Lancaster, Pennsylvania. Consolidated Financial Statements June 30, 2014 and 2013

Transcription

1 Lancaster, Pennsylvania Consolidated Financial Statements

2 Table of Contents Page(s) Independent Auditors Report 1 Consolidated Statements of Financial Position, 2 Consolidated Statements of Activities, Years Ended 3 4 Consolidated Statements of Cash Flows, Years Ended

3 KPMG LLP 1601 Market Street Philadelphia, PA Independent Auditors Report The Board of Trustees Franklin & Marshall College: We have audited the accompanying consolidated financial statements of Franklin & Marshall College and its subsidiaries, which comprise the consolidated statements of financial position as of June 30, 2014 and 2013, and the related consolidated statements of activities, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Franklin & Marshall College and its subsidiaries as of, and the results of their net assets and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. Philadelphia, Pennsylvania October 20, 2014 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

4 Consolidated Statements of Financial Position (Thousands) ASSETS: Cash and cash equivalents $ 2,158 $ 2,329 Accounts and other receivables 6,565 5,706 Contributions receivable, net 23,452 25,219 Inventories and prepaid expenses 1,171 1,528 Student loans receivable, net 2,625 2,726 Funds held by bond trustee Investments 404, ,295 Land, buildings, and equipment, net 227, ,116 Other assets 8,078 7,328 Collection items (Note 8) - - Total assets $ 676,478 $ 642,678 LIABILITIES: Accounts payable and accrued expenses $ 5,008 $ 4,848 Deferred income and deposits 5,604 11,469 Funds held in custody for others 3,591 3,446 Annuity obligations 14,630 13,331 Postretirement benefits obligation 21,479 24,045 Bonds payable 81,574 83,297 Long-term debt payable by Advanced Studies in England Ltd Other liabilities 7,904 7,621 Total liabilities 140, ,386 NET ASSETS: Unrestricted 280, ,889 Temporarily restricted 142, ,828 Permanently restricted 112, ,575 Total net assets 536, ,292 Total liabilities and net assets $ 676,478 $ 642,678 See accompanying notes to financial statements. 2

5 Consolidated Statements of Activities For the Year Ended June 30, 2014 (With Comparative Totals for 2013) (Thousands) 2014 Unrestricted Temporarily Restricted 2013 Permanently Restricted Total Total OPERATING REVENUES: Tuition and fees $ 110,559 $ - $ - $ 110,559 $ 108,853 Student financial aid (38,939) - - (38,939) (36,822) Net tuition and fees 71, ,620 72,031 Summer school and other fees 1, ,511 1,598 Interest and dividend income 5,437 6, ,693 8,299 Private contributions 2,613 8,494 5,498 16,605 16,077 Government grants & other contracts 1, ,609 1,775 Other sources 1, ,726 1,938 Auxiliary operations 22, ,444 22,367 Net assets released from restrictions 17,820 (17,820) Total operating revenues 124,418 (2,015) 5, , ,085 OPERATING EXPENSES: Instruction 49, ,075 48,969 Research 4, ,071 4,201 Public service 1, ,134 1,365 Academic support 7, ,760 7,973 Student services 19, ,479 19,312 Institutional support 20, ,661 18,347 Fund-raising 6, ,904 6,649 Auxiliary operations 13, ,836 13,541 Total operating expenses 122, , ,357 CHANGE IN NET ASSETS FROM OPERATING ACTIVITIES 1,498 (2,015) 5,805 5,288 3,728 NONOPERATING ACTIVITIES: Net realized and unrealized gains on investments 14,804 18,515 3,261 36,580 26,492 Investment management fees (279) (400) (3) (682) (733) Postretirement benefit changes other than net periodic costs 2, ,736 2,747 Changes in annuity obligations (702) (968) (865) (2,535) (2,182) Economic development expense (78) - - (78) (97) Other (gains) losses (351) CHANGE IN NET ASSETS FROM NONOPERATING ACTIVITIES 17,229 17,147 2,393 36,769 25,876 CHANGE IN NET ASSETS NET ASSETS, BEGINNING OF YEAR NET ASSETS, END OF YEAR 18,727 15,132 8,198 42,057 29, , , , , ,688 $ 280,616 $ 142,960 $ 112,773 $ 536,349 $ 494,292 See accompanying notes to financial statements. 3

6 Consolidated Statements of Activities For the Year Ended June 30, 2013 (Thousands) Unrestricted Temporarily Restricted Permanently Restricted OPERATING REVENUES: Tuition and fees $ 108,853 $ - $ - $ 108,853 Student financial aid (36,822) - - (36,822) Net tuition and fees 72, ,031 Summer school and other fees 1, ,598 Interest and dividend income 4,379 3, ,299 Private contributions 3,543 7,024 5,510 16,077 Government grants & other contracts 1, ,775 Other sources 1, ,938 Auxiliary operations 22, ,367 Net assets released from restrictions 15,283 (15,283) Total Total operating revenues 122,625 (4,305) 5, ,085 OPERATING EXPENSES: Instruction 48, ,969 Research 4, ,201 Public service 1, ,365 Academic support 7, ,973 Student services 19, ,312 Institutional support 18, ,347 Fund-raising 6, ,649 Auxiliary operations 13, ,541 Total operating expenses 120, ,357 CHANGE IN NET ASSETS FROM OPERATING ACTIVITIES 2,268 (4,305) 5,765 3,728 NONOPERATING ACTIVITIES: Net realized and unrealized gains/(losses) on investments 10,229 14,192 2,071 26,492 Investment management fees (307) (422) (4) (733) Postretirement benefit changes other than net periodic costs 2, ,747 Changes in annuity obligations (602) (742) (838) (2,182) Economic development expense (97) - - (97) Other losses (351) - - (351) CHANGE IN NET ASSETS FROM NONOPERATING ACTIVITIES 11,619 13,028 1,229 25,876 CHANGE IN NET ASSETS NET ASSETS, BEGINNING OF YEAR NET ASSETS, END OF YEAR 13,887 8,723 6,994 29, , ,105 97, ,688 $ 261,889 $ 127,828 $ 104,575 $ 494,292 See accompanying notes to financial statements. 4

7 Consolidated Statements of Cash Flows For the Years Ended (Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets $ 42,057 $ 29,604 Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation expense 8,036 7,731 Net realized and unrealized gains on investments (36,580) (26,492) Investment management fees Other changes in annuity obligations 4,193 2,697 Contribution to grantor trust - (8,707) Loss on disposition of fixed assets Other (gains) losses (753) 269 Contributions restricted for long-term purposes (7,188) (6,840) Contributions of securities and fixed assets (6,391) (1,918) Proceeds from sales of donated securities Changes in operating assets and liabilities: Accounts and other receivables (307) (1,489) Contributions receivable 2,127 (1,561) Inventories and prepaid expenses 357 (132) Other assets (712) (2,015) Accounts payable and accrued expenses 159 (818) Deferred income and deposits (5,961) (768) Funds held in custody for others 100 (249) Postretirement benefits obligation (2,566) (1,917) Other liabilities Net cash used in operating activities (2,435) (11,641) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (46,954) (38,962) Proceeds from sales of investments 45,459 62,424 Student loans disbursed (451) (568) Student loans collected Purchases of land, buildings, and equipment (5,221) (4,709) Net cash (used in) provided by investing activities (6,615) 18,916 CASH FLOWS FROM FINANCING ACTIVITIES: Contributions restricted for long-term purposes 7,188 6,840 Proceeds from sales of donated securities 6,248 1,594 Payments on long-term debt (1,663) (15,168) Payments of annuity obligations (2,894) (2,622) Net cash provided by (used in) financing activities 8,879 (9,356) (171) (2,081) 2,329 4,410 NET DECREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,158 $ 2,329 SUPPLEMENTAL DATA: Interest paid $ 4,130 $ 4,978 Gifts of securities, land, buildings, and equipment 4,885 1,917 See accompanying notes to financial statements. 5

8 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation Franklin & Marshall College (the College ) in Lancaster, Pennsylvania, is a private, four-year residential college dedicated to excellence in undergraduate liberal arts education. The College s consolidated financial statements include Advanced Studies in England Ltd. ( ASE ), a wholly owned subsidiary in Bath, England, which conducts study abroad programs. ASE s financial statements are based on the twelve month fiscal year ending May 31. Also included in the consolidated financial statements is the Millport Conservancy, a controlled entity that is a nature preserve used for educational purposes. The College maintains its accounts in accordance with U.S. generally accepted accounting principles ( GAAP ) on the accrual basis. The College s total assets, liabilities, and net assets are presented in the consolidated statement of financial position; the changes in the College s net assets are presented in the consolidated statement of activities; and the changes in the College s cash and cash equivalents are presented in the consolidated statement of cash flows. The classification of the College s net assets and its revenues, expenses, gains, and losses is based on the existence or absence of donor-imposed restrictions as follows: Unrestricted - Net assets that are not subject to donor-imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees or may otherwise be limited by contractual agreements with outside parties. Temporarily restricted - Net assets whose use by the College is subject to donor-imposed stipulations that can be fulfilled by actions of the College pursuant to those stipulations or that expire by the passage of time. Permanently restricted - Net assets subject to donor-imposed stipulations that they be maintained permanently by the College. Generally, the donors of these assets permit the College to use all or part of the income earned on these assets. Such assets primarily include the College s donor endowment funds. Operating Activities The consolidated statement of activities includes a performance measure of operations labeled as change in net assets from operating activities. In addition to revenues and expenses generated from the College s operations, this measure also includes contributions restricted for long-term purposes and net assets released from restrictions. Excluded from this measure are net realized and unrealized gains and losses on investments, investment management fees, postretirement benefit changes other than net periodic costs, changes in annuity obligations, economic development activity related to the Northwest Gateway Project (see Note 15), and other gains and losses. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The College considers highly liquid investments with an original maturity of three months or less when purchased, and cash management accounts functioning as cash equivalents, to be cash equivalents. Cash and 6

9 cash equivalents that are components of the College s long-term investment funds are not classified as cash equivalents. Contributions Contributions, including unconditional pledges, are reported as revenue in the net asset class (unrestricted, temporarily restricted, or permanently restricted) appropriate to any donor restrictions on the gift at the time of receipt thereof. Revocable trusts for which the College is the trustee are reported as investments with an offsetting deposit liability. Revenue is recognized when the trusts become irrevocable. Allowances for uncollectible amounts are recorded based on management s estimate of realizability of the underlying pledges. The College reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a stipulated time restriction expires or purpose restriction is fulfilled, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions. The College reports gifts of land, buildings, and equipment as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire longlived assets are reported as restricted support. Absent explicit donor stipulations about how long those longlived assets must be maintained, the College reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Concentration of Market Risk Investments consist of a wide variety of financial instruments with no single investment individually material. The College s investments are exposed to various risks such as interest rate, market, and credit risks. Such risks, and the resulting investment security values, may be influenced by changes in economic conditions and market perceptions and expectations. Accordingly, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the consolidated statement of financial position. Land, Buildings, and Equipment Land, buildings, and equipment are recorded at cost as of the date of acquisition or fair value as of the date of receipt in the case of gifts. Interest costs for the construction of certain long-term assets are capitalized during the construction or installation period and amortized over the related assets useful lives. Depreciation of buildings and equipment is provided over the estimated useful lives of the respective assets on a straight-line basis. The College estimates useful lives as follows: buildings, 50 years (buildings acquired before 1995, 100 years); additions and renovations to existing buildings, 25 or 50 years, depending on the type of project; and equipment, 10 years. The cost and accumulated depreciation of property sold or retired is removed from the respective accounts, and any resultant gain or loss is recognized in income in the period of disposal. Capitalized Costs for Software Obtained for Internal Use Costs for obtaining and installing software are capitalized if significant and amortized over the estimated useful life of the software, presently 3 years. All other software costs are expensed. 7

10 Deferred Income and Deposits Deferred income and deposits consist of payments of student fees and tuition and summer program revenues that are deferred until the period in which they are earned. Also included is the liability for those revocable trusts for which the College is the trustee. Fair Value Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The College measures its contributions receivable at inception, funds held by bond trustee, investments, split-interest agreements, and certain annuity obligations at fair value. Additionally, the College discloses the fair value of the College s outstanding debt. The College s valuation methodologies for each of these items are described below. Three levels of inputs may be used to measure fair value: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market, as well as U.S. Treasury securities. Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, model-derived valuations whose inputs are observable or whose primary values are observable, and alternative investments with fair value based on net asset value ( NAV ) from fund managers where the fund can be liquidated at NAV within 90 days of the Statement of Financial Position date. Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As quoted prices are not readily available, fair value may be estimated based on NAV reported by general partners or fund managers. The carrying amount of student accounts receivable, accounts payable and accrued expenses approximate fair value due to the short maturity of these financial instruments. The fair value of student loans receivable under federal programs cannot be determined because these loans can only be assigned to the federal government or its designee. Contributions receivable The College values contributions receivable at fair value on the date the gift is received using level 3 inputs to calculate present value of future cash flows as described in Note 4. Contributions receivable are not measured at fair value subsequent to this initial measurement, because the discount rate selected remains constant over time. Funds held by bond trustee The fair value of the College s funds held by bond trustee are invested in short term, highly liquid securities for which fair value is based on Level 1 prices. Investments Fair value of investments, with the exception of private equity and certain commingled funds, has been determined from observable market quotations, when available. The College s investment managers use a variety of pricing sources to determine market valuations. 8

11 Estimated fair value of private equity investments and certain commingled funds that are not readily marketable are generally recorded at NAV as provided by external investment managers as a practical expedient for fair value. The College reviews and evaluates the values provided by external investment managers and the valuation methods and assumptions used in determining the NAV of those investments, and makes adjustments to NAV if it is determined that it is inappropriate to use NAV as a practical expedient. Split-interest agreements and annuity obligations Depending on the type of agreement, the College measures fair value for split-interest agreements either at inception or on a recurring basis. Fair value of the residual gift is generally based on the present value of expected future cash flows including payments to beneficiaries and investment return, and level 3 inputs include the life expectancy of the donor and other beneficiaries as well as financial assumptions. The College uses a discount rate for the annuity obligation at the time the gift is received based on several factors including the risks involved. Beneficial interests in trusts Beneficial interests in trusts held by others are recognized at the estimated fair value of the underlying assets of the trust or the fair value of the future cash flows when the College is notified of the trust's existence. Because the trusts will not be distributed to the College, the inputs to fair value are considered level 3. Debt The College s disclosure of the fair value of its debt in Note 9 is based on Level 2 inputs including observable interest rates and maturity schedules. 2. TEMPORARILY RESTRICTED NET ASSETS: Temporarily restricted net assets result from contributions and other inflows of assets whose use by the College is limited by donor-imposed stipulations that expire by the passage of time or can be fulfilled and removed by actions of the College pursuant to those stipulations. Temporarily restricted net assets consist of the following at June 30: (Thousands) Accumulated gains on donor endowments $ 100,699 $ 87,531 Contributions receivable and split-interest agreements subject to time and/or purpose restrictions 23,428 24,058 Unexpended donor restricted funds Scholarship and financial aid 4,984 4,611 Instruction 1,567 1,914 Capital projects 3,699 2,462 Other 8,583 7,252 $ 142,960 $ 127,828 Accumulated endowment gains are temporarily restricted by the donor s original endowment gift designation or by time restrictions under Pennsylvania endowment law (Note 6). 9

12 3. PERMANENTLY RESTRICTED NET ASSETS: Permanently restricted net assets result from contributions and other inflows of assets whose use by the College is limited by donor-imposed stipulations that they be maintained permanently by the College. They are designated for the following purposes: (Thousands) Donor-contributed principal invested to support: Scholarship and financial aid $ 39,740 $ 34,768 Educational and general programs 40,290 40,257 Donor contributions receivable, split-interest agreements, and other assets for endowments 32,743 29, CONTRIBUTIONS RECEIVABLE: $ 112,773 $ 104,575 Unconditional promises to give that are expected to be collected within one year are recorded at estimated amounts to be realized. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. The net present value of contributions receivable is calculated using a discount range of 3% to 7.5%. Amortization of the discounts is included in contribution revenue. Conditional promises to give are not included as revenue until the conditions are substantially met. The College recognizes the benefit of any irrevocable trust in which the College is a beneficiary, has been informed of its interest, and can reasonably estimate its fair value. The College s beneficial interest in these trusts is recorded at fair value of the trust assets, which is a reasonable estimate of the present value of the future cash flows to be received. The College is aware of thirteen irrevocable charitable remainder trusts for which it is a beneficiary as of June 30, Included in contributions receivable are the following unconditional promises to give: (Thousands) Pledges due in less than one year $ 4,473 $ 4,284 Pledges due in one to five years 8,120 10,199 Pledges due in more than five years 9,951 10,863 Charitable remainder trusts 4,956 4,596 27,500 29,942 Less: Unamortized discount (2,921) (3,456) Allowance for uncollectibles (1,127) (1,267) Net contributions receivable $ 23,452 $ 25,219 10

13 5. INVESTMENTS: A summary of the College s investment portfolio by type is shown below: June 30, 2014, Fair Value (Thousands) Level 1 Level 2 Level 3 Total Long-term (pooled) investments: Global equity: Hedged equity $ - $ 11 $ 66 $ 77 Private equity ,844 25,844 Public equity 73,053 57,871 35, ,785 73,053 57,882 61, ,706 Global fixed income: Credit/distressed ,330 14,330 High quality/rate sensitive 20,822 11,999-32,821 20,822 11,999 14,330 47,151 Diversifying strategies 1-15,371 20,966 36,337 Real assets: Real estate ,878 12,878 Natural resources - 15,557 9,179 24,736 Special opportunities - - 1,075 1,075-15,557 23,132 38,689 Total long-term (pooled) investments 93, , , ,883 Trust and nonpooled split interest investments: Beneficial interest in perpetual trusts ,498 14,498 Cash and cash equivalents 2, ,750 Global equity: Public Equity 23, ,373 Global fixed income: High quality/rate sensitive 10, ,833 Total trusts and nonpooled Split interest investments 36,956-14,498 51,454 Nonpooled investments: Cash and cash equivalents Global equity: Public Equity Global fixed income: High quality/rate sensitive 37, ,563 Total nonpooled investments 38, ,071 Total investments $ 168,902 $ 100,809 $ 134,697 $ 404,408 11

14 June 30, 2013, Fair Value (Thousands) Level 1 Level 2 Level 3 Total Long-term (pooled) investments: Global equity: Hedged equity $ 1,217 $ - $ 9,408 $ 10,625 Private equity - 3,359 20,128 23,487 Public equity 67,738 47,159 28, ,896 68,955 50,518 58, ,008 Global fixed income: Credit/distressed 1, ,788 13,832 High quality/rate sensitive 18,650 11,193-29,843 19,685 11,202 12,788 43,675 Diversifying strategies 1-13,898 19,704 33,602 Real assets: Real estate ,852 12,852 Natural resources - 13,764 1,277 15,041 Special opportunities ,764 14,337 28,101 Total long-term (pooled) investments 88,640 89, , ,386 Trust and nonpooled split interest investments: Beneficial interest in perpetual trusts ,190 13,190 Cash and cash equivalents 1, ,332 Global equity: Public equity 20, ,359 Global fixed income: High quality/rate sensitive 8, ,420 Revocable trust 5, ,426 Total trusts and nonpooled Split interest investments 35,537-13,190 48,727 Nonpooled investments: Cash and cash equivalents 3, ,650 Global equity: Public equity Global fixed income: High quality/rate sensitive 31, ,223 Total nonpooled investments 35, ,182 Total investments $ 159,359 $ 89,382 $ 118,554 $ 367,295 1 Diversifying strategies consists of products with low or no correlation to the broad market indices. It may include global macro, event-driven, or other products that moderate volatility for the overall portfolio. 12

15 The following table provides additional information on those investments reported at NAV as of June 30, 2014: Redemptions Upon Fund (Thousands) Fair Terminations (in years) Value Liquidity (in days) (unless earlier distributions) Major Category Using NAV < > 365 < >5 Unfunded Commitments Global equity $ 119,653 $ - $ 57,881 $ 35,928 $ - $ - $ 3,684 $ 13,083 $ 9,077 $ 5,121 Global fixed income 26,329-11,999 8, ,628 (450) Diversifying strategies 36,337-15,371 15, , Real assets 38,689-15,557 6, ,170 5,955 4,787 $ 221,008 $ - $ 100,808 $ 66,967 $ 167 $ 5,143 $ 4,010 $ 23,253 $ 20,660 $ 9,458 The following table provides additional information on those investments reported at NAV as of June 30, 2013: Redemptions Upon Fund (Thousands) Fair Terminations (in years) Value Liquidity (in days) (unless earlier distributions) Major Category Using NAV < > 365 < >5 Unfunded Commitments Global equity $109,052 $ 50,518 $ - $30,901 $ 7,505 $ - $ 4,442 $ 7,171 $ 8,515 $ 10,079 Global fixed income 23, ,193 6,823 1, ,874 (450) Diversifying strategies 33,602-13,898 7, , Real assets 28,101-13, ,735-11,602 6,276 $194,746 $ 50,527 $ 38,855 $ 45,643 $ 8,777 $ 11,605 $ 7,177 $ 7,171 $ 24,991 $ 15,905 The following tables provide a reconciliation of the beginning and ending balances of investments classified within the fair value hierarch Level 3: (Thousands) Global Equity Global Fixed Income 2014 Diversifying Strategies Real Assets Beneficial Interest in Perpetual Trust Total Balance at June 30, 2013 $ 58,535 $ 12,788 $ 19,704 $ 14,337 $ 13,190 $ 118,554 Net realized and unrealized gains 12,161 1,941 (92) 907 1,308 16,225 Purchases 10,030 2,005 2,004 2,912-16,951 Sales (18,944) (3,439) (6,444) (1,361) - (30,188) Transfers in/(out) of Level 3 (11) 1,035 5,794 6,337-13,155 Balance at June 30, 2014 $ 61,771 $ 14,330 $ 20,966 $ 23,132 $ 14,498 $ 134,697 Net gains (losses) in Level 3 attributable to changes in net unrealized gains relating to those investments still held at June 30, 2014 $ 3,322 $ 758 $ (2,591) $ 907 $ 1,308 $ 3,704 13

16 (Thousands) Global Equity Global Fixed Income 2013 Diversifying Strategies Real Assets Beneficial Interest in Perpetual Trust Total Balance at June 30, 2012 $ 75,143 $ 12,458 $ 8,591 $ 13,639 $ 12,582 $ 122,413 Net realized and unrealized gains 5,581 3,945 2,249 1, ,471 Purchases 4,327 1,709 12,393 2,210-20,639 Sales (24,830) (12,251) (3,529) (2,600) - (43,210) Transfers in/(out) of Level 3 (1,686) 6, ,241 Balance at June 30, 2013 $ 58,535 $ 12,788 $ 19,704 $ 14,337 $ 13,190 $ 118,554 Net gains in Level 3 attributable to changes in net unrealized gains relating to those investments still held at June 30, 2013 $ 3,627 $ 1,769 $ 1,778 $ 520 $ 608 $ 8,302 The College recognizes transfers in and out of fair value levels at fiscal year end when investments are reevaluated for proper fair value level disclosure. During the fiscal years ending, $13,155,000 and $5,241,000 of investments, moved from Level 3 to Level 2 due to the redemption of the investments, at their June 30 net asset value, subsequent to year-end. Expenses related to the investment portfolio are reported separately in the consolidated statement of activities with the exception of brokers commissions and other investment fees, which are reported as a reduction of interest and dividend income. Some donors have entered into trust or other arrangements under which the College receives benefits that are shared with other beneficiaries (split-interest agreements). The College currently has charitable remainder trusts, perpetual income trusts, gift annuities, deferred gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. Split-interest agreements are included in investments except for externallymanaged charitable remainder trusts, which are included in contributions receivable (Note 4). For the year ended June 30, 2013, the revocable trust in which the College was beneficiary and acted as the trustee was recorded with an offsetting deposit liability. During the year ended June 30, 2014, the $5,500,000 revocable trust was liquidated as requested by the donor. The funds were used to establish a charitable gift annuity with the College and to satisfy contributions receivable. Included in the investment summary above are certain split-interest agreements requiring the College to pay a certain sum to the donors or beneficiaries during their lifetimes as defined in the respective agreements. A unisex mortality table was used to calculate the obligations. Discount rates ranging from 5.4% to 7.0% were used to calculate the present value of the obligations for 2014 and

17 A summary of the fair value of the investments supporting the agreements along with their corresponding liability is shown below: (Thousands) June 30, 2014 June 30, 2013 Type Investment Liability_ Investment Liability_ Gift annuities $ 25,031 $ 9,735 $ 19,158 $ 8,588 Deferred gift annuities Charitable remainder unitrusts 14,288 4,558 13,192 4,391 Charitable remainder annuity trusts $ 40,659 $ 14,630 $ 33,539 $ 13, ENDOWMENT: The College's endowment consists of approximately 620 individual funds established for a variety of purposes. It includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donorimposed restrictions. Interpretation of Relevant Law The College classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment; (b) the original value of subsequent gifts to the permanent endowment; and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the College in a manner consistent with the standard of prudence prescribed by relevant law. Pennsylvania law permits the Board of Trustees to make an election to annually appropriate for expenditure a selected percentage between 2% and 7% of the fair value of the assets related to donor-restricted endowment funds averaged over a period of three or more preceding years, provided the Board has determined that such percentage is consistent with the long-term preservation of the real value of such assets. Return Objectives and Risk Parameters The pooled endowment investments are managed by external advisors, using primarily commingled vehicles, as well as one separate account. Intergenerational equity is the cornerstone of the endowment s long-term investment objective. The primary long-term goal is to generate returns sufficient to cover annual spending, investment management fees, and inflation. The shorter-term objective is to create a portfolio of investments that generates competitive returns, while managing principal risk and volatility. To monitor performance relative to objectives, consistency of investment philosophy, and investment risk, results are measured on a rolling five-year basis to determine whether a positive real return has been achieved after the draw. Results are also evaluated against established benchmark indices, the mean return of comparable endowment funds, and internal custom benchmarks. 15

18 Strategies Employed for Achieving Objectives The Prudent Investor Rule of the Commonwealth of Pennsylvania is applied to the total portfolio. Therefore, any reasonable investment may be considered for the endowment pool as long as the risk and return tradeoff of the entire portfolio is prudent. The College s portfolio is diversified across geographic regions, asset classes, investment strategies, and industries. Investment guidelines recognize that the College is an entity with a perpetual lifespan, so the strategy is designed for a long-term investment horizon. Liquidity levels are carefully monitored to ensure access to funds to meet liabilities when needed. The risk profile of investments is monitored using analytical metrics including standard deviation, correlation matrices, and leverage levels. Spending Policy and How the Investment Objectives Relate to Spending Policy The College s spending policy is designed to maximize sustainable spending from year to year while ensuring intergenerational equity. This is consistent with the College s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term, as well as to provide additional real growth through new gifts and investment return. The College uses a total-return spending policy, which means that a percentage of the fair value is spent as opposed to spending only interest and dividends. The Finance Committee of the Board of Trustees selects the payout policy each year, and approved a 5.25% payout for fiscal years 2014 and This payout is applied against the seven-year average of the December 31 fair value of each named fund, with an increase or decrease no greater than 5% of the prior year s spending. The draw is shown in the consolidated financial statements as a component of net assets released from restrictions. Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the original gift amount maintained as permanently restricted net assets. Deficiencies of this nature were approximately $592,000 and $1,267,000 as of, respectively. Such deficiencies are recorded in unrestricted net assets. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions. Net Asset Classifications of Endowment Funds Net asset classification by type of endowment as of June 30, 2014: Temporarily Permanently (Thousands) Unrestricted Restricted Restricted Total Donor-restricted endowment Funds $ (592) $ 100,699 $ 80,030 $ 180,137 Board-designated endowment Funds 120, ,521 Total funds $ 119,929 $ 100,699 $ 80,030 $ 300,658 16

19 Changes in endowment net assets for the year ended June 30, 2014: Temporarily Permanently (Thousands) Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 108,003 $ 87,531 $ 75,025 $ 270,559 Investment return: Investment income 4,082 6,042-10,124 Net depreciation (realized And unrealized gains) 12,789 16,330-29,119 Total investment return 16,871 22,372-39,243 Contributions - - 4,260 4,260 Appropriation of endowment assets for expenditure (5,945) (9,204) - (15,149) Other changes: Transfers to create boarddesignated endowment funds 1, ,000 Liquidated gift annuities, trusts, etc Return income to principal Endowment net assets, end of year $ 119,929 $ 100,699 $ 80,030 $ 300,658 Net asset classification by type of endowment as of June 30, 2013: Temporarily Permanently (Thousands) Unrestricted Restricted Restricted Total Donor-restricted endowment Funds $ (1,267) $ 87,531 $ 75,025 $ 161,289 Board-designated endowment Funds 109, ,270 Total funds $ 108,003 $ 87,531 $ 75,025 $ 270,559 17

20 Changes in endowment net assets for the year ended June 30, 2013: Temporarily Permanently (Thousands) Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 101,033 $ 80,941 $ 71,662 $ 253,636 Investment return: Investment income 1,967 2,886-4,853 Net depreciation (realized And unrealized gains) 9,790 12,983-22,773 Total investment return 11,757 15,869-27,626 Contributions - - 2,541 2,541 Appropriation of endowment assets for expenditure (5,953) (9,279) - (15,232) Other changes: Transfers to create boarddesignated endowment funds 1, ,164 Liquidated gift annuities, trusts, etc Return income to principal Endowment net assets, end of year $ 108,003 $ 87,531 $ 75,025 $ 270, LAND, BUILDINGS, AND EQUIPMENT: Land, buildings, and equipment values are composed of the following at : (Thousands) Land and buildings $ 260,118 $ 257,017 Equipment 52,883 50,583 Construction in progress 7,051 6, , ,512 Less: Accumulated depreciation (92,462) (84,396) $ 227,590 $ 230,116 Depreciation expense for buildings and equipment was recorded in the amount of $8,036,000 and $7,731,000 for the years ended, respectively. The College has recorded all known asset retirement obligations for which the fair value of the liability could be reasonably estimated relating to the regulatory remediation of asbestos in certain campus buildings. A liability of $7,647,000 and $7,318,000 at, respectively, is included in other liabilities. The related asset value in buildings is $1,586,000, less accumulated depreciation of $1,218,000, and $1,586,000, less 18

21 accumulated depreciation of $1,176,000, at, respectively. Following is a reconciliation of the aggregate retirement liability associated with the College s obligation of asbestos remediation: (Thousands) Balance, beginning of year $ 7,318 $ 7,006 Increase in the present value of the obligation Liabilities settled (1) (4) Balance, end of year $ 7,647 $ 7, COLLECTION ITEMS: Collection items consist of artworks, rare books, and other objects that have come to the College and Millport Conservancy principally through gifts, although some were purchased and certain of the collections were received in trust. The collection is held for public exhibition and education and is protected, kept unencumbered, cared for, and preserved. Each of the items is cataloged, and activities verifying their existence and assessing their condition are performed continuously. The collection s insurance-appraised value is approximately $7,506,000. The collections are not recognized as assets in the consolidated statement of financial position as permitted by GAAP. Purchases of collection items are recorded as decreases in unrestricted net assets in the year in which the items are acquired, or as reductions in temporarily or permanently restricted net assets if the assets used to purchase the items are restricted by donors. Proceeds from deaccessions are reflected as increases in the appropriate net asset classes. No collection items were deaccessioned in 2014 or BONDS PAYABLE: Bonds payable at, consist of the following: (Thousands) Series C, 3.5%, maturing annually in varying amounts to 2014 $ - $ 54 College Revenue Bonds, Series of 2006, 3.65% %, maturing in varying amounts to ,900 52,435 College Revenue Bonds, Series of 2008, 5.00%, maturing in varying amounts in 2025, 2029, and ,000 30,000 80,900 82,489 Unamortized net premium $ 81,574 $ 83,297 The fair value of the College s bonds payable was approximately $86,608,000 and $87,317,000 at June 30, 2014 and 2013, respectively. Interest expense was $3,802,000 and $4,485,000 for the years ended June 30, 2014 and 2013, respectively, net of interest cost capitalized on the construction of buildings of $222,000 and $191,000 for the years ended, respectively. 19

22 Series of 1964 Bonds payable issued in 1964 were paid in full during the year ended June 30, They were collateralized by a first mortgage on certain dormitories and their sites, together with a pledge of receipts and revenues of certain of the mortgaged facilities. The indentures under which these bond issues were administered provided that the College maintain cash and securities in collateral accounts in the amount of $148,000 for years ended June 30, 2014 and The College maintained sufficient deposits to meet this requirement through the date of final payment. College Revenue Bonds, Series of 2006 and 2008 On June 19, 2008, the College borrowed $30,000,000 through the issuance of tax-exempt fixed rate bonds by the Lancaster Higher Education Authority, City of Lancaster, Pennsylvania. When marketed upon issuance, the bonds had a discount of $108,000. The proceeds of the bonds were used for the construction of a new residence hall, the financing of other projects, and to pay the costs of issuing the 2008 bonds. On May 1, 2006, the College borrowed $54,470,000 through the issuance of tax-exempt fixed rate bonds by the Lancaster Higher Education Authority, City of Lancaster, Pennsylvania. When marketed upon issuance, the College received a premium of $1,894,000. The proceeds of the bonds were used to refund the balance of the variable rate College Revenue Bonds, Series 1997, in the outstanding principal amount of $33,765,000 and to pay the costs of issuing the 2006 bonds. The remainder of the proceeds was used for the construction of the College s Life Sciences and Philosophy Building and for the financing of other projects. The College has entered into a guaranty with the bond trustee to secure the full and prompt payment of the principal and interest on the bonds and any additional bonds issued under the indenture. The obligation of the College to make payments under the guaranty is a general obligation of the College collateralized by the full faith and credit of the College. The College has collateralized its obligation under the guaranty by granting a security interest in unrestricted College revenues. The bond indentures include several general covenants, such as completing the projects and maintaining "notfor-profit" status. For the year ended June 30, 2014, the College was in compliance with these bond covenants. Bond proceeds were held by a trustee until expended on the projects described in the indentures. Bond issuance costs and unamortized bond premium and discount are being amortized over the lives of the respective bonds on the straight-line method, which approximates the interest method. A summary of scheduled bond payments subsequent to June 30, 2014, follows: (Thousands) Fiscal Year Ended 2006 Bonds 2008 Bonds Total _ 2015 $ 1,670 $ - $ 1, ,755-1, ,840-1, ,045-5, ,300-5,300 Thereafter 35,290 30,000 65,290 $ 50,900 $ 30,000 $ 80,900 20

23 The College has an unsecured line of credit of $10,000,000 that may be used to support general operating expenses, if needed, at a variable prime or money market interest rate. There were no borrowings under the line during 2014 and RETIREMENT BENEFITS: Retirement benefits are provided for eligible employees through a defined contribution plan. College contributions to the plan are based on a percentage of employees salaries. Participants interests are fully vested upon the date they become eligible for the plan. The College contributed $5,056,000 and $4,894,000 to the retirement plan during the fiscal years ended, respectively. The College currently provides defined benefit postretirement medical and life insurance plans for eligible employees who retire from active employment after completing 10 years of service subsequent to age 50. Payments by the College for postretirement medical coverage do not begin until age 65, except for employees who elected retirement under a special early retirement program. On May 12, 2011, the Board voted to adopt a defined contribution postretirement health plan effective January 1, 2013, for those employees retiring on or after January 1, 2013, who are less than age 55 on December 31, Under the new plan, the College makes contributions on behalf of each eligible employee through a voluntary employee beneficiary association (VEBA) trust. Eligible employees as of December 31, 2012, also received a onetime contribution through a grantor trust during the year ended June 30, Total one-time College funding to the grantor trust on behalf of all eligible employees during the year ended June 30, 2013 was $8,707,000. Under the College s current defined benefit postretirement medical and life insurance plans, during 2014, $1,320,000 in benefits were paid, $1,035,000 contributed by the College and $285,000 contributed by participants. For the year 2013, $1,265,000 in benefits were paid, $975,000 contributed by the College and $290,000 contributed by participants. Net postretirement benefit costs, for the years ended, include: (Thousands) Service cost $ 705 $ 892 Interest cost Amortization of actuarial loss from earlier periods (1) 324 Amortization of prior service credit (351) (351) Net periodic postretirement benefit cost $ 1,221 $ 1,839 The following table sets forth the postretirement benefit changes other than net periodic benefit cost recognized in the consolidated statements of activities apart from expenses for the years ended : (Thousands) Amounts arising during the period: Actuarial net gain $ (3,088) $ (2,774) Amounts arising during the period: Actuarial net (gain)/loss 1 (324) Prior service credit Postretirement benefit changes other than net periodic benefit cost $ (2,736) $ (2,747) 21

24 The following amounts are expected to be recognized in net periodic benefit cost for the year ending June 30, 2015: (Thousands) 2015 Prior service credit $ 351 The following table sets forth the status of the plan with the components of the accumulated postretirement benefit obligation recognized in the consolidated statements of financial position at, respectively: (Thousands) Accumulated postretirement benefit obligation at beginning of year $ 24,045 $ 25,962 Service cost Interest cost Actual contributions during the year, net of employee contributions (1,051) (1,009) Actuarial gain (3,088) (2,774) Accumulated postretirement benefit obligation $ 21,479 $ 24,045 The actuarial calculation uses a measurement date of June 30 for each fiscal year and incorporates the following assumptions: Discount rates: Net periodic benefit cost for the year ended June % 3.95% Benefit obligation at June % 4.55% Rate of compensation increase 4.50% 4.50% Healthcare cost trend rate 4.8% in 2014, increasing 0.8% through 2025, decreasing 0.4% through 2039, and fluctuating to an ultimate rate of 6.0% over the next 50 years 7.4% in 2013, decreasing 2.1% through 2017, fluctuating up 1.5% through 2032, and decreasing gradually to an ultimate rate of 4.6% over the next 50 years 22