Indiana University of Pennsylvania of the State System of Higher Education. Financial Statements and Supplementary Information

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1 Indiana University of Pennsylvania of the State System of Higher Education Financial Statements and Supplementary Information

2 Table of Contents Page Independent Auditors Report 1 Financial Statements Balance Sheet - Primary Institution 3 Statement of Revenues, Expenses, and Changes in Net Assets - Primary Institution 5 Statement of Cash Flows - Primary Institution 6 Balance Sheet - Component Units 7 Statement of Revenues, Expenses, and Changes in Net Assets - Component Units 8 9 Supplementary Information Schedule of Funding Progress for the System Plan and REHP (OPEB) 41

3 Independent Auditors Report Council of Trustees Indiana University of Pennsylvania We have audited the accompanying financial statements of Indiana University of Pennsylvania of the State System of Higher Education (the University ) and its aggregate discretely presented component units as of and for the years ended. These financial statements are the responsibility of the University s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of the aggregate discretely presented component units. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for the discretely presented component units, is based on the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the University and of its aggregate discretely presented component units as of, and the respective changes in financial position and cash flows, where applicable, thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America. 1

4 The University has not presented Management s Discussion and Analysis (MD&A) that accounting principles generally accepted in the United States of America has determined is necessary to supplement, although not required to be part of, the basic financial statements. The Schedule of Funding Progress for the System Plan and REHP (OPEB) on page 40 is not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Pittsburgh, Pennsylvania November 29,

5 Indiana University of Pennsylvaniaof the State System of Higher Education Balance Sheet - Primary Institution Assets Current Assets Cash and cash equivalents $ 71,540,267 $ 54,183,613 Accounts receivable: Governmental grants and contracts 1,929,732 4,363,584 Students, net of allowance for doubtful accounts of $2,749,728 in 2011 and $2,437,055 in ,277,083 9,064,221 Sales and service 316,896 37,645 Other 698, ,838 Inventories 702, ,547 Prepaid expenses, suppliers 1,491, ,063 Conversion pay receivable 17,763 27,952 Loans receivable, net of allowance for doubtful accounts of $804,147 in 2011 and $629,235 in , ,522 Investment income receivable 36,623 99,484 Due from component units 5,995,659 3,162,068 Other current assets 265, ,333 Total current assets 92,029,603 73,752,870 Noncurrent Assets Restricted cash and cash equivalents 3,812,004 3,091,052 Endowment investments 4,396,295 3,759,520 Loans receivable, net 7,190,059 7,303,399 Bond discount/issuance costs 22,401 26,160 Capital assets, net 147,580, ,111,371 Total noncurrent assets 163,000, ,291,502 Total $ 255,030,448 $ 213,044,372 See notes to financial statements 3

6 Balance Sheet - Primary Institution Liabilities and Net Assets Current Liabilities Accounts payable and accrued expenses: Supplies and services $ 2,310,492 $ 8,295,832 Employees 15,578,307 16,067,045 Deferred revenue: Students 3,830,352 3,437,850 Grants 103, ,844 Other 152, ,135 Accrued interest payable 113,687 54,381 Students deposits 766, ,987 Other deposit liabilities 296, ,392 Current portion of workers compensation obligation 449, ,663 Current portion of compensated absences obligation 1,481,112 1,318,052 Current portion of postretirement benefits obligation 6,728,000 6,393,000 Current portion of capital lease obligations 1,344 1,235 Current portion of loans payable 8,204,895 - Current portion of bonds payable, net 2,889,434 2,299,669 Current portion of bond premium 312, ,341 Current portion of Due to System, Academic Facilities Renovation Bond Program (AFRP) 509, ,313 Current portion of due to component units 1,375,432 1,353,971 Other current liabilities 873, ,810 Total current liabilities 45,977,922 42,610,520 Noncurrent Liabilities Deferred revenue, other 69, ,895 Workers compensation obligation 572, ,209 Compensated absences obligation 11,526,368 14,020,383 Postretirement benefits obligation 102,071,658 93,520,409 Capital lease obligations 2,449 3,693 Bonds payable, net 54,352,286 26,527,484 Bond premium 2,936, ,203 Due to System, AFRP 6,080,991 6,597,706 Due to component units 141, ,672 Other noncurrent liabilities 8,304,715 8,647,782 Total noncurrent liabilities 186,058, ,825,436 Total liabilities 232,036, ,435,956 Net Assets (Deficit) Invested in capital assets, net of related debt 72,636,363 88,041,470 Restricted for: Nonexpendable: Scholarships and fellowships 2,845,337 2,845,337 Other 878, ,731 Expendable: Scholarships and fellowships 417, ,974 Capital projects 1,616, ,060 Other 107, ,247 Unrestricted (55,507,714) (73,157,403) Total net assets 22,993,764 19,608,416 Total $ 255,030,448 $ 213,044,372 See notes to financial statements 4

7 Statement of Revenues, Expenses, and Changes in Net Assets - Primary Institution Years Ended Operating Revenues: Tuition and fees $ 119,747,396 $ 110,166,588 Less scholarship discounts and allowances 28,765,172 26,356,343 Net tuition and fees 90,982,224 83,810,245 Governmental grants and contracts: Federal 31,938,007 27,536,958 State 15,944,573 17,579,417 Local 22,023 13,648 Nongovernmental grants and contracts 2,780,527 2,636,067 Sales and services of educational departments 6,400,183 5,034,590 Auxiliary enterprises 25,813,227 22,767,031 Other revenues 126,638 80,844 Total operating revenues 174,007, ,458,800 Operating Expenses: Instruction 99,862,367 96,415,393 Research 1,061,621 1,126,453 Public service 6,424,749 6,388,106 Academic support 21,278,178 21,864,354 Student services 18,700,182 18,022,356 Institutional support 26,578,885 27,300,522 Operations and maintenance of plant 19,147,778 19,300,915 Depreciation 10,741,676 10,525,872 Student aid 13,775,394 13,605,547 Auxiliary enterprises 22,445,197 21,409,748 Total operating expenses 240,016, ,959,266 Operating Loss (66,008,625) (76,500,466) Nonoperating Revenues (Expenses): State appropriations, general and restricted 57,711,535 56,303,155 ARRA state fiscal stabilization funds 5,038,483 8,590,664 Investment income, net 1,143,031 1,681,060 Unrealized gain on investments 538, ,898 Gifts for other than capital purposes 3,547,040 2,496,372 Interest expense on capital asset-related debt (1,954,460) (1,640,300) Loss on disposal of assets (29,279) (3,016,425) Other nonoperating revenue 205, ,469 Nonoperating revenues, net 66,200,719 64,937,893 Gain (Loss) Before Other Revenues 192,094 (11,562,573) Other Revenues: State appropriations, capital - 223,526 Capital gifts and grants 3,193,254 5,984,637 Total other revenues 3,193,254 6,208,163 Increase (Decrease) in Net Assets 3,385,348 (5,354,410) Net Assets, Beginning of Year 19,608,416 24,962,826 Net Assets, End of Year $ 22,993,764 $ 19,608,416 See notes to financial statements 5

8 Statement of Cash Flows - Primary Institution Years Ended Cash Flows from Operating Activities Tuition and fees, net $ 91,199,000 $ 81,884,348 Grants and contracts 52,803,043 43,983,561 Payments to suppliers for goods and services (54,112,095) (40,806,143) Payments to employees (160,776,484) (154,164,978) Loans issued to students (1,235,370) (565,408) Loans collected from students 1,235,393 1,183,398 Student Aid (13,775,394) (13,605,547) Auxiliary enterprise charges 25,848,922 22,486,496 Sales and services of educational departments 3,602,160 2,990,562 Other receipts (payments) (1,074,821) 2,496,206 Net cash used in operating activities (56,285,646) (54,117,505) Cash Flows from Noncapital Financing Activities State appropriations 62,750,018 64,893,819 Gifts for other than capital purposes 3,530,171 2,388,606 PLUS, Stafford, and other loans receipts (non-perkins) 112,287,303 98,495,728 PLUS, Stafford, and other loans disbursements (non-perkins) (112,351,991) (98,609,409) Agency transactions, net 65,958 (102,365) Other 205, ,469 Net cash provided by noncapital financing activities 66,487,173 67,224,848 Cash Flows from Capital Financing Activities Proceeds from capital debt and leases 45,034,845 - Capital appropriations 0 223,526 Capital grants and gifts received 2,501,315 4,938,118 Purchases of capital assets (33,178,189) (28,757,939) Principal paid on capital debt and leases (5,992,773) (2,976,328) Interest paid on capital debt and leases (2,317,843) (1,757,047) Net cash provided by (used in) capital financing activities 6,047,355 (28,329,670) Cash Flows from Investing Activities Proceeds from sales and maturities of investments 6,933 92,965 Interest on investments 1,205,892 1,730,231 Purchase of investments (105,053) (113,688) Net cash provided by investing activities 1,107,772 1,709,508 Net Increase (Decrease) in Cash and Cash Equivalents 17,356,654 (13,512,819) Cash and Cash Equivalents, Beginning of Year 54,183,613 67,696,432 Cash and Cash Equivalents, End of Year $ 71,540,267 $ 54,183,613 Reconciliation of Operating Loss to Net Cash Used in Operating Activities: Operating loss $ (66,008,625) $ (76,500,466) Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation expense 10,741,676 10,525,872 Expenses paid by Commonwealth or donor 10,049 21,766 Changes in assets and liabilities: Receivables, net 2,941,739 (3,896,265) Inventories (18,616) 128,628 Other assets (3,967,986) 397,165 Restricted cash (90,493) (1,228,498) Accounts payable (6,467,258) 8,109,667 Deferred revenue 110,507 47,427 Students' deposits (10,247) (94,587) Compensated absences (2,330,955) 385,411 Loans to students and employees ,990 Other liabilities 8,804,540 7,368,385 Net cash used in operating activities $ (56,285,646) $ (54,117,505) Noncash Transactions: Equipment acquired by capital lease $ - $ - Equipment acquired by trade $ 61,480 $ 54,761 Equipment acquired by like-kind exchanges $ 2,054 $ - See notes to financial statements 6

9 Balance Sheet - Component Units Assets Assets Cash and cash equivalents $ 10,715,592 $ 7,802,408 Accounts receivable 1,849,278 2,641,531 Contributions/pledges receivable 6,697,850 7,885,975 Due from university 1,517,267 1,637,643 Inventories 1,681,607 1,571,214 Investments 46,232,349 37,206,302 Capital assets, net 229,995, ,127,994 Restricted cash and investments 30,819,319 30,099,743 Total $ 329,509,205 $ 325,972,810 Liabilities and Net Assets Liabilities Accounts payable and accrued expenses $ 3,525,201 $ 5,269,692 Annuity liabilities 141, ,249 Due to university 5,995,659 3,162,068 Deposits payable 4,181,340 3,491,911 Capital leases 18,089,517 18,783,891 Long-term debt, net 236,905, ,630,987 Other liabilities 26,537,474 30,920,312 Total liabilities 295,376, ,415,110 Net Assets Unrestricted (12,181,681) (16,397,031) Temporarily restricted 13,397,148 10,470,861 Permanently restricted 32,916,955 31,483,870 Total net assets 34,132,422 25,557,700 Total $ 329,509,205 $ 325,972,810 See notes to financial statements 7

10 Statement of Revenues, Expenses, and Changes in Net Assets - Component Units Years Ended Changes in Unrestricted Net Assets Revenues and Other Additions: Sales and service $ 8,219,591 $ 8,104,148 Student fees 6,795,433 6,110,203 Grants and contracts 6,397,064 5,684,541 Rental income 26,751,340 22,670,692 Investment income 490,896 1,263,419 Other 2,795,965 2,893,171 Unrealized gain (loss) on investments 5,962,772 (9,114,369) Contributions 475, ,699 Net assets released based on satisfaction of program restrictions 6,138,194 6,208,037 Total revenues and other addtions 64,026,830 44,308,541 Expenses and Other Deductions Program services: Scholarships and grants 1,681,095 1,894,915 Student activities and programs 5,998,783 5,744,085 University stores 7,550,816 7,543,091 Housing 28,998,302 26,532,431 Other university support 1,309,014 2,781,258 Other programs 8,398,996 6,383,489 Management and general 3,194,132 2,174,468 Fundraising 2,680, ,132 Total expenses and other deductions 59,811,480 53,656,869 Increase (decrease) in unrestricted net assets 4,215,350 (9,348,328) Changes in Temporarily Restricted Net Assets Contributions 2,301,564 4,055,324 Investment gain 1,763,054 5,044,059 Unrealized gain (loss) on investments 4,784,863 (1,050,671) Net assets released based on satisfaction of program restrictions (6,138,194) (6,208,037) Net assets transferred 215,000 58,841 Increase in temporarily restricted net assets 2,926,287 1,899,516 Changes in Permanently Restricted Net Assets Contributions 1,433,085 1,768,204 Increase in permanently restricted net assets 1,433,085 1,768,204 Increase (Decrease) in Net Assets 8,574,722 (5,680,608) Net Assets, Beginning of Year 25,557,700 31,238,308 Net Assets, End of Year $ 34,132,422 $ 25,557,700 See notes to financial statements 8

11 1. Nature of Operations and Summary of Significant Accounting Policies Organization Indiana University of Pennsylvania of the State System of Higher Education (the University ), a public four-year doctoral intensive institution located in Indiana, Pennsylvania, was founded in The University is one of fourteen universities of the Pennsylvania State System of Higher Education ( PASSHE ). PASSHE was created by the State System of Higher Education Act of November 12, 1982, P.L. 660, No. 188, as amended ( Act 188 ). PASSHE is a component unit of the Commonwealth of Pennsylvania (the Commonwealth ). Reporting Entity In accordance with Government Accounting Standards Board ( GASB ) Statement No. 39, Determining Whether Certain Organization s Are Component Units, an amendment of GASB 14, the University has determined that The Student Co-Operative Association, Inc. (the Cooperative ), The College Student Union Association, Inc. (the Student Union ), The Foundation for IUP, Inc. (the Foundation ), and The IUP Research Institute, Inc. (the Research Institute ) should be included in the University s financial statements as discretely presented component units. The component units are legally separate, tax-exempt organizations that report their financial condition and results of activities under the accounting requirements promulgated by the Financial Accounting Standards Board ( FASB ). 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 component unit s financial information in the University s financial reporting entity for these differences. Complete financial statements for the component units may be obtained at the University s accounting office. Measurement Focus, Basis of Accounting, and Basis of Presentation The University functions as a business-type activity, as defined by GASB. The accompanying financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America, as prescribed by GASB. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements have been met. The University applies only the Financial Accounting Standards Board pronouncements issued before November 30, 1989, except for those that conflict with GASB pronouncements. 9

12 Operating Revenues Operating revenues of the University consist of tuition, all academic, instructional, and other student fees, grants and contracts, sales and services of educational activities, and auxiliary enterprise revenues. In addition, governmental and private grants and contracts in which the grantor receives equal value for the funds given to the University are recorded as operating revenue. All expenses, with the exception of interest expense, loss on the sale of investments, loss on the disposal of assets, and extraordinary expenses are recorded as operating expenses. Appropriations, gifts, interest income (except for interest earned by auxiliaries totaling $213,815 in 2011 and $211,304 in 2010, which is included in auxiliary revenues), capital grants, gains on the sale of investments, gains on the disposal of assets, parking and library fines, and governmental and private research grants and contracts in which the grantor does not receive equal value for the funds given to the University are reported as non-operating revenue. Scholarship Discounts and Allowances Student tuition and fee revenues, and certain other revenues from students, are reported net of scholarship discounts and allowances in the statement of revenues, expenses, and changes in net assets. Scholarship discounts and allowances are 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 students behalf. To the extent that revenues from such programs are used to satisfy tuition and fees and other student services, the University has recorded a scholarship discount and allowance. Certain other scholarship or discount amounts are paid directly to, or refunded to, the students and are generally reflected as expenses. Net Assets The University maintains the following net asset classifications: Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction, repair, or improvement of those assets. Restricted nonexpendable: Net assets subject to externally imposed conditions requiring that they be maintained by the University in perpetuity. Restricted expendable: Net assets whose use is subject to externally imposed conditions that can be fulfilled by the actions of the University or by the passage of time. Unrestricted: All other categories of net assets. Unrestricted net assets may be designated for specific purposes by the University s Council of Trustees. When both restricted and unrestricted funds are available for expenditure, the decision as to which funds are used first is left to the discretion of the University. 10

13 Cash Equivalents and Investments The University considers all demand and time deposits, money market funds, and overnight repurchase agreements to be cash equivalents. Investments purchased are stated at fair value. Investments received as gifts are recorded at their fair value or appraised value as of the date of the gift. Accounts Receivable and Loans Receivable Accounts and loans receivable consist of tuition and fees charged to current and former students, amounts due from federal and state governments in connection with reimbursements of allowable expenditures made pursuant to grants and contracts, and other miscellaneous sources. Accounts and loans receivable are reported at net realizable value. Accounts are written off when they are determined to be uncollectible based upon management s assessment of individual accounts. The allowance for doubtful accounts is estimated based upon the University s historical losses and periodic review of individual accounts. Inventories Inventories consist mainly of supplies and are stated at the lower of cost or market, with cost being determined principally on the weighted average method. Capital Assets Land and buildings at the University s campus acquired or constructed prior to the creation of PASSHE on July 1, 1983, are owned by the Commonwealth and made available to the University. Since the University neither owns such assets nor is responsible to service associated bond indebtedness, no value is ascribed thereto in the accompanying financial statements. Likewise, no value is ascribed to the portion of any land or buildings acquired or constructed utilizing capital funds appropriated by the Commonwealth after June 10, 1983, and made available to the University. Buildings, equipment and furnishings acquired or constructed by the University after June 30, 1983, through the expenditure of University funds or the incurring of debt, are stated at cost less accumulated depreciation, calculated using the straight-line method. All assets with a purchase cost, or fair value if acquired by gift, in excess of $5,000 with an estimated useful life of two years or greater are capitalized. All library books are capitalized. Normal repair and maintenance expenditures are not capitalized because they neither add to the value of the property nor materially prolong useful life. Management reviews capital assets for impairment whenever events or changes in circumstances indicate that the service utility of an asset has declined significantly and unexpectedly. Any write-downs due to impairment are charged to operations at the time impairment is identified. 11

14 Deferred Revenue Deferred revenue includes amounts received for tuition and fees, grants, corporate sponsorship payments, and certain auxiliary activities prior to the end of the fiscal year but relate to the subsequent accounting period. Compensated Absences Employees right to receive annual leave and sick leave payments upon termination or retirement for services already rendered is recorded as a liability. Pension Plans Employees of the University are required to enroll in one of three available cost-sharing multiple-employer retirement plans immediately upon employment. The University recognizes annual pension expenditures equal to its contractually required contributions to the plans. Income Taxes The University, as a member of PASSHE, which is a political subdivision of the Commonwealth, is excluded from federal income taxes under Section 115(1) of the Internal Revenue Code. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 12

15 New Accounting Standards In December 2009, GASB issued Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. Statement No. 57 amends Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, and Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. The University is required to adopt Statement No. 57 for the fiscal year ending June 30, In June 2010, GASB issued Statement No. 59, Financial Instruments Omnibus. Statement No. 59 updates existing standards regarding financial reporting and disclosure requirements of certain financial instruments and external investment pools. The University is required to adopt Statement No. 59 for the fiscal year ending June 30, The University has determined that Statements No. 57 and 59 have no effect on its balance sheet or statement of revenues, expenses, and changes in net assets. In November 2010, GASB issued Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements. Statement No. 60 establishes guidance for accounting and financial reporting for service concession arrangements, which are a type of public-private or public-public partnership. The University is required to adopt Statement No. 60 for the fiscal year ending June 30, In November 2010, GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus. Statement No. 61 modifies existing requirements for the assessment of potential component units in determining what should be included in the financial reporting entity and financial reporting entity display and disclosure requirements. The University is required to adopt Statement No. 61 for the fiscal year ending June 30, In June 2011, GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. Statement No. 63 establishes standards for reporting what GASB defines as deferred outflows and inflows of resources, which they have distinguished from assets and liabilities, and net position, which currently is referred to as net assets. The University is required to adopt Statement No. 63 for the fiscal year ending June 30, The University has not yet determined the effect of Statements No. 60, 61, and 63 on its financial statements. 13

16 2. Condensed Component Unit Information The following represents combining condensed balance sheet information for the component units as of June 30, 2011: Cooperative Student Union Foundation Research Institute University Acquisitions Total Due from University $ 296,866 $ $ 1,218,312 $ 2,089 $ $ 1,517,267 Capital assets, net 1,277,416 21,145, ,474,431 98, ,995,943 Other assets 3,931,592 3,141,154 87,978,549 2,944,699 97,995,994 Total assets $ 5,505,874 $ 24,286,358 $ 296,671,292 $ 3,045,680 $ - $ 329,509,204 Due to University 13,722 5,545, ,083 5,995,659 Capital leases 17,731,505 17,731,505 Other liabilities 1,539,897 5,393, ,980,123 1,736, ,649,619 Total liabilities $ 1,553,619 23,124, ,525,977 2,172, ,376,783 Net Assets: Unrestricted 3,952,255 1,161,566 (18,168,788) 873,285 (12,181,682) Temporarily restricted 13,397,148 13,397,148 Permanently restricted 32,916,955 32,916,955 Total net assets $ 3,952,255 $ 1,161,566 $ 28,145,315 $ 873,285 $ - $ 34,132,421 14

17 The following represents combining revenues, expenses, and changes in net assets information for the component units for the year ended June 30, 2010: Cooperative Student Union Foundation Research Institute University Acquisitions Total Due from University $ 274,464 $ - $ 1,113,144 $ 18,590 $ 231,445 $ 1,637,643 Capital assets, net 1,056,243 21,368, ,078,460-7,624, ,127,994 Other assets 3,099,663 3,035,748 77,040,858 3,398, ,147 87,207,173 Total assets $ 4,430,370 $ 24,404,500 $ 285,232,462 $ 3,417,347 $ 8,488,131 $ 325,972,810 Due to University $ 2,626 $ - $ 2,187,905 $ 763,774 $ 207,763 $ 3,162,068 Capital leases - 18,783, ,783,891 Other liabilities 891,638 4,490, ,034,131 1,462,149 8,590, ,469,151 Total liabilities $ 894,264 $ 23,274,541 $ 265,222,036 $ 2,225,923 $ 8,798,346 $ 300,415,110 Net Assets: Unrestricted $ 3,536,106 $ 1,129,959 $ (21,405,045) $ 1,191,424 $ (849,475) $ (16,397,031) Temporarily restricted - - 9,931, ,260 10,470,861 Permanently restricted ,483, ,483,870 Total net assets $ 3,536,106 $ 1,129,959 $ 20,010,426 $ 1,191,424 $ (310,215) $ 25,557,700 15

18 The following represents combining revenues, expenses, and changes in net assets information for the component units for the year ended June 30, 2011: Cooperative Student Union Foundation Research Institute University Acquisitions Total Revenues and gains: Contributions $ 4,210,224 $ $ $ 4,210,224 Sales and services $ 7,763,841 $ 455,750 8,219,591 Student fees 6,795,433 6,795,433 Grants and contracts 6,397,064 6,397,064 Rental income 25,945, ,862 26,751,340 Investment income 5,554 62,680 2,173,902 10,665 1,149 2,253,950 Unrealized loss on investments 10,747,635 10,747,635 Other revenues and gains 348, ,000 2,321, ,302 3,010,965 Total revenues and gains 14,913, ,680 45,398,589 6,863, ,313 68,386,202 Expenses and losses: Program services Scholarships and grants 1,681,095 1,681,095 Student activities and programs 5,998,783 5,998,783 University stores 7,550,816 7,550,816 Housing 28,331, ,718 28,998,302 Other university support 1,309,014 1,309,014 Other programs 159,582 1,919,211 6,320,203 8,398,996 Management and general 948,067 31,491 1,342, ,741 10,380 3,194,132 Fundraising 2,680,342 2,680,342 Total expenses and losses 14,497, ,073 37,263,700 7,181, ,098 59,811,480 Changes in net assets 416,149 31,607 8,134,889 (318,139) 310,215 8,574,722 Net assets, beginning of year 3,536,106 1,129,959 20,010,426 1,191,424 (310,215) 25,557,700 Net assets, end of year $ 3,952,255 $ 1,161,566 $ 28,145,315 $ 873,285 $ 0 $ 34,132,422 16

19 The following represents combining revenues, expenses, and changes in net assets information for the component units for the year ended June 30, 2010: Cooperative Student Union Foundation Research Institute University Acquisitions Total Revenues and gains: Contributions $ - $ - $ 6,034,890 $ - $ - $ 6,034,890 Sales and services 7,669, ,743-8,104,148 Student fees 6,110, ,110,203 Grants and contracts ,684,541-5,684,541 Rental income 125,000-21,327,565-1,218,127 22,670,692 Investment income 7, ,122 6,160,406 7,931 3,692 6,307,478 Unrealized gain (loss) on investments 5,097 - (10,170,137) - - (10,165,040) Other revenues and gains 301,948 10,000 2,586,384 9, ,562 3,229,349 Total revenues and gains 14,218, ,122 25,939,108 6,136,670 1,543,381 47,976,261 Expenses and losses: Program services Scholarships and grants - - 1,894, ,894,915 Student activities and programs 5,744, ,744,085 University stores 7,543, ,543,091 Housing ,112,176-1,420,255 26,532,431 Other university support - - 2,781, ,781,258 Other programs - (545,438) 1,814,334 5,114,593-6,383,489 Management and general 920,703 27, , ,276 10,831 2,174,468 Fundraising , ,132 Total expenses and losses 14,207,879 (518,048) 32,426,083 6,109,869 1,431,086 53,656,869 Changes in net assets 11, ,170 (6,486,975) 26, ,295 (5,680,608) Net assets, beginning of year 3,525, ,789 26,497,401 1,164,623 (422,510) 31,238,308 Net assets, end of year $ 3,536,106 $ 1,129,959 $ 20,010,426 $ 1,191,424 $ (310,215) $ 25,557,700 17

20 3. Deposits and Investments The University predominantly maintains its cash balances on deposit with PASSHE. PASSHE maintains these and other PASSHE funds on a pooled basis. Although PASSHE pools its funds in a manner similar to an internal investment pool, individual PASSHE entities do not hold title to any assets in the fund. PASSHE as a whole owns title to all assets. The University does not participate in the unrealized gains or losses on the investment pool; instead, the University holds shares equal to its cash balance. Each share has a constant value of $1, and income is allocated based on the number of shares owned. Revenue realized at the PASSHE level is calculated on a daily basis and posted monthly to each entity s account as interest income. The University s portion of pooled funds totals $73,566,006 and $55,832,875 at June 30, 2011 and 2010, respectively. PASSHE invests its funds in accordance with the Board s Investment Policy, which authorizes PASSHE to invest in repurchase agreements, commercial paper, obligations of the United States Treasury, agencies and sponsored entities, certificates of deposit, municipal bonds, mortgage-backed securities, asset-backed securities, banker's acceptances, and corporate bonds. Restricted nonexpendable funds and amounts designated by the Board or University trustees may be invested in the investments described above, as well as corporate equities and approved pooled common funds. For purposes of convenience and expedience, the University uses local financial institutions for activities such as cash deposits. In addition, the University may accept gifts of investments from donors as long as risk is limited to the investment itself. Restricted gifts of investments fall outside the scope of the investment policy. In keeping with its legal status as a system of public universities, PASSHE recognizes a fiduciary responsibility to invest all funds prudently in accordance with ethical and prevailing legal standards. In addition, PASSHE recognizes that the funds in its custody can be classified according to purpose, time frame for use, source, and other similar classifications. Differential investment guidelines and objectives are required to manage various funds classifications appropriately and optimally. Regardless of funds classifications, certain general tenets apply. Investments in all classifications seek to minimize exogenous risks while maintaining or expanding purchasing power. Adequate liquidity is maintained so assets are held to maturity. In all classifications, high quality investments are preferred. Reasonable portfolio diversification is pursued to ensure that no single security or investment or class of securities or investments will have a disproportionate or significant impact on the total portfolio. Investments are made in U.S.-based corporations. Investment performance in all classifications is monitored on a frequent and regular basis to ensure that objectives are attained and guidelines are followed. 18

21 Safety of principal and liquidity are the top priorities for the investment of PASSHE's operating funds. Within those guidelines, income optimization is pursued. Speculative investment activity is not allowed; this includes investing in asset classes such as commodities, futures, shortsales, equities, real or personal property, options, venture capital investments, private placements, letter stocks, and unlisted securities. Collateralized mortgage obligations (CMOs) are sometimes based on cash flows from interest-only (IO) payments or principal-only (PO) payments and are sensitive to prepayment risks. The CMOs in PASSHE's portfolio do not have IO or PO structures; however, they are subject to extension or contraction risk based on movements in interest rates. PASSHE's operating funds are invested and reinvested in the following types of instruments with qualifications as provided. Investment Categories Limit (% of Market Value) Single User (maximum) Rating Limit (Moody s) Government securities/ repurchase agreements Greater than 20% 5% Repurchase N/A Commercial paper/certificates of deposit/ banker s acceptances Less than 30% 5% of each type P-1 Municipal bonds Less than 20% 5% Aa or higher Corporate bonds Less than 20% N/A Aa of higher Collateralized mortgage obligations (CMOs) Less than 20% N/A Aaa Asset-backed securities Less than 20% N/A Aaa System notes Less than 20% 5% N/A At, the carrying amount of the University s demand and time deposits were $1,786,265 and $1,441,790, respectively, as compared to bank balances of $1,480,396 and $1,419,914, respectively. The difference is caused primarily by items in-transit. All bank balances were covered by federal depository insurance or were collateralized by a pledge of United States Treasury obligations held by Federal Reserve banks in the name of the banking institutions, or uninsured and uncollateralized but covered under the collateralization provisions of the Commonwealth of Pennsylvania Act 72 of 1971 ( Act 72 ), as amended. Act 72 allows banking institutions to satisfy the collateralization required by pooling eligible investments to cover total public funds on deposit in excess of federal insurance. Such pooled collateral is pledged with the financial institutions trust departments. 19

22 The carrying value (fair value) of deposits and investments for the University s pooled funds on June 30, 2011 is presented below: Moody s Rating (if applicable) Modified Duration (if applicable) Fair value Deposits Demand and time deposits $ 1,786,265 Investments Equity/balances mutual funds 4,396,295 Total $ 6,182,560 Of the local investments noted above, the exposure to foreign currency risk is as follows: Investment Currency Fair Value Deposit British Pound $ 10,787 Deposit Euro 1,186 Total $ 11,973 The carrying value (fair value) of deposits and investments for the University s pooled funds on June 30, 2010 is presented below: Moody s Rating (if applicable) Modified Duration (if applicable) Fair value Deposits Demand and time deposits $ 1,441,790 Investments Equity/balances mutual funds 3,759,520 Total $ 5,201,310 Of the local investments noted above, the exposure to foreign currency risk is as follows: Investment Currency Fair Value Deposit British Pound $ 12,973 Deposit Euro 3,563 Total $ 16,536 20

23 4. Capital Assets Capital assets acquired or constructed by the University through the expenditures of University funds or the incurrence of debt consist of the following: Estimated Lives (in years) Beginning Balance July 1, 2010 Additions Retirements Reclassifications Ending Balance June 30, 2011 Land $ 4,589,374 $ 0 $ 0 $ 0 $ 4,589,374 Construction in progress 27,566, ,289 (1,231) (27,172,515) 1,003,541 Total capital assets not being depreciated 32,156, ,289 (1,231) (27,172,515) 5,592,915 Buildings, including improvement ,849,500 29,979,737 (328) 27,172, ,001,424 Furnishings and equipment (including cost of capital leases) ,513,639 2,440,556 (617,481) 0 32,336,714 Library books 10 10,171, ,143 (54,447) 0 10,328,210 Total capital assets being depreciated 224,534,653 32,631,436 (672,256) 27,172, ,666,348 Less accumulated depreciation: Buildings, including improvements (97,972,533) (7,989,687) 15 0 (105,962,205) Furnishings and equipment (25,439,480) (2,339,699) 587,693 0 (27,191,486) Library books (8,167,641) (412,290) 54,445 0 (8,525,486) Total capital assets being depreciated, net 92,954,999 21,889,760 (30,103) 27,172, ,987,171 Capital assets, net $ 125,111,371 $ 22,500,049 $ (31,334) $ 0 $ 147,580,086 21

24 Estimated Lives (in years) Beginning Balance July 1, 2009 Additions Retirements Reclassifications Ending Balance June 30, 2010 Land $ 4,960,206 $ - $ (370,832) $ - $ 4,589,374 Construction in progress 7,765,263 25,243,219 - (5,441,484) 27,566,998 Total capital assets not being depreciated 12,725,469 25,243,219 (370,832) (5,441,484) 32,156,372 Buildings, including improvement ,805,357 1,958,600 (7,355,941) 5,441, ,849,500 Furnishings and equipment (including cost of capital leases) ,598,479 1,280,959 (365,799) - 30,513,639 Library books 10 9,905, ,156 (42,230) - 10,171,514 Total capital assets being depreciated 223,309,424 3,547,715 (7,763,970) 5,441, ,534,653 Less accumulated depreciation: Buildings, including improvements (94,777,863) (7,701,966) 4,507,296 - (97,972,533) Furnishings and equipment (23,439,054) (2,364,054) 363,628 - (25,439,480) Library books (7,750,019) (459,852) 42,230 - (8,167,641) Total accumulated depreciation (125,966,936) (10,525,872) 4,913,154 - (131,579,654) Total capital assets being depreciated, net 97,342,488 (6,978,157) (2,850,816) 5,441,484 92,954,999 Capital assets, net $ 110,067,957 $ 18,265,062 $ (3,221,648) $ - $ 125,111,371 22

25 5. Leases The University has entered into a long-term operating lease for the use of facilities. Future annual minimum payments in the aggregate, under non-cancelable operating leases are as follows: Years ending June 30: 2012 $ 248, , , ,971 Total $ 493,709 Total rent expense for operating leases was $2,152,618 and $2,058,032 for the years ended, respectively. The component units have entered into capital lease agreements for the financing of buildings, building improvements and equipment. Future minimum payments by year and in the aggregate, with initial or remaining terms of one year or more, are as follows: Years ending June 30: 2012 $ 2,222, ,216, ,170, ,033, ,040,856 Thereafter 22,847,625 Total minimum lease payments 33,531,865 Less amount representing interest on capital leases 15,442,078 Present value of net minimum capital lease payments $ 18,089,517 Buildings and building improvements, net of depreciation, at, include $20,399,369 and $20,810,786, respectively, acquired through leases that have been capitalized. 23

26 6. Bonds Payable And Long Term Debt Bonds payable consist of tax-exempt revenue bonds issued by PASSHE through the Pennsylvania Higher Educational Facilities Authority ( PHEFA ). In connection with the bond issuances, PASSHE entered into a loan agreement with PHEFA on behalf of the University under which PASSHE has pledged its full faith and credit for the repayment of the bonds. The loan constitutes an unsecured general obligation of PASSHE. PASSHE s Board of Governors has allocated portions of certain bond issuances to the University to undertake various capital projects or to advance refund certain previously issued bonds. The University is responsible for the repayment of principal and interest on its applicable portion of each obligation. The various bond series allocated to the University for the years ended, are as follows: Weighted Average Interest Rate Balance July 1, 2010 Bonds Issued Bonds Redeemed Balance June 30, 2011 Series T issued in July 2001 for various projects 4.87% $ 2,701,678 $ - $ (2,701,678) $ - Series U issued in August 2002 for various projects 4.43% 125,000 - (60,000) 65,000 Series W issued in October 2002 for various projects 4.76% 901,582 - (217,015) 684,568 Series X issued in May 2003 for various projects 4.28% 484,660 - (95,098) 389,562 Series Z issued in March 2004 for various projects 3.95% 327,717 - (199,166) 128,552 Series AA issued in July 2004 for various projects 4.62% 1,059,958 - (56,141) 1,003,818 Series AC issued in July 2005 for various projects 4.90% 4,580,432 - (282,826) 4,297,606 Series AF issued in July 2007 for various projects 4.95% 1,222,996 - (48,196) 1,174,801 Series AG issued in March 2008 for various projects 4.60% 635,734 - (150,702) 485,031 Series AH issued in July 2008 for various projects 4.69% 12,663,839 - (649,327) 12,014,512 Series AI issued in August 2008 for various projects 4.01% 4,216,347 - (257,164) 3,959,184 Series AL issued in July 2010 for various projects 5.00% - 33,986,017 (776,832) 33,209,185 Total bonds payable 28,919,944 33,986,017 (5,494,144) 57,411,818 Plus unamortized gain on refinancing Less unamortized loss on refinancing (93,654) (170,745) Outstanding at end of year $ 28,827,153 $ 33,986,017 $ (5,194,144) $ 57,241,720 24

27 Weighted Average Interest Rate Balance July 1, 2009 Bonds Issued Bonds Redeemed Balance June 30, 2010 Series T issued in July 2001 for various projects 4.87% $ 2,987,160 $ - $ (285,481) $ 2,701,679 Series U issued in August 2002 for various projects 4.38% 185,000 - (60,000) 125,000 Series W issued in October 2002 for various projects 4.74% 1,277,950 - (376,368) 901,582 Series X issued in May 2003 for various projects 4.37% 948,771 - (464,111) 484,660 Series Z issued in March 2004 for various projects 3.96% 519,962 - (192,245) 327,717 Series AA issued in July 2004 for various projects 4.58% 1,114,345 - (54,387) 1,059,958 Series AC issued in July 2005 for various projects 4.91% 4,850,032 - (269,600) 4,580,432 Series AF issued in July 2007 for various projects 4.93% 1,269,311 - (46,315) 1,222,996 Series AG issued in March 2008 for various projects 4.53% 781,370 - (145,636) 635,734 Series AH issued in July 2008 for various projects 4.69% 13,282,502 - (618,663) 12,663,839 Series AI issued in August 2008 for various projects 3.89% 4,464,782 - (248,435) 4,216,347 Total bonds payable 31,681,185 - (2,761,243) 28,919,944 Plus unamortized gain on refinancing 2, Less unamortized loss on refinancing (111,808) (93,654) Outstanding at end of year $ 31,571,758 - $ (2,761,243) $ 28,827,153 The University participates in PASSHE s Academic Facilities Renovation Bond Program (AFRP), which was established for the purpose of renovating the academic facilities across PASSHE. This program will provide $100,000,000 in funding over the next several years. PASSHE will issue bonds to provide a pool for funding for AFRP ($44,384,646 and $47,857,567 was outstanding as of, respectively). Universities can request funds for AFRP projects in accordance with their pre-approved amount of funding from the pool. Repayments to the pool are made annually based on the University s proportionate share of the total allocation of funds under the program. The balance owed by the University to PASSHE s AFRP pool of funding was $6,590,526 at June 30, 2011 and $7,088,019 at June 30,

28 The component units have entered into long-term debt agreements for the financing of buildings and building improvements. Future minimum payments by year and in the aggregate are as follows: Principal Interest Total Years ending June 30: 2012 $ 3,176,108 $ 10,202,446 $ 13,378, ,604,075 10,069,764 13,673, ,975,414 9,921,390 13,896, ,763,977 9,738,971 16,502, ,077,066 9,490,476 46,567,542 Thereafter 187,693, ,038, ,732,083 Plus unamortized bond premium 149,667 Less unamortized bond issue costs (5,534,029) Total $ 236,905, ,290,205 $ 166,461,565 $ 408,751,770 26

29 Principal and interest maturities for each of the next five years and in subsequent five-year periods ending June 30 are as follows: Total Series U Principal 65, ,000 Interest 2, ,438 Total 67, ,438 W Principal 220, , , ,568 Interest 32,085 22,042 11, ,497 Total 252, , , ,065 X Principal 103, ,138 98,777 18,597 19,217 40, ,562 Interest 17,703 12,507 7,100 3,149 2,405 2, ,344 Total 121, , ,877 21,746 21,622 43, ,906 Z Principal 23,930 24,857 25,785 26,527 27, ,552 Interest 4,424 3,706 2,929 2,027 1, ,184 Total 28,354 28,563 28,714 28,554 28, ,736 AA Principal 58,480 60,820 63,744 66,960 69, , , ,003,818 Interest 46,345 44,006 40,965 37,778 34, ,077 28, ,915 Total 104, , , , , , , ,362,733 AC Principal 296, , , , ,721 1,816, , ,297,607 Interest 212, , , , , ,791 97, ,454,354 Total 508, , , , ,853 2,267, , ,751,961 AF Principal 50,312 52,428 54,779 57,365 60, , , ,209-1,174,801 Interest 57,970 55,831 53,603 50,864 47, ,655 94,981 5, ,059 Total 108, , , , , , , ,369-1,732,860 AG Principal 156, , , ,031 Interest 16,383 11,300 5, ,534 Total 172, , , ,565 AH Principal 674, , , , ,035 4,757,474 2,956, ,324-12,014,512 Interest 565, , , , ,346 1,452, ,557 39,193-4,400,991 Total 1,240,830 1,242,156 1,242,433 1,240,922 1,242,381 6,210,087 3,391, ,517-16,415,503 AI Principal 266, , , , ,662 1,722, , ,959,184 Interest 157, , , , , ,612 63, ,152,589 Total 423, , , , ,788 2,119, , ,111,773 AL Principal 1,002,521 1,052,723 1,109,444 1,161,165 1,221,109 5,547,223 6,235,000 7,955,000 7,925,000 33,209,185 Interest 1,660,459 1,610,333 1,557,697 1,502,225 1,444,167 6,387,749 4,935,250 3,213,250 1,014,750 23,325,880 Total 2,662,980 2,663,056 2,667,141 2,663,390 2,665,276 11,934,972 11,170,250 11,168,250 8,939,750 56,535,065 Total Principal 2,918,131 2,985,609 3,114,949 2,751,065 2,886,267 14,632,477 11,573,789 8,624,533 7,925,000 57,411,820 Interest 2,773,325 2,637,383 2,497,118 2,349,984 2,217,234 9,008,977 5,655,411 3,257,603 1,014,750 31,411,785 Total $ 5,691,456 $ 5,622,992 $ 5,612,067 $ 5,101,049 $ 5,103,501 $ 23,641,454 $ 17,229,200 $ 11,882,136 $ 8,939,750 $ 88,823,605 27

30 7. Compensated Absences Compensated absences activity for the years ended June 30, is as follows: Balance, July 1 $ 15,338,435 $ 14,953,024 Current changes in estimate (849,843) 1,782,698 Payouts (1,481,112) (1,397,287) Balance, June 30 $ 13,007,480 $ 15,338, Postretirement Benefits University employees who retire after meeting specified service and age requirements become eligible for participation in one of two defined healthcare benefit plans. These plans include hospital, medical/surgical, and major medical coverage, and provide a Medicare Supplement for individuals over age 65. Retired Employees Health Program Plan Description Employee members of the American Federation of State, County and Municipal Employees; Pennsylvania Doctors Alliance; and Pennsylvania Social Services Union participate in the Retired Employees Health Program (REHP), which is sponsored by the Commonwealth and administered by the Pennsylvania Employee Benefits Trust Fund (PEBTF). The REHP provides eligible retirees and their eligible dependents with health care benefits. Benefit provisions are established and may be amended under pertinent statutory authority. The REHP neither issues a stand-alone financial report nor is it included in the report of a public employee retirement system or other entity. Funding Policy The contribution requirements of plan members and contributing entities are established and may be amended by the Commonwealth's Office of Administration and the Governor's Budget Office. Plan members receiving benefits who retired prior to July 1, 2005 are not required to make contributions. Beginning July 1, 2005, plan members receiving benefits who retire on or after July 1, 2005 contribute at a percentage of their final salary, the rate of which varies based on the plan member s retirement date. Agency member (employer) contributions are established primarily on a pay-as-you-go basis. In 2010/11, PASSHE contributed $200 for each current active employee per biweekly pay period. PASSHE made contributions of $20,069,000 $25,318,000 and $26,131,000 for the fiscal years ending June 30, 2011, 2010, and 2009, respectively, which equaled the required contributions for the year. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. 28