University Enterprises, Inc. Sacramento, California FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION WITH INDEPENDENT AUDITORS REPORT

Transcription

1 Sacramento, California FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION WITH INDEPENDENT AUDITORS REPORT June 30, 2017 and 2016

2 TABLE OF CONTENTS June 30, 2017 and 2016 Page Number Independent Auditors Report 1 FINANCIAL SECTION Required Supplementary Information Management s Discussion and Analysis 5 Basic Financial Statements Statements of Net Position 13 Statements of Revenues, Expenses, and Changes in Net Position 17 Statements of Cash Flows 19 Notes to the Basic Financial Statements 23 REQUIRED SUPPLEMENTARY INFORMATION SECTION Schedule of Funding Progress for Other Postemployment Benefits 61 Schedule of Changes in Net Pension Liability and Related Ratios 62 Schedule of Contributions 63 Notes to the Required Supplementary Information 64 SUPPLEMENTARY INFORMATION SECTION Schedule of Net Position 66 Schedule of Revenues, Expenses, and Changes in Net Position 67 Other Information 68 Note to the Supplementary Information 75

3 INDEPENDENT AUDITORS REPORT To the Board of Directors University Enterprises, Inc. Sacramento, California Report on the Financial Statements We have audited the accompanying financial statements of University Enterprises, Inc. (UEI), a component unit of California State University, Sacramento, as of and for the years ended June 30, 2017 and 2016, which include the statements of net position; the statements of revenues, expenses, and changes in net position, and cash flows; and the related notes to the basic financial statements, which collectively comprise UEI s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements UEI s management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to UEI s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of UEI s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Page 1

4 INDEPENDENT AUDITORS REPORT Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of UEI as of June 30, 2017 and 2016; the changes in financial position; and cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that management s discussion and analysis, the Schedule of Funding Progress for Other Postemployment Benefits, and the required supplementary information listed on the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audits were conducted for the purpose of forming an opinion on the financial statements that collectively comprise UEI s basic financial statements. The supplementary schedules listed as supplementary information in the tables of contents are presented for purposes of additional analysis as required by California State University Chancellor s Office and are not a required part of the basic financial statements. The supplementary schedules are the responsibility of management and were derived from, and relate directly to, the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary schedules are fairly stated, in all material respects, in relation to the basic financial statements as a whole. Page 2

5 INDEPENDENT AUDITORS REPORT Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated September 12, 2017, on our consideration of UEI s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering UEI s internal control over financial reporting and compliance. September 12, 2017 Chico, California Page 3

6 FINANCIAL SECTION

7 MANAGEMENT S DISCUSSION AND ANALYSIS This section of the University Enterprises, Inc. (UEI) annual financial report presents our discussion and analysis of the financial performance of UEI during the fiscal years ended June 30, 2017 and This discussion has been prepared by management along with the financial statements and related footnote disclosures and should be read in conjunction with, and is qualified in its entirety by, the financial statements and footnotes. The financial statements, footnotes and this discussion are the responsibility of management. REPORTING ENTITY UEI is a non profit corporation and an auxiliary organization of California State University, Sacramento (University). UEI s corporate purposes include, among other things, providing and maintaining facilities for the students, faculty and staff of the University and establishing and operating food service, the bookstore and other facilities on the University campus. UEI also provides contract services including administrative, personnel and payroll functions for University research and sponsored programs, projects and accounts. OVERVIEW OF THE FINANCIAL STATEMENTS The financial statements presented herein include all of the activities of UEI as prescribed by statements of the Government Accounting Standards Board (GASB). UEI is a component unit of the University. The Statements of Net Position include all assets and liabilities of UEI. They are prepared under the accrual basis of accounting, whereby revenues and receivables are recognized when the service is provided and expenses and liabilities are recognized when incurred, regardless of when cash is exchanged. The Statements of Revenues, Expenses, and Changes in Net Position present information showing how net position changed during the most recent two fiscal years. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods (e.g., uncollected service charges and earned but unused vacation leave). The Statements of Cash Flows present information about the cash receipts and cash payments of UEI during the two most recent fiscal years. When used with related disclosures and information in the other financial statements, the information provided in these statements should help financial report users assess UEI s ability to generate future net cash flows, its ability to meet its obligations as they come due, and its need for external financing. It also provides insight into the reasons for differences between operating income and associated cash receipts and payment; and the effects on UEI s financial position of its cash and its noncash investing, capital, and related financing transactions during the year. Notes to the Basic Financial Statements provide additional information that is essential to a full understanding of the data provided in UEI s basic financial statements. The notes are included immediately following the basic financial statements within this report. Page 5

8 MANAGEMENT S DISCUSSION AND ANALYSIS FINANCIAL HIGHLIGHTS Fiscal Year 2017 UEI recorded a $2.76 million increase in net position during A $381 thousand deficit in University Support Programs activities was offset by a $3.14 million surplus in UEI s central Enterprise operations. The latter was achieved against a budgeted deficit of $242 thousand, meaning actual results exceeded budget by $3.38 million. The Enterprise surplus consisted of $79.02 and $75.88 million in total revenues and expenses, respectively. UEI s overall net position stands at $40.1 million at June 30, 2017, up from $37.34 million at the end of the previous fiscal year. The surplus was achieved in large part as a result of $2.48 million in investment earnings. In addition to interest and dividends, this figure included $1.44 million in realized gains (on sales and dispositions) and $524 thousand in unrealized gains (on appreciation of UEI s investment portfolio). UEI maintains $20.32 million in long term investments consisting of 83% equity and 17% fixed income. Please refer to note 2 for more detailed information about UEI s investments. $40.59 million in total grants and contracts from federal and state governments and various private organizations was recorded as revenue during , representing a $6.82 million increase over the previous year. UEI records $40.59 million in expenses on its direct contract activity due to the contractual obligation to expend all grant funds for the purposes intended. Income is earned in the form of indirect cost recovery, shown as Administration fees in the Statement of Revenues and Expenses. Fees earned through Sponsored Programs Administration (SPA) activities as well as UEI s California Intern Network (CAIN), amounted to of $2.96 and $2.09 million, respectively. Both represent significant increases over the previous year. During , UEI allocated $5.70 million in corporate overhead to its revenue producing units. Exclusive of overhead, Property Services generated a $3.09 million surplus, mostly on $13.59 million in rental and lease income from its real estate portfolio. UEI s Dining Services division, which includes both contracted and self operated eateries, as well as student meal plans and Catering, produced a $1.46 million surplus. Other income comes in the form of contract functions, including payroll, accounting, tax and administrative services provided to other University auxiliary organizations and licensing revenue. UEI incurred $12.76 million in salaries and related benefits costs, representing 40.9% of total internal operating expenses. This is exclusive of wages tied to federal and state contracts. Other expenses included $3.54 million in interest expense, $8.37 million in operating costs, $3.09 million in rent expense, $3.07 million in depreciation and amortization, and $361 thousand in recorded contributions to the University and University Support Programs. UEI s balance in the Local Agency Investment Fund (LAIF) account with the state of California has decreased to $7.26 million. These monies are used to cover ongoing operating expenses of the organization. The entire balance is shown under the University Support Programs from which the Enterprise Fund is essentially borrowing money to pay for large capital purchases and other operating outlays. This has resulted in a Due to/from other funds balance in the amount of $4.84 million that UEI essentially owes itself. UEI Enterprise carries $95.31 million (72.2% of total assets) in a combination of direct financing leases and capital assets on its balance sheet and $76.84 million (76.1% of total liabilities) in related liabilities. UEI maintains asset to liability and current ratios of 1.31 and 1.58 to 1, respectively. Page 6

9 MANAGEMENT S DISCUSSION AND ANALYSIS Fiscal Year 2016 UEI recorded a $989 thousand decrease in net position during A $1.17 deficit in University Support Programs activities covered the entire loss. UEI s central Enterprise operations actually generated a $180 thousand surplus. The latter was achieved against a budgeted surplus of $40 thousand. The Enterprise surplus consisted of $66.95 and $66.77 million in total revenues and expenses, respectively. UEI s net position stands at $37.34 million at June 30, 2016, down from $38.33 million at the end of the previous fiscal year. The surplus was achieved in spite of overall losses in UEI s investment portfolio. Along with the market, returns rallied during the final three quarters of the fiscal year, but overall yielded $284 thousand in losses, as a result of $938 thousand in realized losses, $122 thousand in unrealized gains, and $532 thousand in interest and dividends net of management fees. UEI maintains $20.62 million in long term investments, 78% in equity and 22% in fixed income. Please refer to note 2 for more detailed information about UEI s investments. $33.77 million in total grants and contracts from federal and state governments and various private organizations was recorded as revenue during UEI is obligated to use all grant monies for the purposes intended and, therefore, charges $33.77 million in expense on its direct contract activity. Income is generated in the form of indirect cost recovery, shown as Administrative fees in the Statement of Revenues and Expenses. Fees are earned through Sponsored Programs Administration (SPA) activities as well as UEI s California Intern Network (CAIN), in amounts of $2.34 and $1.55 million, respectively. Both SPA and CAIN generated fiscal year pre overhead surpluses, in keeping with all of UEI s revenue generating units. The most lucrative department remains the Property Services division which yielded a $2.29 million surplus, with the majority ($12.8 million) of the revenue derived from rental and lease income from UEI s real estate portfolio. Self operated and contracted dining operations, located mostly in the Student Union and Riverfront Center, generate the majority of UEI s Dining Services revenue, which totaled $14.40 million during UEI also recorded $1.0 million in revenue from various non dining contracted activities. Exclusive of wages tied to federal and state contracts, UEI incurred $11.27 million in annual salaries and related benefits costs. During , $3.6 million was charged to interest expense. This represents a $366 thousand decrease from the previous year and is attributable to the savings derived from the refinancing of 2005A and 2007A Series bonds. See note 5 for additional information. UEI incurred total rent expense of $3.06 million during the year. Certain capital purchases made during have decreased the overall balance in UEI s short term investments from $11.87 to $8.63 million. These monies are held in the Local Agency Investment Fund (LAIF) and function as operating cash to meet ongoing operational needs. The aforementioned purchases have required the Enterprise fund to borrow against the University Support Programs fund. The effect has been the addition of a Due to/from other funds line on the balance sheet. UEI carries $96.38 million in property related assets on the balance sheet. 74.6% of total liabilities are a combination of obligations on debt financed property as well as a capital lease obligation. UEI maintains both an asset to liability ratio and current ratio of 1.33 to 1. Page 7

10 MANAGEMENT S DISCUSSION AND ANALYSIS UEI S CONDENSED STATEMENTS OF NET POSITION (Amounts Expressed in Thousands) June ASSETS Current assets $ 29,433 $ 28,941 $ 32,458 Noncurrent Assets Long term investments 20,325 20,615 23,481 Accounts receivable 429 Capital assets net 53,139 53,395 48,440 Net investment in direct financing leases 41,503 42,172 42,980 Other Total Noncurrent Assets 116, , ,204 Deferred Outflows of Resources Deferred outflows from pension 6,079 3,222 1,200 Deferred outflows from unamortized loss on debt refunding Total Deferred Outflows of Resources 6,668 3,840 1,200 TOTAL ASSETS AND DEFERRED OUTFLOWS $ 152,143 $ 149,447 $ 148,862 LIABILITIES, DEFERRED INFLOWS, AND NET POSITION Current liabilities including current portion of long term debt $ 11,330 $ 12,874 $ 10,323 Long term liabilities net of current portion 98,727 95,927 97,258 Total Liabilities 110, , ,581 Deferred Inflows of Resources Deferred inflows from pension 1,941 3,261 2,953 Deferred inflows from unamortized gain on debt refunding Total Deferred Inflows of Resources 1,985 3,307 2,953 Net Position Net investment in capital assets 16,792 15,245 7,842 Restricted expendable 3,806 3,831 7,086 Unrestricted 19,503 18,263 23,400 Total Net Position 40,101 37,339 38,328 TOTAL LIABILITIES, DEFERRED INFLOWS, AND NET POSITION $ 152,143 $ 149,447 $ 148,862 Page 8

11 MANAGEMENT S DISCUSSION AND ANALYSIS Total current assets showed an increase of $492 thousand between 2017 and This change is primarily due to a combination of the following: a) an increase of $1.15 million in cash due to the of timing of payments, b) a decrease of $1.37 million in short term investments (LAIF), c) an increase of $1.01 million in accounts receivable due to the timing of billings and collections of receivables, and d) a decrease of $304 thousand in prepaid expenses and other assets. Total noncurrent assets decreased by $624 thousand in 2017 against The decrease was due to a combination of the following: a) a decrease in long term investments of $290 thousand primarily due to the rebalancing of the investment portfolio, b) a decrease of $669 thousand in direct financing leases due to regular amortization, c) a decrease of $255 thousand in capital assets due to regular depreciation, d) an increase of $178 thousand in note receivable primarily due to the finalization of a housing loan in 2017, and e) an increase of $429 thousand in accounts receivable due to the new lease with the University for S Street location. Deferred outflows of resources related to pensions totaling $6.08 million in 2017 with a measurement date of June 30, 2016, consisted of the following components: a) a reclassification of current year s pension contributions in the amount of $1.5 million to deferred outflows, all of which will be amortized during fiscal year , per accounting pronouncement GASB Statement No. 71, and b) differences between projected and actual earnings on pension plan investments in the amount of $4.58 million. Total current liabilities decreased by $1.54 million in 2017 compared to The decrease was mainly due to the following: a) a decrease of $2.83 million in accounts payable as a result of the completion of the Dining Commons servery renovation project and timing of payments, b) an increase of $1.14 million in accrued liabilities due to increased payroll and related taxes as a result of increased student employment, and, c) an increase of $111 thousand in current portion of long term debt. Long term liabilities increased by $2.8 million in The main contributing factors were: a) an increase of $174 thousand in other postemployment benefits obligation; b) an increase of $4.38 million in net pension liability; c) an increase of $1.13 million in advances from grantors, due to timing of advance payments and timing of expenditures; d) a decrease of $2.04 million and $194 thousand in bonds payable and note payable, respectively, due to normal amortization; e) a decrease of $92 thousand in other noncurrent liabilities, and f) a decrease of $487 thousand in capital lease obligations due to normal amortization. Deferred inflows of resources related to pension totaling $1.94 million in 2017 with a measurement date of June 30, 2016, consisted of the following components: a) changes of assumptions in the amount of $272 thousand, b) differences between expected and actual experiences in the amount of $193 thousand, and c) differences between projected and actual earnings on pension plan investments in the amount of $1.48 million. Net investment in capital assets increased by $1.55 million in 2017 over 2016 primarily due to the finalization of the Dining Services renovation project. Page 9

12 MANAGEMENT S DISCUSSION AND ANALYSIS UEI S CONDENSED STATEMENTS OF CHANGES IN NET POSITION (Amounts Expressed in Thousands) June Operating Revenues Sales and commissions $ 16,077 $ 15,622 $ 14,428 Sales and services of educational activities 12,965 12,563 13,567 Grants and contracts 40,594 33,770 33,089 Administration fees 6,049 4,795 4,908 Rental income 13,941 13,179 12,785 Total Operating Revenues 89,626 79,929 78,777 Operating Expenses Cost of sales 4,107 3,985 3,682 Grants and contracts 40,594 33,770 33,089 Other expenses 41,236 37,802 36,338 Total Operating Expenses 85,937 75,557 73,109 Operating Income 3,689 4,372 5,668 Gain (Loss) on sale of capital assets net (17) (187) 3 Net other nonoperating expenses (910) (5,174) (3,519) Increase (Decrease) in Net Position 2,762 (989) 2,152 Net Position Beginning of Year 37,339 38,328 45,521 Restatements (9,345) Net Position as Restated Beginning of Year 37,339 38,328 36,176 Net Position as Restated End of Year $ 40,101 $ 37,339 $ 38,328 Total operating revenues increased by $9.7 million in 2017 over The increase in revenues was due to the following factors: a) an increase of $6.82 million in grants and contracts activities, of which $3.82 million was generated from student employment services funded by state, city and private organizations, b) an increase in administrative fees of $1.25 million as a result of the aforementioned improvement in grants and contracts funded by federal and state, and student employment services, c) an increase of $455 thousand in sales and commissions due to increased sales of student meal plans, d) an increase of $402 thousand in sales and services of educational activities related to University Support Programs, and e) an increase of $762 thousand in rental income primarily due to the new lease with the University for the S Street location. Page 10

13 MANAGEMENT S DISCUSSION AND ANALYSIS Total operating expenses increased by $10.38 million in The main contributing factors were: a) an increase of $6.82 million in grants and contracts expenditures and student employment services, b) an increase of $122 thousand in cost of sales due to increased Dining Services sales, and c) an increase of $3.43 million in other expenses primarily due to increased activities from Dining Services and various other programs. Net other non operating expenses consist primarily of interest expense, contributions to the University, investment earnings, and contributions and other income. The decrease of $4.26 million in expenses in 2017 was primarily due to an increase in investment earnings of $2.77 million in 2017, a decrease of $1.36 million in contributions to the University, a decrease of $60 thousand in interest expense, and an increase of $75 thousand in contributions and other income. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets net of accumulated depreciation, capital assets totaled $53.14 million and $53.4 million as of June 30, 2017 and 2016, respectively. The following table summarizes the changes in capital assets for the fiscal years ended 2017, 2016, and 2015: CHANGES IN CAPITAL ASSETS (Amounts Expressed in Thousands) Years Ended June Change 2016 Change 2015 Capital Assets Land $ 4, % $ 4, % $ 3,365 Construction in progress % 4, % 1,185 Buildings and improvements 28, % 28, % 26,309 Assets under capital lease 24, % 24, % 24,358 Leasehold improvements 15, % 11, % 10,563 Equipment 9, % 7, % 6,742 Total Capital Assets 82, % 79, % 72,522 Accumulated Depreciation Buildings and improvements 10, % 9, % 8,953 Assets under capital lease 8, % 7, % 6,495 Leasehold improvements 3, % 4, % 3,756 Equipment 7, % 5, % 4,878 Total Accumulated Depreciation 29, % 26, % 24,082 Total Capital Assets Net $ 53, % $ 53, % $ 48,440 The decrease of $3.7 million in construction in progress was mainly due to the transfer of the completed Dining Commons servery renovation from construction in progress to leasehold improvements and equipment. Page 11

14 MANAGEMENT S DISCUSSION AND ANALYSIS The increase of $4.16 million in leasehold improvements was mainly due to the aforementioned transfer of the Dining Commons servery renovation project. The increase of $2.08 million in equipment was mainly due to the aforementioned transfer of equipment related to the Dining Commons servery renovation and new additions of equipment from various other projects. Long Term Debt totaled $78.52, $81.13, and $84.38 million at June 30, 2017, 2016, and 2015, respectively. These amounts were comprised of revenue bonds, notes payable, and a capital lease. CHANGES IN LONG TERM DEBT (Amounts Expressed in Thousands) Years Ended June Change 2016 Change 2015 Current portion of long term debt $ 2,534 $ 2,424 $ 2,440 Long term debt 75,985 78,707 81,938 Totals $ 78, % $ 81, % $ 84,378 Long term debt as of June 30, 2017, decreased from 2016 due to the normal pay down of $2.42 million in principal payments in Additional information on long term debt obligations can be found in note 5 to the basic financial statements included in this report. REQUEST FOR INFORMATION The financial report is designed to provide a general overview of UEI s finances. For questions concerning any information in this report or for additional financial information, contact Craig Barth, Chief Financial Officer, University Enterprises, Inc., 6000 J Street, Sacramento, California, 95819, or call (916) Page 12

15 STATEMENTS OF NET POSITION University Support June 30, 2017 Enterprise Programs Total ASSETS AND DEFERRED OUTFLOWS Current Assets Cash $ 1,946,236 $ $ 1,946,236 Restricted cash and investments 3,204, ,401 3,806,545 Short term investments 7,264,872 7,264,872 Accounts receivable 13,987, ,433 14,706,719 Due to (from) other funds (4,841,289) 4,841,289 Inventories 134, ,547 Prepaid expenses and other assets 754, ,863 Notes receivable current 150, ,650 Net investment in direct financing leases 668, ,434 Total Current Assets 16,004,871 13,427,995 29,432,866 Notes receivable net of current portion 645, ,992 Long term investments 20,324,986 20,324,986 Accounts receivable 429, ,018 Net investment in direct financing leases 41,503,134 41,503,134 Capital assets net 53,139,390 53,139,390 Total Assets 132,047,391 13,427, ,475,386 Deferred Outflows of Resources Deferred outflows from pension 4,147,054 1,931,887 6,078,941 Deferred outflows from unamortized loss on debt refunding 588, ,686 Total Deferred Outflows of Resources 4,735,740 1,931,887 6,667,627 TOTAL ASSETS AND DEFERRED OUTFLOWS $ 136,783,131 $ 15,359,882 $ 152,143,013 The accompanying notes are an integral part of these financial statements. Page 13

16 STATEMENTS OF NET POSITION University Support June 30, 2017 Enterprise Programs Total LIABILITIES, DEFERRED INFLOWS, AND NET POSITION Current Liabilities Accounts payable $ 3,058,996 $ $ 3,058,996 Accrued liabilities 4,158, ,545 4,845,017 Unearned revenue 129, , ,771 Liability for disallowances and overruns 225, ,781 Current portion of long term debt 2,534,389 2,534,389 Total Current Liabilities 10,107,555 1,222,399 11,329,954 Long Term Liabilities Other postemployment benefits obligation 2,190,749 3,941,628 6,132,377 Net pension liability 8,433,633 3,928,771 12,362,404 Bonds payable net of current portion 58,643,591 58,643,591 Note payable net of current portion 1,676,037 1,676,037 Other noncurrent 1,524,153 1,524,153 Unearned revenue 7,397 7,397 Advances from grantors 2,715,773 2,715,773 Capital lease obligation net of current portion 15,665,336 15,665,336 Total Long Term Liabilities 90,856,669 7,870,399 98,727,068 Total Liabilities 100,964,224 9,092, ,057,022 Deferred Inflows of Resources Deferred inflows from pension 1,324, ,971 1,941,381 Deferred inflows from unamortized gain on debt refunding 43,435 43,435 Total Deferred Inflows of Resources 1,367, ,971 1,984,816 Net Position Net investment in capital assets 16,791,600 16,791,600 Restricted expendable 3,204, ,401 3,806,545 Unrestricted 14,455,318 5,047,712 19,503,030 Total Net Position 34,451,062 5,650,113 40,101,175 TOTAL LIABILITIES, DEFERRED INFLOWS, AND NET POSITION $ 136,783,131 $ 15,359,882 $ 152,143,013 The accompanying notes are an integral part of these financial statements. Page 14

17 STATEMENTS OF NET POSITION University Support June 30, 2016 Enterprise Programs Total ASSETS AND DEFERRED OUTFLOWS Current Assets Cash $ 796,423 $ $ 796,423 Restricted cash and investments 3,175, ,668 3,814,737 Short term investments 8,631,675 8,631,675 Accounts receivable 13,032, ,061 13,694,324 Due to (from) other funds (3,342,607) 3,342,607 Inventories 96,922 96,922 Prepaid expenses and other assets 1,053,164 5,615 1,058,779 Note receivable current 39,064 39,064 Net investment in direct financing leases 808, ,856 Total Current Assets 15,659,154 13,281,626 28,940,780 Note receivable net of current portion 468, ,333 Long term investments 20,615,187 20,615,187 Net investment in direct financing leases 42,171,561 42,171,561 Other assets 16,200 16,200 Capital assets net 53,394,594 53,394,594 Total Assets 132,308,829 13,297, ,606,655 Deferred Outflows of Resources Deferred outflows from pension 2,198,397 1,024,114 3,222,511 Deferred outlfows from unamortized loss on debt refunding 617, ,609 Total Deferred Outflows of Resources 2,816,006 1,024,114 3,840,120 TOTAL ASSETS AND DEFERRED OUTFLOWS $ 135,124,835 $ 14,321,940 $ 149,446,775 The accompanying notes are an integral part of these financial statements. Page 15

18 STATEMENTS OF NET POSITION University Support June 30, 2016 Enterprise Programs Total LIABILITIES, DEFERRED INFLOWS, AND NET POSITION Current Liabilities Accounts payable $ 5,889,608 $ $ 5,889,608 Accrued liabilities 3,139, ,679 3,701,920 Unearned revenue 159, , ,357 Liability for disallowances and overruns 226, ,656 Current portion of long term debt 2,423,807 2,423,807 Total Current Liabilities 11,838,698 1,035,650 12,874,348 Long Term Liabilities Other postemployment benefits obligation 2,275,214 3,682,889 5,958,103 Net pension liability 5,444,519 2,536,305 7,980,824 Bonds payable net of current portion 60,684,265 60,684,265 Note payable net of current portion 1,870,426 1,870,426 Other noncurrent 1,615,576 1,615,576 Unearned revenue 82,397 82,397 Advances from grantors 1,583,962 1,583,962 Capital lease obligation net of current portion 16,151,880 16,151,880 Total Long Term Liabilities 89,708,239 6,219,194 95,927,433 Total Liabilities 101,546,937 7,254, ,801,781 Deferred Inflows of Resources Deferred inflows from pension 2,224,522 1,036,284 3,260,806 Deferred inflows from unamortized gain on debt refunding 45,580 45,580 Total Deferred Inflows of Resources 2,270,102 1,036,284 3,306,386 Net Position Net investment in capital assets 15,244,633 15,244,633 Restricted expendable 3,175, ,868 3,830,937 Unrestricted 12,888,094 5,374,944 18,263,038 Total Net Position 31,307,796 6,030,812 37,338,608 TOTAL LIABILITIES, DEFERRED INFLOWS, AND NET POSITION $ 135,124,835 $ 14,321,940 $ 149,446,775 The accompanying notes are an integral part of these financial statements. Page 16

19 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION University Support Year Ended June 30, 2017 Enterprise Programs Total REVENUES Operating Revenues Sales and commissions $ 16,076,576 $ $ 16,076,576 Sales and services of educational activities 12,964,662 12,964,662 Grants and contracts noncapital 40,594,180 40,594,180 Administration fees 5,578, ,091 6,049,182 Rental income 13,941,100 13,941,100 Total Operating Revenues 76,189,947 13,435,753 89,625,700 Operating Expenses Cost of sales 4,107,069 4,107,069 Grants and contracts 40,594,180 40,594,180 Operating expenses 18,935,509 13,916,086 32,851,595 General and administrative 5,262,609 5,262,609 Sponsored research 3,259 3,259 Other programs 52,106 52,106 Depreciation and amortization 3,066,067 3,066,067 Total Operating Expenses 71,965,434 13,971,451 85,936,885 Operating Income (Loss) 4,224,513 (535,698) 3,688,815 Nonoperating Revenues (Expenses) Investment earnings 2,484,554 2,484,554 Contributions and other income 348,056 5, ,056 Contributions to the University (210,666) (210,666) Loss on sale of capital assets net (17,400) (17,400) University support (150,000) 150,000 Interest expense (3,535,792) (3,535,792) Net Nonoperating Revenues (Expenses) (1,081,248) 155,000 (926,248) Increase (Decrease) in Net Position 3,143,265 (380,698) 2,762,567 Net Position Beginning of Year 31,307,796 6,030,812 37,338,608 Net Position End of Year $ 34,451,061 $ 5,650,114 $ 40,101,175 The accompanying notes are an integral part of these financial statements. Page 17

20 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION University Support Year Ended June 30, 2016 Enterprise Programs Total REVENUES Operating Revenues Sales and commissions $ 15,622,076 $ $ 15,622,076 Sales and services of educational activities 12,563,070 12,563,070 Grants and contracts noncapital 33,770,042 33,770,042 Administration fees 4,374, ,367 4,794,908 Rental income 13,178,880 13,178,880 Total Operating Revenues 66,945,539 12,983,437 79,928,976 Operating Expenses Cost of sales 3,985,209 3,985,209 Grants and contracts 33,770,042 33,770,042 Operating expenses 17,038,600 12,831,837 29,870,437 General and administrative 5,032,726 5,032,726 Sponsored research 18,715 18,715 Other programs 19,683 19,683 Depreciation and amortization 2,860,692 2,860,692 Total Operating Expenses 62,687,269 12,870,235 75,557,504 Operating Income 4,258, ,202 4,371,472 Nonoperating Revenues (Expenses) Investment earnings (284,264) (284,264) Contributions and other income 262,694 15, ,694 Contributions to the University (109,213) (1,462,041) (1,571,254) Gain on sale of capital assets net (186,976) (186,976) University support (165,000) 165,000 Interest expense (3,595,724) (3,595,724) Net Nonoperating Expenses (4,078,483) (1,282,041) (5,360,524) Increase (Decrease) in Net Position 179,787 (1,168,839) (989,052) Net Position Beginning of Year 31,128,009 7,199,651 38,327,660 Net Position End of Year $ 31,307,796 $ 6,030,812 $ 37,338,608 The accompanying notes are an integral part of these financial statements. Page 18

21 STATEMENTS OF CASH FLOWS University Support Year Ended June 30, 2017 Enterprise Programs Total CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers/students $ 75,840,803 $ 10,637,311 $ 86,478,114 Cash paid suppliers and employees (68,939,555) (12,196,381) (81,135,936) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,901,248 (1,559,070) 5,342,178 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Payments received on notes receivable (289,245) (289,245) University support (150,000) 150,000 Contributions to the University (210,666) (210,666) Contributions and other income 348,056 5, ,056 NET CASH PROVIDED BY (USED IN) NONCAPITAL FINANCING ACTIVITIES (301,855) 155,000 (146,855) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal paid on long term debt (2,230,000) (2,230,000) Repayment of bonded debt (193,807) (193,807) Proceeds from sale of capital assets Interest paid (3,735,057) (3,735,057) Acquisition of capital assets (2,828,886) (2,828,886) NET CASH USED IN CAPITAL AND RELATED FINANCING ACTIVITIES (8,987,127) (8,987,127) CASH FLOWS FROM INVESTING ACTIVITIES Investment income 506, ,012 Decrease in net investment in direct financing lease 808, ,856 Proceeds from sales and maturities of investments 8,554,891 8,554,891 Purchase of investments (6,303,137) (6,303,137) NET CASH PROVIDED BY INVESTING ACTIVITIES 3,566,622 3,566,622 Net Increase (Decrease) in Cash and Cash Equivalents 1,178,888 (1,404,070) (225,182) Cash and Cash Equivalents Beginning of Year 3,971,492 9,271,343 13,242,835 Cash and Cash Equivalents End of Year $ 5,150,380 $ 7,867,273 $ 13,017,653 The accompanying notes are an integral part of these financial statements. Page 19

22 STATEMENTS OF CASH FLOWS University Support Year Ended June 30, 2017 Enterprise Programs Total RECONCILIATION TO THE STATEMENTS OF NET POSITION Cash $ 1,946,236 $ $ 1,946,236 Restricted cash and investments 3,204, ,401 3,806,545 Short term investments 7,264,872 7,264,872 TOTAL CASH AND CASH EQUIVALENTS $ 5,150,380 $ 7,867,273 $ 13,017,653 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Operating income $ 4,224,513 $ (535,698) $ 3,688,815 Adjustments to reconcile: Depreciation and amortization expense 3,066,067 3,066,067 Amortization of deferred inflows from pension (900,112) (419,313) (1,319,425) Loss on disposal of capital assets 17,400 17,400 Net effect of changes in operating assets and liabilities: (Increase) Decrease in assets: Accounts receivable (955,434) (57,372) (1,012,806) Due to (from) other funds 1,498,682 (1,498,682) Inventories (37,625) (37,625) Deferred outflows from pension (1,948,657) (907,773) (2,856,430) Deferred outflows from loss on debt refunding 28,923 28,923 Prepaid expenses and other assets (130,724) 21,815 (108,909) Increase (Decrease) in liabilities: Accounts payable (2,830,612) (2,830,612) Accrued liabilities 939, ,865 1,063,721 Net pension liability 2,989,114 1,392,466 4,381,580 Deferred inflows from unamortized gain on debt refunding (2,145) (2,145) Unearned revenue 1,027,342 62,883 1,090,225 Liability for disallowances and overruns (875) (875) Other postemployment benefits obligation (84,465) 258, ,274 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 6,901,248 $ (1,559,070) $ 5,342,178 The accompanying notes are an integral part of these financial statements. Page 20

23 STATEMENTS OF CASH FLOWS University Support Year Ended June 30, 2016 Enterprise Programs Total CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers/students $ 64,615,017 $ 8,975,012 $ 73,590,029 Cash paid suppliers and employees (55,871,558) (12,236,576) (68,108,134) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 8,743,459 (3,261,564) 5,481,895 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Payments received on notes receivable (184,151) (184,151) University support (165,000) 165,000 Contributions to University (109,213) (1,462,041) (1,571,254) Contributions and other income 262,694 15, ,694 NET CASH USED IN NONCAPITAL FINANCING ACTIVITIES (195,670) (1,282,041) (1,477,711) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal paid on long term debt (2,525,000) (2,525,000) Repayment on bonded debt (15,255,000) (15,255,000) Proceeds from debt insurance 14,720,855 14,720,855 Proceeds from sale of capital assets 2,500,000 2,500,000 Interest paid (3,886,292) (3,886,292) Acquisition of capital assets (10,502,304) (10,502,304) NET CASH USED IN CAPITAL AND RELATED FINANCING ACTIVITIES (14,947,741) (14,947,741) CASH FLOWS FROM INVESTING ACTIVITIES Investment income 344, ,314 Decrease in net investment in direct financing lease 799, ,046 Proceeds from sales and maturities of investments 9,091,802 9,091,802 Purchase of investments (7,041,381) (7,041,381) NET CASH PROVIDED BY INVESTING ACTIVITIES 3,193,781 3,193,781 Net Decrease in Cash and Cash Equivalents (3,206,171) (4,543,605) (7,749,776) Cash and Cash Equivalents Beginning of Year 7,177,663 13,814,948 20,992,611 Cash and Cash Equivalents End of Year $ 3,971,492 $ 9,271,343 $ 13,242,835 The accompanying notes are an integral part of these financial statements. Page 21

24 STATEMENTS OF CASH FLOWS University Support Year Ended June 30, 2016 Enterprise Programs Total RECONCILIATION TO THE STATEMENTS OF NET POSITION Cash $ 796,423 $ $ 796,423 Restricted cash and investments 3,175, ,668 3,814,737 Short term investments 8,631,675 8,631,675 TOTAL CASH AND CASH EQUIVALENTS $ 3,971,492 $ 9,271,343 $ 13,242,835 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Operating income $ 4,258,270 $ 113,202 $ 4,371,472 Adjustments to reconcile: Depreciation and amortization expense 2,860,692 2,860,692 Amortization of deferred inflows from pension 210,119 97, ,002 Loss on disposal of capital assets 186, ,976 Net effect of changes in operating assets and liabilities: (Increase) Decrease in assets: Accounts receivable (3,813,359) (127,090) (3,940,449) Due to (from) other funds 3,342,607 (3,342,607) Inventories 8,290 8,290 Deferred outflows from pension (1,379,589) (642,676) (2,022,265) Deferred outflows from loss on debt refunding (617,609) (617,609) Prepaid expenses and other assets (283,619) (5,615) (289,234) Increase (Decrease) in liabilities: Accounts payable 2,743,950 2,743,950 Accrued liabilities (161,715) 1,207 (160,508) Net pension liability 481, , ,715 Deferred inflows from unamortized gain on debt refunding 45,580 45,580 Unearned revenue 521,757 11, ,437 Liability for disallowances and overruns (398) (398) Other postemployment benefits obligation 340, , ,244 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 8,743,459 $ (3,261,564) $ 5,481,895 The accompanying notes are an integral part of these financial statements. Page 22

25 NOTES TO THE BASIC FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Reporting Entity University Enterprises, Inc. (UEI), is a governmental not for profit, tax exempt California State University auxiliary organization located on the campus of California State University, Sacramento (University). UEI is a component unit of the University. UEI operates as an auxiliary organization on the University campus pursuant to the Operating Agreement dated July 1, The Operating Agreement sets forth the terms and conditions under which UEI operates as an auxiliary organization of the California State University system. Pursuant to the Operating Agreement, UEI: (i) leases certain real property on the University campus; (ii) operates the Hornet Bookstore and certain food service facilities; (iii) provides contract services to the University for research and sponsored projects; (iv) provides loans, scholarships, stipends, and related financial assistance; and (v) administers externally funded projects, gifts, bequests, endowments, trusts, and similar funds. The Operating Agreement term ends on September 1, 2027, unless sooner terminated or extended. The Operating Agreement may be terminated sooner if: (i) the CSU Board notifies UEI that an administrative necessity or emergency exists requiring termination; (ii) UEI ceases its operations; or (iii) a violation of any substantial provision of the Operating Agreement occurs. Upon the termination of the Operating Agreement, the CSU Board, at its sole discretion, may require UEI to transfer all assets in its possession to a successor nonprofit corporation qualifying as an auxiliary organization. Effective June 8, 2005, and amended on March 25, 2013, UEI executed an operating agreement between UEI and Follett Higher Education Group, Inc. (Follett), in which Follett assumed the operation of the Hornet Bookstore. The agreement expires on June 30, 2020, and is automatically renewed for successive one year renewal terms under the same terms and conditions set forth in the agreement, unless either party notifies the other of its intent not to renew. Basis of Presentation Pursuant to the requirements established by the Chancellor of the California State University, UEI has adopted the provisions of Statement No. 35 of the Governmental Accounting Standards Board (GASB), Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. With minor exceptions, this statement provides that public colleges and universities are subject to the financial reporting requirements of GASB Statement No. 34, which is applicable to state and local governments. As a component unit of the University, UEI is required to adopt GASB Statements Nos. 34 and 35. UEI also observes GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, and GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. These statements establish standards for reporting deferred outflows of resources, deferred inflows of resources, and net position for all state and local governments. Page 23

26 NOTES TO THE BASIC FINANCIAL STATEMENTS UEI operates as a business enterprise, and the accompanying financial statements reflect the flow of economic resources measurement focus and the full accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred, regardless of the timing of related cash flows. UEI reports the following major proprietary funds: Enterprise This fund accounts for the general activities of UEI. Operations include retail, property development, dining services, special services, new business development, and contracts and grants. University Support Programs This fund accounts for the educational sales and services to students and surrounding communities and other sponsored programs. When both restricted and unrestricted resources are available for use, it is UEI s policy to use restricted resources first, then unrestricted resources as they are needed. Cash and Cash Equivalents Cash and cash equivalents, for purposes of the statement of cash flows, include cash on hand, cash in commercial bank accounts, restricted cash and investments held in trust, and amounts in short term investments. Amounts in short term investments include deposits in the State of California Investment Pooled Money Investment Account Local Agency Investment Fund (LAIF) and instruments with original maturities of three months or less. Restricted Cash and Investments Restricted cash and investments include restricted cash held in trust and investments restricted as to use. Restricted cash held in trust consists of debt service reserve funds held with a major national bank for the Series 2005 bonds. Fair Value Measurements Governmental Accounting Standards Board (GASB) Statement No. 72, Fair Value Measurements and Applications, establishes a framework for measuring fair value under generally accepted accounting standards, and expands disclosures about fair value measurements. That framework provides a fair value hierarchy that classifies assets and liabilities into three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon the following: Level 1: Level 2: Level 3: Quoted market prices for identical instruments traded in active exchange markets. Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data. Model based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the UEI s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management s judgment and estimation which may be significant. UEI does not hold any level 3 investments. Page 24