UNIVERSITY OF ALBERTA FINANCIAL STATEMENTS

Transcription

1 UNIVERSITY OF ALBERTA FINANCIAL STATEMENTS for the Year Ended March 31, 2008

2 TABLE OF CONTENTS Financial Analysis 3 Statement of Administrative Responsibility for Financial Reporting 16 Auditor's Report 17 Statement of Financial Position 18 Statement of Operations 19 Statement of Changes in Net Assets 20 Statement of Cash Flows 21 Notes to the Financial Statements 22 FINANCIAL SERVICES 3 rd Floor Administration Building University of Alberta Edmonton Canada T6G 2M7 Telephone: (780) Fax: (780) Website: fs.requests@ualberta.ca

3 University of Alberta Financial Analysis For the year ended March 31, 2008 Executive Summary The University of Alberta has reported a $50.3 million deficiency of revenue over expense for the year ended March 31, 2008 compared to a $65.8 million excess reported last year. The year end unrestricted net assets position is $51.8 million as compared to last year s $40.9 million. The 2008 deficiency is mainly due to net investment losses. The University holds $169.7 million of asset-backed commercial paper ( ABCP ) in its Non Endowed Investment Pool. The year end results include a write-down of $41 million related to ABCP holdings; representing 24 per cent of the total value. Partially offsetting this loss is an $11.8 million unrealized gain on shares held in a publicly traded spin-off company. The Unitized Endowment Pool had a loss of 6 per cent; therefore the University was required to transfer $27.2 million from endowments (cumulative capitalized earnings) to fund the endowment spending allocation. The Canadian market for ABCP suffered a liquidity disruption in August Shortly thereafter, a group of financial institutions and other parties agreed to a standstill period under the Montreal Accord, and a Pan-Canadian Investors Committee was formed to oversee the orderly restructuring of these investments during the standstill period. The University is a member of the Investors Committee. On April 24, 2008, nearly 96 per cent of the 1,932 ABCP note holders voted in favor of the restructuring plan devised by the Investors Committee. Current expectations are that the plan will be finalized in the coming months. In the absence of an active market for third-party ABCP, the University has estimated the fair value of these assets using an internal valuation model. The valuation model incorporates administration s best estimates; however the ongoing nature of the restructuring negotiations contributes to significant measurement uncertainty. Due to this uncertainty, it is possible that the ultimate fair value of these assets may vary significantly from administration s current best estimate and the magnitude of any such difference could be material to the financial results. At the dates the University acquired these investments they were rated R1 (high), the highest credit rating issued for commercial paper, as required by the University s investment policy. A comprehensive long-term cash flow forecast has been prepared and administration is confident that the exposure to ABCP does not represent a liquidity issue for the University and all obligations and commitments will continue to be met. The endowment investments had no exposure to ABCP investments. Financial highlights for 2008: The provincial government base operating grant increased by six percent and the Province s three-year forecast identifies continuing six percent increases through to fiscal The University received a number of new grants for academic program expansion, and in addition the Province provided a one-time grant to compensate the University for the tuition freeze impact. Research revenue (before deferrals) was $471.6 million in 2008, as compared to $461.4 million in The University is among the top five institutions in Canada in attracting research support from the whole range of Canadian and international sponsors. The University s fundraising activities also produced significant increases. New endowment contributions totaled $46.1 million and includes the final matching grant installment of $12.8 million for the China Institute. Expendable donations totaled $29.4 million and the University also received a $17.4 million in-kind contribution of land. In support of the University s capital plan, the Province provided $412.3 million in funding for several key capital priorities. Some of the larger projects that received funding included: Centennial Centre for Interdisciplinary Science ($165.4 million); Health Research Innovation Facility ($91.4 million); Utilities expansion ($59 million); The Edmonton Clinic North ($25 million) and the Augustana Campus Library and Forum ($20 million). 3

4 Areas of significant financial risk: unfunded pension liabilities, particularly with respect to the Universities Academic Pension Plan (UAPP), where the University of Alberta s active membership represents almost half of the total. The University s estimated share of the UAPP unfunded pension liability is approximately $175 million. Although generally accepted accounting principles do not currently require that this obligation be recorded, the University has disclosed this amount in the notes to the financial statements (refer to later section in the financial analysis); deferred maintenance, which now exceeds an estimated $870 million and place programs and initiatives at some risk (refer to later section in the financial analysis); uncertainty about utility costs due to the volatile energy market; inflationary pressures, particularly related to construction costs and contracted services; and the salary negotiations currently in progress for the academic staff. Investment income, too, can fluctuate significantly due to market performance. The University is wholly committed to addressing these obligations and will work closely with the provincial government on a long-term strategy that minimizes the University s exposure while maintaining its unprecedented forward momentum. At the same time, administration will continue to plan with the assumption that, in a booming province with multiple competing priorities, there is no guarantee that operating grant increases of six percent will continue indefinitely. The Financial Analysis is intended to provide the reader with the financial highlights for the 2008 year and should be read in conjunction with the March 31, 2008 audited Financial Statements. click on Annual Financial Statements Other documents the reader can refer to for a more in-depth discussion and analysis of the University s goals and objectives are as follows: click on Key Strategic Planning Documents: University Plan (update 2008) Capital Plan (update 2008) Annual Report (most recent fiscal year) Other information the reader may find useful: click on Investment Reports (most recent fiscal year) website link: 4

5 Introduction To reflect the nature and restrictions placed on its revenue sources, the University classifies its revenues into separate categories. The major classification distinction is whether the revenues represent unrestricted or restricted contributions. Unrestricted contributions are flexible in that they are available to the University s Board of Governors to allocate for spending, as it deems appropriate. Such contributions are recognized as revenue immediately. The University, on the other hand, can only expend restricted contributions for the specific purposes defined by the external sponsor or donor. Such contributions are deferred and recognized as revenue when conditions of the contributions are met. The term deferrals is used to describe the deferred component. The University segregates its financial activity into the following separate funds to further enhance accountability, budgetary control and stewardship of resources: Unrestricted funds: General Operating - this fund includes the provincial government operating grant, tuition fee revenue, investment income available for general spending and any new revenues generated by faculties and administrative units. Ancillary Services - these University business enterprises provide goods and services to the University community and to individuals, companies and organizations external to the University. These units are expected to operate on either a break-even basis, covering their full operating and capital costs, or on a profit basis. Enrolment Planning Envelope (EPE) - funded by the provincial government for the purposes of implementing specific new programs or expanding existing programs. Viable programs may become part of the operating grant in subsequent years. Internally Restricted (Research and Special Purpose) these funds include the internally restricted endowment spending allocation as well as other funds available for spending that do not have any external restrictions. Restricted funds: Research - funded by grants and contracts from external sponsors, donations and endowment investment income available for spending. Special Purpose - funded by grants and contracts from external sponsors, donations and endowment investment income available for spending. Expenditures include scholarships and bursaries, and other special projects involving teaching and community service. Capital - funded by provincial, federal and other government grants and donations. Funds are primarily designated for the acquisition of buildings, equipment and furnishings, including major renovations. For financial statement reporting purposes, the Statement of Financial Position, Statement of Operations, and Statement of Changes in Net Assets combine the assets, liabilities, equity and revenues and expenses of all funds. 5

6 Excess (Deficiency) of Revenue over Expense The University ended the 2008 year with a $50.3 million deficiency of revenue over expense (2007: $65.8 excess) and $51.8 million in unrestricted net assets (2007: $40.9). The decrease of $116.1 million, from an excess of revenue over expense to a deficiency, is due to a number of factors. A significant factor is the $65.4 million decrease in investment income, which is mainly attributable to the 2.8% loss for the Non Endowed Investment Pool ( NEIP ) (2007: 5.6% return) and the 6% loss for the Unitized Endowment Pool ( UEP ) (2007: 10.7% return). The endowment spending allocation ($27.2 million) has therefore been funded by a transfer from endowment net assets (cumulative capitalized earnings) as per the authority provided under the Post-Secondary Learning Act. The NEIP return also reflects the $41 million write-down in unrealized investment losses related to holdings in ABCP. Partially offsetting the NEIP loss is an $11.8 million unrealized gain on shares held in a publicly traded spin-off company. Other significant factors include: In the prior year the University reported that spending lags had contributed to the excess, due to the operating grant increase and the significant increases to the enrolment planning envelope grants. In 2008, expenditures have been incurred against this 2007 increase in funding. In the prior year the University reduced the vacation pay liability due to a change in estimation. There are no such adjustments in the current year, therefore the impact is an increase in expense over last year of approximately $8.8 million. The University has increased it s provision for a site remediation project by $7.2 million. Revenues from the Province of Alberta increased due to a 6% increase in the operating grant and the University also received new enrolment planning envelope grants. Revenues The following table highlights revenues before and after deferrals: (000's) (000's) (000's) (000's) Revenue per Financial Statements Revenue before Deferrals Revenue per Financial Statements Revenue before Deferrals Provincial government $ 624,247 $ 1,074,076 $ 600,566 $ 722,395 Federal and other government sources 153, , , ,454 Sales of services and products 196, , , ,741 Credit course tuition and related fees 188, , , ,880 Grants and donations 73, ,125 60,344 99,255 Investment income (loss) (7,956) (7,956) 57,461 61,295 Revenue $ 1,228,468 $ 1,751,163 $ 1,205,860 $ 1,455,020 6

7 Total Revenues (before deferrals) While the University s major funding comes from the provincial operating grant, tuition fees and sales, there have also been significant increases in restricted funds for sponsored research, infrastructure and specific academic programs. The provincial government has identified within its three year forecast, a 6% increase in the base operating grant through to fiscal There were also a number of new grants for academic program expansion Revenue Comparative For the year ended March 31 (in millions of dollars) 100 In 2008, total revenues (before deferrals) amounted to $1,751.2 million (2004: $1,117.8) representing a 56.7% increase over the five year period. Provincial Government 50 0 Provincial Government Operating Research Tuition & Related Fees Sales (excl. research) EPE, Capital, Special Purpose % of total revenue % 26.9% 10.8% 10.5% 26.3% 0.2% % 32.2% 13.7% 12.9% 10.0% 6.1% Other In 2008, total provincial government revenue (before deferrals) amounted to $1,074.1 million, representing an increase of $351.7 million (48.7%) compared to the prior year Change (000's) (000's) (000's) Unrestricted: Operating grant $ 442,168 $ 403,643 $ 38,525 Performance envelope award 3,266 5,091 (1,825) Enrolment planning envelope grants 38,127 28,489 9,638 Other grants 9,320 12,072 (2,752) 492, ,295 43,586 Restricted: Capital grants 319,571 63, ,253 Research grants 204, ,252 43,366 Special purpose grants 52,006 43,530 8,476 Access to the future fund (matching grants) 5,000 5, , , ,095 Revenue (before deferrals) $ 1,074,076 $ 722,395 $ 351,681 The total operating grant increased by 9.5% compared to the prior year. The base operating grant increased by 6%, the University also received a one-time tuition fee grant to compensate for the tuition freeze impact and there were slight increases to various other operating grants. The enrolment planning envelope increase is due to new grants received for the implementation of new programs or expansion to existing programs. Capital grants increased significantly due to funding for the Centennial Centre for Interdisciplinary Science, Utilities expansion, Augustana Campus Library and Forum, Edmonton Clinic North and a number of other capital projects. Research grants increased primarily due to the funding received for the Health Research Innovation Facility and the special purpose grants increased mainly due to funding from Alberta Advanced Education and Technology for the Lois Hole Library ($5.3) and the new Access to the Future Fund (innovation fund) ($2.6). The Access to the Future Fund (matching grant) provided the University with research ($3.5) and special purpose ($1.5) funding; these matching grants were then capitalized to endowments. 7

8 The Province also provided a grant for the China Institute Endowment of $12.8 million (2007: $24.5), which is recorded as an endowment contribution. This now completes the province s commitment to match the original in-kind contribution of $37.3 million. Research Research revenue (before deferrals) amounted to $471.6 million, representing an increase of $10.2 million (2.2%) compared to the prior year Change (000's) (000's) (000's) Research revenue by type: Provincial government $ 208,082 $ 166,817 $ 41,265 Federal and other government 175, ,683 (11,887) Grants and donations 69,575 72,789 (3,214) Investment income 5,913 23,560 (17,647) Sales of services and products 12,204 10,548 1,656 Research revenue (before deferrals) $ 471,570 $ 461,397 $ 10,173 The University of Alberta continues to increase its level of research funding in all areas of scholarly activity. The University remains in the top five institutions in Canada overall in both funding and impact of research activities. The Province of Alberta increase is due to funding for the Health Research Innovation Facility (HRIF). Government of Canada funding decreased over last year ($11.5). There were increases in funding from Canadian Institutes of Health Research ($2.1), NSERC ($3.9) and an overall increase across other federal funded programs ($5.0). These increases were offset by a decrease in funding from Canada Foundation for Innovation ($22.4) due to funding received in the prior year for a capital research project (Health Research Innovation Facility). Funding from business decreased $5.2 million. Other sources (includes other government, associations, foundations, institutes, individuals) increased by $4.1 million. Endowment income funding has decreased ($18.5) due to the UEP investment loss. Research funding has increased 31% over the past five years. In addition to increased support from government (38%), research activities funded from the business sector have increased (65.1%) and other sources have increased (36.6%). In 2008, research funding represented 26.9% of total revenues (before deferrals) as compared to 32.2% in Research Revenue by Source For the year ended March 31 (in millions of dollars) Endowment Income Other Business Government of Canada Province of Alberta 8

9 Tuition and Related Fees Tuition and related fees amounted to $189.0 million (2007: $181.9). This increase is primarily attributable to a 3.3% increase in tuition fees coupled with a 1.1% enrolment increase. In 2006, the provincial government announced a comprehensive framework to make post-secondary studies more affordable for students. A key component of the framework was a new tuition fee policy, starting in fall The tuition fee policy limits tuition increases to changes in the annual Consumer Price Index (CPI). Along with the announcement of the new tuition policy, the provincial government increased its grants to post-secondary institutions for the three years starting to offset the difference between maximum annual tuition increase under the old policy and the new policy. The tuition fees (instructional fees only) for an Arts or Science student with a full time course load in 2008 were $4,686 as compared to $4,537 in Sales of Services and Products Ancillary services units and academic and administrative units generate revenues through the sale of services and products to individuals, companies and organizations external to the University. Also included in sales are miscellaneous types of revenues received by the University. Sales of services and products amounted to $196.2 million (2007: $181.7). The ancillary services units generated sales of $85.1 million for 2008 (2007: $82.3). The units with the largest sales are: Bookstore ($25.5), Housing and Food Services ($23.3), Utilities ($16.9) and Parking Services ($11.5). Academic and administrative units generated sales of $111.1 million (2007: $99.4), with the most significant activity as follows: Faculty of Medicine and Dentistry ($55.5) which is mainly revenue from Capital Health and the Practice Plans in support of positions that provide an interaction between the academic environment and the clinical services environment; non credit tuition and related fees generated by the Faculty of Extension ($10.4); Physical Education and Recreation revenue generated by athletic teams, sport camps and rentals of facilities ($8.7); Faculty of Business professional and executive development programs ($7.0) and Faculty of Agriculture, Life and Environmental Sciences ($5.8) which is mainly from the sale of animal, plant and related products. The $111.1 million in academic and administrative unit sales represents an $11.7 million increase which is due to increased activity or new sales activity primarily in the following areas: Faculty of Medicine ($7.3), Faculty of Extension ($1.3 in non-credit tuition fees due to an increase in enrolment) and a net overall increase across all other units ($3.1). Investment Income (Loss) The loss from investments for the year was $8.0 million compared to $57.5 million in income recorded in the prior year. Investments primarily fall into two categories, the Unitized Endowment Pool ( UEP ) and the Non Endowed Investment Pool ( NEIP ). The UEP had a loss of 6% (2007: 10.7% return). Although this loss resulted in erosion in the real value of the UEP assets, the primary objective of earning the spending allocation plus fees plus inflation over the long-term continues to be met as the aggregate market value exceeds the cumulative endowed contributions indexed for inflation. The US sub-prime mortgage crisis resulted in a contraction of credit and liquidity in the global financial sector. Central banks responded in a coordinated fashion by injecting liquidity on numerous occasions. The prospect of a US housing sector led recession coupled with commodity driven inflation led to fears of stagflation. Investors became concerned that a major slow down in the US economy would have a significant negative impact on the global economy. These concerns together with increased risk aversion resulted in losses for equities in most developed economies. The Morgan Stanley Capital International World Index posted a loss of 13.5% (2007: 14.7% return). This had a negative impact on performance given the UEP s 50.7% allocation to foreign equities as at March 31, Collectively the UEP s managers detracted 1.8% from performance as the UEP s benchmark posted a loss of 4.2% (2007: 9.9% return). At March 31, 2008 the benchmark was comprised of the following: 20% DEX Bond Universe Index, 10% DEX Real Return Bond Index, 15% S&P/TSX Composite Index and 55% Morgan Stanley Capital International World Index 50% hedged to the Canadian Dollar. The NEIP, comprised of 3 distinct strategies (short-term, mid-term and long-term), recorded an overall loss of 2.8% for the year (2007: 5.6% return). The short-term money market investments had a loss of 3.2% (2007: 4.4% return); this compares unfavorably with the benchmark DEX 91 Day Treasury Bill return of 4.6% (2007: 4.2%) and is primarily attributable to the University s exposure to third-party asset-backed commercial paper ( ABCP ). In August of 2007 a liquidity crisis for 9

10 third-party ABCP unfolded. This previously robust market collapsed with almost no warning due to investor concerns about the underlying exposure to US sub-prime mortgage assets in the affected 22 trusts with a value of $32 billion. At the time, the University s exposure to the affected ABCP was $171.2 million. In addition to this, the University held $38.8 million in bank-sponsored ABCP. All ABCP holdings at the time of acquisition were rated R1 (high), as required by the University s investment policy. As of March 31, 2008 the University s holdings of ABCP amounted to $169.7 million. Of this amount, $161.9 million is subject to restructuring under the Montreal Accord, of which $159 million falls under the information statement in respect of the plan of compromise and arrangement (the Plan ) dated March 20, The remaining $7.8 million is related to banksponsored ABCP, which is subject to separate restructuring negotiations. The Plan will result in the issuance of long-term floating rate notes that match the duration of the underlying assets. Note holders in trusts that are comprised of exclusively traditional assets will receive traditional asset tracking notes. Trusts whose assets are comprised of both synthetic and traditional assets will be consolidated into a master asset vehicle, cross collateralized and supported by a margin funding facility. The master asset vehicle will issue a series of long-term floating rate notes. US sub-prime assets will be excluded from the aforementioned restructuring and ineligible tracking notes will be issued. With the exception of the exposure to US residential mortgages in the ineligible tracking notes, the remaining underlying assets are of high quality and should receive a strong investment grade credit rating. The University has used a discounted cash flow model supplemented by valuation information to arrive at a write-down of $41 million representing 24% of the total value. Of this write-down $22.5 million reflects the fact that a substantial portion of the restructured notes are anticipated to have an interest rate yield that is significantly below that of securities of comparable risk and duration. $4.5 million of the write-down reflects the degree of uncertainty associated with the restructuring process as at March 31, The remaining write-down of $14 million relates to an impairment of value on the University s underlying exposure to US residential mortgages of $20.4 million. After the restructuring is complete the long-term floating rate notes will be held in the University s mid-term bond portfolio. The majority of these notes are anticipated to have a maturity date of December 20, Although it is expected that an active market for the restructured notes will evolve over time, it is possible that the restructured notes will be held to maturity. A comprehensive long-term cash flow forecast has been prepared and administration is confident that the exposure to ABCP does not represent a liquidity issue for the University and all obligations and commitments will continue to be met. The UEP investments had no exposure to ABCP investments. On April 1, 2007 the University retained the services of an external money market manager to assist with the NEIP s shortterm investment program. This external mandate did not have any exposure to the affected third-party ABCP. As at March 31, 2008 this mandate had been fully implemented. On November 2, 2007, the Board of Governors approved a revised University Funds Investment Policy, in which the credit standards for internally managed short and mid-term funds were significantly enhanced. The high quality mid-term bond portfolio had a return of 6% (2007: 4.5%); this trailed the benchmark DEX Short Term Bond Index return of 6.4% (2007: 4.6%). The long-term portion of the NEIP, which is invested in the UEP, detracted from performance with a loss of 6% (2007: 10.7% return). The University holds a significant equity position in a publicly traded spin-off company (BioMS Medical Corp.), pursuant to a licensing transaction that was completed on December 14, On January 23, 2008 BioMS announced the successful completion of an exclusive worldwide sub-license agreement with Eli Lilly and Company. As a result of this transaction all remaining contractual restrictions on the University s equity holdings were removed. The University s entire equity holding in BioMS Medical Corp. are now recorded at market value. An unrealized capital gain of $11.8 million related to this one time transaction is reflected in investment income. Given the nature of this unrealized gain it has not been included in the calculation of the 2.8% loss for the NEIP. 10

11 Expenses Expenses for 2008 increased by $143.9 million (12.1%) from $1,191.9 million in 2007 to $1,335.8 million in The main components of this increase are: Salaries expense increased by $66.9 million (11.2%). The collective bargaining process resulted in negotiated salary increases for academic (3.9%) and support (3.9%) staff and, in addition, staff received merit increases. There were also increases in new hires (approximately 650) relating to the increased level of activity. (2008: approx. 10,350 staff, 2007: approx. 9,700 staff). Included in the above staff counts are approximately 1,313 academic staff granted tenure Expense Comparative For the year ended March 31 (in millions of dollars) There were salary expense increases of $40.7 million in the general operating fund, $9.1 million in the research fund and an overall increase of $17.1 million in the remaining funds. The increase in the remaining funds includes an increase due to a change in estimation for the academic staff vacation pay liability in the prior year (the impact was an approximate $8.8 decrease to salary expense in the 2007 year) % of total expense Salaries & benefits Materials, supplies & maintenance Scholarships & bursaries Utilities Amortization of capital assets % 25.4% 5.5% 2.6% 7.7% % 21.1% 6.0% 3.5% 8.5% Benefits expense increased by $17.1 million (16.4%). The increase is primarily due to increased salary costs and staff numbers. There were increases of $11.4 million in the general operating fund, $0.7 million in the research fund and an overall increase of $5.0 million in the remaining funds. The increase in the remaining funds is mainly due to a change in estimation for the academic staff vacation pay liability in the prior year. Materials, supplies and services expense increased by $33.5 million (14.0%) due to increased activity in the operating fund ($12.3), increased research activity ($20.5) and a net increase across all other funds ($0.7). Utilities expense decreased by $0.8 million (2.4%) as a result of lower power and chilled water costs. The University has managed some of its exposure to volatility in the electrical industry by entering into contracts to fix a portion of its electrical costs. Maintenance expense increased by $16.8 million (42.3%). The increase is mainly in the operating fund and is due to increased operating activity and an increase in the provision for a site restoration project ($7.2). Scholarships and bursaries expense increased by $3.5 million (5.1%). This increase was spread throughout a number of initiatives and programs. A variety of scholarship programs received a $1.9 million increase in support from the general operating fund. The remaining $1.6 million increase is primarily due to an increase in research funded scholarships and bursaries. All other areas of expense were comparable to the prior year. 11

12 Donations Donations (before deferrals) received in the year totaled $89.3 million as compared to $54.5 million in 2007 and are comprised of: $29.4 million (2007: $27.3) in expendable donations. $25.3 million (2007: $23.2) in endowed donations. $34.6 million (2007: $4.0) in in-kind donations. In-kind donations include a land donation ($17.4) and a donation of software ($14.0). In 2008, the University received $5.0 million from the Access to the Future Fund (provincial government matching grant program). The Province also provided $12.8 million in matching funds for the China Institute Endowment, which is recorded as an endowment contribution. These provincial government grants are not included in the $89.3 million of donation funding. Donor pledges outstanding at March 31, 2008 are $89.2 million (2007: $79.4) and are not reflected in the University s financial statements. These pledges are expected to be honoured over the next several years Donations Received For the year ended March 31 (in millions of dollars) In-kind Capital Donations Endow ed Donations Expendable Donations 12

13 Financial Position The University s net assets position decreased by $9.2 million due to a decrease in endowment value of $17.3 million, a decreased investment in capital assets and collections of $2.8 million and an increase in unrestricted net assets of $10.9 million. Endowments Endowments consist of restricted donations to the University, the principal of which is required to be maintained intact in perpetuity, as well as internal allocations by the Board of Governors. The investment income generated from endowments must be used in accordance with the various purposes established by the donors and the Board of Governors. The endowment investment policy, which is long term in nature, is designed to meet the funding objectives of the University by maximizing returns with an acceptable level of risk, while maintaining the real capital value of the endowment and providing for an appropriate level of spending. The University has long recognized the value of permanent funding support and through successful fund raising efforts over the years, ranks fourth overall amongst Canadian universities in terms of total endowment funds. Endowment investments recorded a loss of 6% for the year ended March 31, 2008 (2007; 10.7% return) and averaged 9.3% on a five year annualized basis Endowments by Category For the year ended March 31 (in millions of dollars) Academic Programs $205.4 $200.7 $172.4 $139.0 $138.1 Research Scholarships Chairs & Professorships Total $734.2 $751.5 $640.1 $556.8 $538.5 Endowment funding supports a variety of key initiatives in the areas of scholarships, professorships, chairs, visiting speakers, research and many other activities. The spending allocation for these programs in 2008 is $30 million (2007: $35.2). As a result of the investment loss, the spending allocation for externally restricted endowments in 2008 is funded from the endowment net assets (cumulative capitalized earnings) and the spending allocation for the internally restricted endowments is funded from unrestricted net assets. Because the University is funding the current year s spending allocation for externally restricted endowments from cumulative capitalized earnings, the University chose to decapitalize only the amount that was required to cover the 2008 externally restricted endowment expenditures ($27.2) versus the full endowment spending allocation per policy ($36.0). The difference of $8.8 million will be allocated as a first charge to next year s investment income. The spending allocation is 4.65% (2007: 4.89%) and is based on a moving average of the endowment s fair value. At March 31, 2008, there were approximately 2,105 individual endowments. The total value of endowments is $734.2 million (2007: $751.5), a net decrease of $17.3 million, comprised of: $41.1 million externally endowed donations. (includes provincial matching funds for the China Institute Endowment of $12.8 million) $10.8 million capitalization from expendable funds: (includes $5 million provincial matching grant program). ($41.9) million investment loss. ($27.2) million allocated for program spending from endowment net assets (cumulative capitalized earnings). The fair value of endowments exceeds cumulative capitalized endowment contributions (indexed for inflation) by $72 million. Fiscal years ending March 31 using CPI All Items Index Total Endowment Growth versus Inflation For the year ended March 31 (in millions of dollars) 2008 Surplus $ Surplus $ Market Value Contributions Inflated

14 Acquisition of Capital Assets and Collections Change (000's) (000's) (000's) Buildings and utilities $ 163,449 $ 171,338 $ (7,889) Equipment and furnishings 79,229 51,518 27,711 Learning resources 16,071 16,807 (736) Permanent collections 760 2,098 (1,338) Land 24, ,059 Total acquisitions $ 284,157 $ 242,350 $ 41,807 The additions to buildings and utilities are distributed amongst many different University structures and facilities on the north campus, south campus, Enterprise Square, Augustana campus and Campus St. Jean. The most significant additions to individual buildings in 2008 were as follows (in millions of dollars): construction of the Centennial Centre for Interdisciplinary Science (CCIS) ($48.2) renovation of Enterprise Square ($37.7) construction of the Health Research Innovation Facility (HRIF) ($31.3) construction of various buildings: The Edmonton Clinic North ($8.0), Utilities expansion ($5.0), Augustana Campus Library ($4.7), Jubilee Auditorium Car Park ($3.9), Killam Centre for Advanced Studies ($3.5). major renovations on various buildings: Pembina Hall ($4.6), Manulife Place ($3.8). The increase in equipment and furnishings is due to acquisitions of research equipment and large in-kind contributions of software. The increase in land is due to the acquisition of land for the St. Albert Research Station. The $24.5 million acquisition was funded through an in-kind contribution ($17.4), provincial government grant ($5.0) and University funds ($2.1). Deferred Maintenance The average age of the University s buildings is 46 years. Most of the significant research teaching facilities were built in the 1950 s or 1960 s and are now at a point of requiring major system upgrades. The University s deferred maintenance deficit now exceeds an estimated $870 million and place the University s programs and initiatives at some risk. The University has been attempting to provide a reasonable level of care across the campus, directing portions of its capital grants to buildings of strategic importance or to address abnormally high maintenance costs. This strategic approach coordinates deferred maintenance, functional renewal and other programs like the development of smart classrooms to maximize the effect of limited funding. Deferred maintenance requirements are not reflected in the University s financial statements since they are not liabilities or commitments for accounting purposes. 14

15 Unfunded pension liability The University participates with other employers in the Universities Academic Pension Plan (UAPP) to provide pensions for academic staff members. There is an acturial deficiency in the plan, and the University has estimated its share of the deficiency (under CICA 3461: Employee Future Benefits) by prorating the total employers share by the University s percentage of the total payroll costs of the plan. The University s estimated share of the unfunded UAPP deficiency, given significant measurement uncertainty in the methodology and assumptions used, is approximately $175 million. The University has not recorded its share of the unfunded actuarial deficiency in its financial statements, as the Universities are still working toward an agreement on a reasonable basis to calculate each University s share of the liability. In addition, proposed changes to the plan may significantly impact the UAPP liability. In the upcoming year, the University of Alberta will work with the other Universities and the Ministry of Advanced Education and Technology to determine the appropriate accounting treatment for recording the UAPP liability. The University is also a participant in the Public Sector Pension Plan (PSPP) for support staff members. No attempt to isolate the University s share of the PSPP has been undertaken to date due to the number of participating employers in the PSPP and the resultant complexities in calculating accurate information on the University s share of any surplus or unfunded liability. Unrestricted Net Assets The increase of $10.9 million in unrestricted net assets is summarized in the table below: Change (000's) (000's) (000's) Unexpended (over expended) funds: General operating $ 17,559 $ 7,953 $ 9,606 Enrolment planning envelope 19,662 12,036 7,626 Ancillary enterprises 22,642 26,690 (4,048) Special purpose (operating) 37,705 37,873 (168) Other research 30,600 29, , ,470 13,698 Accrued employee benefits (76,385) (73,540) (2,845) Unrestricted net assets $ 51,783 $ 40,930 $ 10,853 The most significant factors in the change from prior year are: General operating - increased funding from the Province and reclassification of ancillary chargeback units offset by investment loss. Enrolment planning envelope mainly due to new grants. Ancillary enterprises - due to reclassification of ancillary chargeback units to the general operating fund. Accrued employee benefits due to various increases (vacation pay: $1.4, retirement benefits: $1.0, long-term disability: $0.4). 15

16 UNIVERSITY OF ALBERTA STATEMENT OF ADMINISTRATIVE RESPONSIBILITY FOR FINANCIAL REPORTING The administration of the University is responsible for the preparation and for the integrity and objectivity of the accompanying financial statements and the notes thereto. The administration believes that the financial statements present fairly the University's financial position as at March 31, 2008 and the results of its operations for the year then ended. The financial statements have been prepared in accordance with generally accepted accounting principles. Where alternative accounting methods exist, those deemed most appropriate in the circumstances have been chosen. Financial statements are not precise, since they include certain amounts based on estimates and judgments. Such amounts have been determined on a reasonable basis in order to ensure that the financial statements are presented fairly in all material respects. In fulfilling its responsibilities and recognizing the limits inherent in all systems, the administration has developed and maintains a system of internal control designed to provide reasonable assurance that University assets are safeguarded from loss and that the accounting records are a reliable basis for the preparation of financial statements. The integrity of internal controls is reviewed on an ongoing basis by the Internal Audit Department. The Board of Governors carries out its responsibility for review of the financial statements principally through its Audit Committee. The majority of the members of the Committee are not officers or employees of the University. This committee meets regularly with administration and with external and internal auditors to discuss the results of audit examinations and financial reporting matters. The external and internal auditors have full access to the Board Audit Committee with and without the presence of the administration. The Board of Governors of the University of Alberta has approved the financial statements. The financial statements for the year ended March 31, 2008 have been audited and reported on by the Auditor General for the Province of Alberta whose report outlines the scope of his audit and presents his opinion on the financial statements. Original Signed by Indira Samarasekera Indira V. Samarasekera, OC President May 28, 2008 Original Signed by Phyllis Clark Phyllis Clark Vice-President (Finance & Administration) and Chief Financial Officer

17 Auditor s Report To the Board of Governors of the University of Alberta I have audited the statement of financial position of the University of Alberta as at March 31, 2008 and the statements of operations and change in unrestricted net assets, changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of the University s management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I plan and perform an audit to obtain reasonable assurance 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. In my opinion, these financial statements present fairly, in all material respects, the financial position of the University as at March 31, 2008 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. I draw your attention to Note 8 to the financial statements that describes the unfunded liability of the Universities Academic Pension Plan which may affect the University s future financial statements. Our opinion is not qualified in respect of this matter. The official version of the Report of the Auditor General, and the information the Report covers, is in printed form. (Original Signed by Fred Dunn) Edmonton, Alberta May 28, 2008 FCA Auditor General

18 UNIVERSITY OF ALBERTA STATEMENT OF FINANCIAL POSITION AT MARCH 31, 2008 (in thousands of dollars) ASSETS Current Cash and cash equivalents (Note 3) $ 77,343 $ 245,704 Short-term investments (Note 4) 410,401 16,211 Accounts receivable 189, ,280 Inventories and prepaid expenses 16,960 13, , ,112 Investments (Note 4) 1,014, ,241 Capital assets and collections (Note 6) 1,718,478 1,537,838 $ 3,427,650 $ 2,908,191 LIABILITIES AND NET ASSETS Current Liabilities Outstanding cheques $ - $ - Accounts payable and accrued liabilities 161, ,399 Current portion of employee benefit liabilities (Note 7) 32,986 31,187 Current portion of long-term obligations (Note 9) 9,799 14,811 Equity Net Expenditure Deferred contributions, research and other (Note 10) 280, ,765 Deferred revenue 18,824 16,674 Tuition Revenue Deferral Deferred revenue 503, ,836 Staff benefit liabilities Long-term debt Employee benefit liabilities (Note 7) 43,399 42,353 Long-term obligations (Note 9) 185, ,544 Deferred contributions, research and other (Note 10) 90,000 90,000 Deferred contributions, capital (Note 10) 290,074 10,501 Unamortized deferred capital contributions (Note 11) 1,121, ,131 2,234,008 1,705,365 Net Assets Endowments (Note 12) 734, ,478 Equity Net Expenditure Investment in capital assets and collections (Note 13) 407, ,418 Unrestricted 51,783 40,930 Equity Net Expenditure 1,193,642 1,202,826 $ 3,427,650 $ 2,908,191 Signed on behalf of the Board of Governors Original Signed Original Signed Chairman of the Board President The Accompanying notes are part of these Statements

19 UNIVERSITY OF ALBERTA STATEMENT OF OPERATIONS AND CHANGE IN UNRESTRICTED NET ASSETS FOR THE YEAR ENDED MARCH 31, 2008 (in thousands of dollars) REVENUE Provincial government (Note 17) $ 624,247 $ 600,566 Federal and other government 153, ,868 Sales of services and products 196, ,741 Credit course tuition and related fees 188, ,880 Grants and donations 73,340 60,344 Investment income (loss) (Note 5) (7,956) 57,461 EXPENSE 1,228,468 1,205,860 Amortization of deferred capital contributions (Note 11) 56,971 51,874 1,285,439 1,257,734 Salaries 664, ,486 Employee benefits 121, ,202 Materials, supplies and services 272, ,902 Utilities 35,001 35,849 Maintenance 56,497 39,703 Interest 10,068 8,023 Scholarships and bursaries 73,217 69,678 Amortization of capital assets 102,882 98,046 1,335,750 1,191,889 EXCESS (DEFICIENCY) OF REVENUE OVER EXPENSE (50,311) 65,845 TRANSFER FROM ENDOWMENT NET ASSETS (Note 11) - TRANSFER (TO) FROM ENDOWMENTS (Note 12) 27,809 (7,614) ADOPTION OF NEW FINANCIAL INSTRUMENTS ACCOUNTING STANDARD (Note 2) 7,926 - NET CHANGE IN INVESTMENT IN CAPITAL ASSETS (Note 13) 25,429 (21,198) Change in unrestricted net assets for the year 10,853 37,033 UNRESTRICTED NET ASSETS, BEGINNING OF YEAR 40,930 3,897 UNRESTRICTED NET ASSETS, END OF YEAR $ 51,783 $ 40, The accompanying notes are part of these financial statements

20 UNIVERSITY OF ALBERTA STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED MARCH 31, 2008 (in thousands of dollars) Endowments Investment in Capital Externally Internally Assets and Unrestricted Restricted Restricted Total Collections Net Assets NET ASSETS, March 31, 2006 $ 572,457 $ 67,686 $ 640,143 $ 387,641 $ 3,897 Excess of revenue over expense ,845 Investment income (Note 5) 32,536-32, Gifts of endowment principal 71,185-71, Transfers (Note 12) 20,156 (12,542) 7,614 - (7,614) Net investment in capital assets (Note 13) ,198 (21,198) Contributions of assets not subject to amortization (Note 13) ,579 - NET ASSETS, March 31, 2007 $ 696,334 $ 55,144 $ 751,478 $ 410,418 $ 40,930 Adoption of new financial instruments accounting standard (Note 2) 1,008-1,008-7,926 Deficiency of revenue over expense (50,311) Investment loss (Note 5) (42,954) - (42,954) - - Gifts of endowment principal 52,468-52, Transfers (Note 12) (27,809) - (27,809) - 27,809 Net investment in capital assets (Note 13) (25,429) 25,429 Contributions of assets not subject to amortization (Note 13) ,679 - NET ASSETS, March 31, 2008 $ 679,047 $ 55,144 $ 734,191 $ 407,668 $ 51, The accompanying notes are part of these financial statements

21 UNIVERSITY OF ALBERTA STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2008 (in thousands of dollars) CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES Excess (deficiency) of revenue over expense $ (50,311) $ 65,845 Add (deduct) non-cash items: Amortization of capital assets 102,882 98,046 Amortization of deferred capital contributions (56,971) (51,874) Loss on disposal of capital assets 550 1,055 Employee benefit liabilities 2,845 (8,547) Unrealized (gain) loss on investments 45,525 (6,449) Total non-cash items 94,831 32,231 Net change in non-cash working capital (*) (496,752) 50,935 CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES (452,232) 149,011 Acquisition of capital assets and collections (284,159) (242,350) Purchases of investments, net (33,692) (98,522) Endowment investment earnings 21,650 - Endowment investment earnings in excess of the spending allocation - 4,727 Proceeds on disposal of capital assets (296,115) (336,085) CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES Endowment contributions 52,468 71,185 Increase in long term deferred contributions research and other - - Capital contributions 476, ,928 Contributions of assets not subject to amortization 22,679 1,579 Long-term obligations - new financing 38,307 47,143 Long-term obligations - repayments (9,528) (8,199) 579, ,636 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (168,361) 80,562 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 245, ,142 CASH AND CASH EQUIVALENTS, END OF YEAR (Note 3) $ 77,343 $ 245,704 (*) Net change in non-cash working capital: (Increase) decrease in short-term investments $ (560,419) $ 1,511 Increase in accounts receivable (38,417) (22,144) Increase in inventories and prepaid expenses (3,043) (1,924) Increase in accounts payable 36,744 10,176 Increase in deferred contributions, research and other 66,233 62,637 Increase in deferred revenue 2, $ (496,752) $ 50, The accompanying notes are part of these statements