementation fall2010. Enrollment growth and student retention Kentucky State University recruits a diverse student body of traditional, nontraditional and transfer students seeking baccalaureate and advanced degrees. Enrollment growth and retention continues to be a priority of University management. Program expansion the University is well positioned to meet the needs of Kentuckians through its programs and educational activities. The University offers the following programs: Bachelors in Mass Communications and Journalism, a Masters of Art in Special Education, and a Masters in Business Administration, a Masters in Public Administration, a Masters in Computer Science, and a Masters in Environmental Studies Regional Stewardship Kentucky State University began the initiative to meet the economic and community needs of its area of geographic responsibility through collaborative initiatives with businesses, community based organizations, schools and other educational agencies, citizens and local and state officials. The overall financial position of the University strengthened during fiscal year Revenue streams remain secure and steady. As the University adapts to present economic environments, new opportunities for funding will be explored to compliment state support. Executive management s goal is to deliver exceptional programs and services to students and constituents while maintaining financial integrity. Management believes Kentucky State University is able to sustain its sound financial position and solidify its progress toward becoming a regional university of excellence. 19

22 Statements of Net Assets June 30, 2012 and ASSETS Current assets Cash and cash equivalents $ 23,842,721 $ 29,623,196 Accounts, grants and loans receivable, net 13,941,173 8,408,728 Inventory and other current assets 511, ,926 Total current assets 38,295,793 38,395,850 Noncurrent assets Accounts, grants and loans receivable, net 744, ,612 Investments 11,169,649 10,581,408 Capital assets, net 84,512,241 83,376,527 Total noncurrent assets 96,426,815 94,700,547 Total assets 134,722, ,096,397 LIABILITIES Current liabilities Accounts payable and accrued liabilities 3,781,912 2,210,577 Accrued compensated absences 1,730,370 2,131,019 Deferred revenue 2,211,334 2,146,007 Deposits 120,991 36,372 Other current liabilities 122, ,097 Bonds and capital lease obligations, current portion 796, ,247 Total current liabilities 8,763,719 7,449,319 Noncurrent liabilities Bonds and capital lease obligations, noncurrent portion 7,875,689 8,676,154 Federal grants refundable 991, ,709 Total noncurrent liabilities 8,867,398 9,667,863 Total liabilities 17,631,117 17,117,182 NET ASSETS Invested in capital assets, net of related debt 75,839,623 73,936,126 Restricted Nonexpendable 8,657,506 8,594,513 Expendable 6,668,365 5,119,673 Unrestricted 25,925,997 28,328,903 Total net assets $117,091,491 $ 115,979,215 See accompanying notes. 20

23 FOUNDATION, INC. Statements of Financial Position June 30, 2012 (With comparative totals for June 30, 2011) Temporarily Permanently ASSETS Unrestricted Restricted Restricted Total Total Cash and cash equivalents $ 41,100 $ 230,102 $ 760,184 $ 1,031,386 $ 1,128,337 Marketable securities 169,585 1,034,857 5,907,007 7,111,449 6,585,258 Property and equipment, net of accumulated depreciation 81,365 81,365 99,083 Other assets 848 5,176 28,582 34,606 35,125 Total assets $ 292,898 $ 1,270,135 $ 6,695,773 $ 8,258,806 $ 7,847,803 LIABILITIES AND NET ASSETS Accounts payable $ 2,121 $ 6,003 $ 8,124 $ 22,523 Total liabilities 2,121 6,003 8,124 22,523 Net assets 290,777 1,264,132 $ 6,695,773 8,250,682 7,825,280 Total liabilities and net assets $ 292,898 $ 1,270,135 $ 6,695,773 $ 8,258,806 $ 7,847,803 See accompanying notes. 21

24 Statements of Revenues, Expenses and Changes in Net Assets Years ended June 30, 2012 and REVENUES Operating revenues Student tuition and fees (net of scholarship allowances of $4,533,476 and $4,902,590) $ 18,943,062 $ 18,200,942 Federal grants and contracts 10,720,989 11,755,168 Federal appropriations 3,796,394 5,042,652 State and local grants and contracts 1,547,004 2,311,744 Auxiliary enterprises Residence halls 3,278,362 3,327,151 Dining 3,261,069 3,016,738 Bookstore 152, ,725 Other auxiliaries 146, ,090 Other operating revenues 1,653,909 1,103,669 Total operating revenues 43,500,187 45,032,879 EXPENSES Operating expenses Educational and general Instruction 14,381,597 14,090,472 Research 7,668,990 4,819,546 Public service 6,113,245 5,456,045 Academic support 4,286,089 4,031,587 Student services 7,464,907 6,517,442 Institutional support 12,059,904 10,764,712 Operation and maintenance of plant 3,297,562 3,428,856 Student aid 10,098,858 10,302,761 Depreciation 4,122,855 4,235,658 Auxiliary enterprises Residence halls 2,426,878 1,668,880 Dining 2,896,641 2,809,722 Other auxiliaries 541, ,119 Depreciation 343, ,263 Total operating expenses 75,702,373 69,159,063 Operating loss (32,202,186) (24,126,184) 22

25 Statements of Revenues, Expenses and Changes in Net Assets, continued Years ended June 30, 2012 and NONOPERATING REVENUES (EXPENSES) State appropriations $ 24,660,001 $ 25,363,422 Federal grants and contracts 7,373,490 7,062,876 Gifts 251, ,703 Investment income (net of investment expense) 849,729 1,789,055 Interest on capital asset related debt (373,738) (429,253) Other non operating revenues (expenses) 447,119 (46,632) Endowment gifts 106,552 Net nonoperating revenues 33,314,462 34,709,171 Increase in net assets 1,112,276 10,582,987 Net assets, beginning of year 115,979, ,396,228 Net assets, end of year $ 117,091,491 $ 115,979,215 See accompanying notes. 23

26 FOUNDATION, INC Statements of Activities June 30, 2012 (With comparative totals for June 30, 2011) Temporarily Permanently Unrestricted Restricted Restricted Total Total Revenue and support: Contributions $ 19,000 $ 495,980 $ 145,448 $ 660,428 $ 799,105 Interest and dividends 5,922 25, , , ,372 Net realized and unrealized gains (losses) on marketable securities 5,451 19, , , ,335 Interfund management fees and other income 148, , ,098 Net assets released from restrictions 546,976 (357,962) (189,014) Total revenue and support 725, , ,223 1,190,412 1,887,910 Expenses: Scholarships 75,285 75,285 48,589 Operating expenses 122, ,873 98,419 Personal services 61,084 61,084 48,783 Interfund management fees 147, , ,491 University support 261, , ,179 Student support 36,725 36,725 89,181 Travel and promotion 60,278 60,278 73,080 Total expenses 765, , ,722 Increase (decrease) in net assets (39,606) 182, , ,402 1,210,188 Transfers (41,359) 41,359 Net assets, beginning of year 330,383 1,122,706 6,372,191 7,825,280 6,615,092 Net assets, end of year $ 290,777 $ 1,264,132 $ 6,695,773 $ 8,250,682 $ 7,825,280 See accompanying notes. 24

27 Statements of Cash Flows Years ended June 30, 2012 and Cash flows from operating activities Tuition and fees $ 18,669,508 $ 17,013,052 Grants and contracts 11,096,565 18,371,985 Payments to suppliers (21,787,788) (17,398,053) Payments to employees (38,395,403) (36,041,598) Student financial aid (10,068,725) (10,090,455) Loans issued to students (241,777) (127,276) Collection of loans issued to students 239, ,366 Auxiliary enterprises: Residence halls and dining 6,539,431 6,343,889 Bookstore 152, ,725 Other auxiliaries 146, ,090 Other receipts 1,428, ,779 Net cash from operating activities (32,221,163) (20,655,496) Cash flows from non capital financing activities State appropriations 24,660,001 25,363,422 Federal grants and contracts 7,373,490 7,062,876 Gifts for other than capital purposes Endowment gifts 251, , ,703 Student organization agency receipts 158,164 23,225 Student organization agency disbursements (73,545) (39,096) Other receipts (payments) 447,119 (30,761) Net cash from non capital financing activities 32,923,090 33,349,369 Cash flows from capital financing activities Purchases of capital assets (5,602,369) (5,245,486) Principal paid on capital debt (767,783) (1,701,209) Interest paid on capital debt (373,738) (429,253) Net cash from capital financing activities (6,743,890) (7,375,948) Cash flows from investing activities Investment income 901,436 1,835,922 Investment expenses (51,707) (46,867) Proceeds from sale of investments 3,977,271 1,988,570 Purchases of investments (4,565,512) (2,444,779) Net cash from investing activities 261,488 1,332,846 Net (decrease) increase in cash and cash equivalents (5,780,475) 6,650,771 Cash and cash equivalents at beginning of year 29,623,196 22,972,425 Cash and cash equivalents at end of year $ 23,842,721 $ 29,623,196 25

28 Statements of Cash Flows, continued Years ended June 30, 2012 and Reconciliation of net operating loss to net cash from operating activities Operating loss $ (32,202,186) $ (24,126,184) Adjustments to reconcile operating loss to net cash from operating activities: Depreciation expense 4,466,655 4,841,921 Bad debt expense: 2,746, ,000 Changes in assets and liabilities: Receivables, net (8,281,565) (2,593,974) Inventory and prepaid expenses (147,973) (14,388) Accounts payable and accrued liabilities 1,571, ,790 Accrued compensated absences (400,649) 360,623 Other Liabilities (38,914) (108,227) Deferred revenue 65,327 9,943 Net cash from operating activities $ (32,221,163) $ (20,655,496) See accompanying notes. 26

29 Notes to the Financial Statements 1. Organization and Summary of Significant Accounting Policies Reporting Entity Kentucky State University (the University) is a component unit of the Commonwealth of Kentucky and is included in the general purpose financial statements of the Commonwealth. The Kentucky State University Foundation, Inc. (the Foundation) is a legally separate, tax exempt organization supporting the University. The Foundation acts primarily as a fund raising organization to supplement the resources that are available to the University in support of its programs. The Foundation s Board of Directors is self perpetuating and consists of graduates and friends of the University. Although the University does not control the timing or amount of receipts from the Foundation, the majority of resources or income thereon that the Foundation holds and invests is restricted by the donors to the activities of the University. Because these restricted resources held by the Foundation can only be used by, or for the benefit of, the University, the Foundation is considered a component unit of the University and is discretely presented in the University s financial statements. Basis of Presentation The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board (GASB), including Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, and Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis of Public College and Universities, issued in June and November, 1999, respectively. The University reports as a Business Type Activity (BTA), as defined by GASB Statement No. 35. BTA s are those activities that are financed in whole or in part by fees charged to external parties for goods and services. The University, as a BTA, applies (a) all applicable Financial Accounting Standards Board (FASB) pronouncements issued before December 1, 1989, and (b) those GASB pronouncements issued after that date. Basis of Accounting The financial statements have been prepared on the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when an obligation has been incurred. GASB Statement No. 35 establishes standards for external financial reporting for public colleges and universities and requires that resources be classified for accounting and reporting purposes into the following net asset categories: Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction or improvement of those assets. 27

30 Notes to the Financial Statements, continued 1. Organization and Summary of Significant Accounting Policies, continued Basis of Accounting, continued Restricted: Nonexpendable Net assets subject to externally imposed stipulations that they be maintained permanently by the University. Such assets include the University s permanent endowment funds. Expendable Net assets whose use by the University is subject to externally imposed stipulations that can be fulfilled by actions of the University pursuant to those stipulations or that expire by the passage of time. Unrestricted: Net assets whose use by the University is not subject to externally imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of management or the Board of Trustees or may otherwise be limited by contractual agreements with outside parties. The financial statement presentation required by GASB Statement No. 35 is intended to provide a comprehensive, entity wide perspective of the University s assets, liabilities, net assets, revenues, expenses, changes in net assets and cash flows. Cash Equivalents For the Statement of Cash Flows, the University considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Accounts, Grants, and Loans Receivable, net Accounts receivables consist of tuition and fee charges, loans to students and amounts due from federal and state governments, non governmental sources, in connection with reimbursements of allowable expenses made pursuant to grants and contracts. Accounts receivables are recorded net of allowance for doubtful accounts. Allowance for Doubtful Accounts The allowance for doubtful accounts is established through a provision for doubtful accounts charged to expense. The allowance represents an amount, which, in management s judgment, will be adequate to absorb probable losses on existing accounts that may become uncollectible. Inventories Inventories are stated at the lower of cost (first in, first out method) or market and consist of physical plant items. Inventories consist of physical plant, postage and printing supplies. 28

31 Notes to the Financial Statements, continued 1. Organization and Summary of Significant Accounting Policies, continued Endowment Funds Kentucky State University recognizes its fiduciary duty not only to invest the University s endowment holdings in formal compliance with theuniform Prudent Management of Institutional Funds Act (UPMIFA)but also to manage those funds in continued recognition of the basic long term nature of the University. The University interprets this to mean, in addition to the adopted spending guidelines and restrictions described below, that the assets of the University shall be actively managed, that is, investment decisions regarding the particular securities to be purchased or sold shall be the result of the conscious exercise of discretion. The University recognizes that, commensurate with its overall objective of maximizing long range return while maintaining a high standard of portfolio quality and consistency of return, it is necessary that proper diversification of assets be maintained both among and within the classes of securities held. Within this context of active management and the necessity of adherence to proper diversification, the University relies upon appropriate professional advice. The University recognizes that long term objectives are most important, but it is also necessary that shorter term benchmarks be used to assess the periodic performance of the investment program. The University anticipates annual spending of five percent (5%) of the average market value for the past three years, the amount of which shall be determined in January of each year. The University believes that it is prudent to diversify endowment investments so as to minimize the risks of large losses and has established asset allocation ranges based upon the University s participation demographics, anticipated cash flow requirements and the expected returns of the capital markets. The University President will allocate assets within classes of investments which he/she considers to be appropriate. Investments Investments are valued at fair value based on quoted market prices. Short term investments are investments that are not cash equivalents but mature within the next fiscal year and are classified as current assets. Capital Assets Capital assets are stated at cost at date of acquisition or, in the case of gifts, at fair value at date of gift. Equipment with a unit cost of $2,000 or more and having an estimated useful life of greater than one year is capitalized. Renovations to buildings and infrastructure and land improvements that significantly increase the value or extend the useful life of the structure are capitalized. Routine repairs and maintenance are charged to operating expense in the year in which the expense is incurred. Depreciation of capital assets is computed on a straight line basis over the estimated useful lives of the respective assets. The University capitalizes, but does not depreciate, works of art and historical treasures that are held for exhibition, education, research and public service. Estimated lives used for depreciation purposes are as follows: 29

32 Notes to the Financial Statements, continued 1. Organization and Summary of Significant Accounting Policies, continued Capital Assets, continued Classification Improvements Buildings Transportation equipment Equipment Enterprise Resource Software Library holdings Estimated Life 20 years 40 years 5 15 years 5 20 years 7 years 10 years Compensated Absences The liability and expense incurred for employee vacation and sick pay are recorded as accrued compensated absences in the statements of net assets and as a component of compensation and benefit expense in the statements of revenues, expenses and changes in net assets. Deferred Revenue Deferred revenue includes amounts received for tuition and fees prior to the end of the fiscal year but related to the subsequent reporting period. Deferred revenues also include amounts received from grant and contract sponsors and state deferred maintenance funds that have not yet been earned. Income Taxes The University is an agency and instrumentality of the Commonwealth of Kentucky, pursuant to Kentucky Revised Statutes sections through Accordingly, the University is generally exempt from federal income taxes as an organization described in Section 115 of the Internal Revenue Code of 1986, as amended. The Foundation has received a determination from the Internal Revenue Service granting exemption from federal income taxation pursuant to the provisions of the Internal Revenue Code section 501(c)(3). Restricted Asset Spending Policy The University s policy is that restrictions on assets cannot be fulfilled by the expenditure of unrestricted funds for similar purposes. The determination on whether restricted or unrestricted funds are expended for a particular purpose is made on a case by case basis. Restricted funds remain restricted until spent for the intended purpose. 30

33 Notes to the Financial Statements, continued 1. Organization and Summary of Significant Accounting Policies, continued Operating Activities The University defines operating activities, as reported on the statement of revenues, expenses and changes in net assets, as those that generally result from exchange transactions, such as payments received for providing goods and services and payments made for services and goods received. Nearly all of the University s expenses are from exchange transactions. Certain significant revenues relied upon for operations, such as state and certain federal appropriations, gifts and investment income, are recorded as non operating revenues, in accordance with GASB Statement No. 35. Scholarship Discounts and Allowances Financial aid to students is reported in the financial statements under the alternative method as prescribed by the National Association of College and University Business Officers (NACUBO). Certain aid, such as loans and funds provided to students awarded by third parties, is accounted for as third party payments (credited to the student s account as if the student made the payment). All other aid is reflected in the financial statements as operating expenses, or scholarship allowances, which reduce revenues. The amount reported as operating expenses represents the portion of aid that was provided to the student in the form of cash. Scholarship allowances represent the portion of aid provided to the student in the form of reduced tuition. Under the alternative method, these amounts are computed by allocating the cash payments to students, excluding payments for services, on the ratio of total aid to the aid not considered to be third party aid. Federal Grants and Contracts Per GASB Statement No. 24, pass through grants should be reported as revenues and expenses in the financial statements if that entity has any administrative or direct financial involvement in the program. An entity has administrative involvement if it determines eligible secondary recipients or projects, even if using grantorestablished criteria. Therefore, Pell Grants are considered nonexchange transactions and are recorded as nonoperating revenues in the accompanying financial statements. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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 could differ from those estimates. 31