STATE OF LOUISIANA LEGISLATIVE AUDITOR

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1 LEGISLATIVE AUDITOR University of Louisiana System State of Louisiana Baton Rouge, Louisiana December 31, 2002 Financial and Compliance Audit Division Daniel G. Kyle, Ph.D., CPA, CFE Legislative Auditor

2 LEGISLATIVE AUDIT ADVISORY COUNCIL MEMBERS Senator J. Tom Schedler, Chairman Representative Edwin R. Murray, Vice Chairman Senator Robert J. Barham Senator Foster L. Campbell, Jr. Senator Lynn B. Dean Senator Willie L. Mount Representative Rick Farrar Representative Victor T. Stelly Representative T. Taylor Townsend Representative Warren J. Triche, Jr. LEGISLATIVE AUDITOR Daniel G. Kyle, Ph.D., CPA, CFE DIRECTOR OF FINANCIAL AND COMPLIANCE AUDIT Albert J. Robinson, Jr., CPA This document is produced by the Legislative Auditor, State of Louisiana, Post Office Box 94397, Baton Rouge, Louisiana in accordance with Louisiana Revised Statute 24:513. Forty copies of this public document were produced at an approximate cost of $ This material was produced in accordance with the standards for state agencies established pursuant to R.S. 43:31. This report is available on the Legislative Auditor s Web site at In compliance with the Americans With Disabilities Act, if you need special assistance relative to this document, or any documents of the Legislative Auditor, please contact Wayne Skip Irwin, Director of Administration, at 225/

3 UNIVERSITY OF LOUISIANA SYSTEM Baton Rouge, Louisiana Basic Financial Statements and Independent Auditor's Reports As of and for the Year Ended June 30, 2002 Under the provisions of state law, this report is a public document. A copy of this report has been submitted to the Governor, to the Attorney General, and to other public officials as required by state law. A copy of this report has been made available for public inspection at the Baton Rouge office of the Legislative Auditor. December 31, 2002

4 UNIVERSITY OF LOUISIANA SYSTEM Basic Financial Statements and Independent Auditor's Reports As of and for the Year Ended June 30, 2002 CONTENTS Statement Page No. Independent Auditor's Report on the Financial Statements 2 Basic Financial Statements: Statement of Net Assets A 4 Statement of Revenues, Expenses, and Changes in Net Assets B 6 Statement of Cash Flows C 8 Notes to the Financial Statements 10 Exhibit Report on Compliance and on Internal Control Over Financial Reporting Based on an Audit of the Basic Financial Statements Performed in Accordance With Government Auditing Standards Findings and Recommendations on Internal Control Over Financial Reporting A B Appendix Management s Corrective Action Plans and Responses to the Findings and Recommendations A 1

5 DANIEL G. KYLE, PH.D., CPA, CFE LEGISLATIVE AUDITOR OFFICE OF LEGISLATIVE AUDITOR BATON ROUGE, LOUISIANA December 19, NORTH THIRD STREET POST OFFICE BOX TELEPHONE: (225) FACSIMILE: (225) Independent Auditor's Report on the Financial Statements UNIVERSITY OF LOUISIANA SYSTEM Baton Rouge, Louisiana We have audited the accompanying basic financial statements of the University of Louisiana System, a component unit of the State of Louisiana, as of and for the year ended June 30, 2002, as listed in the table of contents. These financial statements are the responsibility of the University of Louisiana System s management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of University Facilities, Inc., a Louisiana nonprofit corporation considered a blended component unit, which represents 1.92 and less than one percent, respectively, of the total assets and revenues of the University of Louisiana System. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for University Facilities, Inc., is based solely on the report of other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the basic financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall basic financial statement presentation. We believe that our audit and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the University of Louisiana System as of June 30, 2002, and the changes in its financial position and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1-A to the financial statements, the University of Louisiana System implemented the provisions of Governmental Accounting Standards Board Statement Number 35, Basic Financial Statements-and Management s Discussion and Analysis-for Public Colleges and Universities, for fiscal year ended June 30, This results in a change in the format and content of the basic financial statements 2

6 LEGISLATIVE AUDITOR UNIVERSITY OF LOUISIANA SYSTEM Audit Report, June 30, 2002 In accordance with Government Auditing Standards, we have also issued our report dated December 19, 2002, on our consideration of the University of Louisiana System s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. Management s discussion and analysis is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. However, this information is not included in the financial statements for fiscal year ended June 30, Respectfully submitted, DLC:WJR:AJR:dl Daniel G. Kyle, CPA, CFE Legislative Auditor [ULS02] 3

7 Statement A UNIVERSITY OF LOUISIANA SYSTEM Statement of Net Assets June 30, 2002 ASSETS Current assets: Cash and cash equivalents $89,771,401 Investments 7,501,957 Receivables (net) 32,646,491 Due from state treasury 1,624,146 Due from private foundations 702,652 Inventories 6,737,020 Prepayments 10,952,608 Notes receivable (net) 5,638,267 Other current assets 2,190,709 Total current assets 157,765,251 Noncurrent assets: Restricted cash and cash equivalents 42,489,263 Investments 89,287,446 Receivables (net) 607,368 Notes receivable (net) 23,093,307 Capital assets (net) 568,362,653 Assets under capital lease 1,001,831 Other noncurrent assets 1,134,403 Total noncurrent assets 725,976,271 Total assets 883,741,522 LIABILITIES Current liabilities: Accounts payable and accruals 23,592,621 Due to state treasury 120,298 Deferred revenues 16,908,228 Amounts held in custody for others 2,685,333 Compensated absences payable 2,154,336 Capital lease obligations 181,526 Notes payable 769,702 Bonds payable 4,199,365 Other current payables 3,232,584 Total current liabilities 53,843,993 (Continued) The accompanying notes are an integral part of this statement. 4

8 Statement A UNIVERSITY OF LOUISIANA SYSTEM Statement of Net Assets, 2002 LIABILITIES (CONT.) Noncurrent liabilities: Compensated absences payable $23,879,708 Capital lease obligations 1,145,436 Notes payable 4,886,509 Bonds payable 49,579,917 Other noncurrent liabilities 145,002 Total noncurrent liabilities 79,636,572 Total liabilities 133,480,565 NET ASSETS Invested in capital assets, net of related debt 508,602,162 Restricted for: Nonexpendable 103,390,453 Expendable 116,829,133 Unrestricted 21,439,209 Total net assets $750,260,957 (Concluded) The accompanying notes are an integral part of this statement. 5

9 Statement B UNIVERSITY OF LOUISIANA SYSTEM Statement of Revenues, Expenses, and Changes in Net Assets For the Fiscal Year Ended June 30, 2002 OPERATING REVENUES Student tuition and fees (net of scholarship allowances of $56,385,185) $160,405,439 Federal appropriations 121,071 Federal grants and contracts 115,230,657 State and local grants and contracts 22,531,923 Nongovernmental grants and contracts 18,926,036 Sales and services of educational departments 3,959,755 Auxiliary enterprise revenues (net of scholarship allowances of $5,260,442; $71,321,110 of revenues are used as security for revenue bonds) 80,298,018 Other operating revenues 11,124,825 Total operating revenues 412,597,724 OPERATING EXPENSES Educational and general: Instruction 231,678,384 Research 57,615,843 Public service 14,485,843 Academic services 52,930,722 Student services 40,332,591 Institutional support 63,884,125 Operations and maintenance of plant 52,379,697 Depreciation 36,257,320 Scholarships and fellowships 51,129,513 Auxiliary enterprises 99,732,557 Other operating expenses 4,598,630 Total operating expenses 705,025,225 Operating loss (292,427,501) NONOPERATING REVENUES (Expenses) State appropriations 278,506,299 Gifts 6,390,327 Investment income (net of investment expense of $311,470) 5,965,788 Interest expense (2,639,550) Other nonoperating revenues 1,289,421 Net nonoperating revenues 289,512,285 Income (loss) before other revenues and expenses (2,915,216) (Continued) The accompanying notes are an integral part of this statement. 6

10 Statement B UNIVERSITY OF LOUISIANA SYSTEM Statement of Revenues, Expenses, and Changes in Net Assets, 2002 Capital appropriations $22,414,689 Capital grants and gifts 11,901,754 Additions to permanent endowment 14,472,724 Other (1,183,395) Increase in net assets 44,690,556 NET ASSETS Net assets - beginning of year (restated) 705,570,401 Net assets - end of year $750,260,957 (Concluded) The accompanying notes are an integral part of this statement. 7

11 Statement C UNIVERSITY OF LOUISIANA SYSTEM Statement of Cash Flows For the Fiscal Year Ended June 30, 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Tuition and fees $166,370,015 Grants and contracts 157,964,223 Payments to suppliers (141,796,809) Payments for utilities (22,021,026) Payments to employees (345,956,956) Payments for benefits (56,252,655) Payments for scholarships and fellowships (64,327,615) Interest earned on loans to students 616,282 Loans issued to students and employees (4,670,430) Collection of loans to students and employees 3,721,374 Auxiliary enterprise charges 59,477,073 Sales and services of educational departments 3,905,722 Other receipts (payments) (5,966,527) Net cash used by operating activities (248,937,329) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: State appropriations 276,967,255 Gifts and grants for other than capital purposes 5,213,549 Private gifts for endowment purposes 14,472,724 TOPS receipts 38,192,500 TOPS disbursements (38,211,222) Federal Family Education Loan program receipts 147,780,129 Federal Family Education Loan program disbursements (147,765,469) Student organization agency transactions 284,625 Other receipts (disbursements) 2,473,248 Net cash provided by noncapital financing sources 299,407,339 CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES: Capital appropriations received 22,414,689 Capital grants and gifts received 11,901,755 Proceeds from sale of capital assets 76,345 Purchases of capital assets (47,824,956) Principal paid on capital debt and leases (4,957,743) Interest paid on capital debt and leases (2,639,548) Deposit with trustees (466,148) Other sources 316,970 Net cash used by capital financing activities (21,178,636) (Continued) The accompanying notes are an integral part of the financial statements. 8

12 Statement C UNIVERSITY OF LOUISIANA SYSTEM Statement of Cash Flows, 2002 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales and maturities of investments $75,948,393 Interest received on investments 5,989,524 Purchase of investments (91,727,354) Net cash provided for investing activities (9,789,437) Net increase in cash and cash equivalents 19,501,937 Cash at the beginning of the year 112,758,727 Cash at end of the year $132,260,664 RECONCILIATION OF NET OPERATING REVENUES (Expenses) TO NET CASH PROVIDED (Used) BY OPERATING ACTIVITIES: Operating loss ($292,427,501) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation expense 36,257,320 Correction of errors 230,037 Changes in assets and liabilities: Increase in accounts receivable, net (2,469,990) Increase in notes receivable, net (99,159) Decrease in inventories 531,645 Increase in prepaid expenses (181,442) Decrease in other assets 4,975,761 Increase in accounts payable 3,622,473 Increase in deferred revenue 1,874,519 Decrease in amounts held in custody for others (3,150,259) Decrease in compensated absences (1,102,512) Increase in loans to students and employees 149,825 Increase in other liabilities 2,851,954 Net cash used by operating activities ($248,937,329) (Concluded) The accompanying notes are an integral part of the financial statements. 9

13 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements As of and for the Year Ended June 30, 2002 INTRODUCTION The University of Louisiana System is a publicly supported institution of higher education. The system is a component unit of the State of Louisiana, within the executive branch of government. The universities that comprise the system are under the management and supervision of the University of Louisiana System Board of Supervisors; however, the annual budget of the system and changes to the degree programs, departments of instruction, et cetera, of the individual institutions require the approval of the Board of Regents for Higher Education. The board of supervisors is comprised of 15 members appointed for staggered sixyear terms by the governor, with the consent of the Senate, and one student member appointed for a one-year term by a council composed of the student body presidents of the universities within the system. As state universities, operations of the universities instructional programs are funded through annual lapsing appropriations made by the Louisiana Legislature. The chief executive officer of the system is the president. The system is comprised of eight universities in eight cities which includes Grambling State University at Grambling, Louisiana Tech University at Ruston, McNeese State University at Lake Charles, Nicholls State University at Thibodaux, Northwestern State University at Natchitoches, Southeastern Louisiana University at Hammond, University of Louisiana at Lafayette, and University of Louisiana at Monroe. The universities had approximately 73,693 students enrolled during the 2002 spring semester and employ approximately 9,088 employees. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PRESENTATION The Governmental Accounting Standards Board (GASB) promulgates accounting principles generally accepted in the United States of America and reporting standards for state and local governments. These principles are found in the Codification of Governmental Accounting and Financial Reporting Standards, published by the GASB. The accompanying financial statements have been prepared in accordance with such principles. In June 1999, the GASB issued Statement No. 34, Basic Financial Statements-and Management s Discussion and Analysis-for State and Local Governments. This was followed in November 1999 by GASB Statement No. 35, Basic Financial Statements-and Management s Discussion and Analysis-for Public Colleges and Universities. As a component unit of the State of Louisiana, the University of Louisiana System is required to adopt GASB 34 and 35, as amended by GASB 36, 37, and 38. The financial statement presentation required by GASB 34 and 35 replaces the fund-group perspective previously required and provides a comprehensive, entity-wide perspective of the system s assets, liabilities, net assets, revenues, expenses, changes in net assets, and cash flows. 10

14 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) B. REPORTING ENTITY GASB Codification Section 2100 has defined the governmental reporting entity to be the State of Louisiana. The University of Louisiana System is considered a component unit of the State of Louisiana because the state exercises oversight responsibility and has accountability for fiscal matters as follows: (1) the majority of the members of the governing boards are appointed by the governor; (2) the state has control and exercises authority over budget matters; (3) state appropriations provide the largest percentage of total revenues; (4) the state issues bonds to finance certain construction; and (5) the universities within the system primarily serve state residents. The accompanying financial statements present information only as to the transactions of the programs of the University of Louisiana System as authorized by Louisiana statutes and administrative regulations. A Louisiana nonprofit corporation, University Facilities, Inc., (UFI), is considered a component unit of Southeastern Louisiana University, one of the universities that comprises the system, and is included in the financial statements. The component unit is included in the reporting entity because UFI is fiscally dependent on Southeastern Louisiana University. The purpose of this organization is to promote, assist, and benefit the mission of Southeastern Louisiana University through the acquisition, construction, development, management, leasing or otherwise assisting in the acquisition, construction, development, management or leasing of student housing or other facilities on behalf of Southeastern Louisiana University. Although UFI is legally separate, it is reported as a part of Southeastern Louisiana University because the majority of its revenue comes from the leasing of facilities to the university. Annually, the State of Louisiana issues basic financial statements, which include the activity contained in the accompanying financial statements. The financial statements are audited by the Louisiana Legislative Auditor. C. BASIS OF ACCOUNTING For financial reporting purposes, the system is considered a special-purpose government engaged only in business-type activities. All activities of the system are accounted for within a single proprietary (enterprise) fund. Accordingly, the University of Louisiana System s financial statements have been presented using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All significant intra-agency transactions have been eliminated. The system has the option to apply all Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989, unless FASB conflicts with GASB. The system has elected to not apply FASB pronouncements issued after the applicable date. 11

15 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) D. BUDGET PRACTICES The State of Louisiana s appropriation is an annual lapsing appropriation established by legislative action and by Title 39 of the Louisiana Revised Statutes. The statute requires that the budget be approved by the Board of Regents for Higher Education and certain legislative and executive branches of state government. Budget revisions are granted by the Joint Legislative Committee on the Budget. In compliance with these legal restrictions, budgets are adopted on the accrual basis of accounting, except that (1) depreciation is not recognized; (2) leave costs are treated as budgeted expenditures to the extent that they are expected to be paid; (3) summer school tuition and fees and summer school faculty salaries and related benefits for June are not prorated but are recognized in the succeeding year; and (4) inventories are recorded as expenditures at the time of purchase. E. CASH AND CASH EQUIVALENTS AND INVESTMENTS Cash includes cash on hand, demand deposits, and interest-bearing demand deposits. Cash equivalents include certificates of deposit and all highly liquid investments with a maturity of three months or less when purchased. Under state law, the system may deposit funds within a fiscal agent bank organized under the laws of the State of Louisiana, the laws of any other state in the Union, or the laws of the United States. Furthermore, the system may invest in certificates of deposit of state banks organized under Louisiana law and national banks having their principal offices in Louisiana. Cash equivalents reported on the Statement of Net Assets include all negotiable certificates of deposit, regardless of maturity. These terms are also used in the preparation of the Statement of Cash Flows. In accordance with Louisiana Revised Statute (R. S.) 49:327, the system is authorized to invest funds in direct United States Treasury obligations, United States government agency obligations, and money market funds. In addition, funds derived from gifts and grants, endowments, and reserve funds established in accordance with bond issues may be invested as stipulated by the conditions of the gift instrument or bond indenture. In addition, investments are maintained in investment accounts in external foundations as authorized by policies and procedures established by the Board of Regents and are reported at fair value in accordance with GASB Statement 31. Changes in the carrying value of investments, resulting from unrealized gains and losses, are reported as a component of investment income in the Statement of Revenues, Expenses, and Changes in Net Assets. For purposes of the Statement of Cash Flows, the system considers all highly liquid investments (including restricted assets) with a maturity of three months or less when purchased to be cash equivalents. 12

16 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) F. INVENTORIES Inventories are valued at the lower of cost or market. The system uses periodic and perpetual inventory systems and values its various other inventories using the first-in, first-out and weighted-average valuation methods. Adjustments are made at fiscal year end to account for inventories using the consumption method. G. NONCURRENT CASH AND INVESTMENTS Cash that is externally restricted to make debt service payments, to maintain sinking or reserve funds, or to purchase or construct capital or other noncurrent assets is reported as noncurrent cash. Noncurrent investments consist of endowments and similar type accounts for which donors or other outside sources have stipulated that, as a condition of the gift instrument, the principal is to be maintained inviolate and in perpetuity. H. CAPITAL ASSETS Capital assets are reported at cost at the date of acquisition or their estimated fair value at the date of donation. For movable property, the system s capitalization policy includes all items with a unit cost of $5,000 or more and an estimated useful life greater than one year. Renovations to buildings, infrastructure, and land improvements that significantly increase the value or extend the useful life of the structure are capitalized if they exceed $100,000. Any infrastructure exceeding $3 million must be capitalized. Routine repairs and maintenance are charged to operating expense in the year in which the expense is incurred. Depreciation is computed using the straight-line method over the estimated useful life of the assets, generally 40 years for buildings and infrastructure, 20 years for depreciable land improvements, and 3 to 10 years for most movable property. I. DEFERRED REVENUES Deferred revenues include amounts received for tuition and fees and certain auxiliary activities prior to the end of the fiscal year but are related to the subsequent accounting period. Deferred revenues also include amounts received from grant and contract sponsors that have not yet been earned. J. COMPENSATED ABSENCES Employees accrue and accumulate annual and sick leave in accordance with state law and administrative regulations. The leave is accumulated without limitation; however, nine-month faculty members do not accrue annual leave but are granted faculty leave during holiday periods when students are not in classes. Employees who are considered having non-exempt status according to the guidelines contained in the Fair Labor Standards Act may be paid for compensatory leave earned. 13

17 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) Upon separation of employment, both classified and non-classified personnel or their heirs are compensated for accumulated annual leave not to exceed 300 hours. In addition, academic and non-classified personnel or their heirs are compensated for accumulated sick leave not to exceed 25 days upon retirement or death. Act 343 of 1993 allows members of the Louisiana State Employees Retirement System, upon application for retirement, the option of receiving an actuarially determined lump sum payment for annual and sick leave which would otherwise have been used to compute years of service for retirement. Unused annual leave in excess of 300 hours plus unused sick leave are used to compute retirement benefits. Upon termination or transfer, a classified employee will be paid for any one and one-half hour compensatory leave earned and may or may not be paid for any straight hour-forhour compensatory leave earned. Compensation paid will be based on the classified employee s hourly rate of pay at termination or transfer. K. NONCURRENT LIABILITIES Noncurrent liabilities include (1) principal amounts of revenue bonds payable, notes payable, and capital lease obligations with contractual maturities greater than one year and (2) estimated amounts for accrued compensated absences and other liabilities that will not be paid within the next fiscal year. L. POSTEMPLOYMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The system provides certain continuing health care and life insurance benefits for its retired employees. The system recognizes the cost of providing these retiree benefits as an expense when paid during the year. M. NET ASSETS Net assets comprise the various net earnings from operation, nonoperating revenues, expenses, and contributions of capital. Net assets are classified in the following components: (a) (b) Invested in capital assets, net of related debt - consists of the system s total investment in capital assets, net of accumulated depreciation, and reduced by the outstanding balances of any bonds or other borrowings attributable to the acquisition, construction, or improvement of those assets. Restricted net assets - nonexpendable - consists of endowments and similar type funds for which donors or other outside sources have stipulated that, as a condition of the gift instrument, the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of 14

18 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) producing present and future income, which may either be expended or added to principal. (c) (d) Restricted net assets - expendable - consists of resources that the system is legally or contractually obligated to spend in accordance with restrictions imposed by external third parties. Unrestricted net assets - consists of resources derived from student tuition and fees, state appropriations, and sales and services of educational departments and auxiliary enterprises. These resources are used for transactions relating to the educational and general operations of the system and may be used at the discretion of the governing board to meet current expenses and for any purpose. When an expense is incurred that can be paid using either restricted or unrestricted resources, the system s policy is to first apply the expense toward unrestricted resources, then toward restricted resources. N. CLASSIFICATION OF REVENUES The system has classified its revenues as either operating or nonoperating according to the following criteria: (a) (b) Operating revenue includes activities that have the characteristics of exchange transactions, such as (1) student tuition and fees, net of scholarship discounts and allowances; (2) sales and services of auxiliary enterprises, net of scholarship discounts and allowances; and (3) most federal, state, and local grants and contracts and federal appropriations. Nonoperating revenue includes activities that have the characteristics of nonexchange transactions, such as gifts and contributions, state appropriations, and investment income. O. SCHOLARSHIP DISCOUNTS AND ALLOWANCES Student tuition and fee revenues and certain other revenues from students are reported net of scholarship discounts and allowances in the Statement of Revenues, Expenses, and Changes in Net Assets. Scholarship discounts and allowances are the difference between the stated charge for services (tuition and fees) provided by the system and the amount that is paid by students and/or third parties making payments on the students behalf. 15

19 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) P. ACCOUNTING CHANGES As a result of the adoption of GASB Statement No. 35, the system was also required to make certain changes in accounting principles, specifically, (1) the adoption of depreciation on capital assets; (2) changes in capitalization thresholds for capital assets; (3) the allocation of certain summer semester revenues and expenses between fiscal years rather than recognizing all of the revenues and expenses in the fiscal year in which the semester was predominantly conducted; (4) change in reporting of endowments held by external foundations to 100% of the endowment balance rather than reporting only the portion that consists of state funds (40%); (5) change in reporting of self-assessed student fees as restricted funds rather than as agency funds; and (6) reporting of student tuition and fees net of discount and allowances. Net assets at July 1, 2001, were reduced by $610,375,384 for the cumulative effect of these changes on years prior to fiscal year CASH AND CASH EQUIVALENTS At June 30, 2002, the system has cash and cash equivalents (book balances) of $128,770,463 as follows: Petty cash $381,274 Demand deposits 80,974,234 Certificates of deposit 44,609,491 Cash with fiscal agents 2,737,683 Cash with state treasurer 67,781 Total $128,770,463 These cash and cash equivalents are reported as follows on the Statement of Net Assets: Current assets $89,771,401 Noncurrent assets 38,999,062 Total $128,770,463 Under state law, these deposits (or the resulting bank balances) must be secured by federal deposit insurance or similar federal security or the pledge of securities owned by the fiscal agent bank. The fair market value of the pledged securities plus the federal deposit insurance must at all times equal the amount on deposit with the fiscal agent. These securities are held in the name of the system or the pledging bank by a holding or custodial bank that is mutually acceptable to both parties. At June 30, 2002, the system has $146,662,464 in deposits (collected bank balances) that were secured from risk in the following manner: 16

20 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) Certificates Cash of Deposit Other Total Bank balances (collected balances): Insured or collateralized with securities held by the entity or its agent in the entity's name - GASB Category 1 $33,356,929 $13,888,636 $47,245,565 Collateralized with securities held by the pledging institution's trust department or agent in the entity's name - GASB Category 2 62,757,515 29,153,184 91,910,699 Uncollateralized, including any securities held for the entity but not in the entity's name - GASB Category 3 3,200,846 1,567,671 $2,737,683 7,506,200 Total bank balances $99,315,290 $44,609,491 $2,737,683 $146,662,464 Included in cash and cash equivalents is cash available to the system within the state treasury totaling $67,781. Securities pledged for cash in the state treasury are not included in the previously mentioned computations as these amounts are secured by fiscal agent banks established by the state treasury independent of the system. 3. INVESTMENTS At June 30, 2002, the system has investments totaling $100,279,604, which includes $3,490,201 of short-term investments reported on the Statement of Net Assets as cash and cash equivalents. A summary of the system s investments follows: Reported Fair Amount Value Category 1: U.S. Government securities $19,162,365 $19,162,365 Common and preferred stock 1,314,439 1,314,439 Corporate bonds 1,160,176 1,160,176 Other: Cash and money markets 196, ,250 Mortgage backed securities 76,866 76,866 Municipal bonds 2,880 2,880 Diamonds 8,239 8,239 Total categorized investments 21,921,215 21,921,215 Investments not categorized: Investments held by private foundation in external investment pool 78,057,519 78,057,519 Other - corporate bonds 300, ,870 Total investments $100,279,604 $100,279,604 17

21 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) These investments are reported on the Statement of Net Assets as follows: Current assets - investments $7,501,957 Noncurrent assets: Restricted cash and cash equivalents 3,490,201 Investments 89,287,446 Total $100,279,604 The categorized investments are considered to be Category 1 in applying the credit risk of GASB Codification Section I Investments held by private foundations in an external investment pool are managed in accordance with the terms outlined in management agreements executed between the system universities and their respective foundations. The system universities are voluntary participants. These investments, totaling $78,057,519, were not categorized. 4. RECEIVABLES Receivables are shown on the Statement of Net Assets net of an allowance for doubtful accounts at June 30, These receivables are composed of the following: Allowance for Net Accounts Doubtful Accounts Noncurrent Type Receivable Accounts Receivable Portion Student tuition and fees $12,300,422 ($6,212,386) $6,088,036 $225,277 Auxiliary enterprises 3,254,306 (404,807) 2,849, ,596 Contributions and gifts 448, ,365 Federal, state, and private grants and contracts 21,921,679 (244,272) 21,677, ,027 Other 2,798,408 (607,856) 2,190,552 16,468 Total $40,723,180 ($7,469,321) $33,253,859 $607, DUE FROM PRIVATE FOUNDATIONS Due from private foundations in the amount of $702,652 consists of contributions from outside sources in support of the athletic program which have not been remitted at June 30, NOTES RECEIVABLE Notes receivables are comprised of loans to students under the Federal Perkins Loan, Health Profession Loan, Nursing Student Loan, and short-term student loan programs. The universities administer the Perkins, Health Profession, and Nursing Student Loan programs. Restricted federal and state contributions and interest on the loans provide the funding for the Perkins and Health Profession Loan programs. The Perkins program provides for the cancellation of a loan at rates of 10% to 30% per year up to a maximum of 100% if the 18

22 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) participant complies with certain provisions. If loans are determined to be uncollectible and not eligible for reimbursement by the federal government, the loans can be written off and assigned to the U.S. Department of Education. Health Profession (Pharmacy) loans are awarded to students enrolled in the pharmacy curriculum. There are no qualifying cancellation entitlements and loans determined to be uncollectable may be requested for write-off approval through the U.S. Department of Health and Human Services. Loans are no longer issued under the Nursing Student Loan program, but collections are still made on outstanding loans. Short-term student loans are funded from self-assessed student fees and are available to qualified students for limited personal and emergency financial needs. The sorority promissory notes represent promissory notes of sororities to construct buildings on certain campuses. Notes receivable are shown on the Statement of Net Assets net of an allowance for doubtful accounts at June 30, These receivables are composed of the following: Allowance for Notes Notes Doubtful Receivable Noncurrent Type Receivable Accounts (Net) Portion Federal Perkins Loans $30,653,517 ($3,692,406) $26,961,111 $21,901,696 Health Profession (Pharmacy) Loans 1,256,257 (33,793) 1,222,464 1,002,973 Nursing Student Loans 447,497 (221,414) 226, ,638 Short-term student loans 103,550 (1,884) 101,666 Sorority promissory notes 220, ,250 Total $32,681,071 ($3,949,497) $28,731,574 $23,093, CHANGES IN CAPITAL ASSETS A summary of changes in capital assets for the fiscal year ended June 30, 2002, follows: 19

23 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) Adjusted Balance Prior Balance July 1, Period July 1, 2001 Adjustment 2001 Capital assets not being depreciated: Land $31,595,225 ($2,905,469) $28,689,756 Land improvements 958, ,131 Capitalized collections 234, ,502 Livestock 90,235 90,235 Construction in progress 29,612,650 (657,882) 28,954,768 Total capital assets not being depreciated $62,256,241 ($3,328,849) $58,927,392 Other capital assets: Infrastructure $8,997,080 ($4,354,011) $4,643,069 Less accumulated depreciation (1,973,304) (1,973,304) Total infrastructure 8,997,080 (6,327,315) 2,669,765 Land improvements 44,337,536 (11,849,245) 32,488,291 Less accumulated depreciation (11,784,524) (11,784,524) Total land improvements 44,337,536 (23,633,769) 20,703,767 Buildings 788,897,113 28,872, ,770,048 Less accumulated depreciation (398,216,565) (398,216,565) Total buildings 788,897,113 (369,343,630) 419,553,483 Equipment 203,158,976 (94,268,547) 108,890,429 Less accumulated depreciation (70,507,750) (70,507,750) Total equipment 203,158,976 (164,776,297) 38,382,679 Library books 115,018,980 (12,803,845) 102,215,135 Less accumulated depreciation (89,245,755) (89,245,755) Total library books 115,018,980 (102,049,600) 12,969,380 Total other capital assets $1,160,409,685 ($666,130,611) $494,279,074 Capital asset summary: Capital assets not being depreciated $62,256,241 ($3,328,849) $58,927,392 Other capital assets, at cost 1,160,409,685 (94,402,713) 1,066,006,972 Total cost of capital assets 1,222,665,926 (97,731,562) 1,124,934,364 Less accumulated depreciation NONE (571,727,898) (571,727,898) Capital assets, net $1,222,665,926 ($669,459,460) $553,206,466 20

24 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) Balance June 30, Additions Transfers Retirements 2002 $413,974 ($179,366) $28,924, , ,502 35,125 (9,205) 116,155 20,852,456 ($5,606,539) (5,980,573) 38,220,112 $21,301,555 ($5,606,539) ($6,169,144) $68,453,264 $4,643,069 ($116,077) (2,089,381) (116,077) NONE NONE 2,553, ,625 ($1,830,000) 31,032,916 (840,032) 1,830,000 (10,794,556) (465,407) NONE NONE 20,238,360 14,170,345 $11,376,520 (3,836,166) 839,480,747 (19,720,146) 3,836,166 (414,100,545) (5,549,801) 11,376,520 NONE 425,380,202 11,122,266 42,305 (5,882,685) 114,172,315 (8,204,809) 2,942,557 (75,770,002) 2,917,457 42,305 (2,940,128) 38,402,313 6,307,046 (367,310) 108,154,871 (5,857,952) 283,662 (94,820,045) 449,094 NONE (83,648) 13,334,826 ($2,764,734) $11,418,825 ($3,023,776) $499,909,389 $21,301,555 ($5,606,539) ($6,169,144) $68,453,264 31,974,282 11,418,825 (11,916,161) 1,097,483,918 53,275,837 5,812,286 (18,085,305) 1,165,937,182 (34,739,016) NONE 8,892,385 (597,574,529) $18,536,821 $5,812,286 ($9,192,920) $568,362,653 21

25 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) In accordance with R.S. 39: , the system has complied with the Louisiana movable property statutes. The system does not capitalize collections. These collections include the following: the Louisiana Room, the Rare Book Room, and the Southwestern Archives and Manuscripts Collection at the University of Louisiana at Lafayette; the Thomas Gilhula War Collection, the Friends of the Library Louisiana Collection, the James A. Noe Collection, the Otto E. Pressman Collection, an African Artifacts Collection, a Geosciences collection, an Herbarium Collection, and artifacts in the Natural History Museum at the University of Louisiana at Monroe; and various works of art and artifacts at Southeastern Louisiana University. The system does not capitalize the collections because they meet the following requirements for exclusion from capitalization in accordance with the requirements of GASB 34; i.e., they are (1) held for public exhibition, education, or research in furtherance of public service rather than financial gain; (2) protected, kept unencumbered, cared for, or preserved; and (3) subject to an organizational policy that requires the proceeds from sales of the items to be used to acquire other items for the collection. 8. PENSION PLANS Plan Description. Substantially all employees of the system are members of two statewide, public employee retirement systems. Academic employees are generally members of the Louisiana Teachers Retirement System (TRS), and classified/unclassified state employees are members of the Louisiana State Employees Retirement System (LASERS). Both plans are cost-sharing, multiple-employer defined benefit pension plans administered by separate boards of trustees. TRS and LASERS provide retirement, disability, and survivors benefits to plan members and beneficiaries. The State of Louisiana guarantees benefits granted by the retirement systems by provisions of the Louisiana Constitution of Generally, all full-time employees are eligible to participate in the retirement systems; employee benefits vest with TRS after five years of service and with LASERS after ten years of service. Article 10, Section 29 of the Louisiana Constitution of 1974 assigns the authority to establish and amend benefit provisions to the state legislature. The retirement systems issue annual publicly available financial reports that include financial statements and required supplementary information for the retirement systems. The reports may be obtained by writing to the Teachers Retirement System of Louisiana, Post Office Box 94123, Baton Rouge, Louisiana , or by calling (225) and/or the Louisiana State Employees Retirement System, Post Office Box 44213, Baton Rouge, Louisiana 70804, or by calling (225) Funding Policy. The contribution requirements of plan members and the system are established and may be amended by the state legislature. The legislature annually sets the required employer contribution rate equal to the actuarially required employer contribution as set forth in R.S. 11:102. Employees contribute 8% (TRS) and 7.5% (LASERS) of covered salaries. The state is required to contribute 13.1% of covered salaries to TRS and 13% of covered salaries to LASERS. The State of Louisiana, through the annual appropriation to the system, funds the system s employer contribution. The system s employer contributions to TRS for the years ended June 30, 2002, 2001, and 2000, were $14,581,132, $16,517,510, and $17,332,784, 22

26 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) respectively, and to LASERS for the years ended June 30, 2002, 2001, and 2000, were $9,928,679, $9,844,417, and $9,376,838, respectively, equal to the required contributions for each year. 9. OPTIONAL RETIREMENT SYSTEM R.S. 11:921 created an optional retirement plan for academic and administrative employees of public institutions of higher education. This program was designed to aid universities in recruiting employees who may not be expected to remain in the TRS for 10 or more years. The purpose of the optional retirement plan is to provide retirement and death benefits to the participants while affording the maximum portability of these benefits to the participants. The optional retirement plan is a defined contribution plan that provides for full and immediate vesting of all contributions remitted to the participating companies on behalf of the participants. Eligible employees make an irrevocable election to participate in the optional retirement plan rather than the TRS and purchase retirement and death benefits through contracts provided by designated companies. Total contributions by the system are 13.1% of the covered payroll. The participant's contribution (8%), less any monthly fee required to cover the cost of administration and maintenance of the optional retirement plan, is remitted to the designated company or companies. Upon receipt of the employer's contribution, the TRS pays over to the appropriate company or companies, on behalf of the participant, an amount equal to the employer's portion of the normal cost contribution as determined annually by the actuarial committee. The TRS retains the balance of the employer contribution for application to the unfunded accrued liability of the system. Benefits payable to participants are not the obligations of the State of Louisiana or the TRS. Such benefits and other rights of the optional retirement plan are the liability and responsibility solely of the designated company or companies to whom contributions have been made. Employer and employee contributions to the optional retirement plan totaled $13,656,343 and $8,411,833, respectively, for the year ended June 30, POSTEMPLOYMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The system provides certain continuing health care and life insurance benefits for its retired employees. Substantially all of the system's employees become eligible for these benefits if they reach normal retirement age while working for the system. These benefits for retirees and similar benefits for active employees are provided through a state-operated group insurance program and various insurance companies whose monthly premiums are paid jointly by the employee and the system. The system recognizes the cost of providing these benefits to retirees (system's portion of premiums) as an expense when paid during the year. These retiree benefits, for 3,074 retirees, totaled $12,255,974 for the year ended June 30,

27 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) 11. PAYABLES The following is a summary of payables and accrued expenses at June 30, 2002: Account Name Vendor payables $9,057,305 Accrued salaries and payroll deductions 13,997,149 Other 538,167 Total payables $23,592, DEFERRED REVENUES The following is a summary of deferred revenues at June 30, 2002: Account Name Prepaid tuition and fees $11,398,276 Prepaid athletic ticket sales 969,883 Grants and contracts 3,746,677 Other 793,392 Total deferred revenues $16,908, COMPENSATED ABSENCES At June 30, 2002, employees of the system have accumulated and vested annual, sick and compensatory leave of $16,108,467, $9,474,081, and $451,496, respectively. These balances were computed in accordance with GASB Codification Section C60. The leave payable is recorded in the accompanying financial statements. 14. LEASE OBLIGATIONS Operating Leases For the year ended June 30, 2002, the total rental expense for all operating leases is $550,678. The following is a schedule by years of future minimum annual rental payments required under operating leases: 24

28 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) Total Minimum Nature of Payments Operating Lease Thereafter Required Office space $448,025 $282,461 $273,485 $270,493 $270,493 $2,367,141 $3,912,098 Equipment 82,630 62, ,491 Land 4,212 3,576 3,576 3,576 3,576 28,608 47,124 Other 25,631 2,000 27,631 Total $560,498 $350,898 $277,061 $274,069 $274,069 $2,395,749 $4,132,344 Capital Leases The system records items under capital leases as assets and obligations in the accompanying financial statements. The system s capital leases at June 30, 2002, consist of various equipment leases. The following is a schedule of future minimum lease payments under these capital leases, together with the present value of minimum lease payments at June 30, 2002: Fiscal Year Ending June 30: 2003 $251, , , , ,148 Thereafter 646,253 Total minimum lease payments 1,653,927 Less - amount representing executory costs NONE Net minimum lease payments 1,653,927 Less - amount representing interest (326,965) Present value of net minimum lease payments $1,326,962 Lessor - Operating Lease The system s leasing operations consist primarily of the leasing of property for the purposes of providing food services to students; bookstore operations; and office space for postal services, banking services, and vending operations. 25

29 UNIVERSITY OF LOUISIANA SYSTEM Notes to the Financial Statements (Continued) The following schedule provides an analysis of the system s investment in property on operating leases and property held for lease by major classes as of June 30, 2002: Accumulated Carrying Cost Depreciation Amount Office space $7,665,485 $5,230,627 $2,434,858 Equipment 147,074 7, ,762 Total $7,812,559 $5,237,939 $2,574,620 The following is a schedule by years of minimum future rentals on noncancelable operating leases as of June 30, 2002: Total Minimum Nature of Future Operating Lease Thereafter Rentals Office space $884,561 $468,667 $402,000 $382,000 $221,583 $289,000 $2,647,811 Other 500, ,000 1,000,000 Total $1,384,561 $968,667 $402,000 $382,000 $221,583 $289,000 $3,647,811 Minimum future rentals do not include contingent rentals which may be received as stipulated in the lease contracts. These contingent rental payments occur as a result of sales volume or customer usage of services provided. Contingent rentals received from operating leases for the year ended June 30, 2002, were $538,437 for office space. 15. LONG-TERM LIABILITIES The following is a summary of bond and other long-term debt transactions of the system for the year ended June 30, 2002: Balance Balance Amounts July 1, June 30, Due Within 2001 Additions Reductions 2002 One Year Bonds, notes, and capital leases payable: Bonds payable $57,721,628 ($3,942,346) $53,779,282 $4,199,365 Notes payable 4,991,934 $1,165,931 (501,654) 5,656, ,702 Capital lease obligations 1,560,229 (233,267) 1,326, ,526 Subtotal 64,273,791 1,165,931 (4,677,267) 60,762,455 5,150,593 Other liabilities: Accrued compensated absences payable 27,138,581 7,478,498 (8,583,035) 26,034,044 2,154,336 Other 69,357 81,934 (6,289) 145,002 Subtotal 27,207,938 7,560,432 (8,589,324) 26,179,046 2,154,336 Total $91,481,729 $8,726,363 ($13,266,591) $86,941,501 $7,304,929 26