The Uniform Guidance Audit Report Year ended July 31, 2016 (With Independent Auditors Reports Thereon)
Table of Contents Independent Auditors Report 1 Financial Statements Statements of Financial Position 3 Statements of Activities 4 Statements of Cash Flows 5 6 Independent Auditors Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 35 Schedule of Expenditures of Federal Awards 37 Notes to Schedule of Expenditures of Federal Awards 38 Independent Auditors Report on Compliance for Each Major Program; Report on Internal Control over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance 40 Schedule of Findings and Questioned Costs 42 Page
KPMG LLP Aon Center Suite 5500 200 E. Randolph Street Chicago, IL 60601-6436 Independent Auditors Report The Board of Trustees Illinois Wesleyan University: Report on the Financial Statements We have audited the accompanying financial statements of Illinois Wesleyan University (the University), which comprise the statements of financial position as of, and the related statements of activities, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 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 financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial statement 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. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors 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 opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University as of, and the changes in its net assets and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 24, 2016 on our consideration of the University 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. KPMG LLP is 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.
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 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 the University s internal control over financial reporting and compliance. Chicago, Illinois October 24, 2016 /s/kpmg LLP 2
Statements of Financial Position Assets 2016 2015 Current assets: Cash and cash equivalents $ 2,887,597 5,950,270 Accounts receivable 2,427,973 987,375 Accounts receivable estates 284,855 280,000 Student accounts receivable, net of allowance of $200,000 and $175,000 in 2016 and 2015 281,877 253,256 Pledges receivable, net 2,672,041 1,995,077 Student notes receivable (note 6) 1,091,108 1,090,036 Inventories and prepaid expenses 1,857,561 1,616,478 Total current assets 11,503,012 12,172,492 Investments (note 3) 208,848,557 224,667,549 Annuities receivable 248,062 231,130 Pledges receivable, net of allowance of $1,072,278 and $1,070,876 in 2016 and 2015 (note 5) 7,263,877 6,090,186 Student notes receivable, net of allowance of $2,333,920 and $2,247,964 in 2016 and 2015 (note 6) 6,958,277 6,827,545 Land, buildings, and equipment, net (note 7) 142,512,560 141,837,079 Total assets $ 377,334,345 391,825,981 Liabilities and Net Assets Current liabilities: Accounts payable and accrued liabilities $ 1,522,077 1,189,277 Current portion of long-term bonds (note 9) 925,000 2,295,000 Current portion of long-term bonds subject to short-term remarketing agreements (note 9) 2,976,000 19,176,000 Annuities payable (note 13) 1,185,003 1,174,541 Accrued postretirement benefits (note 10) 624,000 618,000 Deferred revenue 1,212,295 1,385,423 Student advances and deposits 7,569,085 8,225,451 Accrued interest 164,648 850,863 Accrued wages and compensated absences 573,971 533,810 Agency funds 361,920 280,765 Total current liabilities 17,113,999 35,729,130 Note payable (note 8) 1,113,126 Long-term bonds (note 9) 71,372,285 53,399,338 Interest rate swap (note 9) 276,227 384,532 Annuities payable (note 13) 7,882,574 8,274,540 Accrued postretirement benefits (note 10) 13,567,000 13,261,000 Asset retirement obligation (note 14) 3,870,448 3,660,628 Refundable U.S. government grants 4,132,154 4,077,746 Total liabilities 119,327,813 118,786,914 Net assets (note 12): Unrestricted 145,537,913 155,026,246 Temporarily restricted 27,359,926 35,971,871 Permanently restricted 85,108,693 82,040,950 Total net assets 258,006,532 273,039,067 Total liabilities and net assets $ 377,334,345 391,825,981 See accompanying notes to financial statements. 3
Statements of Activities 2016 2015 Temporarily Permanently Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total Revenue: Tuition and fees $ 75,562,703 75,562,703 75,470,572 75,470,572 Less university assistance 35,038,597 35,038,597 33,802,986 33,802,986 Net tuition and fees 40,524,106 40,524,106 41,667,586 41,667,586 Endowment payout 11,992,877 11,992,877 10,578,606 10,578,606 Net loss on investments after endowment payout (13,533,315) (3,073) (87,514) (13,623,902) (4,486,931) (2,406) (39,086) (4,528,423) Sales and services of auxiliary enterprises 13,462,574 13,462,574 13,766,523 13,766,523 Contributions 3,346,911 3,399,441 3,149,329 9,895,681 2,829,897 6,948,597 1,433,112 11,211,606 Government appropriations 314,396 314,396 310,527 310,527 Government grants and contracts 143,348 500 143,848 1,704,440 5,000 1,709,440 Interest collected on student loans 22,672 182,275 204,947 25,591 200,065 225,656 Change in split-interest agreement obligations (397,678) (175,423) (573,101) (806,983) (26,120) (123,458) (956,561) Other revenue 1,268,033 3,917 (924) 1,271,026 1,116,127 17,462 (670) 1,132,919 Change in present value of swap agreement 108,305 108,305 229,891 229,891 Net assets released from restrictions 12,034,000 (12,034,000) 4,942,583 (4,942,583) Total revenue 69,263,557 (8,610,543) 3,067,743 63,720,757 71,852,266 2,025,541 1,469,963 75,347,770 Expenses: Program: Instruction and library 36,864,569 36,864,569 37,802,103 37,802,103 Auxiliary enterprises 13,613,055 13,613,055 14,215,078 14,215,078 Student services 4,745,816 4,745,816 4,788,616 4,788,616 Support: General institutional 7,872,455 1,402 7,873,857 7,433,736 (165) 7,433,571 Public relations and information 7,138,809 7,138,809 7,204,658 7,204,658 General administrative 3,909,757 3,909,757 3,238,827 3,238,827 Total expenses 74,144,461 1,402 74,145,863 74,683,018 (165) 74,682,853 Increase (decrease) in net assets (4,880,904) (8,611,945) 3,067,743 (10,425,106) (2,830,752) 2,025,706 1,469,963 664,917 Other changes in net assets: Change in donor designation (449,337) 449,337 Loss on impaired assets (1,663,806) (1,663,806) Loss on debt extinguishment (1,770,623) (1,770,623) Recognition of change in postretirement funded status (1,173,000) (1,173,000) (1,357,000) (1,357,000) Other changes in net assets (4,607,429) (4,607,429) (1,357,000) (449,337) 449,337 (1,357,000) Change in net assets (9,488,333) (8,611,945) 3,067,743 (15,032,535) (4,187,752) 1,576,369 1,919,300 (692,083) Net assets at beginning of year 155,026,246 35,971,871 82,040,950 273,039,067 159,213,998 34,395,502 80,121,650 273,731,150 Net assets at end of year $ 145,537,913 27,359,926 85,108,693 258,006,532 155,026,246 35,971,871 82,040,950 273,039,067 See accompanying notes to financial statements. 4
Statements of Cash Flows 2016 2015 Cash flows from operating activities: Change in net assets $ (15,032,535) (692,083) Adjustments to reconcile change in net assets to net cash used in operating activities: Recognition of change in postretirement funded status 1,173,000 1,357,000 Net unrealized and realized gains on investments 5,044,711 (2,241,590) Change in present value of swap agreement (108,305) (229,891) Loss on debt extinguishment 1,770,623 Depreciation 5,018,914 4,993,672 Amortization of bond issuance costs 10,865 76,881 Amortization of bond discount 4,032 53,537 Amortization of bond premium (17,773) Contributions restricted for long-term purposes (3,149,329) (1,433,112) Changes in assets and liabilities: Student accounts receivable (28,621) (55,852) Accounts receivable and accounts receivable -estates (1,445,453) 554,069 Inventories and prepaid expenses (241,083) (85,408) Pledges receivable (1,850,655) (3,105,975) Accounts payable and accrued liabilities and accrued interest (353,415) 613,734 Accrued wages and compensated absences 40,161 (300,489) Deferred revenue (173,128) (172,228) Student advances and deposits (656,366) (14,305) Agency funds 81,155 70,032 Annuities payable (381,504) (86,983) Accrued postretirement benefits (861,000) (910,000) Net cash used in operating activities (11,155,706) (1,608,991) Cash flows from investing activities: Proceeds from sales and maturities of investments 58,103,352 41,870,038 Purchases of investments (47,346,004) (36,922,008) Purchases of land, buildings, and equipment (5,484,575) (5,452,278) Issuance of loans to students (1,612,157) (1,278,235) Repayments of loans from students 1,480,353 1,603,970 Net cash provided (used in) investing activities 5,140,969 (178,513) Cash flows from financing activities: Contributions restricted for long-term purposes 3,149,329 1,433,112 Proceeds from note payable 1,113,126 Proceeds from issuance of bonds 56,482,907 Payment of bond issuance costs (523,341) Repayments of principal of indebtedness (64,095,000) (2,190,000) Premium received in debt extinguishment 6,770,635 Receipt of refundable U.S. Government grants 54,408 27,305 Net cash provided (used in) financing activities 2,952,064 (729,583) Decrease in cash and cash equivalents (3,062,673) (2,517,087) Cash and cash equivalents at beginning of year 5,950,270 8,467,357 Cash and cash equivalents at end of year $ 2,887,597 5,950,270 Supplemental disclosure of cash flow information: Cash paid for interest, net of capitalized interest $ 2,390,936 2,425,997 See accompanying notes to financial statements. 5
(1) Nature of Activities and Summary of Significant Accounting Policies Illinois Wesleyan University (the University) is a not-for-profit organization founded in 1850 and incorporated under special act of the legislature approved February 12, 1853 under the laws of the State of Illinois. The University offers undergraduate bachelor degrees in liberal arts, science, nursing, fine arts, and music and is accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools. The cost of operations of the University is covered by a combination of tuition and room and board charges paid by students, gifts, grants, investment income, and certain other sources. (2) Summary of Significant Accounting Policies The financial statements of the University have been prepared on the accrual basis. Significant accounting policies followed by the University are described below. (a) Basis of Presentation In order to ensure observance of limitations and restrictions placed on the use of the resources available to the University, the accounts of the University are maintained in accordance with the principles of fund accounting. This is the procedure by which resources for various purposes are classified for accounting and reporting purposes into funds that are in accordance with activities or objectives specified by the donor. For external reporting purposes, however, the University s financial statements have been prepared to focus on the organization as a whole and to present balances and transactions classified in accordance with the existence or absence of donor-imposed restrictions. Net assets and related activity are classified as unrestricted, temporarily restricted, and permanently restricted as follows: Unrestricted net assets that are not subject to donor-imposed restrictions. Temporarily Restricted net assets that are subject to donor-imposed restrictions that will be met either by actions of the University or by the passage of time. Permanently Restricted net assets that are subject to donor-imposed restrictions to be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income earned on related investments for general or specific purposes. (b) Revenue Revenue is reported as an increase 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. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or law. 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 applicable classes of net assets. 6 (Continued)
Private gifts, including unconditional pledges, are recognized in the period received at fair value. Conditional pledges are not recognized until the conditions on which they depend are substantially met. Fair value is estimated giving consideration to anticipated future cash receipts (after allowance is made for uncollectible contributions) and discounting such amounts at a risk-adjusted rate commensurate with the duration of the donor s payment plan. These inputs to the fair value estimate are considered Level 3 in the fair value hierarchy. In subsequent periods, the discount rate is unchanged and the allowance for uncollectible contributions is reassessed and adjusted if necessary. Amortization of the discounts is recorded as additional contribution revenue. Contributions received with donor-imposed restrictions that are met in the same year as the gifts are received are reported as revenue of the unrestricted net asset class. Contributions of land, building, and equipment without donor-imposed restrictions concerning the use of such long-lived assets are reported as revenue of the unrestricted net asset class. Contributions of cash or other assets to be used to acquire land, building, and equipment with donor-imposed restrictions are reported as revenue of the temporarily restricted net asset class; the restrictions are considered to be released at the time of acquisition of such long-lived assets. Contributions of assets other than cash are recorded at estimated fair value. Annuities and life income agreements are recorded at the fair value of the contributed assets, less the present value of estimated future payments. Bequests are recognized when declared valid in probate and irrevocable trusts are recognized when verifiable. Student tuition and fees are recorded as revenue during the year the related academic services are rendered. Deferred revenue consists primarily of tuition and fees collected through the end of July for the fall semester. Revenue from government grant agreements is recognized as it is earned through expenditure in accordance with the agreement. Auxiliary enterprises consist primarily of the operations of the residence halls, bookstore, food service, Memorial Center, and Hansen Student Center. (c) Endowment Payout The University has adopted a spending policy in support of current operational budget requirements. The University utilizes the total return concept in allocating endowment income. In accordance with the University s return objective, 5.25% of a four-year rolling average of the fair value of endowment investments valued at calendar year-end is available each subsequent year for expenditure in the form of endowment payout. The payout percentage is set each year by the board of trustees with the objective of a 5.25% average payout over time. For the fiscal years ended, the exact payout percentage was 5.50% and 4.85%, based on the measurement date calculation, as of December 31, 2014 and 2013, respectively. If endowment yields (i.e., interest and dividends) are in excess of the established spending rate, such excess is returned to the endowment fund and reinvested. If endowment yields are not sufficient to support the spending policy, the yield shortfall is provided from realized gains. 7 (Continued)
(d) Cash Equivalents Cash equivalents include amounts on deposit with an original maturity of three months or less. (e) Investments All investments, including the investment in farmland, realty, leased properties, and nonmarketable investments are carried at fair value for the years ended. Investments include assets held in perpetual trusts, which are managed by a trustee other than the University and are comprised of primarily marketable securities and farmland. The University invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the value of investment securities will occur in the near term and such changes could materially affect amounts reported in the statements of financial position. (f) Inventories Inventories, which consist primarily of books and supplies held for resale at the University bookstore, are priced at the lower of cost or market. Cost is determined by deducting the gross profit margin from the retail price. (g) Land, Buildings, and Equipment Land, buildings, and equipment are stated at cost or, in the case of gifts, fair value at date of donation, less accumulated depreciation. Buildings and equipment are depreciated using the straight-line method over their estimated useful lives, which are as follows: Improvements other than buildings Buildings Building improvements Library collection Equipment 50 years 60 years 20 years 20 years 3 10 years Long-lived assets, such as property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are not separately presented in the statements of financial position and reported at the lower of the carrying amount or fair value less cost to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held-for-sale are included in land, buildings, and equipment, net on the statements of financial position. An impairment was recognized on a dormitory and storage facility in fiscal year 2016. The carrying amount of the impaired assets was $533,620 at July 31, 2016. There were no impairments to land, buildings, and equipment for the fiscal year 2015. 8 (Continued)
(h) Capitalized Interest The University s policy is to capitalize interest cost during the construction of major projects. For debt-financed projects, the capitalized interest cost is based on the weighted average of available project funds pro rata share of interest expense. For nondebt-financed projects, the capitalized interest cost is imputed based on the weighted average of all University bond issues. (i) Collections Contributed collections such as works of art and historical treasures, where no appraised value was attainable at time of receipt, are not recognized as revenue and have not been capitalized or depreciated. A collection of traditional Pueblo pottery and a few wooden and basketry objects was presented to the University in the mid-1880 s by John Wesley Powell. The collection is preserved by the University and is on display in The Ames Library. (j) Income Taxes The University is generally exempt from income taxes under Internal Revenue Code, Section 501(a), as an organization described in Section 501(c)(3). Accordingly, it is generally not subject to income taxes except to the extent it has taxable income from activities that are not related to its exempt purpose. The University assesses uncertain tax positions and determined that there were no such positions that have a material effect on the financial statements. (k) Derivative Instruments The University entered into interest rate swap agreements to manage its exposure on its variable rate Demand Revenue Bonds Series 2008 and Demand Revenue Bonds Series 2012 (note 9). The University entered into a forward interest rate swap agreement to manage its exposure on its variable rate line of credit (note 8). Any changes in the fair value of the interest rate swap agreements are recognized in the statements of activities. The fair value of the transactions has also been recorded on the statements of financial position. By using derivative financial instruments to hedge exposures to changes in interest rates, the University exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of the derivative contract is positive, the counterparty owes the University, which creates credit risk for the University. When the fair value of a derivative contract is negative, the University owes the counterparty, and therefore, it does not possess credit risk. If the contract is terminated, the fair value at the time of termination would be due to the University if the derivative contract is positive. If the derivative contract is negative, the University would owe the counterparty upon termination. The University minimizes the credit risk in derivative instruments by entering transactions with high-quality counterparties. Market risk is the adverse effect on the value of financial instruments that results from a change in interest rates. The market risk associated with the interest-rate contracts is managed by establishing parameters that limit the types and degree of market risk that may be undertaken. The University has limited its market risk under the interest rate swap contracts to the difference between seventy-four percent (74%) of LIBOR and SIFMA rates for the Demand Revenue Bonds Series 2008 and Demand Revenue Bonds Series 2012. 9 (Continued)
(l) Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (m) Fair Value Measurements The University applies the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (ASC Topic 820), for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820-10-35, Subsequent Measurement, (ASC Topic 820-10-35) clarifies the application of ASC Topic 820 in cases where the market for a financial instrument is not active and provides an example to illustrate key considerations in determining fair value in those circumstances. The University has considered the guidance provided by ASC Topic 820-10-35 in its determination of estimated fair values during fiscal years 2016 and 2015. (n) New Accounting Pronouncements In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The University implemented ASU No. 2015-07 for the year ended July 31, 2016. 10 (Continued)
(3) Investments The cost and fair value at of the University s investments are as follows: 2016 2015 Cost Fair value Cost Fair value Bonds $ 18,981,717 20,257,492 18,954,831 20,010,934 Fixed income mutual funds 1,359,169 1,339,719 1,437,449 1,354,461 Domestic equity mutual funds 894,292 1,305,467 933,921 1,370,037 International equity mutual funds 11,360,285 10,369,562 12,375,073 11,410,554 Common stock 7,449,452 8,350,817 18,892,242 27,407,731 Common and collective trusts 53,589,738 58,665,208 35,313,733 44,714,394 Nonmarketable investments 35,629,707 43,069,690 37,611,181 46,000,348 Perpetual trusts held by others 5,983,379 12,102,581 5,983,379 12,515,097 Farmland, realty, and leased properties 10,890,003 50,666,949 11,160,884 57,339,345 Other investments 2,721,072 2,721,072 2,544,648 2,544,648 Total investments $ 148,858,814 208,848,557 145,207,341 224,667,549 A summary of investments as of is as follows: 2016 2015 Endowment $ 196,186,202 210,818,085 Charitable gift annuities 9,287,215 10,270,469 Charitable remainder unitrusts 3,310,562 3,514,410 Other 64,578 64,585 Total investments $ 208,848,557 224,667,549 The University has invested in several nonmarketable investments including private equity, distressed opportunities, venture capital, secondary funds, and farmland and realty. Investments of this nature, excluding farmland and realty, involve an investment commitment to be funded over several years. Funding is made when capital calls are made by the respective investment manager. As of July 31, 2016 and 2015, the University had unfunded commitments to such investments of approximately $23,596,000 and $19,371,000, respectively. Future commitments will be funded with existing endowment cash balances, investment income, and rebalancing. 11 (Continued)
Investment return for the years ended includes the following: 2016 Temporarily Permanently Unrestricted restricted restricted Total Dividends, interest, and rents $ 4,134,718 295 (193,705) 3,941,308 Investment expenses (527,622) (527,622) Net dividends, interest, and rents 3,607,096 295 (193,705) 3,413,686 Realized gains 14,425,763 (9) 14,425,754 Change in accumulated unrealized gains (19,573,297) (3,359) 106,191 (19,470,465) Net investment gains (5,147,534) (3,368) 106,191 (5,044,711) Total return on investments $ (1,540,438) (3,073) (87,514) (1,631,025) 2015 Temporarily Permanently Unrestricted restricted restricted Total Dividends, interest, and rents $ 4,261,346 215 24,950 4,286,511 Investment expenses (477,918) (477,918) Net dividends, interest, and rents 3,783,428 215 24,950 3,808,593 Realized gains 5,961,698 5,961,698 Change in accumulated unrealized gains (3,653,451) (2,621) (64,036) (3,720,108) Net investment gains 2,308,247 (2,621) (64,036) 2,241,590 Total return on investments $ 6,091,675 (2,406) (39,086) 6,050,183 12 (Continued)
(4) Fair Value Measurement (a) Fair Value of Financial Instruments The following methods and assumptions were used by the University in estimating the fair value of its financial instruments: The carrying amount reported in the statements of financial position for the following approximates fair value because of the short maturities of these instruments: cash and cash equivalents, inventories and prepaid expenses, accounts payable and accrued liabilities, student advances and deposits, accrued wages and compensated absences, and agency funds. The estimated fair values excluding cash and cash equivalents however, involve unobservable inputs considered to be Level 3 in the fair value hierarchy. Fair values of the University s investments are estimated based on prices provided by its investment managers and its custodian bank. Fair value for common stock is measured using quoted market prices at the reporting date multiplied by the quantity held. Fair value for corporate bonds and notes and U.S. government agency securities are valued using pricing models maximizing the use of observable inputs for similar securities. This includes basing value on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the bond is valued under a discounted cash flows approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks or a broker quote if available. Fair value of farmland holdings are estimates provided by an independent third-party farm services provider and are based on comparable sales by region, soil quality, and other relevant factors. Management compares such estimates to verify reasonableness. The University has certain investments in realty, leased properties, and nonmarketable investments for which quoted market prices are not available. The estimated fair value of these alternative investments includes estimates, appraisals, assumptions, and methods provided by independent financial advisors and reviewed by the University. Fair values for shares in mutual funds are based on share prices (NAV) as of the last business day of the fiscal year. The University s interest in alternative investments funds is generally reported at the NAV reported by the fund managers. NAV is used as a practical expedient to estimate fair value of the University s interest therein, unless it is possible that all or a portion of the investment will be sold for an amount different from NAV. As of July 31, 2016 and 2015, the University had no specific plans or intentions to sell investments at amounts different than NAV. 13 (Continued)
Fair value of the interest rate swap is determined using pricing models developed based on the LIBOR swap rate and other observable market data. The value was determined after considering the potential impact of collateralization and netting agreements, adjusted to reflect nonperformance risk of both the counterparty and the University. Fair value is estimated based on pricing models that utilize significant observable inputs, such as relevant interest rates, that reflect assumptions market participants would use in pricing the instruments. These inputs fall within Level 2 of the fair value hierarchy. (b) Fair Value Hierarchy The University applies the provisions of ASC Topic 820 for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. ASC Topic 820 established a 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 the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The asset s or liability s fair value measurement Level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy are as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the University has the ability to access at the measurement date. Level 2 inputs are observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 inputs are unobservable inputs for the asset or liability. For fiscal years 2016 and 2015, there were no transfers between Level 1, Level 2, or Level 3 of the fair value hierarchy. 14 (Continued)
The following tables present the University s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of : Fair value measurements at July 31, 2016 using Redemption Days Fair value Level 1 Level 2 Level 3 or liquidation notice Financial assets: Cash and cash equivalents: Cash and cash equivalents $ 2,887,597 2,887,597 Daily Investments, excluding cash surrender value of life insurance policies of $2,649,999: Bonds: Domestic 13,462,801 Daily 1 2 Global 6,794,691 6,794,691 Monthly 6 Fixed income mutual funds 1,339,719 Daily 1 Domestic equity mutual funds 1,305,467 Daily 1 International equity mutual funds 10,369,562 2,055,644 Daily 1 Common stock 8,350,817 2,044,972 Daily 1 2 Common and collective trusts: Index funds 29,159,161 29,159,161 Daily 2 International 29,506,046 Monthly 6 Commodities/ MLP indexes 93,001 Daily 1 Nonmarketable investments: Hedge Quarterly funds 1, 3 25,570,398 to annual 100 Private equity 2, 3 17,406,292 Illiquid Not applicable Perpetual trusts held by others 12,102,581 5,384,678 Not applicable Not applicable Farmland, realty, and leased properties 50,666,949 50,666,949 Limited Not applicable Other investments 71,073 71,073 Not applicable Not applicable Total $ 209,086,155 6,988,213 41,338,530 50,738,022 Liabilities: Interest rate swaps $ 276,227 276,227 Daily 32 1. The University s hedge fund investments are subject to redemption restrictions based on allowable lock-up periods. 2. The private equity funds have initial terms of up to 15 years with an average remaining life of 7 years. 3. Carrying values have been estimated by the fund s management in the absence of readily determinable fair values. 15 (Continued)
Fair value measurements at July 31, 2015 using Redemption Days Fair value Level 1 Level 2 Level 3 or liquidation notice Financial assets: Cash and cash equivalents: Cash and cash equivalents $ 5,950,270 5,950,270 Daily Investments, excluding cash surrender value of life insurance policies of $2,473,575: Bonds: Domestic 12,480,403 Daily 1 2 Global 7,530,531 7,530,531 Monthly 6 Fixed income mutual funds 1,354,461 Daily 1 Domestic equity mutual funds 1,370,037 Daily 1 International equity mutual funds 11,410,554 2,143,648 Daily 1 Common stock 27,407,731 27,407,731 Daily 1 2 Common and collective trusts: Index funds 12,235,706 Daily 2 International 32,371,156 Monthly 6 Commodities/ MLP indexes 107,532 Daily 1 Nonmarketable investments: Hedge Quarterly funds 1, 3 32,569,060 to annual 100 Private equity 2, 3 13,431,288 Illiquid Not applicable Perpetual trusts held by others 12,515,097 5,469,782 Not applicable Not applicable Farmland, realty, and leased properties 57,339,345 57,339,345 Limited Not applicable Other investments 71,073 71,073 Not applicable Not applicable Total $ 228,144,244 35,501,649 13,000,313 57,410,418 Liabilities: Interest rate swaps $ 384,532 384,532 Daily 32 1. The University s hedge fund investments are subject to redemption restrictions based on allowable lock-up periods. 2. The private equity funds have initial terms of up to 15 years with an average remaining life of 9 years. 3. Carrying values have been estimated by the fund s management in the absence of readily determinable fair values. 16 (Continued)
The following table is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value for the years ended : 2016 2015 Balance at beginning of the year $ 57,410,418 61,970,865 Total net realized gains (losses) 3,370,627 2,186,746 Total net unrealized gains (losses) (6,401,518) (4,372,742) Purchases 43,697 Proceeds from sales (3,599,761) (2,290,102) Depreciation (85,441) (84,349) Balance at end of the year $ 50,738,022 57,410,418 The amount of total gains (losses) for fiscal years 2016 and 2015 included in net loss on investment after endowment payout attributable to the change in unrealized gains (losses) relating to assets still held at are $(6,401,518) and $(4,372,742), respectively. (5) Pledges Receivable At, pledges receivable include the following unconditional promises to give: 2016 2015 Restricted for endowment $ 2,678,712 457,674 Restricted for future periods 9,476,621 9,684,000 Total pledges receivable 12,155,333 10,141,674 Less: Unamortized discount 1,147,137 985,535 Allowance for uncollectible pledges 1,072,278 1,070,876 Net pledges receivable $ 9,935,918 8,085,263 Amounts due in: Less than one year $ 2,891,801 2,134,513 One to five years 5,573,532 4,805,129 More than five years 3,690,000 3,202,032 Total $ 12,155,333 10,141,674 The management of the University expects the recorded pledges receivable to be paid in full and will make an allowance when a specific pledge s collectibility becomes doubtful. The management of the University reviews pledges each year to determine whether a discount for collectibility would be appropriate. The discount rates utilized in fiscal years 2016 and 2015 were equal to the applicable federal mid-term rate for the year the pledge was made and ranged from 1.70% to 2.10%. 17 (Continued)
(6) Student Notes Receivable, Net of Allowance Student notes receivable at consist of the following loan funds: 2016 2015 Federal Perkins Loan program $ 3,376,318 3,251,550 Nursing Student Loan program 1,128,131 1,051,785 Institutional loans 5,878,856 5,862,210 Students notes receivable 10,383,305 10,165,545 Allowance for loan loss (2,333,920) (2,247,964) Student notes receivable, net of allowance $ 8,049,385 7,917,581 Although there are multiple funding sources for student notes receivable, the University s student notes receivable is generated through the extension of credit to students to fund educational costs, and therefore, all such receivables are considered part of the same portfolio. Student notes receivable is initially measured at cost, and the University assesses and monitors risk and performance of the entire portfolio. The University extends institutional loans to international students. Institutional loans to international students are expensed when issued and the expense is included in university assistance on the statements of activities. These loans are also recorded as a receivable and written off at face value and reflected in the allowance for loan losses. Institutional loans to international students and the corresponding allowance for loan loss were $1,598,377 and $1,705,752 at, respectively. Payments made on these loans are recorded as income and reflected in recoveries in the chart below. An allowance for loan loss in student notes receivable is established based upon an annual review of the collectibility of the underlying student loans utilizing the student notes receivable aging and the historical loss rates on loans. The allowance represents management s estimate of the amount of student notes balances for which a loss is probable. Actual losses are charged against the allowance. The allowance for loan loss is increased through charges to expense and recoveries of loans previously charged to the allowance. 18 (Continued)
The activity in the allowance for doubtful accounts and recorded student notes receivable for the years ended is as follows: 2016 2015 Allowance for loan loss: Beginning balance $ (2,247,964) (2,163,386) Write-offs (181,438) (238,900) Recoveries 288,812 129,511 Provision (193,330) 24,811 Ending balance (2,333,920) (2,247,964) Student notes receivable 10,383,305 10,165,545 Ending balance $ 8,049,385 7,917,581 The following table details the credit risk profiles of the student notes receivable based on payment activity as of using the Department of Education reporting standards for the Perkins Loan program. Loans are considered nonperforming if they are more than 270 days past due: 2016 2015 Student notes receivable: Performing $ 7,598,300 7,523,542 Nonperforming 2,785,005 2,642,003 Total student notes receivable $ 10,383,305 10,165,545 The following table provides an analysis of the aging of the past due student notes receivable as of : Total < 270 270 Days student Days 2 years 2 5 Years > 5 Years Total notes past due past due past due past due past due Current receivables July 31, 2016 $ 507,651 351,156 636,294 1,797,555 3,292,656 7,090,649 10,383,305 July 31, 2015 509,536 265,592 724,540 1,651,871 3,151,539 7,014,006 10,165,545 Interest income recognized on student notes receivable was $204,947 and $225,656 during fiscal years 2016 and 2015, respectively. For the years ended, no portion of student notes receivable was sold. 19 (Continued)
(7) Land, Buildings, and Equipment The University s land, buildings, and equipment held at consist of the following: 2016 2015 Land $ 9,168,610 9,158,610 Buildings and improvements 203,565,841 199,880,046 Computers, furniture, equipment, and library materials 22,567,164 21,694,776 235,301,615 230,733,432 Less accumulated depreciation (96,281,226) (93,374,058) 139,020,389 137,359,374 Construction in process 3,492,171 4,477,705 Land, buildings, and equipment, net $ 142,512,560 141,837,079 The depreciation expense for fiscal years 2016 and 2015 was $5,018,914 and $4,993,672, respectively. The cost of depreciable assets retired, less proceeds, is charged to accumulated depreciation. Construction in process includes capitalized interest of $54,289 and $52,662 for the years ended July 31, 2016 and 2015, respectively. As of July 31, 2016, construction in process represents various building and capital improvement projects. These projects have outstanding contracted costs of approximately $2,277,000. These projects are being financed by contributions, current operations, and a line of credit (note 8). (8) Note Payable On July 29, 2016, the University established a line of credit of $6 million for capital purposes with Commerce Bank. The line of credit matures on September 30, 2023 and has scheduled amortization beginning September 30, 2019. Outstanding balances against the line of credit bear interest at the monthly LIBOR rate plus 1.60%. The interest rate at July 31, 2016 was 2.087%. Amount outstanding was $1,113,126 at July 31, 2016. On July 29, 2016, the University entered into a forward swap agreement with Commerce Bank effective December 31, 2018, whereby, on a monthly basis, the University would receive a variable rate interest payment equal to one-month LIBOR in exchange for a fixed interest rate payment of 1.50%. The swap agreement matures on September 30, 2023. The swap s notional amount of $5 million amortizes to match the repayment of the line of credit. The liability for the payable under this instrument at July 31, 2016 was $54,050. 20 (Continued)
(9) Long-Term Bonds Long-term bonds outstanding as of consists of the following: 2016 2015 IFA Revenue Bonds, Series 2016, 3.98% (weighted average) $ 56,775,000 IFA Revenue Bonds, Series 2012, 0.84% (weighted average) 12,900,000 12,900,000 IFA Revenue Bonds, Series 2008, 2.10% (weighted average) 20,385,000 IEFA Revenue Bonds, Series 2006B, 5.05% (weighted average) 31,125,000 IEFA Revenue Bonds, Series 2006, 4.80% (weighted average) 12,585,000 Principal outstanding 69,675,000 76,995,000 Premium on Series 2016 6,752,861 Discount on Series 2016 (291,286) Discount on Series 2012 (87,075) (90,300) Discount on Series 2008 (128,792) Discount on Series 2006B (445,951) Discount on Series 2006 (177,176) Debt issuance cost on Series 2016 (521,895) Debt issuance cost on Series 2012 (254,320) (263,739) Debt issuance cost on Series 2008 (168,083) Debt issuance cost on Series 2006B (611,375) Debt issuance cost on Series 2006 (239,246) Gross 75,273,285 74,870,338 Less amount due within one year (925,000) (2,295,000) Less amount subject to short-term remarketing agreements (2,976,000) (19,176,000) Net $ 71,372,285 53,399,338 On August 20, 2003, the University entered into an eight-year interest rate swap agreement with Bank One, now JPMorgan Chase, whereby, on a monthly basis, the University would receive a variable rate interest payment equal to 74% of one-month LIBOR in exchange for a fixed interest rate payment of 3.358%. The swap s notional amount of $31.3 million amortizes to match the repayment of the University s now-defeased $31.3 million variable rate Series 2003 Bonds while the 74% of LIBOR variable interest rate is expected to correlate with changes in the SIFMA bond index. Net receipts under the agreement are recorded as an adjustment to interest expense. In June 2008, the University paid off the Series 2003 Bonds with proceeds from the variable rate Series 2008 Bonds. The University maintained the original swap agreement until it was extended. The swap exposes the University to basis risk should the relationship between the weekly remarketing rate on the bonds and the 74% of LIBOR rate change significantly. 21 (Continued)
On August 19, 2010, the University extended the existing swap agreement with JPMorgan Chase through September 2016. Effective September 1, 2010, on a monthly basis, the University receives a variable rate interest payment equal to 74% of one-month LIBOR in exchange for a fixed interest rate payment of 2.01%. The swap s notional amount of $27.085 million amortizes to match the repayment of the University s Series 2008 Bonds. The liability for the payable under this instrument at July 31, 2016 and 2015 was $25,264 and $322,063, respectively. In February 2006, the Illinois Finance Authority (IFA) issued $14.26 million of Revenue Bonds, Illinois Wesleyan University, Series 2006. The proceeds of this bond issue were used to refund $12.465 million of the Series 1997 Bonds and to finance the installment of sprinkler systems in residence halls. The deposit of funds into an irrevocable trust established for the purpose of satisfying scheduled payments of interest and principal on the refunded portion of the University s Series 1997 Bonds is considered to be a legal extinguishment of debt, and accordingly, the outstanding principal is not included in the University s statements of financial position at. In July 2016, the University, through the Illinois Finance Authority (IFA), refunded $12.285 million of the Series 2006 Bonds as part of the Series 2016 Bond issue, which is described below. For fiscal year 2016, the weighted average interest rate of the bonds was 4.80%. The total interest expense for this obligation for fiscal years 2016 and 2015 was $561,700 and $571,279, respectively, including $14,765 of discount amortization in fiscal year 2015. The Series 2006 Bonds maturing on or after September 1, 2016 were subject to redemption at the option of IFA, at the direction of the University, prior to maturity, in whole or in part on any date occurring on or after September 1, 2015. The University incurred $418,680 of Series 2006 bond issuance costs, which it recorded as a deferred asset and amortized the nonrefunded portion on a straight-line basis over the life of the bond. The amortization of the bond issuance cost was $19,937 in fiscal year 2015. In December 2006, the IFA issued $31.93 million of Revenue Bonds, Illinois Wesleyan University, Series 2006B. The proceeds of this bond issue were used to refund $28.325 million of the Series 2001 Bonds and to finance the acquisition, construction, furnishing, and equipping of certain educational facilities, including without limitation the installment of sprinkler systems in residence halls. The deposit of funds into an irrevocable trust established for the purpose of satisfying scheduled payments of interest and principal on the refunded portion of the University s Series 2001 Bonds is considered to be a legal extinguishment of debt, and accordingly, the outstanding principal is not included in the University s statements of financial position at. In July 2016, the University, through the IFA, refunded $31.005 million of the Series 2006B Bonds as part of the Series 2016 Bond issue, which is described below. For fiscal year 2016, the weighted average interest rate of the bonds was 5.05%. The total interest expense for this obligation for fiscal years 2016 and 2015 was $1,490,379 and $1,400,876, respectively, including $21,236 of discount amortization in fiscal year 2015. The Series 2006B Bonds maturing on or after September 1, 2017 were subject to redemption at the option of IFA, at the direction of the University, prior to maturity, in whole or in part on any date occurring on or after September 1, 2016. 22 (Continued)