Southwestern Michigan College. Financial Report with Additional Information June 30, 2016

Transcription

1 Financial Report with Additional Information June 30, 2016

2 Board of Trustees Mr. Thomas Jerdon Chairperson Mr. Keith McKenzie Vice Chairperson Mr. William White Secretary Ms. Becky L. Moore Treasurer Ms. Beth Cripe Trustee President Dr. David M. Mathews President College Administration Mr. Thomas Atkinson Chief of Staff Ms. Susan B. Coulston, CPA Vice President - Chief Business Officer Dr. David Fleming Vice President of Instruction Dr. Heidi Grabemeyer-Layman Trustee Mr. Todd Obren Trustee

3 Contents Report Letter 1-3 Management s Discussion and Analysis 4-16 Basic Financial Statements Statement of Net Position 17 Statement of Revenue, Expenses, and Changes in Net Position 18 Statement of Cash Flows Balance Sheet and Statement of Activities - Discretely Presented Component Unit - Foundation 21 Notes to Financial Statements Required Supplementary Information 49 Schedule of the College s Proportionate Share of the Net Pension Liability 50 Schedule of College s Contributions 50 Additional Information 51 Combining Statement of Net Position Combining Statement of Revenue, Expenses, and Changes in Net Position 54-55

4 Independent Auditor's Report To the Board of Trustees Report on the Financial Statements We have audited the accompanying financial statements of (the "College") and its discretely presented component unit, as of and for the years ended June 30, 2016 and 2015, and the related notes to the financial statements, which collectively comprise Southwestern Michigan College's basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and in accordance with the standards applicable to the financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. The financial statements of the discretely presented component unit were not audited under Government Auditing Standards. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 1

5 To the Board of Trustees Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of and its discretely presented component unit as of June 30, 2016 and 2015, and the respective changes in its financial position, and, where applicable, cash flows, for the years then ended, in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1 to the basic financial statements, effective July 1, 2015, the College adopted new accounting guidance under Governmental Accounting Standards Board (GASB) Statement No. 72, Fair Value Measurement and Application. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion & analysis, schedule of the college's proportionate share of the net pension liability, and schedule of college's contributions as identified in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board which considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise 's basic financial statements. The additional information, as identified in the table of contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. The additional information, as identified in the table of contents, is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the additional information, as identified in the table of contents, is fairly stated in all material respects in relation to the basic financial statements as a whole. 2

6 To the Board of Trustees Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 17, 2016 on our consideration of 's internal control over financial reporting and on 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 is an integral part of an audit performed in accordance with Government Auditing Standards in considering 's internal control over financial reporting and compliance. October 17,

7 Management's Discussion and Analysis - Unaudited The discussion and analysis of 's (the College ) financial statements provides an overview of the College's financial activities for the years ended June 30, 2016, 2015, and Management has prepared the financial statements and the related note disclosures along with the discussion and analysis. Responsibility for the completeness and fairness of this information rests with the College s administration. Using this Report The College s annual financial report includes the report of independent auditors, the management s discussion and analysis, the basic financial statements, notes to the financial statements, required supplementary information, and additional information. The basic financial statements are comprised of three components: the statement of net position, the statement of revenue, expenses, and changes in net position, and the statement of cash flows. These financial statements are 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. Financial Highlights In comparison with fiscal year 2015, the College s net position for fiscal year 2016 increased by $5.0 million. This was mostly due to the $3.7 million of revenue received from the State for capital appropriations in fiscal year 2016 related to the O Leary and Daugherty Building renovation project. In addition, gross tuition decreased $0.9 million due to a decrease in contact hours of 10.5 percent and approximately a 2.0 percent increase in tuition rates. The reduced tuition was offset by lower than budgeted salary and healthcare expenses during fiscal year In comparison with fiscal year 2014, the College s net position for fiscal year 2015 decreased by $9.6 million. This was mostly due to the $10.6 million adjustment to record the College s proportionate share of net pension liability as of July 1, 2014 in accordance with the adoption of GASB Statement No. 68. In addition, gross tuition decreased $1.0 million due to a decrease in contact hours of 9.3 percent and a 1.8 percent increase in tuition rates. The reduction in net position due to the change in accounting position and reduced tuition was offset by lower than budgeted salary and healthcare expenses during fiscal year The savings generated in fiscal year 2015 along with the uncertainty of claims in future years prompted the College to create a designated budget stabilization fund to offset any budget overruns in future years. The College funded the budget stabilization fund with $1.0 million in fiscal year In addition, the College contributed an additional $.2 million in fiscal year 2015 to the healthcare stabilization fund bringing the balance in that fund to $1.0 million as of June 30,

8 Management's Discussion and Analysis - Unaudited (Continued) Statement of Net Position and Statement of Revenue, Expenses, and Changes in Net Position The statement of net position and the statement of revenue, expenses, and changes in net position report information relevant to the College's net position and its changes therein. These statements include all assets and liabilities using the accrual basis of accounting, which is similar to the accounting method used by most private sector institutions. Total net position at June 30, 2016, 2015, and 2014 is $33.4 million, $28.4 million, and $37.9 million, respectively. The College's balance sheet at June 30 is summarized as follows: Condensed Balance Sheet as of June 30 (in millions) Assets Current assets $ 7.9 $ 11.4 $ 9.7 Capital assets Other noncurrent assets Total assets Deferred Outflow of Resources Total assets and deferred outflows of resources $ 73.8 $ 69.6 $ 62.8 Liabilities Current liabilities $ 3.3 $ 3.5 $ 3.3 Noncurrent liabilities Total liabilities Deferred Inflow of Resources Total liabilities and deferred inflows of resources Net Position Net investment in capital assets Unrestricted (deficit) 0.7 (1.8) 7.6 Total net position Total liabilities, deferred inflows, and net position $ 73.8 $ 69.6 $

9 Management's Discussion and Analysis - Unaudited (Continued) Statement of Net Position The primary changes in the assets and liabilities of the College between 2016 and 2015 are summarized as follows: The decrease in current assets from 2015 to 2016 is primarily due a shift from short-term to long-term investments due to the nature of the College s upcoming cash needs. There was also an increase in accounts receivable balances from 2015 to 2016 due to the timing of several state and federal grant payments. The increase in current assets from 2014 to 2015 is primarily due an increase in investments as a result of lower than budgeted General Fund expenses during fiscal year Noncurrent assets increased from 2015 to 2016 due an increase in fixed assets resulting from the renovation of the O Leary and Daugherty Buildings in fiscal year Another reason for the increase was an overall increase in the College s investment balances due to lower than budgeted General Fund expenses during fiscal year Noncurrent assets increased from 2014 to 2015 due an increase in fixed assets resulting from the renovation of the O Leary Building in fiscal year 2015 along with unspent restricted bond proceeds of $1.3 million as of June 30, Current liabilities decreased from 2015 to 2016 as a result of a decrease in accounts payable related to building projects. Current liabilities increased from 2014 to 2015 as a result of an increase in accounts payable related to building projects in process and an increase in payroll related liabilities. Noncurrent liabilities increased from 2015 to 2016 due to the impact of the GASB Statement No. 68 adjustments. Noncurrent liabilities increased from 2014 to 2015 due the adoption of GASB Statement No. 68 and issuance of $5 million of 2014 Community College Improvement Bonds. The following chart provides a graphic breakdown of net position by category for the fiscal years ended June 30, 2016, 2015, and 2014: Breakdown of Net Position - By Category (5.0) Net investment in capital assets Unrestricted (deficit) (1.8)

10 Net Position Management's Discussion and Analysis - Unaudited (Continued) In comparison with fiscal year 2015, the College's net position for fiscal year 2016 increased by $5.0 million, or 17.8 percent. This was mostly due to the $3.7 million of revenue received from the State for capital appropriations in fiscal year 2016 related to the O Leary and Daugherty Building renovation project. In comparison with fiscal year 2014, the College's net position for fiscal year 2015 decreased by $9.6 million or 25.2 percent. This was due to the $10.6 million adjustment to record the net pension liability as of July 1, 2014 in accordance with the adoption of GASB Statement No. 68. In both fiscal years 2016 and 2015, transfers into the Plant Fund were funded by operating and nonoperating revenue in excess of expenses in both the General Fund and Auxiliary Fund. 7

11 Management's Discussion and Analysis - Unaudited (Continued) Statement of Revenue, Expenses, and Changes in Net Position Following is a comparison of the major components of operating results of the College for the years ended June 30, 2016, 2015, and 2014: Operating Results for the Years Ended June 30 (in millions) Operating Revenue Tuition and fees $ 10.0 $ 10.8 $ 11.7 Scholarship allowance (3.3) (3.6) (3.6) Tuition and fees - Net Federal grants Sales and services of auxiliary activities Scholarship allowance (0.8) (0.7) (1.0) Auxiliary services - Net Other Total operating revenue Operating Expenses Instruction Public service Instructional support Student services Institutional administration Physical plant operations Depreciation Total operating expenses Operating Loss (13.9) (14.7) (14.3) Nonoperating Revenue (Expenses) State appropriations Federal Pell Grant Property taxes Investment income Bond issuance cost - (0.1) (0.2) Interest on capital asset - Related debt (1.2) (1.2) (1.2) Interest on ARRA subsidy Net nonoperating revenue Other Revenue - State Capital Appropriations Increase in Net Position Net Position - Beginning of year Adjustment for change in acounting principle - (10.6) - Net position, beginning of year, as restated Net Position - End of year $ 33.4 $ 28.4 $

12 Total Revenue Management's Discussion and Analysis - Unaudited (Continued) The major changes in revenue for fiscal year 2016 are a result of decreased tuition and fees and Pell Grant funding, an increase in property tax revenue, and the receipt of $3.7 million from the State for capital appropriations related to the O Leary and Daughtery Building renovation project. The major changes in revenue for fiscal year 2015 are a result of decreased tuition and fees and Pell Grant funding, and increased state appropriations as a result of additional funding through MPSERS rate stabilization payments. Auxiliary revenue decreased from 2014 to 2015 due to outsourcing the operation of the College s campus bookstore in October Operating Revenue For the College as a whole, operating revenue includes all transactions that result in the sales and/or receipts from goods and services, such as tuition, fees, and housing. In addition, certain federal, state, and private grants are considered operating if they are not for capital purposes and are considered a contract for services. Operating revenue changes were as follows: For fiscal year 2016, net tuition and fee revenue decreased by $0.5 million or 7.6 percent as a result of a 10.5 percent decrease in contact hours offset by approximately a 2.4 percent average increase in tuition and fees. For fiscal year 2015, net tuition and fee revenue decreased by $0.9 million, or 11.2 percent, as a result of a 9.3 percent decrease in contact hours offset by a 1.8 percent average increase in tuition and fees. The following graph illustrates the percentage of operating revenue by source for the year ended June 30, 2016: Operating Revenue - By Source Auxiliary 15% Other Operating 7% Tuition & Fees 69% Federal Grants 9% 9

13 Management's Discussion and Analysis - Unaudited (Continued) Nonoperating Revenue Nonoperating revenue is all revenue sources that are primarily nonexchange in nature. They consist primarily of state appropriations, federal Pell Grant funding, property taxes, and state capital appropriations. Nonoperating revenue changes included the following factors: State appropriations decreased by $0.1 million, or 2.1 percent, from fiscal year 2015 to 2016 and increased by $0.1 million, or 1.5 percent from fiscal year 2014 to Property tax revenue increased by $.2 million, or 4.6 percent, from fiscal year 2015 to 2016 and increased $0.1 million, or 2.4 percent, from fiscal year 2014 to Federal Pell Grant revenue decreased $0.8 million, or 15.5 percent, from fiscal year 2015 to 2016 due to decreased enrollment and decreased $0.9 million, or 16.1 percent, from fiscal year 2014 to 2015 due to decreased enrollment. The following graph illustrates these sources of nonoperating revenue for the year ended June 30, 2016: Nonoperating Revenue - By Source Other 1% Federal Pell Grant 20% Property Taxes 27% State Appropriations 52% 10

14 Operating Expenses Management's Discussion and Analysis - Unaudited (Continued) Operating expenses are all the costs associated with administering the programs and performing the primary purposes of the College. These costs include salaries, benefits, utilities, supplies, services, and depreciation and are then categorized by function. Overall, total operating expenses decreased $1.3 million (5.6 percent) in fiscal year For the purpose of the financial statements, operating expenses are presented according to the State of Michigan's Activities Classification Structure (ACS). Highlights of the major changes by category are as follows: Expenditures for salaries and wages decreased 5.8 percent and increased 2.0 percent for the years ended June 30, 2016 and 2015, respectively, while expenditures for benefits decreased 3.9 percent and increased 6.9 percent for the years ended June 30, 2016 and 2015, respectively. These changes affected expenses in most of the operating expense categories. As reflected in the 2015 ACS report, the College has the second lowest ratio of salaries and benefits to total operating costs of all the community colleges in the State. In fiscal year 2016, student services decreased as a result of reduced federal Pell Grant expenditures due to decreased enrollment. In fiscal year 2015, student services decreased as result of outsourcing the operation of the College s bookstore in October 2013 to an unrelated party and reduced federal Pell Grant expenditures due to decreased enrollment. Depreciation increased 6.5 percent from 2015 to 2016 due to the capitalization of the O Leary Building renovation costs. Depreciation remained constant from 2014 to The following is a graphic illustration of operating expenses by source for the College as a whole for the year ended June 30, 2016: Operating Expenses - By Source Public Serivce 1% Depreciation 9% Physical Plant Operations 13% Instruction 33% Instit. Admin. 16% Student Services 20% Instructional Support 8% 11

15 General Fund Revenue Management's Discussion and Analysis - Unaudited (Continued) Internally, the College prepares its financial statements using fund accounting, which is then reorganized into operating and nonoperating components for the audited financial statements. The College accounts for its primary programs and operations in its General Fund. The General Fund is financed primarily through four sources of revenue - tuition and fees, state appropriations, property taxes, and other. For this report, these sources of revenue are classified as either operating or nonoperating. The following graph illustrates the percentage of total General Fund revenue by source for the year ended June 30, 2016: General Fund Revenue - By Source State Appropriations 31% Other 2% Tuition and Fees 44% Property Taxes 23% General Fund Expenses The College accounts for its primary programs and operations in its General Fund. General Fund expenses are recorded according to the following categories: instruction, instructional support, student services, institutional administration, and operations and maintenance of the assets of the College. Each category includes salaries, benefits, utilities, supplies, and services for each function. Overall, total General Fund expenses decreased $0.8 million (3.9 percent) and increased $0.5 million (2.5 percent) for the years ended June 30, 2016 and 2015, respectively. For the purpose of these financial statements, expenses are presented according to the State of Michigan's Activities Classification Structure (ACS). 12

16 Management's Discussion and Analysis - Unaudited (Continued) The following graph illustrates the percentage of total General Fund expenses by source for the year ended June 30, 2016: General Fund Expenses - By Source Instit. Admin. 19% Oper./Maint. 15% Public Service 1% Instruction 40% Instructional Support 10% Student Services 15% Statement of Cash Flows Another way to assess the financial health of the College is to look at the statement of cash flows. Its primary purpose is to provide relevant information about the cash receipts and cash payments of an entity during a period. The statement of cash flows also helps users assess: An entity's ability to generate future net cash flows Its ability to meet its obligations as they come due Its needs for external financing Major sources of funds from operations came from tuition and fees, grants, contracts, and auxiliary activities (i.e. the bookstore and student housing). These sources were offset by expenditures for operations such as payments to employees and suppliers. For fiscal year 2016, cash decreased by $1.9 million due to expenditures made for capital purchases that were partially offset by revenue received from the State for capital appropriations. For fiscal year 2015, cash increased by $1.0 million due to issuance of bonds offset by decreases in tuition and auxiliary revenue. Cash used in capital and related financing for fiscal years 2016, 2015, and 2014 was $3.7 million, $1.7 million, and $4.3 million, respectively. Cash used by investing activities for fiscal years 2016, 2015, and 2014 was ($1.2) million, ($1.7) million, and ($0.7) million, respectively. 13

17 Management's Discussion and Analysis - Unaudited (Continued) Cash Flows for the Year Ended June 30 (in millions) Cash (Used in) Provided By Operating activities $ (13.2) $ (12.4) $ (11.5) Noncapital financing activities Capital and related financing activities (3.7) (1.7) (4.3) Investing activities (1.2) (1.7) (0.7) Net (Decrease) Increase in Cash and Cash Equivalents (1.9) Cash and Cash Equivalents - Beginning of year Cash and Cash Equivalents - End of year $ 0.6 $ 2.5 $ 1.5 Capital Asset and Debt Administration Capital Assets At June 30, 2016 and 2015, the College had $86.9 million and $81.3 million, respectively, invested in capital assets, before accumulated depreciation of $29.6 million and $27.4 million, respectively. Depreciation charges totaled $2.3 million and $2.2 million, respectively, for the 2016 and 2015 fiscal years. Capital Assets at June 30 (in millions) Land and land improvements $ 4.3 $ 4.3 $ 4.2 Buildings and improvements Furniture, fixtures, and equipment Library materials Land Construction in progress Total $ 86.9 $ 81.3 $

18 Debt Management's Discussion and Analysis - Unaudited (Continued) The College had $24.5 million, $25.2 million, and $20.8 million in debt outstanding at June 30, 2016, 2015, and 2014, respectively. The table below summarizes these amounts by type of debt instrument. The College's bond rating by Standard & Poor s was AA at June 30, 2016, 2015, and Debt Outstanding at June 30 (in millions) Bonds payable $ 24.4 $ 25.0 $ 20.6 Capital lease Total $ 24.5 $ 25.2 $ 20.8 Economic Factors That Will Affect the Future The economic outlook for the College is tied heavily to national and state economic conditions. Although federal and state appropriations have been determined for the upcoming fiscal year, it is important to note that in times of financial constraint, such funding can be reduced mid-year through an executive order. The College s most recent rating by Standard & Poor s was affirmed to be AA with a stable outlook, which is better than Moody s recent issuance of a negative outlook for higher education overall. For fiscal year 2017, the College has budgeted a slight increase in state operating funding and property tax revenue over fiscal year Additionally, the fiscal year 2017 budget includes a tuition and fees increase of 2.6 percent over the fiscal year 2016 rates, with no anticipated increase in enrollment from the fiscal year 2016 actual level. This resulted in budgeted tuition and fees of $0.3 million more than actual fiscal year 2016 results but approximately $0.8 million less than the fiscal year 2016 budget. While thus far in fiscal year 2017 the College has experienced an 3.4 percent decline in enrollment, we are not alone. Only six of the 28 community colleges in the State reported any increase in enrollment this fall. The College is appropriately positioned with its current processes and structures to react effectively to this change in estimated enrollment. We are able to adjust our expenditures adequately, if necessary, to continue our mission of providing affordable local access to high quality college education. We believe our strategy of providing a full college life experience with the building of three residence halls, constant reinvestment in our facilities, and enhancement of our robust offering of student activities and opportunities on and off campus continues to put the College in a position to increase its market share of traditional-age students. is also embracing the new reality of the way early middle college is transforming community colleges statewide. We are poised to adapt instruction and scheduling to take advantage of this new opportunity of early middle college while maintaining academic integrity and a commitment to student success. Based on these strategies, along with the fact that the surrounding area high schools are projected to increase the number of graduating seniors over the next 10 years, we believe our enrollment going forward will also increase. 15

19 Management's Discussion and Analysis - Unaudited (Continued) recently completed a capital project with the State of Michigan for an $8.6 million renovation of two classroom buildings on our Dowagiac Campus. The twostage plan first completely renovated the general academic O Leary Building into a new Science and Allied Health Building, then renovated the previous science Daugherty Building into the new Academic Building with general purpose classrooms. We believe the renovations and upgrades to these buildings will enhance the College s capacity to provide a very high level of course offerings in the science fields and positively influence the educational experience of our students. A total of $3.75 million of the total cost was paid by the State of Michigan and the remaining amount was financed by the College through the issuance of construction bonds and use of accumulated Building and Site Fund reserves. received state planning authorization for a $9.6 million renovation of the nursing building on our Dowagiac Campus. The renovations and expansion of this building will enhance the College s capacity to provide education offerings in the nursing and health fields. The State of Michigan has approved $4.0 million of the total cost, and the remaining $5.6 million will be funded by the College using reserve funds in the Building and Site Fund and through fundraising efforts in conjunction with the Foundation. As the School of Nursing has just completed the national accreditation process with the Accreditation Commission for Education in Nursing (ACEN), these renovated facilities will be the appropriate home for this expanding program. has a well-established long-range planning process which involves the board of trustees, along with the administrative leaders of the College. The evaluation of programs and services is always under review by the College s administration. It is imperative that the College s scarce resources are always allocated to those programs and services that drive the College s core mission of student success. The College s desire to attract, retain, develop, and graduate students is at the center of all decisions made as the College looks to use our resources most efficiently and effectively and reallocate as deemed necessary through the College s annual long-range planning process. The College has reviewed its cash flow data and reserve funds. is financially positioned to continue normal operations into the future. 16

20 Statement of Net Position Assets June Current assets: Cash and cash equivalents (Note 3) $ 565,942 $ 1,107,802 Short-term investments (Note 3) 3,984,973 8,476,798 Accounts receivable - Net (Note 5) 3,252,516 1,768,434 Other current assets 54,765 56,320 Total current assets 7,858,196 11,409,354 Noncurrent assets: Restricted cash - 1,366,744 Other long-term investments (Note 3) 6,707, ,885 Student loans receivable - Net 812, ,894 Capital assets - Net (Note 6) 57,257,966 53,917,321 Total noncurrent assets 64,778,342 57,056,844 Total assets 72,636,538 68,466,198 Deferred Outflows of Resources (Note 8) 1,143,960 1,106,714 Total assets and deferred outflows of resources 73,780,498 69,572,912 Liabilities Current liabilities: Accounts payable 705,806 1,061,564 Accrued liabilities: Payroll and withholdings 774, ,922 Interest payable 191, ,281 Other 158, ,275 Unearned revenue 584, ,172 Long-term obligations - Current (Note 7) 678, ,844 Accrued vacation 188, ,068 Total current liabilities 3,282,116 3,555,126 Noncurrent liabilities: Long-term obligations - Net of current portion (Note 7) 23,831,073 24,509,990 Net pension liablity (Note 8) 10,821,127 10,588,583 Student loans payable 1,386,762 1,389,267 Total noncurrent liabilities 36,038,962 36,487,840 Total liabilities 39,321,078 40,042,966 Deferred Inflows of Resources (Note 8) 1,059,282 1,170,572 Total liabilities and deferred outflows of resources 40,380,360 41,213,538 Net Position Net investment in capital assets 32,747,976 30,122,231 Unrestricted net position (deficit) (Note 1) 652,162 (1,762,857) Total net position $ 33,400,138 $ 28,359,374 See Notes to Financial Statements. 17

21 Statement of Revenue, Expenses, and Changes in Net Position Year Ended June Operating Revenue Tuition and fees $ 9,941,480 $ 10,798,286 Scholarship allowance (3,278,218) (3,589,927) Net tuition and fees 6,663,262 7,208,359 Federal grants and contracts 861, ,385 Sales and services of auxiliary activities 2,334,504 2,224,437 Scholarship allowance (769,806) (739,522) Net sales and services of auxiliary activities 1,564,698 1,484,915 Other sources 655, ,697 Total operating revenue 9,744,453 10,349,356 Operating Expenses Instruction 7,632,746 8,264,994 Public service 75,000 75,000 Instructional support 1,940,213 1,926,099 Student services 4,767,188 5,579,687 Institutional administration 3,706,767 3,874,493 Operations and maintenance of plant 3,187,796 3,143,006 Depreciation 2,348,155 2,205,685 Total operating expenses 23,657,865 25,068,964 Operating Loss (13,913,412) (14,719,608) Nonoperating Revenue (Expenses) State appropriations 6,810,375 6,956,905 Federal Pell Grant 4,103,101 4,856,096 Property taxes (Note 2) 5,306,329 5,072,087 Investment income and other interest income 65,906 26,874 Bond issuance cost - (63,735) Interest on capital asset - Related debt (1,239,791) (1,235,019) Interest on ARRA subsidy 158, ,582 Net nonoperating revenue 15,204,376 15,772,790 Income - Before other revenue 1,290,964 1,053,182 Other Revenue - State Capital Appropriations 3,749,800 - Increase in Net Position 5,040,764 1,053,182 Net Position - Beginning of year 28,359,374 37,925,515 Adjustment for change in accounting principle (Note 1) - (10,619,323) Net position, beginning of year, as restated 28,359,374 27,306,192 Net Position - End of year $ 33,400,138 $ 28,359,374 See Notes to Financial Statements. 18

22 Statement of Cash Flows Year Ended June Cash Flows from Operating Activities Tuition and fees $ 6,631,262 $ 7,107,072 Grants and contracts 161, ,468 Payments to suppliers (6,265,047) (6,470,727) Payments to employees (14,343,047) (15,142,774) Auxiliary enterprise charges 628, ,897 Other (40,062) 705,556 Net cash used in operating activities (13,227,485) (12,356,508) Cash Flows from Noncapital Financing Activities Local property taxes 5,306,329 5,072,087 Federal direct lending receipts 3,762,140 4,367,242 Federal direct lending disbursements (3,762,140) (4,367,242) State appropriations 6,778,486 6,896,919 Pell Grant 4,103,101 4,856,096 Net cash provided by noncapital financing activities 16,187,916 16,825,102 Cash Flows from Capital and Related Financing Activities Purchase of capital assets (5,622,024) (4,979,516) State capital appropriations 3,749,800 - Proceeds from bond issue - 5,000,000 Principal paid on capital debt (651,844) (599,851) Proceeds from sale of capital assets 28,307 Proceeds from issuance of capital debt - (63,735) Cash received from federal stabilization funds (ARRA) 158, ,852 Interest paid on capital debt (1,339,359) (1,304,995) Net cash used in capital and related financing activities (3,676,664) (1,788,515) Cash Flows from Investing Activities Disbursements of student loans - (10,000) Collections on student loans 141, ,031 Net purchases from sales and maturities of investments (1,400,002) (1,931,532) Investment income 65,906 26,874 Net cash used in investing activities (1,192,371) (1,706,627) Net (Decrease) Increase in Cash and Cash Equivalents (1,908,604) 973,452 Cash and Cash Equivalents - Beginning of year 2,474,546 1,501,094 Cash and Cash Equivalents - End of year $ 565,942 $ 2,474,546 See Notes to Financial Statements. 19

23 Statement of Cash Flows (Continued) A reconciliation of operating loss to net cash from operating activities is as follows: Year Ended June Reconciliation of Operating Loss to Net Cash from Operating Activities Operating loss $ (13,913,412) $ (14,719,608) Adjustments to reconcile operating loss to net cash from operating activities: Depreciation expense 2,348,155 2,205,685 (Gain) Loss on disposal of fixed assets (558) 1,593 Change in pension liablity and deferreds 84,008 33,118 (Increase) decrease in assets: Accounts receivable (1,452,193) (1,426) Other current assets 1,555 (50,019) (Decrease) increase in liabilities: Accounts payable (355,758) 252,016 Accrued payroll and withholdings 124,979 79,978 Accrued other (52,806) (56,322) Unearned revenue 23,252 (114,697) Accrued vacation and sick leave (34,707) 13,174 Net cash used in operating activities $ (13,227,485) $ (12,356,508) See Notes to Financial Statements. 20

24 Discretely Presented Component Unit Foundation Balance Sheet June Assets Cash and cash equivalents $ 215,101 $ 204,413 Investments (Note 3) 11,643,870 11,191,707 Pledges receivable Total assets $ 11,858,971 $ 11,396,948 Liabilities - Due to $ 332,770 $ 159,060 Net Assets Unrestricted 80,238 91,300 Temporarily restricted 1,494,408 1,463,690 Permanently restricted 9,951,555 9,682,898 Total net assets 11,526,201 11,237,888 Total liabilities and net assets $ 11,858,971 $ 11,396,948 Statement of Activities Year Ended June Revenue Contributions $ 307,112 $ 147,369 Contributed services 150, ,128 Rent revenue 178, ,500 Interest income 188, ,167 Net realized and unrealized losses on investments (23,960) (72,187) Total revenue 800, ,977 Expenses Grants and contributions 353, ,060 Management and general 54,810 95,241 Fundraising 103,323 95,124 Total expenses 511, ,425 Net Increase in Net Assets 288, ,552 Net Assets - Beginning of year 11,237,888 11,039,336 Net Assets - End of year $ 11,526,201 $ 11,237,888 See Notes to Financial Statements. 21

25 Notes to Financial Statements June 30, 2016 and 2015 Note 1 - Basis of Presentation and Significant Accounting Policies Basis of Presentation Reporting Entity - (the College ) is a Michigan community college whose financial statements have been prepared in accordance with generally accepted accounting principles as applicable to public colleges and universities outlined in Governmental Accounting Standards Board (GASB) Statement No. 35 and the Manual for Uniform Financial Reporting - Michigan Public Community Colleges, The College reports as a business-type activity, as defined by GASB Statement No. 35. Business-type activities are those that are financed in whole or in part by fees charged to external parties for goods or services. The accompanying financial statements have been prepared in accordance with criteria established by the Governmental Accounting Standards Board for determining the various governmental organizations to be included in the reporting entity. These criteria include significant operational or financial relationships with the College. Based on application of the criteria, the financial statements of the Foundation have been discretely presented in s financial statements. The Foundation (the Foundation ), a nonprofit organization, was formed to operate exclusively for charitable purposes to promote, establish, conduct, maintain, and operate educational and scientific activities in conjunction with the College. Separate financial statements of the Foundation may be obtained by contacting, Cherry Grove Road, Dowagiac, MI The Foundation is a private nonprofit organization that reports under Financial Accounting Standards Board (FASB) standards. As such, certain revenue recognition criteria and presentation features are different from GASB revenue recognition criteria and presentation features. No modifications have been made to the Foundation s financial information in the College s financial reporting entity for these differences. The Internal Revenue Service has determined the Foundation is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. Accordingly, no provision for income taxes has been recorded. 22

26 Notes to Financial Statements June 30, 2016 and 2015 Note 1 - Basis of Presentation and Significant Accounting Policies (Continued) Significant accounting policies followed by the College are described below to enhance the usefulness of the financial statements to the reader: Accrual Basis - The financial statements of have been prepared on the accrual basis of accounting, whereby revenue is recognized when earned and expenditures are recognized when the related liabilities are incurred and certain measurement and matching criteria are met. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Cash and Cash Equivalents - Cash and cash equivalents consist of all highly liquid investments with an initial maturity of three months or less. Restricted Cash - Cash that was received from the issuance of the 2014 Community College Improvement Bonds, which is restricted for the use of capital projects. Investments - Investments are recorded at fair value, based on quoted market price. Bond Issuance Costs - Bond issuance costs are expensed as incurred. In fiscal year 2015, bond issue costs of $63,735 were expensed with the issuance of the 2014 bonds. Property and Equipment - Property and equipment are recorded at cost or, if donated, the fair value at the time of donation. Library books are recorded using a historically based estimated value. Expenditures for maintenance and repairs are charged to current expenditures as incurred. Depreciation is computed using the straight-line method. No depreciation is recorded on land and the art collection. Expenditures for major renewals and betterments that extend the useful lives of the assets are capitalized. The following estimated useful lives are used to compute depreciation: Land improvements Buildings and improvements Furniture, fixtures, and equipment Library materials years years 3-20 years 5 years 23

27 Notes to Financial Statements June 30, 2016 and 2015 Note 1 - Basis of Presentation and Significant Accounting Policies (Continued) Student Loans Receivable - Student loans receivable are carried at unpaid principal balances less an allowance for uncollectible loans. The allowance for uncollectible loans is increased by charges to refundable Perkins Loan program advances and decreased by charge-offs, which also reduces the corresponding liabilities. Management s periodic evaluation of the adequacy of the allowance is based on Perkins Loan program requirements, the College s past loan loss experience, specific impaired loans, adverse situations that may affect the borrower s ability to repay, and current economic conditions. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual terms. The College has recorded an allowance for uncollectible loans of $125,000 and $140,000 as of June 30, 2016 and 2015, respectively. The College s practice is to charge off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower s failure to meet repayment terms, the borrower s deteriorating or deteriorated financial condition, or for other reasons. Loans are placed on nonaccrual status when management believes, after considering economic conditions, business conditions, and collection efforts, that the loans are impaired or collection of interest is doubtful. Uncollected interest previously accrued is charged off or an allowance is established by a charge to interest income. Interest income on nonaccrual loans is recognized only to the extent cash payments are received. The Federal Perkins Loan Program is scheduled to expire on September 30, As of June 30, 2016, the College has made $358,390 in institutional capital contributions, which are reflected as part of the College s net assets. Under current guidance issued by the Department of Education, at the time the College liquidates the loan portfolio and assigns the student loans to the Department of Education, the College will be forgoing its institutional capital contribution not yet received back through loan collections. The College has begun the liquidation process and plans to have the process completed by June 30, Unearned Revenue - Revenue received prior to year end that is related to the next fiscal period is recorded as unearned revenue. The balance as of June 30, 2016 consists of approximately $317,000 for the 2016 fall semester and $268,000 for the 2016 summer semester. The balance as of June 30, 2015 consists of approximately $239,000 for the 2015 fall semester and $322,000 for the 2015 summer semester. Grants received prior to qualifying expenditures are also included in unearned revenue. Generally, the College first applies restricted resources when an expense is incurred for which both restricted and unrestricted resources are available. Compensated Absences - Compensated absences represent the accumulated liability to be paid under the College's current vacation pay policy. Under the College's policy, employees earn vacation time based on time of service with the College. Student Loans Payable - Funds provided by the United States government pursuant to the Perkins Loan program are loaned to qualified students and may be re-loaned upon collection. Since these funds are ultimately distributable to the federal government upon liquidation of the program, should it occur, the advances are reflected as liabilities on the accompanying balance sheet. 24

28 Notes to Financial Statements June 30, 2016 and 2015 Note 1 - Basis of Presentation and Significant Accounting Policies (Continued) Operating and Nonoperating Revenue - Operating activities reported on the statement of revenue, expenses, and changes in net position are those activities that generally result from exchange transactions, such as payments received for providing services and payments made for services or goods received. Certain significant revenue streams relied upon for operations are recorded as nonoperating revenue, as defined by GASB Statement No. 34, including state appropriations, property taxes, federal Pell Grant revenue, gifts, and investment income. Pell Grant Reimbursements - Pell Grant reimbursements are classified as nonoperating revenue due to their nonexchange nature. The amount received during the years ended June 30, 2016 and 2015 was $4,103,101 and $4,856,096, respectively. Unrestricted Net Position - Unrestricted net position represents net positions that are not subject to externally imposed constraints. Unrestricted net positions may be designated for specific purposes by action of management or the board of trustees. The College, through board action, has designated the use of unrestricted net position as of June 30, 2016 and 2015 as follows: Designated for General Fund division use $ 3,543,436 $ 3,443,436 Designated for net pension liability (10,736,449) (10,652,441) Designated for capital maintenance and replacement 5,522,765 3,363,897 Designated for budget stablization 1,000,000 1,000,000 Designated for healthcare expenses 1,000,000 1,000,000 Designated for marketing expenses 126,605 Designated for scholarships and grants (141,169) (179,723) Designated for auxiliary expenditures 336, ,974 Total unrestricted net position (deficit) $ 652,162 $ (1,762,857) Net Investment in Capital Assets - Net investment in capital assets represent capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction, or improvement of those assets. Federal Financial Assistance Programs - The College participates in federally funded Pell Grants, SEOG grants, Federal Work-Study, and Federal Direct Lending programs. Federal programs are audited in accordance with the Single Audit Act amendments of 1996, the U.S. Office of Management and Budget Revised Unform Guidance, Audit of States, Local Governments, and Non-Profit Organizations, and the compliance supplement. During the years ended June 30, 2016 and 2015, the College distributed $3,762,140 and $4,367,242, respectively, for direct lending through the U.S. Department of Education, which is not included as revenue and expenditures on the accompanying financial statements. Reclassifications - Deferred outflows of resources totaling $1,106,714 related to MPSERS, which were presented net with deferred inflows of resources of $1,170,572 in 2015, have been reclassified to their respective deferred outflows of resources lines on the 2015 statement of net position.