Consolidated Financial Statements and Consolidating Information (With Independent Auditors Report Thereon)
Table of Contents Page Independent Auditors Report 1 Consolidated Statement of Financial Position 3 Consolidated Statement of Activities 4 Consolidated Statement of Cash Flows 5 6 Consolidating Information: Consolidating Statement of Financial Position 25 Consolidating Statement of Activities 26
KPMG LLP 4200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 Independent Auditors Report The Board of Trustees University of Minnesota Foundation: Report on Financial Statements We have audited the accompanying consolidated financial statements of the University of Minnesota Foundation (the Foundation), which comprise the consolidated statement of financial position as of, and the related consolidated statements of activities and cash flows for the year 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 audit. We conducted our audit 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 includes 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 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 the Foundation as of, and the changes in its net assets and its cash flows for the year then ended in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.
Other Matter Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The supplementary information included in the consolidating statement of financial position and the consolidating statement of activities is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. October 14, 2013 2
Consolidated Statement of Financial Position Assets Cash and cash equivalents $ 25,942,981 Investments, at fair value 2,003,970,341 Receivables from pending liquidations 37,029,358 Pledges receivable, net 127,464,949 Other receivables, primarily interest 3,051,646 Split interest agreements: Beneficial interest in perpetual trusts 67,619,172 Assets held in charitable trusts 24,604,815 Beneficial interest in trusts 5,630,137 Gift annuities 40,321,562 Office property and equipment, net 2,695,928 University of Minnesota Foundation Dinnaken Housing, LLC: Property and equipment, net 25,506,873 University Gateway Corporation: Property and equipment, net 28,972,042 Net investment in direct financing leases 18,615,718 Debt issuance costs, net of accumulated amortization 872,880 Total assets $ 2,412,298,402 Liabilities, Minority Interest, and Net Assets Liabilities: Accounts payable, accrued expenses, and other liabilities $ 23,817,022 Gift annuities payable 22,178,851 Liability under charitable trust agreements 11,330,376 Investments held for custody of others 221,898,694 University Gateway Corporation: Derivative financial instrument 1,860,295 Capital lease payable 235,987 Bonds payable 51,673,899 Total liabilities 332,995,124 Minority interest in University Gateway Corporation 7,056,682 Net assets: Unrestricted 47,975,011 Temporarily restricted 1,100,908,295 Permanently restricted 923,363,290 Total net assets 2,072,246,596 Total liabilities, minority interest, and net assets $ 2,412,298,402 See accompanying notes to consolidated financial statements. 3
Consolidated Statement of Activities Year ended Temporarily Permanently Unrestricted restricted restricted Total Revenue: Contributions $ 1,613,156 61,900,687 56,104,955 119,618,798 Investment income, net of investment expenses of $3,292,326 2,557,133 10,084,770 53,815 12,695,718 Net realized/unrealized gains on investments 10,689,512 127,218,827 1,600,312 139,508,651 Change in carrying value of trusts 327,342 3,116,725 6,427,129 9,871,196 Support services revenue 2,327,494 2,327,494 University of Minnesota Foundation Dinnaken Housing, LLC rental revenue 5,021,882 5,021,882 University Gateway Corporation revenue 1,937,678 1,937,678 Miscellaneous revenue 1,017,607 1,017,607 Inherent contribution of Minnesota Medical Foundation assets (8,814,526) 227,496,753 246,107,718 464,789,945 Net assets released from restriction 165,304,112 (165,304,112) Total revenue 181,981,390 264,513,650 310,293,929 756,788,969 Expenses: Program services: Distributions for University purposes 140,425,335 140,425,335 Support services: Management and general: Operational expenses 7,810,456 7,810,456 Legal and accounting fees 526,499 526,499 Depreciation 599,509 599,509 Other expenses 374,743 374,743 Fundraising: Promotion and development 21,072,454 21,072,454 University of Minnesota Foundation Dinnaken Housing, LLC: Operational expenses 3,129,126 3,129,126 Depreciation 1,093,489 1,093,489 University Gateway Corporation: Operational expenses 1,944,303 1,944,303 Depreciation 320,275 320,275 Change in derivative financial instrument (1,064,333) (1,064,333) Total expenses 176,231,856 176,231,856 Net increase in net assets before other changes in net assets 5,749,534 264,513,650 310,293,929 580,557,113 Other changes in net assets: Increase in minority interest of University Gateway Corporation (865,815) (865,815) Consolidation of University Gateway Corporation (note 1(a)) (12,708,160) (12,708,160) Changes in net assets (7,824,441) 264,513,650 310,293,929 566,983,138 Net assets at beginning of year 55,799,452 836,394,645 613,069,361 1,505,263,458 Net assets at end of year $ 47,975,011 1,100,908,295 923,363,290 2,072,246,596 See accompanying notes to consolidated financial statements. 4
Consolidated Statement of Cash Flows Year ended Cash flows from operating activities: Change in net assets $ 566,983,138 Inherent contribution of Minnesota Medical Foundation (464,789,945) Consolidation of University of Gateway Corporation 12,708,160 Adjustments to reconcile change in net assets to net cash used in operating activities: Net realized and unrealized gains on investments (139,508,651) Change in net carrying value of trusts (60,444) Change in derivative financial instrument (1,064,333) Depreciation expense 2,013,273 Noncash contributions (7,438,556) Contributions restricted for long-term investment (56,104,955) Changes in operating assets and liabilities: Pledges receivable 42,506,142 Other receivables (732,725) Unamortized debt issue costs 17,897 Accounts payable, accrued expenses, and other liabilities 9,200,481 Net cash used in operating activities (36,270,518) Cash flows from investing activities: Purchases of property and equipment (1,146,275) Investments held for custody of others 19,350,984 Change in receivables from pending liquidations (13,417,934) Proceeds from sales of investments 1,327,125,918 Purchase of investments (1,342,667,272) Cash acquired from Minnesota Medical Foundation 1,165 Cash acquired due to consolidation of University Gateway Corporation 910,586 Principal payments on direct financing leases 424,903 Net cash used in investing activities (9,417,925) Cash flows from financing activities: Proceeds from contributions restricted for long-term investment 56,104,955 Changes in minority interest in University Gateway Corporation 865,815 Payments on bonds payable 1,530 Payments under capital lease obligation (6,239) Net cash provided by financing activities 56,966,061 Net change in cash 11,277,618 Cash and cash equivalents at beginning of year 14,665,363 Cash and cash equivalents at end of year $ 25,942,981 Noncash activities: Contributions of securities and property $ 7,438,556 Inherent contribution of Minnesota Medical Foundation 464,789,945 Consolidation of University Gateway Corporation 12,708,160 Changes in minority interest in University Gateway Corporation 865,815 See accompanying notes to consolidated financial statements. 5
(1) Organization and Summary of Significant Accounting Policies The University of Minnesota Foundation (the Foundation) was incorporated as a not-for-profit corporation in the state of Minnesota in 1962 and operates exclusively for the benefit of the University of Minnesota (the University). The accounting policies of the Foundation conform to U.S. generally accepted accounting principles (U.S. GAAP). The following is a summary of the more significant accounting policies: (a) Principles of Consolidation The consolidated financial statements include those of the Foundation and its related entities, the University of Minnesota Foundation Investment Advisors (UMFIA), the University of Minnesota Foundation Dinnaken Housing, LLC (Dinnaken Housing), and University Gateway Corporation (UGC). UMFIA is a nonprofit organization established to oversee the investment and management of the investments of the Foundation. Dinnaken Housing (doing business as University of Minnesota Foundation Real Estate Advisors) is a limited liability corporation established primarily to provide housing to University students. UGC is a nonprofit organization established to construct, own, and operate a facility to be used to support its beneficiary organizations and the University in student recruiting, alumni relations, fundraising activities, and general operations. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain amounts are shown separately on the consolidated statement of financial position (including property and equipment, net, of Dinnaken Housing and property and equipment, net, investment in direct financing leases and debt issuance costs, net of accumulated amortization, of UGC) while other amounts (such as cash and cash equivalents, investments, other receivables and accounts payable, accrued expenses, and liabilities of Dinnaken Housing and UGC) are included in the consolidated amounts on the consolidated statement of financial position. During the fiscal year, the Board of Trustees for the Foundation and the Board of Trustees for the Minnesota Medical Foundation (MMF) agreed to combine their operations to better fulfill their respective missions, to enhance their ability to serve the University and their donors, and to create one voice for private giving at the University. The effective date of the Legal Plan of Merger was February 1, 2013. Under this Legal Plan of Merger, the MMF was merged with and into the Foundation and MMF s separate existence ceased. The merger is reflected in the consolidated financial statements in accordance with the technical accounting requirements of ASC 958-805 Not-for-Profit Entities Business Combinations. MMF s assets and liabilities were combined at fair market value under the acquisition method as of the effective merger date of February 1, 2013 and no consideration was transferred. MMF s income and expense activity prior to the effective transaction date is not included in the Foundation s consolidated financial statements. 6 (Continued)
The amounts of the estimated fair value of the MMF assets and liabilities assumed on the transaction date are as follows: Fair value at February 1, 2013 Assets: Cash $ 1,165 Investments 342,816,531 Pledges* 81,094,299 Other receivables 609,198 Split interest agreements and charitable gift annuities 50,789,164 Office property and equipment, net 594,760 Total assets $ 475,905,117 Liabilities: Accounts payable, accrued expenses, and other liabilities $ 3,234,987 Liability for charitable trust agreements 6,019,842 Investments held for custody of others 1,247,843 Other deferred revenue 612,500 Total liabilities 11,115,172 Inherent contribution (assets less liabilities) $ 464,789,945 *The fair value of assets assumed includes gross pledges receivable of $125,501,130, less an allowance for uncollectible pledges of $12,650,000, less a 9% discount of $31,756,831. Prior to the merger, the Foundation had a 50% voting interest in UGC. Under U.S. GAAP, consolidation was not required. Subsequent to the merger, the Foundation has a 67% voting interest which thus requires consolidation of UGC assets, liabilities, and income and expense activity commencing with the effective merger date of February 1, 2013. The remaining 33% voting interest belongs to the University of Minnesota Alumni Association (UMAA) and is not controlled by the Foundation. As a result, this amount is reflected as minority interest in UGC on the consolidated statement of financial position and statement of activities. The consolidation of UGC on February 1, 2013 resulted in a net impact of $(12,708,160) on the net assets of the Foundation. This amount represents $18,574,457 of UGC s net assets as of February 1, 2013, less $6,190,867 of UMAA s minority interest in UGC, and less $25,091,750 of the interest in the net assets of related parties (investments managed by the Foundation on behalf of UGC). 7 (Continued)
(b) Basis of Presentation Net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Net assets of the Foundation and changes therein are classified into the following three categories: Unrestricted net assets represent the portion of expendable funds that are available for support of the operations of the Foundation. Temporarily restricted net assets consist of contributions that have been restricted by the donor for specific purposes or are time restricted. Permanently restricted net assets consist of contributions that have been restricted by the donor that stipulate the resources be maintained permanently, but permit the Foundation to use or expend part or all of the income derived from the donated assets for either specified or unspecified purposes. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Expirations of temporary restrictions on net assets (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as reclassifications between the applicable classes of net assets. (c) (d) (e) (f) Basis of Accounting The consolidated financial statements of the Foundation have been prepared on the accrual basis of accounting. New Accounting Pronouncements In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements and Disclosures (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance amends Accounting Standards Codification (ASC) 820, Fair Value Measurement, to establish common requirements for measuring fair value and for disclosing information for the reporting periods beginning after December 15, 2011. The Foundation adopted the required disclosure provisions of this new guidance effective July 1, 2012. Cash and Cash Equivalents Cash and cash equivalents on the consolidated statement of cash flows consist of cash held in checking and temporary investments with maturities of less than three months. Derivative Financial Instruments The Foundation invests in various stock indexes, fixed income, foreign currency derivatives, and put options. The Foundation uses derivatives with the objectives of reducing portfolio risk and/or lowering investment costs. Derivative uses include managing the duration of the fixed income portfolio, gaining investment exposure to specific markets, maintaining investment policy allocation, and managing risk related to specific public companies that are within the underlying investment funds. Derivative instruments are measured at fair value and reported as assets or liabilities in the 8 (Continued)
consolidated statement of financial position. Changes in the fair value of derivatives during the year are reported in the consolidated statement of activities. The interest rate swap of UGC represents a derivative financial instrument and is recognized as either an asset or liability at its fair value in the consolidated statement of financial position, with the changes in the fair value reported in the consolidated statement of activities and changes in net assets. UGC holds this interest rate swap for the fixed interest rate certainty that it provides and was entered into in prior periods related to UGC s bonds payable. (g) (h) Contributions Contributions, including unconditional promises to give, are recognized as revenues on an accrual basis. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met. Contributions to be received after one year are discounted at rates of 1.6% 5.2% based on when the contribution was made, except for the MMF existing pledges receivable balance at February 1, 2013, which were fair valued and thus a discount rate of 9.0% was utilized. Amortization of discounts is recorded as additional contribution revenue. An allowance for uncollectible contributions receivable is provided based upon management s judgment including such factors as prior collection history. Beneficial Interest in Trusts The Foundation has beneficial interests in charitable remainder, lead, and perpetual trusts that are held by other entities such as banks or charitable organizations. The Foundation records its interest in these trusts, upon discovery of their existence, at fair value as determined using the present value of the estimated future cash receipts to be received from the trust. Because of the complex issues related to collecting the data for these transactions, there can be a time delay in the recording of the asset because of the time needed for discovery, verification of the Foundation s rights, and the determination of the valuation of future payments. Included within beneficial interest in perpetual trusts are three inter-related trust agreements whereby the Foundation will receive a continual stream of periodic payments equal to 5% annually of the fair value of the trusts. The present value of the future benefits to be received by the Foundation for these trusts was $37,955,013 at. (i) Assets Held in Charitable Trusts The Foundation has entered into unitrust and annuity trust agreements as trustee that provide, among other matters, that the trustee shall pay to the beneficiaries an annual income payment until the income obligation is completed in accordance with the donor s trust agreement. The Foundation records the assets held in these trusts at fair value and the corresponding liability at the actuarially determined present value of payments to be made to the designated beneficiaries. The residual amount is recorded as contribution revenue at the time the trust is established. In subsequent periods, the liability under charitable trust agreements is adjusted and changes therein are reported as a component of the change in carrying value of trusts in the consolidated statement of activities. Upon termination of the income obligation, the assets of the trust are held by the Foundation in accordance with the donor s trust agreement. 9 (Continued)
(j) (k) Gift Annuity Agreements The Foundation has entered into gift annuity agreements that provide that the Foundation shall pay to the designated beneficiaries an annual amount until the death of the designated beneficiaries. The payments continue even if the assets of the gift annuity fund have been exhausted. The Foundation records the assets received at fair value and a corresponding liability is recorded for the actuarially determined present value of payments to be made to the designated beneficiaries, with the residual amount recorded as contribution revenue. Upon the death of the beneficiaries, the assets of the gift annuity fund are held by the Foundation in accordance with the agreements. Income Taxes The Internal Revenue Service has ruled that the Foundation is a publicly supported organization under Internal Revenue Code Section 170(b)(1)(A) and is not a private foundation as defined under Section 509(a)(1). The Foundation is a tax-exempt organization under Section 501(c)(3) and, as such, is subject to federal and state income tax only on net unrelated business income. FASB ASC 740-10, Accounting for Uncertainty in Income Taxes, provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely than-not recognition threshold to be recognized. This interpretation also provides guidance on measurement derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Foundation recorded no liabilities in 2013 for unrecognized tax positions. (l) Investments Investments in cash equivalents, corporate bonds, other fixed income securities, hedge funds, equity securities, and treasury inflation protected securities with readily determinable fair values are reported at fair value as set forth in note 3 (traditional structures). Investments held in alternative structures are recorded at net asset values provided by external investment managers as a practical expedient in determining fair value. Because such investments are not readily marketable, the estimated value is subject to uncertainty and therefore may differ materially from the value that would have been used had a ready market for such investments existed. Donated investments are recorded at their fair values, as determined on the date of donation. Investment income and gains and losses are recorded in the period incurred. For management efficiency, investments of the unrestricted and restricted net assets are pooled, except for certain net assets that the board of trustees or the donors have designated to be segregated and maintained separately. Receivables from pending liquidations represent sales of investments made prior to the end of the fiscal year, but settled after the fiscal year end. 10 (Continued)
(m) Fair Value of Financial Instruments The carrying amounts of cash, other receivables, and accounts payable, accrued expenses, and other liabilities approximate fair value because of the short maturity of these instruments. Investments are reported at fair value as described in note 1(l). Pledges receivable, net are reported at the present value of expected future cash flows using discount rates established at the date of gift and approximate fair value. The fair value of interest in unitrusts, pooled income, annuity trusts, and gift annuities is based on quoted market prices at the reporting date of the underlying investments. Split interest agreement liabilities are carried at the present value of the estimated expected future cash flows using discount rates assumptions established upon initial recognition of the liability. Given the number of these agreements, it is not practicable to estimate their fair value. (n) (o) Office Property and Equipment Office property and equipment are stated at cost, less accumulated depreciation, and depreciated over their estimated useful lives using the straight-line method. Dinnaken Housing Dinnaken Housing, which includes four student housing facilities, an office building, and a parking lot, was recorded at fair value upon the Foundation receiving 100% control during the year ended June 30, 2011. Rental revenues are recorded as earned over the lives of the associated lease agreements related to the housing facilities and office building. Dinnaken Housing property and equipment, less accumulated depreciation, is depreciated over the estimated useful lives using the straight-line method. Dinnaken Housing also holds nondepreciable land and all properties are exempt from real estate taxes. (p) UGC Net Investment in Direct Financing Leases and Property and Equipment UGC s leases with the Foundation, UMAA, and the University of Minnesota Regents have been classified as direct financing leases. Under the direct financing method of accounting for leases, the total net rentals receivable under the lease contracts, net of unearned income, are recorded as net investment in direct financing leases, and the unearned income on each lease is recognized each month at a constant periodic rate of return on the unrecovered investment. Upon consolidation, the net investment in direct financing leases between the Foundation and UGC was eliminated and transferred into property and equipment on the consolidated statement of financial position and the corresponding depreciation expense for the five-month period from February 1, 2013 to was reflected in the consolidated statement of activities. (q) Investments Held for Custody of Others The Foundation manages certain investments on behalf of other charitable organizations, including UMAA, Minnesota 4-H Foundation, Association of Public and Land-grant Universities, Immigration History Research Center, Minnesota Landscape Arboretum Foundation, Veterans Administration Medical Center, and the Walker Art Center (the Walker). The management of these investments is 11 (Continued)
subject to agreements with each that govern the arrangements, including the timing of additions and redemptions. At, investments held for custody of others were $221,898,694. (r) Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (2) Investments The investments at are summarized as follows: Traditional Alternative structures structures Total Cash and cash equivalents $ 376,943,699 376,943,699 Fixed income 280,890,481 22,465,108 303,355,589 Global equity 109,041,256 223,555,089 332,596,345 Hedge funds 18,046,777 348,375,239 366,422,016 Natural resources 110,296,007 110,296,007 Treasury inflation protected securities (TIPS) 52,516,253 52,516,253 Real estate 90,856,987 90,856,987 Private equity 400,916,577 400,916,577 Other investments 3,377,860 3,377,860 Total $ 837,438,466 1,199,842,867 2,037,281,333 Less charitable gift annuities reported separately (33,310,992) Total $ 2,003,970,341 Fixed income investments include high yield bonds, bank loans, mortgage, and related securitizations. Investments held in traditional structures represent those held directly by the Foundation in custodial accounts with financial institutions. Investments held in alternative structures include those held through interests in collective trust funds, limited partnerships, commingled funds, and limited liability companies. Net asset values provided by external investment managers for alternative structures include estimates, appraisals, assumptions, and methods that are reviewed by management. It is possible that the redemption rights may be restricted by the funds in the future in accordance with the underlying fund agreements. Changes in market conditions and the economic environment may impact the net asset value of the funds and, consequently, the fair value of the Foundation s interests in the funds. The Foundation has $1,199,842,867 of investments in alternative structures which are reported at net asset value as a practical expedient. Although a secondary market exists for these investments, it is not active and individual 12 (Continued)
transactions are typically not observable. When transactions do occur in this limited secondary market, they may occur at discounts to the reported net asset value. It is, therefore, reasonably possible that if the Foundation were to sell these investments in the secondary market, a buyer may require a discount to the reported net asset value, and the discount could be significant. (3) Fair Value Measurements FASB ASC 820 established a three-tier fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described below: Level 1 Inputs that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the organization has the ability to access. Level 2 Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Fixed income securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. These prices are based on observable market data for the same or similar securities, including quoted prices in markets that are not active, or matrix pricing or other similar techniques that use observable market inputs, such as benchmark yields, expected prepayment speeds and volumes, and issuer ratings. Level 3 Inputs that are unobservable inputs for the asset or liability, which are typically based on an entity s own assumptions, as there is little, if any, related market activity. In instances where the determination of fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. 13 (Continued)
The following table summarizes the Foundation s financial assets measured at fair value on a recurring basis at : Total fair value Fair value measurements using of assets at Level 1 Level 2 Level 3 Investments: Cash and cash equivalents $ 376,943,699 376,943,699 Fixed income: Asset backed securities 44,432,492 44,432,492 Mortgages 19,779,943 19,779,943 Alternative structures 22,465,108 22,465,108 Corporate bonds 9,761,083 9,761,083 Government 203,793,712 203,793,712 Other 3,123,251 3,123,251 Global equity: Small cap 85,285,439 85,285,439 Large cap 23,755,817 23,755,817 Alternative structures 223,555,089 223,555,089 Hedge funds: Directional long biased equity 139,343,756 139,343,756 Fixed income arbitrage 18,046,777 91,788,324 109,835,101 Long/short nonequity 49,187,552 49,187,552 Market neutral equity 24,279,142 24,279,142 Structured credit 43,776,465 43,776,465 Natural resources 110,296,007 110,296,007 Real estate 90,856,987 90,856,987 Treasury inflation protected securities (TIPS) 52,516,253 52,516,253 Private equity: Buyout 143,708,751 143,708,751 Distressed 69,367,204 69,367,204 Special situations 39,520,877 39,520,877 Venture capital 148,319,745 148,319,745 Other investments 3,377,860 3,377,860 Total investments $ 504,031,732 333,406,734 1,199,842,867 2,037,281,333 Gift annuities not categorized above $ 7,010,570 7,010,570 Beneficial interest in perpetual trusts 67,619,172 67,619,172 Beneficial interest in trusts 5,630,137 5,630,137 There were no transfers between Level 1, Level 2, or Level 3 during the year ended. 14 (Continued)
The changes in investments measured at fair value on a recurring basis included as Level 3 measurements are summarized as follows: Net change in unrealized gains (losses) Fair market included in value of change in net assets assets for acquired the period from the Net realized relating to Beginning Minnesota and Ending investments balance at Medical Investment unrealized balance at held at July 1, 2012 Foundation income gains (losses) Purchases Sales Fixed income: Alternative structures $ 21,061,409 50,342,043 (7,144) 1,763,418 6,482,739 (57,177,357) 22,465,108 1,901,787 Global equity: Alternative structures 187,822,938 143,862,163 781,797 40,847,582 11,887,306 (161,646,697) 223,555,089 35,147,636 Hedge funds: Directional long-biased equity 109,871,665 37,391,564 19,114,182 2,500,000 (29,533,655) 139,343,756 18,710,028 Fixed income arbitrage 78,933,425 2,854,899 10,000,000 91,788,324 2,854,899 Fund of funds (61,310) 61,310 Long/short nonequity 50,879,854 8,589,773 5,000,000 (15,282,075) 49,187,552 6,703,617 Market neutral equity 32,983,476 13,351,245 1,801,901 (23,857,480) 24,279,142 1,801,901 Structured Credit 19,580,490 9,195,975 15,000,000 43,776,465 9,195,974 Natural resources 91,212,696 1,215,756 (24,998) (5,427,251) 35,057,540 (11,737,736) 110,296,007 (5,427,251) Real estate 76,059,359 5,336,747 23,719 10,735,307 10,386,840 (11,684,985) 90,856,987 10,735,309 Private equity: Buyout 127,426,155 8,546,914 (38,893) 15,739,121 6,226,822 (14,191,368) 143,708,751 15,739,121 Distressed 68,436,068 4,949,233 (53) 17,508,056 5,898,653 (27,424,753) 69,367,204 17,508,056 Special situations 21,863,409 208,736 18,361,566 (912,834) 39,520,877 208,735 Venture capital 153,367,817 2,903,727 (60,777) 30,062,013 18,728,117 (56,681,152) 148,319,745 28,696,025 Other investments 3,389,262 (32,634) 22,441 (1,209) 3,377,860 (32,635) $ 1,042,888,023 267,899,392 673,651 152,899,768 145,613,334 (410,131,301) 1,199,842,867 143,743,202 The changes in other investments or financial assets measured at fair value on a recurring basis included as Level 3 measurements are summarized as follows: Net change in unrealized Fair market gains (losses) value of included in assets change in net acquired assets for the from the Change in period relating Beginning Minnesota carrying Net realized Ending to investments balance at Medical value and unrealized Purchases/ balance at held at July 1, 2012 Foundation of trusts gains (losses) Sales Beneficial interest in trusts $ 26,786,523 38,715,446 7,747,340 73,249,309 7,747,340 Given that the net asset value of the underlying funds as a practical expedient to fair value is used for all of the Foundation s Level 3 investments, a table of valuation techniques, observable inputs, and ranges of inputs is not provided for those classified as Level 3. 15 (Continued)
The following is a summary of the investments whose net asset value approximates fair value and the related unfunded commitments and redemption restrictions associated with each major category at June 30, 2013: Total Unfunded Redemption Redemption fair value commitments frequency notice periods Alternative investments: Fixed income (a) $ 22,465,108 8,715,431 none none Global equity (b) 223,555,089 none or daily to none or quarterly 0 60 days Hedge funds (c) 348,375,239 monthly to 30 180 days biannually Natural resources (d) 110,296,007 45,869,286 none none Real estate (e) 90,856,987 53,878,401 none none Private equity (f) 400,916,577 96,516,665 none none Other investments (g) 3,377,860 none none $ 1,199,842,867 204,979,783 (a) (b) (c) Fixed Income this category includes direct investments in private funds that invest in debt securities. The fair value of these investments has been estimated using the percentage share of the Foundation s ownership interest in partner s capital. Distributions from each fund are received when the underlying investments in the funds create distributable cash flow and when underlying investments are liquidated. These investments cannot be redeemed. It is estimated that the underlying assets of the fund will be liquidated over the next two to five years. Global Equity this category includes investments of $212,638,554 in funds that invest in common stocks. The managers of the funds have the flexibility to change their exposure based on their view of particular securities and the overall market. Certain of the funds have redemption and notice of redemption requirements that generally limit the ability to liquidate the positions in a short period of time. The fair values of the investments have been estimated using the net asset value per share of the investments. This category also includes direct investments of $10,916,535 in private funds that invest in less liquid but publicly traded common stocks. The fair value of this investment has been estimated using the percentage share of the Foundation s ownership interest in partner s capital. Distributions from the fund are received when the underlying investments in the fund create distributable cash flow and when underlying investments are liquidated. This investment cannot be redeemed. It is estimated that the underlying assets of the fund will be liquidated over the next six years. Hedge Funds this category includes investments in hedge funds that invest in equity, debt, structured products, and derivative securities. Debt securities include corporate debt, mortgage debt, and sovereign debt. The managers of these funds have the flexibility to change their exposure based on their view of particular securities and the overall market. The strategies of these funds include event-driven, relative value, arbitrage, and directional strategies. Certain of these funds have various redemption and notice of redemption requirements that generally limit the ability to liquidate them in 16 (Continued)
a short period of time. The fair values of these investments have been estimated using the net asset value per share of the investments. (d) (e) (f) (g) Natural Resources this category includes investments in funds that invest in natural resources common stock and derivative securities. The manager of the fund has the flexibility to change their exposure based on their view of particular securities and the overall market. The fund has redemption and notice of redemption requirements that generally limit the ability to liquidate the position in a short period of time. The fair value of the investment has been estimated using the net asset value per share of the investment. Real Estate this category includes direct investments in real asset funds, generally through limited partnerships, that invest in real estate. The manager of the fund has the flexibility to change their exposure based on their view of particular securities and the overall market. The fund has redemption and notice of redemption requirements that generally limit the ability to liquidate the position in a short period of time. The fair value of the investment has been estimated using the net asset value per share of the investment. Private Equity this category includes direct investments in private equity funds, generally through limited partnerships, that invest in private companies, private debt, intellectual property, structured products, and special situations. The fair value of these investments has been estimated using the percentage share of the Foundation s ownership interest in partner s capital. Distributions from each fund are received when the underlying investments in the funds create distributable cash flow and when underlying investments are liquidated. These investments cannot be redeemed. It is estimated that the underlying assets of the fund will be liquidated over the next one to ten years. Other investments this category includes direct investments in property, limited partnerships, contract for deeds, and cash surrender value of life insurance that were gifted to the Foundation. The fair value of these investments has been estimated using the appropriate measurement for the type of investment, including fair value, appraisals, and percentage share of the Foundation s ownership interest in partner s capital. The Foundation s alternative investments which are redeemable at net asset value under the original terms of the partnership agreements and/or subscription agreements and operations of the underlying funds may be restricted or eliminated by the funds in the future in accordance with the underlying fund agreements. Due to the nature of the investments held by the funds, changes in market conditions and the economic environment may significantly impact the net asset value of the funds and, consequently, the fair value of the Foundation s interest in the funds. 17 (Continued)
(4) Pledges Receivable Pledges receivable, net of unamortized discount (at rates of 1.6% to 9.0%) of $26,565,465 are summarized as follows at : Unconditional promises expected to be collected in: Less than one year $ 35,870,588 One year to five years 61,091,721 Greater than five years 34,052,640 131,014,949 Reserve for uncollectible pledges (3,550,000) Pledges receivable $ 127,464,949 In addition, the Foundation has received conditional promises to give in the amount of $26,169,434 as of (of which $19,725,132 was assumed in the MMF merger). These gifts are primarily conditioned on completion of building or fundraising projects, evaluation of progress on projects, or matching funds. At, 34% of the Foundation s gross pledges receivable balance was related to one donor. (5) Office Property and Equipment The following is a summary of office property and equipment at : Leasehold improvements $ 1,367,457 Furniture and fixtures 2,637,684 UMFIA 127,671 Less accumulated depreciation (1,436,884) $ 2,695,928 (6) Dinnaken Housing Property and Equipment The following is a summary of Dinnaken Housing property and equipment at : Land $ 5,271,124 Property and equipment 23,171,159 Less accumulated depreciation (2,935,410) $ 25,506,873 18 (Continued)
(7) University Gateway Corporation Property and Equipment The following is a summary of UGC property and equipment at : Building $ 15,063,603 Plaza exterior features 1,765,486 Furniture and fixtures 3,944,866 Construction in progress 854,433 Less accumulated depreciation (5,918,868) Subtotal 15,709,520 Elimination adjustment due to consolidation of UGC (note 1(p)) 13,262,522 $ 28,972,042 (8) Temporarily Restricted Net Assets Temporarily restricted net assets are available as of for the following purposes: The portion of unexpended investment return generated from donor-restricted endowment funds subject to the Uniform Prudent Management of Institutional Funds Act (UPMIFA) consists of: Capital improvement/facilities $ 7,368,663 Faculty support 7,799,645 Scholarships and fellowships 94,438,136 Lectureships, professorships, and chairs 151,303,858 College program support 62,154,016 Research 8,834,343 Other 2,030,905 Subtotal 333,929,566 Gifts and other unexpended revenues and gains available for: Capital improvement/facilities 132,426,147 Faculty support 14,125,513 Scholarships and fellowships 138,893,184 Lectureships, professorships, and chairs 38,677,188 College program support 285,513,502 Research 135,518,170 Trusts 13,238,098 Other 8,586,927 Subtotal 766,978,729 Total temporarily restricted net assets $ 1,100,908,295 19 (Continued)
(9) Permanently Restricted Net Assets Permanently restricted net assets are restricted to investment in perpetuity. The permanently restricted net asset balances and purposes the income is expendable to support as of are as follows: Capital improvement/facilities $ 7,284,185 Faculty support 23,247,687 Scholarships and fellowships 362,152,863 Lectureships, professorships, and chairs 317,635,038 College program support 95,727,802 Research 37,757,145 Trusts 77,114,766 Other 2,443,804 $ 923,363,290 (10) Endowment Funds The Foundation follows the provisions of FASB ASC 958, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds. ASC 958 provides guidance on the net asset classification of donor restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA) and also requires disclosures about endowment funds, both donor restricted and board designated endowment funds. (a) Interpretation of Relevant Law The board of trustees has interpreted UPMIFA to require that endowment fund investment and spending policies be designed with the aim of preserving the amount of each endowment fund which is prudent for the uses, benefits, purposes, and duration for which each endowment fund was established. For accounting purposes only, the Foundation has classified as permanently restricted net assets the following: (a) the original value of gifts donated to its endowment funds, (b) the original value of subsequent gifts to such endowment funds, and (c) accumulations to such endowment funds 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 a donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by UPMIFA. 20 (Continued)
(b) Endowment Net Asset Composition by Type of Fund as of Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment funds $ (28,659,333) 333,929,566 829,525,606 1,134,795,839 Board-designated endowment funds 9,068,746 9,068,746 $ (19,590,587) 333,929,566 829,525,606 1,143,864,585 (c) Changes in Endowment Net Assets for the Year Ended Temporarily Permanently Unrestricted restricted restricted Total Endowment net assets, beginning of year $ 3,272,721 301,251,525 564,346,986 868,871,232 Endowments received from MMF (29,961,670) 21,131,577 203,328,781 194,498,688 Total investment return 7,505,533 73,865,024 12,177,461 93,548,018 Cash contributions and pledge receipts 49,261,726 49,261,726 Change in carrying value of trusts 410,652 410,652 Appropriation of assets (407,171) (62,318,560) (62,725,731) Endowment net assets, end of year $ (19,590,587) 333,929,566 829,525,606 1,143,864,585 (d) (e) Funds with Deficiencies (Underwater Funds) At, as a result of investment losses and Board authorized distributions, the fair value of certain endowment assets was less than the related donor-restricted amounts. In accordance with U.S. GAAP, deficiencies of this nature are reported in unrestricted net assets and totaled $28,659,333. The reporting of such deficiencies as a reduction of Foundation-controlled unrestricted net assets does not legally create an affirmative obligation of the Foundation to restore the fair value of those funds from unrestricted assets. Return Objectives and Risk Parameters The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Foundation must hold indefinitely or for a donor-specified period(s) as well as board-designated funds. Under this policy, the investment goal is to achieve an annualized return of five percentage points in excess of inflation; thereby providing designated programs with a 21 (Continued)