University of Montevallo Financial Statements and Report on Federal Financial Assistance Programs In Accordance with the OMB Uniform Guidance For the

Transcription

1 Financial Statements and Report on Federal Financial Assistance Programs In Accordance with the OMB Uniform Guidance For the Year Ended September 30, 2016 EIN

2 Index Page(s) Report of Independent Auditors Management s Discussion and Analysis (Unaudited) Financial Statements Statements of Net Position University September 30, 2016 and Statements of Financial Position Foundation September 30, 2016 and Statements of Revenues, Expenses, and Changes in Net Position University Years Ended September 30, 2016 and Statements of Activities and Changes in Net Assets Foundation Years Ended September 30, 2016 and September 30, Statements of Cash Flows University Years Ended September 30, 2016 and Notes to Financial Statements Required Supplementary Information (Unaudited) Schedule of Expenditures of Federal Awards and Notes to Schedule of Expenditures of Federal Awards Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Report of Independent Auditors on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and Internal Control Over Compliance in Accordance with OMB Uniform Guidance Schedule of Findings and Questioned Costs Section I: Summary of Auditors Results Section II: Financial Statements Findings Section III: Federal Award Findings and Questioned Costs Summary of Status of Findings from Prior Audits Section IV: Summary of Status of Findings from Prior Audits Management s Views and Corrective Action Plan.57 58

3 Report of Independent Auditors To the Board of Trustees of the Report on the Financial Statements We have audited the accompanying financial statements of the (the University ), a component unit of the State of Alabama, as of and for the years ended September 30, 2016 and 2015, and the related notes to the financial statements, which consist of the statements of net position and the related statements of revenues, expenses, and changes in net position and statements of cash flows of the and the statements of financial position and of activities and changes in net assets of the Foundation (the Foundation ), the University s discretely presented component unit. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on the financial statements based on our audits. We did not audit the financial statements of the Foundation, the University s discretely presented component unit, as of and for the years ended September 30, 2016 and Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the Foundation, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. The financial statements of the Foundation were not audited in accordance with Government Auditing Standards. PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL T: (205) , F: (205) ,

4 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the University s preparation and fair presentation of the financial statements in order to design 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. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinion In our opinion, based upon our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the University and its discretely presented component unit at September 30, 2016 and 2015, and the respective changes in financial position and, where applicable, cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information The accompanying management s discussion and analysis on pages 4 through 11 and the required supplementary information on page 40 are required by accounting principles generally accepted in the United States of America to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in the appropriate operational, economic, or historical context. We applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 2

5 The University has omitted the management s discussion and analysis for the year ended September 30, 2015 that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in the appropriate operational, economic, or historical context. Our opinions on the basic financial statements are not affected by this missing information. Other Information Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards for the year ended September 30, 2016 is presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated February, 2017 on our consideration of the University s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters for the year ended September 30, The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the University s internal control over financial reporting and compliance. February 10,

6 Management s Discussion and Analysis (Unaudited) Years Ended September 30, 2016 and 2015 The purpose of management s discussion and analysis is to provide readers with an objective and easily readable analysis of the s (the University s or UM s ) financial position and activities based on currently known facts, decisions, and conditions. This discussion has been prepared by University management and should be read in conjunction with the financial statements and related footnotes. The financial statements, footnotes and this discussion are the responsibility of University management. The University s financial report presents financial information for the University and the University of Montevallo Foundation (the Foundation ), the University s discretely presented component unit, through five primary financial statements and notes to the financial statements. Three of the primary statements, the statement of net position; the statement of revenues, expenses and changes in net position; and the statement of cash flows, present the financial position, changes in financial position and cash flows of the University, respectively. The financial statements of the Foundation are presented discretely from the University. The notes to the financial statements provide additional information that is essential to a full understanding of the financial statements. Introduction Established in 1896, the University is a public liberal arts institution. Unique to higher education in Alabama, the University has a legislatively-mandated mission to provide to students from throughout the state an affordable, geographically accessible, small college public higher education experience of high quality, with a strong emphasis on undergraduate liberal studies and with professional programs supported by a broad base of arts and sciences, designed for their intellectual and personal growth in the pursuit of meaningful employment and responsible, informed citizenship. In response to its mission, the University, located in the center of the State of Alabama ( Alabama ) on a 160-acre campus, currently enrolls approximately 3,000 students, primarily from within the state, including a small number of out-ofstate and international students. The University has consistently been recognized in the U.S. News and World Report s Best Colleges; in 2016 it has moved up two spots to be ranked as the 13th best public university in the South in its division. Noted for its academic reputation, small class size and esteemed faculty, the University takes great pride in its extraordinary value. The University s pursuit of quality is further demonstrated by its accreditation by the Commission on Colleges of the Southern Association of Colleges and Schools and its commitment to attain national accreditation in undergraduate programs where such recognition is available and appropriate. During fiscal year 2016, the University received various other recognitions including: Being named a College of Distinction for the fifth consecutive year Designated as a Military Friendly School since 2009 Honored by the U.S. Department of Education as a 2016 Green Ribbon School Recognition as one of the Most Beautiful College Campuses in America by Thrillist.com. In April 2016, Standard and Poor s Ratings Services upgraded the University s rating from A to A+, and noted the outlook as stable. At a time when many other universities are experiencing financial instability, the has received two bond rating upgrades by Standard & Poor s in six years. The University s last upgrade occurred in 2013, when S&P upgraded the University from A- to A. During 2016, the University announced the public phase of their first-ever comprehensive fund raising campaign, The Campaign for Montevallo: It s About Family. A main priority of the multi-million dollar fund raising campaign is to develop facilities for learning, living and competing. 4

7 Management s Discussion and Analysis (Unaudited) Years Ended September 30, 2016 and 2015 Academic highlights during Fiscal Year 2016 include: UM s new Environmental Studies (ES) major is the first of its kind in public higher education in Alabama. ES is an interdisciplinary program that incorporates perspectives from the social and natural sciences, the arts and humanities, and business. The purpose of the program is to provide students with the skills, knowledge, and attitudes they will need as citizens and as members of the workforce to make informed decisions with respect to ecological issues. We have an 80% acceptance rate to Health Professional schools (Medical, Dental, Pharmacy, etc.) over the past 3 years and we average 13 students per year being accepted into these programs. The Master of Science in Speech-Language Pathology graduates boast a 100% employment rate and a 100% pass rate on the National Praxis Examination in Speech-Language Pathology for over 5 years. Dr. Erin Chandler s Honors English Composition classes have begun their work with Mrs. Jawana Jackson of the Sullivan and Richie Jean Sherrod Jackson Foundation in Selma, Alabama. With the assistance of Carey Heatherly and Cedric Norman, this class will begin recording oral histories and will move forward with the archival process of transforming the house into a museum. Dr. Amiee Melon s MBA students will also compose a marketing plan for the up-and-coming museum. Michael E. Stephens College of Business has the fastest growing MBA program in the state of Alabama. Students now have the option to attend classes on campus or electronically in real time. The College of Education Graduate Counseling Program launched a free Community Counseling Clinic. The clinic is serving children, adolescents, and adults through individual, group, family, and couples therapy sessions while also serve as a teaching center so that faculty can assess student professional skill development, client progress, monitor the need for medical services, and evaluate clinical interventions. The University and the College of Fine Arts celebrated the groundbreaking for Strong Hall which will expand and renovate the existing Mass Communication Building. The expansion and renovation will bring together faculty and students from Communication Studies and Mass Communication and will include a new master control room, high-definition audio, video production and edit bay rooms, a new broadcast studio, two computer labs, additional classroom space and faculty office suites. The University, along with its faculty, staff and students support the community through various partnerships and activities. 700 students participated in 2016 s The Big Event by volunteering their services to those throughout the community. Falcon Scholars in Action was created in 2009 through a partnership with Shelby County and has placed 175 UM students in service rolls throughout nonprofit agencies in Shelby County. UM faculty and staff volunteer monthly to educate 12th grade Shelby County College and Career Center (CCC) students on how to better understand the basics of business, soft skills, and secondary education options. Volunteers in Tax Assistance (VITA) completed its 5th year of assistance with over 150 clients served during the 2016 tax season. 5

8 Management s Discussion and Analysis (Unaudited) Years Ended September 30, 2016 and 2015 Annual Report The University s financial report includes three financial statements: the statement of net position; the statement of revenues, expenses and changes in net position, and the statement of cash flows. These financial statements are prepared in accordance with Governmental Accounting Standards Board ( GASB ) Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis-for Public Colleges and Universities. GASB Statement No. 35 establishes standards for external financial reporting for public colleges and universities and requires that financial statements be presented on an entity-wide basis to focus on the University as a whole. All references to 2016, 2015 or another year refer to the fiscal year ended September 30, unless otherwise noted. Financial Statements The statement of net position presents the financial position of the University as of the end of each fiscal year. It displays the University s assets (current and noncurrent), liabilities (current and noncurrent), deferred outflows and inflows, and net position (assets minus liabilities). The statement provides a measure of the current financial condition of the University by showing assets available to support the operations of the University. It also presents how much the University owes vendors and creditors. Finally, the statement of net position provides a picture of the net position and its availability for expenditure by the University. Net position is divided into three major categories. The first category, Net investment in capital assets, represents the University s capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction, or improvement of those assets. The second category is Restricted net position, which is divided into two categories, nonexpendable and expendable. The corpus of nonexpendable restricted resources, as it pertains to the University s permanent endowment funds, is only available for investment purposes. Donors have primarily restricted income derived from these investments to fund scholarships. Expendable restricted net position is available for expenditure by the University but must be spent for purposes stipulated by donors and/or external entities that have placed a time or purpose restriction on the use of the assets. The final category is Unrestricted net position, which is available to the University without external stipulations. Much of the University s unrestricted net position has been internally designated or reserved for specific purposes such as renewal and replacement of equipment, capital projects, and academic programs. At September 30, 2016, the University s assets were approximately $105.2 million, liabilities were approximately $86.8 million, and net position was approximately $26.0 million. With the implementation of GASB 68 effective October 1, 2014 related to the pension liabilities (see Note 1 to the financial statements), the University also had deferred outflows of approximately $7.8 million and deferred inflows of approximately $225,000 as of September 30, Net pension liability of $41,539,000 was included in noncurrent liabilities. The University ended the year with a net decrease to total net position of approximately $696,000. The statement of revenues, expenses and changes in net position is a presentation of the University s operating results. It indicates whether the financial condition has improved or deteriorated. In accordance with GASB requirements, certain significant revenues relied upon and budgeted for fundamental operational support of the core instructional mission of the University are required to be recorded as nonoperating revenues, including state educational appropriations, private gifts and investment income. 6

9 Management s Discussion and Analysis (Unaudited) Years Ended September 30, 2016 and 2015 Financial Highlights Condensed financial statements for the University as of and for the years ended September 30, 2016 and 2015 are as follows (in thousands): Condensed Statements of Net Position (in thousands) Assets Current $ 38,595 $ 42,119 Noncurrent 13,571 14,352 Capital assets, net 53,046 52,787 Total assets 105, ,258 Deferred outflows 7,840 3,881 Total assets and deferred outflows $ 113,052 $ 113,139 Liabilities Current $ 19,857 $ 22,468 Noncurrent 66,968 61,380 Total liabilities 86,825 83,848 Deferred inflows 225 2,593 Total liabilities and deferred inflows 87,050 86,441 Net position Net Investment in capital assets 28,107 26,511 Restricted, nonexpendable - endowment 2,139 2,139 Restricted, expendable 4,498 4,731 Unrestricted (8,742) (6,683) Total net position 26,002 26,698 Total liabilities, deferred inflows and net position $ 113,052 $ 113,139 7

10 Management s Discussion and Analysis (Unaudited) Years Ended September 30, 2016 and 2015 Condensed Statements of Revenues, Expenses, and Changes in Net Position (in thousands) Operating revenues Student tuition and fees, net $ 22,450 $ 22,116 Grants and contracts 9,160 6,433 Auxiliary 9,167 8,845 Other 1,629 2,393 42,406 39,787 Operating expenses Educational and general 61,476 56,117 Auxiliary enterprises 4,622 4,595 Other ,249 60,726 Operating loss (23,843) (20,939) Nonoperating revenues State educational appropriations 18,016 17,926 Federal grants 4,395 4,699 Other, net (948) (1,119) Net nonoperating revenues 21,463 21,506 Capital activities 1, (Decrease) increase in net position (696) 975 Net position Beginning of year, as previously reported 26,698 59,125 Cumulative effect of accounting change (see Note 1) - (33,402) Beginning of year, as restated (as of October 1, 2014) 26,698 25,723 End of year $ 26,002 $ 26,698 8

11 Management s Discussion and Analysis (Unaudited) Years Ended September 30, 2016 and 2015 Condensed Statements of Cash Flows (in thousands) Net cash provided by (used in) Operating activities $ (22,569) $ (17,009) Investing activities 5,493 (6,033) Capital and related financing activities (4,452) (5,909) Noncapital financing activities 22,310 24,263 Net change in cash and cash equivalents 782 (4,688) Cash and cash equivalents Beginning of year 11,878 16,566 End of year $ 12,660 $ 11,878 The University maintained a strong financial position throughout fiscal The University s cash and cash equivalents and investments financial statement line items decreased $5.6 million as of September 30, 2016 compared to September 30, 2015 due primarily to the increase in operating expenses and receivable balances, combined with the decrease in accounts payable at September 30, The fluctuations in individual investments financial statement line items is mainly due to the change in allocation of funds between investment vehicles to reflect the needs and intents of the University. The Perkins Loan program provides a service to some University students; however, the majority of students are served by other loan programs. The balance in loans receivable from this program declined due to increased collections over disbursements. Capital assets include land and improvements, infrastructure, buildings and improvements, equipment and library books. Net capital assets increased by approximately $259,000 in The increase is primarily due to completion of several construction projects net of the recognition of annual depreciation and retirement of capital assets. Capital improvements during fiscal year the 2016 included the following: $244,000 for replacement of the Napier Boiler $126,000 for Water Well #1 reactivation $276,000 for new lighting equipment for the UM Track and Lacrosse field $134,000 for Comer Hall roof $111,000 for Speech and Hearing roof $142,000 for Recruiter Software implementation Accounts payable and accrued liabilities decreased from $7.3 million to $4.1 million during The decrease in accounts payable is primarily due to a decrease of over $1.7 million in accrued payroll due to timing of cash payments for monthly payroll and taxes for September 2016, and a decrease of approximately $1.3 million in the vendor accounts payable at September 30,

12 Management s Discussion and Analysis (Unaudited) Years Ended September 30, 2016 and 2015 Unearned revenues totaled $14.2 million and $13.8 million at the end of 2016 and 2015, respectively. The change is the result of the decision of the Board of Trustees to raise tuition and fee rates for the academic year Federal refundable loans remained consistent with prior year. This account represents the liability of the University should the Perkins Loan program close at the end of the current fiscal year. The Perkins Loan program provides a service to some University students; however, the majority of students are served by other loan programs. Long-term debt decreased by approximately $1,361,000. The decrease is the net effect of principal payments of $866,000 on bonds, $320,000 on an existing capital lease, $137,000 on existing note payable and amortization of bond discount of $13,000. The net pension liability increased by approximately $7.0 million, and other liabilities were consistent with prior year balances. Generally, operating revenues are earned by providing goods and services to the various customers and constituencies of the University. The statement of revenues, expenses and changes in net position (the SRECNP ) reflects operating revenue increased by approximately $2.6 million for The increase in operating revenue is primarily attributable to tuition, room and board increases, and increases in the State of Alabama AMSTI grant programs. Operating expenses are those expenses paid to acquire or produce the goods and services provided in return for operating revenues and to further the mission of the University. Total operating expenses increased by approximately $5.5 million to $66.2 million in This is primarily due to salary increases, increased expenses of the State of Alabama AMSTI programs, and sport expansions. Nonoperating revenues are revenues received for which goods and services are not provided. GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments requires that state educational appropriations be classified as nonoperating revenues. The state appropriation for 2016 was approximately $90,000 more than in The University also received an appropriation for the upgrade of facilities in the amount of $1,000,000. University expenses are presented using functional expense classifications. By contrast, natural classifications are used in the cash flow statement. The largest functional expense category is instruction, accounting for 36.3% of operating expenses, up 2.2% from prior year. The statement of cash flows presents cash flows by category: operating activities, investing activities, capital and related financing activities and noncapital financing activities. The increase in cash and cash equivalents of approximately $782,000 is due to investment strategy for maintenance of cash on hand to fund operational expenses. Emphasis is placed on cash used in operating activities, from which the University experienced a net outflow of approximately $22.7 million and approximately $17.0 million for the years ended September 30, 2016 and 2015, respectively. The increase in cash used in operations from prior year is due to the increase in vendor and compensation payments, offset by increased State grant receipts. The net cash used in investing activities was an inflow of cash in the amount of $5.5 million in contrast to 2015 net use of cash in the amount of $6.0 million. In 2016, the University transferred investments to cash and cash equivalents to fund increased operational expenses and liability payments. Furthermore, cash used in capital financing is also down from the prior year, primarily due to the significant construction accomplished in prior years using bond proceeds. The decrease in noncapital financing activities for 2016 relates primarily to the collections of the significant receivable for direct lending from 2014 during Capital Assets and Long-term Debt Activity Capital assets include land, infrastructure, buildings and improvements, equipment, libraries, and construction in progress. Capital assets, net of accumulated depreciation, increased by approximately $259,000 to $53.0 million in 2016, compared to a $1.0 million increase in

13 Management s Discussion and Analysis (Unaudited) Years Ended September 30, 2016 and 2015 The University s primary investment in capital assets is in buildings, most of which were built before The central section of campus is a National Historic District with two antebellum structures and brick streets and paths. The Olmsted brothers, landscape architects, famous for designing New York City s Central Park, developed the plan for the University s campus. Currently, the University has identified deferred maintenance needs in excess of $30 million. The University has recognized that buildings and equipment have depreciated in value and the importance that funding be found to restore and replenish these assets for future use. As a result, the University has increased capital additions in the last five years through a variety of sources including appropriations, unrestricted funds, partnerships, grants and bond proceeds. Annual Capital Additions Fiscal Year ,938, ,780, ,021, ,464, ,741,705 The University has $26.2 million and $27.5 million in long-term debt and capital lease obligations outstanding at September 30, 2016 and 2015, respectively. The decrease of approximately $1.3 million primarily results from scheduled bond and capital lease payments of $1.3 million. Analysis of Known Future Events The GASB requires management to describe currently known facts, decisions, or conditions that are expected to have a significant effect on the financial position or results of operations of the University. Currently, less than half of the University s budget is received from the state of Alabama. For fiscal year 2017 O&M appropriation of $18.7 million and $1 million capital appropriation have not been prorated. At this time, the University continues to believe it has sufficient net assets to persevere through these economically challenging times without adversely impacting the quality of the education provided to students. Management will continue to be cautious in looking ahead and conservative in approaching new ventures. Cautionary Note Regarding Forward-Looking Statements Certain information provided by the University, including written (as outlined above) or oral statements made by its representatives, may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of All statements, other than the statements of historical fact, which address future activities, events, or developments that the University expects or anticipates will or may occur, contain forward-looking information. In reviewing such information, it should be kept in mind that actual results may differ materially from those projected or suggested in such forward-looking information. This forward-looking information is based upon various factors and was derived using various assumptions. The University does not update forward-looking information contained in this report or elsewhere to reflect actual results, changes in assumptions, or changes in other factors. 11

14 Statements of Net Position September 30, 2016 and Assets Current assets Cash and cash equivalents $ 12,660,554 $ 11,878,328 Investments 16,705,467 22,462,932 Accounts receivable, net 4,907,770 4,018,922 Prepaid expenses 4,321,277 3,759,067 Total current assets 38,595,068 42,119,249 Noncurrent assets Investment in affiliate 1,053,600 1,059,901 Investments 2,369,086 2,422,268 Cash and investments for capital activities 8,045,432 8,691,671 Deposits with bond trustees 1,875,890 1,893,849 Loans receivable, net 226, ,927 Capital assets, net 53,045,810 52,787,150 Total noncurrent assets 66,616,541 67,138,766 Total assets 105,211, ,258,015 Deferred outflows Pension 7,840,000 3,881,000 Total deferred outflows 7,840,000 3,881,000 Total assets and deferred outflows $ 113,051,609 $ 113,139,015 Liabilities and Net Position Current liabilities Accounts payable and accrued liabilities $ 4,131,457 $ 7,264,645 Unearned revenues 14,181,715 13,766,496 Current portion of long-term debt and capital lease obligations 1,373,729 1,322,587 Deposits held for others 170, ,103 Total current liabilities 19,857,168 22,467,831 Noncurrent liabilities Long-term debt and capital lease obligations, net 24,800,832 26,161,819 Net pension liability 41,539,000 34,580,000 Refundable student deposits 130, ,397 Federal refundable loans 496, ,868 Total noncurrent liabilities 66,967,578 61,380,084 Total liabilities 86,824,746 83,847,915 Deferred inflows Pension 225,000 2,593,000 Total deferred inflows 225,000 2,593,000 Total liabilities and deferred inflows 87,049,746 86,440,915 Net position Net investment in capital assets 28,107,272 26,511,427 Restricted Nonexpendable - endowment 2,139,161 2,139,161 Expendable 4,498,249 4,730,989 Unrestricted (8,742,819) (6,683,477) Total net position 26,001,863 26,698,100 Total liabilities, deferred inflows and net position $ 113,051,609 $ 113,139,015 The accompanying notes are an integral part of these financial statements 12

15 Foundation Statements of Financial Position September 30, 2016 and Assets Cash and cash equivalents $ 1,751,320 $ 1,362,205 Investments 32,167,755 29,767,873 Land and buildings, net 628, ,851 Total assets $ 34,547,187 $ 31,766,929 Liabilities Agency funds $ 224,731 $ 207,483 Accounts payable 85,316 - Total liabilities 310, ,483 Net Assets Unrestricted net assets 3,757,679 3,579,082 Temporarily restricted net assets 12,135,336 10,430,194 Permanently restricted net assets 18,344,125 17,550,170 Total net assets 34,237,140 31,559,446 Total liabilities and net assets $ 34,547,187 $ 31,766,929 The accompanying notes are an integral part of these financial statements 13

16 Statements of Revenues, Expenses, and Changes in Net Position Years Ended September 30, 2016 and Operating revenues Student tuition and fees (net of scholarship allowance of $11,379,824 in 2016 and $10,408,162 in 2015) $ 22,450,446 $ 22,116,321 Grants and contracts Federal 1,714,743 1,500,085 State and local 7,445,234 4,933,386 Auxiliary (net of scholarship allowance of $254,256 in 2016 and $227,507 in 2015) 9,167,130 8,844,871 Other operating revenues 1,628,991 2,392,770 Total operating revenues 42,406,544 39,787,433 Operating expenses Instruction 24,054,346 20,726,785 Research 34,854 33,227 Public service 538, ,744 Academic support 6,456,207 5,816,690 Student services 9,973,620 9,615,284 Institutional support 7,865,280 7,394,455 Operations and maintenance of plant 6,290,656 5,855,754 Depreciation 3,579,580 3,418,842 Student aid 2,683,033 2,721,557 Auxiliary enterprises 4,621,939 4,595,491 Other expenses 150,572 13,882 Total operating expenses 66,248,755 60,726,711 Operating loss (23,842,211) (20,939,278) Nonoperating revenues (expenses) State educational appropriations 18,015,810 17,926,178 Federal grants 4,394,925 4,698,751 Loss on sale of fixed assets - (23,909) Net investment income 165, ,183 Equity in loss from investment in affiliate (30,074) (238,412) Interest expense (1,083,818) (1,118,516) Net non-operating revenues 21,462,024 21,506,275 Capital activities Capital grants and contracts Federal - 150,000 State 1,683, ,990 Increase (decrease) in net position (696,237) 974,987 Net position - beginning of year Beginning of year, as previously reported - 59,125,113 Cumulative effect of accounting change (see Note 1) - (33,402,000) Net Position - beginning of year 26,698,100 25,723,113 Net position - end of year $ 26,001,863 $ 26,698,100 The accompanying notes are an integral part of these financial statements 14

17 Foundation Statement of Activities and Changes in Net Assets Year Ended September 30, 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, investment income and other support Donations $ 509,492 $ 680,369 $ 677,196 $ 1,867,057 Investment income, net - 572, ,234 Net realized and unrealized gain on investments - 1,814,446-1,814,446 Other support 24, ,608 9, ,758 Net assets released from restrictions 1,493,607 (1,493,607) - - 2,027,257 1,895, ,188 4,609,495 Expenditures Scholarships 728, ,932 Academic support 422, ,827 Program management 780, ,042 1,931, ,931,801 Change in net assets before internal transfers 95,456 1,895, ,188 2,677,694 Internal transfers 83,141 (189,908) 106,767 - Increase in net assets 178,597 1,705, ,955 2,677,694 Net assets Beginning of year 3,579,082 10,430,194 17,550,170 31,559,446 End of year $ 3,757,679 $ 12,135,336 $ 18,344,125 $ 34,237,140 The accompanying notes are an integral part of these financial statements 15

18 Foundation Statement of Activities and Changes in Net Assets Year Ended September 30, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, investment income and other support Donations $ 483,107 $ 1,133,305 $ 888,080 $ 2,504,492 Investment income, net - 460, ,894 Net realized and unrealized loss on investments - (880,874) - (880,874) Other support 26, ,411 1, ,023 Net assets released from restrictions 1,887,730 (1,887,730) - - 2,397,249 (814,994) 889,280 2,471,535 Expenditures Scholarships 697, ,699 Academic support 725, ,614 Program management 896, ,344 2,319, ,319,657 Change in net assets before internal transfers 77,592 (814,994) 889, ,878 Internal transfers 176,666 (216,855) 40,189 - Increase (decrease) in net assets 254,258 (1,031,849) 929, ,878 Net assets Beginning of year 3,324,824 11,462,043 16,620,701 31,407,568 End of year $ 3,579,082 $ 10,430,194 $ 17,550,170 $ 31,559,446 The accompanying notes are an integral part of these financial statements 16

19 Statements of Cash Flows Years Ended September 30, 2016 and Cash flows from operating activities Student tuition and fees $ 22,782,498 $ 23,323,611 Grants and contracts 9,066,320 6,632,553 Receipts from sales and services of auxiliary enterprises, net 8,832,448 8,859,322 Payments to employees and related benefits (40,665,099) (37,019,146) Payments to suppliers (20,880,688) (18,284,093) Payments for scholarships (3,043,023) (3,006,077) Other receipts 1,338,194 2,484,696 Net cash used in operating activities (22,569,350) (17,009,134) Cash flows from investing activities Interest and dividends from investments, net 165, ,183 Proceeds from sales and maturities of investments 34,226,883 20,483,115 Loss on investment in affiliate (39,042) (238,412) Purchases of investments (28,860,252) (26,539,720) Net cash provided by (used in) investing activities 5,492,770 (6,032,834) Cash flows from capital and related financing activities Purchases of capital assets (3,711,505) (4,343,999) Federal grants for capital activities - 150,000 State grants for capital activities 1,683, ,990 Principal payments on capital debt and capital leases (1,322,587) (1,278,353) Proceeds from sale of fixed assets - 17,825 Interest payments on capital debt (1,101,615) (712,594) Net cash used in capital and related financing activities (4,451,757) (5,909,131) Cash flows from noncapital financing activities State appropriations 18,015,810 17,926,178 Federal grants 4,264,599 4,850,784 Funds held for others 46,571 51,515 Federal Perkins Loan Program disbursements (13,016) (49,091) Federal Perkins Loan Program receipts 69, ,163 Federal Direct Student Loan Program disbursements (16,441,753) (16,360,431) Federal Direct Student Loan Program receipts 16,369,058 17,730,186 Net cash provided by noncapital financing activities 22,310,564 24,263,304 Net increase (decrease) in cash and cash equivalents 782,227 (4,687,795) Cash and cash equivalents Beginning of year 11,878,328 16,566,123 End of year $ 12,660,555 $ 11,878,328 Reconciliation of operating loss to net cash used in operating activities Operating loss $ (23,842,211) $ (20,939,278) Adjustments to reconcile operating loss to net cash used in operating activities Depreciation 3,579,580 3,418,842 Amortization of bond discount 12,743 12,743 Pension expense 3,738,000 2,834,000 Changes in assets and liabilities Accounts receivable, net (684,827) 227,569 Prepaid expenses and other assets (562,210) (339,728) Accounts payable and accrued liabilities (2,119,644) 596,156 Pension obligations (3,106,000) (2,944,000) Unearned revenues 415, ,562 Net cash used in operating activities $ (22,569,350) $ (17,009,134) Supplemental noncash activities disclosure Loss on disposal of assets $ - $ (23,909) Capital assets purchased with a liability 247, ,406 The accompanying notes are an integral part of these financial statements 17

20 Notes to Financial Statements September 30, 2016 and Organization and Summary of Significant Accounting Policies Financial Reporting Entity The (the University ) is a public liberal arts institution and is considered a component unit of the State of Alabama (the State ). The financial statements of the University include individual schools, colleges and departments of the University. The University is affiliated with the Foundation (the Foundation ), a legally separate, not-for-profit corporation. The Foundation s primary purpose is to assist the University in fulfilling and performing its educational purposes. See further disclosure regarding the inclusion of the Foundation s financial information below. Basis of Accounting For financial reporting purposes, the University is considered a special-purpose government engaged only in business-type activities as defined by Governmental Accounting Standards Board ( GASB ) Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities, an amendment of GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. Business-type activities are those that are financed in whole or in part by fees charged to external parties for goods or services. Accordingly, the financial statements of the University have been prepared in accordance with accounting principles generally accepted in the United States of America using the economic measurement focus and the accrual basis of accounting. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. GASB Statement No. 39, Determining Whether Certain Organizations are Component Units, requires the University s legally separate, tax-exempt, affiliated campus foundation to be considered a component unit of the University and presented discretely in the University s financial statements. The Foundation presents financial information in accordance with Financial Accounting Standards Board standards. Scope of Statements - The University follows Governmental Accounting Standards Board (GASB) Statement Number 61, The Financial Reporting Entity: Omnibus-an amendment of GASB Statements No. 14 and No. 34 ( GASB 61 ). This Statement provides additional guidance in determining whether certain organizations affiliated with the University should be considered component units of the University for financial reporting purposes. The Statement also provides guidance on determining whether component units should be presented in the University s financial statements as blended or discrete components based on their relationship and organizational structure. As defined by generally accepted accounting principles established by the GASB, the financial reporting entity consists of the University, as well as its discretely presented component unit, the Foundation. The Foundation is a legally separate, tax-exempt component unit of the University. The Foundation is organized exclusively for charitable, scientific, and educational purposes in order to benefit the University. The Foundation is governed by a 22- member board of trustees. Although the University does not control the timing or amount of receipts from the Foundation, the majority of resources or income that the Foundation holds and invests are restricted to the activities of the University by the donors. Because these restricted resources held by the Foundation can only be used by, or for the benefit of, the University, the Foundation is considered a component unit of the University. The Foundation is reported in separate financial statements because it does not meet the criteria to be blended with the University as described in GASB 61. The Foundation is a not-for-profit organization that reports its financial results under the Financial Accounting Standard Board ( FASB ) Statements. Most significant to the Foundation s operations and reporting model is Accounting Standards Codification 18

21 Notes to Financial Statements September 30, 2016 and 2015 (ASC) 958, Not-for-Profit Entities. As such, certain revenue recognition criteria and presentation features are different from GASB revenue recognition criteria and presentation features. No modifications have been made to the Foundation s financial information in the University s financial reporting entity for these differences; however, significant note disclosures (see Note 1) to the Foundation s financial statements have been incorporated into the University s notes to the financial statements. Net Position The University presents net position in the following three categories according to external restrictions or availability of assets for satisfaction of University obligations: Net Investment in capital assets: The first category, Net investment in capital assets, represents the University s capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction, or improvement of those assets. Restricted: The University classifies net position resulting from transactions with purpose restrictions as restricted net position until the specific resources are used for the required purpose or for as long as the provider requires the resources to remain intact. o o Nonexpendable Net position subject to externally imposed stipulations that require them to be maintained permanently by the University. Such assets include the corpus of the University s permanent endowment funds. Expendable Net position whose use by the University is subject to externally imposed stipulations that can be fulfilled by actions of the University pursuant to those stipulations or that expire by the passage of time. Unrestricted: Net position that neither is subject to externally imposed stipulations nor invested in capital assets. Unrestricted net position may be designated for specific purposes by action of management. Substantially all unrestricted net position is internally designated for academic or capital programs. When an expense is incurred for purposes for which both unrestricted and restricted net position is available, it is the University s policy to expend amounts from restricted net position before expending amounts from unrestricted net position. The Foundation presents net assets in the following three categories: Unrestricted: Net assets that are not restricted by donors or the donor-imposed restrictions have expired. Temporarily restricted: Net assets subject to donor-imposed restrictions that permit the Foundation to use or expend the donated assets as specified and are satisfied either by the passage of time or by actions of the Foundation. Permanently restricted: Net assets subject to certain donor-imposed restrictions that stipulate that resources be maintained permanently but permit the Foundation to use or expend part or all of the income derived from the donated assets for specified or unspecified purposes. 19

22 Notes to Financial Statements September 30, 2016 and 2015 At September 30, 2016 and 2015, donor-imposed restrictions on the Foundation s temporarily restricted net assets were satisfied as follows: Purpose-restricted contributions used for Scholarships $ 728,932 $ 697,699 Academic support 405, ,107 Program management 359, ,924 $ 1,493,607 $ 1,887,730 At September 30, 2016 and 2015, the Foundation has temporarily restricted net assets of $12,135,336 and $10,430,194, respectively. The temporarily restricted net assets consist of cash and investments and are available for scholarship, academic support and program management purposes. At September 30, 2016 and 2015, the Foundation has permanently restricted net assets of $18,344,125 and $17,550,170. The permanently restricted net assets consist of cash, investments and pledges receivable and are subject to donor-imposed restrictions that the principal be invested in perpetuity. In accordance with donor restrictions, the earnings from the Foundation s permanently restricted net assets can be expended for scholarships and academic support. During 2016 and 2015, certain donors made changes to their original restricted contributions to allow the Foundation to change the use of these donations. These changes are presented as internal transfers on the Foundation s statements of activities and changes in net assets. Cash and Cash Equivalents The University and the Foundation consider all highly liquid investments with an original maturity of three months or less to be cash equivalents, including money market accounts. Restricted cash equivalents of the University are reflected as noncurrent investments in the accompanying financial statements. Investments The University s investments are reported at fair value. Net investment income and gains (losses) on investments, including changes in the fair value of investments, are reported as nonoperating revenues (expenses) in the statements of revenues, expenses, and changes in net position. The Foundation s investments are reported at fair value. Marketable securities that are donated are initially recorded at fair value as of the date received. Other investments, including real estate, are stated at cost at the date of acquisition or appraised value at the date of donation. Investments in privately held stock are initially stated at the value the donor reported to the Internal Revenue Service at the date of the gift. Net investment income and gains (losses) on investments, including changes in fair value of investments, are reported in the statements of activities and changes in net assets. Accounts Receivable Accounts receivable consists primarily of tuition and fees charged to students and amounts due from the federal government, state and local governments, or private sources in connection with reimbursement of allowable expenditures made pursuant to the University s grants and contracts. Accounts receivable are recorded net of estimated uncollectible amounts. 20

23 Notes to Financial Statements September 30, 2016 and 2015 Pledges Receivable The Foundation presents pledges receivable for unconditional promises to give at the present value of the estimated future cash flows. The discounts on these amounts are computed using a risk-free interest rate applicable to the year in which the promise is received. Amortization of the discounts is included in donation revenue. Conditional promises to give are not recorded as pledges receivable until the conditions are substantially met. The Foundation has conditional promises of approximately $1,194,000 at September 30, 2016 and $1,235,000 at September 30, 2015, substantially all of which are conditional based upon the continued success of the donors. These amounts are not reflected in the accompanying financial statements. Funds on Deposit with Bond Trustees Funds on deposit with bond trustees are held and invested by the bond trustees pursuant to University bond trust indentures. The use of principal and earnings thereon is restricted by the terms of the indentures or agreements. Capital Assets Capital assets of the University are recorded at cost at the date of acquisition, or acquisition value at date of donation in the case of gifts, less accumulated depreciation. For equipment, the University s capitalization policy includes all items with a unit cost of $2,500 or more and an estimated useful life of greater than one year. Renovations to buildings, infrastructure and land improvements that significantly increase the value or extend the useful life of the structure are capitalized. Routine repairs and maintenance expenditures are charged to operating expense in the year in which the expense is incurred. Capital assets acquired through federal grants and contracts where the federal government retains a reversionary interest are capitalized and depreciated. Interest costs, net of any related investment earnings for certain assets acquired with the proceeds of tax-exempt borrowings, are capitalized as a component of the cost of acquiring those assets. There were no net interest costs capitalized in fiscal years 2016 and Depreciation of buildings and building improvements (50 years), land improvements and infrastructure (20 years), library collection (10 years), inventoried equipment (5-10 years), and computer software (5 years) is recognized on a straight-line basis. The University capitalizes certain software and development costs associated with obtaining and developing internal-use computer software. Training costs and data conversion costs are expensed as incurred. Capital assets of the Foundation, comprised of land and buildings, are recorded at cost at the date of acquisition or fair value at the date of donation, less accumulated depreciation. Depreciation expense is calculated using the straight-line method based on estimated useful lives. The estimated useful life of the buildings range from 20 years to 27.5 years. Unearned Revenues Unearned revenues consist primarily of amounts received for fall student tuition and fees that are not earned until the next fiscal year. 21

24 Notes to Financial Statements September 30, 2016 and 2015 Revenues The University defines operating activities as reported on the statements of revenues, expenses, and changes in net position as those activities that generally result from exchange transactions such as payments received for providing services and payments made for services or goods received. Nearly all of the University s revenues and expenses are from exchange transactions. Certain significant revenue streams relied upon for operations are recorded as nonoperating revenues, including state educational appropriations, Federal Pell grants, and investment income. Revenues received for capital activities are considered neither operating nor nonoperating activities, and are presented after nonoperating activities on the accompanying statements of revenues, expenses, and changes in net position. Scholarship Allowances and Student Aid Student tuition, fees, and auxiliary revenues from students are reported net of scholarship allowances in the statements of revenues, expenses and changes in net position. Scholarship allowances represent the difference between the stated charge for goods and services provided by the University and the amount that is paid by students and/or third parties making payments on the students behalf. Payments of financial aid made directly to students continue to be classified as student aid expense. Certain governmental grants, such as Pell grants and other federal, state or nongovernmental programs, are recorded as either operating or nonoperating revenues in the University s financial statements. To the extent that revenues from such programs are used to satisfy tuition, fees, and certain other student charges, the University has recorded a scholarship allowance. Scholarship allowances applied to student accounts reduce both operating revenue and operating expense in the statements of revenue, expenses and changes in net position. Compensated Absences The University accrues annual leave for employees at rates based upon length of service and job classification. Loans Receivable Loans receivable consist primarily of loans to students under the Federal Perkins Loan program, net of an allowance for uncollectible accounts of $120,000 at September 30, 2016 and Federal Refundable Loans Certain loans to students are administered by the University with funding primarily supported by the federal government. The University s statements of net position include both the loans receivable and the related federal refundable loan liability representing federal capital contributions owed upon termination of the program. Deposits Held for Others Deposits held for others are funds held by an institution acting as custodian or fiscal agent. The funds are deposited with the institution for safekeeping, to be used or withdrawn by the depositor at will. At September 30, 2016 and 2015, the University held assets of approximately $170,000 and $114,000, respectively, which are owned by others and managed by the University on behalf of the other parties. 22

25 Notes to Financial Statements September 30, 2016 and 2015 The Foundation applies the provisions of Accounting Standards Codification 958, Not-for-Profit Entities. This guidance establishes standards for transactions in which an organization accepts a contribution from a donor and agrees to use those assets on behalf of or transfer those assets, the return of investment on those assets or both to another entity that is specified by the donor. This guidance specifically requires the recognition of a liability for funds held on behalf of another entity if it agrees to solicit donations on behalf of the beneficiary entity or if the beneficiary entity can compel the Foundation to make distributions to it or on its behalf. Agency funds represent cash and investments held by the Foundation on behalf of the University of Montevallo National Alumni Association (the Association ). The Foundation has solicited donations on behalf of the Association and the Association can compel distributions from the Foundation of such funds to itself or on its behalf. Accordingly, the cash and investments held have been reported as a liability for agency funds in the accompanying 2016 and 2015 statements of financial position of the Foundation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Income Tax Status The Internal Revenue Service has determined that the University, as an instrumentality of the state of Alabama, is a tax-exempt organization; accordingly, no provision for income taxes has been made in the accompanying financial statements. The Foundation is exempt from federal income taxes under Section 501(c) (3) of the Internal Revenue Code. Management of the Foundation believes that all revenue-producing activities of the Foundation comply with Section 501(c)(3) of the Internal Revenue Code. Accordingly, no accrual for taxes has been recorded. Recently Adopted Accounting Standards: During the year ended September 30, 2016, the University adopted GASB Statement No. 72, Fair Value Measurement and Application. With the adoption of this statement, the University expanded disclosures to present its investments across a hierarchy of valuation inputs. The adoption of GASB 72 was not material to the University s financial statements. The GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 ( GASB 73 ), in June The objective of this statement is to improve the usefulness of information about pensions included in the general purpose external financial reports of state and local governments for making decisions and assessing accountability. This statement is effective for fiscal years beginning after June 15, 2015 except those provisions that address employers and governmental nonemployer contributing entities for pensions that are not within the scope of GASB Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27. The University has determined there was no impact from the adoption of GASB

26 Notes to Financial Statements September 30, 2016 and 2015 The GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, ( GASB 76 ) in June The objective of this Statement is to identify in the context of the current governmental financial reporting environment the hierarchy of generally accepted accounting principles ( GAAP ). This Statement supersedes Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. This Statement is effective for financial statements for periods beginning after June 15, 2015, and should be applied retroactively. The University determined there was no impact from the adoption of GASB 76. The GASB issued Statement No. 79, Certain External Investment Pools and Pool Participants ( GASB 79 ), in December The objective of this statement is to address accounting and financial reporting for certain external investment pools and pool participants. This statement is effective for financial statements for periods beginning after June 15, 2015, except for certain provisions on portfolio quality, custodial credit risk, and shadow pricing. These provisions are effective for reporting periods beginning after December 15, The University determined there was no impact from the adoption of GASB 79. During 2015, the University adopted the provisions of Governmental Accounting Standards Board ( GASB ) Statement No.68, Accounting and Financial Reporting for Pensions, an Amendment to GASB Statement No.27, and GASB Statement No.71, Pension Transition for Contributions Made Subsequent to the Measurement Date, an Amendment of GASB Statement No.68. These statements revise existing standards for employer financial statements relating to measuring and reporting pension liabilities for multi-employer cost-sharing pension plans provided by the University to its employees. The University is required to recognize a liability equal to its proportionate share of the Teachers Retirement System of Alabama Plan s net pension liability. In accordance with the transition provisions of GASB 68, and because TRS did not provide the information for full retrospective adoption, the University adopted the standard on a prospective basis by recording an adjustment to opening unrestricted net position as of October 1, This adjustment established the opening pension liability of $36.1 million and the opening deferred outflow of $2.7 million and resulted in a corresponding decrease to opening unrestricted net position of $33.4 million. See Note 8 for further information. Recently Issued Accounting Pronouncements: The GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pensions Plans ( GASB 74 ), in June The objective of this Statement is to improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB ) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability. This Statement is effective for financial statements for fiscal years beginning after June 15, The University is evaluating whether there will be any material impact from its adoption of GASB 74. The GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, ( GASB 75 ), in June The objective of this Statement is to improve accounting and financial reporting by state and local governments for OPEB. This Statement is effective for fiscal years beginning after June 15, The University is evaluating whether there will be any material impact from its adoption of GASB

27 Notes to Financial Statements September 30, 2016 and 2015 The GASB issued Statement No. 80, Blending Requirements for Certain Component Units an amendment of GASB Statement No. 14 ( GASB 80 ), in January The objective of this statement is to improve financial reporting by clarifying the financial statement presentation requirements for certain component units. This statement amends the blending requirements established in paragraph 53 of Statement No. 14, The Financial Reporting Entity, as amended. This statement is effective for financial statements for reporting periods beginning after June 15, The University is evaluating whether there will be any material impact from its adoption of GASB Cash and Cash Equivalents All banks or other financial institutions utilized as depositories by the University must provide evidence of their designation by the Alabama State Treasurer as a qualified public depository ( QPD ) under the Security of Alabama Funds Enhancement Act ( SAFE ). From time to time, the Board of Trustees of the (the Board ) may request that the depository provide evidence of its continuing designation as a QPD. The enactment of the SAFE program changed the way all State public deposits are collateralized. In the past, the banks pledged collateral directly to each individual public entity. Under the mandatory SAFE program, each QPD is required to hold collateral for all its public depositors on a pooled basis in a custody account established for the State Treasurer, as SAFE administrator. In the unlikely event a public entity should suffer a deposit loss due to QPD insolvency or default, a claim form would be filed with the State Treasurer who would use the SAFE pool collateral or other means to reimburse the loss. Given the nature of the State of Alabama requirement, risk of loss for deposits held in QPD institutions is considered remote. 3. Investments The University invests its endowment funds in accordance with applicable limitations set forth in gift instruments, Board guidelines, or applicable laws. Certain bond indentures require the University to invest the amounts held in specific construction funds, redemption funds, and bond funds in federal securities, eligible certificates, or eligible investments. The Board has the responsibility for the establishment of the investment policy and the oversight of this policy. The Board acknowledges that the purpose of any investment activity at the University is first and foremost to preserve capital, while providing additional revenues to the University. By investment policy, the University may invest in any securities eligible under the Alabama SAFE program and interest bearing checking accounts. The University s investment policy for investments does not include foreign instruments in the list of acceptable investment criteria. Equity securities held by the University are a result of prior stock gifts received from third-party donors. Fair Value Measurements GASB 72 sets forth the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). 25

28 Notes to Financial Statements September 30, 2016 and 2015 The three levels of the fair value hierarchy under GASB 72 are described as follows: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the University has the ability to access. Level 2 Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the assets or liabilities; Inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs reflect the University s own assumptions about the inputs market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs are developed based on the best information available in the circumstances and may include the University s own data. At September 30, 2016 and 2015, the fair value of the University s investments based on the inputs used to value them is summarized as follows: 2016 Valuation Level 1 Level 2 Level 3 Total Technique Equity Securities $ 131,972 $ - $ - $ 131,972 Market Agency securities 8,414, ,414,557 Market Municipal Bonds - 2,945,432-2,945,432 Market Certificates of deposit 4,812, ,812,344 Market Money market funds 10,815, ,815,680 Market $ 24,174,553 $ 2,945,432 $ - $ 27,119,985 Level 1 Level 2 Level 3 Total Valuation Technique Equity Securities $ 123,804 $ - $ - $ 123,804 Market Agency securities 5,131, ,131,478 Market Municipal Bonds - 4,362,265-4,362,265 Market Certificates of deposit 3,047, ,047,610 Market Money market funds 20,911, ,911,714 Market $ 29,214,606 $ 4,362,265 $ - $ 33,576, Investment Risk Factors There are many factors that can affect the value of investments. Some, such as custodial credit risk, concentration of credit risk and foreign currency risk may affect both equity and fixed income securities. Equity securities respond to such factors as economic conditions, individual company earnings performance and market liquidity, while fixed income securities are particularly sensitive to credit risks and changes in interest rates. Credit Risk Profile Fixed income securities are subject to credit risk, which represents the likelihood that a bond issuer will fail to pay interest or principal in a timely manner, or that negative perceptions of the issuer s ability to make these payments will cause security prices to decline. These circumstances may arise due to a variety of factors such as financial weakness, bankruptcy, litigation and/or adverse 26

29 Notes to Financial Statements September 30, 2016 and 2015 political developments. Certain fixed income securities, primarily obligations of the U.S. government or those explicitly guaranteed by the U.S. government, are not considered to have credit risk. A bond s credit quality is supported by an assessment of the issuer s ability to pay interest on the bond, and ultimately, to pay the principal. Credit quality is evaluated by one or more of the independent bond-rating agencies, for example Moody s Investors Service ( Moody s ) or Standard & Poor s ( S&P ). The lower the rating, the greater the likelihood in the rating agency s opinion that the bond issuer will default, or fail to meet its payment obligations in a timely manner. Generally, the lower a bond s credit rating, the higher its yield will be in compensation for the additional risk. As of September 30, 2016 the University held agency security investment positions with credit ratings ranging from AAA to AA- and municipal bond investment positions with credit ratings ranging from AAA to A. As of September 30, 2015 the University held agency security investment positions with credit ratings ranging from AAA to AA+ and municipal bond investment positions with credit ratings ranging from AAA to A+. Custodial Risks Custodial credit risk is the risk that, in the event of the corporate failure of the custodian, the investment securities may not be returned. University investments are registered in the University s name or represent ownership interests that do not exist in physical or book-entry form, including money market funds included in cash and cash equivalents. As a result, custodial credit risk is remote. Concentration of Credit Risk Concentration of credit risk represents the risk associated with a lack of diversification, such as having substantial investments in a few individual issuers, thereby exposing the University to greater risks resulting from adverse economic, political, regulatory, geographic, or credit developments. The University s investment policies place no limit on the amount the University may invest in any one issuer. However, this specific risk is partially mitigated by the investment criteria established for the University s investments. There were two investments in issuers that represent 5% or more of total investments at September 30, Investments relate to U.S Government agency security issuers Federal Home Loan Mortgage Corporation and Federal National Mortgage Association in the amount of $2,210,580 and $2,744,792 as of September 30, 2016, respectively. Interest Rate Risk Interest rate risk is the risk that the value of fixed income securities will decline because of changing interest rates. The prices of fixed income securities with a longer time to maturity, measured by effective duration, tend to be more sensitive to changes in interest rates and are, therefore, more volatile than those with shorter durations. While the Board does not have a specific policy relative to interest rate risk, the University has historically invested in short term instruments, with maturities generally ranging from 6 to 36 months. The Foundation s investments at September 30, 2016 and 2015 consist of the following: 27

30 Notes to Financial Statements September 30, 2016 and Corporate bonds and notes $ 42,149 $ - Limited partnerships 458, ,236 Mutual funds and equity securities 28,348,073 26,838,225 Hedge funds 1,236,463 1,194,511 Real estate funds 1,178, ,668 Loan trust funds 248,841 - Private equity funds 681, ,378 Derivative options (26,096) (89,145) $ 32,167,755 $ 29,767,873 The Foundation recognized investment income of $825,759 ($748,716 in 2015 and investment expenses of $253,525 ($287,822 in 2015). Investment in Affiliates The University, the City of Montevallo, and Shelby County, Alabama entered into an agreement on May 18, 2012 to create the Montevallo Development Cooperative District (the MDCD or the District ). The MDCD is a capital improvement cooperative district created under Title 11 Section 99B of the Alabama State Code. Its purpose is to promote economic development, tourism, education, recreation, the arts, historic preservation, livability and a healthy and active lifestyle in Montevallo, Alabama. It does so by administering special capital projects entered into by the members that contribute to the revitalization of downtown Montevallo. Funding for administration of MDCD is provided by MDCD s share of a 1 cent sales and use tax imposed by the City; however, members of the District may elect to contribute funding to specific projects. MDCD s board consists of 3 directors, with the University, the City and the County each having one representative. Each director has one vote (and thus, voting rights among the parties are equal). All rights and powers to operate MDCD are vested with the board. In accordance with Governmental Accounting Standards Board ( GASB ) Statement No.14, the University reports an investment in the MDCD based upon each specific MDCD project in which it participates, as opposed to an overall interest in MDCD itself. Furthermore, the University s investment will be adjusted for its share of each project s change in net position, pursuant to each project s Memorandum of Agreement. During 2016, the University contributed $23,773 to the District and absorbed $30,074 in expenses which are reflected in the statement of revenues, expenses, and changes in net position. During 2015, the University contributed $912,020 to the District, $693,298 was for the UM Track project on UM land and therefore excluded from equity in loss from investment in affiliate as UM Track was capitalized by UM. Remaining equity in loss from investment of $238,412 is presented in the 2015 statement of revenues, expenses, and changes in net position. 4. Accounts Receivable The composition of accounts receivable at September 30, 2016 and 2015 is summarized as follows: 28

31 Notes to Financial Statements September 30, 2016 and Tuition and fees, net of allowance for doubtful accounts of $535,942 in 2016 and $418,465 in 2015 $ 2,021,928 $ 2,056,238 Auxiliary 742, ,711 Federal, state, and private grants and contracts 1,705,931 1,409,252 Other accounts receivables 437, ,721 Accounts receivable, net $ 4,907,770 $ 4,018, Capital Assets The University s capital assets activity for the year ended September 30, 2016, is summarized as follows: Beginning Retirements/ Ending Balance Additions Transfers Balance Capital assets not being depreciated Land $ 645,786 $ - $ - $ 645,786 Construction-in-progress 396,581 1,436,608 (396,581) 1,436,608 1,042,367 1,436,608 (396,581) 2,082,394 Other capital assets Land improvements and infrastructure 18,959, ,895-19,186,775 Buildings and building improvements 64,151, ,608-64,609,731 Software and equipment 13,763,318 1,825,355 (68,566) 15,520,107 Library books 8,070, ,355 (25,970) 8,331, ,944,863 2,798,213 (94,536) 107,648,540 Less: Accumulated depreciation for Land improvements and infrastructure 10,496, ,738-11,441,370 Buildings and building improvements 27,552,139 1,114,061-28,666,200 Software and equipment 8,413,101 1,218,065 (68,566) 9,562,600 Library books 6,738, ,716 (25,970) 7,014,954 53,200,080 $ 3,579,580 $ (94,536) 56,685,124 Capital assets, net $ 52,787,150 $ 53,045,810 29

32 Notes to Financial Statements September 30, 2016 and 2015 The University s capital assets activity for the year ended September 30, 2015, is summarized as follows: Beginning Retirements/ Ending Balance Additions Transfers Balance Capital assets not being depreciated Land $ 645,786 $ - $ - $ 645,786 Construction-in-progress 2,125, ,581 (2,125,153) 396,581 2,770, ,581 (2,125,153) 1,042,367 Other capital assets Land improvements and infrastructure 17,150,117 1,809,763-18,959,880 Buildings and building improvements 61,204,784 2,946,339-64,151,123 Software and equipment 12,925,696 1,173,843 (336,221) 13,763,318 Library books 7,809, ,032 (2,135) 8,070,542 99,090,242 6,192,977 (338,356) 104,944,863 Less: Accumulated depreciation for Land improvements and infrastructure 9,563, ,394-10,496,632 Buildings and building improvements 26,421,073 1,131,066-27,552,139 Software and equipment 7,663,811 1,043,778 (294,488) 8,413,101 Library books 6,429, ,604 (2,135) 6,738,208 50,077,861 $ 3,418,842 $ (296,623) 53,200,080 Capital assets, net $ 51,783,320 $ 52,787,150 Included in the statements of net position at September 30, 2016 and 2015, are capital assets financed under capital leases of which the following is a summary: Equipment $ 2,997,295 $ 2,997,295 Less: Accumulated depreciation (2,198,018) (1,798,378) $ 799,277 $ 1,198,917 The Foundation s capital assets at September 30, 2016 and 2015 are summarized as follows: Land $ 458,584 $ 458,584 Buildings 322, , , ,918 Less: Accumulated depreciation (152,806) (144,067) $ 628,112 $ 636,851 30

33 Notes to Financial Statements September 30, 2016 and Long-term Debt and Capital Lease Obligations Long-term debt and capital lease obligation activity for the year ended September 30, 2016, is summarized as follows: Beginning New Principal Ending Type/Supported by Balance Debt Repayment Balance Central energy management bonds of 1983 $ 102,000 $ - $ (11,000) $ 91,000 Revenue bonds series ,720,000 - (575,000) 5,145,000 Revenue bonds series ,715,000 - (25,000) 9,690,000 Revenue bonds series 2012-A 9,670,000 - (25,000) 9,645,000 Revenue bonds series 2012-B 230,000 - (230,000) - Note payable 1,197,186 - (136,613) 1,060,573 Capital lease 1,010,604 - (319,974) 690,630 27,644,790 $ - $ (1,322,587) 26,322,203 Less: Unamortized bond discounts (160,384) (147,642) Long-term debt and capital lease obligations, net of related discounts 27,484,406 26,174,561 Less: Current portion of long-term debt and capital lease obligations (1,322,587) (1,373,729) Long-term debt and capital lease obligations, net $ 26,161,819 $ 24,800,832 Long-term debt and capital lease obligation activity for the year ended September 30, 2015, is summarized as follows: Beginning New Principal Ending Type/Supported by Balance Debt Repayment Balance Central energy management bonds of 1983 $ 113,000 $ - $ (11,000) $ 102,000 Revenue bonds series ,275,000 - (555,000) 5,720,000 Revenue bonds series ,740,000 - (25,000) 9,715,000 Revenue bonds series 2012-A 9,695,000 - (25,000) 9,670,000 Revenue bonds series 2012-B 455,000 - (225,000) 230,000 Note payable 1,330,352 - (133,166) 1,197,186 Capital lease 1,314,791 - (304,187) 1,010,604 28,923,143 $ - $ (1,278,353) 27,644,790 Less: Unamortized bond discounts (173,127) (160,384) Long-term debt and capital lease obligations, net of related discounts 28,750,016 27,484,406 Less: Current portion of long-term debt and capital lease obligations (1,278,353) (1,322,587) Long-term debt and capital lease obligations, ne$ 27,471,663 $ 26,161,819 Principal and interest on these revenue bonds are collateralized by a pledge of all University revenues excluding state appropriations, investment income, and revenues restricted by external parties. Debt obligations bear interest at fixed rates ranging from 1.75% to 5.19%, and mature at various dates through fiscal year

34 Notes to Financial Statements September 30, 2016 and 2015 Maturities and interest on long-term debt, excluding capital lease obligation, for the next five fiscal years and thereafter are as follows: 2016 Principal Interest Total 2017 $ 1,037,148 $ 1,016,774 $ 2,053, ,070, ,175 2,051, ,110, ,589 2,054, ,149, ,059 2,053, ,193, ,379 2,054, ,135,613 3,590,744 9,726, ,135,000 2,234,018 9,369,018 Thereafter 6,800, ,383 7,487,383 $ 25,631,573 $ 11,219,121 $ 36,850,694 The above maturities do not include capitalized lease obligation totaling approximately $691,000. The future minimum lease payments required under capitalized lease are disclosed in Note 13. The following is a detailed schedule of long-term debt and capital lease obligation for the year ended September 30, 2016: Date Final Interest Original Outstanding Description and Purpose Issued Maturity Rate - % Indebtedness Indebtedness Central energy management bonds of 1983 September 6, 1985 May 1, % $ 3,385,000 $ 91,000 Revenue bonds series 2006 November 1, 2006 May 1, % 7,895,000 5,145,000 Revenue bonds series 2008 June 1, 2008 May 1, % 9,900,000 9,690,000 Revenue bonds series 2012-A September 20, 2012 May 1, % 9,890,000 9,645,000 Revenue bonds series 2012-B September 20, 2012 May 1, % 905,000 - Note payable May 9, 2013 May 9, % 1,460,159 1,060,573 Capital lease February 20, 2009 February 20, % 2,997, ,630 Total debt $ 36,432,454 $ 26,322, Pledged Revenues Pledged revenues for fiscal 2016 and 2015 as defined by the Revenue Bond Master Indenture, as follows: Tuition and fees $ 33,830,270 $ 32,524,483 Indirect cost recovery 558, ,914 Auxiliary sales and services 9,421,386 9,072,378 Other sources 689, ,217 $ 44,499,864 $ 42,983,992 32

35 Notes to Financial Statements September 30, 2016 and Employee Benefits - Pension Plan Most employees of the University participate in the Teachers Retirement System of Alabama ( TRS or the Plan ), a cost sharing, multiple-employer public employee retirement system for the various state-supported educational agencies and institutions. This plan is administered by the Retirement Systems of Alabama. In addition, certain employees meeting eligibility requirements participate in an optional program with the Teachers Insurance and Annuity Association - College Retirement Equities Fund ( TIAA-CREF ). TRS is a defined benefit plan while the TIAA-CREF programs are defined contribution plans. Plan description TRS is a cost-sharing multiple-employer public employee retirement plan that was established as of September 15, 1939 under the provisions of Act 419 of the Legislature of 1939 for the purpose of providing retirement allowances and other specified benefits for qualified persons employed by State-supported educational institutions. The responsibility for the general administration and operation of the TRS is vested in its Board of Control. The TRS Board of Control consists of 15 trustees. The plan is administered by the Retirement Systems of Alabama (RSA). Title 16-Chapter 25 of the Code of Alabama grants the authority to establish and amend the benefit terms to the TRS Board of Control. The Plan issues a publicly available financial report that can be obtained at Benefits Provided State law establishes retirement benefits as well as death and disability benefits and any ad hoc increase in postretirement benefits for the TRS. Benefits for TRS members vest after 10 years of creditable service. TRS members who retire after age 60 with 10 years or more of creditable service or with 25 years of service (regardless of age) are entitled to an annual retirement benefit, payable monthly for life. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, members of the TRS are allowed % of their average final compensation (highest 3 of the last 10 years) for each year of service. Act 377 of the Legislature of 2012 established a new tier of benefits (Tier 2) for members hired on or after January 1, Tier 2 TRS members are eligible for retirement after age 62 with 10 years or more of creditable service and are entitled to an annual retirement benefit, payable monthly for life. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, Tier 2 members of the TRS are allowed 1.65% of their average final compensation (highest 5 of the last 10 years) for each year of service. Members are eligible for disability retirement if they have 10 years of credible service, are currently in-service, and determined by the RSA Medical Board to be permanently incapacitated from further performance of duty. Preretirement death benefits are calculated and paid to the beneficiary based on the member s age, service credit, employment status and eligibility for retirement. Contributions Covered members of the TRS contributed 5% of earnable compensation to the TRS as required by statute until September 30, From October 1, 2011, to September 30, 2012, covered members of the TRS were required by statute to contribute 7.25% of earnable compensation. Effective October 1, 2012, covered members of the TRS are required by statute to contribute 7.50% of earnable compensation. Certified law enforcement, correctional officers, and firefighters of the TRS contributed 6% of earnable compensation as required by statute until September 30, From October 1, 2011 to September 30, 2012, certified law enforcement, correctional 33

36 Notes to Financial Statements September 30, 2016 and 2015 officers, and firefighters of the TRS were required by statute to contribute 8.25% of earnable compensation. Effective October 1, 2012, certified law enforcement, correctional officers, and firefighters of the TRS are required by statute to contribute 8.50% of earnable compensation. Tier 2 covered members of the TRS contribute 6% of earnable compensation to the TRS as required by statute. Tier 2 certified law enforcement, correctional officers, and firefighters of the TRS are required by statute to contribute 7% of earnable compensation. Participating employers contractually required contribution rate for the year ended September 30, 2016 was 11.94% of annual pay for Tier 1 members and 10.84% of annual pay for Tier 2 members. These required contribution rates are a percent of annual payroll, actuarially determined as an amount that, when combined with member contributions, is expected to finance the costs of benefits earned by members during the year, with an additional amount to finance any unfunded accrued liability. Total employer contributions to the pension plan from the System for fiscal years ended 2016 and 2015, respectively, were $3,106,000 and $2,944,000. Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At September 30, 2016 the System reported a liability of $41,539,000 for its proportionate share of the collective net pension liability. The collective net pension liability was measured as of September 30, 2015 and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of September 30, The System s proportion of the collective net pension liability was based on the employers shares of contributions to the pension plan relative to the total employer contributions of all participating TRS employers. At September 30, 2015 the System s proportion was % which was an increase of % from its proportion measured as of September 30, For the year ended September 30, 2016, the System recognized pension expense of $3,738,000. At September 30, 2016 the System reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Differences between expected and actual experience $ - $ 225,000 Change of assumptions - - Net difference between projected and actual earnings on pension plan investments 2,721,000 - Changes in proportion and differences between Employer contributions and proporationate share of contributions 2,013,000 - Employer contributions subsequent to the measurement date 3,106,000 - Total $ 7,840,000 $ 225,000 $3,106,000 of the amount reported as deferred outflows of resources related to pensions resulting from System contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended September 30, Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows: 34

37 Notes to Financial Statements September 30, 2016 and 2015 Year ended September 30: 2017 $ 1,153, ,153, ,153, ,000, ,000 Actuarial assumptions The total pension liability was determined by an actuarial valuation as of September 30, 2014 using the following actuarial assumptions, applied to all periods included in the measurement: Inflation 3.00% Investment rate of return* 8.00% Projected salary increases 3.5%-8.25% *Net of pension plan investment expense The actuarial assumptions used in the actuarial valuation as of September 30, 2014, were based on the results of an investigation of the economic and demographic experience for the TRS based upon participant data as of September 30, The Board of Control accepted and approved these changes on January 27, 2012, which became effective at the beginning of fiscal year Mortality rates for TRS were based on the RP-2000 Combined Mortality Table for Males or Females, as appropriate, with adjustments for mortality improvements based on Scale AA projected to 2015 and set back one year for females. The long-term expected rate of return on pension plan investments was determined using a lognormal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target asset allocation and best estimates of geometric real rates of return for each major asset class are as follows: Target Allocation Long-Term Expected Rate of Return* Fixed income 25.00% 5.00% U.S. large stocks 34.00% 9.00% U.S mid stocks 8.00% 12.00% U.S. small stocks 3.00% 15.00% International developed market stocks 15.00% 11.00% International emerging market stocks 3.00% 16.00% Real estate 10.00% 7.50% Cash 2.00% 1.50% % * Includes assumed rate of inflation of 2.50% 35

38 Notes to Financial Statements September 30, 2016 and 2015 The amounts presented and disclosed in the financial statements as of September 30, 2016 related to the GASB 68 pension activity were based upon the best available information at the valuation date. Subsequent to the valuation date, the Retirement Systems of Alabama completed experience studies for both TRS and ERS. As a result, certain assumptions including the mortality rates and discount rate will likely change for future valuations of the pension liability. This could result in a significant increase in the pension liability recorded by the University in fiscal year Discount rate The discount rate used to measure the total pension liability was 8%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that the employer contributions will be made at rates equal to the difference between actuarially determined contribution rates and the member rate. Based on those assumptions, components of the pension plan s fiduciary net position were projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Sensitivity of the System s proportionate share of the net pension liability to changes in the discount rate The following table presents the System s proportionate share of the net pension liability calculated using the discount rate of 8%, as well as what the System s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentage point lower (7%) or 1-percentage-point higher (9%) than the current rate: 1% Decrease Current Rate 1% Increases (7.00%) (8.00%) (9.00%) System's proportionate share of the collective net pension liability $ 54,972,000 $ 41,539,000 $ 30,172,000 Pension plan fiduciary net position Detailed information about the pension plan s fiduciary net position is available in the separately issued RSA Comprehensive Annual Report for the fiscal year ended September 30, The supporting actuarial information is included in the Governmental Accounting Standards Board Statement No. 67 Report for the TRS prepared as of September 30, The auditor s report dated October 17, 2016 on the total pension liability, total deferred outflows of resources, total deferred inflows of resources, total pension expense for the sum of all participating entities as of September 30, 2015 along with supporting schedules is also available. The additional financial and actuarial information is available at 9. Post-Employment Benefits The University offers postemployment health care benefits ( OPEB ) to all employees who officially retire from the University. Health care benefits are offered through the Alabama Retired Education Employees Health Care Trust with TRS. Retired employees age sixty-five or older who are eligible for Medicare must enroll in the Medicare Coordinated Plan under which Medicare is the primary insurer and the University s health care plan becomes the secondary insurer. Despite the availability of the University s plan, most retirees elect to participate in the PEEHIP with TRS, in which case the retirees pay a portion of the PEEHIP premium, with the University paying an allocation toward the cost of retiree coverage. Certain retirees may also elect to continue their basic term life insurance coverage and accidental death and dismemberment insurance up to 36

39 Notes to Financial Statements September 30, 2016 and 2015 certain maximum amounts. The retirees pay the full amount of the premiums in such cases. Retirees are eligible for tuition assistance benefits for themselves as well as for their spouse and unmarried dependent children. PEEHIP is a cost-sharing multiple-employer defined benefit health care plan administered by the Public Education Employee Health Insurance Board. PEEHIP offers a basic hospital/medical plan that provides basic medical coverage for up to 365 days of care during each hospital confinement. The basic hospital/medical plan also provides for physicians benefits, outpatient care, prescription drugs, and mental health benefits. The Code of Alabama 1975, Section 16-25A-8 provides the authority to set the contribution requirements for retirees and employers. The required rates for retirees who retired prior to October 1, 2005, or members who retired on or after October 1, 2005, and before January 1, 2012, with 25 years of service are listed in the chart below and show a retiree s out-of-pocket cost after subtracting the retiree insurance contributions: Individual Coverage/Non-Medicare Eligible $ 151 Family Coverage/Non-Medicare Eligible Retired Member $ 391 and Non-Medicare Eligible Dependent(s) Family Coverage/Non-Medicare Eligible Retired Member $ 250 and Dependent Medicare Eligible Individual Coverage/Medicare Eligible Retired Member $ 10 Family Coverage/Medicare Eligible Retired Member $ 250 and Non-Medicare Eligible Dependent(s) Family Coverage/Medicare Eligible Retired Member $ 109 and Dependent Medicare Eligible Members who retired on or after October 1, 2005 are subject to the retiree sliding scale premium based on years of service. The required contribution rate of the employer was $399 per employee per month in the year ended September 30, The University paid approximately $1,214,000 and $1,109,000 for 254 retirees for years ended September 30, 2016 and The required contribution rate is determined by PEEHIP in accordance with state statute. The complete financial report for PEEHIP can be obtained by contacting the TRS Communication Department at Compensated Absences Upon termination of employment, employees are paid all unused accrued vacation at their regular rate of pay up to a designated maximum number of days. In accordance with GASB Statement No. 16, Compensated Absences, the financial statements include an accrual of $909,102 and $822,578 as of September 30, 2016 and 2015, respectively, for accrued vacation pay and salaryrelated payments associated with vacation pay. There is no such accrual recognized for sick leave benefits because there is no terminal cash benefit available to employees for accumulated sick leave. 11. Operating Expenses by Natural Classification Operating expenses by natural classification for the years ended September 30, 2016 and 2015 are as follows: 37

40 Notes to Financial Statements September 30, 2016 and Compensation and benefits $ 39,838,064 $ 36,958,762 Scholarships 2,683,033 2,721,557 Depreciation 3,579,580 3,418,842 Other supplies and services 20,148,078 17,627, Federal Direct Student Loan Program $ 66,248,755 $ 60,726,711 The Federal Direct Student Loan Program ( FDSLP ) was established under the Higher Education Act of 1965, as amended in the Student Loan Reform Act of The FDSLP enables an eligible student or parent to obtain a loan to pay for the student s cost of attendance directly through the rather than through private lenders. The University began participation in the FDSLP on July 1, As a university qualified to originate loans, the University is responsible for handling the complete loan origination process, including funds management and promissory note functions. The University is not responsible for collection of these loans. The amount of disbursements under the FDSLP during years ended September 30, 2016, and 2015 were approximately $16,442,000 and $16,360,000 respectively. 13. Commitments and Contingencies Leases The University frequently enters into operating leases for office equipment. The University entered into a new 12 month building lease in June Also, new 36 month computer refresh program lease programs were entered into in fiscal year 2016 and are included in the future lease payments below. The minimum future lease payments on noncancelable leases are as follows for leases entered into as of September 30, 2016: 2017 $ 344, , , $ 24, ,637 Operating lease expense for these leases for the years ended September 30, 2016 and 2015, respectively, was approximately $391,000 and $316,000, respectively. The University has entered into a capital lease agreement to finance an energy management project on campus. The lessor retains a security interest in the property under the lease. Minimum annual rental under the capital lease obligation is included in long-term debt as follows: 2017 $ 372, , ,848 Less: Amount representing interest (54,218) $ 690,630 38

41 Notes to Financial Statements September 30, 2016 and 2015 Litigation The University is engaged in various legal actions in the ordinary course of business. Management does not believe the ultimate outcome of these actions will have a material adverse effect on the University s financial position or results of operations. Contingent Liability The University is a party to agreements to outsource the University bookstore and cafeteria operations to a third-party through May 2017 and May 2020, respectively. The agreements require the third-party to fund renovations to the University bookstore and cafeteria. If either of the contracts is terminated before expiration, the University is required to reimburse the third party any unamortized balance remaining on the initial cost of renovations. The unamortized balances are calculated on a straight-line basis over the term of each agreement. At September 30, 2016, the total unamortized balance the University is contingently obligated for under these agreements is approximately $1,031,000. This contingent liability is not recorded in the statement of financial position of the University. 14. Other Noncurrent Liabilities The activity with respect to other noncurrent liabilities for the years ended September 30, 2016 and 2015 is as follows: Federal loan funds Federal refundable loans at beginning of year $ 497,868 $ 496,873 Loan activity received 9,340 14,893 Loan activity disbursed (10,266) (13,898) Federal refundable loans at end of year $ 496,942 $ 497,868 Other liabilities Refundable student deposits $ 130,804 $ 140, Related Parties The University received educational appropriations from the State of Alabama of approximately $18,016,000 and $17,926,000 during 2016 and 2015, respectively. The University also received appropriations for the upgrading of facilities in 2016 and 2015 in the amount of $1,000,000 and $250,000, respectively. The University provides, at no cost to the Foundation, certain office space and administrative support. Total administrative support provided to the Foundation from the University was approximately $270,000 during the year ended September 30, 2016 ($280,000 for the year ended September 30, 2015). The University occupies a building owned by the Foundation that houses the business office of the University. At September 30, 2016 and 2015 the building was fully depreciated. The University leases land and a building from the Foundation, which adjoins the Ebenezer Wetlands Biological Site. At September 30, 2016 and 2015, the carrying amount of the building was $170,000 and $178,000. Total lease payments to the Foundation for years ending September 30, 2016 and 2015, was $24,000 each year. For the years ending September 30, 2016 and 2015 respectively, the University received direct support from the Foundation of approximately $388,000 and $642,000, which was recorded as 39

42 Notes to Financial Statements September 30, 2016 and 2015 other revenue in the statements of revenues, expenses and changes in net assets. During the periods ending September 30, 2016 and 2015, the University administered approximately $719,000 and $665,000 in scholarships as agency transactions for the Foundation. 40

43 Required Supplementary Information (Unaudited) September 30, 2016 and 2015 Schedule of the University's Proportionate Share of the Net Pension Liablility Teachers' Retirement Plan of Alabama (Dollar amounts in thousands) UM's proportion of the collective net position liability % % UM's proportionate share of the net pension liability $ 41,539 $ 34,580 UM covered-employee payroll during the measurement period 25,339 24,050 UM's proportionate share of the collective net pension liability as a percentage of its covered-employee payroll % % Plan fiduciary net position as a percentage of the total collective pension liability 67.51% 71.01% Schedule of System Contributions Teachers' Retirement Plan of Alabama (Dollar amounts in thousands) UM contractually required contribution $ 3,106 $ 2,944 UM contributions in relation to the contractually required contribution 3,106 2,944 UM contribution deficiency (excess) - - UM's covered-employee payroll 26,461 25,339 Contributions as a percentage of covered-employee payroll 11.74% 11.62% Notes to schedules Employer s covered-employee payroll: The total payroll paid to employees (not just pension payroll). Measurement period: For fiscal year 2016, the measurement period is October 1, 2014 September 30,

44 Schedule of Expenditures of Federal Awards and Notes to Schedule of Expenditures of Federal Awards

45 Schedule of Expenditures of Federal Awards Year Ended September 30, 2016 Direct Pass-Through Pass-Through Entity Total Passed to Federal Program CFDA Expenditures Pass-Through Entity Sponsor Number Expenditures Sub-Recipients Student Financial Assistance Cluster Department of Education Federal Supplemental Educational Opportunity Grants (FSEOG) $ 98,951 $ - $ 98,951 $ - Federal Work Study Program (FWS) , ,165 - Federal Pell Grant Program ,394,925-4,394,925 - Federal Perkins Loan Outstanding loans as of October 1, , ,391 - New loans issued during ,750-2,750 - Federal Direct Lending ,441,753-16,441,753 - Trio Cluster Total Student Financial Assistance Cluster 21,491,935-21,491,935 - Department of Education Upward Bound , ,266 - Student Support Services , ,077 - McNair Post-Baccalaureate Achievement , ,133 - Total Trio Cluster 1,109,476-1,109,476 - Other Financial Assistance Department of Education Federal AMSTI and Title II, PartB, Mathematics and Science Partnerships Grant PL , NCLB Act B 188, ,227 - Department of Early Childhood Education, Office of School Readiness - Title V, ESEA A - 22,202 State of Alabama Agreement dated 7/7/ ,202 - Federal School Improvement Funds PL I-A, EASA of 1965, Title I, Part A ,952-19, ,179 22, ,381 - Department of Health And Human Services Alabama Department of Human Resources Title IV-E Grant ,456 University of Alabama C , ,456 85,456 - Department of Veteran Affairs Post-9/11 Veterans Educational Assistance , , , ,989 - Department of Agriculture Food and Nutrition Service - Child and Adult Care Food Program ,316 State of Alabama B , ,316 4,316 - Total Other Financial Assistance 777, , ,142 - Total Federal Award Expenditures $ 23,378,579 $ 111,974 $ 23,490,553 $ - The accompanying notes are an integral part of the Schedule of Expenditures of Federal Awards 43

46 Notes to Schedule of Expenditures of Federal Awards Year Ended September 30, Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards (the Schedule ) summarizes the federal expenditures of the University under programs of the federal government for the year ended September 30, The amounts reported as federal expenditures were obtained from the University s general ledger. Because the Schedule presents only a portion of the operations of the University, it is not intended to and does not present the financial position, changes in net assets or cash flows of the University. The University applies its predetermined approved facilities and administrative rate when charging indirect costs to federal awards rather than the 10% de minimis cost rate as described in Section of the Uniform Guidance. For the purposes of the Schedule, federal awards include all grants, contracts, and similar agreements entered into directly between the University and agencies and departments of the federal government and all sub awards to the University by nonfederal organizations pursuant to federal grants, contracts, and similar agreements. 2. Summary of Significant Accounting Policies For purposes of the Schedule, expenditures for federal award programs are recognized on the accrual basis of accounting. 3. Federal Student Loan Programs Federal Perkins Loan Program (84.038) The Federal Perkins Loan Program is administered directly by the University and balances and transactions relating to the program are included in the University s basic financial statements. The balances of loans outstanding at September 30, 2016, and funds advanced by the University to eligible students during the year ended September 30, 2016 under the federal student loan programs, are summarized as follows: New loans issued $ 2,750 Total loan outstanding balance 303,654 The University did not recover an administrative cost allowance from the Perkins Loan program. The CFDA # has been closed by the Department of Education because there will be no further Federal Capital Contributions to the Perkins Loan Program. Federal Direct Student Loan Program (84.268) The Federal Direct Student Loan Program ( FDSLP ) was established under the Higher Education Act of 1965, as amended in the Student Loan Reform Act of The FDSLP enables an eligible student or parent to obtain a loan to pay for the student s cost of attendance directly through the rather than through private lenders. The University began participation in the FDSLP on July 1, As a university qualified to originate loans, the University is responsible for handling the complete loan origination process, including funds management and promissory note functions. The University is not responsible for collection of these loans. The amount of disbursements under the FDSLP during the current year is presented in the Schedule of Expenditures of Federal Awards. 44

47 Report of Independent Auditors on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards To the Board of Trustees of the We have audited the financial statements of the (the University ) as of and for the year ended September 30, 2016, and the related notes to the financial statements, which collectively comprise the University s basic financial statements and have issued our report thereon dated February 10, We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. The financial statements of the Foundation (the Foundation ), the University s discretely presented component unit, were not audited in accordance with Government Auditing Standards, and accordingly, this report does not include reporting on internal control over financial reporting or instances of reportable noncompliance associated the Foundation. Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the University s internal control over financial reporting ( internal control ) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control. Accordingly, we do not express an opinion on the effectiveness of the University s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL T: (205) , F: (205) ,

48 deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the University s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. February 10,

49 Report of Independent Auditors Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Uniform Guidance To the Board of Trustees of the Report on Compliance for Each Major Federal Program We have audited the s (the University ) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the University s major federal programs for the year ended September 30, The University s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to its federal programs. Auditors Responsibility Our responsibility is to express an opinion on compliance for each of the University s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the University s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the University s compliance. PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL T: (205) , F: (205) ,

50 Opinion on Each Major Federal Program In our opinion, the University complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended September 30, Other Matters The results of our auditing procedures disclosed two instances of noncompliance, which are required to be reported in accordance with the Uniform Guidance and which are described in the accompanying schedule of findings and questioned costs as items and Our opinion on each major federal program is not modified with respect to this matters. The University s response to the noncompliance findings identified in our audit is described in the accompanying Management s View and Corrective Action Plan. The University s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. Report on Internal Control Over Compliance Management of the University is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the University s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the University s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material 48