LAKE SUPERIOR STATE UNIVERSITY

Transcription

1 ANNUAL FINANCIAL REPORT FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

2 TABLE OF CONTENTS PAGE University Officers 1 Management s Discussion and Analysis 2-7 Independent Auditors Report 8-9 Lake Superior State University Statements of Net Assets 10 Statements of Revenues, Expenses and Changes in Net Assets 11 Statements of Cash Flows Lake Superior State University Foundation Statements of Net Assets 14 Statements of Activities 15 Notes to Financial Statements 16-37

3 Lake Superior State University Board of Trustees Charles J. Schmidt Dean M. Altobelli Chair Term Expires January 27, 2008 Term Expires January 27, 2010 Barbara J. Cliff Gary L. Wolfram First Vice Chair Term Expires January 27, 2008 Term Expires January 27, 2010 Cindy N. Dingell W.W. Frenchie LaJoie Second Vice Chair Term Expires January 27, 2012 Term Expires January 27, 2012 Devereaux M. Trepp L. Meg Brown Term Expires January 27, 2006 Term Expires January 27, 2006 President and Vice Presidents Dr. Betty J. Youngblood President Mark A. Jastorff Vice President, Student Life and Alumni Relations Dr. Bruce T. Harger Vice President, Academic Affairs and Provost Business and Finance Staff Joseph F. Herbig Director of Business Operations David W. Eitland Director of Development Lake Superior State University Foundation Dr. Kevin P. Cooper Chairman Dr. Betty J. Youngblood First Vice Chair, Ex-Officio Dr. Thomas G. Robinson Second Vice Chair -1-

4 Lake Superior State University Management s Discussion and Analysis Fiscal Year Ended June 30, 2005 This section of the Lake Superior State University ("University") annual financial report presents management s discussion and analysis of the financial condition of the University as of June 30, 2005 and its financial performance during the fiscal year then ended. This discussion should be read in conjunction with the accompanying financial statements and footnotes. The financial statements, footnotes and this discussion are the responsibility of University management. Reporting Entity Lake Superior State University is an institution of higher education and is considered to be a component unit of the State of Michigan. The Governor of the State of Michigan appoints the University s Board of Trustees. The University is included in the State s financial statements as a discrete component unit. Transactions with the State of Michigan primarily relate to appropriations for operations, appropriations for Charter Schools, receipt of grants, payments to State retirement programs on behalf of certain University employees, and reimbursements for capital outlay projects. The basic financial statements include not only the University itself, but also a legally separate entity, the Lake Superior State University Foundation, for which the University is financially accountable. Financial statement information for this component unit is reported separately from the financial information presented for the University. Using the Annual Financial Report This annual report includes financial statements prepared in accordance with Governmental Accounting Standards Board ( GASB ) Statement No. 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. The accompanying financial statements, which focus on the financial condition, results of operations and cash flows of the University as a whole, present financial information in a form similar to that used by commercial enterprises. The financial statements are prepared using the accrual basis of accounting, whereby revenues and assets are recognized when the service is provided and expenses and liabilities are recognized when others provide the service, regardless of when cash is exchanged. The Statement of Net Assets includes all assets and liabilities. Over time, increases or decreases in net assets (the difference between assets and liabilities) is one indicator of the improvement or erosion of the University s financial health when considered with operating measures such as enrollment levels and the physical condition of facilities. The Statement of Revenues, Expenses and Changes in Net Assets presents the revenues earned and expenses incurred during the year. Activities are reported as either operating or nonoperating. A public University s dependency on State aid and grants will result in operating deficits because the financial reporting model classifies State appropriations and grants as nonoperating revenues. The utilization of capital assets is reflected in the financial statements as depreciation, which amortizes the cost of an asset over its expected useful life. -2-

5 The Statement of Cash Flows presents information related to cash inflows and outflows summarized by operating, noncapital financing, capital and related financing, and investing activities, and helps measure the University s ability to meet its financial obligations as they mature. Summary of Selected Financial Data Lake Superior State University Condensed Statements of Net Assets June Assets: Current assets $10,099,022 $11,922,986 $ 8,843,430 Capital assets 76,531,442 77,380,346 73,757,574 Other noncurrent assets 9,745,363 8,538,675 7,202,652 Total Assets $96,375,827 $97,842,007 $89,803,656 Liabilities: Current liabilities $ 3,936,250 $ 4,886,497 $ 4,942,209 Noncurrent liabilities 31,883,735 31,757,658 32,850,290 Total Liabilities 35,819,985 36,644,155 37,792,499 Net Assets: Invested in capital assets, net of related debt 48,177,482 50,543,709 43,639,991 Restricted, nonexpendable 205, , ,327 Restricted, expendable 11,091,742 9,856,894 8,660,903 Unrestricted, undesignated (deficit) 1,081, ,922 (495,064) Total Net Assets 60,555,842 61,197,852 52,011,157 Total Liabilities and Net Assets $96,375,827 $97,842,007 $89,803,656 Total current assets decreased by $1.8 million. This decrease is a result of a decrease in cash reserves of $1.1 million that have been held for the financing of several capital projects. During fiscal 2005, the University progressed with the implementation of a new administrative software system and upgrades to the University computer network infrastructure. Receivables from the State of Michigan decreased by $500,000 as reimbursements to the University for construction costs on the Fine Arts Building have declined significantly as this project approaches final completion. Inventories decreased by $100,000 as the University eliminated the final inventories of the campus bookstore. The management and operations of the bookstore were contracted to a third party effective July 1, Capital assets decreased by $800,000 as a result of the annual depreciation charge of $4.4 million exceeding the value of new assets of $3.6 million. -3-

6 Other noncurrent assets increased by $1.2 million. This is due to proceeds of $839,000 from an interest rate swap transaction being deposited in a diversified investment portfolio. The proceeds of this investment will be used to contribute to debt service payments in future years. Also an increase of $400,000 to the University endowment investment portfolio is a result of additional contributions and portfolio earnings. Total liabilities decreased by $800,000 primarily as a result of a $900,000 decrease of accounts payable. Due to the implementation of the finance module of the University s new administrative software system, purchasing activity for fiscal year 2005 was virtually terminated in mid-may. This meant that purchasing normally done in June, and payable at June 30, was completed in May, thus eliminating much of the accounts payable at June 30, Although noncurrent liabilities increased by only $100,000, the long-term portion of bond debt was reduced by $700,000 and the University has recorded an interest rate swap liability of $800,000 (see the related footnote on page 31 of the financial statements). Total net assets decreased by $600,000. The University s net investment in capital assets decreased by $2.4 million. Restricted, expendable scholarship net assets increased by $600,000, capital projects and debt service net assets increased by $500,000 and unrestricted reserves increased by $500,000. The June 30, 2005 unrestricted reserves of $1,081,000 consist of designated fund reserves of $451,000, auxiliary fund reserves of $183,000, insurance and benefit reserves of $1.56 million and a general fund deficit of $1.11 million. Lake Superior State University Condensed Statements of Revenues, Expenses and Changes in Net Assets Year Ended June Total operating revenues $26,067,559 $28,798,636 $26,132,049 Total operating expenses 39,560,111 41,938,597 43,499,008 Operating loss (13,492,552) (13,139,961) (17,366,959) Net nonoperating revenues 11,787,531 11,605,549 12,397,793 Loss before other revenues (1,705,021) (1,534,412) (4,969,166) Total other revenues 1,063,011 10,721, ,508 (Decrease) increase in net assets (642,010) 9,186,695 (4,410,658) Net assets, beginning of year 61,197,852 52,011,157 56,421,815 Net assets, end of year $60,555,842 $61,197,852 $52,011,157 Operating revenues decreased by $2.7 million. The most significant change is a $1.9 million decrease in auxiliary revenues. This is due to the University no longer operating the campus bookstore. Operations of the bookstore were contracted to a third party effective July 1, A $700,000 decrease in tuition and fees is the result of lower enrollments for fiscal year

7 Operating expenses decreased overall by $2.4 million. Again this is a result of outsourcing of bookstore operations. This alone reduced operating expenses by $2.0 million. There were three new administrative positions added during fiscal year 2005 which are considered vital to the growth of the University. These positions were Dean of Enrollment Management, Webmaster and Director of Public Safety. Again in fiscal year 2005, operational spending was tightly controlled and departmental managers underspent their allotted supply budgets by $200,000. Nonoperating and Other revenues decreased a total of $9.5 million. Capital appropriations decreased by $9.8 million due to the absence of major construction funded by the State of Michigan. After initial appropriations, executive order appropriations reductions, supplemental appropriations and restoration of executive order reductions, State appropriations for fiscal year 2005 did increase by $200,000. Cash provided by (used in): Lake Superior State University Condensed Statements of Cash Flows Year Ended June Operating activities $(9,814,357) $ (7,972,715) $(12,527,705) Noncapital financing activities 12,779,744 12,723,262 13,882,838 Capital and related financing activities (3,531,175) (1,113,850) (7,918,560) Investing activities (565,799) (294,620) 8,343,862 Net change in cash and cash equivalents (1,131,587) 3,342,077 1,780,435 Cash and cash equivalents, beginning of year 7,401,938 4,059,861 2,279,426 Cash and cash equivalents, end of year $ 6,270,351 $ 7,401,938 $ 4,059,861 Cash and cash equivalents decreased by $1.1 million for the year ended June 30, Cash used in operations increased by $1.8 million. This is a result of cash received from operations (tuition, grants, and auxiliary activities) decreasing by $2.7 million and cash used for operations (payments to employees and vendors) decreasing by $700,000. Fluctuations of cash flows in financing and investing activities are the result of capital project costs on the administrative software and the network infrastructure projects which are not funded with capital appropriations. -5-

8 A Year in Review A Look Ahead During fiscal year , the University saw a continued need to focus on spending controls while maintaining high quality academic programs. Management continued to review all University operations for potential cost reductions and cost avoidance opportunities. As a result, the combined fund balances of the University s general fund, designated funds, auxiliary funds and plant reserve funds increased by $950,000. Management continues to make progress toward the elimination of deficit fund balances in all funds. Enrollment declined in Fall Headcount enrollment declined 11.3% or 367 students. Fulltime equivalent enrollment decreased by 8.0% or 218 students. Elimination of the off-campus Skilled Trades Program and three on-campus degree programs played a role in the declining enrollment. The University had fewer students, but on-campus students were enrolled in more credit hours. This increased institutional operating efficiencies. The Higher Education Appropriations Bill for fiscal year mandated that Michigan universities limit tuition increases to 2.8%. Unfortunately, the specifics of the Bill were not known until after the Board of Trustees of Lake Superior State University approved a tuition rate increase of 2.4%. In exchange for the cap on tuition increases, the State promised not to make further reductions to university appropriations during the fiscal year However, in February 2005, the governor issued an executive order that once again cut higher education appropriations. The 2005 executive order cut came with the promise to restore this reduction should the State revenues surpass the February 2005 projections. As of August 2005, 55% of this executive order reduction had been restored. Additional restoration may occur in Fall Reduced tuition revenues and stagnate State appropriations have placed a great burden on the University. Increases in health care costs, utility costs, and the expenses associated with the MPSERS retirement program have made it necessary to further reduce other operating costs. These reductions have come primarily from a salary freeze and continued deferred maintenance. The University is engaged in negotiations with its two employee unions and is attempting to negotiate a sharing of escalating health care costs. On April 5, 2005, the University entered into a basis rate swap transaction with Piper Jaffray Financial Products (PJFP). However, the swap does not become effective until May The elements of this transaction state that, LSSU will pay PJFP at the Bond Market Association (BMA) interest rate and PJFP will pay to LSSU sixty-eight percent of the London Inter Bank Offer Rate (LIBOR). The payments, to be made monthly, will be calculated on the notional amount of University bonds outstanding at the end of each month. The initial notional amount of this transaction in May 2008 will be $20,115,000. The BMA rate and 68% of LIBOR rate have a thirty-five year history that shows the BMA to LIBOR relationship, and it is expected that over the life of this basis rate swap (which terminates in May 2031) the monthly differences between these rates swaps will be minimal. Because the University entered into this agreement in 2005, with a future effective date of May 2008, the University received a lump sum cash distribution from PJFP in the amount of $839,000. Under direction from the Board of Trustees of the University, this cash was placed into a diversified investment portfolio. The fair market value of the portfolio will be liquidated over the life of the swap agreement ( ) and the liquidated proceeds will be used to pay for debt service payments. If this swap agreement were to be terminated by the University prior to May 2008, the University would be liable for a termination payment which could be greater than the proceeds already received (see the related footnote on page 31 of the financial statements). -6-

9 Looking forward into fiscal year , the University will officially open the new Fine and Performing Arts Center. The Arts Center will be used for faculty offices and academic classrooms. In its inaugural season, the Arts Center will host several concerts, lectures, and other presentations and performances. South, East, and Brown Halls have been vacated. State appropriations for higher education are expected to remain near the fiscal year level. There has been much discussion in the Michigan legislature about formula funding based on student enrollment, number of degrees offered, and research activities. At this time, management does not have final information concerning State appropriations. Tuition rates at Lake Superior State University, as well as all other Michigan universities, are likely to rise at levels higher than in past years to compensate for little or no growth in State funding. The University will also continue to review academic programs. The University will add programs that will benefit current and future students, provided that they are cost effective. Likewise, management will continue to evaluate low-enrollment programs to measure viability and/or ways to increase enrollment. In an effort to increase enrollment, the University reorganized the offices of Admissions, Registrar and Financial Aid into a combined Enrollment Management unit. Under the guidance of a Dean of Enrollment Management, policies, procedures and practices are continually studied, reviewed and revised. Specifically, the University will continue to enhance its presence in the State of Michigan through increased staff visits to high schools, advanced use of technology in recruiting, and advertising in markets with high concentrations of high school students. There is also a strong commitment to recruit transfer students from regional community colleges. In summary, Lake Superior State University continues to be a viable alternative in higher education. LSSU is the only university in Michigan that provides public education in a learning environment that is similar to private institutions. Through the dedication and determination of its dedicated faculty and staff, the University will continue to provide a high quality educational experience for its students. -7-

10 Board of Trustees Lake Superior State University Sault Ste. Marie, Michigan INDEPENDENT AUDITORS' REPORT September 9, 2005 We have audited the accompanying financial statements of the business-type activities and the discretely presented component unit of Lake Superior State University ( the University ), a component unit of the State of Michigan, as of June 30, 2005 and 2004 and for the years then ended, which collectively comprise the University s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the University s management. Our responsibility is to express opinions 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 audits 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 opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities and the discretely presented component unit of Lake Superior State University as of June 30, 2005 and 2004 and the respective changes in financial position and cash flows of the University for the years then ended in conformity with accounting principles generally accepted in the United States of America. As described in Note 1 to the financial statements, during fiscal 2005 the University adopted the provisions of the Governmental Accounting Standards Board ( GASB ) Statement No. 40, Deposit and Investment Risk Disclosures. This pronouncement requires the disclosure of credit risk, custodial credit risk, interest rate risk, concentration of credit risk, the University s investment policy and various additional information. As described in Note 1 to the financial statements, during fiscal 2004 the University adopted the provisions of Governmental Accounting Standards Board ( GASB ) Statement No. 39, Determining Whether Certain Organizations are Component Units, which amends GASB Statement No. 14, The Financial Reporting Entity. Adoption of this pronouncement results in the University including in its financial statements, the financial statements of the Lake Superior State University Foundation as a discretely presented component unit. -8-

11 In accordance with Government Auditing Standards, we have also issued under separate cover our report dated September 9, 2005, on our consideration of Lake Superior State University s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and 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 the internal control over financial reporting or on compliance. That report, which is included in the University s single audit report, is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits. The Management s Discussion and Analysis (MD&A) presented on pages 2 to 7 is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquires of management regarding the methods of measurement and presentation of this required supplementary information. However, we did not audit the information and express no opinion on it. -9-

12 STATEMENTS OF NET ASSETS June 30 Assets Current assets Cash and cash equivalents $ 6,270,351 $ 7,401,938 Accounts receivable, net 1,015,436 1,016,149 State appropriations receivable 2,501,861 3,020,065 Inventories 269, ,239 Other 42,065 86,595 Total current assets 10,099,022 11,922,986 Noncurrent assets Student loans receivable, net 2,638,767 2,720,507 Investments 847,761 - Endowment investments 6,258,835 5,818,168 Land and construction in progress 19,297,898 16,778,249 Depreciable capital assets, net 57,233,544 60,602,097 Total noncurrent assets 86,276,805 85,919,021 Total assets $ 96,375,827 $ 97,842,007 Liabilities Current liabilities Accounts payable and accrued expenses $ 1,746,077 $ 2,613,221 Deferred revenue 818, ,317 Deposits 105, ,955 Current portion of long-term debt 961, ,255 Current portion of employee benefit programs 305, ,749 Total current liabilities 3,936,250 4,886,497 Interest rate swap liability 839,000 - Long-term debt, net of current portion 29,615,954 30,285,294 Employee benefit programs, net of current portion 1,428,781 1,472,364 Total liabilities 35,819,985 36,644,155 Net assets Invested in capital assets, net of related debt 48,177,482 50,543,709 Restricted Nonexpendable Scholarships and research 205, ,327 Expendable Scholarships and research 6,643,002 5,995,686 Loans 3,132,576 3,010,530 Capital projects and debt service 1,316, ,678 Unrestricted 1,081, ,922 Total net assets 60,555,842 61,197,852 Total liabilities and net assets $ 96,375,827 $ 97,842,007 The accompanying notes are an integral part of these financial statements. -10-

13 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Year Ended June O p erating revenues Tuition and fees (net of scholarship allowances of $4,220,065 and $4,275,159 in 2005 and 2004, respectively) $ 11,255,142 $ 11,921,362 Federal grants and contracts 4,277,045 4,220,458 State grants and contracts 221, ,644 Nongovernmental grants and contracts 1,813,355 2,064,045 Auxiliary activities 7,715,825 9,630,194 Other 784, ,933 Total operating revenues 26,067,559 28,798,636 Operating expenses Instruction 12,118,631 12,464,749 Research 450, ,357 Public service 742, ,535 Academic support 2,378,092 2,346,677 Student services 1,879,369 1,742,467 Student aid 1,620,258 1,533,085 Institutional support 4,331,140 4,663,413 Operation and maintenance of plant 3,907,421 3,540,722 Auxiliary activities 7,305,808 9,265,597 Depreciation 4,486,318 4,877,101 Other 339, ,894 Total operating expenses 39,560,111 41,938,597 Operating loss (13,492,552) (13,139,961) Nonoperating revenues (expenses) State appropriations 12,631,309 12,429,555 Interest on capital debt and leases (1,571,912) (1,596,223) Investment income, net of investment expenses 722, ,186 Gain (loss) on assets sold or retired 5,505 (46,969) Net nonoperating revenues 11,787,531 11,605,549 Loss before other revenues (1,705,021) (1,534,412) Other revenues Capital grants and gifts 469, ,273 Additions to expendable endowments 180,153 16,425 Capital appropriations 413,588 10,272,409 Total other revenues 1,063,011 10,721,107 (Decrease) Increase in net assets (642,010) 9,186,695 Net assets, beginning of year 61,197,852 52,011,157 Net assets, end of year $ 60,555,842 $ 61,197,852 The accompanying notes are an integral part of these financial statements. -11-

14 STATEMENTS OF CASH FLOWS Year Ended June Cash flows from operating activities Tuition and fees $ 11,229,376 $ 11,767,768 Grants and contracts 6,260,168 6,651,767 Payments to employees (23,469,866) (24,583,576) Payments to vendors (10,794,520) (10,359,601) Payments for financial aid (1,620,258) (1,533,085) Loans issued to students (686,239) (762,868) Collections of interest and principal on loans to students 767, ,651 Auxiliary activities 7,755,086 9,585,854 Other receipts 743, ,375 Net cash used in operating activities (9,814,357) (7,972,715) Cash flows from noncapital financing activities State appropriations 12,599,591 12,706,837 Gifts for endowments 180,153 16,425 Federal Direct Lending receipts 8,834,062 8,617,636 Federal Direct Lending disbursements (8,834,062) (8,617,636) Net cash provided by noncapital financing activities 12,779,744 12,723,262 Cash flows from capital and related financing activities Capital appropriations 963,510 9,426,688 Capital grants and gifts received 407, ,327 Purchases and construction of capital assets (3,302,797) (8,449,509) Proceeds from interest rate swap transaction 839,000 - Proceeds from disposal of capital assets 76,708 - Principal paid on capital debt and leases (939,080) (858,059) Interest paid on capital debt and leases (1,576,262) (1,600,296) Net cash used in capital and related financing activities (3,531,175) (1,113,850) Cash flows from investing activities Proceeds from sales and maturities of investments 453,269 4,933,094 Purchases of investments (1,335,016) (5,348,347) Interest on investments 315, ,633 Net cash used in investing activities (565,799) (294,620) Net (decrease) increase in cash and cash equivalents (1,131,587) 3,342,077 Cash and cash equivalents, beginning of year 7,401,938 4,059,861 Cash and cash equivalents, end of year $ 6,270,351 $ 7,401,938 The accompanying notes are an integral part of these financial statements. -12-

15 STATEMENTS OF CASH FLOWS (Concluded) Year Ended June 30 Reconciliation of net operating loss to net cash used in operating activities Operating loss $ (13,492,552) $ (13,139,961) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 4,486,318 4,877,101 Change in assets and liabilities: Accounts receivable, net (15,063) (70,784) Student loans receivable, net 81,740 (222,217) Inventories 128, ,392 Other 44, ,755 Accounts payable and accrued liabilities (862,794) (60,346) Deferred revenue (35,223) 28,777 Deposits (28,726) (30,865) Employee benefit programs (121,517) (283,567) Net cash used in operating activities $ (9,814,357) $ (7,972,715) Supplemental disclosures of non-cash financing and investing activities Gifts in-kind received and recorded as capital assets $ 77,300 $ 37,543 Acquisition of capital equipment financed by capital lease $ 328,520 $ 59,789 The accompanying notes are an integral part of these financial statements. -13-

16 FOUNDATION STATEMENTS OF NET ASSETS June Assets Cash and cash equivalents $ 1,245,765 $ 849,684 Investments 3,411,343 3,049,988 Deferred charges 37 - Unconditional promises to give, net 240, ,182 Beneficial interest in charitable remainder trust 229, ,468 Total assets $ 5,127,672 $ 4,417,322 Liabilities Accounts payable and accrued expenses $ 19,791 $ 13,962 Employee benefit programs 22,342 18,231 Annuity obligations 70, ,703 Total liabilities 112, ,896 Net assets Unrestricted 53,856 29,992 Temporarily restricted 1,220, ,512 Permanently restricted 3,740,674 3,299,922 Total net assets 5,015,446 4,273,426 Total liabilities and net assets $ 5,127,672 $ 4,417,322 The accompanying notes are an integral part of these financial statements. -14-

17 FOUNDATION STATEMENTS OF ACTIVITIES Year Ended June Revenue and support Contributions $ 1,242,639 $ 1,512,656 Investment income 148, ,964 Net unrealized gains on investments 132,441 73,904 Change in value of split interest agreements 77,765 49,728 Total revenue and support 1,600,876 1,835,252 LSSU distributions and expenses Distributions to Lake Superior State University 496, ,753 Operating expenses 362, ,876 Total LSSU distributions and expenses 858,856 1,009,629 Change in net assets 742, ,623 Net assets, beginning of year 4,273,426 3,447,803 Net assets, end of year $ 5,015,446 $ 4,273,426 The accompanying notes are an integral part of these financial statements. -15-

18 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity Lake Superior State University ( the University ) is an institution of higher education and is considered a discrete component unit of the State of Michigan because its Board of Trustees is appointed by the Governor. Accordingly, the University's financial statements are included in those of the State. Transactions with the State of Michigan relate primarily to appropriations for operations, appropriations for charter schools, grants from various State agencies, State Building Authority (SBA) revenues and payments to the State retirement program on behalf of certain University employees. As required by Governmental Accounting Standards Board Statement No. 39 (see discussion of adoption of this accounting standard below) the University s basic financial statements include the financial statements of both the University and its component unit, the Lake Superior State University Foundation (the Foundation ) which is a legally separate tax-exempt component unit of the University. The Foundation acts primarily as a fund-raising organization to supplement the resources that are available to the University in support of its programs. The Foundation s Board of Directors includes members of the University s Board of Trustees, certain officers of the University and other community representatives elected by the Foundation Board. Although the University does not necessarily control the timing or amount of receipts from the Foundation, the majority of its resources or income earned thereon are restricted by the donors to the activities of the University. Because these restricted resources held by the Foundation can be used only by, or for the benefit of, the University, the Foundation is considered a component unit of the University. The Foundation financial statements are reported on separate pages to emphasize that a) it is legally separate from the University and b) its assets are not necessarily available to satisfy all liabilities of the University. However, the Foundation s financial position and activities are summarized with those of the University in the notes to the financial statements. Basis of Presentation The accompanying University financial statements have been prepared using the economic resource measurement focus and the accrual basis of accounting with the exception that certain investment income and interest earned on the Federal Perkins student loan program are recorded only when received. In accordance with Governmental Accounting Standards Board ( GASB ) Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and other Governmental Entities that Use Proprietary Fund Accounting, the University follows all applicable GASB pronouncements. In addition, the University applies all applicable Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board (APB) Opinions and Accounting Research Bulletins of the Committee on Accounting Procedures issued on or before November 30, 1989 unless those pronouncements conflict with or contradict GASB pronouncements. The University has elected not to apply FASB pronouncements issued after November 30, In applying these accounting pronouncements, the University follows the guidance for special purpose governments engaged only in business type activities rather than issuing financial statements that focus on accountability of individual funds. -16-

19 Governmental Accounting Standards Board Statement No. 39 Effective for the fiscal year ended June 30, 2004, the University adopted the provisions of GASB Statement No. 39, Determining Whether Certain Organizations are Component Units, which resulted in inclusion of the financial statements of the Lake Superior State University Foundation as a discretely presented component unit in the financial statements of the University. The Foundation s financial statements are prepared in accordance with the accounting standards established by the Financial Accounting Standards Board and, accordingly, a reporting model different from that of the University is used. Contributions to the University by the Foundation (reported primarily as Other revenues-capital gifts and grants) have been made in the amount of $496,006 for fiscal 2005 and $601,753 for fiscal Support from the University provided to the Foundation amounted to $274,546 and $273,695 during fiscal 2005 and 2004, respectively. Governmental Accounting Standards Board Statement No. 40 Effective for the fiscal year ended June 30, 2005, the University adopted the provisions of the GASB issued Statement No. 40, Deposit and Investment Risk Disclosures. This statement is an amendment of the GASB Statement No. 3, which classified deposits and investments into three categories of custodial credit risk. This Statement addresses the common deposit and investment risks related to credit risk, concentration of credit risk, interest risk, and foreign currency risk. As an element of interest rate risk, this Statement requires certain disclosures of investments that have fair values that are highly sensitive to changes in interest rates. This Statement is designed to inform financial statement users about deposit and investment risks that could affect the University s ability to provide services and meet its obligations as they become due. The Board of Trustees believes that there are risks inherent in all deposits and investments, and it believes that the disclosures required by this Statement provide users of the University s financial statements with information to assess common risks inherent in deposit and investment transactions. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments, excluding noncurrent investments, with an original maturity when purchased of three months or less. University Endowment Investments / Investments University endowment investments consist primarily of long-term mutual funds and are stated at fair value. Foundation Investments Foundation investments consist primarily of long-term mutual funds and are stated at fair value. -17-

20 Inventories Inventories, consisting primarily of supplies and petroleum products, are valued at cost (using the specific identification method) not in excess of market. During fiscal 2004, the University contracted with a third party to manage the operations of the campus bookstore. In contemplation of this outsourcing arrangement, the University sold most of the bookstore inventories by the end of fiscal 2004 and the balance of remaining inventories in fiscal year The third party officially began managing the bookstore on July 1, Capital Assets Capital assets, consisting of institutional physical properties used in University operations, are stated at cost when purchased and at estimated fair value at date of receipt for other acquisitions. Building additions and improvements with a cost in excess of $10,000 are capitalized if the life of the building is extended. Equipment with a cost in excess of $2,500 with a useful life of 3 or more years is capitalized. Certain maintenance and replacement reserves have been established to provide for significant repair and maintenance costs to residence halls and certain other facilities. Depreciation is provided on a straight-line basis over the estimated useful life of the related capital assets as follows: Classification Buildings Land improvements Infrastructure Equipment Personal computers Library books Vehicles Life 40 years 20 years 20 years 7 years 3 years 7 years 7 years Revenue Recognition Revenues are recognized when earned and expenses are recognized when the service is provided or when materials are received. Restricted grant revenue is recognized only to the extent expended. Operating revenues of the University consist of tuition and fees, grants and contracts, sales and services of educational activities and auxiliary enterprise revenues. Transactions related to capital and financing activities, noncapital financing activities, investing activities and State appropriations are components of nonoperating revenue. Restricted and unrestricted resources are allocated to the appropriate departments within the University which are responsible for adhering to any donor restrictions. State appropriation revenue is recognized in the period for which it is appropriated. -18-

21 During fiscal 2005 and 2004 the University received $14,914,236 and $13,136,854 (net of a 3% administrative fee retained by the University), respectively, of State appropriations which were forwarded to seven charter schools. The University also received $100,000 in State appropriations for Bay Mills Community College during fiscal 2005 which were forwarded to Bay Mills Community College immediately upon receipt. Appropriations received and related disbursements passed on to the charter schools and Bay Mills Community College are considered agency transactions and, accordingly, are not reported in the accompanying financial statements. Income Taxes The University is classified as a State instrumentality under Internal Revenue Code Section 115, and is also classified as a charitable organization under Internal Revenue Code section 501 (c) (1), and is therefore exempt from federal income taxes. Certain activities of the University may be subject to taxation as unrelated business income under Internal Revenue Code Sections 511 to 514. No such taxes were incurred for either fiscal year 2005 or The Foundation is also exempt from federal income taxes under Section 501(c) (3) and qualifies as a nonprofit foundation under Section 509 (a) (1) of the Internal Revenue Code. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements. Split-Interest Agreements The Foundation s split-interest agreements with donors consist of irrevocable charitable remainder trusts for which the Foundation is a beneficiary. Contribution revenue was recognized at the date the trust was established based on the expected present value of the Foundation s interest in the trust assets. Changes in the value of the assets and other changes in the estimates of future receipts are recognized in the statement of activities of the Foundation. Annuity Obligations Payable The Foundation s annuity and life income agreements require payments during the life of the annuitant at various rates up to 7% of the principal amounts. The obligation for annuity obligations payable is reported at the present value of the future payments based on the life expectancy tables and an implied rate of discount of 5.8%. Changes in the value of annuity obligations payable are reported in the statement of activities of the Foundation. 2. CASH AND CASH EQUIVALENTS AND INVESTMENTS - UNIVERSITY Cash and short-term investments - The University utilizes the "pooled cash" method of accounting for substantially all of its cash and short-term investments. Investment policies for cash and short-term investments, as set forth by the Board of Trustees, authorize the University to invest, with limitations, in commercial paper of companies with a rating within the two highest classifications of prime as established by at least one of the standard rating services. Investments may also be made in securities of the U.S. Treasury and federal agencies and in time savings accounts. Short-term investments are stated at fair value. -19-

22 Investments - The Board of Trustees has authorized certain University administrators to invest in short, intermediate and long-term pools of investments, depending on the nature and need of funds. An established Board policy is followed for the investment of University funds. The primary investment objective for the investment pools is as follows: Short-term investment pool - to provide for the preservation of capital. Funds needed for expenditures in less than one year will be considered short-term. Intermediate investment pool - to provide for preservation of capital and maximization of income without undue exposure to risk. Funds needed for expenditures within one to five years will be considered intermediate term. Long-term investment pool - to provide for long-term growth of principal and income without undo exposure to risk. Funds not needed for expenditures within five years will be considered long-term. The University's general policy toward the long-term investment pool shall be to diversify investments within both equity and fixed income securities so as to provide a balance that will enhance total return. The University invests with selected money managers as part of an institutional mutual fund or in segregated accounts. Performance objectives for each pool of investments have been established to measure the total return of a manager against a comparable index, as well as the amount of risk the manager is taking. The University uses the service of outside investment counsel in providing performance measurements and asset allocation recommendations. Reports are submitted to the Board of Trustees on an annual basis to ensure compliance with the prescribed policy. Investment income and realized gains or losses are distributed using an average cash method on accounts designated to receive investment earnings. Unrealized gains or losses are distributed based on cash balances on June 30. Cash and Cash Equivalents University cash and cash equivalents consist of the following amounts at June 30: Disbursement accounts (deposits) $ 4,325,591 $ 5,517,955 Money market funds 1,930,733 1,874,299 Equities 14,027 9,684 Total cash and cash equivalents $ 6,270,351 $ 7,401,938 The University utilizes the "pooled" method of accounting for substantially all investments, which consisted of the following amounts at June 30: -20-

23 University endowment investments Mutual funds Equity funds $ 4,699,755 $ 4,368,261 Bond/fixed income funds 1,559,080 1,449,907 Total University endowment investments 6,258,835 5,818,168 University investments Mutual funds Money market funds 126, Equity funds 508, Bond/fixed income funds 212, Total University investments 847, Total investments $ 7,106,596 $ 5,818,168 Interest Rate Risk The University s investment policy does not limit investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. The maturity dates for each investment is identified below for investments held at year end. As of June 30, 2005, the University had the following debt investments and maturities: Maturities (in Years) Fair Market Value Less Than Government money market funds $ 126,414 $ 126,414 $ - $ - Mutual bond funds 1,771, ,771,536 Total investments $ 1,897,950 $ 126,414 $ - $1,771,536 Credit Risk - State law limits investments to specific government securities, certificates of deposits and bank accounts with qualified financial institutions, commercial paper with specific maximum maturities and ratings when purchased and qualified mutual funds. The University s investment policy does not have specific limits in excess of state law on investment credit risk. -21-

24 Custodial Credit Risk Deposits - Custodial credit risk is the risk that in the event of a bank failure, the University s deposits may not be returned. State law does not require a policy for deposit custodial credit risk. The University believes that due to the dollar amounts of cash deposits and the limits of FDIC insurance, it is impractical to insure all bank deposits. As a result, management evaluates each financial institution it deposits University funds with and assesses the level of risk of each institution; only those institutions with an acceptable estimated risk level are used as depositories. As of year-end, $1,038,215 of the University s bank balance of $1,138,215 was exposed to custodial credit risk because it was uninsured and uncollateralized. Custodial Credit Risk Investments - For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the University will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. State law does not require and the University does not have a policy for investment custodial credit risk. Custodial credit risk for the University s mutual fund investments cannot be determined as these investments are not evidenced by specifically identifiable securities. Concentration of Credit Risk - State law limits allowable investments but does not limit concentration of credit risk. The University s investment policy does not have specific limits in excess of state law on concentration of credit risk. None of the investments held by the University exceeds 5 percent of the University s investments. Foreign Currency Risk The University s exposure to foreign currency risk is derived from its positions in international investments consisting solely of foreign currency denominated mutual fund equity investments. The University s investment policy permits it to invest in these asset types. At June 30, 2005 the University held 28,066 units of the EuroPacific Growth Fund Class F (Security identifier: AEGFX) with a fair value of $1,004,491. The University holds no other assets which may be subject to the risks of foreign currency. There is no foreign currency risk with any holdings under the caption cash and cash equivalents in the accompanying statements of net assets and all international investments are equity investments held through mutual funds. Policies regarding marketable securities in the University endowment investments, as set forth by the Board of Trustees, authorize the investment manager to invest in high-grade equities, bonds or other marketable securities. The University endowment income spending policy is 100% of the cash earnings of each endowment. The annual spending income allocation cannot reduce the original gift principal. The spending policy is reviewed periodically by the finance committee, which recommends changes to the Board of Trustees. The net appreciation on investments of donor-restricted endowments approximated $736,000 and $497,000 at June 30, 2005 and 2004, respectively. The net appreciation is a component of restricted, expendable net assets. The yields of the University endowment investments were as follows for the year ended June 30: Interest and dividends 1.7 % 1.0% Net realized and unrealized gains Total return 8.4% 14.2% -22-

25 According to the law of the State of Michigan, the Board of Trustees may appropriate for expenditure for the uses and purposes for which an endowment is established an allocation of the net appreciation, realized and unrealized, in the fair value of the assets of an endowment over the historic dollar value as is prudent under the facts and circumstances prevailing at the time of the action or decision. 3. INVESTMENTS - FOUNDATION The Foundation also utilizes the "pooled" method of accounting for substantially all investments, which consisted of the following amounts at June 30: Mutual funds Money market funds $ 100,067 $ -- Equity funds 2,487,239 2,282,702 Bond/fixed income funds 813, ,083 Sub-total 3,401,118 3,039,785 Marketable securities 10,225 10,203 Total Foundation investments $ 3,411,343 $ 3,049, ACCOUNTS, STATE APPROPRIATIONS AND STUDENT LOAN RECEIVABLES Accounts receivable result primarily from student tuition and fee billings and auxiliary enterprise sales, such as food service and student residence. In addition, receivables arise from grant awards, financial aid and State Building Authority ( SBA ) revenues. These receivables are reported net of an allowance for collection losses in the amount of $361,186 and $308,113 at June 30, 2005 and 2004, respectively. University accounts receivable consist of the following net amounts at June 30: Tuition and fees $ 257,246 $ 240,311 Auxiliary activities 129, ,622 Governmental grants and contracts 544, ,130 Private grants and contracts 3,674 8,806 Other 79,685 83,280 Accounts receivable, net $ 1,015,436 $ 1,016,