BEMIDJI STATE UNIVERSITY

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3 BEMIDJI STATE UNIVERSITY A MEMBER OF THE MINNESOTA STATE COLLEGES AND UNIVERSITIES SYSTEM ANNUAL FINANCIAL REPORT FOR THE YEARS ENDED JUNE 30, 2012 and 2011 Prepared by: Chief Financial Officer Deputy Hall Bemidji State University 1500 Birchmont Drive NE Bemidji, MN

4 Upon request, this publication is available in alternate formats by calling one of the following: General number (651) Toll free: For TTY communication, contact Minnesota Relay Service at or

5 BEMIDJI STATE UNIVERSITY ANNUAL FINANCIAL REPORT FOR THE YEARS ENDED JUNE 30, 2012 and 2011 TABLE OF CONTENTS INTRODUCTION Page Transmittal Letter... 5 Organizational Chart...7 FINANCIAL SECTION Independent Auditors Report...10 Management s Discussion and Analysis...12 Basic Financial Statements Statements of Net Assets Bemidji State University Foundation Statements of Financial Position...21 Statements of Revenues, Expenses, and Changes in Net Assets...22 Bemidji State University Foundation Statements of Activities...23 Statements of Cash Flows Notes to the Financial Statements...26 REQUIRED SUPPLEMENTARY INFORMATION SECTION Schedule of Funding Progress for Net Other Postemployment Benefits...49 SUPPLEMENTARY SECTION Components of Bemidji State University - Statements of Net Assets...52 Components of Bemidji State University - Statements of Revenues Expenses, and Changes in Net Assets Report 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

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7 3 INTRODUCTION

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12 The financial activity of the Bemidji State University is included in this report. The University is one of 31 colleges and universities included in the Minnesota State Colleges and Universities Annual Financial Report which is issued separately. The University s portion of the Revenue Fund is also included in this report. The Revenue Fund activity is included both in the Minnesota State Colleges and Universities Annual Financial Report and in a separately issued Revenue Fund Annual Financial Report. All financial activity of Minnesota State Colleges and Universities is included in the state of Minnesota Comprehensive Annual Financial Report. 8

13 9 FINANCIAL SECTION

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16 MANAGEMENT S DISCUSSION AND ANALYSIS (Unaudited) INTRODUCTION The following discussion and analysis provides an overview of the financial position and activities of Bemidji State University, a member of the Minnesota State Colleges and Universities system at June 30, 2012 and 2011, and for the years then ended. This discussion has been prepared by management and should be read in conjunction with the financial statements and the notes, which follow this section. Bemidji State University (BSU) and Northwest Technical College (NTC) are aligned under the leadership of one president. The institutions share administration, business services, information technology, select student services, and some academic areas. BSU and NTC maintain separate institutional accreditation from the Higher Learning Commission and all student, personnel, and financial records are recorded in separate integrated student records systems. For financial statement purposes, the records of BSU and NTC are combined and referred to within this document as the University unless specifically noted. The University is one of 31 colleges and universities comprising the Minnesota State Colleges and Universities system. Minnesota State Colleges and Universities are governed by a 15 member board of trustees appointed by the Governor. Twelve trustees serve six-year terms, eight representing each of Minnesota s congressional districts and four serving at-large. Three student trustees: one from a state university, one from a community college and one from a technical college, serve two-year terms. The Board of Trustees selects the Chancellor and has broad policy responsibility for system planning, academic programs, fiscal management, personnel, admissions requirements, tuition and fees, and policies and procedures. BSU is a comprehensive public university founded in 1919, with current student enrollment of approximately 4,800 undergraduate students and 275 graduate students from nearly all 50 states and approximately 35 foreign countries. The campus is comprised of 89 acres with 19 academic/student services buildings, seven residence buildings, and a 240 acre private forest. BSU offers more than 65 majors and pre-professional programs. A select number of graduate programs are offered. The online programs offered through professional education have the highest enrollment. BSU operates with approximately 400 faculty members and 200 staff. NTC was established in 1965 and has a current student enrollment of approximately 1,200 students. NTC offers 23 areas of study in six divisions Business; Environmental Technology, Industrial Technology and General Technology; General Education; Health; Human and Protective Services; and the Bemidji School of Nursing. NTC operates with approximately 70 faculty members and 35 staff. NTC is also the fiscal host for Distance Minnesota, an online inter-institutional consortium. Over half of its 1,200 students have courses through this consortium. The membership to Distance Minnesota includes founding members Alexandria Technical and Community College, Northland Community and Technical College and Northwest Technical College, and a university partner Bemidji State University. FINANCIAL HIGHLIGHTS The University s financial position improved during fiscal year 2012, and ended at June 30 with assets of $117.8 million and liabilities of $43.6 million compared to fiscal year 2011 with assets of $116.3 million and liabilities of $46.1 million and fiscal year 2010 with assets of $106.8 million and liabilities of $40.7 million. The increase in total assets was primarily due to a $3.7 million increase in current assets. The University continued to make efforts in fiscal year 2012 to increase cash in anticipation of budgetary challenges. 12

17 Net assets, which represent the residual interest in the University s assets after liabilities are deducted, are comprised of: Investment in capital assets, net of related debt was $47.6 million for fiscal year 2012 compared with $48.9 million in fiscal year 2011 and $49.2 million in fiscal year Restricted net assets were $7.5 million for fiscal year 2012, $7.3 million for fiscal year 2011 and $7.3 million for fiscal year Unrestricted net assets were $19.1 million for fiscal year 2012, $14.0 million for fiscal year 2011, and $9.6 million for fiscal year USING THE FINANCIAL STATEMENTS The University s financial report includes three financial statements: the statements of net assets, the statements of revenues, expenses and changes in net assets and the statements of cash flows. These financial statements are prepared in accordance with generally accepted accounting principles (GAAP) as prescribed by the Governmental Accounting Standards Board (GASB) through authoritative pronouncements. These statements establish standards for external financial reporting for public colleges and universities and require that financial statements be presented on a consolidated basis to focus on the University as a whole, with resources classified for accounting and reporting purposes into three net asset categories. STATEMENTS OF NET ASSETS The statements of net assets present the financial position of the University at the end of the fiscal year and include all assets and liabilities of the University. The difference between total assets and total liabilities (net assets) is one indicator of the current financial condition of the University. The change in net assets is an indicator of whether the overall financial condition has improved or worsened during the year. Assets and liabilities are generally measured using current values. One notable exception is capital assets, which are stated at historical cost less an allowance for depreciation. A summary of the University s assets, liabilities, and net assets at June 30, 2012, 2011, and 2010 follows: Summarized Statement of Net Assets Assets Current assets $ 38,731 $ 35,018 $ 32,095 Current restricted assets 3,161 9,221 1,942 Noncurrent assets: Student loans receivable, net 4,148 4,333 4,249 Capital assets, net 71,766 67,774 68,497 Total assets 117, , ,783 Liabilities: Current liabilities 10,031 10,787 11,480 Noncurrent liabilities 33,520 35,263 29,193 Total liabilities 43,551 46,050 40,673 Net Assets $ 74,255 $ 70,296 $ 66,110 Unrestricted current assets consist primarily of cash, cash equivalents and investments which total $33.7 million at June 30, 2012, $31.1 million at June 30, 2011, and $27.5 million at June 30, This represents approximately 5.9 months, 5.0 months, and 4.5 months of operating expenses (excluding depreciation) for fiscal years 2012, 2011 and 2010, respectively. Included in current assets are accounts receivables. The accounts receivable balance ending June 30, 2012 was $2.6 million comprised primarily of tuition and fees, and room and board. Also, the June 30, 2012 accounts receivable included $0.7 million in Distance MN contract billings. The accounts receivable balance ending June 30, 2011 was $1.3 million while accounts receivable balance ending June 30, 2010 was $1.5 million. 13

18 Current liabilities consist primarily of accounts payable and salaries payable. Accounts payable was $1.3 million at June 30, 2012, $0.9 million at June 30, 2011 and $1.4 million at June 30, Salaries payable was $3.7 million at June 30, 2012, $5.6 million at June 30, 2011 and $5.6 million June 30, The decrease in salaries payable at June 30, 2012 was attributable to a combination of fewer days being accrued based on the payroll cycle and the expiration of time-limited early separation incentives that were available in fiscal years 2011 and Net assets represent the residual interest in the University s assets after liabilities are deducted. The University s net assets at June 30, 2012, 2011, and 2010 are summarized as follows: Summarized Net Assets Invested in capital assets, net of related debt $ 47,620 $ 48,914 $ 49,197 Restricted expendable, bond covenants 3,509 3,472 3,874 Restricted expendable, other 3,967 3,875 3,475 Unrestricted 19,159 14,035 9,564 Total net assets $ 74,255 $ 70,296 $ 66,110 Invested in capital assets, net of related debt, represents the University s capital assets net of accumulated depreciation and outstanding principal balances of debt. Restricted net assets include funding received for capital projects, revenue bond covenants and the University's capital contribution for Perkins loans. CAPITAL AND DEBT ACTIVITIES One of the critical factors in continuing the quality of the University s academic programs and residential life is the development and renewal of its capital assets. The University continues to implement a long-range plan to modernize its complement of older facilities, balanced with some new construction. Capital outlay totaled $9.4 million in fiscal year 2012, $4.1 million in fiscal year 2011, and $6.0 million in fiscal year Capital expenses are primarily comprised of replacement and renovation of facilities, as well as significant investments in equipment. In fiscal year 2012, the largest capital expenditure was for the Birch Hall renovation project as well as the plumbing repair project in the physical education building. The primary outlays for fiscal year 2011 were for the implementation of the campus-wide emergency alert system, installation of new flooring in the recreation center, and revenue fund roofing projects. The two largest capital outlay projects for fiscal year 2010 were elevator modifications and Bangsberg Hall tuck pointing and abatement. Construction in progress as of June 30, 2012 includes the replacement of the Education Arts roof, cooling tower improvements and the replacement of the American Indian Resource Center steam line. Construction in progress as of June 30, 2011 included the plumbing repair project in the physical education building and Birch Hall renovation project at BSU along with the restroom renewal and ADA code compliance project at NTC. Construction in progress as of June 30, 2010, funded through operating funds, included the following projects: replacement of the multipurpose floor in the campus recreation center, enhancements to the keyless entry system in the residence halls, emergency alert system for all campus buildings, and asset preservation and replacement projects funded from capital bonding funds in fiscal year 2009 and fiscal year Additional information for capital project commitments can be found in Note 16 to the financial statements. Long-term debt totaled $25.3 million at June 30, 2012, $26.6 million at June 30, 2011, and $20.1 million at June 30, The additional borrowing incurred in fiscal year 2011 was for the Birch Hall renovation project. General obligation bonds financed the Sattgast Hall addition and renovation. Additional information on capital and debt activities can be found in Notes 6 and 8 to the financial statements. 14

19 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS The statements of revenues, expenses and changes in net assets present the University s results of operations. Summarized Statement of Revenue, Expenses and Change in Net Assets Operating revenues: Tuition, auxiliary and sales, net $ 28,826 $ 29,444 $ 26,552 Restricted student payments, net 9,611 9,559 9,028 Other income Total operating revenues 38,851 39,454 36,122 Nonoperating revenues: State and capital appropriations 21,349 24,647 27,735 Private grants and interest income, net 2,036 1,832 1,628 Federal and state grants 16,631 18,375 18,657 Total nonoperating revenues 40,016 44,854 48,020 Total revenues 78,867 84,308 84,142 Operating expenses: Salaries and benefits 46,534 50,463 50,060 Supplies, services and other 21,004 21,941 21,015 Depreciation 5,236 4,813 4,500 Financial aid, net 1,045 1,943 2,335 Total operating expenses 73,819 79,160 77,910 Nonoperating expenses 1, Total expenses 74,908 80,122 78,807 Increase in net assets 3,959 4,186 5,335 Net assets, beginning of year 70,296 66,110 60,775 Net assets, end of year $ 74,255 $ 70,296 $ 66,110 Tuition, fees, and state appropriations are the primary sources of funding for the University s academic and residential life programs. Net tuition, auxiliary and sales revenue declined by 2.1 percent in fiscal year 2012, increased by 10.9 percent in fiscal year 2011 and increased by 2.1 percent in fiscal year The net restricted student payments increased by 0.5 percent in fiscal year 2012, increased by 5.9 percent in fiscal year 2011, and increased by 10.7 percent in fiscal year Federal and state grants decreased by 9.5 percent in fiscal year 2012 and decreased 1.5 percent in fiscal year 2011 after increasing by 35.5 percent in fiscal year In fiscal year 2012, state grants increased $0.4 million offsetting a decrease to federal grants of $2.1 million primarily due to a reduction in federal financial aid programs. In fiscal year 2011, federal grants increased by $0.7 million offsetting decreases to state grants of $1.0 million primarily due to a reduction in the state grant financial aid program. Federal funding from the American Recovery and Reinvestment Act (ARRA) along with an increase in financial aid funds were the main contributors to the $4.9 million increase in fiscal year

20 The following graph depicts the revenue trends by source over the past three fiscal years: 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 24% 24% 23% 11% 12% 13% 32% 35% 37% 30% 28% 26% $83,965 3% 1% 1% $84,074 In Thousands $78,665 Revenue by Source (Excludes Interest Income) Capital Appropriation Grants Restricted Student Payments, net and Other Tuition, Auxiliary and Sales, net General Appropriation Total operating expenses decreased $5.3 million or 6.7 percent in 2012 after increasing $1.3 million or 1.6 percent between fiscal year 2011 and Salaries and benefits decreased $3.9 million or 7.8 percent after increasing $0.4 million or.01 percent between fiscal years 2011 and Recalibration, at the end of fiscal year 2011, eliminated nineteen faculty positions and three classified positions. During fiscal year 2012, bargaining unit contracts were under negotiation and remain unresolved. The increase in fiscal year 2011 was primarily due to the Board Early Separation Incentive. The faculty collective bargaining agreement for both the college and university had no salary increases for the fiscal years 2010 and 2011 agreement. There were no across-the-board wage increases in the staff contracts with less than half of the staff eligible for progression step increases during the year. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 7% 6% 6% 3% 3% 1% 6% 6% 7% 2% 2% 2% 6% 6% 6% 12% 13% 15% 64% 64% 63% $77, $79, $73,819 In Thousands Operating Expenses Other Financial aid, net Depreciation Repairs and Maintenance Supplies Purchased Services Salaries 16

21 Net assets increased by $4.0 million or 5.6 percent in fiscal year Net assets increased by $4.2 million or 6.3 percent in fiscal year 2011 after increasing $5.3 million or 8.8 percent in fiscal year The increase in fiscal year 2012 was primarily due to a $3.8 million increase in unrestricted cash and accounts receivable. The increase in unrestricted cash was a result of expense savings from recalibration efforts while the increase in receivables resulted from contract billings as the College assumed the fiscal host role for Distance Minnesota. The increase in fiscal year 2011 was primarily due to a $3.6 million increase in unrestricted cash and investments. Operating reserves were added to in fiscal year 2011 to buffer a potential loss of enrollment due to academic program reductions. The increase in fiscal year 2010 was primarily due to the access to stimulus funding and conservative spending in preparation for budgetary challenges in the next biennium. COMPONENT UNIT The Bemidji State University Foundation (BSU Foundation) is a component unit of the University. As such, the separately audited financial statements for the Foundation are included, but shown separately from those of the University in compliance with the requirements of GASB Statement No. 39. The Foundation contributed $766,413, $677,896, and $653,793 to the University for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. ECONOMIC FACTORS THAT WILL AFFECT THE FUTURE The University has successfully gone through a year of transition after making budget reductions in excess of $4.0 million between fiscal years 2011 and Approximately 20 academic programs were downsized or eliminated. These changes resulted in a refocus of the academic priorities of the institution. With the state of Minnesota likely projecting a budget deficit in the upcoming biennium, it is unlikely that there will new funding available to assist with the base operating budget. This factor along with the system strategic focus on increasing access and affordability, meaning modest annual tuition increases (projected to three percent or less), increases the need to put emphasis on enrollment management, philanthropic pursuits, and new partnerships and collaborations to generate new revenue streams. With tuition and fees funding the majority of the operating budget, it is critical to have realistic and attainable enrollment goals. While there is pressure to keep growing year after year, even within the system, the institution has lagged behind the system peers (all colleges and universities in the Minnesota State Colleges and Universities system) the past several years (see next page). The institution is focusing on establishing a base enrollment number that allows sufficient resources to achieve its goals, but reduces emphasis on simply comparing the results to the previous year. New markets are being explored that build upon the areas of strength. A new internal funding structure has been implemented to encourage departments to support adding new sites and/or distance offerings to students not in the traditional Bemidji market area. Another area that is being actively explored is increasing the number of international students. The additional students will bring more revenue to the University, but as important, it will help diversify the student population and provide more global experiences for students from the traditional draw area. Additionally, a new position was created to increase campus use during the summer months. There will be greater emphasis placed on blended learning and hosting camps and conferences. Better utilizing the campus during a time where its geographic location and natural setting are assets will provide more auxiliary services and additional revenues while giving the campus more exposure to new audiences. The following chart depicts where the University s enrollment would be if the percentage change in enrollment for all colleges and universities in the Minnesota State College and Universities system combined was applied to BSU/NTC actual student full-year equivalent figures starting in This trendline is compared to the actual and projected enrollment for BSU/NTC. 17

22 A capital campaign for Bemidji State University, which has not been publically launched, is being led by the BSU Foundation and is expected to provide additional financial support for the operations and assist in acquiring more students of the quality and quantity that the University desires. The three priorities of the campaign are scholarships, academic excellence, and annual support. Additional scholarship funds will help increase access for financially challenged and first generation students. The financial support will also be used for activities and programs that increase the likelihood of student success. Some examples include early awareness programs, career exploration, college transition, retention support, and providing internship experiences. Having this additional financial support will eventually impact retention rates and play a large role in stabilizing enrollment. Initial results of the silent phase of the funding raising campaign have significantly increased the Foundation s revenues and assets. The change is illustrated below: BSU Foundation Total Revenue Thousands $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $- $7,193 $4,827 $4,744 $1,949 $1, The University is aggressively pursuing new partnerships and collaborations to seek new revenue streams. One area of emphasis is the health sciences and nursing area. On July 1, 2012, BSU and NTC s nursing programs joined under the School of Nursing while retaining their own unique educational missions. NTC will continue to provide practical nursing and associate registered nursing programs, while BSU will continue to provide the four-year, baccalaureate nursing program. This new school will streamline the process for outside healthcare agencies to enter into contracts with the two programs, including the existing relationship with the largest rural, not-for-profit health care system in the nation. 18

23 Another area of emphasis for partnerships and collaborations is the 360 Manufacturing and Applied Engineering Center of Excellence, which serves manufacturing and engineering industry needs by cultivating a talented workforce through flexible education and career opportunities. These programs primarily deal with applied engineering, engineering technology and precision manufacturing, including automation and robotics, machining and welding. Significant federal grant opportunities from the National Science Foundation and the Department of Labor have come to fruition over the course of the last year due to the work in this area. On the expenditure side, personnel projections are the most important variable as personnel costs comprise about 65 percent of overall expenditures. Faculty salaries were frozen for fiscal year 2010 and 2011 and negotiations continue for fiscal year 2012 and While increased compensation could be difficult to afford financially, it will be important to continue to plan for increases. While faculty compensation is the largest expenditure of the operating budget, it is critical for the University to continue to have the ability to attract the highest quality faculty. Therefore, the University needs to plan that while faculty contracts have not increased costs much the past few years, they may return to more traditional pattern at a faster rate than the revenue will increase. This phenomenon will put increasing pressure to continue to use reallocation of resources as the main source of funds to invest in new programs and to increase investments in other programs. Investing in the physical plant will also be a priority moving forward and will be a challenge. There is still a significant amount of deferred maintenance backlog (over $50 million) that needs to be addressed. Putting together a successful project request along with having the ability to pay the debt service will be two on-going challenges to balance along with ensuring the facilities meet student expectations. Being able to advance the master facilities plan will be important to make sure the University is positioning itself well for the future as an attractive destination as well as keeping operating costs down. The University is continuing to poise itself to meet the challenges of the future. Continuing to plan financially over a multi-year period will help ensure the University builds in the flexibility needed in the budgets to advance the strategic agenda while ensuring the University has a fiscally-sustainable institution. REQUESTS FOR INFORMATION This financial report is designed to provide a general overview of the University s financial position. Those interested in the University s finances should direct questions concerning any of the information provided in this report or requests for additional financial information to: Chief Financial Officer Deputy Hall Bemidji State University 1500 Birchmont Drive N.E. Bemidji, MN

24 BEMIDJI STATE UNIVERSITY STATEMENTS OF NET ASSETS AS OF JUNE 30, 2012 AND 2011 (IN THOUSANDS) Assets Current Assets Cash and cash equivalents $ 31,159 $ 28,620 Investments 2,519 2,499 Grants receivable Accounts receivable, net 2,610 1,316 Prepaid expense 994 1,055 Inventory Student loans, net Other assets Total current assets 38,731 35,018 Current Restricted Assets Cash and cash equivalents 3,161 9,221 Total current restricted assets 3,161 9,221 Noncurrent Restricted Assets Construction in progress Total noncurrent restricted assets Total restricted assets 3,161 9,881 Noncurrent Assets Student loans, net 4,148 4,333 Capital assets, net 71,766 67,114 Total noncurrent assets 75,914 71,447 Total Assets 117, ,346 Liabilities Current Liabilities Salaries and benefits payable 3,686 5,600 Accounts payable 1, Unearned revenue 1,302 1,441 Payable from restricted assets Interest payable Funds held for others Current portion of long-term debt 1,470 1,224 Other compensation benefits Total current liabilities 10,031 10,787 Noncurrent Liabilities Noncurrent portion of long-term debt 23,807 25,335 Other compensation benefits 5,234 5,458 Capital contributions payable 4,479 4,470 Total noncurrent liabilities 33,520 35,263 Total Liabilities 43,551 46,050 Net Assets Invested in capital assets, net of related debt 47,620 48,914 Restricted expendable, bond covenants 3,509 3,472 Restricted expendable, other 3,967 3,875 Unrestricted 19,159 14,035 Total Net Assets $ 74,255 $ 70,296 The notes are an integral part of the financial statements. 20

25 BEMIDJI STATE UNIVERSITY FOUNDATION STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30, 2012 AND 2011 (IN THOUSANDS) Assets Current Assets Cash and cash equivalents $ 208 $ 11 Investments 15,628 14,830 Pledges and contributions receivable, net 1, Other receivables and other assets Total current assets 17,311 15,449 Noncurrent Assets Long-term pledges receivable 2, Annuities/Remainder interests/trusts Property and equipment, net Other assets Total noncurrent assets 3, Total Assets $ 20,726 $ 16,236 Liabilities and Net Assets Current Liabilities Salaries and benefits payable $ 21 $ - Accounts payable Interest payable 3 3 Annuities payable Total current liabilities Noncurrent Liabilities Annuities payable Notes payable Total noncurrent liabilities Total Liabilities 1, Net Assets Unrestricted 5, Temporarily restricted 1,654 2,555 Permanently restricted 12,676 12,108 Total Net Assets 19,718 15,258 Total Liabilities and Net Assets $ 20,726 $ 16,236 The notes are an integral part of the financial statements. 21

26 BEMIDJI STATE UNIVERSITY STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEARS ENDED JUNE 30, 2012 AND 2011 (IN THOUSANDS) Operating Revenues Tuition, net $ 23,465 $ 23,445 Fees, net 2,807 3,067 Sales, net 2,554 2,932 Restricted student payments, net 9,611 9,559 Other income Total operating revenues 38,851 39,454 Operating Expenses Salaries and benefits 46,534 50,463 Purchased services 10,852 10,471 Supplies 4,492 4,885 Repairs and maintenance 1,219 1,933 Depreciation 5,236 4,813 Financial aid, net 1,045 1,943 Other expense 4,441 4,652 Total operating expenses 73,819 79,160 Operating loss (34,968) (39,706) Nonoperating Revenues (Expenses) Appropriations 20,276 23,951 Federal grants 12,496 14,661 State grants 4,135 3,714 Private grants 1,834 1,740 Interest income Interest expense (964) (963) Grants to other organizations - (142) Total nonoperating revenues (expenses) 37,979 43,195 Income Before Other Revenues, Expenses, Gains, or Losses 3,011 3,489 Capital appropriations 1, Donated assets and supplies - 20 Loss on disposal of capital assets (125) (19) Change in net assets 3,959 4,186 Total Net Assets, Beginning of Year 70,296 66,110 Total Net Assets, End of Year $ 74,255 $ 70,296 The notes are an integral part of the financial statements. 22

27 BEMIDJI STATE UNIVERSITY FOUNDATION STATEMENTS OF ACTIVITIES FOR THE YEARS ENDED JUNE 30, 2012 AND 2011 (IN THOUSANDS) Unrestricted Temporarily Restricted Permanently Restricted 2012 Total 2011 Total Support and Revenue Contributions $ 5,171 $ 1,047 $ - $ 6,218 $ 1,686 Endowment gifts Investment income ,152 Unrealized gains Program income Other income Net assets released from restrictions 2,319 (2,070) (249) - - Total support and revenue 7,526 (901) 568 7,193 4,744 Expenses Program services Scholarships Special projects 1, ,433 2,182 Total program services 2, ,200 2,860 Supporting services Management and general Fundraising Total supporting services Total expenses 2, ,733 3,369 Change in Net Assets 4,793 (901) 568 4,460 1,375 Net Assets, Beginning of Year 595 2,555 12,108 15,258 13,883 Net Assets, End of Year $ 5,388 $ 1,654 $ 12,676 $ 19,718 $ 15,258 The notes are an integral part of the financial statements. 23

28 BEMIDJI STATE UNIVERSITY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2012 AND 2011 (IN THOUSANDS) Cash Flows from Operating Activities Cash received from customers $ 37,803 $ 39,605 Cash repayment of program loans Cash paid to suppliers for goods or services (20,677) (22,060) Cash payments for employees (48,824) (50,715) Financial aid disbursements (1,045) (1,924) Cash payments for program loans (389) (620) Net cash flows used in operating activities (32,602) (35,241) Cash Flows from Noncapital Financing Activities Appropriations 20,276 23,951 Federal grants 12,513 14,911 State grants 4,135 3,714 Private grants 1,834 1,585 Agency activity 156 (147) Grants to other organizations - (142) Net cash flows provided by noncapital financing activities 38,914 43,872 Cash Flows from Capital and Related Financing Activities Investment in capital assets (8,514) (4,413) Capital appropriation Proceeds from sale of capital assets 16 8 Proceeds from borrowing - 7,489 Proceeds from bond premium Interest paid (962) (811) Repayment of note principal (31) (27) Repayment of bond principal (1,169) (1,131) Net cash flows provided by (used in) capital and related financing activities (9,950) 2,038 Cash Flows from Investing Activities Proceeds from sales and maturities of investments Purchase of investments (35) (2,208) Investment earnings Net cash flows provided by (used in) investing activities 117 (1,722) Net Increase (Decrease) in Cash and Cash Equivalents (3,521) 8,947 Cash and Cash Equivalents, Beginning of Year 37,841 28,894 Cash and Cash Equivalents, End of Year $ 34,320 $ 37,841 The notes are an integral part of the financial statements. 24

29 BEMIDJI STATE UNIVERSITY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2012 AND 2011 (IN THOUSANDS) Operating Loss $ (34,968) $ (39,706) Adjustment to Reconcile Operating Loss to Net Cash Flows used in Operating Activities Depreciation 5,236 4,813 Provision for loan defaults (24) (18) Loan principal repayments Loans issued (389) (620) Loans forgiven Donated property not capitalized Change in assets and liabilities Inventory 7 31 Accounts receivable (924) 204 Accounts payable 217 (210) Salaries and benefits payable (1,914) (52) Unearned revenues (124) (52) Other compensation benefits (376) (199) Capital contributions payable 9 8 Other 50 (149) Net reconciling items to adjust operating loss 2,366 4,465 Net cash flow used in operating activities $ (32,602) $ (35,241) Non-Cash Investing, Capital, and Financing Activities: Capital projects on account $ 938 $ 240 Equipment on account

30 BEMIDJI STATE UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2012 AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES Basis of Presentation The reporting policies of Bemidji State University, a member of the Minnesota State Colleges and Universities system, conform to generally accepted accounting principles (GAAP) as prescribed by the Governmental Accounting Standards Board (GASB). The statements of net assets; statements of revenues, expenses and changes in net assets; and statements of cash flows include financial activities of Bemidji State University. Financial Reporting Entity Minnesota State Colleges and Universities is an agency of the state of Minnesota and receives appropriations from the state legislature, substantially all of which are used to fund general operations. The University receives a portion of the Minnesota State Colleges and Universities appropriation. The operations of most student organizations are included in the reporting entity because the Board of Trustees has certain fiduciary responsibilities for these resources. Discretely presented component units are legally separate organizations that raise and hold economic resources for the direct benefit of a college or university in accordance with GASB Statement No. 39; Determining Whether Certain Organizations are Component Units. The Bemidji State University Foundation is considered significant to the University and is included as a discretely presented component unit and separately identified in Note 18. Complete financial statements may be obtained from the Bemidji State University Foundation, 1501 Birchmont Drive Northeast, Bemidji, MN Basis of Accounting The basis of accounting refers to when revenues and expenses are recognized and reported in the financial statements. The accompanying financial statements have been prepared as a special purpose government entity engaged in business type activities. Business type activities are those that are financed in whole or in part by fees charged to external parties for goods or services. Accordingly, these financial statements have been presented using the economic resources measurement focus and the accrual basis of accounting. Revenues are recognized when earned and expenses are recognized as they are incurred. Eliminations have been made to minimize the double counting of internal activities. Interfund receivables and payables have been eliminated in the statements of net assets. Minnesota State Colleges and Universities applies all applicable Financial Accounting Standards Board statements issued prior to November 30, 1989, and GASB statements issued since that date. Budgetary Accounting University budgetary accounting, which is the basis for annual budgets and the allocation of state appropriations, differs from GAAP. University budgetary accounting includes all receipts and expenses up to the close of the books in August for the budget fiscal year. Revenues not yet received by the close of the books are not included. The criterion for recognizing expenses is the actual disbursement, not when the goods or services are received. The state of Minnesota operates on a two year (biennial) budget cycle ending on June 30 of odd numbered years. Minnesota State Colleges and Universities is governed by a 15 member board of trustees appointed by the Governor with the advice and consent of the state senate. The Board approves the University s biennial budget request and allocation as part of the Minnesota State Colleges and Universities total budget. Budgetary control is maintained at the University. The University President has the authority and responsibility to administer the budget and can transfer money between programs within the University and College without Board approval. The budget of the University can be legally amended by the authority of the Vice Chancellor/Chief Financial Officer of Minnesota State Colleges and Universities. The state appropriations do not lapse at year end. Any unexpended appropriation from the first year of a biennium is available for the second year. Any unexpended balance may also carry over into future bienniums. 26

31 Capital Appropriation Revenue Minnesota State Colleges and Universities is responsible for paying one third of the debt service for certain general obligation bonds sold for capital projects, as specified in the authorizing legislation. The portion of general obligation bond debt service that is payable by the state of Minnesota is recognized by the Minnesota State Colleges and Universities as capital appropriation revenue when the related expenses are incurred. Individual colleges and universities are allocated cash, capital appropriation revenue, and debt based on capital project expenses. Cash and Cash Equivalents The cash balance represents cash in the state treasury and demand deposits in local bank accounts as well as cash equivalents. Cash equivalents are short term, highly liquid investments having original maturities (remaining time to maturity at acquisition) of three months or less. Cash and cash equivalents include amounts in demand deposits, savings accounts, cash management pools, repurchase agreements, and money market funds. Restricted cash is cash held for capital projects and cash in the Revenue Fund is for capital projects and debt service. The Revenue Fund is used to account for the revenues, expenses and net assets of revenue producing facilities, which are supported through usage. It has the authority to sell revenue bonds for the construction and maintenance of revenue producing facilities. All balances related to the state appropriation, tuition revenues, and most fees are in the state treasury. The University also has accounts in local banks. The activities handled through local banks include financial aid, student payroll, auxiliary, and student activities. Investments The Minnesota State Board of Investment invests the University s balances in the state treasury, except for the Revenue Fund, as part of a state investment pool. This asset is reported as a cash equivalent. Interest income earned on pooled investments is retained by the System office and allocated to the colleges and universities as part of the appropriation allocation process. Cash in the Revenue Fund is invested separately. The Fund contracts with the Minnesota State Board of Investment and U.S. Bank, N.A., for investment management services. Investments are reported at fair value. Receivables Receivables are shown net of an allowance for uncollectible accounts. Inventories Inventories are valued at cost using the retail cost method. Prepaid Expense Prepaid expense consists primarily of deposits in the state of Minnesota Debt Service Fund for future general obligation bond payments. Capital Assets Capital assets are recorded at cost or, for donated assets, at fair value at the date of acquisition. Estimated historical cost has been used when actual cost is not available. Such assets are depreciated or amortized on a straight line basis over the useful life of the assets. Estimated useful lives are as follows: Asset Type Useful Life Buildings years Building Improvements years Equipment 3-20 years Library Collections 7 years Equipment includes all items with an original cost of $10,000 and over for items purchased since July 1, 2008; $5,000 and over for items purchased between July 1, 2003 and June 30, 2008; and $2,000 and over for items purchased prior to July 1, Buildings, building improvements, and internally developed software includes all projects with a cost of $250,000 and over for projects started since July 1, 2008, and $100,000 and over for projects started prior to July 1, All land and library collection purchases are capitalized regardless of amount spent. 27

32 Funds Held for Others Funds held for others are primarily assets held in a custodial capacity such as student organizations, student loans and other clearing accounts that serve as a flow-through conduit. Long Term Liabilities The state of Minnesota appropriates for and sells general obligation bonds to support construction and renovation of the Minnesota State Colleges and Universities facilities as approved through the state s capital budget process. The University is responsible for a portion of the debt service on the bonds sold for some University projects. The University may also enter into capital lease agreements for certain capital assets. Other long term liabilities include notes payable, compensated absences, net other postemployment benefits, workers compensation claims, early termination benefits, and capital contributions associated with Perkins loan agreements with the U.S. Department of Education. Minnesota State Colleges and Universities may finance the construction, renovation, and acquisition of facilities for student residences and student unions through the sale of revenue bonds. These activities are accounted for and reported in the Revenue Fund included herein. Details on the Revenue Fund bonds are available in the separately audited and issued Revenue Fund annual financial report. Copies are available from the Financial Reporting System Director, Minnesota State Colleges and Universities, 30 7 th St. E., Suite 350, St. Paul, Minnesota Unearned Revenue Unearned revenue consists primarily of tuition received, but not yet earned, for summer session. It also includes room deposits and amounts received from grants which have not yet been earned under the terms of the agreement. Operating Activities Operating activities as reported in the statements of revenues, expenses and changes in net assets are those 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 expenses are from exchange transactions. Certain significant revenue streams relied upon for operations are recorded as nonoperating revenues, including state appropriations, federal, state and private grants, and investment income. Tuition, Fees, and Sales, Net Tuition, fees, and sales are reported net of scholarship allowances. See Note 12 for additional information. Restricted Student Payments Restricted student payments consist of room, board, sales, and fee revenue restricted for payment of revenue bonds, and are net of scholarship allowances. See Note 12 for additional information. Federal Grants The University participates in several federal grant programs. The largest programs include Pell, Supplemental Educational Opportunity Grant, Federal Work Study, TRIO, and AmeriCorps. Federal grant revenue is recognized as nonoperating revenue in accordance with GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions. Expenditures under government contracts are subject to review by the granting authority. To the extent, if any, that such a review reduces expenditures allowable under these contracts, the University will record such disallowance at the time the determination is made. Use of Estimates To prepare the basic financial statements in conformity with generally accepted accounting principles, management must make estimates and assumptions. These estimates and assumptions may 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. The most significant areas that require the use of management s estimates relate to allowances for uncollectible accounts, scholarship allowances, workers compensation claims, and compensated absences. 28

33 Net Assets The difference between assets and liabilities is net assets. Net assets are further classified for accounting and reporting purposes into the following three net asset categories: Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation, and outstanding principal balances of debt attributable to the acquisition, construction or improvement of those assets. Restricted expendable: Net assets subject to externally imposed stipulations. Net asset restrictions for the University are as follows: Restricted for bond covenants revenue bond restrictions. Restricted for other includes restrictions for the following: Donations restricted per donor requests. Loans University capital contributed for Perkins loans. Capital projects restricted for completion of capital projects. Debt service legally restricted for bond debt repayments. Faculty contract obligations faculty development and travel required by contracts. Net Assets Restricted for Other Donations $ 541 $ 541 Loans Capital projects 61 Debt service 2,380 2,205 Faculty contract obligations Total $ 3,967 $ 3,875 Unrestricted: Net assets that are not subject to externally imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of management, the System Office, or the Board of Trustees. New Accounting Pronouncements In December 2010, the GASB issued Statement No. 60, Accounting and Reporting for Service Concession Arrangements. The objective of this statement is to improve financial reporting by establishing recognition, measurement, and disclosure requirements for Service Concession Arrangements (SCA s) for both transferors and governmental operators, and by requiring governments to account for and report SCAs in the same manner, which improves the comparability of financial statements. In addition, it is designed to alleviate the confusion that can arise when determining what guidance should be applied in complex circumstances not previously specifically addressed in GASB literature. The requirements of this statement are effective for Minnesota State Colleges and Universities for the year ended June 30, The effect GASB Statement No. 60 will have on the fiscal year 2013 basic financial statements has not been determined. 2. CASH, CASH EQUIVALENTS, AND INVESTMENTS Cash and Cash Equivalents All balances related to the appropriation, tuition, and most fees are in the state treasury. In addition, the University has two checking and five savings accounts in local banks. The activities handled through local banks include financial aid, student payroll, auxiliary, and student activities. Minnesota Statutes, Section 118A.03, requires that deposits be secured by depository insurance or a combination of depository insurance and collateral securities held in the state s name by an agent of the state. This statute further requires that such insurance and collateral shall be at least 10 percent greater than the amount on deposit. 29

34 The following table summarizes cash and cash equivalents: Year Ended June 30 Carrying Amount Cash, in bank $ 3,153 $ 2,568 Restricted cash 1,735 3,791 Cash, trustee account (US Bank) 1,426 5,430 Total local cash and cash equivalents 6,314 11,789 Total treasury cash accounts 28,006 26,052 Grand Total $ 34,320 $ 37,841 At June 30, 2012 and 2011, the University s local bank balances were $3,092,680 and $2,456,800, respectively. These balances were adjusted by items in transit to arrive at the University s cash in bank balance. The University s balance in the treasury, except for the Revenue Fund, is invested by the Minnesota State Board of Investment as part of the state investment pool. This asset is reported as a cash equivalent. The cash accounts are invested in short term, liquid, high quality debt securities. Investments The Minnesota State Board of Investment manages the majority of the state s investments. All investments managed by Minnesota State Board of Investment are governed by Minnesota Statutes, Chapters 11A and 356A. Minnesota Statutes, Section 11A.24, broadly restricts investments to obligations and stocks of United States and Canadian governments, their agencies and registered corporations, other international securities, short term obligations of specified high quality, restricted participation as a limited partner in venture capital, real estate, or resource equity investments, and the restricted participation in registered mutual funds. Generally when applicable, the statutes limit investments to those rated within the top four quality rating categories of a nationally recognized rating agency. The statutes further prescribe the maximum percentage of fund assets that may be invested in various asset classes and contain specific restrictions to ensure the quality of the investments. Within statutory parameters, Minnesota State Board of Investment has established investment guidelines and benchmarks for all funds under its management. These investment guidelines and benchmarks are tailored to the particular needs of each fund and specify investment objectives, risk tolerance, asset allocation, investment management structure, and specific performance standards. Custodial Credit Risk Custodial credit risk for investments is the risk that in the event of a failure of the counterparty, the University will not be able to recover the value of the investments that are in the possession of an outside party. Board procedure requires compliance with Minnesota Statutes, Section 118A.03, and further excludes the use of FDIC insurance when meeting collateral requirements. Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The University s policy for reducing its exposure to credit risk is to comply with Minnesota Statutes, Section 118A.04. This statute limits investments to the top quality rating categories of a nationally recognized rating agency. Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The University s policy for reducing this risk of loss is to comply with Board procedure which recommends investments be diversified by type and issuer. Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of a debt investment. The University complies with Board procedure that recommends considering fluctuating interest rates and cash flow needs when purchasing short term and long term investments. 30