CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS June 30, 2010 and 2009 Fouts Center for Visual Arts, 2008 WHITMAN COLLEGE Peter W. Harvey, Treasurer Walter R. Froese, CPA, Controller

2 WHITMAN COLLEGE CONTENTS PAGE FINANCIAL STATEMENTS: LETTER FROM THE TREASURER AND CONTROLLER 1 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 2 CONSOLIDATED STATEMENT OF ACTIVITIES 3 4 CONSOLIDATED STATEMENT OF CASH FLOWS 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 22 INDEPENDENT AUDITOR S REPORT 23 CONSOLIDATED FINANCIAL STATEMENT CERTIFICATION 24

3 November 2010 Whitman College Letter from the Treasurer and Controller We are pleased to present these consolidated financial statements for the year ended June 30, In spite of trying times, the College continues to build on its past success. Last fall, the College experienced a sizeable increase in enrollments, even though students and parents dealt with a difficult economy. This momentum continues as the College is seeing its highest enrollments ever this fall. Student retention and graduation rates also remain strong. Alumni and other donors also faced a challenging economy. We are grateful for their unwavering support of Whitman; contributions increased over 33 percent from the prior year. The College s endowment achieved a return of over 13 percent, a substantial recovery from a negative 20 percent return the prior year. Whitman, like other businesses, has had to retrench over the last few years. The goal was to do so with as little impact as possible to its core academic and student programs. This year, the College spent just slightly more as a percentage of total expenses on instruction, academic support and student services as the prior year. The College was also able to achieve a desirable student-tofaculty ratio of ten to one. Since 1999, the College has twice issued tax exempt debt. The strategic use of debt has made a great difference in the quality of the physical plant at Whitman. This year the College finished the Sherwood Center athletic complex. Currently, improvements to several buildings, including Maxey Hall and Harper Joy Theatre, are in various stages of completion. The success of Whitman couldn t happen without the support of its faculty, staff, alumni and governing board members. Their guidance and support is much appreciated. Peter W. Harvey, Treasurer Walter R. Froese, Controller 1

4 Consolidated Statement of Financial Position (in thousands) Whitman College June 30, ASSETS Cash and cash equivalents $ 20,911 $ 27,056 Accounts receivable, net Inventory and prepaid expenses 930 1,089 Contributions and trusts receivable, net 18,623 12,030 Student loans, net 3,322 3,318 Deferred compensation Investments 350, ,406 Land, buildings, equipment and collections, net 140, ,012 Total assets $ 536,450 $ 489,223 LIABILITIES Accounts payable $ 2,613 $ 2,767 Accrued compensation and benefits 3,907 4,154 Deferred revenue and enrollment deposits 1,314 1,180 Interest rate exchange agreements 9,694 6,016 Split-interest contracts payable 6,429 6,095 Deferred compensation Long-term obligations 5,925 5,822 Government grants payable 3,384 3,386 Bonds and mortgages payable 60,801 61,296 Total liabilities 94,885 91,610 Commitments NET ASSETS Unrestricted net assets 171, ,070 Temporarily restricted net assets 143, ,327 Permanently restricted net assets 126, ,216 Total net assets 441, ,613 Total liabilities and net assets $ 536,450 $ 489,223 See notes to consolidated financial statements. 2

5 Consolidated Statement of Activities For the year ended June 30, 2010 (in thousands) Whitman College Temporarily Permanently Unrestricted Restricted Restricted Total OPERATING ACTIVITIES Revenues Tuition and fees $ 54,300 $ 54,300 Room and board charges 7,692 7,692 Less, Institutional financial aid (20,700) (20,700) Net student revenue 41,292 41,292 Government grants 1,456 1,456 Contributions 1,408 $ 4,023 5,431 Investment income, net Net loss on investments and interest rate exchange agreements (2,331) (2,331) Bookstore revenue 1,203 1,203 Other income, net 1, ,470 Net operating revenues 44,790 4,058 48,848 Endowment support to operations 5,905 9,270 15,175 Net assets released from restrictions 9,984 (9,984) - Net resources funding operations 60,679 3,344 64,023 Expenses Instruction 21,898 21,898 Academic support 10,375 10,375 Student services 8,892 8,892 Institutional support 8,993 8,993 Auxiliary operations 11,354 11,354 Total operating expenses 61,512 61,512 Change in net assets from operating activities (833) 3,344 2,511 NONOPERATING ACTIVITIES Contributions 350 3,208 $ 8,767 12,325 Investment income, net 292 1, ,701 Net gain on investments and other assets 14,140 27,558 1,204 42,902 Change in split-interest contracts payable (194) (849) (715) (1,758) Other income, net 1, ,446 Donor redesignation of net asset restrictions - (140) Endowment support to operations (5,905) (9,270) (15,175) Net assets released from restrictions 2,160 (2,160) - Change in net assets from nonoperating activities 12,061 19,853 9,527 41,441 Total change in net assets 11,228 23,197 9,527 43,952 Net assets at beginning of year 160, , , ,613 Net assets at end of year $ 171,298 $ 143,524 $ 126,743 $ 441,565 See notes to consolidated financial statements. 3

6 Consolidated Statement of Activities For the year ended June 30, 2009 (in thousands) Whitman College Temporarily Permanently Unrestricted Restricted Restricted Total OPERATING ACTIVITIES Revenues Tuition and fees $ 50,671 $ 50,671 Room and board charges 7,455 7,455 Less, Institutional financial aid (18,375) (18,375) Net student revenue 39,751 39,751 Government grants 1,046 1,046 Contributions 1,459 $ 3,428 4,887 Investment income, net Net loss on investments and interest rate exchange agreements (3,337) (3,337) Bookstore revenue 1,139 1,139 Other income, net 1, ,340 Net operating revenues 41,900 3,512 45,412 Endowment support to operations 6,296 10,124 16,420 Net assets released from restrictions 11,102 (11,102) - Net resources funding operations 59,298 2,534 61,832 Expenses Instruction 23,193 23,193 Academic support 10,007 10,007 Student services 9,301 9,301 Institutional support 10,359 10,359 Auxiliary operations 10,901 10,901 Total operating expenses 63,761 63,761 Change in net assets from operating activities (4,463) 2,534 (1,929) NONOPERATING ACTIVITIES Contributions 1,333 1,732 $ 5,308 8,373 Investment income, net 1,649 1, ,969 Net loss on investments and other assets (32,212) (60,281) (570) (93,063) Change in split-interest contracts payable (255) 377 (823) (701) Other income, net ,009 Endowment support to operations (6,296) (10,124) - (16,420) Net assets released from restrictions 9,658 (9,658) - - Change in net assets from nonoperating activities (26,073) (75,844) 4,084 (97,833) Total change in net assets (30,536) (73,310) 4,084 (99,762) Net assets at beginning of year 192, , , ,375 Reclassification of net assets (1,911) 1, Net assets at end of year $ 160,070 $ 120,327 $ 117,216 $ 397,613 See notes to consolidated financial statements. 4

7 Consolidated Statement of Cash Flows (in thousands) Whitman College For the years ended June 30, CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 43,952 $ (99,762) Adjustments to reconcile change in net assets to net cash used in operating activities Depreciation, amortization and accretion 5,764 5,011 Net (gain) loss on investments (40,571) 96,400 Change in value of split-interest contracts 1, Restricted contributions (6,044) (6,139) Gifts of securities and investment real estate (1,284) (376) Changes in operating assets and liabilities Receivables, inventory and prepaid expenses (5,345) (3,160) Payables, deferred revenue and student deposits (183) 54 Long-term obligations 71 1,266 Net cash used in operating activities (1,882) (6,005) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments (40,057) (32,455) Sales and maturities of investments 42,388 64,935 Purchases of land, buildings, equipment and collections (12,463) (19,830) Proceeds from sale of real estate 1,026 - Student payments on loans Disbursements of student loans (371) (366) Net cash (used in) provided by investing activities (9,151) 12,708 CASH FLOWS FROM FINANCING ACTIVITIES Principal paid on long-term debt (522) (362) Split-interest contract payments (1,241) (1,790) New split-interest contracts used Contributions restricted to long-term investment and plant 6,044 6,139 Net cash provided by financing activities 4,888 4,197 Net change in cash and cash equivalents (6,145) 10,900 Cash and cash equivalents at beginning of year 27,056 16,156 Cash and cash equivalents at end of year $ 20,911 $ 27,056 Supplemental disclosure of cash flow information: Cash paid for interest (net of amounts capitalized) $ 1,955 $ 2,291 Purchases of assets on account $ 302 Write-off fully depreciated assets $ 1,523 $ 1,096 See notes to consolidated financial statements. 5

8 Notes to Consolidated Financial Statements Whitman College June 30, 2010 and 2009 Organization - Whitman College is an independent, co-educational, non-sectarian, residential, liberal arts and sciences, undergraduate college founded in Whitman College was chartered by the State of Washington as a degree granting college in The student body is drawn from across the United States and many other countries; however, it is predominantly from the western United States. Note 1 - Summary of Significant Accounting Policies and Basis of Presentation Basis of Presentation - The consolidated financial statements of Whitman College (the College) have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles (GAAP) in the United States of America. Net Asset Classifications - The activities and net assets of the College are classified according to donor imposed restrictions on the balance thereof. Unrestricted activities and net assets - Are resources not subject to donor-imposed restrictions. Temporarily restricted activities and net assets - Are resources which require either the passage of time or some action by the College to fulfill donor restrictions. Contributions restricted by a donor for the acquisition of land, buildings and equipment are reported as temporarily restricted revenues. Such restrictions are released once the related assets are placed into service. Permanently restricted activities and net assets - Are the net value of contributions received or promised, a donor has directed to be maintained as an endowment, the earnings of which are to be used as the donor has specified. Use of Estimates - The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions which affect the reported amounts of assets, liabilities and the disclosure of contingencies as well as revenues and expenses. Actual results could differ from those estimates. Reclassification - Certain reclassifications of prior year data have been made to conform to the presentation of the current year financial statements. Subsequent to the issuance of the June 30, 2008 consolidated financial statements, it was determined some investment activity had not been properly distributed to net assets. The approximate cumulative effect was an understatement of temporarily restricted net assets of $1,911 and an overstatement of unrestricted net assets of $1,911 at June 30, The reclassification was not material and does not impact total net assets or the change in net assets. Consolidation - The consolidated financial statements include the accounts of Whitman College, the Paul Garrett Whitman College Foundation, and the 21 st Century Trust. All significant intercompany transactions have been eliminated. Cash and Cash Equivalents - Cash equivalents are highly liquid investments with an original maturity of three months or less. Cash and cash equivalents held by investment managers are classified as investments. Cash balances maintained by the College at various depository and brokerage institutions are often in excess of federally insured limits. The College has not experienced any significant losses on its cash investments. The residual funds from the WHEFA 2008 bond issue of $4,174 and $12,895 are included in cash and equivalent as of June 30, 2010 and 2009, respectively, and are restricted for certain construction projects. Whitman College notes to consolidated financial statements (in thousands) 6

9 Note 1 - Summary of Significant Accounting Policies and Basis of Presentation (continued) Inventory - Inventory consists mainly of books and supplies and is valued at the lower of cost (retail method) or market. The value of inventories is not greater than the expected realizable value. Land, Buildings, Equipment and Collections - Land, buildings, building improvements, equipment, and collections are carried at original cost, or if donated at fair value on date of the gift. All such assets except land and collections are stated net of accumulated depreciation, which is computed on a straight-line basis over the estimated useful lives of the assets. Any eligible single items over ten thousand dollars are capitalized and depreciated over their estimated useful lives. Estimated useful lives for buildings are 20 to 40 years, for equipment 5 to 10 years and for books 5 years. Split-interest Contracts Payable - The College has legal title to certain annuity and life income agreements subject to life interests of beneficiaries composed predominantly of charitable remainder annuity trusts, charitable remainder unitrusts and perpetual trusts held by third parties. The contracted payments to the beneficiaries take precedence over any financial claims upon the College. Actuarial methods are used to record annuity and life income contracts and agreements where the beneficiary of the agreement is guaranteed annual amounts either by specified amounts or percentages of the value of the trusts. The account is credited with investment income and gains and is charged with investment losses and payments to beneficiaries. Actuarial gains and losses are adjusted annually against the liability account. The liability is based on the present value of estimated future payments discounted at rates between 4.0% and 9.2% either over specified periods or lives estimated according to IRS mortality tables. No obligation has been recorded for contracts which do not guarantee a payment amount. Of the total split-interest contracts payable, the College had obligations for annuity contract payments of $2,815 and $2,957 at June 30, 2010 and 2009, respectively. At June 30, 2010 and 2009, total assets held by the College under split-interest agreements amounted to $21,741 and $18,764, respectively, and of those totals $18,240 and $16,485 are included in investments restricted for donor purposes, respectively. The College maintains reserves in compliance with applicable state requirements for contracts issued in the respective states. In accordance with state annuity requirements, the College has currently reserved $425 for the State of California and $2,366 for Washington State. Deferred Revenue - Deferred revenue consists primarily of tuition and fees related to future academic periods. Revenue and Expense Recognition - Revenue is reported as an increase to unrestricted net assets, unless donor restrictions are imposed. Conditional promises to give are recognized as income when the donor-imposed conditions are substantially met. When temporary restrictions are met, either by the passage of time or purpose has been fulfilled, the net assets are released to the unrestricted category. Expenses either decrease unrestricted net assets or are netted into related income. Statements of Activities, Operating Activities - The College defines operations as activities closely related to its educational and residential mission as well as any necessary ancillary activities. The endowment s support of operations is included as revenue in the operating section and is shown as an expense in the nonoperating section. All other significant transfers have been eliminated. Expense Allocation - The cost of operations and maintenance of the physical plant including depreciation and interest costs related to plant has been allocated to functional expense categories based on square footage used by each function. Whitman College notes to consolidated financial statements (in thousands) 7

10 Note 1 - Summary of Significant Accounting Policies and Basis of Presentation (continued) Federal Income Taxes - Whitman College is a qualified not-for-profit organization under Internal Revenue Code Section 501(c)(3) and as such, is generally exempt from federal taxation of income. Accordingly no provision has been made for federal income taxes. Contributions to the College are generally tax deductible. The Paul Garrett Whitman College Foundation and the 21 st Century Trust are separate tax entities which are consolidated in these financial statements, both of which are qualified 501(c)(3) entities. Management believes they have no uncertain tax positions and in addition, unrelated business income tax, if any, is immaterial; therefore, no tax provision has been made. Risks and Uncertainties - The financial instruments of the College are exposed to various risks such as interest rate, market and credit risks. The College seeks to mitigate such risks through prudent investment strategies such as diversified asset classes and investment managers. Due to such risks and market volatility, the values and related activity reported in the financial statements can vary substantially from year-to-year. Such variations could be material to the financial statements. Financial Instruments - Where practicable, the College s financial instruments are stated at fair value. Fair value approximates carrying value for cash and cash equivalents, accounts receivable, accounts payable and government grants payable. Investments are stated at fair value. Contributions and trusts receivable are discounted for the present value of expected future cash outflows. Bonds approximate fair value due to having a variable interest rate. The interest rate exchange agreements are carried at fair value. A reasonable calculation of discounted future cash flows from student loan receivables could not be made due to the variability of repayment terms inherent in such loans. Note 2 - Receivables Accounts receivable Student accounts $ 238 $ 228 Allowance for doubtful accounts (37) (36) Other Total accounts receivable, net $ 415 $ Student loans Federal Perkins Loan Program $ 3,361 $ 3,354 Other loan programs Less: allowance for doubtful accounts (85) (83) Net student loans $ 3,322 $ 3,318 Federal Perkins Loan Program - Student borrowers in the Perkins program are not required to put up collateral or obtain co-signers. Qualifying Perkins borrowers may defer principal payments and in some circumstances the interest and/or principal may be forgiven. The federal share of this receivable is offset by the government grants payable in the Consolidated Statements of Financial Position. Other Loan Programs - Other loans include several federal programs as well as an institutional program. Whitman College notes to consolidated financial statements (in thousands) 8

11 Note 2 - Receivables (continued) Contributions and Trusts - Revenue related to unconditional promises to give is recorded when pledged at the net present value of the expected future inflows of cash using discount rates from 4.0% to 8.4%. The College is the recipient of promises to give made by parties related to the College. At June 30, 2010 and 2009, such promises amounted to $8,166 and $2,967, respectively Within one year $ 2,701 $ 2,348 Between one and five years 7,106 2,979 More than five years 18,070 12,015 Gross receivable 27,877 17,342 Less allowance for uncollectible contributions (596) (220) Less discount to present value (8,658) (5,092) Net receivable $ 18,623 $ 12,030 Contribution and trust receivables are intended to be used for the following purposes: Undesignated $ 4,807 $ 2,411 Operations 8,586 7,360 Plant projects Endowments 14,062 6,673 Gross receivable $ 27,877 $ 17,342 Note 3 - Land, Buildings, Equipment, and Collections Buildings $ 153,261 $ 135,815 Accumulated depreciation (45,225) (41,528) 108,036 94,287 Construction in progress 9,697 17,332 Land 18,685 19,578 Net book value of land and buildings 136, ,197 Equipment and books 7,552 6,193 Accumulated depreciation (4,184) (3,329) Net book value of equipment and books 3,368 2,864 Collections Net book value of land, buildings, equipment and collections $ 140,737 $ 135,012 Commitments for future construction projects were $7,720 as of June 30, As of June 30, 2010 and 2009, interest costs of $468 and $302 were capitalized into the cost of buildings respectively. Whitman College notes to consolidated financial statements (in thousands) 9

12 Note 4 - Deferred Compensation Certain employees of the College at their option may elect to defer a portion of their wages. Deferred compensation is placed in a separate fund, which is considered College property until the College approves a withdrawal by the employee due to an emergency or retirement. Because the participants are general creditors for these funds, the invested asset is separately recorded along with a separate corresponding liability to the employee. As of June 30, 2010 and 2009, the value of employee accounts invested through an agent was $818 and $807, respectively. As of June 30, 2009, the College maintained an account valued at $87. The participant was paid out in the following year and the account closed. Note 5 - Long-Term Obligations Asset Retirement Obligation - The College has accrued obligations for costs required by law to be incurred relative to the retirement of certain College plant assets. At Whitman such issues generally involve asbestos abatement costs at the retirement of certain buildings. At demolition or renovation appropriate abatement procedures and the related costs are a legal requirement. The related costs are capitalized and each obligation is carried at the estimated net present value of the expected future costs required at retirement. The Asset Retirement Obligation at June 30, 2010 and 2009 is valued at $714 and $753, respectively. Health Insurance Terminal Obligation - The College has accrued an obligation for estimated costs which would be incurred if the College s health insurance plan were terminated. The value of such termination costs at June 30, 2010 and 2009 is estimated to be $660 and $535, respectively. Postretirement Benefit Plan - The College provides postretirement health benefits for all employees who were full- time employees hired prior to June 30, 1992, and retire after reaching a specified age with 10 years of service. Employees terminating prior to meeting age and length of service eligibility are not covered under the program. A small number of the currently retired and fully eligible active plan participants under the program are participating in the College's regular health insurance program or modified cost reimbursement under Medicare Supplement. All other participants are limited to the cost of the Medicare supplement at the rate established July 1, 1992, adjusted annually by not more than five percent. The calculation and current assumptions used by the College are periodically reviewed by an actuary. At June 30, 2010 and 2009, the College utilized a five and three-eighths percent discount rate to determine the actuarial present value of the obligation, and a five percent health care cost trend rate for both years. A one percentage point increase in each year of the annual trend rate would increase the accumulated obligation by approximately $564, and increase the benefit cost components by approximately $47, for the year. Projected annual benefit payments for the next five years are estimated to average $195 and the aggregate amount for the following five years ended June 30, 2020 are estimated to be $1,242. Whitman College notes to consolidated financial statements (in thousands) 10

13 Note 5 - Long-Term Obligations (continued) Post-retirement benefit cost Benefits earned $ 89 $ 95 Interest accrued on benefits earned in prior years Benefit cost $ 334 $ 339 Benefits paid $ 168 $ 161 Post-retirement benefit obligation Current retirees $ 1,861 $ 1,982 Active plan participants 2,690 2,552 Total accumulated benefit obligation $ 4,551 $ 4,534 Funds internally reserved for obligation $ 4,608 $ 3,853 College contributions to the reserve $ 207 $ 209 Note 6 - Retirement Plan The College participates in a qualified, defined contribution pension plan, which is administered by the Teachers Insurance and Annuity Association and College Retirement Equities Fund. The plan covers substantially all full-time employees and is funded by employee and College contributions, which are based on levels of compensation. The College contributions to the plan for the years ended June 30, 2010 and 2009 amounted to $2,480 and $2,458, respectively. Note 7 - Bonds and Mortgages Payable The State of Washington provides tax-exempt financing capacity to private higher education institutions sited in the state, through Washington Higher Education Facilities Authority (WHEFA). The College has issued such bonds in both 2004 and Both bond issues are secured by the general revenues of the College. The related discounts and issuance costs for each bond issue is amortized on a straight-line basis until maturity. Both issues were structured to pay a variable rate of interest. The College seeking to curtail exposure to rising interest rates and variable debt payments has entered into interest rate exchange agreements for each issue to synthetically convert the entire notional amount of each bond issue to a fixed rate of interest. The agreements can be terminated before the maturity date with an adjustment with the counterparty for the respective agreement s fair value at the termination date. The net changes in the fair value of these interest rate exchange agreements for the years ended June 30, 2010 and 2009 amounted to unrealized losses of $3,678 and $3,307, respectively. These year-to-year changes are recorded in the operating section of the Consolidated Statements of Activities. Whitman College notes to consolidated financial statements (in thousands) 11

14 Note 7 - Bonds and Mortgages Payable (continued) WHEFA This series is a bullet structure and matures October 1, The bonds pay a variable rate of interest based on the SIFMA index, which averaged.23% for the year ended June 30, The College through an agreement with JP Morgan Chase Bank as the counterparty has exchanged the variable rate for a fixed rate of 4.34% for the life of the loan. WHEFA This series was issued June 10, 2008 and matures January 1, The bonds pay a variable rate of interest based on 67% of the one month LIBOR index, which averaged.27% for the year ended June 30, The College through an agreement with GK Baum Financial Services Corporation as the counterparty has exchanged the variable rate for a fixed rate of 3.37% for the life of the loan WHEFA Series 2004, Variable Rate Demand Revenue Bonds $ 28,770 $ 28,770 WHEFA Series 2008, Variable Rate Demand Revenue Bonds 30,255 30,395 Subtotal WHEFA bonds 59,025 59,165 Mortgage note % interest rate, matures Mortgage note 2-9.0% interest rate, matures Mortgage note 3-5.0% interest rate, matures Mortgage note 4-5.0% interest rate, matures ,136 2,459 61,419 61,940 Unamortized discount and issuance cost (618) (644) Total $ 60,801 $ 61,296 The mortgages are all secured by real estate properties. The present value of bonds and mortgages payable at June 30, 2010, approximates $51,341 based on discounting the future cash flows through the scheduled maturities. The following schedules are the approximate principal payments required for these bonds and mortgages. June 30, 2011 $ 722 June 30, June 30, ,124 June 30, ,152 June 30, ,180 Thereafter 56,367 $ 61,419 Whitman College notes to consolidated financial statements (in thousands) 12

15 Note 8 - Fair Value of Assets and Liabilities Fair Value Measurements - The College uses fair value to measure the value of its investments and interest rate exchange agreements. Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of assets or liabilities should be based on assumptions market participants would use. The fair value hierarchy is categorized into three levels based on the inputs as follows: Level 1 - Inputs reflecting unadjusted quoted prices for identical assets or liabilities in active markets Level 2 - Inputs other than quoted prices observable for the assets or liability either directly or indirectly, including inputs in markets not considered active or quoted prices for similar assets or liabilities Level 3 - Unobservable inputs The availability of valuation techniques and observable inputs can vary by instrument and can be affected by a wide variety of factors, including the type, whether it is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent valuations are based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market existed. Accordingly, the degree of judgment exercised by the College in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined by the lowest level input significant to the fair value measurement. Investments in mutual funds, fixed income securities, and certain domestic and international equities which are valued based on quoted market prices, are typically classified within Level 1. Values of investments, funds held in trust by others, and interest rate exchange agreements which are not established by an active market but do track or are established by observable inputs, such as a market based index or a blend of indices, are typically classified within Level 2. Where available, audited investment net asset values are used as a starting point to establish fair value. The College reviews such net asset values for possible adjustments to arrive at fair value. For the years ended June 30, 2010 and 2009 there were no adjustments made to net asset values provided by investment managers. Investments and funds held in trust by others which are valued utilizing unobservable inputs, are classified within Level 3. The managers and trustees of such assets generally value their underlying investments at fair value and in accordance with fair value accounting. Investments with no readily available market are generally valued according to the mark-to-market method, which attempts to apply a fair value standard by referring to meaningful third-party transactions, comparable public market valuations and/or the income approach. Consideration is also given to financial condition and operating results of the investment, the amount a fund can reasonably expect to realize upon the sale of an investment, and any other factors deemed relevant. An investment can be carried at acquisition price (cost) if little has changed since the initial investment of the company and is most representative of fair value. Investments with a readily available market (listed on a securities exchange or traded in the over-the-counter market) are valued at quoted market prices or at an appropriate discount from such price if marketability of the securities is restricted. Whitman College notes to consolidated financial statements (in thousands) 13

16 Note 8 - Fair Value of Assets and Liabilities (continued) The following table presents information about the College s assets and liabilities measured at fair value as of June 30, 2010 and Quoted Prices in Significant Active Markets for Significant Other Unobservable Identical Assets Observable Inputs Inputs Balance as of Level 1 Level 2 Level 3 June 30, 2010 Assets Marketable fixed income funds $ 40,125 $ - $ - $ 40,125 Marketable balanced funds Marketable domestic equity funds 13, ,312 Marketable real asset funds 2, ,311 Balanced commingled trusts - 18,240-18,240 Domestic equity commingled funds - 15,458 31,287 46,745 International equity commingled funds - 53,491-53,491 Private securities Alternative investments Private equity/opportunistic funds - 9,033 56,934 65,967 Hedged equity funds - 14,027 29,595 43,622 Real asset funds ,684 23,684 Absolute return funds - 14,370 16,806 31,176 Funds held in trust by others - 11, ,163 Total assets $ 56,138 $ 135,737 $ 158,819 $ 350,694 Liability Interest rate exchange agreements $ 9,694 $ 9,694 Quoted Prices in Significant Active Markets for Significant Other Unobservable Identical Assets Observable Inputs Inputs Balance as of Level 1 Level 2 Level 3 June 30, 2009 Assets Marketable fixed income funds $ 25,906 $ - $ - $ 25,906 Marketable domestic equity funds 23, ,081 Marketable real asset funds 2, ,016 Balanced commingled trusts - 16,845-16,845 Domestic equity commingled funds - 23,049 6,350 29,399 International equity commingled funds - 31,569 17,583 49,152 Private securities Alternative investments Private equity/opportunistic funds ,264 53,264 Hedged equity funds ,585 44,585 Real asset funds ,743 22,743 Absolute return funds ,428 31,428 Funds held in trust by others - 10, ,529 Total assets $ 51,003 $ 81,885 $ 176,518 $ 309,406 Liability Interest rate exchange agreements $ 6,016 $ 6,016 Whitman College notes to consolidated financial statements (in thousands) 14

17 Note 8 - Fair Value of Assets and Liabilities (continued) The following table presents additional information about Level 3 assets and liabilities measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of positions the College has classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category may include changes in fair value attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs. Total gains and (losses) in the table below are shown in the Consolidated Statement of Activities. Domestic International Private Funds Equity Equity Equity/ Hedged Real Absolute Held in Commingled Commingled Private Opportunistic Equity Asset Return Trust by Funds Funds Securities Funds Funds Funds Funds Others Level 3 beginning balance, July 1, 2008 $ 15,088 $ 23,773 $ 928 $ 45,524 $ 53,991 $ 26,768 $ 45,596 $ 257 Total gains (losses) (8,631) (5,190) 62 (12,325) (4,894) (7,133) (6,304) (150) Purchases ,899-5, Sales (107) (1,000) (846) (4,834) (4,512) (2,566) (7,864) - Level 3 ending balance, June 30, 2009 $ 6,350 $ 17,583 $ 458 $ 53,264 $ 44,585 $ 22,743 $ 31,428 $ 107 Level 3 beginning balance, July 1, 2009 $ 6,350 $ 17,583 $ 458 $ 53,264 $ 44,585 $ 22,743 $ 31,428 $ 107 Transfers between level classifications 23,049 (17,583) - (6,072) (12,545) - (11,741) - Total gains (losses) 2, ,419 3,272 2,652 2,839 - Purchases ,642-5, Sales (600) - (900) (12,319) (5,717) (7,324) (5,720) (62) Level 3 ending balance, June 30, 2010 $ 31,287 $ - $ 468 $ 56,934 $ 29,595 $ 23,684 $ 16,806 $ 45 Net appreciation (depreciation) on investments in the table above are reflected on the following lines in the Statement of Activities: "Net loss on investments and interest rate exchange agreements" in operating activities, and "Net gain (loss) on investments" in nonoperating activities. Net unrealized gains (losses) on investments included in the Statement of Activities for Level 3 assets on hand at June 30, 2010 and 2009 is approximately $16,573 and $(43,767), respectively. Whitman College notes to consolidated financial statements (in thousands) 15

18 Note 8 - Fair Value of Assets and Liabilities (continued) The following table shows the fair value, unfunded commitments, and redemption restrictions for Level 2 and 3 investments reported at net asset value as of June 30, 2010: Strategies Fair Value at Unfunded Redemption Redemption and Other June 30, 2010 Commitments Frequency Notice Period Restrictions Balanced commingled trusts $ 18,240 $ - Various N/A (1) Domestic equity commingled funds 46,745 - Daily - Semi-annually Daily to 30 days (2) International equity commingled funds 53,491 - Monthly - Two Years days (3) Private securities Various N/A (4) Private equity/opportunistic funds 65,967 33,402 Various N/A (5) Hedged equity funds 43,622 - Quarterly - Triennially days (6) Real asset funds 23,684 10,655 Various Daily to 30 days (7) Absolute return funds 31,176 - Quarterly - Annually 45 to 90 days (8) Funds held in trust by others 11,163 - Various N/A (9) (1) The majority of the balanced commingled trusts allocation is composed of individual annuity trusts and unitrusts of varying mixes of equity and fixed income securities. The allocation mix is based upon the underlying risk tolerances of the annuity and unitrust holders. (2) Domestic equity commingled funds are composed primarily in managers who invest in publicly traded domestically domiciled companies. Through a securities lending program a portion of funds are invested in a short term investment vehicle collateralized by cash, US Treasury and/or government agency issues. (3) International equity commingled funds are comprised primarily of managers who invest in publicly traded companies who are domiciled outside the United States. Managers are well diversified in different regions, but may overweight in specific markets opportunistically. (4) Private securities are composed largely of illiquid securities previously donated to the College. A portion of these assets are held for their income generating capacity while others will be sold at the next available opportunity. (5) Private equity/opportunistic funds limited partnerships are invested with managers whose investment strategies consist of event driven, relative value, private equity, and debt investments featuring buyouts, mergers, distressed assets, and venture capital. There are no redemption rights available for investors other than the liquidation of assets held by the fund, which will result in a distribution of capital to investors. (6) Hedged equity fund managers invest in global long/short primarily publicly traded equities, but also have exposure in private equity, debt, and derivatives. (7) Real asset funds are composed of investment managers with both funds on active markets with daily quoted prices and limited partnership structures. Investments are centered on the energy, commodities, and real estate sectors through real asset holdings as well as public, private equity, and debt instruments. (8) Absolute return funds are composed of investment managers who seek consistent positive returns regardless of the direction of financial markets through the use of arbitrage strategies as well as investments in distressed securities, long/short equity, and private market transactions. (9) Funds held in trusts by others are composed of numerous trusts managed by outside administrators. Trust documents determine the annual distribution amount from each trust. Assets are composed largely of publicly traded domestic equity and fixed income securities with additional exposure to farm real estate and private notes. Whitman College notes to consolidated financial statements (in thousands) 16

19 Note 8 - Fair Value of Assets and Liabilities (continued) By Board policy, the College manages its investments to maintain a diversified portfolio both as to investment type, strategy, and manager Total return for investments Interest and dividend income $ 2,028 $ 3,555 Realized net gains (losses) 5,197 (10,168) Unrealized net gains (losses) 37,513 (82,925) Total return on investments $ 44,738 $ (89,538) Investments according to purpose Investments restricted for donor purposes $ 241,418 $ 221,072 Investments designated for long-term purposes 24,887 31,753 Investments board designated for reserves or endowment 84,389 56,581 Total investments $ 350,694 $ 309,406 The College was committed to invest a total of $137,780 across 23 limited partnerships. At June 30, 2010, future payments necessary to meet those commitments totaled $44,050. Note 9 - Net Assets Unrestricted: Operations and reserves $ 10,326 $ 7,680 Plant facilities 58,619 62,085 Endowments 92,963 82,435 Trusts and other 7,730 6,531 Split-interest agreements 1,660 1,339 Total unrestricted net assets $ 171,298 $ 160,070 Temporarily restricted: Restricted for specific purposes $ 22,612 $ 17,614 Endowments 111,265 93,321 Trusts and other 1,064 2,253 Split-interest agreements 8,583 7,139 Total temporarily restricted net assets $ 143,524 $ 120,327 Permanently restricted: Endowments $ 109,510 $ 102,983 Trusts and other 12,392 10,306 Split-interest agreements 4,841 3,927 Total permanently restricted net assets $ 126,743 $ 117,216 Whitman College notes to consolidated financial statements (in thousands) 17

20 Note 9 - Net Assets (continued) Endowment net assets - The College's endowment consists of approximately 816 individual funds established for a variety of purposes. Its endowment includes both donor-restricted endowment funds, funds designated by the Board of Trustees to function as endowments, and certain funds held in trust by others. As required by GAAP, net assets associated with endowment funds, including funds designated by the Board to function as endowments, are classified and reported based on the existence or absence of donor imposed restrictions. The College is subject to the requirements of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) as enacted by the State of Washington. The College's Board of Trustees has interpreted UPMIFA as requiring the 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 College classifies as permanently restricted net assets (a) the original value of the 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 in force at the time the accumulation is added to the fund. The remaining portion of a donor-restricted endowment fund not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the College in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the College considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. The duration and preservation of the fund 2. The purposes of the College and the donor-restricted endowment fund 3. General economic conditions 4. The possible effect of inflation and deflation 5. The expected total return from income and the appreciation of investments 6. Other resources of the College 7. The investment policies of the College Endowment net asset composition by type of fund and restriction are as follows: UR - Unrestricted TR - Temporarily PR - Permanently restricted UR TR PR Total As of June 30, 2010 Donor-restricted endowment funds $ (594) $ 111,265 $ 109,510 $ 220,181 Board-designated endowment funds 93, ,557 Total endowment net assets $ 92,963 $ 111,265 $ 109,510 $ 313,738 UR TR PR Total As of June 30, 2009 Donor-restricted endowment funds $ (1,327) $ 93,321 $ 102,983 $ 194,977 Board-designated endowment funds 83, ,762 Total endowment net assets $ 82,435 $ 93,321 $ 102,983 $ 278,739 Whitman College notes to consolidated financial statements (in thousands) 18

21 Note 9 - Net Assets (continued) Funds with Deficiencies - As of June 30, 2010, 45 individual endowment accounts had account values less than the total of original and all subsequent contributions. This condition usually entails a relatively recent contribution concurrent with negative returns. In accordance with GAAP, deficiencies of this nature are reported in unrestricted net assets and as of June 30, 2010 and 2009, total $594 and $1,327, respectively. Changes in endowment net assets: June 30, UR TR PR 2010 Beginning balance $ 82,435 $ 93,321 $ 102,983 $ 278,739 Investment return: Investment income Net gain appreciation - realized and unrealized 10,606 26,030 1,012 37,648 Subtotal, investment return 10,850 26,532 1,012 38,394 Contributions - 7 5,400 5,407 Endowment support to operations (5,905) (9,270) - (15,175) Transfers to endowment funds 5, ,373 Ending balance $ 92,963 $ 111,265 $ 109,510 $ 313,738 June 30, UR TR PR 2009 Beginning balance $ 107,992 $ 157,709 $ 99,991 $ 365,692 Investment return: Investment income 416 1, ,857 Net (loss) (depreciation) - realized and unrealized (25,023) (55,669) - (80,692) Subtotal, investment return (24,607) (54,270) 42 (78,835) Contributions - 6 2,263 2,269 Endowment support to operations (6,296) (10,124) - (16,420) Transfers to endowment funds 5, ,033 Ending balance $ 82,435 $ 93,321 $ 102,983 $ 278,739 Whitman College notes to consolidated financial statements (in thousands) 19

22 Note 9 - Net Assets (continued) Return Objectives and Risk Parameters - The College has adopted investment policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment and maintain the purchasing power of the endowment assets. The investment policy, as approved by Board of Trustees, provides general investment guidelines as follows: Target Acceptable Ranges Fixed income 10% 5% - 15% Domestic equity 20% 15% - 25% International equity 25% 20% - 30% Private equity/opportunistic 15% 10% - 25% Real assets 15% 10% - 20% Absolute return 15% 10% - 20% 100% Strategies Employed for Achieving Objectives - To satisfy its long-term rate-of-return objectives, the College relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The College 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. Actual returns in any given year are expected to vary from the payout rate. Performance of the College's investments is reviewed by the College s Investment Committee and reported to the College's Board of Trustees on at least a quarterly basis. Spending Policy - The Board of Trustees authorizes the annual endowment support to operations. The spending rate will be periodically reviewed by the College Investment Committee to reassess anticipated future rates of inflation and the total return on investments. Typically at least one year's earnings will be accumulated as temporarily restricted in a new endowment before expenditures begin. Endowment support to operations in the Consolidated Statements of Activities is based on a percentage of the average values for a twelve quarter period lagging one full year, for the years ended June 30, 2010 and Such percentage for June 30, 2010 and 2009 was 4.2% and 5%, respectively. Note 10 - Commitments and Contingencies In order to provide liability insurance coverage the College has taken an equity position in the College Liability Insurance Company, Ltd. (CLIC). Part of CLIC s capital is a $2,000 standby letter of credit for which the College is contingently liable on a pro rata basis. In the event the losses of CLIC exceed its capital and primary coverage, the maximum contingent liability to the College approximates $200 for the year ended June 30, Effective January 1, 1985, the College adopted a self-insured health program, which provides for the payment or reimbursement of all or a portion of eligible medical, prescription drug, vision and dental expenses. The College is self-insured up to the first $100 for each occurrence and stop loss insurance has been purchased to cover amounts above the threshold. In addition, the College has an excessloss contract to cover catastrophic situations. The accompanying consolidated financial statements include a reserve liability of $271 and $431 (included in accrued compensation and benefits on the Consolidated Statements of Financial Position) at June 30, 2010 and 2009, respectively. This reserve amount is based upon review by the College and an independent third-party claims administrator for claims incurred but not paid at year end. The College maintains a separate cash account to meet these estimated claims. Whitman College notes to consolidated financial statements (in thousands) 20