TRINITY INTERNATIONAL UNIVERSITY Auditor s Report and Financial Statements
Contents Independent Auditor s Report... 1 Financial Statements Statements of Financial Position... 3 Statements of Activities... 4 Statements of Cash Flows... 5... 6
Independent Auditor s Report Board of Regents Trinity International University Deerfield, Illinois Report on the Financial Statements We have audited the accompanying financial statements of Trinity International University (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 accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the University 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 University'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 Trinity International University as of, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Fort Wayne, Indiana September 17, 2014 2
Statements of Financial Position 2014 2013 Assets Cash and cash equivalents $ 1,511,108 $ 1,237,102 Student accounts receivable, net of allowance of $879,697 and $845,302 for 2014 and 2013 1,319,913 1,293,013 Contributions receivable, net of allowance of $6,668 and $9,677 for 2014 and 2013 370,769 441,442 Federal award reimbursements receivable 357,008 736,689 Other receivables 71,693 62,097 Prepaid expenses and other assets 1,045,153 574,035 Employee loans receivable 232,026 208,076 Loans receivable, net of allowance of $112,734 and $108,435 for 2014 and 2013 2,577,395 2,620,416 Investments 56,732,717 52,957,581 Assets held in trust 644,112 612,549 Property and equipment, net of accumulated depreciation 41,927,803 42,746,361 Total assets $ 106,789,697 $ 103,489,361 Liabilities Accounts payable $ 887,167 $ 956,555 Accrued and other liabilities 526,428 931,279 Deposits 304,693 271,840 Deferred revenue 1,703,381 1,623,880 Annuities and trusts payable 1,059,542 1,115,755 Refundable government loan advances 2,632,654 2,582,675 Long-term debt 21,303,000 22,166,537 Total liabilities 28,416,865 29,648,521 Net Assets Unrestricted 31,992,893 31,772,471 Temporarily restricted 14,673,654 11,229,555 Permanently restricted 31,706,285 30,838,814 Total net assets 78,372,832 73,840,840 Total liabilities and net assets $ 106,789,697 $ 103,489,361 See Notes to Consolidated Financial Statements 3
Statements of Activities Years Ended 2014 Temporarily Permanently Unrestricted Restricted Restricted Total Revenue: Gains (Losses) and Other Support Tuition and fees $ 37,592,599 $ - $ - $ 37,592,599 Institutional scholarships (11,888,610) - - (11,888,610) Net tuition and fees 25,703,989 - - 25,703,989 Contributions 3,394,310 2,041,893 807,817 6,244,020 Auxiliary enterprises 6,181,733 - - 6,181,733 Investment return 1,608,434 5,689,603 56,478 7,354,515 Other 785,197 - - 785,197 Net assets released from restrictions 4,283,960 (4,283,960) - - Change in value of split-interest agreements (30,249) (3,437) 3,176 (30,510) Total revenue, gains (losses) and other support 41,927,374 3,444,099 867,471 46,238,944 Expenses Instruction 14,270,883 - - 14,270,883 Academic support 2,607,590 - - 2,607,590 Student service 7,331,521 - - 7,331,521 Operation and maintenance 3,517,082 - - 3,517,082 Institutional support 7,797,730 - - 7,797,730 Fundraising 1,566,410 - - 1,566,410 Auxiliary enterprises 1,917,622 - - 1,917,622 Other 2,256 - - 2,256 Total expenses 39,011,094 - - 39,011,094 Change in Net Assets Before Depreciation and Amortization 2,916,280 3,444,099 867,471 7,227,850 Depreciation and Amortization (2,695,858) - - (2,695,858) Change in Net Assets 220,422 3,444,099 867,471 4,531,992 Net Assets, Beginning of Year 31,772,471 11,229,555 30,838,814 73,840,840 Net Assets, End of Year $ 31,992,893 $ 14,673,654 $ 31,706,285 $ 78,372,832 See Notes to Consolidated Financial Statements
2013 Temporarily Permanently Unrestricted Restricted Restricted Total $ 37,560,912 $ - $ - $ 37,560,912 (11,498,952) - - (11,498,952) 26,061,960 - - 26,061,960 3,437,601 224,376 3,351,768 7,013,745 6,092,868 - - 6,092,868 2,231,223 2,670,734 (20,247) 4,881,710 982,453 - - 982,453 4,114,130 (4,114,130) - - (38,688) 54,497 13,802 29,611 42,881,547 (1,164,523) 3,345,323 45,062,347 13,830,271 - - 13,830,271 2,676,883 - - 2,676,883 7,736,440 7,736,440 3,498,107 - - 3,498,107 7,498,003 - - 7,498,003 1,637,745 - - 1,637,745 1,847,861 - - 1,847,861 - - - - 38,725,310 - - 38,725,310 4,156,237 (1,164,523) 3,345,323 6,337,037 (2,523,794) - - (2,523,794) 1,632,443 (1,164,523) 3,345,323 3,813,243 30,140,028 12,394,078 27,493,491 70,027,597 $ 31,772,471 $ 11,229,555 $ 30,838,814 $ 73,840,840 See Notes to Consolidated Financial Statements 4
TTrinity International University Statements of Cash Flows Years Ended 2014 2013 Operating Activities Change in net assets $ 4,531,992 $ 3,813,243 Items not requiring (providing) operating activities cash flows Depreciation and amortization 2,695,858 2,523,794 Net realized and unrealized gains on investments (6,426,862) (4,270,296) Contributions restricted for investment in endowment (807,817) (3,351,768) Bad debt expense on contributions receivable 14,700 50,000 Increase in bad debt provision 35,654 30,101 Loss on disposal of fixed assets 2,251 52,687 Changes in Receivables 382,575 424,879 Prepaid expenses and other assets (599,298) 225,210 Assets held in trust (31,563) 5,581 Accounts payable (192,901) (330,226) Accrued and other liabilities (404,851) (213,210) Refundable government loan advances 49,979 38,562 Deferred revenue and deposits 112,354 (252,833) Annuities and trusts payable (56,213) (97,050) Net cash used in operating activities (694,142) (1,351,326) Investing Activities Purchase of property and equipment (1,627,858) (1,290,713) Purchase of investments (14,905,654) (23,292,346) Sales and maturities of investments 17,557,380 24,103,277 Net cash provided by (used in) investing activities 1,023,868 (479,782) Financing Activities Proceeds from contributions restricted for investment in endowment 807,817 3,351,768 Net change in line of credit - (1,880,000) Reduction of long-term debt (863,537) (840,085) Net cash provided by (used in) financing activities (55,720) 631,683 Net Increase (Decrease) in Cash and Cash Equivalents 274,006 (1,199,425) Cash and Cash Equivalents, Beginning of Year 1,237,102 2,436,527 Cash and Cash Equivalents, End of Year $ 1,511,108 $ 1,237,102 Supplemental Cash Flows Information Interest paid $ 392,840 $ 447,466 Property and equipment purchases in accounts payable 123,513 384,527 See Notes to Consolidated Financial Statements 5
Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Trinity International University (University) was incorporated and commenced operations as a notfor-profit organization in 1897 and was incorporated under the laws of the state of Illinois in 1960. Trinity International University is an institution of higher education that offers undergraduate degrees through its Trinity College. The University also offers graduate level masters and doctoral degrees through its Evangelical Divinity School (TEDS), Trinity Graduate School and Trinity Law School. The University s revenue and other support are derived principally from tuition and fees, auxiliary enterprise revenue and contributions. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, expenses, gains, losses and other changes in net assets during the reporting period. Actual results could differ from those estimates. Temporarily and Permanently Restricted Net Assets The temporarily restricted net asset class includes assets and trust obligations of the University related to gifts with explicit donor-imposed restrictions that have not been met as to specified purpose or to later periods of time or after specified dates. Unconditional promises to give that are due in future periods and are not permanently restricted are classified as temporarily restricted net assets. The permanently restricted net asset class includes assets of the University for which the donor has stipulated that the contribution be maintained in perpetuity. Donor-imposed restrictions limiting the use of the assets or their economic benefit neither expire with the passage of time nor can be removed by satisfying a specific purpose. Cash and Cash Equivalents The University considers all liquid investments with original maturities of three months or less to be cash equivalents. At, there were no cash equivalents classified as cash and cash equivalents in the statements of financial position. Cash equivalents that await long-term investing are included in investments. At June 30, 2014, the University s cash accounts exceeded federally insured limits by approximately $511,000. 6
Investments and Investment Return Investments in equity securities having a readily determinable fair value and in all debt securities are carried at fair value. Other investments are valued at fair value. Investment return includes dividend, interest and other investment income; realized and unrealized gains and losses on investments carried at fair value; and realized and unrealized gains and losses on other investments. Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets. Other investment return is reflected in the statements of activities as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. Investment Pools The University maintains master investment accounts for its endowments and quasi-endowments. Realized and unrealized gains and losses from securities in the master investment accounts are allocated monthly to the individual endowments based on the relationship of the fair value of each endowment or quasi-endowment to the fair value of the master investment accounts, as adjusted for additions to or deductions from those accounts. The University has adopted a spending rate for its distribution of endowment fund investment earnings. Amounts earned in excess of the spending rate for the endowment fund are reinvested back into the endowment fund based on the donor agreements. Income Taxes The University is exempt from federal income taxes under Section 501(c)(3) of the U.S. Internal Revenue Code and a similar provision of state law and is not considered to be a private foundation. However, the University is subject to federal income tax on any unrelated business taxable income. The University files tax returns in the U.S. federal jurisdiction. With a few exceptions, the University is no longer subject to U.S. federal examinations by tax authorities for years before 2011. Promises to Give Unconditional promises to give are recognized as revenue or gains in the period received and as assets, decreases of liabilities or expenses depending on the form of the benefits received. Conditional promises to give are recognized when the conditions on which they depend are substantially met. Unconditional gifts expected to be collected within one year are reported at their net realizable value. Unconditional gifts expected to be collected in future years are reported at the present value of estimated future cash flows. The resulting discount is amortized using the level-yield method and is reported as contribution revenue. 7
Student Accounts and Loans Receivable Student accounts receivable are stated at the amount billed to the students less applied scholarships and loan proceeds. The University provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Tuition is generally due at the beginning of the semester unless the student has signed a payment plan. Once the student has separated from the University, charges that are past due without payments for three consecutive months, have had no response to the due diligence process and are assigned to third-party collection agencies are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of each student. Loans receivable consist of amounts due under the Federal Perkins Loan Program and are stated at their outstanding principal amount, net of an allowance for doubtful notes. Loans are made to students based on demonstrated financial need and satisfaction of federal eligibility requirements. Principal and interest payments on loans generally do not commence until after the borrower graduates or otherwise ceases enrollment. The University provides an allowance for doubtful notes, which is based upon a review of outstanding loans, historical collection information and existing economic conditions. Loans that are delinquent continue to accrue interest. Loans that are past due for at least one payment are considered delinquent. The principal amount of loans delinquent greater than 90 days and accruing interest was approximately $703,000 and $441,500 at, respectively. Property and Equipment Expenditures for property and equipment and items which substantially increase the useful lives of existing assets are capitalized at cost. The University provides for depreciation on the straight-line method at rates designed to depreciate the costs of assets over estimated useful lives. Leasehold improvements are depreciated over the useful life or the lease term, whichever is shorter. Estimated lives are as follows: Years Buildings and improvements 40 Furniture and equipment 3 15 Library materials 15 Automobiles 4 6 Land improvements 5 10 Long-Lived Asset Impairment The University evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds it fair value. No asset impairment was recognized during the years ended. 8
Financing Costs Financing costs are amortized over the term of the related debt agreement. Deferred Revenue Income from tuition and other revenue is deferred and recognized over the periods to which the tuition and other revenue relate. Support and Revenue The University reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities as net assets released from restrictions. If a restriction is fulfilled in the same time period in which the contribution is received, the University reports the support as unrestricted. Donated Property and Equipment The University reports gifts of land, buildings and equipment as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations regarding how long those long-lived assets must be maintained, the University reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service, as instructed by the donor. The University reclassifies temporarily restricted net assets to unrestricted net assets at that time. Government Grants Support funded by grants is recognized as the University performs the contracted services under grant agreements. Grant revenue is recognized as earned as the eligible expenses are incurred. Grant expenditures are subject to audit and acceptance by the granting agency and, as a result of such audit, adjustments could be required. Functional Allocation of Expenses The costs of supporting the various programs and other activities have been summarized on a functional basis in the notes to the financial statements. Certain costs have been allocated among the educational programs, management and general and fundraising categories based on the actual direct expenditures and cost allocations based upon estimates of time spent by University personnel. Subsequent Events Subsequent events have been evaluated through the date of the Independent Auditor s Report, which is the date the financial statements were issued. 9
Note 2: Contributions Receivable 2014 2013 Due within one year $ 72,000 $ 151,450 Due in 1-5 years 60,750 42,100 132,750 193,550 Less: Unamortized discount (5%) (9,076) (11,126) Less: Provision for nonpayment (6,638) (9,677) $ 117,036 $ 172,747 The University is also the beneficiary under various trusts and gift annuities administered by the Evangelical Free Church of America, a related party and other nonrelated party administrators. The assets of these trusts are included in contributions receivable on the statements of financial position of the University since the trusts and gift annuities are irrevocable. Contributions receivable from these charitable gift annuities and charitable remainder trusts totaled $253,733 and $268,695 as of, respectively. Note 3: Investments and Investment Return The University s investments at June 30 are as follows: 2014 2013 Cash and money market funds $ 2,085,901 $ 1,017,342 Certificates of deposit, financial institutions - 239,919 Common and preferred stocks Financial 2,632,241 2,306,670 Utilities 385,941 450,895 Consumer 4,959,172 4,741,115 Industrial commodities 554,833 435,227 Capital equipment 907,925 898,957 Technology 1,856,104 1,689,762 Services 202,414 252,422 Energy 927,720 978,078 Other 125,181 129,220 Mutual funds Fixed income fund 12,584,428 13,551,588 Mid-cap fund 21,655 326,998 Growth fund 2,584,237 324,778 Blend fund 16,312,581 12,543,566 Global funds 3,504,558 6,674,541 Alternative investments Hedge fund of funds 7,087,826 6,396,503 Total $ 56,732,717 $ 52,957,581 10
The following schedule summarizes the investment return and its classification in the statements of activities for the years ended : 2014 2013 Dividends and interest (net of investment expenses of $118,587 and $114,514) $ 927,653 $ 611,414 Net realized and unrealized gains on investments 6,426,862 4,270,296 Total return on investments $ 7,354,515 $ 4,881,710 Alternative Investments The fair value of the alternative investment that is not publicly traded has been estimated using the net asset value per share of the investment. The alternative investment that is not publicly traded held at June 30 consists of the following: December 31, 2014 Unfunded Redemption Redemption Fair Value Commitments Frequency Notice Period Hedge fund of funds $ 7,087,826 $ - Quarterly 95 days December 31, 2013 Unfunded Redemption Redemption Fair Value Commitments Frequency Notice Period Hedge fund of funds $ 6,396,503 $ - Quarterly 95 days The above amounts reflect an investment in a hedge fund of funds that pursues multiple strategies to diversify risks and reduce volatility. The fund s composite portfolio includes investments in various private investment funds that employ various long/short, macro, activist and absolute return strategies. 11
Note 4: Property and Equipment The University s property and equipment are as follows: 2014 2013 Buildings and improvements $ 57,037,903 $ 56,261,340 Furniture and equipment 6,182,869 5,489,447 Library materials 9,009,262 9,106,426 Automobiles 383,724 383,724 Land improvements 828,059 773,258 73,441,817 72,014,195 Accumulated depreciation (34,760,931) (32,721,115) 38,680,886 39,293,080 Land 2,718,464 2,718,464 Construction in progress 528,453 734,817 $ 41,927,803 $ 42,746,361 Note 5: Line of Credit The University has a $4,000,000 revolving line of credit expiring in November 2014. There were no borrowings against the line at. Interest varies with the 1 month LIBOR rate plus 300 basis points, with a minimum rate of 4.00% charged. At, the 4% minimum rate was the applicable rate. Note 6: Long-Term Debt Long-term debt at June 30 consists of the following: 2014 2013 Bonds payable (A) $ 21,255,000 $ 22,080,000 Note payable, interest free, payable in monthly installments of $2,000 through June 2016, secured by certain equipment 48,000 72,000 Capital lease covering various IT equipment for five years which expired in December 2013-14,537 $ 21,303,000 $ 22,166,537 12
(A) Obligations issued by the Illinois Finance Authority and guaranteed by the University through a letter of credit arrangement with First American Bank (annual fee of 1.25%); maturing serially at varying amounts through October 2030; monthly interest payment rate variable (.06% at June 30, 2014); secured by first lien on real estate, including improvements thereon, together with a lien on all revenue. The bonds are subjected to a remarketing agreement and are remarketed weekly. In the event that the remarketing of the bonds fail, the letter of credit will be drawn on to redeem all or a portion of the outstanding obligations from the holder(s). If such draw occurs, payments for the amount drawn on the letter of credit must take place on or before the termination date as determined by the letter of credit agreement with periodic interest payments required varying based on the prime rate. Currently, the letter of credit will expire on December 15, 2018. The future maturities of long-term debt as of June 30, 2014, are as follows by fiscal year: Long-Term Debt 2014-2015 $ 889,000 2015-2016 924,000 2016-2017 940,000 2017-2018 985,000 2018-2019 1,025,000 Thereafter 16,540,000 The bonds have the following financial covenants: Financial stability ratio of at least 1.50 Maintain a liquidity ratio (cash/liquid assets to debt) of at least.40/1.0 Maintain total net assets of $35,000,000 or greater Maintain a cash flow coverage ratio of at least 1.10 $ 21,303,000 Interest expense was $394,078 and $438,173 for the years ended. Note 7: Annuities and Trusts Payable The University has been the recipient of several gift annuities which require future payments to the donor or their named beneficiaries. The assets received from the donor are recorded at fair value. The University has recorded a liability at, of $701,260 and $762,810, respectively, which represents the present value of the future annuity obligations. The liability has been determined using discount rates ranging from 3.20% through 9.40% and applicable mortality tables. 13
The University administers various charitable remainder trusts. A charitable remainder trust provides for the payment of distributions to the grantor or other designated beneficiaries over the trust s term (usually the designated beneficiary s lifetime). At the end of the trust s term, the remaining assets are available for the University s use. The portion of the trust attributable to the future interest of the University is recorded in the statements of activities as temporarily restricted contributions in the period the trust is established. Assets held in the charitable remainder trusts are recorded at fair value in the University s statements of financial position. On an annual basis, the University revalues the liability to make distributions to the designated beneficiaries based on actuarial assumptions. The University has recorded a liability at, of $358,282 and $352,945 respectively, which represents the present value of the future trust obligations and is calculated using discount rates ranging from 6.60% through 8.00% and applicable mortality tables. Note 8: Functional Expenses Expenses by functional classification are as follows: 2014 2013 Educational programs Instruction $ 16,523,909 $ 16,035,550 Academic support 3,168,472 3,153,576 Student services 8,112,629 8,503,980 Auxiliary enterprises 4,300,002 4,188,859 Total educational programs 32,105,012 31,881,965 Management and general 8,140,867 7,830,888 Fundraising 1,579,660 1,650,765 $ 41,825,539 $ 41,363,618 Note 9: Leases The University leases operating facilities and various equipment items under noncancelable operating lease arrangements. These leases expire at various dates through 2019. Rental expense for these leases included in the statements of activities for the years ended, was $969,054 and $941,389, respectively. Future minimum lease payments at June 30, 2014, are as follows by fiscal year: 2014-2015 $ 991,752 2015-2016 1,020,756 2016-2017 533,130 2017-2018 131,400 2018-2019 74,250 $ 2,751,288 14
Note 10: Net Assets Temporarily Restricted Net Assets Temporarily restricted net assets are available for the following purposes or periods: 2014 2013 Building initiatives $ 36,091 $ 118,327 Charitable trust agreements 348,827 352,264 Future periods 6,156,017 7,136,640 Accumulated earnings on endowments 8,132,719 3,622,324 $ 14,673,654 $ 11,229,555 Permanently Restricted Net Assets Permanently restricted net assets are restricted to: 2014 2013 Investment in perpetuity, the income of which is expendable to support Scholarships $ 14,922,464 $ 14,615,318 Faculty chairs 16,327,908 15,827,237 Charitable annuity and trust agreements 294,059 234,405 Lectureships 161,854 161,854 $ 31,706,285 $ 30,838,814 Net Assets Released From Restrictions Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors. 2014 2013 Purpose restrictions accomplished Building initiatives $ 882,764 $ - Program initiatives 3,381,196 4,092,630 Time restrictions expired Passage of time 20,000 21,500 $ 4,283,960 $ 4,114,130 15
Note 11: Endowment The University s endowment consists of approximately 140 individual funds established for a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the governing body to function as endowments (board-designated endowment funds). As required by accounting principles generally accepted in the United States of America (GAAP), net assets associated with endowment funds, including board-designated endowment funds, are classified and reported based on the existence or absence of donor-imposed restrictions. The University s governing body has interpreted the State of Illinois Uniform Prudent Management of Institutional Funds Act (Illinois UPMIFA) as requiring preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the University classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of donor-restricted endowment funds is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University in a manner consistent with the standard of prudence prescribed by Illinois UPMIFA. In accordance with Illinois UPMIFA, the University considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. Duration and preservation of the fund 2. Purposes of the University and the fund 3. General economic conditions 4. Possible effect of inflation and deflation 5. Expected total return from investment income and appreciation or depreciation of investments 6. Other resources of the University 7. Investment policies of the University The composition of net assets by type of endowment fund at, was: 2014 Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ 8,132,719 $ 31,706,285 $ 39,839,004 Board-designated endowment funds 11,320,950 - - 11,320,950 Total endowment funds $ 11,320,950 $ 8,132,719 $ 31,706,285 $ 51,159,954 16
2013 Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (227) $ 3,622,324 $ 30,838,814 $ 34,460,911 Board-designated endowment funds 11,176,817 - - 11,176,817 Total endowment funds $ 11,176,590 $ 3,622,324 $ 30,838,814 $ 45,637,728 Changes in endowment net assets for the years ended, were: 2014 Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 11,176,590 $ 3,622,324 $ 30,838,814 $ 45,637,728 Investment return - Investment income 200,564 563,058 7,711 771,333 Transfer of net assets for underwater endowments 227 (227) - - Net appreciation 1,196,729 4,729,318 51,943 - Total investment return 1,397,520 5,292,149 59,654 6,749,323 Contributions 788,004-807,817 1,595,821 Appropriation of endowment assets for expenditure (2,041,164) (781,754) - (2,822,918) Endowment net assets, end of year $ 11,320,950 $ 8,132,719 $ 31,706,285 $ 51,159,954 17
2013 Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 9,924,476 $ 2,381,946 $ 27,493,491 $ 39,799,913 Investment return - Investment income 144,963 363,044 7,297 515,304 Transfer of net assets for underwater endowments 1,068,362 (1,068,362) - - Net appreciation 915,949 3,078,811 36,258 4,031,018 Total investment return 2,129,274 2,373,493 43,555 4,546,322 Contributions 1,365,702 150,000 3,301,768 4,817,470 Appropriation of endowment assets for expenditure (2,242,862) (1,283,115) - (3,525,977) Endowment net assets, end of year $ 11,176,590 $ 3,622,324 $ 30,838,814 $ 45,637,728 Amounts of donor-restricted endowment funds classified as permanently and temporarily restricted net assets at, consisted of: 2014 2013 Permanently restricted net assets portion of perpetual endowment funds required to be retained permanently by explicit donor stipulations or Illinois UPMIFA Temporarily restricted net assets, portion of perpetual endowment funds subject to a time restriction under Illinois UPMIFA with purpose restriction $ 31,706,285 $ 30,838,814 $ 8,132,719 $ 3,622,324 From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level the University is required to retain as a fund of perpetual duration pursuant to donor stipulation or Illinois UPMIFA. In accordance with GAAP, deficiencies of this nature are reported in unrestricted net assets and aggregated $0 and $227 at June 30, 2014 and 2013, respectively. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after investment of new permanently restricted contributions and continued appropriation for certain purposes that was deemed prudent by the governing body. 18
The University has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs and other items supported by its endowment while seeking to maintain the purchasing power of the endowment. Endowment assets include those assets of donor-restricted endowment funds the University must hold in perpetuity or for donor-specified periods, as well as those of board-designated endowment funds. Under the University s policies, endowment assets are invested in a manner that is intended to produce results that exceeds an annualized total return of 5.0% in excess of inflation and investment management fees while assuming a moderate level of investment risk. The University expects its endowment funds to provide an average rate of return to fund its spending distribution with the goal of some appreciation. Actual returns in any given year may vary from this amount. To satisfy its long-term rate of return objectives, the University relies on a total return strategy in which investment returns are achieved through both current yield (investment income such as dividends and interest) and capital appreciation (both realized and unrealized). The University targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. The University has a policy (the spending policy) of appropriating for expenditure each year 5% of its endowment fund s average fair value over the prior four quarters through the year end preceding the year in which expenditure is planned. In establishing this policy, the University considered the long-term expected return on its endowment. Accordingly, over the long term, the University expects the current spending policy to allow its endowment to grow at an average of 3% annually. This is consistent with the University s objective to maintain the purchasing power of endowment assets held in perpetuity or for a specified term, as well as to provide additional real growth through new gifts and investment return. Note 12: Employee Benefits The University provides a retirement plan with the Teachers Insurance and Annuity Association and College Retirement Equities Funds or Fidelity Investments for all full-time employees. Under this plan, the University and plan participants make annual contributions to purchase individual, fixed or variable annuities equivalent to retirement benefits earned. The University matches voluntary contributions to the annuity contract by the employee based on employee classification. Vesting provisions are full and immediate. Employee benefit expense under this plan was $448,007 and $420,665 for 2014 and 2013, respectively. Note 13: Disclosures About Fair Value of Assets and Liabilities Fair value is 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. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities 19
Level 2 Level 3 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 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities Recurring Measurements The following table presents the fair value measurements of assets recognized in the accompanying statements of financial position measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2014 and 2013: Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) June 30, 2014 Investments* Money market funds $ 34,697 $ 34,697 $ - $ - Common and preferred stocks Financial 2,632,241 2,632,241 - - Utilities 385,941 385,941 - - Consumer 4,959,172 4,959,172 - - Industrial commodities 554,833 554,833 - - Capital equipment 907,925 907,925 - - Technology 1,856,104 1,856,104 - - Services 202,414 202,414 - - Energy 927,720 927,720 - - Other 125,181 125,181 - - Mutual funds Fixed income funds 12,584,428 12,584,428 - - Growth fund 2,584,237 2,584,237 - - Blend funds 16,312,581 16,312,581 - - Global funds 3,504,558 3,504,558 - - Alternative investments Hedge fund of funds 7,087,826-7,087,826 - Assets Held in Trusts Common and preferred stocks 228,919 228,919 - - Fixed income securities 415,193-415,193 - Contributions Receivable From Nontrustee Charitable Remainder Trusts 253,733 - - 253,733 * The above table only includes investments measured at fair value on a recurring basis. Also included in investments is cash of $2,051,207 in deposit accounts that are not considered to be recurring fair value measurements. 20
Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) June 30, 2013 Investments* Money market funds $ 34,297 $ 34,297 $ - $ - Certificate of deposit financial institutions 239,919-239,919 - Common and preferred stocks Financial 2,306,670 2,306,670 - - Utilities 450,895 450,895 - - Consumer 4,741,115 4,741,115 - - Industrial commodities 435,227 435,227 - - Capital equipment 898,957 898,957 - - Technology 1,689,762 1,689,762 - - Services 252,422 252,422 - - Energy 978,078 978,078 - - Other 129,220 129,220 - - Mutual funds Fixed income funds 13,551,588 13,551,588 - - Mid-cap fund 326,998 326,998 - - Growth fund 324,778 324,778 - - Blend funds 12,543,566 12,543,566 - - Global funds 6,674,541 6,674,541 - - Alternative investments Hedge fund of funds 6,396,503-6,396,503 - Assets Held in Trusts Common and preferred stocks 191,377 191,377 - - Fixed income securities 421,172-421,172 - Contributions Receivable From Nontrustee Charitable Remainder Trusts 268,695 - - 268,695 Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying statements of financial position, as well as the general classification of such assets pursuant to the valuation hierarchy. The University has no liabilities measured at fair value on a recurring basis. Additionally, the University has no assets or liabilities measured at fair value on nonrecurring basis. There have been no significant changes in the valuation techniques during the year ended June 30, 2014. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. * The above table only includes investments measured at fair value on a recurring basis. Also included in investments is cash of $983,045 in deposit accounts that are not considered to be recurring fair value measurements. 21
Investments and Assets Held in Trusts Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The University has no securities that are classified as Level 3. The value of certain investments, classified as alternative investments, is determined using net asset value (or its equivalent) as a practical expedient. Investments for which the University expects to have the ability to redeem its investments with the investee within 12 months after the reporting date are categorized as Level 2. Investments for which the University does not expect to be able to redeem its investments with the investee within 12 months after the reporting date are categorized as Level 3. Fair value determinations for Level 3 measurements of securities are the responsibility of the Controller s office. The Controller s office obtains valuation information from third parties as needed to generate fair value estimates. The Controller s office challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States of America. Contributions Receivable From Charitable Remainder Trusts Fair value is estimated at the present value of the future assets expected to be received from the trust upon dissolution. Due to the nature of the valuation inputs, the interest is classified within Level 3 of the hierarchy. 22
Level 3 Reconciliation The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying statements of financial position using significant unobservable (Level 3) inputs: Nontrustee Charitable Remainder Trusts Balance, June 30, 2012 $ 219,783 Total realized and unrealized gains included in change in net assets 48,912 Balance June 30, 2013 268,695 Total realized and unrealized gains included in change in net assets (14,962) Balance, June 30, 2014 $ 253,733 The total realized and unrealized gains and losses noted above are all attributable to the change in unrealized gains or losses related to assets still held at the reporting date. The unrealized gains and losses for the contributions receivable from nontrustee charitable remainder trusts are included in revenue, gains and other support in the statements of activities. Unobservable (Level 3) Inputs The following table presents quantitative information about unobservable inputs used in recurring Level 3 fair value measurements. Fair Value at June 30, 2014 Valuation Technique Unobservable Inputs Range Contributions receivable from nontrustee charitable remainder trusts $ 253,733 Discounted cash flows Fair Value at June 30, 2013 Valuation Technique Discount rates Market return rates Unobservable Inputs 2%-7% Range Contributions receivable from nontrustee charitable remainder trusts $ 268,695 Discounted cash flows Discount rates Market return rates 2%-7% Fair Value of Financial Instruments The following table presents estimated fair values of the University s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2014 and 2013. 23
Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Carrying Assets Inputs Inputs Amount (Level 1) (Level 2) (Level 3) June 30, 2014 Financial assets Cash and cash equivalents $ 1,511,108 $ 1,511,108 $ - $ - Investments 56,732,717 49,644,891 7,087,826 - Contributions receivable 370,769 - - 370,769 Loans receivable and employee loans receivable 2,809,421 - - 2,809,421 Assets held in trust 644,112 228,919 415,193 - Financial liabilities Debt 21,303,000 - - 21,303,000 Deposits and refundable government loan advances 2,937,347 - - 2,937,347 Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Carrying Assets Inputs Inputs Amount (Level 1) (Level 2) (Level 3) June 30, 2013 Financial assets Cash and cash equivalents $ 1,237,102 $ 1,237,102 $ - $ - Investments 52,957,581 46,321,159 6,636,422 - Contributions receivable 441,442 - - 441,442 Loans receivable and employee loans receivable 2,828,492 - - 2,828,492 Assets held in trust 612,549 191,377 421,172 - Financial liabilities Debt 22,166,537 - - 22,166,537 Deposits and refundable government loan advances 2,854,515 - - 2,854,515 Cash and Cash Equivalents The carrying amount approximates fair value. Contributions Receivable Fair value is estimated by discounting the cash flows of the future payments expected to be received by using the rates of return on assets with similar cash flows. 24
Loans Receivable and Employee Loans Receivable Fair value is estimated by discounting the future cash flows using the rates at which similar notes would be written for the same remaining maturities. Debt and Line of Credit Fair value is estimated based on the borrowing rates currently available to the University for debt with similar terms and maturities. Annuities and Trusts Payable Fair values of the annuity and trust obligations are based on an actuarial evaluation of the estimated annuity or other payment under such obligations. Deposits and Refundable Government Loan Advances The carrying value approximates fair value. Note 14: Significant Estimates, Concentrations and Risks and Uncertainties Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following: Contributions Approximately 25% and 43% of all contributions were received from two donors and one donor in 2014 and 2013, respectively. Investments 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 values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying statements of financial position. 25