CALIFORNIA POLYTECHNIC STATE UNIVERSITY, SAN LUIS OBISPO. Financial Statements. June 30, (Unaudited)

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1 Financial Statements (Unaudited)

2 Financial Statements Basis of Accounting and the Independent Audit Under state law for fiscal year 2011/12, the University is not required to issue financial statements audited by an independent public accountant. Rather, the University s accounts are audited by an independent public accountant in combination with the other universities in the California State University System (the System). KPMG LLP, a firm of licensed certified public accountants, audited the combined financial statements of the System and issued an unqualified opinion for fiscal year 2011/12. The financial statements of the University presented here for fiscal year 2011/12 have not been audited. These financial statements and footnotes thereto have been prepared based on GAAP accounting information submitted to the California State University System s Office of the Chancellor for purposes of issuing the audited financial statements of the System. Management of the University believes that the financial statements and footnotes thereto for fiscal year 2011/12 represent a fair presentation of the University s financial position and operations based on GAAP.

3 Table of Contents Page Financial Statements (Unaudited): Statement of Net Assets 1 Statement of Revenues, Expenses, and Changes in Net Assets 2 Statement of Cash Flows 3 5

4 Statement of Net Assets (Unaudited) Discretely presented component units GASB FASB Auxiliary Auxiliary Assets University Organizations Organizations Total Current assets: Cash and cash equivalents $ 15,050 16,172, ,811 16,553,822 Short-term investments 87,389,859 83,972,945 5,521, ,884,183 Accounts receivable, net 4,255,768 8,087,485 1,272,047 13,615,300 Notes receivable, current portion 58,777 58,777 Pledges receivable, net 4,013,491 4,013,491 Prepaid expenses and other assets 2,060,576 6,902, ,518 9,152,313 Total current assets 93,721, ,207,878 7,348, ,277,886 Noncurrent assets: Restricted cash and cash equivalents 357, ,495 Accounts receivable, net 43,996,341 17,528 44,013,869 Notes receivable, net of current portion 416, ,234 Student loans receivable, net 5,498,276 5,498,276 Pledges receivable, net 9,963,369 9,963,369 Endowment investments 3,607, ,505, ,112,637 Other long-term investments 74,262,439 32,433, ,695,780 Capital assets, net 752,583,748 24,831,086 1,430, ,844,869 Other assets 920, ,542 Total noncurrent assets 879,947, ,445,093 1,430,035 1,117,823,071 Total assets 973,669, ,652,971 8,778,790 1,338,100,957 Liabilities and Net Assets Current liabilities: Accounts payable 20,628,935 5,629, ,778 26,412,901 Accrued salaries and benefits payable 15,900, , ,840 16,772,220 Accrued compensated absences current portion 6,163, , ,249 7,091,119 Deferred revenue 16,547,499 4,575, ,646 21,411,462 Long-term debt obligations current portion 4,605,000 60,000 92,906 4,757,906 Self-insurance claims liability - current portion 15,000 1,143,259 1,158,259 Other liabilities 3,747, , ,349 4,183,742 Total current liabilities 67,593,422 11,759,160 2,435,027 81,787,609 Noncurrent liabilities: Accrued compensated absences, net of current portion 5,699, ,312 5,870,825 Grants refundable 5,987,620 2,790,571 8,778,191 Long-term debt obligations, net of current portion 437,873,117 2,690,000 99, ,662,764 Depository accounts 1,062,666 5,914,679 6,977,345 Other postemployment benefits obligation 6,297,180 9,299,249 4,123,126 19,719,555 Other liabilities 26,613 8,941,453 8,968,066 Total noncurrent liabilities 456,946,709 29,807,264 4,222, ,976,746 Total liabilities 524,540,131 41,566,424 6,657, ,764,355 Net assets: Invested in capital assets, net of related debt 321,997,930 22,081,086 1,237, ,316,498 Restricted for: Nonexpendable endowments 3,607, ,756, ,363,561 Expendable: Scholarships and fellowships 4,484,651 13,715,112 18,199,763 Research 5,866,476 5,866,476 Loans 3,003, ,680 3,272,102 Capital projects 24,647,310 20,189,629 44,836,939 Debt service 303, ,722 Other 219,187 83,319,657 83,538,844 Unrestricted 91,169,426 65,585, , ,638,697 Total net assets $ 449,129, ,086,547 2,120, ,336,602 See accompanying notes to financial statements. 1

5 Statement of Revenues, Expenses, and Changes in Net Assets (Unaudited) Year ended Discretely presented component units GASB FASB Auxiliary Auxiliary University Organizations Organizations Eliminations Total Revenues: Operating revenues: Student tuition and fees (net of scholarship allowances of $32,639,350) $ 128,794,185 5,125, ,919,446 Grants and contracts, noncapital: Federal 13,576,229 32,375 13,608,604 State 72,041 2,574, ,629 2,777,971 Local 472, ,610 Nongovernmental 3,687, ,032 3,854,697 Sales and services of educational activities 2,049,610 2,049,610 Sales and services of auxiliary enterprises (net of scholarship allowances of $3,413,369) 42,906,714 45,337,083 88,243,797 Other operating revenues 18,208,152 13,218,048 7,179,005 (978,083) 37,627,122 Total operating revenues 192,030,702 78,865,936 12,635,302 (978,083) 282,553,857 Expenses: Operating expenses: Instruction 124,251,039 2,503, ,754,173 Research 1,729,466 17,094,287 18,823,753 Public service 1,043,646 9,021,881 10,065,527 Academic support 27,756,101 9,865,239 37,621,340 Student services 37,071,129 1,971,803 9,859,057 (2,061,148) 46,840,841 Institutional support 30,907,517 13,593,321 (1,015,381) 43,485,457 Operation and maintenance of plant 27,877, ,396 2,628,489 31,116,119 Student grants and scholarships 19,225,478 2,596,598 (2,158,947) 19,663,129 Auxiliary enterprise expenses 29,391,532 39,371,877 68,763,409 Depreciation and amortization 33,076,130 1,764, ,670 35,137,570 Total operating expenses 332,329,272 98,393,306 12,784,216 (5,235,476) 438,271,318 Operating income (loss) (140,298,570) (19,527,370) (148,914) 4,257,393 (155,717,461) Nonoperating revenues (expenses): State appropriations, noncapital 85,070,748 85,070,748 Federal financial aid grants, noncapital 16,360,407 16,360,407 State financial aid grants, noncapital 10,964,116 10,964,116 Nongovernmental and other financial aid grants, noncapital 5,324,724 5,324,724 Other federal nonoperating grants, noncapital 1,182,735 1,182,735 Gifts, noncapital 7,235,367 12,076,641 4,870 (4,256,193) 15,060,685 Investment income, net 584, ,760 81,959 1,261,762 Endowment income (loss), net 11,945 (207,816) (195,871) Interest expense (19,861,100) (142,627) (18,381) (20,022,108) Other nonoperating revenues (expenses), net 942,176 (1,652,738) (710,562) Net nonoperating revenues (expenses) 107,815,161 10,669,220 68,448 (4,256,193) 114,296,636 Income (loss) before other additions (32,483,409) (8,858,150) (80,466) 1,200 (41,420,825) Grants and gifts, capital 3,976,330 5,203,519 9,179,849 Additions to permanent endowments 17,006 1,907,774 (1,200) 1,923,580 Increase (decrease) in net assets (28,490,073) (1,746,857) (80,466) (30,317,396) Net assets: Net assets at beginning of year 477,619, ,328,849 71,228, ,176,372 Restatements 89,504,555 (69,026,929) 20,477,626 Net assets at beginning of year, as restated 477,619, ,833,404 2,201, ,653,998 Net assets at end of year $ 449,129, ,086,547 2,120, ,336,602 See accompanying notes to financial statements. 2

6 Statement of Cash Flows (Unaudited) Year ended University Cash flows from operating activities: Student tuition and fees $ 131,187,620 State grants and contracts 72,041 Payments to suppliers (68,475,401) Payments to employees (209,117,803) Payments to students (19,182,453) Collections of student loans 70,913 Sales and services of educational activities 2,049,610 Sales and services of auxiliary enterprises 41,354,948 Other receipts 19,723,302 Net cash used in operating activities (102,317,223) Cash flows from noncapital financing activities: State appropriations 85,070,748 Federal financial aid grants 16,292,497 State financial aid grants 10,964,116 Nongovernmental and other financial aid grants 5,324,724 Other federal nonoperating grants 1,182,735 Gifts and grants received for other than capital purposes 7,211,395 Federal loan program receipts 77,295,623 Federal loan program disbursements (76,939,291) Monies received on behalf of others 9,524,890 Monies disbursed on behalf of others (9,736,410) Other noncapital financing activities 2,769,712 Net cash provided by noncapital financing activities 128,960,739 Cash flows from capital and related financing activities: Proceeds from capital debt 26,481,812 State appropriations 36,184,233 Proceeds from sale of capital assets 48,548 Acquisition of capital assets (76,897,125) Transfers to escrow agent (26,481,812) Principal paid on capital debt and leases (2,730,000) Interest paid on capital debt and leases (21,145,410) Net cash used in capital and related financing activities (64,539,754) Cash flows from investing activities: Proceeds from sales and maturities of investments 537,283,115 Purchases of investments (500,555,675) Investment income received 1,168,648 Net cash provided by investing activities 37,896,088 Net increase in cash and cash equivalents (150) Cash and cash equivalents at beginning of year 15,200 Cash and cash equivalents at end of year $ 15,050 3 (Continued)

7 Statement of Cash Flows (Unaudited) Year ended University Reconciliation of operating loss to net cash used in operating activities: Operating loss $ (140,298,570) Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation and amortization 33,076,130 Change in assets and liabilities: Accounts receivable, net (785,554) Student loans receivable, net 116,414 Prepaid expenses and other assets (1,601,440) Accounts payable 1,616,473 Accrued salaries and benefits 863,497 Accrued compensated absences (155,508) Deferred revenue 2,849,478 Other postemployment benefits obligation 1,711,440 Other liabilities 290,417 Net cash used in operating activities $ (102,317,223) Supplemental schedule of noncash transactions: Contributed capital/donated assets $ 3,976,330 Change in accrued capital asset costs (purchased but unpaid at year-end) 1,974,178 Amortization of bond premium 741,847 Amortization of loss on refunding 101,743 See accompanying notes to financial statements. 4

8 (1) Organization California Polytechnic State University, San Luis Obispo (the University), an agency of the State of California (the State), was established as a campus of the California State University under the State of California Education Code to offer undergraduate and graduate instruction for professional and occupational goals emphasizing a broad liberal arts education. As one of 23 campuses in the California State University System (the System), the University is included in the financial statements of the System. Responsibility for the University is vested in the Trustees of the System (the Trustees) who, in turn, appoint the Chancellor, the chief executive officer of the System, and the University president, the chief executive officer of the University. The University provides instruction for baccalaureate and masters degrees and certificate programs and operates various auxiliary enterprises such as student dormitories, student unions, and parking facilities. In addition, the University administers a variety of financial aid programs, which are funded primarily through state and federal programs. (2) Summary of Significant Accounting Policies (a) Financial Reporting Entity In accordance with Governmental Accounting Standards Board (GASB) Statements No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, and No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities, the accompanying financial statements include the accounts of the University and the University s three recognized auxiliary organizations. These auxiliary organizations are legally separate entities that provide services primarily to the University s students and faculty. Separate financial statements are issued for each of the recognized auxiliary organizations and may be obtained from the University. The recognized auxiliary organizations are as follows: Cal Poly Corporation California Polytechnic State University Foundation Associated Students Incorporated of California Polytechnic State University at San Luis Obispo (including the accounts of the University Student Union) 5

9 Summary information for the discretely presented auxiliary organizations is as follows: Cal Poly Cal Poly Associated Foundation Corporation Students, Inc. Total Current assets $ 31,083,016 88,124,862 7,348, ,556,633 Capital assets, net 24,831,086 1,430,035 26,261,121 Other noncurrent assets 198,543,615 13,070, ,614,007 Total assets 229,626, ,026,340 8,778, ,431,761 Current liabilities 2,468,447 9,290,713 2,435,027 14,194,187 Noncurrent liabilities 7,861,588 21,945,676 4,222,773 34,030,037 Total liabilities 10,330,035 31,236,389 6,657,800 48,224,224 Invested in capital assets, net of related debt 22,081,086 1,237,482 23,318,568 Restricted 217,506,585 8,913, ,419,698 Unrestricted 1,790,011 63,795, ,508 66,469,271 Total net assets $ 219,296,596 94,789,951 2,120, ,207,537 Cal Poly Cal Poly Associated Year ended Foundation Corporation Students, Inc. Total Operating revenues: Student tuition and fees, net $ 5,125,261 5,125,261 Grants and contracts, noncapital 20,310, ,036 20,641,841 Sales and services of auxiliary enterprises, net 45,337,083 45,337,083 Other 13,218,048 7,179,005 20,397,053 Total operating revenues 78,865,936 12,635,302 91,501,238 6

10 Cal Poly Cal Poly Associated Year ended Foundation Corporation Students, Inc. Total Operating expenses: Instruction $ 1,401,711 1,101,423 2,503,134 Research 620,655 16,473,632 17,094,287 Public service 261,348 8,760,533 9,021,881 Academic support 7,852,710 2,012,529 9,865,239 Student services 174,478 1,797,325 9,859,057 11,830,860 Institutional support 6,585,122 7,008,199 13,593,321 Operation and mantenance of Plant 268, ,419 2,628,489 3,238,885 Student grants and scholarships 1,547,174 1,049,424 2,596,598 Auxiliary enterprise expenses 39,371,877 39,371,877 Depreciation and amortization 1,764, ,670 2,061,440 Total operating expenses 18,712,175 79,681,131 12,784, ,177,522 Operating income (loss) (18,712,175) (815,195) (148,914) (19,676,284) Net nonoperating revenues (expenses) 7,478,907 3,190,313 68,448 10,737,668 Income (loss) before other additions (11,233,268) 2,375,118 (80,466) (8,938,616) Grants and gifts, capital 1,782,384 3,421,135 5,203,519 Additions to permanent endowments 1,907,774 1,907,774 Increase (decrease) in net assets (7,543,110) 5,796,253 (80,466) (1,827,323) Beginning net assets, July 1, ,839,706 69,026,929 2,201, ,068,091 Restatements 19,966,769 19,966,769 Beginning net assets as restated, July 1, ,839,706 88,993,698 2,201, ,034,860 Ending net assets, $ 219,296,596 94,789,951 2,120, ,207,537 The auxiliary organizations are presented in the accompanying financial statements as discretely presented component units of the University due to the nature and significance of their relationship with the University. The relationships are such that exclusion of these organizations from the reporting entity would render the financial statements incomplete, primarily due to the activities that 7

11 the organizations carry out on behalf of the University, such as research, grant administration, foodservice, and academic support. The auxiliary organizations are discretely presented to allow the financial statement users to distinguish them from the University. The financial statements present only the statement of net assets, statement of revenues, expenses, and changes in net assets, and statement of cash flows of only that portion of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the State that is attributable to the transactions of the University and the financial statements do not purport to, and do not, present fairly the financial position of the State or the System as of and the changes in their financial position, or, where applicable, their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. (b) 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 U.S. generally accepted accounting principles, as prescribed by the GASB. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements have been met. The financial statements required by GASB Statement Nos. 34 and 35 include a statement of net assets, a statement of revenues, expenses, and changes in net assets, and a statement of cash flows. As a public institution, the University is considered a special-purpose government under the provisions of GASB Statement No. 35. The University records revenue in part from fees and other charges for services to external users and, accordingly, has chosen to present its financial statements using the reporting model for special-purpose governments engaged only in business-type activities. This model allows all financial information for the University to be reported in a single column in each of the financial statements, accompanied by aggregated financial information for the auxiliary organizations. In accordance with the business-type activities reporting model, the University prepares its statement of cash flows using the direct method. The Associated Students, Inc. (including the accounts of the University Union) auxiliary organization included in these financial statements applies the accounting and reporting standards promulgated by the Financial Accounting Standards Board (FASB), while the Cal Poly Corporation and the California Polytechnic State University Foundation apply the accounting and reporting standards promulgated by the GASB. (c) Election of Applicable FASB Statements The University follows standards of accounting and financial reporting issued by the FASB prior to November 30, 1989, unless those standards conflict with or contradict guidance of the GASB. The University also has the option of following subsequent private-sector guidance subject to the same limitation. The University has elected not to adopt the pronouncements issued by the FASB after November 30,

12 (d) (e) (f) Classification of Current and Noncurrent Assets (Other Than Investments) and Liabilities The University considers assets to be current that can reasonably be expected, as part of its normal business operations, to be converted to cash and be available for liquidation of current liabilities within 12 months of the statement of net assets date. Liabilities that reasonably can be expected, as part of normal University business operations, to be liquidated within 12 months of the statement of net assets date are considered to be current. All other assets and liabilities are considered to be noncurrent. For classification of current and noncurrent investments, refer to note 2(f). Cash Equivalents and Statement of Cash Flows The University considers highly liquid investments with an original maturity date of three months or less to be cash equivalents. The University considers amounts included in the California State University Investment Pool to be investments. The statement of cash flows does not include the cash flows of the discretely presented auxiliary organizations. Investments Investments are reflected at fair value using quoted market prices. Realized gains and losses are included in the accompanying statement of revenues, expenses, and changes in net assets as investment income, net. Unrealized gains and losses are recorded at the System level and are not included in the accompanying statement of revenues, expenses, and changes in net assets as a component of investment income, net. The University had $470,755 in unrealized gains for the year ended. Investments that are used for current operations are classified as short-term investments. Investments that are restricted for withdrawal or use for other than current operations, designated or restricted for the acquisition or construction of noncurrent assets, designated or restricted for the liquidation of the noncurrent portion of long-term debt, and restricted as to the liquidity of the investments are classified as other long-term investment. (g) (h) Accounts Receivable The university maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable based on type of receivables and expectations of repayment. In establishing the required allowance, management considers one or more of the following: type of receivable, state guidelines, historical losses adjusted to take into account current market conditions, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The University reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Capital Assets Capital assets are stated at cost or estimated historical cost if purchased, or if donated, at estimated fair value at date of donation. Capital assets, including infrastructure and intangible assets, with a value of $5,000 or more and with a useful life of one year or more are capitalized. Such costs include, where applicable, interest capitalized as part of the cost of constructed capital assets. Title to all University assets, whether purchased, constructed, or donated, is held by the the State. Although 9

13 title is not with the University for land and buildings, the University has exclusive use of these assets and is responsible for the maintenance of these assets and thus has recorded the cost of these assets on the accompanying financial statements. Capital assets, with the exception of land and land improvements, works of art and historical treasures, construction work in progress, and certain intangible assets, are depreciated or amortized on a straight-line basis over their estimated useful lives, which range from 3 to 45 years. Library books, unless considered rare collections, are capitalized and depreciated over a 10-year period. Periodicals and subscriptions are expensed as purchased. Works of art and historical treasures are valued at cost if purchased or the fair market value at the date of donation, if contributed. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend its life are expensed as incurred. Depreciation and amortization expense is shown separately in the statement of revenues, expenses, and changes in net assets rather than being allocated among other categories of operating expenses. Capitalized interest, net of related investment income at is as follows: Interest expense capitalized for construction projects $ 956,833 (i) (j) (k) (l) Deferred Revenue Deferred revenue consists primarily of fees collected in advance for summer and fall terms, and continuing education programs. Compensated Absences Compensated absences are recognized when the right to receive the compensation is earned by the employees. Vacation is accrued on a monthly basis. The University uses an employee s current pay rate as of July 1, 2012 to calculate the liability for accrued compensated absences. The University employees pay rates are based on length of service and job classifications. Grants Refundable The University periodically receives contributions from the federal government in support of its operation of the Federal Perkins program and Title IV loan programs. The federal government has the ability to terminate its support of these programs at any time and to request the University to return those contributions that it has made on a cumulative basis. Accordingly, the federal contributions received and retained by the University at year-end are considered to be liabilities of the University, and are reflected as such in the accompanying statement of net assets. Self-Insurance Claims Liability The claims liability for losses and loss adjustment expenses included in the accompanying financial statements reflects the estimated ultimate cost of settling claims relating to events that have occurred on or before June The liability includes the estimated amount that will be required for future payments of claims that have been reported and claims related to events that have occurred but have not been reported. The liability is also reduced by estimated amounts recoverable from the reinsurer that are related to the liabilities for unpaid claims and claim adjustment expenses. The 10

14 liability is estimated through an actuarial calculation using individual case basis valuations and statistical analyses. The liability is not discounted. Claims liabilities are recomputed periodically using a variety of actuarial and statistical techniques to produce current estimates that reflect recent settlements, claim frequency, and other economic and social factors. Adjustments to claim liabilities are charged or credited to expense in the periods in which they are made. In the estimate of the unpaid losses and loss adjustment expenses, CSURMA and CSURMA s consulting actuary have employed methods and assumptions they considered reasonable and appropriate given the information currently available. Given the inherent uncertainty in the nature of such estimates, future losses may deviate from those estimates. (m) Net Assets The University s net assets are classified into the following net asset categories: Invested in capital assets, net of related debt Capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction, or improvement of those assets. Restricted nonexpendable Net assets subject to externally imposed conditions that the University retains them in perpetuity. Net assets in this category consist of endowments held by the University or its related auxiliaries. Restricted expendable Net assets subject to externally imposed conditions that can be fulfilled by the actions of the University or by the passage of time. Unrestricted All other categories of net assets. In addition, unrestricted net assets may be designated for use by management of the University or have legislative or bond indenture requirements associated with their use. These requirements limit the area of operations for which expenditures of net assets may be made and require that unrestricted net assets be designated to support future operations in these areas. Campus housing programs are a primary example of operations that have unrestricted net assets with designated uses. (n) Classification of Revenues and Expenses The University considers operating revenues and expenses in the statement of revenues, expenses, and changes in net assets to be those revenues and expenses that result from exchange transactions or from other activities that are connected directly to the University s primary functions. Exchange transactions include charges for services rendered and the acquisition of goods and services. Moreover, the Office of the Chancellor administers and charges campuses for centralized expenses such as State pro rata and management of capital projects and pooled investments, which are included in operating expenses by function in the accompanying statement of revenues, expenses, and changes in net assets. Certain other transactions are reported as nonoperating revenues and expenses in accordance with GASB Statement No. 35. These nonoperating activities include the University s capital and 11

15 noncapital appropriations from the State, financial aid, net investment income, noncapital gifts, interest expense, and capital gifts and grants. The State appropriates funds to the System on an annual basis. The appropriations are, in turn, allocated among the campuses by the Office of the Chancellor. Appropriations are recognized as revenue when authorization is received, and are reported as either noncapital appropriations when used to support general operations or capital appropriations when used for capital projects. Student tuition and fee revenue, and sales and services of auxiliary enterprises, including revenues from student housing programs, are presented net of scholarships and fellowships applied to student accounts. Certain other scholarship amounts are paid directly to, or refunded to, the student and are reflected as expenses. (o) (p) (q) (r) Internal Services Activities Certain institutional internal service providers offer goods and services to University departments, as well as to their external customers. These include activities such as copy centers, postal services, and telecommunications. All internal services activities to University departments have been eliminated in the accompanying financial statements. These eliminations are recorded by removing the revenue and expense in the internal service sales and service units and, if significant, allocating any residual balances to those departments receiving the goods and services during the year. Income Taxes The System was established under the State of California Education Code as an agency of the State. As a campus of the System, the University is generally not subject to federal or state income taxes. However, the University remains subject to income taxes on any net income that is derived from a trade or business, regularly carried on and not in furtherance of the purpose for which it was granted exemption. No income tax provision has been recorded as the net income, if any, from any unrelated trade or business, in the opinion of management, is not material to the financial statements taken as a whole. Eliminations All significant nonexchange transactions between the University and the discretely presented auxiliary organizations have been eliminated from the total column and are separately presented in the eliminations column in the accompanying statement of revenues, expenses, and changes in net assets. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the accompanying financial statements. Actual results could differ from those estimates. 12

16 (3) Cash and Cash Equivalents and Investments The University s cash and cash equivalents and investments as of are classified in the accompanying statement of net assets as follows: Cash and cash equivalents $ 15,050 Short-term investments 87,389,859 Endowment investments 3,607,139 Other long-term investments 74,262,439 Total investments 165,259,437 Total cash, cash equivalents, and investments $ 165,274,487 (a) Cash and Cash Equivalents At, cash and cash equivalents consisted of petty cash. Custodial Credit Risk for Deposits Custodial credit risk for deposits is the risk that the University will not be able to recover deposits or will not be able to recover collateral securities that are in possession of an outside party. The California Government Code and Education Code do not contain legal or policy requirements that would limit the exposure to custodial credit risk for deposits, other than the provision that a financial institution must secure deposits made by state or local governmental units by pledging securities in an undivided collateral pool held by a depository regulated under state law. This risk is mitigated in that the University s deposits are maintained at financial institutions that are fully insured or collateralized as required by state law. (b) Investments At, the University s investment portfolio consists primarily of investments in the State of California Surplus Money Investment Fund (SMIF), State Agency Investment Fund (SAIF), and the CSU Consolidated Investment Pool, separate accounting is maintained as to the amounts allocable to the various CSU funds and programs. Investment Policy State law and regulations require that surplus monies of the University must be invested. The primary objective of the University s investment policy is to safeguard the principal. The secondary objective is to meet the liquidity needs of the University. The third objective is to return an acceptable yield. The University s investment policy authorizes funds held in local trust accounts under Education Code Sections and to be invested in any of the securities authorized by Government Code Section and Education Code Section 89724, subject to certain limitations. In general, the University s investment policy permits investments in obligations of the 13

17 federal and California state governments, certificates of deposit, high grade corporate and fixed income securities, and certain other investment instruments. Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. The University has formal duration guidelines to manage its interest rate risk. The duration guidelines include limits on the maximum maturity of any individual investment in the portfolio and average duration of investment portfolio. One of the ways that the University manages its exposure to interest rate risk is by purchasing a combination of short-term and long-term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or nearing maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations. The University identifies and manages the interest rate risk inherent in its portfolio by measuring the weighted average maturity of its portfolio. Weighted average maturity is based on the stated maturity date, assuming that the callable investments will not be called. The weighted average maturity of the University s investment portfolio for each investment type as of is presented in the table below. Credit Risk Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The following table presents the fair value, weighted average maturity, and actual rating by investment type of the University s allocated share of the CSU Consolidated Investment Pool, the SAIF, and the SMIF as of : Weighted average Rating as of year-end maturity Not Investment type Fair value (in years) AAA AA A rated Money market $ 360,691 $ 3, ,703 Commercial paper 765, ,060 Certificates of deposit 9,030, ,106,340 4,924,575 Repurchase agreements 801, ,504 U.S. agency securities 42,827, ,827,117 Corporate and fixed income securities 36,171, ,209,209 10,193,717 20,768,847 U.S. Treasury securities 21,782, ,782,422 Municipal securities 973, ,508 Mortgage-backed securities 403, ,504 State of California Surplus Money Investment Fund 7,480, ,480,644 State Agency Investment Fund 44,662, ,662,299 Total investments $ 165,259,437 $ 5,213,197 58,504,186 27,259,986 74,282,068 14

18 Concentration of Credit Risk The University s investment policy contains no limitations on the amount that can be invested in any one issuer beyond that stipulated by the California Government Code. As of, the following investments (other than U.S. Treasury securities, mutual funds, and external investment pools) represented 5% or more of the University s investment portfolio: Federal Home Loan Bank notes guaranteed by the federal government $14,304,927 (9.1%), Federal Home Loan Mortgage Corporation notes $12,297,675 (7.8%), and Federal National Mortgage Association notes guaranteed by the federal government $8,323,579 (5.3%). Risk and Uncertainties The University may invest in various types of investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statement of net assets. The University, through the CSU Consolidated Investment Pool, invests in securities with contractual cash flows, such as asset-backed securities and mortgage-backed securities. The value, liquidity, and related income of these securities are sensitive to changes in economic conditions, including real estate values, delinquencies or defaults, or both, and may be adversely affected by shifts in the market s perception of the issuers and changes in interest rates. For additional information regarding the investments of the individual discretely presented auxiliary organizations, refer to their separately issued financial statements. (4) Accounts Receivable Accounts receivable at consisted of the following: Current Noncurrent Total State appropriations $ 43,996,341 43,996,341 Auxiliary organizations 2,688,530 2,688,530 Student accounts 739, ,520 Government grants and contracts 227, ,680 Chancellor's Office - other 6,060 6,060 Other 869, ,286 4,531,076 43,996,341 48,527,417 Less allowance for doubtful accounts (275,308) (275,308) Total $ 4,255,768 43,996,341 48,252,109 15

19 (5) Student Loans Receivable Student loans receivable, net at consisted of the following: Perkins loans $ 4,863,223 Other loans 1,122,433 Total student loans receivable, gross 5,985,656 Less allowance for doubtful accounts (487,380) Total student loans receivable, net $ 5,498,276 (6) Capital Assets Capital assets activity for the year ended consisted of the following: Balance, Balance, June 30, 2011 Additions Retirements Transfers Nondepreciable/nonamortizable capital assets: Land and land improvements $ 5,245,634 5,245,634 Construction work in progress 81,034,762 72,366,661 (2,614,228) (69,259,812) 81,527,383 Total nondepreciable/ nonamortizable capital assets 86,280,396 72,366,661 (2,614,228) (69,259,812) 86,773,017 Depreciable/amortizable capital assets: Buildings and building improvements 737,026,853 3,043,619 69,259, ,330,284 Improvements, other than buildings 22,776,230 (26,101) 22,750,129 Infrastructure 82,640,195 1,485,803 84,125,998 Personal property: Equipment 68,249,927 6,184,371 (3,223,356) 71,210,942 Library books and materials 16,270, ,061 (428,495) 16,242,084 Intangible assets 7,727, ,951 8,051,107 Total depreciable/ amortizable capital assets 934,690,879 11,437,805 (3,677,952) 69,259,812 1,011,710,544 Total cost 1,020,971,275 83,804,466 (6,292,180) 1,098,483,561 16

20 Balance, Balance, June 30, 2011 Additions Retirements Transfers Less accumulated depreciation/ amortization: Buildings and building improvements $ (214,647,555) (24,169,106) 22,468 (238,794,193) Improvements, other than buildings (10,379,019) (1,585,235) (11,964,254) Infrastructure (22,398,962) (2,057,215) (24,456,177) Personal property: Equipment (46,896,934) (4,639,699) 2,735,527 (48,801,106) Library books and materials (14,809,817) (304,608) 428,495 (14,685,930) Intangible assets (6,877,886) (320,267) (7,198,153) Total accumulated depreciation/ amortization (316,010,173) (33,076,130) 3,186,490 (345,899,813) Net capital assets $ 704,961,102 50,728,336 (3,105,690) 752,583,748 For information regarding the capital assets of the individual discretely presented auxiliary organizations, refer to their separately issued financial statements. (7) Lease Obligations Operating leases consist primarily of leases for the use of real property. The University s operating leases have terms expiring in various years through fiscal year The leases can be canceled if the State does not provide adequate funding. Total operating lease expenditures for the year ended were $637,

21 Future minimum lease payments under operating leases having remaining terms in excess of one year are as follows: Operating leases Year ending June 30: 2013 $ 718, , , , , , , , , , , ,666 Total minimum lease payments 5,288,191 Lease financing is provided to the System for the construction of various System and campus facilities through its participation with the State in the State Public Works Board Lease Revenue Bond Program. Certain capital assets recorded by the University may have been financed under these arrangements. However, since the obligation for the repayment of this financing rests with the System and the proceeds of such financing are not readily identifiable with a campus or project, a substantial portion of such financing is not allocated to the individual campuses of the System. Unallocated Lease Revenue Bonds outstanding for the System as of totaled $867,675,253. (8) Long-Term Debt Obligations (a) General Obligation Bond Program The General Obligation Bond program of the State has provided capital outlay funds for the three segments of California Higher Education through voter-approved bonds. Each of the approved bond programs provides a pool of available funds, which is allocated on a project-by-project basis among the University of California, the System, and the Community Colleges. Financing provided to the University through State of California General Obligation Bonds is not allocated to the System by the State. This debt remains the obligation of the State and is funded by state tax revenues. Accordingly, such debt is not reflected in the accompanying financial statements. Total General Obligation Bond debt carried by the State related to System projects is approximately $2,745,965,000 as of. (b) Revenue Bond Programs The Revenue Bond Act of 1947 provides the Trustees with the ability to issue revenue bonds to fund specific self-supporting programs. The statute has enabled the Trustees to finance student housing, 18

22 student unions, parking facilities, health facilities, continuing education facilities, and auxiliary organization facilities. The housing program provides on-campus housing primarily for students. Housing is a self-supporting program deriving its revenues from fees collected for the use of the residence facilities and from interest income. Funds are used for current operating expenses, maintenance and repair, improvements to facilities, and interest and principal payments on outstanding bonds. Available balances after payment of all operating expenses and required charges remain available for future program expenses and capital needs. The student union program provides facilities and programs aimed at creating and enhancing learning experiences outside the classroom by promoting interaction among students, faculty, and staff. The student union program is self-supporting and derives its revenues primarily from student fees and from interest income. Funds are used for maintenance and repair, improvements to facilities, and interest and principal payments on outstanding bonds. After payment of all authorized charges, the balances of these funds are available and can be transferred to a campus auxiliary organization that would have a contract with the University to operate the facility. The operating entity may derive additional revenue from facility subrental, recreational and commercial activities, and interest income. The parking program provides parking facilities. The parking program is self-supporting and derives its revenues primarily from student fees and from interest income. Funds are used for construction, repair and maintenance, and principal and interest payments on outstanding bonds. Available balances after payment of all operating expenses and required charges remain available for future program expenses and capital needs. The health facilities program provides facilities on campus in which to provide health services to students. The health facilities program derives its revenues primarily from student fees and from interest income. Funds are used for current operating expenses, maintenance and repair, improvements to facilities, and interest and principal payments on outstanding bonds. Available balances after payment of all operating expenses and required charges remain available for future program expenses and capital needs. The continuing education program provides nonstate-supported courses to students. The continuing education program is self-supporting and derives its revenues primarily from student fees and from interest income. Funds are used for current operating expenses, maintenance and repair, improvements to facilities, and interest and principal payments on outstanding bonds. Available balances after payment of all operating expenses and required charges remain available for future program expenses and capital needs. Designated auxiliary organization programs provide for certain additional facilities on campuses for the benefit of students and staff. Funds received by the University from designated auxiliary organizations are used to pay principal and interest payments on outstanding bonds. Available balances after payment of all operating expenses and required charges remain available for future program expenses and capital needs. 19

23 The Systemwide Revenue Bond program, formerly the Housing Revenue Bond program, was approved by the Trustees in fiscal year This program provides funding for various construction projects, including student residence and dining halls facilities, continuing education buildings, student unions, parking facilities, health facilities, and auxiliary organization facilities at designated campuses within the System as specified by the individual bond documents. It is designed to provide lower cost debt and greater flexibility to finance revenue bond projects of the System. Rather than relying on specific pledged revenues to support specific debt obligations, this program pools several sources of revenue as the pledge for the related revenue producing projects. The University participates in the Systemwide Revenue Bond program and its allocated share of outstanding Systemwide Revenue Bond debt as of was $429,810,000, which has been used to finance certain projects. The System has pledged future continuing education, healthcare facilities, housing, parking, and student union revenues plus designated auxiliary revenues, net of maintenance and operation expenses before extraordinary items (net income available for debt service), to repay $4,048,568,000 in Systemwide Revenue Bonds issued through fiscal year The bonds are payable solely from continuing education, healthcare facilities, housing, parking, student union, and designated auxiliary net income available for debt service and are payable through fiscal year The Systemwide Revenue Bond indenture requires net income available for debt service to be at least equal to aggregate debt service for all bond indebtedness each fiscal year. The total debt service remaining to be paid on the bonds for the System is $6,258,938,871. In fiscal year 2012, total debt service paid and net income available for debt service, which excluded the designated auxiliary net income, for the System were $237,129,000 and $311,609,000, respectively. (c) Bond Anticipation Notes Revenue Bond Anticipation Notes (BANs) are authorized and issued by the Trustees and purchased by the California State University Institute (the Institute), an auxiliary organization of the System, to provide short term financing to the System for construction projects. They are generally issued for a one to three year periods of up to three years in anticipation of issuing permanent revenue bonds at a future date. The University did not issue any BANs during 2012, nor were any BANs converted into Systemwide Revenue Bonds during the year. The University has no BANs outstanding as of. 20

24 Long-term debt obligations of the University as of consist of the following: Fiscal year Original Amount Interest maturity issue outstanding Description rate date amount at June 30 Systemwide revenue bonds: SRB 2002A Housing % 2032/33 $ 51,665,000 18,085,000 SRB 2005C Union % 2025/26 3,875,000 3,050,000 SRB 2005A Housing % 2038/39 273,010, ,010,000 SRB 2005C Parking % 2035/36 29,395,000 28,755,000 SRB 2009A Housing % 2015/16 11,125,000 10,360,000 SRB 2010A Union % 2025/26 20,710,000 20,710,000 SRB 2010B Union % 2041/42 52,450,000 52,450,000 SRB 2011A Housing % 2026/27 23,390,000 23,390,000 Total 429,810,000 Unamortized bond premium 14,545,191 Unamortized loss on refunding (1,877,074) Total long-term debt 442,478,117 Less current portion (4,605,000) Long-term debt, net of current portion $ 437,873,117 Long-term debt principal obligations and related interest mature in the following fiscal years: Principal Interest Total Year(s) ending June 30: 2013 $ 4,605,000 21,827,885 26,432, ,475,000 21,648,599 27,123, ,415,000 21,407,781 27,822, ,455,000 21,093,431 28,548, ,265,000 20,670,045 30,935, ,685,000 95,016, ,701, ,165,000 78,134, ,299, ,590,000 56,001, ,591, ,005,000 28,539, ,544, ,865,000 1,916,874 39,781, ,560,000 3,277,337 22,837, ,725, ,125 7,347,125 $ 429,810, ,156, ,966,099 21