CALIFORNIA POLYTECHNIC STATE UNIVERSITY, SAN LUIS OBISPO. Financial Statements. June 30, (With Independent Auditors Report Thereon)

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1 Financial Statements (With Independent Auditors Report Thereon)

2 Table of Contents Page Independent Auditors Report 1 Management s Discussion and Analysis 3 Financial Statements: Statement of Net Assets 14 Statement of Revenues, Expenses, and Changes in Net Assets 15 Statement of Cash Flows 16 18

3 KPMG LLP Suite Pacifica Irvine, CA Independent Auditors Report Jeffrey D. Armstrong, President California Polytechnic State University, San Luis Obispo: We have audited the accompanying financial statements of California Polytechnic State University, San Luis Obispo (the University), an agency of the State of California, and its aggregate discretely presented component units as of and for the year ended, which collectively comprise the University s financial statements as listed in the table of contents. These financial statements are the responsibility of the University s management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the aggregate discretely presented auxiliary organizations of the University. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinions, insofar as they relate to the amounts included for the discretely presented auxiliary organizations, are based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinions. As discussed in note 2 to the financial statements, the financial statements of the University are intended to present the financial position, the changes in financial position, and cash flows of only that portion of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the State of California that is attributable to the transactions of the University. They do not purport to, and do not, present fairly the financial position of the State of California or the California State University System as of, the changes in their financial position, or, where applicable, their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. In our opinions, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of California Polytechnic State University, San Luis Obispo and of its aggregate discretely presented component units as of June 30, 2011, and the respective changes in their financial position and, where applicable, cash flows thereof for the year then ended, in conformity with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

4 Management s discussion and analysis on pages 3 through 13 is not a required part of the basic financial statements but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. April 30,

5 Management s Discussion and Analysis This section of California Polytechnic State University, San Luis Obispo s (the University) annual financial report presents the University s discussion and analysis of the financial performance of the University for the fiscal year ended. This discussion has been prepared by management and should be read in conjunction with the financial statements and notes. Introduction to the Financial Statements This annual report consists of a series of financial statements prepared in accordance with the Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, as amended by GASB Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. For reporting purposes, the University is considered a special-purpose government engaged only in business-type activities. The financial statements include the statement of net assets; the statement of revenues, expenses, and changes in net assets; and the statement of cash flows. These statements are supported by the notes to the financial statements and this section. All sections must be considered together to obtain a complete understanding of the financial picture of the University. Statement of Net Assets The statement of net assets includes all assets and liabilities. Assets and liabilities are generally reported at their book value, on an accrual basis, as of the statement date, except investments, which are reported at their fair market value. The statement also identifies major categories of restrictions on the net assets of the University. Statement of Revenues, Expenses, and Changes in Net Assets The statement of revenues, expenses, and changes in net assets presents the revenues earned and expenses incurred during the year on an accrual basis. Statement of Cash Flows The statement of cash flows presents the inflows and outflows of cash for the year and is summarized by operating, noncapital financing, capital and related financing, and investing activities. The statement is prepared using the direct method of cash flows and, therefore, presents gross rather than net amounts for the year s activities. The statement of cash flows for the discretely presented auxiliary organizations is not included in the University s financial statements. Analytical Overview Summary The following discussion highlights management s understanding of the key financial aspects of the University s financial activities. Included is an analysis of current year activities and balances; a discussion of restrictions of University net assets; a discussion of capital assets and long-term debt; and factors impacting future reporting periods. 3 (Continued)

6 Management s Discussion and Analysis The University s condensed summary of net assets as of and 2010 is as follows: Condensed Summary of Net Assets June Assets: Current assets $ 104,593,241 91,669,287 Capital assets 704,961, ,254,645 Other noncurrent assets 187,386, ,671,934 Total assets 996,940, ,595,866 Liabilities: Current liabilities 59,511,091 49,453,874 Long-term debt obligations, net of current portion 443,118, ,424,680 Other noncurrent liabilities 16,692,380 18,679,888 Total liabilities 519,321, ,558,442 Net assets: Invested in capital assets, net of related debt 296,383, ,042,032 Restricted, nonexpendable 3,653,575 3,514,395 Restricted, expendable 74,238,466 15,084,990 Unrestricted 103,343,180 76,396,007 Total net assets $ 477,619, ,037,424 Assets Total assets increased $101.3 million from prior year due to a $12.9 million increase in current assets, a $42.7 million increase in capital assets, and a $45.7 million increase in other noncurrent assets. Total current assets increased primarily due to an increase in short-term investments of $14.7 million, offset by a decrease in accounts receivable of $1.6 million. The increase in short-term investments is directly related to the increase in the composition of investments being used to fund current operations and the decrease in long-term investments being used to fund capital improvements and major capital projects. Net capital assets increased $42.7 million, or 6.5%, primarily due to $74.6 million of current year additions, offset by $31.3 million in current year depreciation expense. Capital asset additions primarily comprise construction work in progress for the following projects: $37.8 million for the Recreation Center Expansion, $18.0 million for the Center for Science, $4.1 million for the Meat Processing Center, and $4.9 million for the thermal energy storage tank. Other noncurrent assets increased $45.7 million, or 32.3%, primarily due to a $78.9 million increase in accounts receivable, offset by a $32.5 million decrease in other long-term investments. Noncurrent accounts receivables increased due to unspent state appropriation proceeds for the Center for Science appropriated in the current year. Long-term investments decreased due to increased spending of long-term investments used to fund capital improvements and major capital projects. The largest decrease was $40.7 million from the Student Union 4 (Continued)

7 Management s Discussion and Analysis Recreation Center Expansion construction project, which is offset by an increase of $7.4 million of Student Union fees reserved for future funding of capital projects and improvements. Liabilities Total liabilities increased $4.8 million, or 0.9%, due to a $10.1 million increase in current liabilities, offset by a $5.3 million decrease in noncurrent liabilities. The increase in current liabilities is primarily due to a $5.1 million increase in accounts payable and a $2.2 million shift in accrued compensated absences from long-term to short-term. Accounts payable increased as a result of $7.0 million in ongoing construction expenses from the Recreation Center Expansion project and Center for Science project. The increase in accounts payable was offset by the completion of two projects within Student Union construction and a onetime $2.9 million prior year purchase of housing equipment. Non-current liabilities decreased primarily due to $1.2 million in debt retirement from Housing Series 2002A revenue bonds and a $4.0 million decrease in accrued compensated absences. The decrease in accrued compensated absences is indicative of more leave being taken in the current year as a result of mandated furloughs in the prior year. Net Assets The University s net assets totaled $477.6 million at the end of the fiscal year, compared to $381.0 million in the previous year, an increase of $96.6 million, or 25.4%. A significant portion, $296.4 million, of net assets at the end of the year is Invested in Capital Assets, net of related debt; however, the overall increase in net assets came primarily from Restricted-expendable for Capital Projects, Invested in Capital Assets and Unrestricted net assets. Restricted-expendable for Capital Projects increased $61.7 million from the prior year primarily due to the receipt of $97.0 million in new capital state appropriation funding for the Center for Science. The increase is offset by $33.1 million of capitalized expenses transferred to Invested in Capital Assets, net of related debt, for the Center for Science and the Recreation Center Expansion construction project additions. Unrestricted net assets represent other net resources available to the University for general and educational obligations. Unrestricted net assets increased $26.9 million from $76.4 million to $103.3 million as of June 30, 2010 and 2011, respectively. The current year increase in unrestricted net assets is $3.6 million less than the prior year increase and is a result of various factors discussed in other sections noted. 5 (Continued)

8 Management s Discussion and Analysis Restricted Resources Net assets of the University include funds that are restricted by donor or law. The following table summarizes which funds are restricted, the type of restriction, and the amount: Restricted Net Assets June Nonexpendable Endowments $ 3,653,575 3,514,395 Expendable: Scholarships and fellowships 4,306,421 4,306,228 Loans 2,713,442 2,475,580 Capital projects 65,108,581 3,371,207 Debt service 1,793,621 4,683,709 Other 316, ,266 Total restricted net assets expendable 74,238,466 15,084,990 Total restricted net assets $ 77,892,041 18,599,385 The University has adopted a practice of utilizing restricted expendable funds, prior to unrestricted funds, when an expense is incurred for purposes for which both are available. 6 (Continued)

9 Management s Discussion and Analysis The University s condensed summary of revenues, expenses, and changes in net assets for the years ended and 2010 is as follows: Condensed Summary of Revenues, Expenses, and Changes in Net Assets Year ended June Operating revenues: Student tuition and fees, net $ 112,451, ,427,726 Sales and services of auxiliary enterprises, net 39,016,599 36,906,914 Other operating revenues 19,592,377 10,774,038 Total operating revenues 171,060, ,108,678 Operating expenses (327,492,157) (299,746,566) Operating loss (156,431,528) (145,637,888) Nonoperating revenues (expenses): State appropriations, noncapital 121,965, ,147,171 Federal financial aid grants, noncapital 17,439,534 16,295,245 State financial aid grants, noncapital 8,588,750 8,075,522 Other federal nonoperating grants, noncapital 8,855,661 23,932,970 Gifts, noncapital 5,203,150 11,321,177 Investment income, net 771, ,292 Endowment income, net 18,278 21,279 Interest expense (20,656,601) (18,148,385) Other nonoperating revenues, net 9,357,391 (440,224) Total nonoperating revenues 151,543, ,599,047 Income (loss) before other additions (4,888,429) 6,961,159 State appropriations, capital 97,044, ,000 Grants and gifts, capital 4,386,317 3,171,122 Additions to permanent endowments 39,662 13,300 Increase in net assets 96,581,714 11,090,581 Beginning net assets 381,037, ,946,843 Ending net assets $ 477,619, ,037,424 Operating Revenues and Expenses Operating revenues and expenses come from sources that are connected directly to the University s primary business function. This includes revenues from categories such as tuition and fees, certain grants and contracts that will be used for noncapital purposes, and sales and services of auxiliary enterprises. Expenses include categories such as salaries, benefits, supplies and other services, scholarships and fellowships, and depreciation and amortization. In this discussion and analysis, expenses are reported by functional program such as instruction, research, public service, academic support, student services, institutional support, operation and 7 (Continued)

10 Management s Discussion and Analysis maintenance of plant, student grants and scholarships, auxiliary enterprise expenses, and depreciation and amortization. Operating Revenues Total operating revenues increased $17.0 million, or 11%, primarily due to a $6.0 million increase in student tuition and fees, net, and an $8.8 million increase in other operating revenues. Student tuition and fees, net, increased from prior year primarily due to the state university fee increase of 10%, offset by a 5% decrease in student enrollment. Other operating revenues increased $8.8 million due primarily to $8.0 million recovery reimbursements from auxiliary organizations. The following charts present the proportional share that each category of operating revenues contributed to the total for fiscal years 2011 and 2010: 11.5% 22.8% 65.7% Operating Revenues Year ended Student tuition and fees, net $ 112,451, % Sales and services of auxiliary enterprises, net 39,016, Other operating revenues 19,592, Student tuition and fees, net Sales and services of auxiliary enterprises, net Other operating revenues Total operating revenues $ 171,060, % 8 (Continued)

11 Management s Discussion and Analysis 7.0% 23.9% Operating Revenues 69.1% Year ended June 30, 2010 Student tuition and fees, net $ 106,427, % Sales and services of auxiliary enterprises, net 36,906, Other operating revenues 10,774, Student tuition and fees, net Sales and services of auxiliary enterprises, net Other operating revenues Total operating revenues $ 154,108, % Operating Expenses Total operating expenses increased by $27.7 million, or 9.3%, of which $14.9 million related to instruction, $4.0 million to institutional support, $3.6 million to student services, $3.0 million to academic support, and $2.1 million to student grants and scholarships. Total operating expenses increased due to increases in salaries and benefits and supplies and other services. Total salaries and benefits costs increased $12.8 million, or 6.6%, due to the cancellation of furloughs in fiscal year 2011, offset by nonrenewal of contracts, layoffs, and vacancies brought about by budget cuts in the California State University System. Supplies and other services increased $13.1 million, or 23.9%, due to cancellation of furloughs combined with $5.0 million in expenses reimbursed from auxiliaries, $1.1 million in telephone infrastructure projects, and $1.9 million attributable to the Continuing Education program managing self-support instruction in summer 2010 for the first time. 9 (Continued)

12 Management s Discussion and Analysis The following charts present the distribution of resources in support of the University s mission for fiscal years 2011 and 2010: Operating Expenses Year ended Instruction $ 128,194, % Research 800, Public service 519, Academic support 27,477, Student services 35,894, Student grants and scholarships 21,938, % 7.9% 9.3% 9.6% 65.6% Total instruction and educational support activities 214,825, Institutional support 30,487, Operation and maintenance of plant 25,835, Auxiliary enterprises expenses 25,014, Depreciation and amortization 31,330, Instruction and educational support activities Institutional support Operation and maintenance of plant Auxiliary enterprise expenses Depreciation and amortization Total operating expenses $ 327,492, % Operating Expenses Year ended June 30, 2010 Instruction $ 113,267, % Research 1,709, Public service 492, Academic support 24,477, Student services 32,332, Student grants and scholarships 19,870, % 8.5% 8.0% 8.9% 64.2% Total instruction and educational support activities 192,150, Institutional support 26,512, Operation and maintenance of plant 23,973, Auxiliary enterprises expenses 25,557, Depreciation and amortization 31,553, Instruction and educational support activities Institutional support Operation and maintenance of plant Auxiliary enterprise expenses Depreciation and amortization Total operating expenses $ 299,746, % Nonoperating Revenues (Expenses) Nonoperating revenues (expenses) come from sources that are not part of the University s primary business functions. Included in this classification are categories such as state appropriations; federal grants; certain financial aid grants, noncapital; grants and gifts, capital; investment income; and interest expense. As the University is part of the System, which is an agency of the State of California (the State), the University s operations are funded primarily from appropriations of state tax revenues. Appropriations used for purposes of acquisition of capital assets totaled $97.0 million for the fiscal year ended, up from $0.9 million for the fiscal year ended June 30, 2010 as a result of new funding for the Center for Science project. General 10 (Continued)

13 Management s Discussion and Analysis (noncapital) appropriation revenues totaled $122.0 million, an increase of $10.8 million from the prior year due to an increase in the state budget allocation that alleviated the effect of a reduction in the American Recovery & Reinvestment Act (ARRA) grant revenue. Other federal nonoperating grants, noncapital decreased $15.1 million primarily due to the reduction in ARRA grant revenue in the current year. Gifts, noncapital decreased by $6.1 million and other nonoperating revenue increased $9.8 million primarily due to a reclassification of scholarship and other funding received from auxiliaries to other nonoperating revenues (expenses). Interest expense increased $2.5 million resulting primarily from an addition of $1.9 million in debt service relating to the University Union Plaza project. Capital Assets and Long-Term Debt Obligations Capital Assets Capital assets, net of accumulated depreciation, are shown below: June Land and land improvements $ 5,245,634 4,545,634 Buildings and building improvements 522,379, ,266,730 Improvements, other than buildings 12,397,210 10,528,192 Infrastructure 60,241,233 62,017,375 Personal property 22,813,695 21,657,847 Intangible assets 849, ,201 Construction work in progress 81,034,762 22,437,666 Total capital assets, net of accumulated depreciation $ 704,961, ,254,645 Capital assets increased by $42.7 million, or 6.5%, primarily due to $74.6 million of current year additions, offset partially by $31.3 million of current year depreciation expense. Construction work in progress was the majority of the increase with $62.6 million in additions of which $37.8 million related to the Recreation Center Expansion, $18.0 million for the Center for Science, $4.1 million for the Meat Processing Center, and $4.9 million for the thermal energy storage tank. Construction work in progress additions are offset by $3.9 million in transfers to building and building improvements. Buildings and building improvements decreased $24.4 million from depreciation expense, offset by $4.8 million of additions and $3.9 million in transfers from construction work in progress. Capital assets commitments at totaled $103.9 million. 11 (Continued)

14 Management s Discussion and Analysis Long-Term Debt Obligations Debt outstanding at and 2010 is summarized below by type of debt instrument: June Systemwide Revenue Bonds: Series 2002A $ 43,930,000 45,000,000 Series 2005C 305,605, ,750,000 Series 2009A 11,125,000 11,125,000 Series 2010A 20,710,000 20,710,000 Series 2010B 52,450,000 52,450,000 Revenue bond anticipation note Total 433,820, ,035,000 Unamortized bond premium 12,195,226 12,783,336 Unamortized loss on refunding (167,005) (178,656) Total long-term debt 445,848, ,639,680 Less current portion (2,730,000) (1,215,000) Long-term debt, net of current portion $ 443,118, ,424,680 The University did not issue Systemwide Revenue Bonds in fiscal year Bond Ratings Moody s Investors Service currently provides an intrinsic rating of Aa2, with a stable outlook, for the Systemwide Revenue Bonds. Standard & Poor s Rating Service currently provides an intrinsic rating of A+, with a stable outlook, for the Systemwide Revenue Bonds. With the exception of certain maturities of Series 2005C, Series 2007A, Series 2008A, and Series 2009A, and all maturities of Series 2010A and 2010B, all Systemwide Revenue Bonds are insured. Since the middle of fiscal year 2008, some providers of insurance for Systemwide Revenue Bonds have been downgraded to ratings below Aaa/AAA. Those bonds that are uninsured bear the intrinsic ratings of the Systemwide Revenue Bonds, which are Aa2 from the Moody s Investors Service and A+ from the Standard & Poor s Rating Service. See notes 8 and 9 to the financial statements for further information on long-term debt obligations. 12 (Continued)

15 Management s Discussion and Analysis Factors Impacting Future Periods The State Budget Act for fiscal year 2012, approved by the Governor on, reduces the California State University System (the System) appropriations by $650 million, or 24% below the fiscal year 2011 enacted budget level. The result will be an approximately $480 million decrease in noncapital state appropriations for the System in fiscal year 2012 to a total of $2.10 billion from $2.58 billion in fiscal year In December 2011, the System s fiscal year 2012 appropriations were further reduced by an additional $100 million due to the $1 billion shortfall in the State revenues. To mitigate the impact of the appropriation reductions, the System increased tuition fee rates, including a 10% increase approved by the Board of Trustees (the Board) in November 2010 and an additional 12% increase approved by the Board in July 2011, both effective for fiscal year 2012, which together will yield approximately $265 million in new tuition fee revenue after discounting for financial aid. Moreover, the System reduces in its base resident student enrollment target for fiscal year 2012 by roughly 10,000 full-time equivalent student headcount (FTES) to approximately 332,000, and reduces expense measures of approximately $292 million. In November 2011, the Board approved an increase in student tuition fees for fiscal year 2013 to raise approximately $138 million in new tuition fee revenue after discounting for financial aid. The University s state noncapital appropriations budget enacted for fiscal year 2012 approved by the legislative process is $89.5 million, a decrease of $32.5 million from the fiscal year 2011 funding level of $122.0 million. In addition, an increase in student fees in fiscal year 2012 is expected to generate $21.1 million during fiscal year 2012 in new revenue, net of financial aid. The budgeted FTES enrollment target for fiscal year 2012 is 15,931. Major capital projects in process include the following: Center for Science and Math: This project involves replacement of a portion of Cal Poly s Science building and will provide lecture space, laboratory space, and faculty offices for the College of Science and Math. The project is scheduled for completion in 2013 and the total projected budget, including upgrading of the chiller capacity in the central plant, is $118,992,000. Recreation Center Expansion: This project is an expansion and renovation of the Recreation Center. The expansion will provide an additional 85,000 square feet for University Union operations. The project is scheduled for completion in winter quarter 2012 and the total project budget is $71,128,

16 Statement of Net Assets Discretely presented component units GASB FASB auxiliary auxiliary Assets University organizations organizations Total Current assets: Cash and cash equivalents $ 15,200 12,947,020 7,895,604 20,857,824 Short-term investments 101,238,781 15,527,004 66,015, ,781,461 Accounts receivable, net 2,880, ,922 9,729,259 12,900,307 Notes receivable, current portion 72,450 72,450 Pledges receivable, net 5,530, ,798 5,773,643 Prepaid expenses and other assets 459, ,505 4,562,464 5,935,103 Total current assets 104,593,241 35,209,296 88,518, ,320,788 Noncurrent assets: Restricted cash and cash equivalents 460,802 16, ,734 Accounts receivable, net 80,180,574 80,180,574 Notes receivable, net of current portion 3,247,494 3,247,494 Student loans receivable, net 5,971,022 5,971,022 Pledges receivable, net 6,126,774 4,086,387 10,213,161 Endowment investments 3,653, ,281,582 4,604, ,539,793 Other long-term investments 97,581,316 26,173,886 2,055, ,810,391 Capital assets, net 704,961,102 2,779,397 23,530, ,270,753 Other assets 661, ,064 Total noncurrent assets 892,347, ,483,505 37,540,892 1,134,371,986 Total assets 996,940, ,692, ,059,143 1,362,692,774 Liabilities and Net Assets Current liabilities: Accounts payable 17,038, ,265 3,229,047 21,049,597 Accrued salaries and benefits payable 15,037,458 1,375,384 16,412,842 Accrued compensated absences current portion 7,195, ,892 8,067,576 Deferred revenue 13,698, ,500 4,540,281 18,723,802 Long-term debt obligations current portion 2,730, ,373 2,896,373 Other liabilities 3,811,643 75,350 1,421,444 5,308,437 Total current liabilities 59,511,091 1,343,115 11,604,421 72,458,627 Noncurrent liabilities: Accrued compensated absences, net of current portion 4,822, ,813 4,950,379 Grants refundable 6,072,602 2,344,395 8,416,997 Long-term debt obligations, net of current portion 443,118,221 3,271,452 2,942, ,332,225 Depository accounts 1,187,666 5,875,351 7,063,017 Other postemployment benefits obligation 4,585,740 30,885,607 35,471,347 Other liabilities 23,806 8,749,385 1,050,619 9,823,810 Total noncurrent liabilities 459,810,601 12,020,837 43,226, ,057,775 Total liabilities 519,321,692 13,363,952 54,830, ,516,402 Net assets: Invested in capital assets, net of related debt 296,383,917 (328,844) 20,441, ,496,152 Restricted for: Nonexpendable endowments 3,653, ,367, ,021,115 Expendable: Scholarships and fellowships 4,306,421 15,843,576 20,149,997 Research 7,400, ,881 7,633,469 Loans 2,713,442 2,713,442 Capital projects 65,108,581 22,288, ,136 87,502,375 Other 2,110,022 77,283,033 7,990,086 87,383,141 Unrestricted 103,343,180 1,474,298 42,459, ,276,681 Total net assets $ 477,619, ,328,849 71,228, ,176,372 See accompanying notes to financial statements. 14

17 Statement of Revenues, Expenses, and Changes in Net Assets Year ended Discretely presented component units GASB FASB auxiliary auxiliary University organizations organizations Eliminations Total Revenues: Operating revenues: Student tuition and fees (net of scholarship allowances of $25,006,218) $ 112,451,653 4,898, ,350,180 Grants and contracts, noncapital: Federal 12,063,261 12,063,261 State 3,316,923 3,316,923 Local 793, ,574 Nongovernmental 5,085,005 5,085,005 Sales and services of auxiliary enterprises (net of scholarship allowances of $3,687,194) 39,016, ,724 42,388,584 81,636,907 Other operating revenues 19,592,377 10,759 22,979,529 (1,493,340) 41,089,325 Total operating revenues 171,060, ,483 91,525,403 (1,493,340) 261,335,175 Expenses: Operating expenses: Instruction 128,194,215 1,203, , ,376,661 Research 800, ,227 16,306,815 17,723,582 Public service 519, ,700 9,051,781 9,790,429 Academic support 27,477,529 6,922,581 2,168,958 36,569,068 Student services 35,894, ,634 10,476,289 (999,436) 45,684,176 Institutional support 30,487,050 6,685,625 9,096,445 (645,290) 45,623,830 Operation and maintenance of plant 25,835, ,527 2,942,103 29,067,893 Student grants and scholarships 21,938,709 1,401,360 1,223,560 (3,006,070) 21,557,559 Auxiliary enterprise expenses 25,014,006 49,605 41,315,245 66,378,856 Depreciation and amortization 31,330, ,774 2,184,708 33,655,690 Total operating expenses 327,492,157 17,841,856 95,744,527 (4,650,796) 436,427,744 Operating loss (156,431,528) (17,599,373) (4,219,124) 3,157,456 (175,092,569) Nonoperating revenues (expenses): State appropriations, noncapital 121,965, ,965,308 Federal financial aid grants, noncapital 17,439,534 17,439,534 State financial aid grants, noncapital 8,588,750 8,588,750 Other federal nonoperating grants, noncapital 8,855,661 8,855,661 Gifts, noncapital 5,203,150 7,860,888 4,900,839 (3,157,456) 14,807,421 Investment income, net 771,628 1,800,302 8,772,844 11,344,774 Endowment income, net 18,278 32,719,653 32,737,931 Interest expense (20,656,601) (155,058) (171,622) (20,983,281) Other nonoperating revenues (expenses), net 9,357,391 (62,812) 397,568 9,692,147 Net nonoperating revenues 151,543,099 42,162,973 13,899,629 (3,157,456) 204,448,245 Income (loss) before other additions (4,888,429) 24,563,600 9,680,505 29,355,676 State appropriations, capital 97,044,164 97,044,164 Grants and gifts, capital 4,386,317 2,612,089 1,956,434 8,954,840 Additions to permanent endowments 39,662 3,080,981 3,120,643 Increase in net assets 96,581,714 30,256,670 11,636, ,475,323 Net assets: Net assets at beginning of year 381,037, ,072,179 59,591, ,701,049 Net assets at end of year $ 477,619, ,328,849 71,228, ,176,372 See accompanying notes to financial statements. 15

18 Statement of Cash Flows Year ended University Cash flows from operating activities: Student tuition and fees $ 112,139,355 Payments to suppliers (70,002,897) Payments to employees (205,505,621) Payments to students (22,183,600) Collections of student loans 48,853 Sales and services of auxiliary enterprises 41,256,111 Other receipts 19,685,603 Net cash used in operating activities (124,562,196) Cash flows from noncapital financing activities: State appropriations 121,965,308 Federal financial aid grants 17,426,171 State financial aid grants 9,315,610 Other federal nonoperating grants 8,855,661 Gifts and grants received for other than capital purposes 5,208,352 Federal loan program receipts 69,966,935 Federal loan program disbursements (69,803,222) Moneys received on behalf of others 10,091,513 Moneys disbursed on behalf of others (9,456,292) Other noncapital financing activities 8,919,028 Net cash provided by noncapital financing activities 172,489,064 Cash flows from capital and related financing activities: State appropriations 18,189,526 Proceeds from sale of capital assets 58,568 Acquisition of capital assets (61,270,800) Principal paid on capital debt and leases (1,215,000) Interest paid on capital debt and leases (23,040,299) Net cash used in capital and related financing activities (67,278,005) Cash flows from investing activities: Proceeds from sales and maturities of investments 461,975,071 Purchases of investments (443,266,840) Investment income received 642,650 Net cash provided by investing activities 19,350,881 Net decrease in cash and cash equivalents (256) Cash and cash equivalents at beginning of year 15,456 Cash and cash equivalents at end of year $ 15, (Continued)

19 Statement of Cash Flows Year ended University Reconciliation of operating loss to net cash used in operating activities: Operating loss $ (156,431,528) Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation and amortization 31,330,208 Change in assets and liabilities: Accounts receivable, net 1,210,966 Student loans receivable, net (186,408) Prepaid expenses and other assets 191,436 Accounts payable (2,332,152) Accrued salaries and benefits 1,364,278 Accrued compensated absences (1,809,444) Deferred revenue 800,351 Other postemployment benefits obligation 1,300,604 Other liabilities (507) Net cash used in operating activities $ (124,562,196) Supplemental schedule of noncash transactions: Contributed capital assets $ 4,386,317 Change in accrued capital asset costs (purchased but unpaid at year-end) 7,498,300 Amortization of bond premium 588,110 Amortization of loss on refunding 11,651 See accompanying notes to financial statements. 17

20 (1) Organization California Polytechnic State University, San Luis Obispo (the University), an agency of the State of California (the State), was established as a campus of the California State University under the State of California Education Code to offer undergraduate and graduate instruction for professional and occupational goals emphasizing a broad liberal arts education. As one of 23 campuses in the California State University System (the System), the University is included in the financial statements of the System. Responsibility for the University is vested in the Trustees of the System (the Trustees) who, in turn, appoint the Chancellor, the chief executive officer of the System, and the University president, the chief executive officer of the University. The University provides instruction for baccalaureate and masters degrees and certificate programs and operates various auxiliary enterprises such as student dormitories, student unions, and parking facilities. In addition, the University administers a variety of financial aid programs, which are funded primarily through state and federal programs. (2) Summary of Significant Accounting Policies (a) Financial Reporting Entity In accordance with Governmental Accounting Standards Board (GASB) Statements No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, and No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities, the accompanying financial statements include the accounts of the University and the University s four recognized auxiliary organizations. These auxiliary organizations are legally separate entities that provide services primarily to the University s students and faculty. Separate financial statements are issued for each of the recognized auxiliary organizations and may be obtained from the University. The recognized auxiliary organizations are as follows: Cal Poly Corporation California Polytechnic State University Foundation Associated Students Incorporated of California Polytechnic State University at San Luis Obispo (including the accounts of the University Student Union) Cal Poly Housing Corporation 18

21 Summary information for the discretely presented auxiliary organizations is as follows: Other Cal Poly Cal Poly auxiliary Foundation Corporation organizations Total Current assets $ 35,209,104 82,041,271 6,477, ,727,547 Capital assets, net 21,926,732 4,382,919 26,309,651 Other noncurrent assets 201,381,108 14,010, , ,714,746 Total assets 236,590, ,978,641 11,183, ,751,944 Current liabilities 1,324,121 9,590,426 2,032,989 12,947,536 Noncurrent liabilities 8,426,385 39,361,286 7,459,503 55,247,174 Total liabilities 9,750,506 48,951,712 9,492,492 68,194,710 Invested in capital assets, net of related debt 19,116, ,503 20,112,235 Restricted 225,183,395 8,328, ,511,498 Unrestricted 1,656,311 41,582, ,096 43,933,501 Total net assets $ 226,839,706 69,026,929 1,690, ,557,234 Other Cal Poly Cal Poly auxiliary Year ended Foundation Corporation organizations Total Operating revenues: Student tuition and fees, net $ 4,898,527 4,898,527 Grants and contracts, noncapital 20,890, ,797 21,258,763 Sales and services of auxiliary enterprises, net 42,388, ,724 42,620,308 Other 17,074,983 5,915,305 22,990,288 Total operating revenues 80,354,533 11,413,353 91,767,886 19

22 Other Cal Poly Cal Poly auxiliary Year ended Foundation Corporation organizations Total Operating expenses: Instruction $ 1,203, ,623 2,182,446 Research 616,227 16,306,815 16,923,042 Public service 218,700 9,051,781 9,270,481 Academic support 6,922,581 2,168,958 9,091,539 Student services 312,634 1,496,223 8,980,066 10,788,923 Institutional support 6,642,793 9,096,445 42,832 15,782,070 Operation and maintenance of plant 290, ,937 2,179,166 3,232,630 Student grants and scholarships 1,401,360 1,223,560 2,624,920 Auxiliary enterprise expenses 41,315,245 49,605 41,364,850 Depreciation and amortization 1,834, ,396 2,325,482 Total operating expenses 17,608,645 84,234,673 11,743, ,586,383 Operating loss (17,608,645) (3,880,140) (329,712) (21,818,497) Net nonoperating revenues (expenses) 42,318,453 13,855,692 (111,543) 56,062,602 Income (loss) before other additions 24,709,808 9,975,552 (441,255) 34,244,105 Grants and gifts, capital 2,612,089 1,956,434 4,568,523 Additions to permanent endowments 3,080,981 3,080,981 Increase (decrease) in net assets 30,402,878 11,931,986 (441,255) 41,893,609 Beginning net assets, July 1, ,436,828 57,094,943 2,131, ,663,625 Ending net assets, $ 226,839,706 69,026,929 1,690, ,557,234 The auxiliary organizations are presented in the accompanying financial statements as discretely presented component units due to the nature and significance of their relationship with the University. The relationships are such that exclusion of these organizations from the reporting entity would render the financial statements incomplete, primarily due to the activities that the organizations carry out on behalf of the University, such as research, grant administration, food service, and academic support. The auxiliary organizations are discretely presented to allow the financial statement users to distinguish them from the University. 20

23 The financial statements present only the statement of net assets, statement of revenues, expenses, and changes in net assets, and statement of cash flows of only that portion of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the State that is attributable to the transactions of the University, and the financial statements do not purport to, and do not, present fairly the financial position of the State or the System as of and the changes in their financial position, or, where applicable, their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. (b) Basis of Presentation The accompanying financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting in accordance with U.S. generally accepted accounting principles, as prescribed by the GASB. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements have been met. The financial statements required by GASB Statement Nos. 34 and 35 include a statement of net assets, a statement of revenues, expenses, and changes in net assets, and a statement of cash flows. As a public institution, the University is considered a special-purpose government under the provisions of GASB Statement No. 35. The University records revenue in part from fees and other charges for services to external users and, accordingly, has chosen to present its financial statements using the reporting model for special-purpose governments engaged only in business-type activities. This model allows all financial information for the University to be reported in a single column in each of the financial statements, accompanied by aggregated financial information for the auxiliary organizations. In accordance with the business-type activities reporting model, the University prepares its statement of cash flows using the direct method. The Cal Poly Corporation and Associated Students, Inc. (including the accounts of the University Union) auxiliary organizations included in these financial statements apply the accounting and reporting standards promulgated by the Financial Accounting Standards Board (FASB), while the California Polytechnic State University Foundation and Cal Poly Housing Corporation apply the accounting and reporting standards promulgated by the GASB. (c) (d) Election of Applicable FASB Statements The University follows standards of accounting and financial reporting issued by the FASB prior to November 30, 1989, unless those standards conflict with or contradict guidance of the GASB. The University also has the option of following subsequent private-sector guidance subject to the same limitation. The University has elected not to adopt the pronouncements issued by the FASB after November 30, Classification of Current and Noncurrent Assets (Other Than Investments) and Liabilities The University considers assets to be current that can reasonably be expected, as part of its normal business operations, to be converted to cash and be available for liquidation of current liabilities within 12 months of the statement of net assets date. Liabilities that reasonably can be expected, as part of normal University business operations, to be liquidated within 12 months of the statement of 21

24 net assets date are considered to be current. All other assets and liabilities are considered to be noncurrent. For classification of current and noncurrent investments, refer to note 2(f). (e) (f) Cash Equivalents and Statement of Cash Flows The University considers highly liquid investments with an original maturity date of three months or less to be cash equivalents. The University considers amounts included in the California State University Investment Pool to be investments. The statement of cash flows does not include the cash flows of the discretely presented auxiliary organizations. Investments Investments are reflected at fair value using quoted market prices. Realized and unrealized gains and losses are included in the accompanying statement of revenues, expenses, and changes in net assets as investment income, net. Investments that are used for current operations are classified as short-term investments. Investments that are restricted for withdrawal or use for other than current operations, designated or restricted for the acquisition or construction of noncurrent assets, designated or restricted for the liquidation of the noncurrent portion of long-term debt, and restricted as to the liquidity of the investments are classified as other long-term investment. (g) Capital Assets Capital assets are stated at cost or estimated historical cost if purchased, or, if donated, at estimated fair value at date of donation. Capital assets, including infrastructure and intangible assets, with a value of $5,000 or more and with a useful life of one year or more are capitalized. Such costs include, where applicable, interest capitalized as part of the cost of constructed capital assets. Title to all assets, whether purchased, constructed, or donated, is held by the State. Although title is not with the University for land and buildings, the University has exclusive use of these assets and is responsible for the maintenance of these assets and thus has recorded the cost of these assets on the accompanying financial statements. Capital assets, with the exception of land and land improvements, works of art and historical treasures, construction work in progress, and certain intangible assets, are depreciated or amortized on a straight-line basis over their estimated useful lives, which range from 3 to 45 years. Library books, unless considered rare collections, are capitalized and depreciated over a 10-year period. Periodicals and subscriptions are expensed as purchased. Works of art and historical treasures are valued at cost if purchased or the fair market value at the date of donation if contributed. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend its life are expensed as incurred. Depreciation and amortization expense is shown separately in the statement of revenues, expenses, and changes in net assets rather than being allocated among other categories of operating expenses. Capitalized interest, net of related investment income at is as follows: Interest expense capitalized for construction projects $ 1,477,610 22

25 (h) (i) (j) (k) Deferred Revenue Deferred revenue consists primarily of fees collected in advance for summer and fall terms, and continuing education programs. Compensated Absences Compensated absences are recognized when the right to receive the compensation is earned by the employees. Vacation is accrued on a monthly basis. The University uses an employee s current pay rate as of July 1, 2011 to calculate the liability for accrued compensated absences. The University employees pay rates are based on length of service and job classifications. Grants Refundable The University periodically receives contributions from the federal government in support of its operation of the Federal Perkins and Nursing Loan programs, both Title IV loan programs. The federal government has the ability to terminate its support of these programs at any time and to request the University to return those contributions that it has made on a cumulative basis. Accordingly, the federal contributions received and retained by the University at year-end are considered to be liabilities of the University, and are reflected as such in the accompanying statement of net assets. Net Assets The University s net assets are classified 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. Restricted nonexpendable Net assets subject to externally imposed conditions that the University retains them in perpetuity. Net assets in this category consist of endowments held by the University or its related auxiliaries. Restricted expendable Net assets subject to externally imposed conditions that can be fulfilled by the actions of the University or by the passage of time. Unrestricted All other categories of net assets. In addition, unrestricted net assets may be designated for use by management of the University or have legislative or bond indenture requirements associated with their use. These requirements limit the area of operations for which expenditures of net assets may be made and require that unrestricted net assets be designated to support future operations in these areas. Campus housing programs are a primary example of operations that have unrestricted net assets with designated uses. (l) Classification of Revenues and Expenses The University considers operating revenues and expenses in the statement of revenues, expenses, and changes in net assets to be those revenues and expenses that result from exchange transactions or from other activities that are connected directly to the University s primary functions. Exchange 23