The University of Memphis Financial Report

Transcription

1 The University of Memphis Financial Report

2 THE TENNESSEE BOARD OF REGENTS The Honorable Bill Haslam, Governor of Tennessee and Chair The Honorable Gregory Duckett, Memphis The Honorable Paul W. Montgomery, Kingsport The Honorable John S. "Steve" Copeland, Cookeville The Honorable Danni B. Varlan, Knoxville The Honorable John Farris, Memphis The Honorable Robert P. Thomas, Nashville The Honorable Emily J. Reynolds, Nashville The Honorable Fran Marcum, Tullahoma The Honorable Tom Griscom, Chattanooga The Honorable Howard Roddy, Chattanooga The Honorable Jonas Kisber, Jackson The Honorable Linda Weeks, Faculty Regent The Honorable Lee Gatts, Student Regent The Honorable Richard Rhoda, Executive Director, Tennessee Higher Education Commission The Honorable Kevin S. Huffman, Commissioner of Education The Honorable Julius Johnson, Commissioner of Agriculture THE TENNESSEE BOARD OF REGENTS ADMINISTRATIVE OFFICERS John Morgan, Chancellor Paula Myrick Short, Vice Chancellor for Academic Affairs Wendy Thompson, Vice Chancellor for Access and Diversity David Gregory, Vice Chancellor for Administration & Facilities Development Dale Sims, Vice Chancellor for Business and Finance Warren Nichols, Vice Chancellor for the Community Colleges James King, Vice Chancellor for Tennessee Technology Centers Thomas Danford, Chief Information Officer Christine Modisher, General Counsel and Board Secretary Monica Greppin, Interim Director of Communications Phyllis Anderson, Executive Assistant to the Chancellor ADMINISTRATIVE OFFICERS Shirley C. Raines, President Thomas Nenon, Interim Provost David G. Zettergren, Vice President for Business and Finance Rosie Phillips Bingham, Vice President for Student Affairs Ellen Watson, Interim Vice President for Information Technology and Chief Information Officer Julie Johnson, Vice President for Advancement Linda Bonnin, Vice President for Communications, Public Relations, and Marketing Tom Bowen, Director of Intercollegiate Athletics Byron Morgan, Chief Audit Executive for Internal Audit FINANCIAL STAFF Jeannie G. Smith, Assistant Vice President for Business and Finance Libby Shelton, Controller Lorrean Lim, Director of Financial Analysis and Treasury Services Wendi Scott, Manager of Financial Reporting Terrice Watson, Manager of General Accounting Linda Heide, Manager of Grants and Contracts Accounting Russell Teague, Director of Payroll Deborah Becker, Director of Budgeting

3 TABLE OF CONTENTS Letters of Transmittal...1 Management Discussion and Analysis...3 Unaudited Statement of Net Assets Unaudited Statement of Revenues, Expenses, and Changes in Net Assets Unaudited Statement of Cash Flows University Notes to Financial Statements Schedule of Funding Progress University Unaudited Statement of Cash Flows Foundation... 41

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6 Management Discussion and Analysis This section of The University of Memphis s annual financial report presents a discussion and analysis of the financial performance of the University during the fiscal year ended June 30, 2012, with comparative information presented for the fiscal year ended June 30, This discussion has been prepared by management along with the financial statements and related note disclosures and should be read in conjunction with the financial statements and notes. The financial statements, notes, and this discussion are the responsibility of management. Using This Annual Report This report consists of three basic financial statements. The Statement of Net Assets; the Statement of Revenues, Expenses, and Changes in Net Assets; and the Statement of Cash Flows provide information on the University of Memphis as a whole and present a longterm view of the University s finances. The Statement of Net Assets The Statement of Net Assets presents the financial position of the University at the end of the fiscal year and includes all assets and liabilities of the University. The difference between total assets and total liabilities net assets is an indicator of the current financial condition of the University. Assets and liabilities are generally measured using current values. One notable exception is capital assets, which are stated at historical cost less an allowance for depreciation. Net assets are divided into three major categories. The first category, invested in capital assets, net of related debt, provides the University s equity in property, plant, and equipment owned by the University. The next asset category is restricted net assets, which is divided into two categories, nonexpendable and expendable. The corpus of nonexpendable restricted resources is only available for investment purposes. Expendable restricted net assets are available for expenditure by the University but must be spent for purposes as determined by donors and/or external entities that have placed time or purpose restrictions on the use of the assets. The final category is unrestricted net assets. Unrestricted net assets are available to the institution for any lawful purpose of the institution. 3

7 Management Discussion and Analysis Statement of Net Assets - The University (in thousands of dollars) FY 2012 FY 2011 Assets: Current assets $ 102,887 $ 94,111 Capital assets, net 405, ,364 Other assets 97, ,941 Total Assets $ 606,181 $ 585,416 Liabilities: Current liabilities $ 54,356 $ 49,845 Noncurrent liabilities 130, ,658 Total Liabilities $ 184,460 $ 179,503 Net Assets: Invested in capital assets, net of related debt $ 297,926 $ 275,933 Restricted - nonexpendable 3,760 3,737 Restricted - expendable 8,775 8,450 Unrestricted 111, ,793 Total Net Assets $ 421,721 $ 405,913 Comparison of FY 2012 to FY 2011 On December 16, 2011, the State of Tennessee acquired the assets of Lambuth University for use by the Tennessee Board of Regents (TBR). The University of Memphis was given authority to assume control of all assets and to operate the Lambuth Campus as a branch of the University of Memphis. Capital assets, net of related debt increased primarily due to the acquisition of the Lambuth Campus, including $480,423 in land, $27,845,110 in buildings, $643,316 in improvements, $77,000 in equipment and $1,918,348 in library holdings. In FY 2012, the University of Memphis began amortizing TSSBA bond premiums and discounts greater than $100,000 over the life of the bonds. Liabilities increased as a result of a prior period adjustment of $4.2 million in unamortized bond premiums for five projects. 4

8 Management Discussion and Analysis Statement of Net Assets - The Foundation (in thousands of dollars) FY 2012 FY 2011 Assets: Current assets $ 4,168 $ 4,745 Noncurrent assets 110, ,795 Total Assets $ 114,326 $ 112,540 Liabilities: Current liabilities $ 10,852 $ 10,388 Total Liabilities $ 10,852 $ 10,388 Net Assets: Restricted - nonexpendable $ 56,066 $ 53,489 Restricted - expendable 39,881 39,234 Unrestricted 7,527 9,429 Total Net Assets $ 103,474 $ 102,152 Comparison of FY 2012 to FY 2011 Unrestricted net assets decreased principally due to the reclassification of a negative amount from restricted-expendable to unrestricted representing the total amount by which the fair values of certain donor-restricted endowment funds were below the amounts required to be retained permanently in accordance with FAS Many of the University s unrestricted net assets have been designated for specific purposes such as: repairs and replacement of equipment, future debt service, quasi-endowments, capital projects, and student loans. The following graph shows the allocations: Allocation of Net Assets The University 2012 Working Capital % 15% 1% 3% 1% Encumbrance Designated Fees Auxiliaries Plant Construction 15% 18% 13% 1% 3% 1% 19% 39% Renewal and Replacement Undesignated 49% 5

9 Management Discussion and Analysis Comparison of FY 2012 to FY 2011 Undesignated Net Assets increased primarily due to funds accumulated for handling the transition from the time (FY FY 2011) when Federal stimulus and State non-recurring funds were available to supplant the State base reductions to future years when such funds are significantly reduced or totally eliminated from the University s budget. This is in accordance with the University s five-year financial plan implemented in FY 2010 as part of the State of Tennessee budget process. Renewal and Replacement Net Assets increased as a result of funds accumulated to fund anticipated costs associated with the Enterprise Resource Planning system and Information Technology Infrastructure. The decrease in Plant Construction Net Assets is primarily due to completion of renovation projects previously funded with local and non-recurring State funds as well as the utilization of one-time funds to transition to reduced State appropriations. The Statement of Revenues, Expenses, and Changes in Net Assets The Statement of Revenues, Expenses, and Changes in Net Assets presents the operating results of the University, as well as the nonoperating revenues and expenses. Annual State appropriations, while budgeted for operations, are considered non-operating revenues according to accounting principles generally accepted in the United States of America. 6

10 Management Discussion and Analysis Statement of Revenues, Expenses, and Changes in Net Assets - The University (in thousands of dollars) FY 2012 FY 2011 Operating revenues: Net tuition and fees $ 125,075 $ 113,442 Grants and contracts 42,146 42,148 Auxiliary 21,706 19,987 Other 30,925 26,984 Total operating revenues $ 219,852 $ 202,561 Operating expenses $ (427,536) $ (392,579) Operating loss $ (207,684) $ (190,018) Nonoperating revenues and expenses: State appropriations $ 100,584 $ 126,188 Gifts 23,323 18,825 Investment income 2,195 2,300 Other revenues and expenses 64,044 74,450 Total nonoperating revenues and expenses $ 190,146 $ 221,763 Income (loss) before other revenues, expenses, gains or losses $ (17,538) $ 31,745 Other revenues, expenses, gains or losses: Capital appropriations $ 2,953 $ 1,209 Capital grants and gifts 34,625 15,241 Other 16 8 Total other revenues, expenses, gains or losses $ 37,594 $ 16,458 Increase in net assets $ 20,056 $ 48,203 Net asset at beginning of year 405, ,710 Prior period adjustment (4,248) Net assets at end of year $ 421,721 $ 405,913 Comparison of FY 2012 to FY 2011 State appropriations for operations (recurring and non-recurring) decreased by $25.6 million or 20% in FY 2012, while capital appropriations increased for various roof replacements. Gifts increased primarily due to the University s capital campaign. Other nonoperating revenues and expenses decreased due to federally funded State Fiscal Stabilization Funds (SFSF) that were available in FY No SFSF funds were available in FY Capital grants and gifts increased primarily due to the acquisition of the Lambuth Campus. 7

11 Management Discussion and Analysis Statement of Revenues, Expenses, and Changes in Net Assets - The Foundation (in thousands of dollars) FY 2012 FY 2011 Operating revenues and expenses: Gifts and Contributions $ 20,444 $ 13,008 Operating expenses (24,756) (23,142) Operating income (loss) $ (4,312) $ (10,134) Nonoperating revenues and expenses: Investment income(loss) $ 3,658 $ 12,462 Income (loss) before other revenues, expenses, gains or losses $ (654) $ 2,328 Other revenues, expenses, gains or losses: $ 1,976 $ 2,666 Increase in net assets $ 1,322 $ 4,994 Net assets at beginning of year 102,152 97,158 Net assets at end of year $ 103,474 $ 102,152 Comparison of FY 2012 to FY 2011 The increase in gifts and contributions is principally the result of the University s centennial capital campaign. The decrease in investment income is principally due to difficult financial markets. The decrease in other revenues, expenses, gains or losses is due to a lower level of permanently restricted gifts. 8

12 Management Discussion and Analysis Revenues The following is a graphical illustration of revenues by source (both operating and nonoperating), which are used to fund the University s operating activities for the years ended June 30, 2012, and June 30, 2011 (amounts are presented in thousands of dollars) Tuition and Fees 0.1% 0.5% 4.4% 13% 23% 7% 24% 28% Grants and Contracts Sales and Services Gifts Auxiliary Investment Income Other 28% 0.4% 0.6% 5% 8% 7% 25% 26% State Appropriations Comparison of FY 2012 to FY 2011 State appropriations for operations decreased by $25.6 million or 20% from FY 2011 due primarily to the elimination of the non-recurring and maintenance of effort funds associated with the Federal Stimulus funding in FY 2010 and FY Additional decreases were a result of a 2% overall base appropriation reduction and the phasedin removal of the hold harmless provision of THEC s new funding formula model. Capital appropriations increased for various roof replacement projects. Gifts increased primarily due to the acquisition of the Lambuth Campus, valued at $30 million. 9

13 Management Discussion and Analysis Expenses Operating expenses can be displayed in two formats, natural classification and program classification. Both formats are displayed below. Expenses by Natural Classification - The University (in thousands of dollars) FY 2012 FY 2011 Operating Expenses: Salaries and wages $ 185,937 $ 178,295 Benefits 54,767 53,281 Utilities, Supplies, and Other Services 101,348 83,613 Scholarships and Fellowships 56,455 59,057 Depreciation 29,029 18,333 Total Operating Expenses $ 427,536 $ 392, Salaries and wages % 7% Benefits 15% 5% 24% 13% 43% Utilities, supplies, and other services Scholarships and fellowships 21% 14% 45% Depreciation Comparison of FY 2012 to FY 2011 Operating costs (utilities, supplies, and other services) increased by $18 million primarily due to the reclassification of library periodicals from capital library holdings to expenses, contractual obligations related to athletic staffing transitions, maintenance and repairs for the Lambuth Campus, and expenses paid by the Foundation on behalf of the University. Depreciable assets totaling $42.5 million, including $30 million for the Lambuth Campus were capitalized, increasing depreciation expense. In addition, periodicals that were previously capitalized as library holdings were determined to be more appropriately expensed. The estimated useful life of periodicals was decreased from 10

14 Management Discussion and Analysis 10 to 0 years, resulting in a $21 million reduction in library holdings and an additional depreciation expense of $10.9 million, net of accumulated depreciation. Natural Classification - The Foundation (in thousands of dollars) FY 2012 FY 2011 Operating Expenses: Utilities, supplies, and other services $ 143 $ 177 Payment to or on behalf of the University 24,613 22,965 Total Operating Expenses $ 24,756 $ 23,142 Comparison of FY 2012 to FY 2011 Total operating expenses increased principally due to increases for scholarships and fellowships, professional services, departmental enrichment, and special projects, partially offset by a decrease in construction expense. Expenses by Program Classification - The University (in thousands of dollars) FY 2012 FY 2011 Operating Expenses: Instruction $ 127,763 $ 119,445 Research 37,556 34,905 Public Service 10,781 10,784 Academic Support 27,181 30,219 Student Services 54,028 45,668 Institutional Support 34,444 27,247 Maintenance and Operation of Plant 34,896 32,600 Scholarships and Fellowships 56,455 59,057 Auxiliaries 15,403 14,321 Depreciation 29,029 18,333 Total Operating Expenses $ 427,536 $ 392,579 11

15 Management Discussion and Analysis FY 2012 Instruction FY % 4% 7% 30% Research Public Service Academic Support 15% 4% 5% 30% Student Services 8% Institutional Support 8% 8% 13% 9% 2% 6% Maintenance and Operation of Plant Scholarships and Fellowships 7% 11% 8% 3% 9% Auxiliaries Depreciation Comparison of FY 2012 to FY 2011 Student Services expenses increased primarily due to contractual obligations related to athletic staffing transitions. Institutional Support expenses increased due to a legal judgment against the University. The decrease in Academic Support and corresponding increase in the other functions is due to the allocation of computer services. This computer allocation credits Academic Support in the salaries, benefits and operating expense categories, and transfers the expense to all the other functions. The increase in depreciation expense is due to a change in accounting estimate for periodicals previously capitalized as library holdings, now determined to be more appropriately expensed. The write off of periodicals resulted in an additional depreciation expense of $10.9 million. Capital Assets and Debt Administration Capital Assets The University of Memphis had $406 million invested in capital assets, net of accumulated depreciation of $183.7 million at June 30, 2012; and $384 million invested in capital assets, net of accumulated depreciation of $183.3 million at June 30, Depreciation charges totaled $29 million and $18.3 million for the years ended June 30, 2012, and June 30, 2011, respectively. Details of these assets are shown below. 12

16 Management Discussion and Analysis Schedule of Capital Assets, Net of Depreciation - The University ( in thousands of dollars) FY 2012 FY 2011 Land $ 18,487 $ 17,937 Land improvements 49,417 47,562 Buildings 296, ,375 Equipment 14,719 13,286 Library holdings 6,997 16,388 Intangible assets 5,119 5,938 Projects in progress 13,953 13,878 Total $ 405,583 $ 384,364 The University capitalized $30 million in buildings and infrastructure from the acquisition of the Lambuth Campus. Library holdings decreased by $9.4 million due to a change in accounting estimate to expense periodicals beginning in FY Planned capital activities for FY 2013 include a new student housing facility (local funds $53 million), a 1,000 car parking garage on Norriswood (local funds $22.1 million), and research facilities improvements (local funds $1.1 million). Plans also include the acquisition of properties for expansion purposes funded through General Obligation Bonds, as well as local funds. More detailed information about the University s capital assets is presented in Note 5 to the financial statements. Debt The University had $107.6 million and $108.4 million in debt outstanding at June 30, 2012, and June 30, 2011, respectively. The table below summarizes these amounts by type of debt instrument. Outstanding Debt - The University (in thousands of dollars) FY 2012 FY 2011 TSSBA Bonds Payable $ 100,508 $ 100,574 TSSBA Commercial Paper 88 GO Commercial Paper 4,271 4,363 Capital Lease 2,790 3,494 Total $ 107,657 $ 108,431 13

17 Management Discussion and Analysis The ratings on debt issued by the Tennessee State School Bond Authority at June 30, 2012, were as follows: Fitch Moody s Investor Service Standard & Poor s AA+ Aa1 AA More information about the University s long-term liabilities is presented in Note 8 to the financial statements. Economic Factors That Will Affect the Future The State s revenue collections indicate a very slow economic recovery in Tennessee, but the impact this will have on future funding both in operating appropriation and future building projects is not clear. For the fifth consecutive year, the University s base State appropriations will be reduced. The impact of the reduction for FY 2013 is $1.8 million or 2.2% from the previous year. Since FY 2008, the University has sustained a cumulative State appropriation reduction of $43.5 million or 35% by FY However, the Governor recently completed a listening tour of Tennessee aimed at studying the issues around higher education in Tennessee. The expectation is that higher education will be a prime area of focus during the upcoming legislative session, with an emphasis on the financial burden of higher education on students. To compensate for the reduction in State appropriations, the University will utilize FY 2012 operating carry forward funds to transition to reduced State appropriations in accordance with the University s five-year financial plan, which includes budget reductions, restructuring, position attritions, voluntary buyouts, and tuition increases. The University has implemented an 8.2% increase in student fees for FY We remain cognizant of the impact future tuition increases may have on our students and are striving to minimize future increases to the greatest extent possible. The FY 2012 acquisition of the University of Memphis Lambuth Campus and the FY 2013 entrance into the Big East Conference provide a significant opportunity for enrollment and revenue growth. We are not aware of any other factors, decisions, or conditions that are expected to have a significant impact on the financial position or results of operation during this fiscal year. Requests for Information This financial report is designed to provide a general overview of the institution s finances for all those with an interest in the University s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be directed to Libby Shelton, Controller; Administration Building, Room 275, Memphis, Tennessee

18 Unaudited Statement of Net Assets June 30, 2012 University Foundation ASSETS Current assets: Cash and cash equivalents (Notes 2 and 24) $ 37,909, $ 1,685, Short-term investments (Notes 3) 31,116, Accounts, notes, and grants receivable (net) (Notes 4 and 24) 32,258, , Due from primary government 189, Pledges receivable (net) (Note 24) 2,351, Inventories (at lower of cost or market) 591, Prepaid expenses and deferred charges 305, Accrued interest receivable 516, , Total current assets $ 102,887, $ 4,168, Noncurrent assets: Cash and cash equivalents (Note 2) $ 69,611, Investments (Notes 3 and 24) 23,720, $ 104,805, Accounts, notes, and grants receivable (net) (Notes 4 and 24) 4,375, , Pledges receivable (net) (Note 24) 4,515, Capital assets (net) (Note 5) 405,582, Other assets 2, , Total noncurrent assets $ 503,293, $ 110,158, Total assets $ 606,180, $ 114,326, LIABILITIES Current liabilities: Accounts payable (Notes 7) $ 7,672, $ 10,618, Accrued liabilities 23,776, , Student deposits 1,192, Deferred revenue 12,106, Compensated absences (Note 8) 2,535, Accrued interest payable 775, Long-term liabilities, current portion (Note 8) 4,736, Deposits held in custody for others 729, Other liabilities 830, Total current liabilities $ 54,355, $ 10,852, Noncurrent liabilities: Net OPEB obligation (Notes 8 and 13) $ 14,710, Compensated absences (Note 8) 6,899, Long-term liabilities (Note 8) 102,920, Due to grantors (Note 8) 4,375, Other liabilities 1,197, Total noncurrent liabilities $ 130,104, Total liabilities $ 184,459, $ 10,852,

19 Unaudited Statement of Net Assets June 30, 2012 University Foundation NET ASSETS Invested in capital assets, net of related debt $ 297,926, Restricted for: Nonexpendable: Scholarships and fellowships 1,482, $ 25,193, Instructional department uses 17,892, Other 2,277, ,980, Expendable: Scholarships and fellowships 1,291, ,520, Research 1,316, ,996, Instructional department uses 1,433, ,981, Loans 2,688, Capital projects 370, ,484, Debt service Other 1,673, ,898, Unrestricted (Note 10) 111,259, ,526, Total net assets $ 421,720, $ 103,474,

20 Unaudited Statement of Revenues, Expenses, and Changes in Net Assets June 30, 2012 University Foundation REVENUES Operating revenues: Student tuition and fees (net of scholarship allowances of $50,161,108.51) $ 125,074, Gifts and contributions $ 20,444, Governmental grants and contracts 35,918, Non-governmental grants and contracts 6,228, Sales and services of educational activities 5,469, Sales and services of other activities 25,303, Auxiliary enterprises: Residential life (net of scholarship allowances 15,273, of $241, all residential life revenues are used as security for revenue bonds, see Note 11) Bookstore 682, Food service 1,095, Other auxiliaries 4,654, Interest earned on loans to students 151, Total operating revenues $ 219,851, $ 20,444, EXPENSES Operating Expenses Salaries and wages $ 185,936, Benefits 54,766, Utilities, supplies, and other services 101,347, $ 143, Scholarships and fellowships 56,454, Depreciation expense 29,029, Payments to or on behalf of the University of Memphis 24,612, Total operating expenses 427,535, ,755, Operating income (loss) $ (207,684,367.90) $ (4,311,579.00) 17

21 Unaudited Statement of Revenues, Expenses, and Changes in Net Assets June 30, 2012 University Foundation NONOPERATING REVENUES (EXPENSES) State appropriations $ 100,583, Gifts, including $21,121, from the Foundation 23,322, Grants and contracts 68,935, Investment income (net of investment expense $55, for the University and $162, for the Foundation 2,195, $ 3,657, Interest on capital asset-related debt (4,671,147.02) Other non-operating revenues/(expenses) (220,412.44) Net nonoperating revenues $ 190,146, $ 3,657, Income before other revenues, expenses gains, or losses $ (17,538,217.65) $ (653,604.00) Capital appropriations $ 2,952, Capital grants and gifts, including $3,490, from the Foundation 34,624, Additions to permanent endowments 16, $ 1,976, Total other revenues $ 37,593, $ 1,976, Increase (decrease) in net assets $ 20,055, $ 1,322, NET ASSETS Net Assets -beginning of year $ 405,913, $ 102,151, Prior period adjustment (Note 19) (4,248,176.49) Net Assets - end of year $ 421,720, $ 103,474,

22 Unaudited Statement of Cash Flows for the Year Ended June 30, 2012 CASH FLOWS FROM OPERATING ACTIVITIES Tuition and fees $ 125,278, Grants and contracts 41,330, Sales and services of educational activities 6,696, Sales and services of other activities 22,364, Payments to suppliers and vendors (97,961,613.51) Payments to employees (184,220,825.36) Payments for benefits (53,285,690.38) Payments for scholarships and fellowships (56,454,879.19) Loans issued to students (697,907.05) Collection of loans from students 501, Interest earned on loans to students 151, Auxiliary enterprise charges: Residence halls 15,356, Bookstore 682, Food services 1,095, Other auxiliaries 4,694, Net cash provided (used) by operating activities $ (174,468,985.71) CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES State appropriations $ 100,368, Gifts and grants received for other than capital 93,203, or endowment purposes, including $16,489, from the Foundation to the University Private gifts for endowment purposes 16, Federal student loan receipts 136,510, Federal student loan disbursements (136,510,463.00) Changes in deposits held for others 236, Other non-capital financing receipts (payments) (27,826.43) Net cash provided (used) by non-capital financing activities $ 193,797, CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital - state appropriation $ 2,952, Proceeds from sale of capital assets 16, Purchase of capital assets and construction (16,518,225.87) Principal paid on capital debt and lease (5,072,193.88) Interest paid on capital debt and lease (4,683,819.52) Net cash provided (used) by capital and related financing activities $ (23,304,981.52) 19

23 Unaudited Statement of Cash Flows for the Year Ended June 30, 2012 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales and maturities of investments $ 26,169, Income on investments 2,203, Purchase of investments (37,383,067.14) Net cash provided (used) by investing activities $ (9,009,564.28) Net increase (decrease) in cash and cash equivalents $ (12,986,520.76) Cash and cash equivalents - beginning of year 120,507, Cash and cash equivalents - end of year (Note 2) $ 107,521, RECONCILIATION OF OPERATING INCOME/(LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating income/(loss) $ (207,684,367.90) Adjustments to reconcile operating loss to net cash provided (used) by operating activities: Depreciation expense 29,029, Other adjustments 207, Change in assets and liabilities: Receivables, net (3,476,971.34) Inventories 78, Prepaid/deferred items 1,118, Accounts payable 1,676, Accrued liabilities 1,621, Deferred revenues 1,524, Deposits 208, Compensated absences 291, Other 936, Net cash provided (used) by operating activities $ (174,468,985.71) Non-cash investing, capital, and financing transactions Gifts in-kind - capital $ 34,624, Gain/(loss) on disposal of capital assets (125,004.75) 20

24 Notes to the Financial Statements 1. Summary of Significant Accounting Policies REPORTING ENTITY The University is a part of the State University and Community College System of Tennessee (Tennessee Board of Regents). This system is a component unit of the State of Tennessee because the state appoints a majority of the system s governing body and provides significant financial support; the system is discretely presented in the Tennessee Comprehensive Annual Financial Report. The financial statements present only that portion of the Tennessee Board of Regents activities that is attributable to the transactions of The University of Memphis. The University of Memphis Foundation is considered a component unit of the University. Although the University does not control the timing or amount of receipts from the Foundation, the majority of resources, or income thereon, that the Foundation holds and invests are restricted to the activities of the University by the donors. Because these restricted resources held by the Foundation can only be used by, or for the benefit of, the University, the Foundation is considered a component unit of the University and is discretely presented in the University s financial statements. See Note 24 for more detailed information about the component unit and how to obtain the report. BASIS OF PRESENTATION The University and Foundation s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America applicable to governmental colleges and universities engaged in business-type activities as prescribed by the Governmental Accounting Standards Board (GASB). BASIS OF ACCOUNTING For financial statement purposes, the University is considered a special-purpose government engaged only in business-type activities. Accordingly, the financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. All significant interfund transactions have been eliminated. Private-sector standards of accounting and financial reporting issued prior to December 1, 1989, generally are followed to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board (GASB). The University has the option of following private-sector guidance issued subsequent to November 30, 1989, subject to the above limitation. The University has elected not to follow private-sector guidance issued subsequent to November 30, Amounts reported as operating revenues include: 1) tuition and fees, net of waivers and discounts, 2) certain federal, state, local and private grants and contracts, 3) sales and services of auxiliary enterprises, and 4) other sources of revenue. Operating expenses for the University include: 1) salaries and wages, 2) employee benefits, 3) scholarships and fellowships, 4) depreciation, and 5) utilities, supplies, and other services. All other activity is nonoperating in nature. This activity includes: 1) state appropriations for operations, 2) investment income, 3) bond issuance costs, 4) interest on capital asset-related debt, and 5) gifts and nonexchange transactions. When both restricted and unrestricted resources are available for use, generally it is the University s policy to use the unrestricted resources first. 21

25 Notes to the Financial Statements CASH EQUIVALENTS This classification includes instruments that are readily convertible to known amounts of cash and have original maturities of three months or less. INVENTORIES Inventories are valued at the lower of cost or market. All other items are maintained on an average cost or first-in, first-out basis. COMPENSATED ABSENCES The University s employees accrue annual and sick leave at varying rates, depending upon length of service or classification. Some employees also earn compensatory time. The amount of the liabilities for annual leave and compensatory time and their related benefits are reported in the Statement of Net Assets. There is no liability for unpaid accumulated sick leave since the University s policy is to pay this only if the employee is sick or upon death. CAPITAL ASSETS Capital assets, which include property, plant, equipment, library holdings, and intangible assets, are reported in the Statement of Net Assets at historical cost or at fair value at date of donation, less accumulated depreciation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend the assets useful lives are not capitalized. A capitalization threshold of $100,000 is used for buildings and $50,000 is used for infrastructure. Equipment is capitalized when the unit acquisition cost is $5,000 or greater. The capitalization threshold for additions and improvements to buildings and land is set at $50,000. The capitalization threshold for intangible assets is set at $100,000. These assets, with the exception of land, are depreciated/amortized using the straight-line method over the estimated useful lives of the assets, which range from 5 to 40 years. NET ASSETS The University s net assets are classified as follows: INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT: This represents the University s total investment in capital assets, net of outstanding debt obligations related to those capital assets. To the extent debt has been incurred but not yet expended for capital assets, such amounts are not included as a component of invested in capital assets, net of related debt. RESTRICTED NET ASSETS NONEXPENDABLE: Nonexpendable restricted net assets consist of endowment and similar type funds in which donors or other outside sources have stipulated, as a condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may be expendable or added to principal. RESTRICTED NET ASSETS EXPENDABLE: Restricted expendable net assets include resources in which the University is legally or contractually obligated to spend in accordance with restrictions imposed by external third parties. UNRESTRICTED NET ASSETS: Unrestricted net assets represent resources derived from student tuition and fees, state appropriations, and sales and services of educational departments and auxiliary enterprises. 22

26 Notes to the Financial Statements These resources are used for transactions relating to the educational and general operations of the University, and may be used at the discretion of the University to meet current expenses for any purpose. The auxiliary enterprises are substantially self-supporting activities that provide services for students, faculty, and staff. SCHOLARSHIP DISCOUNTS AND ALLOWANCES Student tuition and fee revenues, and certain other revenues from students, are reported net of scholarship discount and allowances in the statement of revenues, expenses, and changes in net assets. Scholarship discounts and allowances are the difference between the stated charge for goods and services provided by the University, and the amount that is paid by the student and/or third parties making payments on the students behalf. Certain governmental grants, such as Pell grants, and other Federal, state or nongovernmental programs are recorded as either operating or nonoperating revenues in the University s financial statements. To the extent that revenues from such programs are used to satisfy tuition and fees and other student charges, the University has recorded a scholarship discount and allowance. 2. Cash and Cash Equivalents In addition to demand deposits and petty cash on hand, this classification includes instruments which are readily convertible to known amounts of cash and which have original maturities of three months or less. At June 30, 2012, cash and cash equivalents consists of $8,805, in bank accounts, $55, of petty cash on hand, $93,479, in the State of Tennessee Local Government Investment Pool administered by the State Treasurer, and $5,180, in the LGIP Deposits Capital Projects account. LGIP Deposits Capital Projects - Payments related to the University s capital projects are made by the State of Tennessee s Department of Finance and Administration. The University s estimated local share of the cost of each project is held in a separate Local Government Investment Pool (LGIP) account. As expenses are incurred, funds are withdrawn from the LGIP account by the Tennessee Board of Regents and transferred to the Department of Finance and Administration. The funds in the account are not available to the University for any other purpose until the project is completed and the Tennessee Board of Regents releases any remaining funds. 3. Investments All investments permitted to be reported at fair value under GASB Statement 31 are reported at fair value, including those with a maturity date of one year or less at the time of purchase. As of June 30, 2012, the University had the following investments and maturities: Investment Maturities in Years Investment Type Fair Value Less than 1 From 1 to 5 years US Treasury Notes $ 52,387, $ 28,667, $ 23,720, Commercial Paper 2,249, ,249, Certificates of Deposit 200, , Total $ 54,836, $ 31,116, $ 23,720, Interest Rate Risk. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of a debt investment. The University does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. 23

27 Notes to the Financial Statements Credit Risk. Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The University is authorized by statute to invest funds in accordance with Tennessee Board of Regents policies. Under the current policy, funds other than endowments may be invested only in obligations of the United States or its agencies which are backed by the full faith and credit of the United States, repurchase agreements for United States securities, certificates of deposit in banks and savings and loan associations, banker's acceptances, commercial paper, money market mutual funds and the State of Tennessee Local Government Investment Pool. The policy requires that investments of endowments in equity securities be limited to funds from private gifts or other sources external to the University and that endowment investments be prudently diversified. Securities are rated using Standard and Poor s, Moody s, and/or Fitch s and are presented below using the Standard and Poor s rating scale. TBR policy restricts investments in banker s acceptances and commercial paper. The policy requires that prime banker s acceptances must be issued by domestic banks with a minimum AA rating or foreign banks with a AAA long-term debt rating by a majority of the rating services that have rated the issuer. Prime banker s acceptances are required to be eligible for purchase by the Federal Reserve System. To be eligible, the original maturity must not be more than 270 days, and it must 1) arise out of the current shipment of goods between countries or with the United States, or 2) arise out of storage within the United States of goods under contract of sale or expected to move into the channel or trade within a reasonable time and that are secured throughout their life by a warehouse receipt or similar document conveying title to the underlying goods. The policy requires that prime commercial paper shall be limited to that of corporations that meet the following criteria: 1) Senior long-term debt, if any, should have a minimum rating of A1 or equivalent, and short-term debt should have a minimum rating of A1 or equivalent, as provided by a majority of the rating services that rate the issuer. If there is no long-term debt rating, the short-term debt rating must be A1 by all rating services (minimum of two). 2) The rating should be based on the merits of the issuer or guarantee by a nonbank. 3) A financial review should be made to ascertain the issuer s financial strength to cover the debt. 4) Commercial paper of a banking institution should not be purchased. Prime commercial paper shall not have a maturity that exceeds 270 days. As of June 30, 2012, the University s investments were rated as follows: Credit Quality Rating Investment Type Fair Value A+ Unrated LGIP $ 98,660, $ 98,660, Commercial Paper 2,249, $ 2,249, Total: $ 100,909, $ 2,249, $ 98,660,

28 Notes to the Financial Statements 4. Accounts, Notes, and Grants Receivable Accounts receivable included the following: June 30, 2012 Student Accounts Receivable $ 11,034, Grants Receivable 10,993, Notes Receivable 1,344, Other Receivables 17,738, Subtotal $ 41,111, Less allowance for doubtful accounts (8,865,648.24) Total $ 32,246, Federal Perkins Loan Program funds include the following: 5. Capital Assets June 30, 2012 Perkins loans receivable $ 4,917, Less allowance for doubtful accounts (528,524.01) Total $ 4,388, Capital asset activity for the year ended June 30, 2012, was as follows: Beginning Balance Additions Transfers Reductions Ending Balance Land $ 17,937, $ 549, $ 18,486, Improvements 66,325, ,186, $ 1,293, ,805, Buildings 388,054, ,891, ,041, ,988, Equipment 36,554, ,148, $ 3,501, ,200, Library holdings 36,010, ,189, ,292, ,907, Intangible assets 8,955, , ,018, Projects in progress 13,878, ,410, (7,335,472.43) 13,952, Total $ 567,715, $ 50,438, $ 28,793, $ 589,360, Less accumulated depreciation: Improvements $ 18,763, $ 3,624, $ 22,388, Buildings 118,680, ,417, ,097, Equipment 23,268, ,524, $ 3,311, ,481, Library holdings 19,622, ,580, ,292, ,910, Intangible assets 3,017, , ,899, Total $ 183,351, $ 29,029, $ 28,603, $ 183,777, Capital assets, net $ 384,364, $ 21,409, $ 190, $ 405,582, The decrease in library holdings is due to a change in accounting estimate. During fiscal year 2012, it was determined that periodicals are more appropriately expensed. The estimated useful life of periodicals was decreased from 10 years to 0 years, resulting in a current year adjustment of $21,961,

29 Notes to the Financial Statements 6. Capital Leases The University has capital lease agreements for the campus wide data network equipment and services. This agreement has beginning and ending dates ranging from January 1, 2011 to December 31, 2015 with an imputed interest rate of 5.517%. Asset balances at June 30, 2012, were $2,866,911.80, net of accumulated depreciation of $1,228, The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of June 30, 2012: Year ended June 30 Minimum Payment 2013 $ 878, , , , Total minimum lease payment $ 3,075, Less: Amounts representing interest and exacter costs (284,480.28) Present value of net minimum lease payment $ 2,790, Accounts Payable Accounts payable included the following: June 30, 2012 Vendors Payables $ 4,512, Construction Projects Payments 608, Other Payables 2,551, Total $ 7,672,

30 Notes to the Financial Statements 8. Long-term Liabilities Long term liability activity for the year ended June 30, 2012, was as follows: Beginning Ending Current Payables TSSBA Debt Balance Additions Reductions Balance Portion Bonds $ 100,574, $ 4,081, $ 96,493, $ 3,993, Unamortized Bond Premium $ 5,076, ,062, ,014, Commercial Paper 87, , General Obligation Debt Commercial Paper 4,363, , , ,270, Lease Obligation 3,494, , ,790, , Subtotal $ 108,431, $ 5,326, $ 6,101, $ 107,656, $ 4,736, Other Liabilities Compensated Absences $ 9,143, $ 5,537, $ 5,245, $ 9,435, $ 2,535, Due to Grantor 4,357, , , ,375, Faculty Voluntary Buyout 1,809, , , ,027, , Net OPEB Obligation 13,773, , ,710, Total long-term liabilities $ 137,516, $ 12,666, $ 11,976, $ 138,206, $ 8,102, TSSBA Debt - Bonds Payable Bonds, with interest rates ranging from 2% to 7%, were issued by the Tennessee State School Bond Authority. The bonds are due serially until 2040 and are secured by pledges of the facilities revenues to which they relate and certain other revenues and fees of the University, including state appropriations, see Note 11 for further details. The bonded indebtedness with the Tennessee State School Bond Authority included in longterm liabilities on the Statement of Net Assets is shown net of assets held by the authority in the debt service reserve and net of unexpended debt proceeds. The reserve amount was $4,750, at June 30, Debt service requirements to maturity for the University s portion of TSSBA bonds at June 30, 2012, are as follows: For the year ending June 30 Principal Interest Total 2013 $ 3,993, $ 4,595, $ 8,588, ,015, ,420, ,436, ,091, ,259, ,351, ,275, ,081, ,357, ,476, ,881, ,358, ,617, ,210, ,827, ,006, ,196, ,203, ,457, ,209, ,667, ,863, ,699, ,563, ,694, , ,031, Total $ 96,493, $ 53,892, $ 150,385,

31 Notes to the Financial Statements TSSBA Debt - Commercial Paper The Tennessee State School Bond Authority issues commercial paper to finance costs of various capital projects during the construction phase. When projects are placed in service, long-term, fixed-rate debt is issued by TSSBA to finance the project over its useful payback period and the commercial paper is redeemed. The amount outstanding for projects at the University was $87, at June 30, For the commercial paper program, the Tennessee State School Bond Authority maintains an interest rate reserve fund. The University contributes amounts to the reserve fund based on the amounts drawn. The principal of the reserve will be contributed to pay off notes or credited back to the University when the notes are converted to bonds. The interest earned on the reserve is used to pay interest due during the month. More detailed information regarding the bonds and commercial paper can be found in the notes to the financial statements in the financial report for the Tennessee State School Bond Authority. That report is available on the state s website at General Obligation Debt - Commercial Paper The Tennessee State Funding Board issues commercial paper for the purpose of, among other things, acquisition of certain sites and existing structures for expansion purposes for the TBR on the behalf of the University. The amount outstanding for projects at the University was $4,270, at June 30, More detailed information regarding the commercial paper can be found in the notes to the financial statements in the financial report for the Tennessee State Funding Board. The Tennessee Comprehensive Annual Financial Report is available on the state s website at 9. Endowments If a donor has not provided specific instructions to the University, state law permits the University to authorize for expenditure the net appreciation (realized and unrealized) of the investments of endowment funds. When administering its power to spend net appreciation, the University is required to consider the University s long-term and short-term needs, present and anticipated financial requirements, expected total return on its investments, price-level trends, and general economic conditions. Any net appreciation that is spent is required to be spent for the purposes for which the endowment was established. The University chooses to spend only a portion of the investment income (including changes in the value of investments) each year. Under the spending plan established by the University, all interest earnings have been authorized for expenditure. The remaining amount, if any, is retained to be used in future years when the amount computed using the spending plan exceeds the investment income. Five of the endowment accounts require any interest generated in excess of expenses be reapplied to the principal. At June 30, 2012, net appreciation of $171, is available to be spent, of which $94, is included in restricted net assets expendable for scholarships and fellowships, $ is included in restricted net assets expendable for instructional departmental uses, $64, is included in restricted net assets expendable for loans, and $12, is included in restricted net assets expendable for other. 28