SOUTHWEST TENNESSEE COMMUNITY COLLEGE TABLE OF CONTENTS

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3 SOUTHWEST TENNESSEE COMMUNITY COLLEGE TABLE OF CONTENTS Page Letter of Transmittal... 2 Management s Discussion and Analysis... 3 STATEMENTS Unaudited Statement of Net Position Unaudited Statement of Revenues, Expenses, and Changes in Net Position Unaudited Statement of Cash Flows Southwest Notes to Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Schedule of Funding Progress Schedule of Proportionate Share of the Net Pension Liability Schedule of Contributions SUPPLEMENTARY INFORMATION Unaudited Statement of Cash Flows Southwest Foundation... 48

4 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended This section of Southwest Tennessee Community College s annual financial report presents a discussion and analysis of the financial performance of the College during the fiscal year ended, with comparative information presented for the fiscal years ended June 30, This discussion has been prepared by management along with the financial statements and related note disclosures and should be read in conjunction with the financial statements and notes. The financial statements, notes, and this discussion are the responsibility of management. The College has one discretely presented component unit, the Southwest Foundation. More detailed information about the foundation is presented in Note 18 to the financial statements. This discussion and analysis focuses on the College and does not include the foundation. Overview of the Financial Statements The financial statements have been prepared in accordance with generally accepted accounting principles as prescribed by the Governmental Accounting Standards Board (GASB), which establishes standards for external financial reporting for public colleges and universities. The financial statements are presented on a consolidated basis to focus on the College as a whole. The full scope of the College s activities is considered to be a single business-type activity, and accordingly, is reported within a single column in the basic financial statements. The College s financial report includes the Statement of Net Position, the Statement of Revenues, Expenses, and Changes in Net Position, and the Statement of Cash Flows. Notes to the financial statements are also presented to provide additional information that is essential to a full understanding of the financial statements. The Statement of Net Position The Statement of Net Position is a point in time financial statement. The Statement of Net Position presents the financial position of the College at the end of the fiscal year. To aid the reader in determining the College s ability to meet immediate and future obligations, the statement includes all assets, liabilities, deferred outflows/inflows, and net position of the College and segregates the assets and liabilities into current and noncurrent components. Current assets are those that are available to satisfy current liabilities, inclusive of assets that will be converted to cash within one year. Current liabilities are those that will be paid within one year. The Statement of Net Position is prepared under the accrual basis of accounting; assets and liabilities are recognized when goods or services are provided or received despite when cash is actually exchanged. From the data presented, readers of the statement are able to determine the assets available to continue the operations of the College. They are also able to determine how much the College owes vendors, lenders, and others. Net position represents the difference between the College s assets and liabilities, along with the difference between deferred outflows and deferred inflows, and is one indicator of the College s current financial condition. Page 3

5 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended The Statement of Net Position also indicates the availability of net position for expenditure by the College. Net position is divided into three major categories. The first category, net investment in capital assets, represents the College s total investment in property, plant, and equipment, net of outstanding debt obligations related to these capital assets. To the extent debt or deferred inflows of resources has been incurred but not yet expended for capital assets, such amounts are not included. The next category is restricted net position, which is sub-divided into two categories, nonexpendable and expendable. Nonexpendable restricted net position includes endowment and similar resources whose use is limited by donors or other outside sources and as a condition of the gift, the principal is to be maintained in perpetuity. Expendable restricted net position is available for expenditure by the College but must be spent for purposes as determined by donors and/or external entities that have placed time or purpose restrictions on the use of the resources. The final category is unrestricted net position. Unrestricted net position is available to the College for any lawful purpose of the College. The following table summarizes the College s assets, liabilities, deferred outflows/inflows, and net position at, and June 30, Statement of Net Position (in thousands of US dollars) Assets: Current assets $ 33,851 $ 28,320 Capital assets, net 108, ,889 Other assets 40,728 41,235 Total Assets 182, ,444 Deferred Outflows of Resources Deferred loss on debt refunding Other deferred outflows 83 5, ,881 Total Deferred Outflows 5,448 5,975 Liabilities: Current liabilities Noncurrent liabilities 12,135 20,224 9,405 17,212 Total Liabilities 32,359 26,617 Deferred Inflows of Resources Other deferred inflows 613 4,451 Total Deferred Inflows 613 4,451 Net Position: Net investment in capital assets 107, ,716 Restricted expendable 2,145 2,909 Unrestricted 45,049 41,726 Total Net Position $ 155,169 $ 154,351 Page 4

6 Comparison of FY2017 to FY2016 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended Deferred outflows of resources decreased by $515,000 due to the change in proportionate share and investment losses of the state pension plans. Deferred inflow of resources decreased significantly due to a decrease in deferred inflows related to pensions resulting from the amortization of investment gains for prior years and an adjustment for investment experience gains/losses between deferred inflows and deferred outflows. Current assets increase represents the additional cash activity from the Tennessee College of Applied Technology (TCAT)-Memphis, driven by higher cash from Pell Grants. Current liabilities increase represents the additional cash activity for TCAT-Memphis. Non-current liabilities increased by $3.1 million due to an increase in pension liabilities. The reduction in net position restricted expendable resulted primarily from the Leap grant expiration in January 2017, the reclassification of Indirect cost recoveries, and Administrative allowances from restricted expendable net position to unrestricted net position. The Statement of Revenues, Expenses, and Changes in Net Position The Statement of Revenues, Expenses, and Changes in Net Position presents the results of operations for the fiscal year. Revenues and expenses are recognized when earned or incurred, regardless of when cash is received. The statement indicates whether the College s financial condition has improved or deteriorated during the fiscal year. The statement presents the revenues received by the College, both operating and non-operating, and the expenses paid by the College, operating and non-operating, and any other revenues, expenses, gains, or losses received or spent by the College. Generally speaking, operating revenues are received for providing goods and services to the various customers and constituencies of the College. Operating expenses are those expenses paid to acquire or produce the goods and services provided in return for the operating revenues, and to carry out the mission of the College. Non-operating revenues are revenues received for which goods and services are not provided directly to the payor. Although Southwest Tennessee Community College is dependent upon state appropriations and gifts to fund educational and general operations, under GASB standards these funding sources are reported as non-operating revenues, as is investment income. As a result, the College has historically reported an excess of operating expenses over operating revenues, resulting in an operating loss. Therefore, the increase in net position is more indicative of overall financial results for the year. Page 5

7 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended A summary of the College s revenues, expenses, and changes in net position for the year ended, and June 30, 2016, follows: Statement of Revenues, Expenses, and Changes in Net Position (in thousands of US dollars) Operating revenues $ 22,404 $ 26,272 Operating expenses 77,148 80,846 Operating loss (54,744) (54,574) Non-operating revenues and expenses 53,754 51,831 Income (loss) before other revenues, expenses, gains, or losses (990) (2,743) Other revenues, expenses, gains, or losses 1,015 1,160 Increase (decrease) in net position 25 (1,583) Net position at beginning of year 154, ,155 Prior period adjustment 793 (4,804) Net position at end of year $ 155,169 $ 154,351 Page 6

8 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended Operating Revenues The following summarizes the operating revenues by source that were used to fund operating activities for the last two fiscal years: Operating Revenues (in thousands of US dollars) Comparison of FY2017 to FY2016 Operating revenue declined by $3.8 million or 14.7 percent in fiscal year The College implemented a new accounting policy in fiscal year 2017, treating bad debt as contra revenue as compared to operating expense. This accounting change decreased operating revenue by $1.7 million, accounting for almost half of the year-over-year reduction in operating revenue. Fall headcount enrollment declined by 8.8 percent in fiscal year 2017, which put downward pressure on fall term tuition and fees as they declined by $0.9 million. The reduction in governmental and non-governmental grants and contracts in the operating revenue section declined by $694,925 largely as a result of misclassification of the Federal SEOG in fiscal year 2016 (Pell funding was mistakenly coded to SEOG). As a result, operating revenues were overstated and non-operating revenues for grants and contracts were understated. After taking into account the adjustments, grants and contracts under operating revenue would have declined by approximately 4 percent. Page 7

9 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended Operating Expenses Operating expenses may be reported by nature or function. The College has chosen to report the expenses in their natural classification on the statement of revenues, expenses, and changes in net position and has displayed the functional classification in the notes to the financial statements. The following summarizes the operating expenses by natural classifications for the last two fiscal years: Operating Expenses by Natural Classification (in thousands of US dollars) Comparison of FY2017 to FY2016 Operating expenses declined by $3.7 million or 4.5 percent in fiscal year The decline in operating expense was driven by a 32.2 percent reduction in operating costs as a result of lower expenses for: bad debt expense reclassified as contra revenue improved operating expense by $1.3 million yearover-year; expenses for furniture and various equipment were lower by $3.1 million in fiscal year The increase in benefits was driven by higher pension expense in fiscal year Page 8

10 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended Non-operating Revenues and Expenses Certain revenue sources that the College relies on to provide funding for operations, including state noncapital appropriations, certain gifts and grants, and investment income, are defined by the GASB as non-operating. Non-operating expenses include capital financing costs and other costs related to capital assets. The following summarizes the College s non-operating revenues and expenses for the last two fiscal years: Non-Operating Revenue (in thousands of US dollars) Comparison of FY2017 to FY2016 Non-operating revenue increased to $53.8 million in fiscal year 2017, up $1.9 million or 3.7 percent year-over-year. Increased revenue from state appropriations, higher investment income as a result of higher interest rates and higher other revenue contributed to the year-over-year improvement. Page 9

11 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended Other Revenues This category is composed of State appropriations for capital purposes, capital grants and gifts, and additions to permanent endowments. These amounts were as follows for the last two fiscal years: Other Revenues - Capital (in thousands of US dollars) Comparison of FY2017 to FY2016 Capital grants and gifts declined by $0.145 million or 12.5 percent in fiscal year 2017 as a result of lower state appropriation. The ADA improvements at the Macon campus were completed in fiscal year 2016, contributing to lower capital appropriation in fiscal year Page 10

12 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended Capital Assets and Debt Administration Capital Assets Southwest Tennessee Community College had $108,114, invested in capital assets, net of accumulated depreciation of $57,250, at ; and $109,889, invested in capital assets, net of accumulated depreciation of $53,316, at June 30, Depreciation charges totaled $4,650, and $3,936, for the years ended, and June 30, 2016, respectively. Schedule of Capital Assets, Net of Depreciation (in thousands of US dollars) Land $ 13,888 $ 13,888 Land improvements & infrastructure 4,903 2,504 Buildings 76,366 73,604 Equipment 8,499 9,962 Library holdings Intangible assets Projects in progress 3,121 8,552 Total $ 108,115 $ 109,889 Significant reductions to capital assets occurred in fiscal year These reductions were from incremental accumulated depreciation of buildings and equipment. At, outstanding commitments under construction contracts totaled $6,840, for various renovations and repairs of buildings and infrastructure. Future state capital outlay appropriations will fund $3,234, of these costs. More detailed information about the College s capital assets is presented in Note 5 to the financial statements. Page 11

13 Debt SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended The College had $1,254, and $1,627, in debt outstanding at, and June 30, 2016, respectively. The table below summarizes these amounts by type of debt instrument. Tennessee State School Bond Authority Bonds Property Acquisition I $ 85, $ 167, Property Acquisition II 58, , Entergy Savings Performance Contract 1,051, ,201, Subtotals 1,195, ,469, Add premium on bond 59, , Totals $ 1,254, $ 1,627, The TSSBA issued bonds with interest rates ranging from 0.35% to 5% due 2024 on behalf of Southwest Tennessee Community College. The College is responsible for the debt service of these bonds. The current portion of the $1,254, outstanding at, is $ 262, The ratings on debt issued by the Tennessee State School Bond Authority at, were as follows: Fitch Moody s Investor Service Standard & Poor s AA+ Aa1 AA+ More information about the College s long-term liabilities is presented in Note 7 to the financial statements. Page 12

14 Economic Factors That Will Affect the Future SOUTHWEST TENNESSEE COMMUNITY COLLEGE Management s Discussion and Analysis For the Year Ended The financial stability of Southwest Tennessee Community College is closely tied to economic conditions in the State of Tennessee and the U.S. Tuition and fees, a major source of the College s revenues, comprise approximately 66 percent of total operating revenues in FY17, while grants and contracts consists of approximately 49 percent of total non-operating revenues. Additionally, state appropriations account for approximately 36 percent of FY17 total revenue, including capital appropriations. The College s governing board, the Tennessee Board of Regents (TBR), approved a 2.6 percent increase in in-state tuition fees effective Fall Semester TBR also approved an increase in the hourly rate charged for hours in excess of 12 per semester, from $31 per credit hour to $32 per credit hour. Assuming enrollment remains stable, the increase in rates is projected to generate new funds for operations. The College continues to support the state s mission to improve Tennessee s future workforce and economic development via the Drive to 55 program. The next phase of this program is Tennessee Reconnect, which the College is a participating institution. Page 13

15 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Unaudited Statement of Net Position For the Year Ended Southwest Southwest Foundation ASSETS Current assets: Cash and cash equivalents (Notes 2,3, and 18) $ 26,424, $ 3,447, Accounts, notes, and grants receivable (net) (Note 4) 6,707, Due from primary government 410, Due from Southwest Foundation 218, Pledges receivable (net) - 53, Inventories (at lower of cost or market) 90, Total current assets 33,851, ,500, Noncurrent assets: Cash and cash equivalents (Notes 2,3, and 18) 40,679, , Investments (Note 18) - 2,935, Net pension asset (Note 10) 48, Pledges receivable (Note 18) - 15, Capital assets (net) (Note 5 and 18) 108,114, , Total noncurrent assets 148,842, ,798, Total assets 182,693, ,298, DEFERRED OUTFLOWS OF RESOURCES Deferred loss on debt refunding 82, Deferred outflows related to pensions 5,365, Total deferred outflows of resources 5,448, LIABILITIES Current liabilities: Accounts payable (Note 6) 2,050, , Accrued liabilities 1,701, Due to primary government 759, , Unearned revenue 2,198, Compensated absences (Note 7) 491, Long-term liabilities, current portion (Note 7) 262, Deposits held in custody for others 4,671, Total current liabilities 12,134, , Noncurrent liabilities: Net OPEB obligation (Note 11) 6,877, Net pension liability (Note 10) 10,839, Compensated absences (Note 7) 1,514, Long-term liabilities (Note 7) 992, Other liabilities - 850, Total noncurrent liabilities 20,224, , Total liabilities 32,359, ,124, Page 14

16 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Unaudited Statement of Net Position For the Year Ended Southwest Southwest Foundation DEFERRED INFLOWS OF RESOURCES Deferred inflows related to pensions 613, Total deferred inflows of resources 613, NET POSITION Net investment in capital assets 107,975, , Restricted for: Nonexpendable: Scholarships and fellowships 1,213, Other 429, Expendable: Scholarships and fellowships 520, Instructional department uses 290, ,721, Pensions 48, Other 1,285, ,250, Unrestricted 45,049, , Total net position $ 155,168, $ 6,174, The notes to the financial statements are integral part of this statement. Page 15

17 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Unaudited Statement of Revenues, Expenses and Changes in Net Position For the Year Ended Southwest Southwest Foundation REVENUES Operating revenues: Student tuition and fees (Note 12) $ 14,830, $ - Gifts and contributions - 294, Governmental grants and contracts 5,464, Non-governmental grants and contracts (Including from component units) 549, Sales and services of educational activities 374, Sales and services of other activities 75, Auxiliary enterprises: Bookstore (all bookstore revnues are used as security for revenue bonds, see Note 12) 196, Food service (all food service revenues are used as security for revenue bonds, see Note 12) 454, Other auxiliaries Other operating revenues 458, Total operating revenues 22,404, , EXPENSES Operating Expenses (Note 15) Salaries and wages 32,405, Benefits 11,366, Utilities, supplies, and other services 14,433, , Scholarships and fellowships 14,291, , Depreciation expense 4,650, Payments to or on behalf of STCC (Note 18) - 100, Total operating expenses 77,147, , Operating income (loss) (54,743,767.43) (186,532.78) Page 16

18 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Unaudited Statement of Revenues, Expenses and Changes in Net Position For the Year Ended Southwest Southwest Foundation NONOPERATING REVENUES (EXPENSES) State appropriations 26,399, Gifts, including $ 96, , from STCC Foundation to Southwest Grants and contracts 27,066, Investment income (net of investment expense of for the institution and for the component unit(s)) 294, , Interest on capital asset-related debt (99,718.26) - Other non-operating revenues/(expenses) (8,429.25) - Net nonoperating revenues 53,749, , Income before other revenues, expenses gains, or losses (993,821.74) 111, Capital appropriations 1,014, Capital grants and gifts, including from STCC Foundation $ 3, , Additions to permanent endowments - 5, Total other revenues 1,018, , Increase (decrease) in net position 24, , NET POSITION Net position -beginning of year 154,351, ,359, Prior period adjustment (Notes 17 and 18) 792, (301,954.50) Net position - end of year $ 155,168, $ 6,174, Page 17

19 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Unaudited Statement of Cash Flows For the Year Ended CASH FLOWS FROM OPERATING ACTIVITIES Tuition and fees $ 16,387, Grants and contracts 5,017, Sales and services of educational activities 374, Sales and services of other activities 75, Payments to suppliers and vendors (15,486,780.26) Payments to employees (32,083,908.64) Payments for benefits (11,030,438.11) Payments for scholarships and fellowships (14,291,951.11) Auxiliary Enterprises Bookstore 196, Food services 409, Other auxiliaries Other receipts (payments) 458, Net cash provided (used) by operating activities (49,973,764.76) CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES State appropriations 26,292, Gifts and grants received for other than capital or endowment purposes, including from Southwest Foundation to the institution 27,167, Changes in deposits held for others 2,718, Net cash provided (used ) by non-capital financing activities 56,178, CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital - state appropriation 1,014, Purchase of capital assets and construction (1,928,882.04) Principal paid on capital debt and lease (242,758.10) Interest paid on capital debt and lease (99,718.26) Net cash provided (used) by capital and related financing activities (1,256,544.16) CASH FLOWS FROM INVESTING ACTIVITIES Income on investments 294, Net cash provided (used) by investing activities 294, Net increase (decrease) in cash and cash equivalents 5,242, Cash and cash equivalents - beginning of year 61,861, Cash and cash equivalents - end of year (Note 2) 67,103, Page 18

20 SOUTHWEST TENNESSEE COMMUNITY COLLEGE Unaudited Statement of Cash Flows For the Year Ended RECONCILIATION OF OPERATING INCOME/(LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating income/(loss) (54,743,767.43) Adjustments to reconcile operating loss to net cash provided (used) by operating activities: Noncash operating expenses 4,722, Change in assets, liabilities, and deferrals: Receivables, net 311, Inventories (47,666.25) Prepaid items 18, Net pension asset (41,123.00) Other assets (69,009.93) Deferred outflows of resources 515, Accounts payable (1,119,530.91) Accrued liabilities 26, Due to component unit/primary government 742, Unearned revenues 235, Compensated absences 32, Net pension liability 3,147, Deferred inflows of resources (3,837,639.00) Other 132, Net cash provided (used) by operating activities $ (49,973,764.76) Non-cash investing, capital, and financing transactions Gifts in-kind - capital $ 3, The notes to the financial statements are integral part of this statement. Page 19

21 Southwest Tennessee Community College 1. Summary of Significant Accounting Policies REPORTING ENTITY The college is a part of the State University and Community College System of Tennessee (the System). The System is a component unit of the State of Tennessee because the state appoints a majority of the System s governing body and provides significant financial support; the System is discretely presented in the Tennessee Comprehensive Annual Financial Report. The financial statements present only that portion of the System s activities that is attributable to the transactions of Southwest Tennessee Community College. The Southwest Tennessee Community College Foundation is considered a component unit of the college. Although the college does not control the timing or amount of receipts from the foundation, the majority of resources, or income thereon, which the foundation holds and invests, are restricted to the activities of the college by the donors. Because these restricted resources held by the foundation can only be used by, or for the benefit of, the college, the foundation is considered a component unit of the college and is discretely presented in the college s financial statements. See Note 18 for more detailed information about the component unit and how to obtain the report. BASIS OF PRESENTATION The college and foundation s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America applicable to governmental colleges and universities engaged in business-type activities as prescribed by the Governmental Accounting Standards Board (GASB). CASH EQUIVALENTS This classification includes instruments that are readily convertible to known amounts of cash and have original maturities of three months or less. INVENTORIES Inventories are valued at the lower of cost or market. All other items are maintained on an average cost or first-in, first-out basis. COMPENSATED ABSENCES The college s employees accrue annual and sick leave at varying rates, depending upon length of service or classification. Some employees also earn compensatory time. The amount of the liabilities for annual leave and compensatory time and their related benefits are reported in the Statement of Net Position. There is no liability for unpaid accumulated sick leave since the college s policy is to pay this only if the employee is sick or upon death. Page 20

22 Southwest Tennessee Community College CAPITAL ASSETS Capital assets, which include property, plant, equipment, library holdings, works of art, historical treasures/collections, and intangible assets, are reported in the Statement of Net Position at historical cost or at acquisition value at date of donation, less accumulated depreciation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend the assets useful lives are not capitalized. A capitalization threshold of $100,000 is used for buildings and $50,000 is used for infrastructure. Equipment is capitalized when the unit acquisition cost is $5,000 or greater. The capitalization threshold for additions and improvements to buildings and land is set at $50,000. The capitalization threshold for intangible assets is set at $100,000. The capitalization threshold for art, historical treasures/collections, and similar assets is set at $5,000. These assets, with the exception of works of art and historical treasures/collections deemed inexhaustible and land, are depreciated/amortized using the straight-line method over the estimated useful lives of the assets, which range from 5 to 60 years. LWIA EQUIPMENT Under a contract with the Tennessee Department of Labor and Workforce Development, the college is the administrative entity and grant recipient for the Local Workforce Investment Area in workforce investment area Number 13 of the State of Tennessee. The title to all the equipment purchased by Southwest Tennessee Community College under the provisions of the Workforce Investment Act resides with the U.S. Government. Therefore, this equipment is not included in Southwest Tennessee Community College s capital assets. PENSIONS For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Closed State and Higher Education Employee Pension Plan and the State and Higher Education Employee Retirement Plan in the Tennessee Consolidated Retirement System (TCRS) and additions to/deductions from the plan s fiduciary net positions have been determined on the same basis as they are reported by the TCRS. For this purpose, benefits (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms of the Closed State and Higher Education Employee Pension Plan and the State and Higher Education Employee Retirement Plan. Investments are reported at fair value. NET POSITION The college s net position is classified as follows: NET INVESTMENT IN CAPITAL ASSETS: This represents the college s total investment in capital assets, net of accumulated depreciation and net of outstanding debt obligations and deferred outflows/inflows of resources related to those capital assets. To the extent debt has been incurred but not yet expended for capital assets, such amounts are not included as a component of net investment in capital assets. Page 21

23 2. Cash Southwest Tennessee Community College RESTRICTED NET POSITION NONEXPENDABLE: Nonexpendable restricted net position consists of endowment and similar type funds in which donors or other outside sources have stipulated, as a condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may be expendable or added to principal. RESTRICTED NET POSITION EXPENDABLE: Restricted expendable net position includes resources in which the college is legally or contractually obligated to spend in accordance with restrictions imposed by external third parties. UNRESTRICTED NET POSITION: Unrestricted net position represents resources derived from student tuition and fees, state appropriations, sales and services of educational departments, sales and services of other, and auxiliary enterprises. These resources are used for transactions relating to the educational and general operations of the college, and may be used at the discretion of the college to meet current expenses for any purpose. The auxiliary enterprises are substantially selfsupporting activities that provide services for students, faculty, and staff. SCHOLARSHIP DISCOUNTS AND ALLOWANCES Student tuition and fee revenues, and certain other revenues from students, are reported net of scholarship discount and allowances in the statement of revenues, expenses, and changes in net position. Scholarship discounts and allowances are the difference between the stated charge for goods and services provided by the college, and the amount that is paid by the student and/or third parties making payments on the students behalf. Certain governmental grants, such as Pell grants, and other Federal, state or nongovernmental programs are recorded as either operating or nonoperating revenues in the college s financial statements. To the extent that revenues from such programs are used to satisfy tuition and fees and other student charges, the college has recorded a scholarship discount and allowance. This classification includes demand deposits and petty cash on hand. At, cash consists of $3,608, in bank accounts, $10, of petty cash on hand, $61,869, in the State of Tennessee Local Government Investment Pool administered by the State Treasurer, $1,480, in the Deposits Capital Projects account and $135, transfer to the Title & Escrow company for the purchase of a tract of land. LGIP Deposits Capital Projects - Payments related to the college s capital projects are made by the State of Tennessee s Department of Finance and Administration. The college s estimated local share of the cost of each project is held in a separate Local Government Investment Pool (LGIP) account. As expenses are incurred, funds are withdrawn from the LGIP account by the System and transferred to the Department of Finance and Administration. The funds in the account are not available to the college for any other purpose until the project is completed and the System releases any remaining funds. The Local Government Investment Pool (LGIP) is administered by the State Treasurer and is measured at amortized cost. The LGIP is part of the State Pooled Investment Fund. There are no minimum or maximum limitations on withdrawals with the exception of a 24-hour notification period for withdrawals of $5 million or more. The fund s required risks disclosures are presented in the State of Tennessee s Treasurer s Report. That report is available on the state s website at or by calling (615) Page 22

24 Southwest Tennessee Community College 3. Investments Credit Risk. Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The college is authorized by statute to invest funds in accordance with the System s policies. Under the current policy, funds other than endowments may be invested only in obligations of the United States or its agencies which are backed by the full faith and credit of the United States, repurchase agreements for United States securities, certificates of deposit in banks and savings and loan associations, banker's acceptances, commercial paper, money market mutual funds and the State of Tennessee Local Government Investment Pool. TBR policy restricts investments in banker s acceptances and commercial paper. The policy requires that prime banker s acceptances must be issued by domestic banks with a minimum AA rating or foreign banks with an AAA long-term debt rating by a majority of the rating services that have rated the issuer. Prime banker s acceptances are required to be eligible for purchase by the Federal Reserve System. To be eligible, the original maturity must not be more than 270 days, and it must 1) arise out of the current shipment of goods between countries or with the United States, or 2) arise out of storage within the United States of goods under contract of sale or expected to move into the channel or trade within a reasonable time and that are secured throughout their life by a warehouse receipt or similar document conveying title to the underlying goods. TBR policy requires that prime commercial paper shall be limited to that of corporations that meet the following criteria: 1) Senior long-term debt, if any, should have a minimum rating of A1 or equivalent, and short-term debt should have a minimum rating of A1 or equivalent, as provided by a majority of the rating services that rate the issuer. If there is no long-term debt rating, the short-term debt rating must be A1 by all rating services (minimum of two). 2) The rating should be based on the merits of the issuer or guaranteed by a nonbank. 3) A financial review should be made to ascertain the issuer s financial strength to cover the debt. 4) Commercial paper of a banking institution should not be purchased. Prime commercial paper shall not have a maturity that exceeds 270 days. As of, the college s investments consisted entirely of investments in the Local Government Investment Pool. The carrying value of these investments was $ 63,350, LGIP investments are not rated by nationally recognized statistical ratings organizations. 4. Accounts, Notes, and Grants Receivable Accounts receivable included the following: Student accounts receivable $ 4,777, Grants receivable 2,292, Other receivables 1,370, Subtotal $ 8,441, Less allowance for doubtful account (1,733,261.58) Total $ 6,707, Page 23

25 Southwest Tennessee Community College Federal Perkins Loan Program funds include the following: Perkins loans receivable $ 136, Less allowance for doubtful accounts (136,610.32) Total - 5. Capital Assets Capital asset activity for the year ended, was as follows: Beg Balance Additions Transfers Reductions End Balance Land $ 13,888, $ 13,888, Land improve & infra 7,582, $ 881, $ 2,127, ,590, Buildings 110,417, , ,232, ,683, Equipment 19,796, , ,365, Library holdings 1,174, $ (43,423.57) 1,130, Intangible assets 1,795, (208,838.05) 1,586, Projects in progress 8,552, , (6,359,685.44) 3,120, Total $ 163,206, $ 2,411, $ (252,261.62) $ 165,365, Less accumulated depreciation/amortization: Land improve & infra. $ 5,078, $ 609, $ 5,687, Buildings 36,813, ,504, ,317, Equipment 9,834, ,033, ,867, Library holdings 595, $ (7,111.62) 588, Intangible assets 995, (206,068.21) 789, Total $ 53,316, $ 4,146, $ (213,179.83) $ 57,250, Capital assets, net $ 109,889, $ (1,735,679.13) $ (39,081.79) $ 108,114, Page 24

26 Southwest Tennessee Community College 6. Accounts Payable Accounts payable included the following: Vendors payable $ 534, Other payables 1,515, Total $ 2,050, Long-term Liabilities Long term liability activity for the year ended, was as follows: Balance July 1, 2016 Additions Reductions Balance Current Portion Payables: TSSBA debt: Bonds $ 1,469, $ (273,996.25) $ 1,195, $ 262, Unamortized bond premium/discount 158, (98,687.45) 59, Subtotal 1,627, (372,683.70) 1,254, , Other Liabilities Compensated Absences 1,973, ,089, (1,057,403.52) 2,005, , Subtotal 1,973, ,089, (1,057,403.52) 2,005, , Total long-term Liabilities $ 3,600, $ 1,089, $ (1,430,087.22) $ 3,260, $ 753, TSSBA Debt - Bonds Payable Bonds, with interest rates ranging from 0.35% to 5%, were issued by the Tennessee State School Bond Authority. The bonds are due serially until 2024 and are secured by pledges of the facilities revenues to which they relate and certain other revenues and fees of the college, including state appropriations, see Note 9 for further details. The bonded indebtedness with the Tennessee State School Bond Authority included in long-term liabilities on the Statement of Net Position is shown net of assets held by the authority in the debt service reserve and net of unexpended debt proceeds. The reserve amount was $199, at. Page 25

27 Southwest Tennessee Community College Debt service requirements to maturity for the college s portion of TSSBA bonds at, are as follows: 8. Endowments For the Year(s) Ending June 30 Principal Interest Total 2018 $ 262, $ 61, $ 324, , , , , , , , , , , , , , , Total $ 1,195, $ 238, $ 1,433, If a donor has not provided specific instructions to Southwest Tennessee College Foundation, state law permits the foundation to authorize for expenditure the net appreciation (realized and unrealized) of the investments of endowment funds. When administering its power to spend net appreciation, the foundation is required to consider its long-term and short-term needs, present and anticipated financial requirements, expected total return on its investments, price-level trends, and general economic conditions. Any net appreciation that is spent is required to be spent for the purposes for which the endowment was established. The foundation chooses to spend only a portion of the investment income (including changes in the value of investments) each year. Under the spending plan established by the foundation, 5% of a trailing three-year average of the endowment s total asset value has been authorized for expenditure. The remaining amount, if any, is retained to be used in future years when the amount computed using the spending plan exceeds the investment income. At, net appreciation of $67, is available to be spent, of which $67, is included in restricted net position expendable for scholarships and fellowships. 9. Pledged Revenues The college has pledged certain revenues and fees, including state appropriations, to repay $1,195, in revenue bonds issued from April 2009 to August Proceeds from the bonds provided financing for Property Acquisition I, Property Acquisition II, and Energy Savings Performance Contract. The bonds are payable through Annual principal and interest payments on the bonds are expected to require 0.6% of available revenues. The total principal and interest remaining to be paid on the bonds is $1,433, Principal and interest paid for the current year and total available revenues were $341, and $58,457,894.75, respectively. Page 26

28 Southwest Tennessee Community College 10. Pension Plans Defined Benefit Plan Closed State and Higher Education Employee Pension Plan General Information about the Pension Plan Plan Description - State employees and higher education employees with membership in the Tennessee Consolidated Retirement System (TCRS) before July 1, 2014, are provided with pensions through the Closed State and Higher Education Employee Pension Plan. This plan is a component of the Public Employee Retirement Plan, an agent, multiple-employer defined benefit pension plan. The Closed State and Higher Education Employee Pension Plan stopped accepting new membership on June 30, 2014, but will continue providing benefits to existing members and retirees. Beginning July 1, 2014, a new agent defined benefit retirement plan, the State and Higher Education Employee Retirement Plan, became effective for state employees and higher education employees hired on or after July 1, The TCRS was created by state statute under Title 8, Chapters 34-37, and Tennessee Code Annotated. The TCRS Board of Trustees is responsible for the proper operation and administration of all employer pension plans in the TCRS. The Tennessee Treasury Department, an agency in the legislative branch of state government, administers the plans of the TCRS. The TCRS issues a publicly available financial report that can be obtained at Benefits Provided - Title 8, Chapters 34-37, Tennessee Code Annotated, establishes the benefit terms and can be amended only by the Tennessee General Assembly. Members of the Closed State and Higher Education Employee Pension Plan are eligible to retire with an unreduced benefit at age 60 with 5 years of service credit or after 30 years of service credit regardless of age. Benefits are determined using the following formula: Average of member s highest compensation for 5 consecutive years (up to Social Security integration level) x 1.50% x Plus: Average of member s highest compensation for 5 consecutive years (over the Social Security integration level) x 1.75% x Years of Service Credit x 105% Years of Service Credit x 105% A reduced early retirement benefit is available at age 55 and vested. Members are vested with five years of service credit. Service related disability benefits are provided regardless of length of service. Five years of service is required for non-service related disability eligibility. The service related and non-service related disability benefits are determined in the same manner as a service retirement benefit but are reduced 10 percent and include projected service credits. A variety of death benefits are available under various eligibility criteria. Member and beneficiary annuitants are entitled to automatic cost-of-living adjustments (COLAs) after retirement. A COLA is granted each July for annuitants retired prior to the 2nd of July of the previous year. The COLA is based on the change in the consumer price index (CPI) during the prior calendar year, capped at 3 percent, and applied to the current benefit. No COLA is granted if the change in the CPI is less than one-half Page 27

29 Southwest Tennessee Community College percent. A one percent COLA is granted if the CPI change is between one-half percent and one percent. A member who leaves employment may withdraw employee contributions, plus any accumulated interest. Contributions - Contributions for state employees and higher education employees are established in the statutes governing the TCRS and may only be changed by the Tennessee General Assembly. The college s employees are non-contributory, as are most members in the Closed State and Higher Education Employee Pension Plan. State and higher education agencies make employer contributions at the rate set by the Board of Trustees as determined by an actuarial valuation. By law, employer contributions for the Closed State and Higher Education Employee Pension Plan are required to be paid. Employer contributions by the college for the year ended, to the Closed State and Higher Education Employee Pension Plan were $2,004, which is percent of covered payroll. The employer rate, when combined with member contributions, is expected to finance the costs of benefits earned by members during the year, the cost of administration, as well as an amortized portion of any unfunded liability. Pension Liabilities (Assets), Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions Pension liability At, the college reported a liability of $10,839, for its proportionate share of the net pension liability. The net pension liability was measured as of June 30, 2016, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The college s proportion of the net pension liability was based on a projection of the college s contributions during the year ended June 30, 2016, to the pension plan relative to the contributions of all participating state and higher education agencies. At the June 30, 2016, measurement date, the college s proportion was percent. The proportionate share from the prior year s measurement date of June 30, 2015 was percent. Pension expense For the year ended, the college recognized a pension expense of $1,867,353. Deferred outflows of resources and deferred inflows of resources For the year ended, the college reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Differences between expected and actual experience $ 607, $ 76, Net difference between projected and actual earnings on pension plan investments 2,621, Changes in proportion of Net Pension Liability (Asset) 20, , Contributions subsequent to the measurement date of June 30, ,004, Total $ 5,255, $ 603, Deferred outflows of resources, resulting from the college s employer contributions of $2,004, subsequent to the measurement date will be recognized as a decrease in net pension liability in the year ended June 30, Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows: Page 28

30 Southwest Tennessee Community College Year Ended June 30: 2018 $ 136, , ,612, ,566 In the table above, positive amounts will increase pension expense, while negative amounts will decrease pension expense. Actuarial assumptions - The total pension liability as of June 30, 2016 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Inflation Salary increases Investment rate of return Cost-of-Living Adjustment 3.0 percent Graded salary ranges from 8.97 to 3.71 percent based on age, including inflation, averaging 4.25 percent 7.5 percent, net of pension plan investment expenses, including inflation 2.5 percent Mortality rates were customized based on the June 30, 2012 actuarial experience study and included some adjustment for expected future improvement in life expectancy. The actuarial assumptions used in the June 30, 2016 actuarial valuation were based on the results of an actuarial experience study performed for the period July 1, 2008 through June 30, The demographic assumptions were adjusted to more closely reflect actual and expected future experience. The long-term expected rate of return on pension plan investments was established by the TCRS Board of Trustees in conjunction with the June 30, 2012 actuarial experience study by considering the following three techniques: (1) the 25-year historical return of the TCRS at June 30, 2012, (2) the historical market returns of asset classes from 1926 to 2012 using the TCRS investment policy asset allocation, and (3) capital market projections that were utilized as a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. Four sources of capital market projections were blended and utilized in the third technique. The blended capital market projection established the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding inflation of 3 percent. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table: Page 29