Financial Statements and Report of Independent Certified Public Accountants. The University of Scranton. May 31, 2012 and 2011

Transcription

1 Financial Statements and Report of Independent Certified Public Accountants The University of Scranton

2 Contents Page Report of Independent Certified Public Accountants 3 Financial statements Statements of financial position 4 Statements of activities 5 Statements of cash flows 6 Notes to financial statements 7

3 Audit Tax Advisory Report of Independent Certified Public Accountants Board of Trustees The University of Scranton Grant Thornton LLP 2001 Market Street, Suite 3100 Philadelphia, PA T F We have audited the accompanying statements of financial position of The University of Scranton (the University) as of and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the University s management. 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 as established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing 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 over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The University of Scranton as of and the results of its activities and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Philadelphia, Pennsylvania October 19, 2012

4 STATEMENTS OF FINANCIAL POSITION May 31, ASSETS Cash and cash equivalents $ 9,332,898 $ 16,666,627 Cash and cash equivalents on deposit with bond trustee 1,648, ,934 Student and other accounts receivable, net of allowance of approximately $729,000 and $748,000 at, respectively 6,730,022 3,425,974 Government construction grant receivable 2,353,418 7,237,657 Contributions receivable, net 5,492,984 5,644,313 Student loans receivable, net of allowance of approximately $441,000 and $493,000 at, respectively 3,395,665 3,931,478 Prepaid expenses and other assets 3,882,001 4,146,864 Investments 184,836, ,327,111 Land, buildings and equipment, net 279,930, ,636,422 Total assets $ 497,602,727 $ 503,151,380 LIABILITIES AND NET ASSETS Liabilities Accounts payable $ 11,540,575 $ 20,712,550 Accrued expenses 4,223,637 3,759,651 Accrued employee benefits 10,771,813 10,098,913 Deposits and deferred income 10,647,520 6,225,846 Split-interest agreements 1,396,946 1,604,834 Federal student loan funds 2,841,922 2,914,698 Long-term debt and capital lease obligations 171,181, ,457,854 Accrued post-retirement benefits 3,464,956 4,894,583 Conditional asset retirement obligation, net 643, ,360 Total liabilities 216,711, ,317,289 Net assets Unrestricted 186,684, ,117,168 Temporarily restricted 37,007,282 43,878,360 Permanently restricted 57,199,103 55,838,563 Total net assets 280,890, ,834,091 Total liabilities and net assets $ 497,602,727 $ 503,151,380 The accompanying notes are an integral part of these statements. 4

5 STATEMENTS OF ACTIVITIES For the years ended May 31, Temporarily Permanently Temporarily Permanently Unrestricted restricted restricted Total Unrestricted restricted restricted Total Operating revenues Tuition and fees, net of student aid of $52,899,802 in 2012 and $50,854,597 in 2011 $ 109,473,925 $ - $ - $ 109,473,925 $ 103,695,660 $ - $ - $ 103,695,660 Federal grants and contracts 1,804, ,804,562 2,159, ,159,759 State grants and contracts 834, , , ,531 Private gifts, grants and contracts 1,471, ,787-1,836,701 4,182, ,976-4,952,949 Investment income 1,871,529 1,475,300-3,346,829 2,201,690 1,648,820-3,850,510 Auxiliary enterprises 33,670, ,670,176 29,075,922 21,568-29,097,490 Other 3,051, ,051,528 2,482, ,012-2,709,391 Net assets released from restrictions 3,342,613 (3,342,613) - - 5,815,051 (5,815,051) - - Total operating revenues 155,520,822 (1,502,526) - 154,018, ,410,965 (3,147,675) - 147,263,290 Operating expenses Instruction 52,345, ,345,269 48,780, ,780,608 Research 344, , , ,362 Public service 1,752, ,752,786 1,963, ,963,117 Academic support 7,449, ,449,691 7,867, ,867,912 Library 5,368, ,368,267 5,106, ,106,369 Student services and activities 16,076, ,076,881 13,759, ,759,879 Institutional support 25,901, ,901,327 28,858, ,858,420 Auxiliary enterprises 34,213, ,213,079 27,275, ,275,886 Total operating expenses 143,451, ,451, ,103, ,103,553 Change in net assets from operating activities 12,068,834 (1,502,526) - 10,566,308 16,307,412 (3,147,675) - 13,159,737 Non-operating activities Government construction grant 3,366, ,366,149 7,237, ,237,657 Private gifts and grants - - 1,360,540 1,360, ,226,104 3,226,104 Net realized and unrealized (losses) gains on investments (3,642,386) (6,725,860) - (10,368,246) 6,285,712 13,803,418-20,089,130 Depreciation expense applicable to federal building grants (868,105) - - (868,105) (868,105) - - (868,105) Reclassification of underwater endowment net assets (1,357,308) 1,357, ,783,808 (1,783,808) - - Change in net assets from non-operating activities (2,501,650) (5,368,552) 1,360,540 (6,509,662) 14,439,072 12,019,610 3,226,104 29,684,786 Total change in net assets 9,567,184 (6,871,078) 1,360,540 4,056,646 30,746,484 8,871,935 3,226,104 42,844,523 Net assets at beginning of year 177,117,168 43,878,360 55,838, ,834, ,370,684 35,006,425 52,612, ,989,568 Net assets at end of year $ 186,684,352 $ 37,007,282 $ 57,199,103 $ 280,890,737 $ 177,117,168 $ 43,878,360 $ 55,838,563 $ 276,834,091 The accompanying notes are an integral part of these statements. 5

6 STATEMENTS OF CASH FLOWS For the year ended May 31, Cash flows from operating activities Change in net assets $ 4,056,646 $ 42,844,523 Adjustments to reconcile change in net assets to net cash provided by operating activities Contributions restricted for long-term investments (1,360,540) (3,226,104) Provision for doubtful accounts (17,033) (237,933) Depreciation 12,721,808 9,476,363 Amortization (249,741) (269,283) Loss on disposal of fixed assets 68, ,381 Changes in estimates of split-interest agreements (207,888) (146,867) Change in accrued post-retirement benefit (1,429,627) 2,523,405 Net realized and unrealized losses (gains) on investments 10,368,246 (20,089,130) Changes in operating assets and liabilities (Increase) decrease in student and other accounts receivable, net (3,284,969) 1,493,668 Decrease (increase) in government construction grants receivable 4,884,239 (7,237,657) Decrease in contributions receivable 97,765 1,526,699 Decrease (increase) in prepaid expenses and other assets 264,863 (848,037) (Decrease) increase in accounts payable (9,395,408) 2,019,284 Increase in accrued and other liabilities 1,131, ,211 Increase in deposits and deferred income 4,421, ,494 Net cash provided by operating activities 22,070,236 28,657,017 Cash flows from investing activities Purchases of investments (183,347,665) (369,064,624) Proceeds from sales of investments 202,469, ,304,473 Purchases of land, buildings and equipment (44,327,617) (76,156,206) Student loans receivable: (Issuance) sales of student loans (176,200) (244,750) Collection of student loans 655, ,274 Write off and cancellations of student loans 107, ,505 (Increase) decrease in cash equivalents on deposit with bond trustee (1,513,560) 2,787,701 Net cash used in investing activities (26,131,764) (99,508,627) Cash flows from financing activities Proceeds from issuance of debt - 67,855,761 Contributions restricted for long-term investments 1,360,540 3,226,104 Payments on long-term debt (4,480,000) (3,765,000) Principal payments under capital lease obligations (79,965) - Refundable student loans (72,776) (222,754) Net cash (used in) provided by financing activities (3,272,201) 67,094,111 Net decrease in cash and cash equivalents (7,333,729) (3,757,499) Cash and cash equivalents at beginning of year 16,666,627 20,424,126 Cash and cash equivalents at end of year $ 9,332,898 $ 16,666,627 Noncash investing and financing activities Construction financed through accounts payable $ 223,433 $ 14,027,625 Equipment acquired under capital lease agreement 576,752 - Cash paid for interest, net of capitalized interest of $777,289 and $2,262,777, respectively 6,768,766 4,321,808 The accompanying notes are an integral part of these statements. 6

7 NOTES TO FINANCIAL STATEMENTS NOTE A - INTRODUCTION The University of Scranton (the University ) is a private, nonsectarian, coeducational, independent, comprehensive university. The University s 58-acre campus is located in northeastern Pennsylvania in the city of Scranton. It is incorporated as a Pennsylvania nonprofit corporation. The University is committed to providing a full range of undergraduate and graduate programs in the arts, sciences, business, education and health professions. All of its programs share a commitment to the Jesuit ideal of serving men and women of diverse religious, ethnic, cultural, social and economic backgrounds. The University offers 60 major programs for undergraduate students. The College of Graduate and Continuing Education offers Master s degrees in 24 programs and offers a Doctor of Physical Therapy degree. Programs for supervision, superintendent s letter of eligibility, and teacher s certification are available. NOTE B - SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Presentation The University s financial statements are presented in accordance with accounting principles generally accepted in the United States of America ( U.S. GAAP ) on an accrual basis. Resources are reported in three separate categories of net assets based on the existence or absence of donor-imposed restrictions. In the accompanying financial statements, net assets that have similar characteristics have been combined into categories as follows (see Note Q): Unrestricted - net assets that are not subject to donor-imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees or may otherwise be limited by contractual agreements with outside parties. Temporarily restricted - net assets whose use by the University is subject to donor-imposed or legal stipulations that can be fulfilled by actions of the University pursuant to those stipulations or that expire by the passage of time. Permanently restricted - net assets subject to donor-imposed stipulations that they be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income earned on these assets. Such assets primarily include the University s permanent endowment funds and irrevocable trusts held by others. Expenses are generally reported as decreases in unrestricted net assets. Expirations of donor-imposed stipulations that simultaneously increase one category of net assets and decrease another are reported as reclassifications between the applicable categories. 7

8 NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued 1. Basis of Presentation - Continued Temporarily restricted net assets for which donor-imposed restrictions are met in subsequent reporting periods are reclassified to unrestricted net assets and reported as net assets released from restrictions. Assets where donors have changed restrictions are reported as changes in donor designation and are reported as non-operating activities on the statements of activities. Net assets which have no donor-stipulated restrictions, as well as contributions for which donors have stipulated restrictions which are met within the same reporting period, are reported as unrestricted revenue. 2. Cash and Cash Equivalents Cash and cash equivalents consist primarily of commercial paper, money market accounts, certificates of deposit and United States Treasury obligations with original maturity dates less than three months (see Note D). 3. Concentration of Credit Risk The University s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, investments and deposits with bond trustees. These funds are held in various high-quality financial institutions and are managed by University personnel and outside advisors. The University maintains its cash and cash equivalents in financial institutions at levels that typically exceed federally insured limits. The University believes that the concentrations of credit risk are reasonable for its cash and cash equivalents, investments and deposits with bond trustees. 4. Student and Other Accounts Receivable Accounts receivable include all current accounts receivable related to student transactions and other receivables of the University other than government construction grant receivable (see Note E). 5. Contributions Receivable Conditional promises to give are not recorded in the financial statements until the condition is substantially met. Unconditional promises are reported as contributions receivable and restricted revenue. Amounts due are recorded at the net present value of future cash flows. Contributions receivable are reduced by an allowance for uncollectible amounts. Gifts of land, building, equipment and cash or other assets that must be used to acquire long-lived assets (collectively, long-lived assets ) are reported as unrestricted revenue 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 are reported as permanently restricted revenue. Contributions receivable are non-recurring fair value measurements. Multi-year contributions are recorded at the present value of future cash flows using a discount rate adjusted for market conditions to arrive at fair value (see Note F). 8

9 NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued 6. Student Loans Receivable Student loans receivable consist primarily of loans made to students under U.S. government loan programs. The loans are stated at net realizable value in the accompanying financial statements. It is not practicable to estimate the fair value of these receivables since they contain federally-mandated interest rates and repayment terms subject to significant restrictions as to their transfer and disposition (see Note G). 7. Allowance for Doubtful Accounts The allowance for doubtful accounts is provided based upon management s judgment, including such factors as prior collection history and type of receivable. The University writes-off receivables when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. 8. Deferred Financing Costs Costs incurred in connection with financing are deferred and are amortized over the period the obligation is outstanding using the straight-line method which approximates the effective interest rate method. Deferred financing costs are included in prepaid expenses and other assets in the statements of financial position. 9. Investments Investments are stated at fair value. The fair value of all debt and equity securities with readily determinable fair values is based on quotations obtained from national securities exchanges. Alternative investments and certain institutional funds, which are not readily marketable, are carried at their net asset value per share, as a practical expedient, as provided by the investment managers. The University reviews and evaluates the fair values provided by the investment managers and agrees with the valuation methods and assumptions used in determining the fair value of the alternative investments. The University believes the carrying amount of these alternative investments is a reasonable estimate of fair value. Because certain alternative investments are not readily marketable, their estimated fair value is subject to uncertainty and therefore may differ from the fair value that would have been used had a ready market for such investments existed. These instruments may contain elements of both credit risk and market risk (see Note H). Unrealized gains and losses arising from increases or decreases in fair value are recognized in the period in which they occur. Realized gains and losses on the sale of investments are determined on the specific identification method on the trade date. Investments acquired through gifts are recorded at fair value at the date of the gift. Dividend and interest income are accrued as earned. 9

10 NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued 10. Land, Buildings and Equipment Physical plant and equipment are stated at cost at date of purchase, or fair value at date of donation in the case of gifts. The University capitalizes all major purchases of furniture and equipment. Assets are depreciated using the straight-line method over 20 years for land improvements, 30 to 40 years for buildings and 3 to 10 years for equipment. Maintenance and repairs are recorded as expenses when incurred. As property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation are relieved and any gain or loss is reported in the corresponding statements of activities. Interest costs during periods of construction are capitalized (see Note I). Property and equipment used in exchange transactions, such as research and instructional grants, in which the resource provider retains legal title during the term of the arrangement, are capitalized by the University if it is probable that the University will be permitted to keep the asset when the arrangement terminates. 11. Impairment of Long-Lived Assets The University reviews long-lived assets and certain identifiable intangibles when circumstances indicate that the carrying amount of an asset may not be recoverable. If an asset is considered impaired, its fair value is written down with a corresponding charge to the change in unrestricted net assets from operating activities. 12. Deposits and Deferred Income Tuition, fees, room, and board revenue is recognized over the academic year as services are provided. Funds received in advance of services provided, as well as student deposits, are included in deferred income. Deferred income from grants and other agreements is earned in the period in which the related services or activities are performed (see Note J). 13. Net Tuition and Fees Net student tuition and fee revenue is reported at net realizable amounts received from students. Student tuition and fees are reported net of University-provided student aid. 14. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, student and other accounts receivable, prepaid expenses and other assets, accounts payable, and accrued expenses approximate fair value. The fair value of investments is based on the quoted market values of the underlying securities, except for alternative investments and certain institutional funds which are reported at net asset value per share, as a practical expedient. Such investments are subject to volatility in market conditions. Accordingly, it is reasonably possible that the reported value of such investments could substantially change in the near term (see Note P). 10

11 NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued 14. Fair Value of Financial Instruments - Continued The fair value of the University s long-term debt at was approximately $180,133,000 and $170,257,000, respectively. 15. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant management estimates and assumptions relate to the determination of allowances for doubtful accounts for accounts receivable, student loans receivable and contributions receivable and bequests in probate; valuation of investments without a readily determinable fair value; useful lives of fixed assets; conditional asset retirement obligations; actuarial estimates for the University s accrued post-retirement benefits and annuities payable; the allocation of expenses from natural to functional classifications; and the reported fair value of certain of the University s assets and liabilities. Actual results could differ from those estimates. 16. Measure of Operations The increase in net assets from operating activities reflected on the accompanying statements of activities includes substantially all of the activity related to unrestricted and temporarily restricted net assets. Amounts not included in the measure of operations consist of contributions to permanent endowments, net realized and unrealized gains (losses) on investments, depreciation expense applicable to facilities funded by federal grants and other activities considered by management to be of a non-operating nature. Federal and state grants for the acquisition or construction of buildings are shown as non-operating revenue. 17. Allocation of Certain Expenses The statements of activities present expenses by functional classification. Depreciation is allocated to the functional classifications based on square footage. Interest expense is allocated to the functional classifications which benefited from the proceeds of the related debt. 18. Income Taxes The University is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. Accordingly, no provision for income taxes is made in the financial statements. Tax positions are recognized or reversed by the University based on a more likely than not threshold. This applies to positions taken or expected to be taken in a tax return. The University does not believe its financial statements include any uncertain tax positions. 11

12 NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued 19. Reclassifications Certain accounts in the 2011 financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements. 20. Recently Adopted Accounting Pronouncements In January 2010, the Financial Accounting Standards Board ( FASB ) issued accounting guidance to enhance fair value measurement disclosures by requiring the reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reason for the transfers. Furthermore, activity in Level 3 fair value measurements should separately provide information about purchases, sales, issues and settlements rather than providing that information as one net number. The University adopted this guidance for the year ended May 31, The adoption of this guidance did not have a material impact on the financial statements (see Note P). In July 2010, the FASB issued accounting guidance to provide financial statement users with greater transparency about an entity s allowance for credit losses and the credit quality of its financing receivables. This guidance is intended to provide additional information to assist financial statement users in assessing an entity s credit risk exposures and evaluating the adequacy of its allowance for credit losses. This guidance is effective for financial statements issued after December 31, The University adopted this guidance for the year ended May 31, The adoption of this guidance did not have a material impact on the financial statements (see Note G). NOTE C - ENDOWMENTS Net assets associated with endowment funds, including funds designated by the Board of Trustees (the Board ) to function as endowments, are classified and reported by the University based on the existence or absence of donor-imposed restrictions. The University s endowment consists of a portfolio of actively managed funds established to provide both a source of operating funds as well as long-term financial stability. The endowment includes both donor-restricted endowment funds and funds designated by the Board to function as quasi-endowments. 1. Interpretation of Relevant Law The University s Board interpreted Commonwealth of Pennsylvania Act 141 as requiring the preservation of the fair value of the original donor-restricted endowment fund gift as of the gift date, 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. This is regarded as the historic dollar value of the endowed fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets, which is regarded as net appreciation, is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University in a manner consistent with the University s spending policy. 12

13 NOTE C - ENDOWMENTS - Continued 2. Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below their historic dollar value. Deficiencies of this nature are reported by a charge to unrestricted net assets and a corresponding increase to temporarily restricted net assets. Funds with deficiencies totaled approximately $2,082,000 and $725,000 at, respectively. As individual donor-restricted funds recover to their historic dollar value, the charges to the unrestricted net assets are reversed. These recoveries (charges) totaled approximately $(1,357,000) and $1,784,000 during the years ended, respectively. Deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions. Over time, these may reverse due to appreciation of the underlying investments. 3. Endowment Investment Policy The University s Board adopted an investment policy that is intended to provide a predictable stream of funding to programs from its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the University must hold in perpetuity, as well as Board-designated funds. Under this approach, the endowment assets are invested in a manner that is intended to produce results that equal the total of the amount drawn annually for operations plus the rate of inflation plus investment management fees. 4. Endowment Spending Policy For financial statement presentation purposes, the University presents interest and dividend income in operating activities and net realized and unrealized gains and losses in non-operating activities. The University pools all investments of endowment and quasi-endowment funds on a fair value basis. The Finance Committee, formerly known as the Economic Strength Committee of the Board, authorizes an endowment spending policy based upon the average fair value of endowment investments as of May 31 for the preceding three audited fiscal years. The authorized endowment spending policy was 4.5% and 5.0% for the years ended, respectively. The Commonwealth of Pennsylvania permits organizations to allocate to income each year a portion of permanently restricted investment gains under a total spending rate policy not to exceed 7.0%. Income in excess of the Board-authorized endowment spending policy is recognized as an increase in temporarily restricted net assets. Such amounts may be released to unrestricted net assets in future years only to the extent of the annual limitation applicable to the year in which they are to be released. 5. Strategies Employed for Achieving Objectives 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 capital appreciation (realized and unrealized) and current yield (interest and dividends). The University s Board outsourced management of the investment portfolio as a best governance practice. A consultant assists the Board s Investment Committee in selecting managers which employ 13

14 NOTE C - ENDOWMENTS - Continued 5. Strategies Employed for Achieving Objectives - Continued a wide range of investment strategies, inclusive of alternative investments, based upon an asset allocation set by the Investment Committee. The rationale for including alternative investment strategy managers for the University s portfolio is to reduce overall volatility while providing equity-like returns. Alternative asset classes historically demonstrate lower volatility on a stand-alone basis compared to traditional asset classes. Additionally, they exhibit low correlations to traditional financial instruments, thus providing diversification benefits at the total fund level. 6. Endowment Fund Activity May 31, 2012 Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment funds $ - $ 29,029,562 $ 55,291,705 $ 84,321,267 Board-designated quasi-endowment funds 34,665, ,665,741 Endowment $ 34,665,741 $ 29,029,562 $ 55,291,705 $ 118,987,008 Net assets, May 31, 2011 $ 37,812,790 $ 36,271,776 $ 54,021,846 $ 128,106,412 Investment return Investment income 637,687 1,470,214-2,107,901 Net realized gains 140,230 1,788,654-1,928,884 Net unrealized losses (3,582,174) (8,495,282) - (12,077,456) Net investment loss (2,804,257) (5,236,414) - (8,040,671) Contributions 1,034,440-1,269,859 2,304,299 Appropriation of endowment assets for operations (draw) (1,377,232) (3,363,108) - (4,740,340) Other changes To fund deficiencies in historical dollar values - 1,357,308-1,357,308 Total changes (3,147,049) (7,242,214) 1,269,859 (9,119,404) Net assets, May 31, 2012 $ 34,665,741 $ 29,029,562 $ 55,291,705 $ 118,987,008 14

15 NOTE C - ENDOWMENTS - Continued 6. Endowment Fund Activity - Continued May 31, 2011 Temporarily Permanently Unrestricted restricted restricted Total Donor-restricted endowment funds $ - $ 36,271,776 $ 54,021,846 $ 90,293,622 Board-designated quasi-endowment funds 37,812, ,812,790 Endowment $ 37,812,790 $ 36,271,776 $ 54,021,846 $ 128,106,412 Net assets, May 31, 2010 $ 31,835,851 $ 28,177,403 $ 50,795,742 $ 110,808,996 Investment return Investment income 723,536 1,648,820-2,372,356 Net realized gains 1,063,473 2,533,108-3,596,581 Net unrealized gains 4,507,794 11,270,310 _- 15,778,104 Net investment gain 6,294,803 15,452,238-21,747,041 Contributions 3,110-3,226,104 3,229,214 Appropriation of endowment assets for operations (draw) (320,974) (5,574,057) - (5,895,031) Other changes To fund deficiencies in historical dollar values - (1,783,808) - (1,783,808) Total changes 5,976,939 8,094,373 3,226,104 17,297,416 Net assets, May 31, 2011 $ 37,812,790 $ 36,271,776 $ 54,021,846 $ 128,106,412 15

16 NOTE D - CASH AND CASH EQUIVALENTS AND INVESTMENTS 2012 Total cash and cash Cash and U.S. Institutional funds Alternative* equivalents cash government Fixed and other and equivalents obligations income Equity funds investments Allocated for debt and debt reserve $ 1,646,994 $ 1,524,210 $ - $ - $ 4,374,322 $ 7,545,526 Split-interest agreements 82,867-1,298,259 2,445,803-3,826,929 Endowment and similar funds 3,374,416-31,467,863 73,278,259 17,033, ,153,952 Other 5,877,115 25,932,435 27,314, ,747-59,291,769 Total $ 10,981,392 $ 27,456,645 $ 60,080,593 $ 75,891,809 $ 21,407,736 $ 195,818,175 * Includes a $4,374,322 Guaranteed Investment Contract 2011 Total cash and cash Cash and U.S. Institutional funds Alternative* equivalents cash government Fixed and other and equivalents obligations income Equity funds investments Allocated for debt and debt reserve $ 134,934 $ 2,748,734 $ 16,352,339 $ - $ 4,374,322 $ 23,610,329 Split-interest agreements 313, ,375 2,455,994-3,667,617 Endowment and similar funds 1,181,204-44,587,120 68,225,865 17,886, ,880,804 Other 15,172,175 20,019,418 36,211, , ,053 71,969,922 Total $ 16,801,561 $ 22,768,152 $ 98,049,070 $ 70,853,899 $ 22,655,990 $ 231,128,672 * Includes a $4,374,322 Guaranteed Investment Contract NOTE E - GOVERNMENT CONSTRUCTION GRANT RECEIVABLE The University is a sub-grantee of a $10,000,000 Redevelopment Assistance Capital Program grant (the Science Center RACP grant) between the Commonwealth of Pennsylvania and Lackawanna County (grantee) to construct a new science center on the University s campus. The Science Center RACP grant construction budget is approximately $55,094,000. The Science Center RACP grant requires the University to provide at least $45,094,000 in private matching funds for the construction of the science center. As of May 31, 2012, approximately $55,094,000 of eligible RACP grant construction costs were incurred, resulting in a RACP grant receivable of $1,749,612. No allowance was established for this receivable as of May 31, The University is a sub-grantee of a $1,000,000 Redevelopment Assistance Capital Program grant (the Mulberry Street Corridor RACP grant ) between the Commonwealth of Pennsylvania and Lackawanna County (grantee) to enhance the Mulberry Street corridor between Madison Avenue and North Webster Avenue on the northeast side of the University s campus. The Mulberry Street Corridor RACP grant budget is approximately $2,460,000. The RACP grant requires the University to provide at least $1,460,000 in private matching funds for the corridor enhancement. As of May 31, 2012, approximately $1,502,000 of eligible RACP grant construction costs were incurred, resulting in a RACP grant receivable of $603,806. No allowance was established for this receivable as of May 31,

17 NOTE F - CONTRIBUTIONS RECEIVABLE Unconditional promises to give at are expected to be realized in the following periods: One year or less $ 2,296,706 $ 1,777,172 Between one year and five years 1,564,690 3,497,198 More than five years 2,867,661 1,730,935 6,729,057 7,005,305 Discount to present value (371,203) (549,686) Allowance for uncollectible amounts (864,870) (811,306) Total $ 5,492,984 $ 5,644,313 NOTE G - STUDENT LOANS RECEIVABLE The University makes uncollateralized loans to students based on financial need. Student loans are funded through Federal government loan programs. At, student loans represented 0.7% and 0.8% of total assets, respectively. At May 31, federal student loans consisted of the following: Federal Perkins Loan Program $ 3,803,051 $ 4,377,244 Federal Nursing Student Loan Program 33,866 47,004 3,836,917 4,424,248 Less allowance for doubtful accounts Beginning of year balance (492,770) (522,848) Decreases 51,518 30,078 End of year balance (441,252) (492,770) Student loans receivable (net) $ 3,395,665 $ 3,931,478 The University participates in the Perkins and Nursing Student federal revolving loan programs. The availability of funds for loans under these programs is dependent on reimbursements to the pool from repayments on outstanding loans. Funds advanced by the Federal government of approximately $2,842,000 and $2,915,000 at May 31, 2012 and 2011, respectively, are ultimately refundable to the government and are classified as liabilities in the statements of financial position. Outstanding loans cancelled under the programs result in a reduction of the funds available for loan and decreases in the liability to the Federal government. 17

18 NOTE G - STUDENT LOANS RECEIVABLE - Continued At, the following amounts were past due under student loan programs: 1-60 days days 90+ days Total May 31, past due past due past due past due 2012 $ 8,876 $ 1,355 $ 518,155 $ 528, ,101 1, , ,523 Allowances for doubtful accounts are established based on prior collection experience and current economic factors which, in management s judgment, could influence the ability of loan recipients to repay the amounts per the loan terms. Amounts due under federal loan programs are guaranteed by the government. NOTE H - INVESTMENTS All investments of endowment and quasi-endowment funds are pooled on a fair value basis. Each individual fund subscribes to or disposes of units of the pool on the basis of the per-unit fair value at the beginning of the month in which the transaction takes place. At May 31, 2012, the pool consisted of 215, units. Each unit had a fair value of $ at May 31, The fair value of each unit decreased by $39.84 during the year ended May 31, The following tabulation summarizes changes in relationships between cost and fair value of the pooled net assets: Number of Fair value in excess of cost Year ended units Fair value Cost May 31, , $ 125,153,952 $ 117,740,431 $ 7,413,521 $ - May 31, , ,880, ,389,827 19,490,977 19,490,977 May 31, , ,506, ,790,397-3,716,377 Change in unrealized (losses) gains (12,077,456) 15,774,600 Realized gains for the year, net 1,928,884 3,596,581 Total (losses) gains for the year, net $(10,148,572) $ 19,371,181 The interest and dividend income yield based upon the average fair value of pooled assets amounted to approximately 1.64% and 1.97% in 2012 and 2011, respectively. 18

19 NOTE H - INVESTMENTS - Continued The following is a summary of the total net (losses) gains on investments resulting from investment activity during the years ended : Total (losses)/gains in pooled investments for the year, net $(10,148,572) $ 19,371,181 Change in unrealized (losses)/gains for the year not included in pooled investments, net (137,329) 692,758 Realized (losses)/gains for the year not included in pooled investments, net (82,345) 25,191 Net (loss)/gain for the year on securities not included in pooled investments, net (219,674) 717,949 Net (losses)/gains for the year per statements of activities $(10,368,246) $ 20,089,130 NOTE I - LAND, BUILDINGS AND EQUIPMENT Land, buildings and equipment at consisted of the following: Land and land improvements $ 39,569,534 $ 35,446,378 Buildings 296,915, ,113,295 Equipment 41,702,022 36,389,465 Buildings financed by federal grants 21,017,728 21,017,728 Construction in progress 5,369,682 88,083, ,573, ,050,037 Accumulated depreciation (108,113,720) (97,751,913) Accumulated depreciation related to buildings financed by federal grants (16,529,807) (15,661,702) $ 279,930,462 $ 247,636,422 The University s Board approved a long-term plan to demolish two academic buildings within the next three fiscal years to clear land for future capital projects. The buildings remaining useful lives are in excess of their expected demolition dates. In accordance with its accounting policy for impairment of long-lived assets, the University altered the useful lives of these buildings to coincide with their expected demolitions resulting in an accelerated depreciation expense of $191,000. The accelerated depreciation expense is included in Unrestricted Instruction Operating Expenses within the Statement of Activities during the year ended May 31, Depreciation expense was $12,721,808 and $9,476,363 for the years ended, respectively. 19

20 NOTE I - LAND, BUILDINGS AND EQUIPMENT - Continued During the years ended, the University disposed of assets of $1,630,369 and $1,899,689, respectively, and accumulated depreciation of $1,535,236 and $1,644,308, respectively. A loss of $68,614 and $255,381 was recognized for the years ended, respectively. Capitalized interest was $777,289 for the year ended May 31, Capitalized interest was $2,262,777 for the year ended May 31, NOTE J - DEPOSITS AND DEFERRED INCOME In September 2007, the University entered into a 20-year service management agreement under which it received an unrestricted grant of $3,500,000 for use in furthering the University s educational mission. This grant is to be amortized on a straight-line basis until 2027 and is contingent upon the continuation of the agreement during the life of the grant. The unamortized balance as of was $2,625,000 and $2,800,000, respectively. In February 2009, the University entered into a second 20-year service management agreement and received an unrestricted grant of $1,600,000. The grant is to be amortized on a straight-line basis through 2028 and is contingent upon the continuation of the agreement. The unamortized balance as of was $1,326,667 and $1,406,667, respectively. In April 2012, the University entered into a third 16-year service management agreement for an unrestricted grant of $1,500,000. The grant is to be amortized on a straight-line basis through 2027 and is contingent upon the continuation of the agreement. The grant was included in contributions receivable at May 31, 2012 and no allowance was established for this receivable. The unamortized balance of the grant at May 31, 2012 was $1,406,250. NOTE K - SPLIT-INTEREST AGREEMENTS The University has several irrevocable charitable remainder annuity trusts (split-interest agreements), with specified distributions to be made to a designated beneficiary or beneficiaries over the trusts terms. Upon termination of the trusts, the University will receive the assets remaining in the trusts. The assets are recorded at fair value when received, and the liability to the donor s beneficiary is recorded, using a discount rate of return at the date of gift. The liability represents the present value of the estimated future payments to be distributed over the beneficiary s expected life. The fair value of the assets as of was $3,826,929 and $3,667,618, respectively, and is included in investments on the statements of financial position. 20

21 NOTE L - OPERATING AND CAPITAL LEASES 1. Operating Leases Minimum future rental commitments for equipment under long-term leases to third parties as of May 31, 2012 are as follows: Year ending May 31, 2013 $ 369, , , , $ 648,993 Rental expense under all leases classified as operating leases for the years ended was approximately $305,838 and $125,716, respectively. 2. Capital Leases Leased property under capital leases by property class at May 31, 2012 is as follows: Property Class Equipment $ 576,752 Less: accumulated depreciation (5,892) $ 570,860 The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of May 31, Year ending May 31, 2013 $ 155, , , , ,496 Thereafter 6,226 Total minimum lease payments 505,427 Less: amount representing interest (8,640) Present value of net minimum lease payment $ 496,787 21

22 NOTE M - LONG-TERM DEBT Long-term debt at is as follows: Pennsylvania Higher Education Facilities Authority - University Revenue Bonds, Series 1999 E3 (a) Original issue $10,000,000; interest determined by weekly process remarketing at the lowest rate of interest based upon the prevailing market conditions not to exceed 12.00%. Interest rates at May 31, 2012 and 2011 were 0.18% and 0.18%, respectively; principal due in annual installments on November 1, varying from $2,400,000 to $2,100,000. The bonds mature in $ 6,900,000 $ 9,200,000 Pennsylvania Higher Education Facilities Authority - University Revenue Bonds, Series 2002 K1 (b) Original issue $6,400,000; interest determined by weekly process remarketing at the lowest rate of interest based upon the prevailing market conditions. Interest rates at were 0.23% and 0.21%, respectively; principal due in annual installments on November 1, 2015, increasing from $200,000 to $2,800,000. The bonds mature in ,400,000 6,400,000 Pennsylvania Higher Education Facilities Authority - University Revenue Bonds, Series A of 2006 (c)(d) Original issue $33,920,000; interest at a fixed rate ranging from 4.00% to 5.00% depending on term of bond; principal due in annual installments on November 1, 2019 increasing from $2,450,000 to $2,935,000. The bonds mature in ,284,113 34,302,959 Pennsylvania Higher Education Facilities Authority - University Revenue Bonds, Series B of 2006 (c)(d) Original issue $22,205,000; interest at a fixed rate ranging from 4.00% to 5.00% depending on term of bonds; principal due in annual installments on November 1, 2013 increasing from $790,000 to $5,160,000. The bonds mature in ,592,707 22,661,215 Scranton-Lackawanna Health and Welfare Authority - University Revenue Bonds, Series 2007 (e) Original issue $30,000,000; interest at a fixed rate ranging from 4.50% to 5.00% depending on the term of bonds; principal due in annual installments on November 1, 2023 increasing from $1,105,000 to $5,425,000. The bonds mature in ,369,420 30,393,384 22

23 NOTE M - LONG-TERM DEBT - Continued Pennsylvania Higher Education Facilities Authority - University Revenue Bonds, Series 2008 (f) Original issue $11,100,000; interest at a fixed rate ranging from 4.50% to 5.00% depending on the term of bonds; principal due in annual installments on May 1 ranging from $1,740,000 to $1,140,000. The bonds mature in $ 2,959,358 $ 4,715,929 City of Wilkes-Barre Finance Authority - University Revenue Bonds, Series 2010 (g) Original issue $65,000,000; interest from 2.00% to 5.00% depending on the term of bonds; principal due in annual installments on November 1 increasing from $520,000 to $9,410,000. The bonds mature in ,179,175 67,784,367 Subtotal 170,684, ,457,854 University Revenue Bonds, net original issue premium (3,889,773) (4,182,854) Bonds payable $ 166,795,000 $ 171,275,000 (a) The University Revenue Bond Series of 1999 are collateralized by a letter of credit which expires on March 31, There are no amounts outstanding as of. (b) The University Revenue Bond Series of 2002 K1 are collateralized by a letter of credit which expires on November 9, The University is currently negotiating to extend the letter of credit. In the event the letter of credit is not renewed and the University Revenue Bonds Series of 2002 K1 cannot be remarketed after November 9, 2012, the bonds would become a current obligation of the University and $6,400,000 would be due in There are no amounts outstanding on the letter of credit as of May 31, 2012 and (c) The University Revenue Bonds, Series A of 2006 were issued to provide funds for various capital projects, including a new campus center. The University Revenue Bonds, Series B, C, D, and E of 2006 were issued to provide funds for the refunding of the outstanding balances of the University Revenue Bonds, Series of 1988; University Revenue Bonds, Series 1997; University Revenue Bonds, Series 2000; and University Revenue Bonds, Series (d) A Bond Reserve Fund equal to the maximum annual debt service on the University Revenue Bonds, Series A of 2006 and Series B of 2006 is included in the investments on the statements of financial position. The University must achieve annual net revenues as defined in the indenture. (e) A Bond Reserve Fund equal to the maximum annual debt service on the University Revenue Bonds, Series 2007 is included in investments on the statements of financial position. The University must achieve annual net revenues as defined in the indenture. 23

24 NOTE M - LONG-TERM DEBT - Continued (f) The University Revenue Bonds, Series 2008 were issued to provide for the refunding of all outstanding balances of the University Revenue Bonds, Series C and D of (g) The University Revenue Bonds, Series 2010 were issued to provide funding for the construction of the campus science center and two mixed use residence halls. Principal payments, including sinking fund payments, due on bonds payable as of May 31, 2012 are as follows: 2013 $ 4,660, ,865, ,925, ,135, ,380,000 Thereafter 141,830,000 Total $ 166,795,000 NOTE N - PENSION AND POST-RETIREMENT LIABILITY Substantially all of the University s full-time employees are covered by various defined contribution pension plans. The University s contributions under the plans are based on salary levels and are subject to a maximum annual contribution per employee. Contributions to the pension plans are made as payroll expenditures are incurred. Pension expense for the years ended was $4,981,554 and $4,802,135, respectively. During 2007, the University entered into a defined benefit window retirement plan for faculty members who were retiring from 2007 to Under this plan, the University paid one year s salary to the participants. As part of the agreement, the University provides certain health benefits upon retirement. The plan resulted in a liability in 2012 and 2011 of $2,332,799 and $2,252,030, respectively. The University recorded future payments of health benefits at their present value, resulting in expense of $80,769 and $165,044 in 2012 and 2011, respectively. During 2011, the University entered into a defined benefit window retirement plan for staff members who are retiring from 2011 to Under the plan, the University pays one year s salary to the participants. The salary portion of the plan resulted in a liability in 2012 and 2011 of $529,568 and $1,788,939 respectively. The University incurred an expense of $1,788,939 to establish the salary portion of this plan in As part of the agreement, the University provides certain health benefits upon retirement. The health benefits portion of the plan resulted in a liability in 2012 and 2011 of $602,589 and $853,614, respectively. The University recorded future payments of health benefits at their present value, resulting in expense of $80,769 and $165,044 in 2012 and 2011, respectively. 1. Reconciliation of Benefit Obligation, Plan Assets and Funded Status The University recognizes the over-funded or under-funded status of defined benefit pension and post-retirement plans as assets or liabilities in its statement of financial position and recognizes changes in that funded status in the year in which the changes occur through changes in unrestricted net assets. 24