LOCK HAVEN UNIVERSITY OF PENNSYLVANIA OF THE STATE SYSTEM OF HIGHER EDUCATION FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION

Transcription

1 FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION YEARS ENDED

2 TABLE OF CONTENTS YEARS ENDED INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS BALANCE SHEETS PRIMARY INSTITUTION 3 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION PRIMARY INSTITUTION 5 STATEMENTS OF CASH FLOWS PRIMARY INSTITUTION 6 COMBINED STATEMENTS OF FINANCIAL POSITION COMPONENT UNITS 8 COMBINED STATEMENTS OF ACTIVITIES COMPONENT UNITS 9 10 REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF FUNDING PROGRESS FOR THE SYSTEM PLAN AND REHP (OPEB) 41

3 CliftonLarsonAllen LLP Council of Trustees Lock Haven University of Pennsylvania of the State System of Higher Education INDEPENDENT AUDITORS REPORT Report on the Financial Statements We have audited the accompanying financial statements of the business type activities and the aggregate discretely presented component units of Lock Haven University of Pennsylvania of the State System of Higher Education (the University), as of and for the year ended June 30, 2013, and the related notes to the financial statements, which collectively comprise the University s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these basic financial statements based on our audit. We did not audit the financial statements of the discretely presented component units, Lock Haven University Student Auxiliary Services, Inc. (Student Services); The Clearfield Educational Foundation, Inc. (Clearfield); and Lock Haven University Foundation (the Foundation), which represent 100%; 100%; and 100% of the assets, net assets, and revenues of the discretely presented component units of the University. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion insofar as it relates to the amounts included for Student Services, Clearfield, and the Foundation, is based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. An independent member of Nexia International (1)

4 Council of Trustees Lock Haven University of Pennsylvania of the State System of Higher Education Opinions In our opinion, based on our audit and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business type activities and the aggregate discretely presented component units of Lock Haven University as of June 30, 2013, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Schedule of Funding Progress for the System Plan and REHP (OPEB) on page 41 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Management has omitted the Management s Discussion and Analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of the financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. Our opinion on the basic financial statements is not affected by this missing information. Other Information The financial statements of Lock Haven University of Pennsylvania of the State System of Higher Education as of June 30, 2012, were audited by other auditors whose report dated October 24, 2012, expressed an unmodified opinion on those statements. CliftonLarsonAllen LLP Plymouth Meeting, Pennsylvania December 6, 2013 (2)

5 BALANCE SHEETS PRIMARY INSTITUTION ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 62,804,579 $ 58,926,625 Accounts Receivable: Governmental Grants and Contracts 835, ,101 Students, Net of Allowance for Doubtful Accounts of $1,925,120 in 2013 and $1,708,360 in ,849,304 1,665,888 Other 470, ,932 Investment Income Receivable 66,256 81,757 Prepaid Expenses 509, ,756 Loans Receivable, Net of Allowance for Doubtful Accounts of $236,737 in 2013 and $201,515 in 2012 Due from Component Unit 296,293 Other Current Assets 124, ,560 Total Current Assets 66,956,443 62,871,619 NONCURRENT ASSETS Loans Receivable 1,038, ,044 Capital Assets, Net 68,458,596 66,413,231 Other Assets 100,000 Total Noncurrent Assets 69,597,123 67,344,275 Total Assets $ 136,553,566 $ 130,215,894 See accompanying Notes to Financial Statements. (3)

6 LIABILITIES AND NET POSITION CURRENT LIABILITIES Accounts Payable and Accrued Expenses $ 7,276,962 $ 7,242,960 Unearned Revenue 1,323,786 1,428,644 Students' Deposits 627, ,985 Workers' Compensation 193, ,624 Compensated Absences 300, ,000 Postretirement Benefit Obligations 2,519,000 2,756,000 Current Portion of Bonds Payable, Net 1,303,383 1,233,761 Capitalized Lease Obligations 10,689 35,375 Due to System, Academic Facilities Renovation Bond Program (AFRP) 166, ,797 Due to Component Unit 499,094 Other Current Liabilities 73,239 69,190 Total Current Liabilities 14,293,746 13,954,336 NONCURRENT LIABILITIES Unearned Revenue 14,316 31,072 Workers' Compensation 187, ,854 Compensated Absences 4,553,375 4,423,368 Postretirement Benefit Obligations 39,988,707 36,468,397 Capitalized Lease Obligations 17,778 10,293 Bonds Payable, Net 19,149,396 20,432,860 Due to System, AFRP 1,512,987 1,679,146 Other Noncurrent Liabilities 1,290,075 1,211,545 Total Noncurrent Liabilities 66,714,404 64,381,535 Total Liabilities 81,008,150 78,335,871 NET POSITION Net Investment in Capital Assets 46,331,902 43,396,941 Restricted for: Nonexpendable: Scholarships and Fellowships 51,384 20,965 Expendable: Scholarships and Fellowships 30,166 Other 26,597 29,729 Unrestricted 9,135,533 8,402,222 Total Net Position 55,545,416 51,880,023 Total Liabilities and Net Position $ 136,553,566 $ 130,215,894 (4)

7 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION PRIMARY INSTITUTION YEARS ENDED OPERATING REVENUES Tuition and Fees $ 46,493,516 $ 45,439,941 Less: Scholarship Discounts and Allowances 11,352,405 10,958,824 Net Tuition and Fees 35,141,111 34,481,117 Governmental Grants and Contracts: Federal 1,535,705 1,632,147 State and Local 6,342,360 6,538,594 Nongovernmental Grants and Contracts 63,959 84,044 Sales and Services of Educational Departments 508, ,856 Auxiliary Enterprises 17,536,123 16,309,199 Other Revenues 890,979 1,338,427 Total Operating Revenues 62,018,585 60,892,384 OPERATING EXPENSES Instruction 33,144,874 31,534,952 Research 44,837 64,304 Public Service 684, ,034 Academic Support 7,278,120 6,365,839 Student Services 8,845,740 9,214,963 Institutional Support 9,704,812 8,500,693 Operations and Maintenance of Plant 4,680,475 5,419,814 Depreciation 4,661,563 4,644,053 Student Aid 4,175,943 4,551,112 Auxiliary Enterprises 15,719,835 12,836,132 Total Operating Expenses 88,940,352 83,800,896 NET OPERATING LOSS (26,921,767) (22,908,512) NONOPERATING REVENUES (EXPENSES) State Appropriations, General and Restricted 19,571,752 19,794,047 Pell Grants 8,037,551 7,865,001 Investment Income, Net of Related Investment Expense of $12,435 in 2013 and $14,750 in , ,498 Gifts for Other than Capital Purposes 27,128 Interest Expense (882,514) (887,736) Loss on Disposal of Assets (7,595) (8,679) Other Nonoperating Revenue 52,877 58,768 Nonoperating Revenues, Net 27,502,555 27,586,899 INCOME BEFORE OTHER REVENUES 580,788 4,678,387 OTHER REVENUES State Appropriations, Capital 607, ,205 Capital Gifts and Grants 2,476,740 85,158 Total Other Revenues 3,084, ,363 CHANGE IN NET POSITION 3,665,393 5,127,750 Net Position Beginning of Year 51,880,023 46,752,273 NET POSITION END OF YEAR $ 55,545,416 $ 51,880,023 See accompanying Notes to Financial Statements. (5)

8 STATEMENTS OF CASH FLOWS PRIMARY INSTITUTION YEARS ENDED CASH FLOWS FROM OPERATING ACTIVITIES Tuition and Fees $ 35,001,027 $ 34,521,300 Grants and Contracts 8,030,070 8,629,842 Payments to Suppliers for Goods and Services (20,006,222) (16,524,234) Payments to Employees (55,908,138) (55,272,853) Loans Issued to Students (256,713) (152,400) Loans Collected from Students 149, ,191 Student Aid (4,175,943) (4,551,112) Auxiliary Enterprise Charges 17,451,728 16,298,373 Sales and Services of Educational Departments 38, ,856 Other Receipts 1,061, ,968 Net Cash Used by Operating Activities (18,615,006) (15,600,069) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES State and Federal Appropriations 19,571,752 19,794,047 Gifts and Nonoperating Grants for Other than Capital Purposes 8,064,679 7,865,001 PLUS, Stafford, and Other Loans Receipts (Non Perkins) 45,382,212 42,163,632 PLUS, Stafford, and Other Loans Disbursements (Non Perkins) (45,382,212) (42,163,632) Agency Transactions, Net (5,178) (831) Other 52,877 55,196 Net Cash Provided by Noncapital Financing Activities 27,684,130 27,713,413 CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES Proceeds of Debt 3,500,159 Capital Appropriations 607, ,205 Capital Grants and Gifts Received 27,208 45,015 Purchases of Capital Assets (4,244,718) (5,474,793) Principal Paid on Debt (1,258,086) (1,155,026) Interest Paid on Debt (1,042,296) (1,046,892) Net Cash Used by Capital Financing Activities (5,910,027) (3,767,332) CASH FLOWS FROM INVESTING ACTIVITIES Interest Income 718, ,163 NET INCREASE IN CASH AND CASH EQUIVALENTS 3,877,954 9,114,175 Cash and Cash Equivalents Beginning of Year 58,926,625 49,812,450 CASH AND CASH EQUIVALENTS END OF YEAR $ 62,804,579 $ 58,926,625 See accompanying Notes to Financial Statements. (6)

9 STATEMENTS OF CASH FLOWS PRIMARY INSTITUTION (CONTINUED) YEARS ENDED RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES Net Operating Loss $ (26,921,767) $ (22,908,512) Adjustments to Reconcile Net Operating Loss to Net Cash Used by Operating Activities: Depreciation Expense 4,661,563 4,644,053 Changes in Assets and Liabilities: Accounts Receivable (567,400) 157,681 Other Assets 245,029 (803,836) Accounts Payable and Accrued Expenses 40,737 (915,054) Unearned Revenue (121,614) 171,802 Students' Deposits 84,836 70,497 Compensated Absences 130, ,065 Loans Receivable (107,483) 43,791 Other Liabilities 3,941,084 3,644,444 Net Cash Used by Operating Activities $ (18,615,006) $ (15,600,069) SUPPLEMENTAL DISCLOSURE OF NONCASH ITEMS Donated Capital Assets $ 2,448,404 $ See accompanying Notes to Financial Statements. (7)

10 COMBINED STATEMENTS OF FINANCIAL POSITION COMPONENT UNITS ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 5,450,343 $ 4,898,230 Accounts Receivable 220, ,555 Contributions/Pledges Receivable 76,971 75,310 Inventories 332, ,385 Due from University 1,038,675 89,769 Short Term Investments 1,649,457 1,346,853 Other Short Term Investments Held by Trustees 18,880,539 Total Current Assets 27,649,415 7,008,102 NONCURRENT ASSETS Investments 11,159,209 12,052,082 Capital Assets, Net 51,039,745 50,790,894 Other Assets 1,297,505 2,409,595 Total Noncurrent Assets 63,496,459 65,252,571 Total Assets $ 91,145,874 $ 72,260,673 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts Payable and Accrued Expenses $ 488,413 $ 4,506,317 Annuity Liabilities 558, ,701 Due to University 751,689 30,929 Total Current Liabilities 1,798,726 5,094,947 NONCURRENT LIABILITIES Bonds Payable 74,191,530 50,499,336 Notes Payable 3,757,191 3,859,262 Other Liabilities 3,289,803 3,855,578 Total Noncurrent Liabilities 81,238,524 58,214,176 Total Liabilities 83,037,250 63,309,123 NET ASSETS Unrestricted (4,764,714) (3,501,000) Temporarily Restricted 3,056,198 2,973,308 Permanently Restricted 9,817,140 9,479,242 Total Net Assets 8,108,624 8,951,550 Total Liabilities and Net Assets $ 91,145,874 $ 72,260,673 See accompanying Notes to Financial Statements. (8)

11 COMBINED STATEMENTS ACTIVITIES COMPONENT UNITS YEARS ENDED CHANGES IN UNRESTRICTED NET ASSETS REVENUES AND OTHER ADDITIONS Sales and Services $ 568,465 $ 659,249 Contributions 206, ,050 Investment Income 285,751 39,334 Student Activity Fees 2,064,492 1,621,328 Rental Income Student Housing 8,531,755 3,028,629 Other Revenues 1,216, ,084 Changes in Value of Interest Rate Swap/Split Interest Agreements 788,660 (2,609,551) Loss on Refunding of Revenue Bonds (1,201,923) Net Assets Released from Restrictions 1,918,803 2,049,903 Total Revenues and Other Additions 14,379,173 6,038,026 EXPENSES AND OTHER DEDUCTIONS Management and General 2,471,242 2,015,789 Rental Expenses Student Housing 7,609,163 2,972,907 Program Expenses Other Programs 3,240,932 1,305,084 Scholarships 823, ,832 Student Services 1,244,937 1,277,975 Fundraising 253, ,475 Total Expenses and Other Deductions 15,642,887 8,649,062 Change in Unrestricted Net Assets (1,263,714) (2,611,036) CHANGES IN TEMPORARILY RESTRICTED NET ASSETS Sales and Services 412, ,331 Contributions and Support 624, ,423 Investment Income 1,163 2,979 Other Revenues 280, ,480 Net Assets Released from Restrictions (1,236,171) (1,564,764) Change in Temporarily Restricted Net Assets 82,890 (343,551) CHANGES IN PERMANENTLY RESTRICTED NET ASSETS Contributions 273,558 1,142,135 Investment Income (Loss) 746,972 (109,263) Net Assets Released from Restrictions (682,632) (485,139) Change in Permanently Restricted Net Assets 337, ,733 CHANGE IN NET ASSETS (842,926) (2,406,854) Net Assets Beginning of Year 8,951,550 11,358,404 NET ASSETS END OF YEAR $ 8,108,624 $ 8,951,550 See accompanying Notes to Financial Statements. (9)

12 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Lock Haven University of Pennsylvania of the State System of Higher Education (the University ), a public four year institution located in Lock Haven, Pennsylvania, was founded in The University is one of fourteen universities of the Pennsylvania State System of Higher Education (PASSHE). PASSHE was created by the State System of Higher Education Act of November 12, 1982, P.L. 660, No. 188, as amended (Act 188). PASSHE is a component unit of the Commonwealth of Pennsylvania (the Commonwealth ). Reporting Entity The University functions as a business type activity, as defined by the Governmental Accounting Standards Board (GASB). Lock Haven University Student Auxiliary Services, Inc. ( SAS ), the Lock Haven University Foundation and the Clearfield Educational Foundation, Inc. (collectively the Foundations ) are included in the University s financial statements as discretely presented component units. A component unit is a legally separate organization for which the primary institution is financially accountable or closely related. SAS is the successor corporation to Lock Haven University Student Cooperative Council, Inc. (the Council ). During the year ended June 30, 2012, a court decree approved the final dissolution of the Council and a transfer of its remaining assets to SAS. There were no significant operational changes as a result of this corporate transition. SAS collects student activity fees and other miscellaneous revenues, which are allocated to clubs, organizations, athletic programs and general administration. SAS also operates the Campus Bookstore and the Student Recreation Center. SAS is a legally separate tax exempt entity that is considered a component unit of the University and is included within the University s financial reporting entity because the economic resources received and held by SAS are for the direct benefit of the University and because of the influence the University has over SAS. The financial activity of SAS is presented as of and for the fiscal years ended June 30, 2013 and The Foundations are legally separate, tax exempt entities that act as fundraising organizations to supplement the resources that are available to the University in support of its programs. In addition, the Lock Haven University Foundation develops and manages student housing facilities and the Durrwachter Alumni Conference Center. Although the University does not control the timing or amount of receipts from the Foundations, the majority of resources, or income there from that the Foundations hold and invest related to their fundraising efforts are restricted to the activities of the University by donors. Because these restricted resources held by the Foundations can only be used by, or for the benefit of, the University, the Foundations are considered component units of the University and are discretely presented in the University s financial statements. The financial activity of the Foundations is presented as of and for the fiscal years ended June 30, 2013 and (10)

13 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Reporting Entity (Continued) During the years ended June 30, 2013 and 2012, the Lock Haven University Foundation (LHUF) awarded grants in aid and scholarships of $823,306 and $836,832, respectively. On June 1, 2011, the University entered into a facility management agreement and ground lease with the Lock Haven University Foundation related to the Fairview Suites student housing complex. During fiscal year end June 30, 2013, the ground lease amounted to $100,000 and facilities management fees of approximately $1,966,000 paid/payable from LHUF to the University, including reimbursement of direct and administrative expenses to the University related to operating and managing the student housing facility. During fiscal yearend June 30, 2013, LHUF made an in kind contribution of $2,448,404 to the University consisting of direct and indirect site work costs paid by LHUF at the Fairview Suites site. During the years ended June 30, 2013 and 2012, the Clearfield Educational Foundation, Inc. distributed $14,325 and $4,940, respectively, to the University for restricted purposes. Complete financial statements for SAS and the Foundations may be obtained at the University s administrative office. Measurement Focus, Basis of Accounting and Basis of Presentation The accompanying financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America, as prescribed by GASB. The economic resources measurement focus reports all inflows, outflows, and balances that affect an entity s net position. Under the accrual basis of accounting, revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements have been met. The accompanying financial statements of the component units, which are all private nonprofit organizations, are reported in accordance with Financial Standards Accounting Board (FASB) requirements. As such, revenue recognition criteria and presentation features are different from GASB revenue recognition criteria and presentation features. No modifications for these differences have been made to the component units financial information presented herein. (11)

14 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Operating Revenues and Expenses Operating revenues of the University consist of tuition, all academic, instructional, and other student fees, grants and contracts, sales and services of educational activities and auxiliary enterprise revenues. In addition, governmental and private grants and contracts in which the grantor receives equal value for the funds given to the University are recorded as operating revenue. All expenses, with the exception of interest expense, loss on investments, loss on the disposal of assets, and extraordinary expenses are recorded as operating expenses. Appropriations, gifts, investment income (except for interest earned by auxiliaries totaling $153,059 and $167,292 for the years ended June 30, 2013 and 2012, respectively, which are included in auxiliary revenues), capital grants, gains on investments, gains on the disposal of assets, parking and library fines, and governmental and private research and other grants and contracts (including Pell grants), in which the grantor does not receive equal value for the funds given to the University are reported as nonoperating revenue. Scholarship Discounts and Allowances and Waivers Student tuition and fee revenues, and certain other revenues from students, are reported net of scholarship discounts and allowances in the statement of revenues, expenses, and changes in net position. Scholarship discounts and allowances are the difference between the stated charge for goods and services provided by the University and the amount that is paid by students and/or third parties making payments on students' behalf. To the extent that revenues from such programs are used to satisfy tuition and fees and other student services, the University has recorded a scholarship discount and allowance. In accordance with a formula prescribed by the National Association of College and University Business Officers (NACUBO), the University allocates the cost of scholarships, waivers, and other student financial aid between Scholarship discounts and allowances (netted against tuition and fees) and Student aid expense. Scholarships and waivers of room and board fees are reported in auxiliary enterprises. The cost of tuition waivers granted to employees is reported as employees benefits expense. Net Position (formerly referred to as Net Assets) The University maintains the following classifications of net position. The term net position has replaced the term net assets as required by GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. Net Investment in capital assets (previously referred to and the same as Invested in capital assets, net of related debt, terminology was changed by GASB in Statement No. 63): Capital assets, net of accumulated depreciation, reduced by the outstanding principal balances of any borrowings used for the acquisition, construction or improvement of those assets and increased by any unspent proceeds related to that debt. Restricted nonexpendable: Net position subject to externally imposed conditions requiring that they be maintained by the University in perpetuity. (12)

15 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Position (formerly referred to as Net Assets)(Continued) Restricted expendable: Net position whose use is subject to externally imposed conditions that can be fulfilled by the actions of the University or by the passage of time. Unrestricted: All other categories of net position. Unrestricted net position may be designated for specific purposes by the University s Council of Trustees. When both restricted and unrestricted funds are available for expenditure, the decision as to which funds are used first is left to the discretion of the University. Cash Equivalents and Investments The University considers all demand and time deposits and money market funds, and overnight repurchase agreements to be cash equivalents. Investments purchased are stated at fair value. Investments received as gifts are recorded at their fair value or appraised values as of the date of the gift. The University classifies investments as short term when they are readily marketable and intended to be converted to cash within one year. Accounts and Loans Receivable Accounts and loans receivable consist of tuition and fees charged to current and former students, amounts due from federal and state governments in connection with reimbursements of allowable expenditures made pursuant to grants and contracts and other miscellaneous sources. Accounts and loans receivable are reported at net realizable value. Accounts are written off when they are determined to be uncollectible based upon management s assessment of individual accounts. The allowance for doubtful accounts is estimated based upon the University s historical losses and periodic review of individual accounts. Capital Assets Land and buildings at the University's campus acquired or constructed prior to the creation of PASSHE on July 1, 1983, are owned by the Commonwealth and made available to the University. Since the University neither owns such assets nor is responsible to service associated bond indebtedness, no value is ascribed thereto in the accompanying financial statements. Likewise, no value is ascribed to the portion of any land or buildings acquired or constructed utilizing capital funds appropriated by the Commonwealth after June 30, 1983, and made available to the University. (13)

16 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Capital Assets (Continued) Buildings, equipment, and furnishings acquired or constructed by the University after June 30, 1983, through the expenditure of University funds or the incurring of debt, are stated at cost less accumulated depreciation, calculated using the straight line method. All assets with a purchase cost, or fair value if acquired by gift, in excess of $5,000 with an estimated useful life of two years or greater are capitalized. Assets under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. Amortization of assets under capital lease is included in depreciation. All library books are capitalized. Normal repair and maintenance expenditures are not capitalized because they neither add to the value of the property nor materially prolong its useful life. The University does not capitalize collections of art, rare books, historical items, etc., as they are held for public exhibition, education, or research rather than financial gain. Impairment of Capital Assets Management reviews capital assets for impairment whenever events or changes in circumstances indicate that the service utility of an asset has declined significantly and unexpectedly. Any writedowns due to impairment are charged to operations at the time impairment is identified. No writedown of capital assets was required for the years ended June 30, 2013 and Unearned Revenue (previously Deferred Revenue) Unearned revenue includes amounts for tuition and fees, grants, corporate sponsorship payments and certain auxiliary activities received prior to the end of the fiscal year but earned in a subsequent accounting period. The University previously referred to unearned revenue as deferred revenue, but changed the terminology in accordance with new GASB requirements. Compensated Absences Employees right to receive annual leave and sick leave payments upon termination or retirement for services already rendered is recorded as a liability. Pension Plans Employees of the University enroll in one of three available retirement plans immediately upon employment. The University recognizes annual pension expenditures equal to its contractually required contributions to the plans. Income Taxes The University, as a member of PASSHE, is tax exempt under Section 115(i) of the Internal Revenue Code; accordingly, no provision for income taxes has been made in the accompanying financial statements. (14)

17 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures 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. Reclassifications Certain reclassifications have been made to the 2012 financial statements in order for them to conform to the 2013 presentation. New Accounting Standards In November 2010, GASB issued Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements. Statement No. 60 establishes guidance for accounting and financial reporting for service concession arrangements, which are a type of public private or public public partnership. The University was required to adopt Statement No. 60 for the fiscal year ending June 30, The University has determined that Statement No. 60 has no effect on its financial statements. In June 2011, GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflow of Resources, and Net Position. In March 2012, GASB issued Statement No. 65, Items Previously Reported as Assets and Liabilities. With Statements No. 63 and 65, GASB has reclassified certain assets and liabilities as deferred outflows and deferred inflows of resources. Further, GASB has replaced the term net assets with net position, and has changed the balance sheet presentation to assets, plus deferred outflows of resources equals liabilities, plus deferred inflows of resources, plus net position. The University was required to adopt Statement No. 63 for the fiscal year ending June 30, 2013, and is required to adopt Statement No. 65 for the fiscal year ending June 30, The University has determined that Statement No. 63 has no effect on the substance of its financial statements; however, the changes increase the complexity of the financial statements to its readers, as the new presentation differs from the traditional and familiar business reporting model. The University has determined that the adoption of Statement No. 65 will require that bond issuance costs, which are currently were netted against the associated bond discount or bond premium on the balance sheet and amortized over the life of the associated bond payable, will be expensed in the period incurred. The amount of fiscal year 2012/13 bond issuance costs that will be restated as an expense on next year s financial statements is $121,484. In June 2012, GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions. Statement No. 68 will require the University to report its share of the pension liabilities that the Commonwealth of Pennsylvania State Employees Retirement System (SERS) and Public School Employees Retirement System (PSERS) must record beginning in fiscal year ending June 30, Although the University has not received an estimate of its share of the pension liabilities from either organization, the liabilities are expected to be significant and have a detrimental effect on its financial statements. (15)

18 NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Standards (Continued) In January 2013, GASB issued Statement No. 69, Government Combinations and Disposals of Government Operations. Statement No. 69 establishes accounting and financial reporting standards related to government combinations and disposals of government operations. In April 2013, GASB issued Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. Statement No. 70 specifies the information required to be disclosed by governments that extend nonexchange financial guarantees. The University has determined that Statements No. 69 and 70 have no effect on its financial statements. NOTE 2 CONDENSED COMPONENT UNIT INFORMATION The following represents combining condensed statement of financial position information for the component units as of June 30, 2013: Non Major LHU Component Foundation Units Total Capital Assets, Net $ 49,563,134 $ 1,476,611 $ 51,039,745 Investments 30,039,748 30,039,748 Other Assets 6,087,928 3,978,453 10,066,381 Total Assets 85,690,810 5,455,064 91,145,874 Long Term Debt 77,948,721 77,948,721 Other Liabilities 4,597, ,072 5,088,529 Total Liabilities 82,546, ,072 83,037,250 Net Assets (Deficit): Unrestricted (9,715,206) 4,950,492 (4,764,714) Temporarily Restricted 3,042,698 13,500 3,056,198 Permanently Restricted 9,817,140 9,817,140 Total Net Assets $ 3,144,632 $ 4,963,992 $ 8,108,624 (16)

19 NOTE 2 CONDENSED COMPONENT UNIT INFORMATION (CONTINUED) The following represents combining condensed statement of financial position information for the component units as of June 30, 2012: Non Major LHU Component Foundation Units Total Capital Assets, Net $ 49,272,088 $ 1,518,806 $ 50,790,894 Investments 11,867, ,247 12,052,082 Other Assets 6,305,351 3,112,346 9,417,697 Total Assets 67,445,274 4,815,399 72,260,673 Long Term Debt 54,355,370 3,228 54,358,598 Other Liabilities 8,471, ,241 8,950,525 Total Liabilities 62,826, ,469 63,309,123 Net Assets (Deficit): Unrestricted (7,621,484) 4,120,484 (3,501,000) Temporarily Restricted 2,971,816 1,492 2,973,308 Permanently Restricted 9,268, ,954 9,479,242 Total Net Assets $ 4,618,620 $ 4,332,930 $ 8,951,550 (17)

20 NOTE 2 CONDENSED COMPONENT UNIT INFORMATION (CONTINUED) The following represents combining statement of activities information for the component units for the year ended June 30, 2013: Non Major LHU Component Foundation Units Total Changes in Unrestricted Net Assets Revenues and Other Additions: Sales and Services $ 13,845 $ 554,620 $ 568,465 Contributions 187,689 18, ,514 Investment income 66, , ,751 Student activity fees 2,064,492 2,064,492 Rental income student housing 8,531,755 8,531,755 Other revenues 958, ,741 1,216,656 Changes in Value of Interest Rate Swap/Split Interest Agreements 788, ,660 Loss on Refunding of Revenue Bonds (1,201,923) (1,201,923) Net Assets Released from Restrictions 1,705, ,609 1,918,803 Total Revenues and Other Additions 11,051,027 3,328,146 14,379,173 Expenses and Other Deductions: Program Expenses Student Housing 7,609,163 7,609,163 Program Expenses Other Programs 3,044, ,117 3,240,932 Scholarships 823, ,306 Student Services 1,244,937 1,244,937 Management and General 1,414,273 1,056,969 2,471,242 Fundraising 253, ,307 Total Expenses and Other Deductions 13,144,749 2,498,138 15,642,887 Change in Unrestricted Net Assets (2,093,722) 830,008 (1,263,714) Changes in Temporarily Restricted Net Assets Sales and Services 412, ,451 Contributions and Support 611,061 13, ,561 Investment Income 1,163 1,163 Other Revenues 280, ,886 Net Assets Released from Restrictions (1,233,516) (2,655) (1,236,171) Change in Temporarily Restricted Net Assets 70,882 12,008 82,890 (18)

21 NOTE 2 CONDENSED COMPONENT UNIT INFORMATION (CONTINUED) Non Major LHU Component Foundation Units Total Changes in Permanently Restricted Net Assets Contributions 273, ,558 Investment Income 746, ,972 Net Assets Released from Restrictions (471,678) (210,954) (682,632) Change in Permanently Restricted Net Assets 548,852 (210,954) 337,898 CHANGE IN NET ASSETS (1,473,988) 631,062 (842,926) Net Assets Beginning of Year 4,618,620 4,332,930 8,951,550 NET ASSETS END OF YEAR $ 3,144,632 $ 4,963,992 $ 8,108,624 The following represents combing statement of activities information for the component units for the year ended June 30, 2012: Non Major LHU Component Foundation Units Total Changes in Unrestricted Net Assets Revenues and Other Additions: Sales and Services $ 13,778 $ 645,471 $ 659,249 Contributions 310,100 30, ,050 Investment income 7,664 31,670 39,334 Student activity fees 1,621,328 1,621,328 Rental income student housing 3,028,629 3,028,629 Other revenues 675, , ,084 Changes in Value of Interest Rate Swap/Split Interest Agreements (2,609,551) (2,609,551) Net Assets Released from Restrictions 2,041,674 8,229 2,049,903 Total Revenues and Other Additions 3,467,295 2,570,731 6,038,026 (19)

22 NOTE 2 CONDENSED COMPONENT UNIT INFORMATION (CONTINUED) Non Major LHU Component Foundation Units Total Changes in Unrestricted Net Assets (Cont.) Expenses and Other Deductions: Program Expenses Student Housing 2,972,907 2,972,907 Program Expenses Other Programs 1,288,136 16,948 1,305,084 Scholarships 836, ,832 Student Services 1,277,975 1,277,975 Management and General 871,516 1,144,273 2,015,789 Fundraising 240, ,475 Total Expenses and Other Deductions 6,209,836 2,439,226 8,649,062 Change in Unrestricted Net Assets (2,742,541) 131,505 (2,611,036) Changes in Temporarily Restricted Net Assets Sales and Services 484, ,331 Contributions and Support 393,106 6, ,423 Investment Income 2,979 2,979 Other Revenues 334, ,480 Net Assets Released Restrictions (1,556,535) (8,229) (1,564,764) Change in Temporarily Restricted Net Assets (344,618) 1,067 (343,551) Changes in Permanently Restricted Net Assets Contributions 1,141, ,142,135 Investment Loss (109,263) (109,263) Net Assets Released from Restrictions (485,139) (485,139) Change in Permanently Restricted Net Assets 547, ,733 CHANGE IN NET ASSETS (2,539,616) 132,762 (2,406,854) Net Assets Beginning of Year 7,158,236 4,200,168 11,358,404 NET ASSETS END OF YEAR $ 4,618,620 $ 4,332,930 $ 8,951,550 (20)

23 NOTE 3 DEPOSITS AND INVESTMENTS Primary Government The University predominantly maintains its cash balances on deposit with PASSHE. PASSHE maintains these and other PASSHE funds on a pooled basis. Although PASSHE pools its funds in a manner similar to an internal investment pool, individual PASSHE entities do not hold title to any assets in the fund. PASSHE as a whole owns title to all assets. The University does not participate in the unrealized gains or losses on the investment pool; instead, the University holds shares equal to its cash balance. Each share has a constant value of $1, and income is allocated based on the number of shares owned. Revenue realized at the PASSHE level is calculated on a daily basis and posted monthly to each entity s account as interest income. The University s portion of pooled funds totals $62,492,439 and $58,380,351 at June 30, 2013 and 2012, respectively. For purposes of convenience and expedience, the University uses local financial institutions for activities such as cash deposits. PASSHE invests its funds in accordance with Board Policy A, Investment, which authorizes PASSHE to invest in obligations of the U.S. Treasury, repurchase agreements, commercial paper, certificates of deposit, banker s acceptances, U.S. money market funds, municipal bonds, corporate bonds, collateralized mortgage obligations (CMOs), asset backed securities, and internal loan funds. Restricted nonexpendable funds and amounts designated by the Board or university trustees may be invested in the investments described above as well as in corporate equities and approved pooled common funds. For purposes of convenience and expedience, universities use local financial institutions for activities such as deposits of cash. In addition, universities may accept gifts of investments from donors as long as risk is limited to the investment itself. Restricted gifts of investments fall outside the scope of the investment policy. In keeping with its legal status as a system of public universities, PASSHE recognizes a fiduciary responsibility to invest all funds prudently and in accordance with ethical and prevailing legal standards. Investment decisions are intended to minimize risk while maximizing asset value. Adequate liquidity is maintained so that assets can be held to maturity. High quality investments are preferred. Reasonable portfolio diversification is pursued to ensure that no single security or investment or class of securities or investments will have a disproportionate or significant impact on the total portfolio. Investments may be made in U.S. dollar denominated debt of high quality U.S. and non U.S. corporations. Investment performance is monitored on a frequent and regular basis to ensure that objectives are attained and guidelines are followed. Safety of principal and liquidity are the top priorities for the investment of PASSHE s operating funds. Within those guidelines, income optimization is pursued. Speculative investment activity is not allowed: this includes investing in asset classes such as commodities, futures, short sales, equities, real or personal property, options, venture capital investments, private placements, letter stocks, and unlisted securities. (21)

24 NOTE 3 DEPOSITS AND INVESTMENTS (CONTINUED) Primary Government (Continued) PASSHE s operating funds are invested and reinvested in the following types of instruments with qualifications are provided. (See Board Policy A, Investment, for a complete list of and more details on permissible investments and associated qualifications.) Investment Categories Qualifications/Moody s Ratings Requirements United States Government Securities Repurchase Agreements Commercial Paper Municipal Bonds Corporate Bonds Collateralized Mortgage Obligations (CMOs) Asset Backed Securities System Investment Fund Loans (University Loans and Bridge Notes) Together with repurchase agreements must comprise at least 20% of the market value of the fund. Underlying collateral must be direct obligations of the United States Treasury and be in PASSHE s or its agent s custody. P 1andP 2 notes only, with no more than 5% and 3%, respectively, of the market value of the fund invested in any single issuer. Total may not exceed 20% of the market value of the fund. Bonds must carry long term debt rating of A or better. Total may not exceed 20% of the market value of the fund. 15% must carry long term debt rating of A or better, 5% may be rated Baa2 or better. Total may not exceed 20% of the market value of the fund. Must be rated Aaa and guaranteed by U.S. government. Total my not exceed 20% of the market value of the fund. Must be Aaa rated. Total may not exceed 20% of the market value of the fund, with no more than 5% invested in any single issuer. Total may not exceed 20% of the market value of the fund, and loan terms may not exceed 5 years. (22)

25 NOTE 3 DEPOSITS AND INVESTMENTS (CONTINUED) Primary Government (Continued) CMO Risk: CMOs are sometimes based on cash flows from interest only (IO) payments or principalonly (PO) payments and are sensitive to prepayment risks. The CMOs in PASSHE s portfolio do not have IO or PO structures; however, they are subject to extension or contraction risk based on movements in interest rates. Moody s Rating: PASSHE uses ratings from Moody s Investors Service, Inc. to indicate the credit risk of investments, i.e. the risk that an issuer or other counterparty to an investment will not fulfill its obligations. An Aaa rating indicates the highest quality obligations with minimal credit risk. Ratings that begin with Aa indicate high quality obligations subject to very low credit risk; ratings that begin with A indicate upper medium grade obligations subject to low credit risk; and ratings that begin with Baa indicate medium grade obligations, subject to moderate credit risk, that may possess certain speculative characteristics. Moody s appends the ratings with numerical modifiers 1, 2, and 3, with 1 indicating a higher ranking and 3 indicating a lower ranking within the category. For shortterm obligations, a rating of P 1 indicates that issuers have a superior ability to repay short term debt obligations, and a rating of P 2 indicates that issuers have a strong ability to repay short term debt obligations. Modified Duration: PASSHE denotes interest rate risk, or the risk that changes in interest rates will affect the fair value of an investment, using modified duration. Duration is a measurement in years of how long it takes for the price of a bond to be repaid by its internal cash flows. Modified duration takes into account changing interest rates. PASSHE maintains a portfolio duration target of 1.8 years with an upper limit of 2.5 years for the intermediate term component of the operating portion of the investment portfolio. PASSHE s duration targets are not applicable to its long term investments. At June 30, 2013 and 2012, the carrying amount of the University s local demand and time deposits were $312,140 and $546,274, respectively, as compared to bank balances of $512,493 and $691,552, respectively. The difference is caused primarily by items in transit. Of the bank balances, $110,488 and $230,103, respectively, were covered by federal government depository insurance, and $402,005 and $461,449, respectively, were uninsured and uncollateralized but covered under the collateralization provisions of the Commonwealth of Pennsylvania Act 72 of 1971, as amended. Act 72 allows banking institutions to satisfy the collateralization requirements by pooling eligible investments to cover total public funds on deposit in excess of federal insurance. Such pooled collateral is pledged with the financial institutions trust departments. At June 30, 2013 and 2012, none of the University s demand and time deposits are exposed to foreign currency risk. (23)

26 NOTE 3 DEPOSITS AND INVESTMENTS (CONTINUED) Major Component Unit The fair value of investments for the Lock Haven University Foundation at June 30 is as follows: Investments: Cash and Cash Equivalents $ 3,543,850 $ 1,843,341 Equity Based Mutual Funds 443,918 5,606,841 Guaranteed Investment Certificate 1,258,213 Fixed Income Mutual Funds 2,122,314 2,292,497 Common Stock 3,640, ,295 US Treasury Obligations 16,541, ,731 Alternative Investment Fund 1,364,209 Dynamic Asset Allocation Mutual Funds 2,348,633 Other 34,917 34,917 Total $ 30,039,748 $ 11,867,835 Reconciliation of Investments: Other Short term Investments held by Trustees: US Treasury Obligations 16,541,581 Cash and Cash Equivalents 2,338,958 18,880,539 Investments Noncurrent 11,159,209 11,867,835 Total $ 30,039,748 $ 11,867,835 (24)

27 NOTE 4 CAPITAL ASSETS Primary Government Capital assets and the changes therein are summarized as follows: For the year ended June 30, 2013: Beginning Ending Balance Balance July 1, 2012 Additions Retirements Reclass June 30, 2013 Land $ 2,567,727 $ $ $ $ 2,567,727 Construction in Progress 3,752,918 1,947,173 (3,712,917) 1,987,174 Total Capital Assets Not Being Depreciated 6,320,645 1,947,173 (3,712,917) 4,554,901 Buildings, including Improvements 92,465,166 3,991,864 3,558, ,015,835 Furnishings and Equipment, including Capital Leases 10,158, ,762 (138,401) 154,112 10,895,874 Library Books 4,138,108 57,160 (104,741) 4,090,527 Total Capital Assets Being Depreciated 106,761,675 4,770,786 (243,142) 3,712, ,002,236 Less: Accumulated Depreciation: Buildings, including improvements (36,080,949) (3,698,783) (39,779,732) Furnishings and Equipment, including Capital Leases (7,005,537) (852,538) 127,371 (7,730,704) Library Books (3,582,603) (110,242) 104,740 (3,588,105) Total Accumulated Depreciation (46,669,089) (4,661,563) 232,111 (51,098,541) Total Capital Assets being Depreciated, Net 60,092, ,223 (11,031) 3,712,917 63,903,695 Capital Assets, Net $ 66,413,231 $ 2,056,396 $ (11,031) $ $ 68,458,596 (25)