Baker University. Accountants Report and Financial Statements June 30, 2011 and 2010

Transcription

1 Accountants Report and Financial Statements

2 Contents Independent Accountants Report on Financial Statements... 1 Financial Statements Statements of Financial Position... 2 Statements of Activities... 3 Statements of Cash Flows

3 Independent Accountants Report on Financial Statements Board of Trustees Baker University Baldwin City, Kansas We have audited the accompanying statements of financial position of Baker University as of June 30, 2011 and 2010, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the University s management. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Baker University as of, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Kansas City, Missouri October 14, 2011

4 Statements of Financial Position Assets Cash and cash equivalents $ 471,787 $ 547,430 Student accounts receivable, net of allowance; $300,000, $290,000 1,133, ,283 Grants and contracts receivable 524, ,422 Inventories 817, ,131 Prepaid expenses 236, ,852 Investments 39,573,386 34,173,987 Pledges, trust and other receivables, net of allowance; $18,500, $20,600 3,107,490 1,309,501 Notes receivable, net of allowance; 2011 and $100,000 4,929,208 5,163,751 Property and equipment, net 36,244,104 36,965,301 Total assets $ 87,038,337 $ 80,251,658 Liabilities and Net Assets Liabilities Accounts payable $ 1,240,120 $ 559,519 Accrued expenses 2,218,215 2,313,747 Students' deposits 94, ,582 Deferred income 2,607,445 2,894,669 Long-term debt 21,224,347 23,534,316 Refundable government loan programs 2,979,629 3,075,547 Present value of annuities payable 725, ,793 Other 249, ,576 Total liabilities 31,339,849 33,368,749 Net Assets Unrestricted 14,890,249 12,000,349 Temporarily restricted 9,288,214 3,846,273 Permanently restricted 31,520,025 31,036,287 Total net assets 55,698,488 46,882,909 Total liabilities and net assets $ 87,038,337 $ 80,251,658 See 2

5 Statement of Activities Year Ended June 30, 2011 Unrestricted Temporarily Restricted Permanently Restricted Revenues, Gains and Other Support Tuition and fees $ 38,853,967 $ 38,853,967 Less University-funded scholarships (9,661,541) (9,661,541) Net tuition and fees 29,192,426 29,192,426 Interest, dividends and other investment income 930,722 $ 53, ,561 Net realized gains on investments 80,742 6,297 87,039 Net unrealized gains on investments 1,733,292 3,231,450 4,964,742 Investment management fees (97,707) (6,076) (103,783) Government contracts and grants 119, ,959 Private gifts, grants and bequests 1,250,431 2,910,317 $ 483,738 4,644,486 Auxiliary enterprises 3,723,188 3,723,188 Other 127, ,934 37,060,987 6,195, ,738 43,740,552 Net assets released from restrictions 753,886 (753,886) - Total Revenues, Gains and Other Support 37,814,873 5,441, ,738 43,740,552 Expenses and Losses Educational and general Instruction 11,908,111 11,908,111 Academic support 3,092,070 3,092,070 Fundraising 1,310,881 1,310,881 Student services 3,055,281 3,055,281 Student activities 2,554,274 2,554,274 General institution support 5,519,258 5,519,258 Operation and maintenance of plant 3,625,741 3,625,741 Funded student aid 578, ,407 Total educational and general 31,644,021 31,644,021 Auxiliary enterprises 3,280,952 3,280,952 Total Expenses and Losses 34,924,973 34,924,973 Increase in Net Assets 2,889,900 5,441, ,738 8,815,579 Net Assets, Beginning of Year 12,000,349 3,846,273 31,036,287 46,882,909 Net Assets, End of Year $ 14,890,249 $ 9,288,214 $ 31,520,025 $ 55,698,488 Total See 3

6 Statement of Activities Year Ended June 30, 2010 Unrestricted Temporarily Restricted Permanently Restricted Total Revenues, Gains and Other Support Tuition and fees $ 40,620,655 $ 40,620,655 Less University-funded scholarships (9,225,182) (9,225,182) Net tuition and fees 31,395,473 31,395,473 Interest, dividends and other investment income 641,226 $ 27, ,796 Net realized gains on investments 34,345 1,818 36,163 Net unrealized gains on investments 1,761,338 1,512,810 3,274,148 Investment management fees (92,037) (3,711) (95,748) Government contracts and grants 140, ,087 Private gifts, grants and bequests 985, ,920 $ 463,287 1,976,495 Auxiliary enterprises 4,093,272 4,093,272 Other 91,563 91,563 39,050,555 2,066, ,287 41,580,249 Net assets released from restrictions 713,070 (713,070) - Total Revenues, Gains and Other Support 39,763,625 1,353, ,287 41,580,249 Expenses and Losses Educational and general Instruction 13,720,103 13,720,103 Academic support 3,533,624 3,533,624 Fundraising 1,323,176 1,323,176 Student services 3,099,946 3,099,946 Student activities 2,310,460 2,310,460 General institution support 5,100,959 5,100,959 Operation and maintenance of plant 3,157,492 3,157,492 Funded student aid 527, ,711 Total educational and general 32,773,471 32,773,471 Auxiliary enterprises 3,409,863 3,409,863 Total Expenses and Losses 36,183,334 36,183,334 Increase in Net Assets 3,580,291 1,353, ,287 5,396,915 Net Assets, Beginning of Year 8,420,058 2,492,936 30,573,000 41,485,994 Net Assets, End of Year $ 12,000,349 $ 3,846,273 $ 31,036,287 $ 46,882,909 See 4

7 Statements of Cash Flows Years Ended Operating Activities Change in net assets $ 8,815,579 $ 5,396,915 Items not requiring (providing) cash Unrealized gains on investments (4,964,742) (3,274,148) Net realized gains on investments (87,039) (36,163) Restricted contributions for long-term purposes (1,394,055) (991,207) Depreciation 1,844,838 1,779,851 Actuarial (gains) losses on annuity obligations 72,996 (79,081) Loss on sale of property, plant and equipment 21,041 26,296 Changes in Accounts receivable (682,156) 195,014 Pledge, trust and other receivables (1,797,989) 12,941 Inventories 27, ,718 Prepaid expenses 34,248 (252,914) Accounts payable 680,601 (571,530) Accrued liabilities (71,462) 17,305 Student deposits (17,924) (2,480) Deferred income (287,224) (231,287) Net cash provided by operating activities 2,193,946 2,214,230 Investing Activities Purchase of equipment and building improvements, net (906,503) (573,576) Net increase (decrease) in refundable governmental loan programs 234,543 (229,693) Proceeds from disposal of equipment - 15,757 Purchase of investments (1,213,264) (521,421) Proceeds from disposition of investments 931, ,312 Net decrease in assets limited as to use - bond proceeds - 261,619 Payments on annuities (65,901) (75,488) Net cash used in investing activities (1,019,578) (736,490) Financing Activities Restricted contributions for long-term purposes 1,394, ,207 Principal payments on long-term debt (1,048,148) (945,949) Proceeds from issuance of long-term debt - 334,500 Net change under line-of-credit agreements and notes payable (1,500,000) (2,100,000) Net increase (decrease) in refundable government loan programs (95,918) 152,592 Net cash used in financing activities (1,250,011) (1,567,650) Decrease in Cash and Cash Equivalents (75,643) (89,910) Cash and Cash Equivalents, Beginning of Year 547, ,340 Cash and Cash Equivalents, End of Year $ 471,787 $ 547,430 Additional Cash Flows Information Cash paid for interest, net of capitalized interest $ 1,080,556 $ 1,321,080 Property and equipment additions included in accounts payable - 50,000 Property and equipment acquired through capital leases 238,179 - See 5

8 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Baker University is a not-for-profit liberal arts university with its primary campus located in Baldwin City, Kansas. In addition, the University operates graduate programs in Johnson County, Kansas (metropolitan Kansas City), Topeka, Kansas, Wichita, Kansas and a nursing program in Topeka, Kansas. The University extends unsecured credit to its students. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues, expenses, gains, losses and other changes during the reporting period. Actual results could differ from those estimates. Net Assets The University reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires; that is, when a stipulated time restriction ends or purpose restriction is accomplished; temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Gifts having donor stipulations that are satisfied in the period the gift is received are reported as unrestricted revenue and net assets. Gifts of land, buildings, equipment and other long-lived assets are reported as unrestricted revenue and net assets unless explicit donor stipulations specify how such assets must be used, in which case the gifts are reported as temporarily or permanently restricted revenue and net assets. Absent explicit donor stipulations for the time long-lived assets must be held, expirations of restrictions resulting in reclassification of temporarily restricted net assets as unrestricted net assets are reported when the long-lived assets are placed in service. Cash and Cash Equivalents The University considers all liquid investments, other than those limited as to use, with original maturities of three months or less to be cash equivalents. At, cash equivalents consisted primarily of money market accounts. 6

9 Effective July 21, 2010, the FDIC s insurance limits were permanently increased to $250,000. At June 30, 2011, the University s bank balances did not exceed FDIC insured limits. Pursuant to legislation enacted in 2010, the FDIC will fully insure all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012, at all FDICinsured institutions. Inventories Inventories are used by the University s nursing and graduate programs and consist of computers. The inventories are recorded at the lower of cost or market, on the first-in, first-out method. Student Accounts, Notes and Pledges Receivables Student accounts receivable are stated at the amounts billed to students less applied scholarships and loan proceeds. The University provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Tuition is generally due at the beginning of the semester, unless the student has signed a payment plan. Charges that are past due and have had no response to the due diligence process are assigned to third-party collection agencies. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the student. Notes receivable consist of amounts due under the Federal Perkins Loan Program and are stated at their outstanding principal amount, net of an allowance for doubtful notes. Loans are made to students based on demonstrated financial need and satisfaction of federal eligibility requirements for the Federal Perkins Loan Program. Principal and interest payments on loans generally do not commence until after the borrower graduates or otherwise ceases enrollment. The University provides an allowance for doubtful notes, which is based upon a review of outstanding loans, historical collection information and existing conditions. Interest income is recorded as received, which is not materially different from the amount that would have been recognized on the accrual basis. Loans that are delinquent continue to accrue interest. Property and Equipment Property and equipment are depreciated over the estimated useful life of each asset, which ranges from three to 40 years. Annual depreciation is primarily computed using the straight-line method. Physical plant equipment has been substantially recorded at cost with the exception of gifts, which are recorded at market value at the date of acquisition. 7

10 The University capitalizes interest costs as a component of construction in progress, based on interest costs of borrowing specifically for the project, net of interest earned on investments acquired with the proceeds of the borrowing. The University did not capitalize any interest during Investments Investments in equity securities having a readily determinable fair value and all debt securities are carried at a fair market value. All other investments are valued at the lower of cost (or fair value at the time of donation, if acquired by contribution) or market value. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair market value and realized gains and losses on other investments. Investment income and gains, that are initially restricted by donor stipulation and, if the restriction will be satisfied in the same year, are included in unrestricted net assets. Other investment income, gains and losses are reflected in the statement of activities as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. Asset Retirement Obligation The University adopted ASC Topic (formerly Financial Accounting Standards Board Interpretation No. 47), Asset Retirement Obligations, in the fiscal year ended June 30, ASC Topic requires that an Asset Retirement Obligation associated with the retirement of a tangible long-lived asset (such as remediation of asbestos) be recognized as a liability in the period in which it is incurred or becomes determinable (as defined by the standard) even when the timing and/or method of settlement may be conditional on a future event. Adoption of ASC Topic has not had a material effect on the results of operations, financial position or cash flows of the University. Contributions Gifts of cash and other assets received without donor stipulations are reported as unrestricted revenue and net assets. Gifts received with a donor stipulation that limits their use are reported as temporarily or permanently restricted revenue and net assets. When a donor stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Gifts having donor stipulations which are satisfied in the period the gift is received are reported as unrestricted revenue and net assets. Gifts and investment income that are originally restricted by the donor and for which the restriction is met in the same time period are recorded as temporarily restricted and then released from restriction. 8

11 Deferred Revenues The University records tuition revenue and related expenses in the period in which the session is substantially completed. Accordingly, certain revenues have been deferred at June 30 and will be recognized as the courses are completed. Transfers Between Fair Value Hierarchy Levels Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are recognized on the actual transfer date. Income Taxes The Internal Revenue Service has issued a determination letter that the University is a non-profit organization as defined under Section 501(c)(3) of the Internal Revenue Code and is exempt from income tax on related income. The University is subject to unrelated business income tax. The University is no longer subject to federal and state tax examinations by taxing authorities for years before Reclassifications Certain reclassifications have been made to the 2010 financial statements to conform to the 2011 financial statement presentation. These reclassifications have no effect on net assets. 9

12 Note 2: Investments and Investment Return Investments at consisted of the following: Managed funds Cash equivalents $ 570,897 $ 987,578 Mutual funds Cohen & Steers Dividend Value Fund 2,579,295 2,041,540 Diamond Hill Large Cap Fund 2,925,243 2,299,499 Vanguard 500 Index Fund 6,294,675 - Janus Advisor Intech Risk Managed Growth Fund - 2,507,212 Thornburg International Value Fund 3,142,401 2,411,693 Loomis Sayles Bond Institutional Fund 3,093,887 2,661,158 PIMCO FDS Total Return Fund 2,868,129 2,707,797 Other Mutual Funds 3,064,717 4,289,571 Equity securities 1,902,853 1,999,786 Fixed income securities 28, ,129 Limited partnerships 7,559,834 6,957,597 Accrued income 21,001 16,629 Annuity contracts Cash equivalents 333,238 43,456 Mutual funds 747, ,573 Real estate 495, ,719 Art and other collectibles 467, ,420 Deposits with bond trustees (restricted for debt service and escrow) 2,746,336 2,734,045 Certificates of deposit 462, ,104 Other investments 269, ,481 Total investments $ 39,573,386 $ 34,173,987 10

13 Investments in limited partnerships at, are as follows: Archstone Offshore Fund $ 3,768,964 $ 3,426,730 Meridian Diversified Fund 2,712,478 2,456,689 Other Limited Partnership Funds 1,078,392 1,074,178 $ 7,559,834 $ 6,957,597 The partnerships invest substantially all assets with independent managers employing various investment strategies. There is not a public market for these limited partnerships and the interest is transferable or redeemable on a quarterly to semi-annual basis with 45 to 90 days notice. A determination of net asset value per share is made and this partnership asset value is considered to be the fair value for these limited partnerships. Investment return during 2011 and 2010 consisted of the following: Interest and dividends $ 699,027 $ 438,856 Mineral rights 285, ,940 Net realized gains on investments 87,039 36,163 Net unrealized gains 4,964,742 3,274,148 Total investment return $ 6,036,342 $ 3,979,107 11

14 Note 3: Property and Equipment Property and equipment at June 30 consists of: Campus Grounds $ 4,306,930 $ 4,270,972 Buildings 33,109,974 33,017,930 Residences 15,898,528 15,898,528 Equipment 7,937,788 7,945,616 Software 7,531 7,531 Construction in progress 514,505-61,775,256 61,140,577 Less accumulated depreciation 25,531,152 24,175,276 $ 36,244,104 $ 36,965,301 Note 4: Long-term Debt Long-term debt consists of the following at : Bonds payable (A) $ 2,985,000 $ 3,415,000 Bonds payable (B) 2,670,000 2,850,000 Bonds payable (C) 1,785,000 2,105,000 Bonds payable (D) 9,890,000 9,930,000 Line of credit (E) 3,400,000 4,900,000 Mortgage payable on President's house (F) 292, ,709 Other obligations 202,219 32,607 $ 21,224,347 $ 23,534,316 (A) Educational Facilities Revenue Bonds, Series 2006, issued by the Kansas Independent College Association Pooled Educational Loan Program; maturing serially through 2016 in amounts ranging from $450,000 to $550,000 with interest ranging from 4.1% to 4.55%. The bonds are collateralized by certain real and personal property, including certain revenues. (B) Educational Facilities Revenue Bonds, Series 2001, issued by the Kansas Independent College Finance Authority. The bonds mature serially through October 2021 in amounts ranging from $185,000 to $315,000 per annum with interest ranging from 4.9% to 5.6%. The bonds are collateralized by certain real and personal property, including certain revenues. 12

15 (C) Educational Facilities Revenue Bonds, Series 2004, issued by the Kansas Independent College Finance Authority. The bonds mature serially through April 2016 in amounts ranging from $330,000 to $385,000 per annum with interest ranging from 4.0% to 4.4%. The bonds are collateralized by certain real and personal property, including certain revenues. (D) Educational Facilities Revenue Bonds, Series 2007 issued by the Kansas Independent College Finance Authority. The bonds mature serially through October 1, 2037 in amounts ranging from $40,000 to $660,000 per annum with interest ranging from 4.15% to 5.2%. The bonds are collateralized by certain real and personal property, including certain revenues. (E) The University has a revolving line of credit agreement with a maximum borrowing limit totaling $7,000,000, which expires on November 23, At, there was $3,400,000 and $4,900,000, respectively, borrowed against this line. Interest rate on the line of credit at June 30, 2011 was 4.75% and is payable monthly; all remaining interest and outstanding amounts are payable at maturity. Certain investments are pledged as collateral. The line of credit agreement has various covenant requirements, including a requirement to pay down the line if the fair market value of the collateral drops to a level that causes the borrowing to equal 80% or more of said securities, a debt service coverage ratio, and a liquidity covenant. Management has determined the University has complied with these covenants at June 30, (F) Mortgage payable to Intrust Bank, due July 24, 2014; payable $2,287 monthly, which includes interest fixed at 6.375% with an irregular last payment estimated at $265,328. The Loan Agreement in connection with the series 2007 bonds contains covenants requiring the University to meet certain financial ratios including maintaining a rate covenant of 1.0. Management has determined the University is in compliance with the minimum rate covenant, as of June 30, Aggregate annual maturities of long-term debt at June 30, 2011 are as follows: 2012 $ 1,098, ,544, ,143, ,407, ,200,000 Thereafter 11,830,000 $ 21,224,347 Note 5: Pension Plans The University participates in a defined contribution plan administered by Teachers Insurance Annuity Association, College Retirement Equities Fund, American Century Investors, Inc., Ameriprise, Inc. and I.D.S. Financial Services for full-time academic, administrative and staff 13

16 personnel. Employee benefits under these plans call for payments at retirement based on the accumulated values in the individual participant s accounts at date of retirement and, consequently, there are no prior service costs. The University s Board of Trustees annually determine the University s contributions to this plan. Total contributions by the University aggregated $410,693 and $418,192 for the years ended, respectively. Note 6: Temporarily Restricted Net Assets Temporarily restricted net assets are available for the following purposes: Buildings and equipment $ 3,165,038 $ 1,080,553 Unappropriated endowment earnings 4,552,150 1,320,700 Other 1,571,026 1,445,020 $ 9,288,214 $ 3,846,273 Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors. The amounts released during the years ended totaled $753,886 and $713,070, respectively. 14

17 Note 7: Permanently Restricted Net Assets Permanently restricted net assets are invested in perpetuity, the income from which is expendable to support various activities as follows: General purposes, including memorials $ 2,773,491 $ 2,759,813 Scholarships 19,998,106 19,687,256 Student loans 2,070,739 2,070,739 Library books 381, ,070 Buildings and equipment 418, ,211 Endowed chairs 5,057,652 5,056,652 Annuities 820, ,546 $ 31,520,025 $ 31,036,287 Note 8: Pledges Receivable Pledges receivable consist of the following unconditional promises to give at June 30: Due in less than one year $ 2,141,305 $ 171,605 Due in one to five years 332, ,473 Due in more than five years 385, ,082 2,859, ,160 Less unamortized discount 71,190 72,315 Less allowance for doubtful accounts 18,500 20,600 $ 2,769,646 $ 814,245 Approximately 86% of the outstanding pledges at June 30, 2011 were due from three donors. Additionally, approximately 25% of outstanding pledges at June 30, 2011 were due from certain members of the Board of Trustees and employees of the University. 15

18 Note 9: Annuities Payable The University has been the recipient of several gift annuities which require future payments to the donor or their named beneficiaries. The assets received from the donor are recorded at fair value. The University has recorded a liability at December 31, 2011 and 2010, of $725,789 and $652,793, respectively, which represents the present value of the future annuity obligations. The liability has been determined using a discount rate of 4.00% and rates of return of 1.63% to 2%. Note 10: Operating Leases The University has non-cancelable operating leases for real estate expiring through The building leases require the University to pay operating costs along with base rental payments. Future minimum lease payments at June 30, 2011 were: 2012 $ 1,788, ,801, ,814, ,836, ,847,816 Thereafter 3,422,189 $ 12,510,840 Rental expense for all operating leases were $1,799,088 and $1,703,110 for the years ended, respectively. Note 11: Litigation The University is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the financial position of the University. No accrual for any potential losses, if any, has been included in these financial statements. 16

19 Note 12: Endowment The University s endowment consists of approximately 380 individual funds established for a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the governing body to function as endowments (board-designated endowment funds). As required by accounting principles generally accepted in the United States of America (GAAP), net assets associated with endowment funds, including board-designated endowment funds, are classified and reported based on the existence or absence of donor-imposed restrictions. The University s governing body has interpreted the State of Kansas Prudent Management of Institutional Funds Act (SPMIFA) as requiring preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the University classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of donor-restricted endowment funds is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, the University considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. Duration and preservation of the fund 2. Purposes of the University and the fund 3. General economic conditions 4. Possible effect of inflation and deflation 5. Expected total return from investment income and appreciation or depreciation of investments 6. Other resources of the University 7. Investment policies of the University 17

20 The composition of net assets by type of endowment fund at is as follows: Unrestricted Temporarily Restricted 2011 Permanently Restricted Total Donor-restricted endowment funds $ (2,058,754) $ 4,552,150 $ 29,948,948 $ 32,442,344 Board-designated endowment funds 901, ,831 Total managed endowment funds $ (1,156,923) $ 4,552,150 $ 29,948,948 $ 33,344,175 Unrestricted Temporarily Restricted 2010 Permanently Restricted Total Donor-restricted endowment funds $ (4,006,358) $ 1,320,700 $ 29,499,910 $ 26,814,252 Board-designated endowment funds 886, ,082 Total managed endowment funds $ (3,120,276) $ 1,320,700 $ 29,499,910 $ 27,700,334 18

21 Changes in endowment net assets for the years ended is as follows: Unrestricted Temporarily Restricted 2011 Permanently Restricted Total Endowment net assets, beginning of year $ (3,120,276) $ 1,320,700 $ 29,499,910 $ 27,700,334 Investment return 2,754,420 3,231,450-5,985,870 Appropriation of endowment assets for expenditure (791,067) - - (791,067) Contributions , ,038 Managed endowment funds, end of year $ (1,156,923) $ 4,552,150 $ 29,948,948 $ 33,344,175 Unrestricted Temporarily Restricted 2010 Permanently Restricted Total Endowment net assets, beginning of year $ (4,806,152) $ - $ 29,036,623 $ 24,230,471 Investment return 2,185,876 1,320,700-3,506,576 Appropriation of endowment assets for expenditure (500,000) - - (500,000) Contributions , ,287 Managed endowment funds, end of year $ (3,120,276) $ 1,320,700 $ 29,499,910 $ 27,700,334 19

22 Amounts of donor-restricted endowment funds classified as permanently restricted net assets at consisted of: Permanently restricted net assets - portion of perpetual endowment funds required to be retained permanently by explicit donor stipulation or SPMIFA $ 29,948,948 $ 29,499,910 From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level the University is required to retain as a fund of perpetual duration pursuant to donor stipulation or SPMIFA. In accordance with GAAP, deficiencies of this nature are reported in unrestricted net assets and aggregated $2,058,754 at June 30, These deficiencies resulted from unfavorable market fluctuations that occurred shortly after investment of new permanently restricted contributions and continued appropriation for certain purposes that was deemed prudent by the governing body. The University has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs and other items supported by its endowment while seeking to maintain the purchasing power of the endowment. Endowment assets include those assets of donor-restricted endowment funds the University must hold in perpetuity or for donor-specified periods, as well as those of board-designated endowment funds. Under the University s policies, endowment assets are invested in a manner that is intended to produce results that mirror the market and assume a moderate level of investment risk. The University expects its endowment funds to provide an average rate of return of approximately 5% annually over time. Actual returns in any given year may vary from this amount. To satisfy its long-term rate of return objectives, the University relies on a total return strategy in which investment returns are achieved through both current yield (investment income such as dividends and interest) and capital appreciation (both realized and unrealized). The University targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. The University does not have a formal spending policy; however, the Board determines the actual spending rate and amount annually. 20

23 Note 13: Disclosures about Fair Value of Assets and Liabilities Accounting Standards Codification (ASC) Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying statements of financial position, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. Investments Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The inputs used by pricing models to determine fair value may include one, or a combination of observable inputs, such as benchmark yields, broker/dealer quotes, issuer spreads, benchmark securities, and reference data market research publications. Investments valued using net asset value (or its equivalent), as a practical expedient, are classified as Level 2 inputs if the University has the ability to redeem its investment with the investment manager at net asset value (or its equivalent) at the measurement date. All other investments not valued using quotes or the inputs discussed above are classified as Level 3 inputs. Cash Equivalents, Mutual Funds and Equity Securities Fair value is determined by quoted prices in the open market. As market quotations are readily available, these mutual funds, money market mutual funds and common stocks are classified within Level 1 of the hierarchy. 21

24 Fixed Income Securities Fair value is determined by quoted prices for similar instruments in the marketplace. These securities consisting of an agency bond are classified within Level 2 of the hierarchy. Limited Partnerships Fair value is measured at the net asset value of the investee funds held under each partnership, as determined by management of the funds. Fair value represents the amount the partnership would expect to receive upon liquidation of its investments in the investee funds. The following table presents the fair value measurements of assets recognized in the accompanying statements of financial position measured at fair value on a recurring basis and level within the fair value hierarchy in which the fair value measurements fall at : Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Fair Value (Level 1) (Level 2) (Level 3) Cash equivalents $ 904,135 $ 904,135 $ - $ - Mutual funds 24,715,685 24,715, Equity securities 1,902,853 1,902, Fixed income securities 28,301-28,301 - Limited partnerships 7,559,834-7,559,834 - Quoted Prices in Active Markets for Identical Assets 2011 Fair Value Measurements Using 2010 Fair Value Measurements Using Significant Other Observable Inputs Significant Unobservable Inputs Fair Value (Level 1) (Level 2) (Level 3) Cash equivalents $ 1,031,034 $ 1,031,034 $ - $ - Mutual funds 19,647,043 19,647, Equity securities 1,999,786 1,999, Fixed income securities 104, ,129 - Limited partnerships 6,957,597-6,957,597-22

25 Note 14: Significant Estimates and Concentrations Current Economic Conditions The current protracted economic decline continues to present universities with difficult circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair value of investments and other assets, declines in contributions, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the University. Current economic conditions have made it difficult for many donors to continue to contribute to universities. A significant decline in contribution revenue could have an adverse impact on the University s future operating results. In addition, given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in investment values, allowances for contributions and student receivables that could negatively impact the University s ability to meet debt covenants or maintain sufficient liquidity. Given the University s level of unrestricted net assets and liquidity of assets, management believes that, while the potential impact of the current economic environment could cause a negative impact on the University s operations, management has taken appropriate actions based on the information available to address these conditions. Note 15: Subsequent Events The University has an agreement with the Institute Professional Development (IPD), which provides administrative services and operational services for the University s off-campus learning centers. During 2011 and 2010, IPD collected tuition and fee revenue from the off-campus learning centers and then compensated the University for a percentage of the collected tuition revenue. Subsequent to year end, the U.S. Department of Education has finalized rules that repeal the safe harbors set forth in 34 C.F.R (b)(22)(ii) as of July 1, Such regulatory changes impact the tuition-sharing formula and the payment for which IPD is compensated. Under the revised contract dated June 30, 2011, payments totaling $5,488,000 will be paid to IPD by the University for services rendered for the period July 1, 2011 to August 31, The fee will be billed monthly in the amount of $392,000. During the term of the agreement, one hundred percent of the tuition and fees from students will be collected by the University. The U.S. stock market has suffered significant declines since June 30, Due to the lag experienced in obtaining information used to report fair values for certain portfolio holdings (primarily limited partnerships), management has not yet quantified the impact of this subsequent decline on its investment portfolio at October 14, Subsequent events have been evaluated through October 14, 2011, which is the date the financial statements were available to be issued. 23