University of California

University of California Required Communications to The Regents Committee on Compliance and Audit Results of the June 30, 2014 Audits

November 5, 2014 Members of The Regents Committee on Compliance and Audit of the University of California: We have audited the financial statements of the University of California (University), the University of California Retirement Plan (UCRP), the University of California Retirement Incentive Program (PERS Plus 5 Plan), and the University of California Retirement Savings Program (UCRSP), as of and for the year ended June 30, 2014. As part of our responsibilities under generally accepted auditing standards, we are required to communicate to you certain matters regarding the results and scope of our audits. This document covers those required communications relating to the June 30, 2014 financial statement audits. We will be available to discuss these communications at the November 18, 2014 meeting and would be pleased to respond to any questions that you might have. We look forward to meeting with you to address your questions and discuss any other matters of interest to you. Pleasefeel free to contact Mark Thomas, Engagement Partner, at (714) 809 0190 0190 with any questions you may have. Very truly yours, KPMG LLP Mark T. Thomas Partner KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

Contents Required Communications to The Regents Committee on Compliance and Audit Appendix A Management Representation Letter 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 2

Required Communications to The Regents Committee on Compliance and Audit The Auditors Responsibility under Professional Standards We are responsible for forming and expressing an opinion about whether the financial statements, that have been prepared by management with the oversight of The Regents Committee on Compliance and Audit, are presented fairly, in all material respects in conformity with U.S. generally accepted accounting principles. We have a responsibility to perform our audit of the financial statements in accordance with auditing standards generally accepted in the United States of America. In carrying out this responsibility, we planned and performed the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, we are to obtain reasonable, not absolute, assurance that material misstatements are detected. We have no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by error or fraud, that are not material to the financial statements are detected. Our audit does not relieve management or the Committee on Compliance and Audit of their responsibilities. In addition, in planning and performing our audit of the financial statements, we considered internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements but not for the purpose of expressing our opinion on the effectiveness of the University s internal control. Accordingly, we do not express an opinion on the effectiveness of the University s internal control. We also have a responsibility to communicate significant matters related to the financial statement audit that are, in our professional judgment, relevant to the responsibilities of The Regents Committee on Compliance and Audit in overseeing the financial reporting process. Generally accepted auditing standards do not require the auditor to design procedures for the purpose of identifying other matters to communicate with those charged with governance. 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 3

Required Communications to The Regents Committee on Compliance and Audit (continued) The Auditors Responsibility under Professional Standards (continued) The auditor is responsible for communicating significant matters related to the financial statement audit that are, in the auditor s professional judgment, relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. We consider the University s internal control over financial reporting as a basis for designing our audit procedures for the limited purpose described above; our procedures may identify significant deficiencies or material weaknesses which we have reported to you in a separate document. Since the University is a recipient of federal funds, we also conduct our audit in accordance with Government Auditing Standards. Under those standards, we perform additional tests of the University s internal controls and compliance with laws and regulations. The financial statements of the campus foundations and Children s Hospital and Research Center Oakland are presented discretely in the University s financial statements. We did not audit the financial statements of the UC San Francisco Foundation as of and for the year ended June 30, 2014, which are included in the aggregate discretely presented component units column in the University s financial statements. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included d for the UC San Francisco Foundation is based upon the report of the other auditor. 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 4

Required Communications to The Regents Committee on Compliance and Audit (continued) The Auditors Responsibility under Professional Standards (continued) The auditors responsibility for other information in documents containing the University s financial statements and our auditors report thereon does not extend beyond the financial information identified in our auditors report, and we have no obligation to perform procedures to corroborate information contained in these documents. We have, however, read the other information included in the University s financial statements, and no matters came to our attention that cause us to believe that such information, or its manner of presentation, is materially inconsistent with the information, or manner of its presentation, appearing in the financial statements. 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 5

Required Communications to The Regents Committee on Compliance and Audit (continued) Accounting Practices and Alternative Treatments Unusual Transactions In 2014, the University became the sole corporate member of Children s Hospital and Research Center Oakland (CHRCO). The University has reported this transaction as a change in reporting entity under Governmental Accounting Standards Board (GASB) pronouncements, and has included CHRCO as a discretely presented component unit in its financial statements. Critical Accounting Policies The critical accounting policies and practices used by the University in preparing its financial statements are described in the notes to the financial statements. These policies and practices are considered both most important to the portrayal al of the University s financial condition and results of operations, and require management s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain. We have discussed with management our judgments about the quality, not just the acceptability, of the University s it accounting principles as applied in its financial reporting. The discussions generally included such matters as the consistency of the University s accounting policies and their application, and the understandability and completeness of the University s financial statements and related disclosures. Significant ifi Accounting Policies i The significant accounting policies used by the University are described in the Significant Accounting Policies footnote disclosure within the University s June 30, 2014 financial statements. 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 6

Required Communications to The Regents Committee on Compliance and Audit (continued) Accounting Practices and Alternative Treatments (continued) Changes in Significant Accounting Policies During the year ended June 30, 2014, the University adopted GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. This Statement reclassifies, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as expenses, certain items that were previously reported as assets and liabilities. The adoption of this standard resulted in a reduction of approximately $98 million to beginning net position. During the year ended June 30, 2014, the University adopted GASB Statement No. 67, Financial Reporting for Pension plans. This Statement revises existing standards for financial reporting for pension plans by changing the approach to measuring the net pension liability. The net pension liability is measured as the total pension liability, less the amount of the pension plan s fiduciary net position. The total pension liability is determined based upon discounting projected benefit payments based on the benefit terms and legal agreements existing at the pension plan s fiscal year end. Projected benefit payments are required to be discounted using a single rate that reflects the expected rate of return on investments. Adoption of Statement No. 67 primarily affected the Retirement System notes to the financial statements. During the year ended June 30, 2014, the University adopted GASB Statement No. 68, Accounting and Financial Reporting for Pensions. The University has elected to early implement this Statement, effective July 1, 2013. This Statement revises existing standards for employer financial statements relating to measuring and reporting pension liabilities for pension plans provided by the University to its employees. This Statement requires recognition of a liability equal to the net pension liability, which is measured as the total pension liability, less the amount of the pension plan s fiduciary net position. This Statement requires that most changes in the net pension liability be included in pension expense in the period of the change. The retroactive adoption of this standard resulted in a reduction of approximately $6.6 billion to beginning net position. 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 7

Required Communications to The Regents Committee on Compliance and Audit (continued) Other Significant Transactions In August 2013, the University issued Medical Center Pooled Revenue Bonds totaling $650 million, including $619 million in fixed rate bonds and $31 million in variable rate bonds. The proceeds from the bonds will be used to finance the East Campus Bed Tower Project at UC San Diego Medical Center and to refund a portion of the UCLA Medical Center Series 2004A bonds. In October 2013, the University issued General Revenue Bonds totaling $2.5 billion, including $712 million in taxable bonds, $600 million in tax-exempt variable-rate demand bonds, and $1.1 billion in tax-exempt bonds in order to refinance debt issued by the state of California or for such purposes as authorized by The Regents. Proceeds, including a bond premium of $124.9 million, were used to pay $2.4 billion in Lease Revenue Bonds issued by the State Public Works Board of the state of California. In April 2014, General Revenue Bonds totaling $970.4 million, including $559.2 million tax-exempt bonds and $411.2 million taxable bonds, were used to finance and refinance certain facilities and projects of the University. In April 2014, the University remarketed General Revenue Bonds totaling $500 million of taxable bonds which were used to finance pension contributions to UCRP and operating costs on an interim basis. 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 8

Required Communications to The Regents Committee on Compliance and Audit (continued) Management Judgments and Accounting Estimates The preparation of financial statements requires management of the University to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas that involve management judgments and estimates include, but are not limited to: Fair value of investments Medical center revenues and contractual allowances Self insurance loss reserves Pension obligations Obligations for retiree health benefits Allowances for uncollectable accounts receivable and pledges receivable Outstanding commitments and contingencies 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 9

Required Communications to The Regents Committee on Compliance and Audit (continued) Uncorrected and Corrected Misstatements In connection with each of our respective financial statement audits, we have not identified any significant financial statement misstatements that have not been corrected in the University s books and records as of and for the year ended June 30, 2014. During the audit, we proposed and the University recorded the following significant corrected adjustments: 1) an adjustment of approximately $431 million to increase the fair value of investments held as of June 30, 2014. 2) an adjustment of approximately $102 million to increase accumulated depreciation as of June 30, 2014. 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 10

Required Communications to The Regents Committee on Compliance and Audit (continued) Disagreements with Management We are required to inform you of any instances of disagreement with management, whether or not satisfactorily resolved, about matters that are significant to the financial statements or the auditors report. There were no disagreements with management on financial accounting and reporting matters that would have caused, if not satisfactorily resolved, a modification of our auditors report on the University s financial statements. Consultation with Other Accountants If we become aware that the University has consulted with other accountants on significant accounting and auditing matters, disclosure or other items related to the financial statements, we would be required to inform you of any such consultations. We are not aware of any such consultations with other accountants. 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 11

Required Communications to The Regents Committee on Compliance and Audit (continued) Significant Issues Discussed, or Subject to Correspondence, with Management, and Material Written Communications We are required to inform you of any significant issues discussed with management as a part of our engagement as auditors of the University. All of our discussions were memorialized in a contract with the University (available from the Office of the President) and in a Management Representation Letter (see attached Appendix A). Additionally, for the year ended June 30, 2014, we issued six Letters to Chancellors which report local internal control recommendations. Significant Difficulties Encountered during the Audits We encountered no significant difficulties in dealing with management while performing the audit. 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 12

Required Communications to The Regents Committee on Compliance and Audit (continued) Independence Our professional standards and other regulatory requirements specify that we communicate to you in writing, at least annually, all relationships between our firm and the University and persons in a financial reporting oversight role at the University and provide confirmation that we are independent accountants with respect to the University. Confirmation of Audit Independence We hereby confirm that as of the date of this communication, we are independent accountants with respect to the University under relevant professional and regulatory standards. 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 319062 13

Appendix A

2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NAPS 319062 The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.