ML11297A043

Compliance Submissions, Self Guarantee Agreement Pursuant to 10 CFR Part 50, 10 CFR Part 70 and NUREG-1757, Vol. 3

ML11297A043
Person / Time
Site:	07000938, MIT Nuclear Research Reactor
Issue date:	10/12/2011
From:	Stone T Massachusetts Institute of Technology (MIT)
To:	Alexander Adams Office of Nuclear Material Safety and Safeguards
References
NUREG-1757, V3
Download: ML11297A043 (61)

Text

iir MASSACHUSETTS INSTITUTE OF TECHNOLOGY EXECUTIVE VICE PRESIDENT AND TREASURER 77 Massachusetts Avenue, Building 3-221 V/4* Fe'DE*

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Cambridge, MA 02139-4307 Phone 617-253-1882 October 12, 2011 U.S. Nuclear Regulatory Commission Office of Nuclear Material Safety and Safeguards 11555 Rockville Pike 1 Whiteflint North Rockville, Maryland 20852 Attention: Alexander Adams Re: Compliance Submissions, Self Guarantee Agreement Pursuant to 10 CFR Part 50, 10 CFR Part 70 and NUREG-1757, Vol.3

Dear Mr. Adams:

In my capacity as the Executive Vice President and Treasurer of the Massachusetts Institute of Technology ("MIT"), a nonprofit university, I serve as MIT's Chief Financial Officer. This letter is in support of MIT's use of the self-guarantee financial test to demonstrate financial assurance, as specified in 10 CFR Part 50 and 10 CFR Part 70, as ongoing compliance with MIT's Self-Guarantee Agreement, dated May 3, 2010 (the "Agreement"), and approved by the Nuclear Regulatory Commission on July 16, 2010.

In order to demonstrate ongoing compliance with the Agreement and 10 CFR Part 50 and 10 CFR Part 70, and MIT's ability to self-guarantee the decommissioning of the following facilities owned or operated by MIT, the current cost estimates or certified amounts for decommissioning each facility, so guaranteed, are shown below, along with their calculation (if applicable), and supporting attachments are enclosed:

Certified Amounts or Name of Facility License Number Location of Facility Current Cost Estimates MIT SNM-986 77 Massachusetts Ave.

$1,125,000.00 Cambridge, MA 02139 MIT Research Reactor R-37 138 Albany St.

$32,220,000.00 Cambridge, MA 02139 A.

License No. SNM-986 Based upon the applicable quantities of special nuclear materials stored at this facility, in accordance with 10 C.F.R. 70.25(d), MIT must guarantee the statutory minimum of $1,125,000 for the proper disposal of these materials.

B.

License No. R-37

1.

Justification for 2005 $23M Decommissioning Estimate:

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Page 3 MIT Self-Guarantee, Decommissioning Expenses License Nos. R-37 and SNM-986 Duke Engineering provided MIT with a cost estimate of $23.OM. That study was completed in November 2001. It included a 10% contingency. Inflation was quite low and for some sectors of the economy slightly negative for the years 2001-2005. Accordingly, for our 2006 submittal, we used the uninflated detailed Duke estimate which was $23.0M. For 2008, we provided an estimate of $29.8 million, based on separate inflation factors applied against the labor costs, using the NUREG-1307, Rev. 12, Page D.1, Example 2,(Northeast Region) of 1.28 (labor) and 1.42 (burial).

2.

Decommissioning Estimate for 2012:

For 2012, we estimate the decommissioning cost of the MIT Reactor to be $32.2 million. This figure is obtained by taking the $23.OM Duke estimate as a base and inflating it for both the cost of labor and burial as shown below:

Duke Study NUREG Inflation 2002 Cost

% of Total Model Inflator 2012 Cost Labor Portion

$20,470,000 890/0 Labor 1.37

$28,043,900 Burial Portion

$ 2,530,000 11°/

Burial 1.65

$ 4,174,500 Total

$23,000,000 100%

I $32,218,4001 Please note that labor was 89% of the total estimate and burial was 11%. The inflator figures are obtained from NUREG-1307, Rev. 14, Page D.1, Example 2 (Appendix D). We take the date of completion of the Duke study to be 2002 as this is closest to the actual date of November 2001. For labor, the cost index is 2.41 in 2010 and 1.862 for 2002. We assume that cost increases are linear through 2012 and obtain:

(1.862+((2.41-1.862)/(2010-2002))(2012-2002)) = 2.547 The inflation factor for 2012 as compared to 2002 is therefore 2.547/1.862 or 1.37. Hence, the labor portion of the cost is ($20.5M)(1.37) or $28.0 million. For burial, the same approach is used to yield a factor of 29.63, an inflation factor of 1.65 and a cost of $4.2 million (Please refer to Attachment 1).

I hereby certify that MIT is currently a going concern, and that it possesses positive tangible net worth in the amount of $12.1 billion, as of the fiscal year ending on June 30, 2011. This figure is derived from MIT's independently audited, year-end financial statements and footnotes for the latest completed fiscal year, which is enclosed. MIT's independent auditor, PricewaterhouseCoopers, has included its review of this letter, which is also enclosed.

MIT is not required to file a Form 10-K with the U.S. Securities and Exchange Commission for the latest fiscal year.

MIT satisfies the following self-guarantee test:

Page 3 MIT Self-Guarantee, Decommissioning Expenses License Nos. R-37 and SNM-986

1. Current bond rating of most recent uninsured, uncollateralized, and unencumbered issuance of this institution:

Rating: Aaa Name of rating service: Moody's Investors Service

2. Date of issuance of bonds:

May 18, 2011

3. Description and date of maturity of bonds:

Amount Interest Rate Maturity Date Description

$750,000,000 5.60%

May 18, 2111 Taxable Series B

4. Is the rating specified on line 1 "A" or better?

Yes I hereby certify that the content of this letter is true and correct to the best of my knowledge.

Signature

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Name:

Theresa M. Stone

Title:

Executive Vice President and Treasurer (Chief Financial Officer)

Date:

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Enclosures

ATTACHMENT 1 NRC Decommissioning Estimate 2012 Duke Study (2002) 23,000,000.00 Labor Portion 20,470,000.00 Burial portion 2,530,000.00 89%

11%

NRC Inflation Model 2012 Labor Burial Inflator 1.37 1.65 32,183,000.00 28,000,000.00 4,183,000.00 LABOR BURIAL 2006 2.384 1.28 25.4385 1.42 2012 2.547 1.37 29.6345 1.65

Appendix D Representative Examples of Decommissioning Costs for 2000 through 2010 In Section 3.4 of this revision and the four previous revisions ofNUREG-1307, decommissioning costs for four typical situations were developed. Results of these calculations are summarized below.

Example 1 (LLW Direct Disposal)

Reactor Type: PWR Thermal Power Rating: 3400 MW thermal Location of Plant: Northwest Compact LLW Burial Location: Washington 2000 2002 2004 2006 2008 2010 1.612 1.775 1.984 2.11 2.23 2.29 1.016 0.985 1.483 2.152 2.746 2.139 2.223 3.634 5.374 6.829 8.283 8.035

$175

$219

$280

$331

$381

$371 BD Decommissioning Cost (Millions)

Example 2 (LLW Direct Disposal)

Reactor Type: PWR Thermal Power Rating: 3400 MW thermal Location of Plant: Atlantic Compact LLW Burial Location: South Carolina (Atlantic Compact) 2000 2002 2004 2006 2008.

2010 1.719 1.862 2.070 2.21 2.33 2.41 1.016 0.985 1.483 2.152 2.746 2.139 17.922 17.922 19.500 22.933 25.231 27.292

$545

$555

$612

$710

$779

$824 B,

Decommissioning Cost (Millions)

Example 3 (LLW Disposition by Waste Vendors)

Reactor Type: PWR Thermal Power Rating: 3400 MW thermal Location of Plant: Atlantic Compact LLW Burial Location: South Carolina (Atlantic Compact) 2000 2002 2004 2006 2008 2010 1.719 1.862 2.070 2.21 2.33 2.41 1.016 0.985 1.483 2.152 2.746 2.139 7.878 9.273 7.790 8.600 9.872 12.280 E.

B, Decommissioning Cost (Millions)

$313

$355

$341

$379

$425

$477 D. I

U.S. PUBLIC FINANCE HIGH PROFILE NEW ISSUE Moody's Assigns Aaa Rating To The Massachusetts Institute Of Technology's

$500 Million Of Taxable Revenue Bonds, Series B; Outlook Remains Stable Aaa And Aaa/VMIG 1 Ratings Affirmed; MIT Will Have $2 Billion Of Rated Debt Outstanding baUnsecured SSecurity:

Bond Amount.

Sale Date Use of Proceeds:

I Unsecured j general obligation

.A i

S5it) nillinr Vanous capital improvement, Expendable Financial S7.2 Resources I

billion Pro-Forma Direct Debt S2 4 (including $750 million of i

billion Series BBonds)

Unrestricted Monthly

-. 4 Liquidity billion Expendable Financial I 3.0 times Resources to Operations Operating Cash Flow Margin i

16.4 Three-Year Average Debt 67 times I i Service Coverage I

Monthly Days Cash on Handri 377.5 days Reliance on Grants and i '!5 Contracts Analyst Contacts:

Moody's Investors Service has assigned a Aaa rating to the Massachusetts Institute of Technology's (MIT) Taxable Revenue BondsSeries B. MIT is globally recognized for its prominent academic and research reputation and is located in Cambridge, Massachusetts, USA. *The university is authorized to issue up to $750 million, but may choose to issue as little as $500.million. At this:time, we have also affirmed the Aaa and

• Aaa/VMIG I ratings assigned to the university's outstanding debt, asdetailed in the RATED DEBT section. The rating outlook is stable.

Summary Rating Rationale MIT's Aaa rating and stable outlook reflect the university's market position as a global market leader in science and engineering education and its preeminent research reputation, exceptionally large balance sheet which provides strong coverage of debt and operations, and history of extraordinary philanthropic support and operating surpluses. The university's long-term rating also incorporates MIT's high reliance on sponsored research, the need to sustain strong philanthropic gifts and investment returns, as well as its significant capital investment associated with its MIT 2030 development framework. MIT's ample liquid assets and capable management team support the highest short-term ratings based on its self-liquidity program.

NEW YORK Karen Kedem Vice President -Senior Analyst Kaien.Kedemomuodys.com 1,212.553.1653 Strengths 1.2122.553.3614 Global market position as an elite science and engineering university with a preeminent research profile; Exceptionally large balance sheet providing strong coverage of pro-forma debt and operations; BOSTON Kimberly S. Tuby 1.617.204.5638 Vice Presideot - SeniorkAualvst Kimnberly.Tuby@nroodys.corn

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U.S. PUBLIC FINANCE I> History of extraordinary philanthropic support; I> Consistently healthy operating performance expected to continue due to strong oversight and fiscal stewardship; Challenges

)> Sustaining a long track-record of superior investment performance to support expense growth,

> High reliance (50% of operating revenues) on sponsored research, particularly from U.S. federal government agencies, which is expected to be pressured in the near-term; Significant long-term development framework for campus facility expansion and modernization, requiring sophisticated management of funding sources over the long-term.

Detailed Credit Discussion USE OF PROCEEDS: Bond proceeds will be used to finance various capital improvements and pay the costs of issuance.

LEGAL SECURITY: Unsecured general obligation of the Institute INTEREST RATE DERIVATIVES: MIT has two interest rate swap agreements related to its Series J variable rate bonds, each with a notional amount of $125 million. Swap payments are unsecured general obligations of the Institute. One of the swaps is with Merrill Lynch Capital Services and guaranteed by Merrill Lynch & Co., Inc. (rated A2/P-1) and expires on June 5, 2011. The second swap is with Deutsche Bank AG (rated Aa3/P-1) and expires on June 5, 2031. Under both swap agreements, MIT pays a fixed rate and receives a variable rate based on SIFMA. There are no automatic termination events and the swap can be terminated by either party if the other party's credit senior unsecured credit rating is below A3. MIT has the right to terminate the agreement anytime, but the counterparty does not. On the second swap, due June 5, 2031, the Institute must post collateral if its rating is A3 or below and the market value of the swap is a liability to MIT of at least $10 million.

The combined market valuation as of May 1,2011 was a liability to the university of $32.7 million.

DEBT STRUCTURE: Following the issuance of up to $750 million of fixed rate taxable bonds, Series B, a relatively moderate 18% of debt outstanding will be variable rate with a demand feature. MIT's variable rate debt with a demand feature includes $250 million of Series J-1 and J-2 bonds and $176.5 million of notes payable under a bank line of credit. The current borrowing is expected to have a notably long maturity of up to 100 years, but it is expected that the bullet payments will be staggered so that the earliest payment would be in 30 years. The university will have the ability, though at a significant cost, to call the bonds before the scheduled maturity dates through a "make whole" provision. The "make whole" provision allows MIT to call a portion or all of the bonds at any time for the greater of par or a premium based on treasuries plus a spread. The use of taxable debt also provides flexibility in the use and investment of bond proceeds relative to tax exempt debt.

Market Position/Competitive Strategy: Global Reputation As A Science And Engineering University With A Large And Prominent Research Profile The Massachusetts Institute of Technology is a global market leading university with a premier niche as a research intensive science and engineering university. We expect that MIT's extraordinarily strong 2

MAY 9. 2011 HIGH PROFILE NEW ISSUE MOODY'S ASSIGNS Aaa RATING TOTHI MASSA(:.IUSTTS INSTITUTE OF TECHNOi.OCY'S

$500 MILLION OF TAXtSBLE BONDS, SERIES B: OUTLOOK REMAINS SARI.BE

N M U.S. PUBLC FINANCE academic and research reputation will continue to enable the university to attract the highest quality students and faculty as well as garner strong research grant awards. MIT is a large university serving more than 10,400 full-time equivalent students in fall 2010, 60% of whom are graduate students.

MIT's undergraduate demand metrics highlight its superior market position, with the university accepting 9.6% of freshmen applicants based on preliminary fall 2011 data. Moody's anticipates that yield on accepted students will be in line with recent years, in the mid-sixty percent range. In addition, the university's geographically diverse student population, with 8% of undergraduate enrollment and 38% of graduate enrollment from outside of the United States, demonstrates MIT's strong global standing. The university's global presence is aided by its free web-based course offerings. This program, known as Open Courseware (OCW), is a program through which MIT provides its educational materials online free of charge, and it has reached over 100 million users within only one decade of its implementation.

Like many of its peers, MIT has chosen not to exercise its considerable tuition pricing power based on its superior demand. Demonstrating its commitment to admit the best students regardless of ability to pay, MIT covers the full cost of tuition for all undergraduate students with family income below

$75,000. In addition, MIT does not consider home equity as a source of payment for families earning less than $100,000. Approximately 28% of the undergraduate enrollment is eligible for free tuition based on the expanded aid policy. The combined changes, implemented in fall 2008, resulted in a marginal increase in the tuition discount rate to 49% from 46%. The university remains committed to providing student aid and will complete a targeted five-year Campaign for Students, which is raising funds for various student-related purposes including financial aid, at the end of fiscal 2011, having raised $550 million to date compared to a $500 million goal. Student charges, including tuition and auxiliary services, represent a modest 12.6% of Moody's calculated operating revenue for FY 2010.

MIT's primary competitors are all highly rated (Aaa or Aa) universities, including Stanford University, Harvard University, Yale University, Princeton University, Carnegie Mellon University, California Institute of Technology, and Columbia University.

MIT maintains an extremely strong research profile, particularly since it does not have a medical school, with nearly $1.2 billion in direct research expenditures in FY 2010. Approximately half of the university's research is associated with the ownership and operation of a federally funded research and development facility, Lincoln Laboratory, which focuses on advanced electronics. MIT has operated the lab since its inception in 1951 and currently has a five-year contract with the Department of Defense which expires in March 2015. Management reports limited competition for this contract.

Excluding Lincoln Laboratory, research funding sources are relatively diverse and include 23% from Health and Human Services, 17% from Department of Defense, 12% from Department of Energy, 15% from corporations, 11% from National Science Foundation, 8% from non-profits, 5% from foreign governments, 5% from National Aeronautics and Space Administration, 2% from other federal, and 2% from internal sources. While federal funding for research will be challenged in the near-term, we expect that universities with large prominent research profiles will continue to secure ongoing grant awards. Management reports that growth of non-federal sources, particularly in regards to international research collaboration, has more than offset the slower pace of funding from US federal agencies. MIT has developed relationships overseas to provide research and development expertise, including the Singapore-MIT Alliance for Research and Technology, which is projected to be a $350 million program over five years. MIT's nearly $580 million in unspent grant awards combined with continued increases in grant applications are expected to help maintain MIT's robust research profile.

3 MAY 9, 2011 HlIGH PROFILE NEW ISSUE MOODY'S ASSIGNS An RATING TO THE MASSACHUSETTS INSTITUTE Of TECHNOl OCY'S SSOO MILLION OF l AXABLE BONDS, SERIES B: OU fLOO" REMAINS S.ARLE

L)S IU B LU ý C INA N C FIGURE 1 Preeminent Reputation Fuels Growth of Research Expenditures x

Campus Federal w*uss Campus Non Federal Broad Federal Broad Non Federal N

Defense Labs Federal Lincoln Labs Federal Lincoln Labs Non Federal Total Research CS

$1,600 Broad Cancer Institute

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• Fiscal 2010 is the base year for constant dollars cited above Research activity remains strong despite the spin-off of a research institute. In FY 2010, the Broad Institute (rated A1), previously a unit of MIT, became a separately incorporated entity. Broad's research activity accounted for $178 million of research expenditures in FY 2009. Management reports that FY 2011 research expenditures are projected to exceed FY 2009 levels during which time the Broad Institute was incorporated. MIT has spun-off other independent research organizations including the Whitehead Institute for Biomedical Research (rated Aal) and Draper Laboratory (rated Aa3). These organizations maintain strong affiliations and close collaboration with the university, including some faculty with tenured appointments on the MIT faculty. Management does not anticipate additional separate incorporations of other research institutes in the near-term.

Operating Performance: Consistently Healthy Operating Performance Expected To Continue Due To Strong Fiscal Stewardship We expect MIT's history of healthy operating performance will continue due to strong fiscal stewardship combined with revenue growth driven by its superior market position. In FY 2010, operating cash flow margin reached a healthy 16.4%, averaging 14.4% over a three year period. Cash flow provided a strong 6.7 times coverage of $59.2 million of annual debt service during the same time period, though much of the university's debt is non-amortizing. Average debt service coverage remains sound covering $334 million of pro-forma maximum annual debt service (FY 2031) by an average of 1.5 times, assuming the largest bullet payment of $250 million. MIT's sources of revenue have remained relatively constant over time, with the university highly reliant on sponsored research revenue (including income associated with the Lincoln Laboratory). In FY2010, Moody's calculation of operating revenue included 51.5% from sponsored research, 20% from investment income, 12.6%

from student charges, 7.2% from gifts, and 8.8% from other sources. As noted above, the diversity of sources of research awards helps insulate the university from variability in any single funding source.

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The university's ongoing monitoring of operating performance, use of sensitivity analysis, and willingness to take actions to address budgetary pressure should contribute to MIT's long-term financial health. In response to the expected reduction in investment income related to the lagged effect of market declines on the university's endowment spending policy, MIT implemented and continues to pursue expense cuts. Management reports that the Institute is reviewing its endowment spending policy to evaluate how best to control for volatility experienced during the financial crisis.

Over fiscal years 2010 and 2011, MIT cut over $120 million in expenses compared to FY 2009 to absorb an 18% reduction in investment income implemented in FY 2011. Expense reductions were achieved through a combination of deferred capital and programmatic investments, moderation in compensation increases, and other savings initiatives. The university anticipates that it will achieve additional efficiencies and further reduce expense as it implements the suggestions of an Institute-wide task force. Notable cost-saving initiatives include the centralization of procurement to achieve greater economies of scale, increased automation of processes across campus, energy conservation projects, and improved space utilization.

Balance Sheet Position: Despite Significant Increase In Debt, Robust Balance Sheet Expected To Continue To Provide Ample Cushion For Debt And Operations MIT's robust balance sheet should continue to provide an ample cushion for debt and operations, despite an increase of as much as 40% in debt associated with the full authorized $750 million of Series B bonds, This conclusion is driven by the expectation of continued extraordinary philanthropic support, healthy operating surpluses, and long-term investment gains. As of the end of FY 2010, expendable financial resources (total net assets less permanently restricted endowment and property/equipment net assets) of $7.2 billion equaled 3.0 times the level of pro-forma debt and annual operating costs, assuming MIT issues $750 million of Taxable Revenue Bonds, Series B.

Incorporating the maximum authorized amount of the Series B issuance and $227 million of capitalized operating leases, expendable financial resources cover comprehensive debt by 2.7 times.

Moody's has reclassified $18.8 million of unrestricted net assets representing the overfunded defined benefit plan to permanently restricted net assets. Although these funds represent a long-term strength since MIT is likely to need to make fewer contributions to the plan compared to other organizations MAY 14, ?01i i1" HIO DR01 1 NI Vv SSLE MOOD"','AATICNA oaY RAJNT MO I11 MAYA(J'i IOW!.', I NrTIT0Tt 01 TTE 3'-NQh bY,v

$511) NWOI(iN 1~IAXABUl STIN!IISFRi~I ES I 0'1011 AII51

U.ý, PUB~LIC I N.ANCE with an underfunded pension, the funds cannot be used for any other purpose and therefore are more akin to permanently restricted endowment funds.

Bond proceeds will be used to finance a portion of the MIT 2030 development framework which calls for significant renewal of facilities and infrastructure, construction of additional research buildings, and continued strategic development of real estate. MIT 2030 includes approximately $1.5 billion for academic plant and $1.5 billion for real estate investments. In addition, management reports that they anticipate pursuing a significant capital upgrade to the facilities at their Lincoln Laboratory facility in Lexington, MA. Management expects that the borrowing for the Lab, which will be guaranteed by the federal government, will appear as a capital lease on its financial statements. Financing for Lincoln Laboratory is not expected for at least three years. MIT 2030 incorporates $770 million in gifts towards academic plant improvements. The timing of capital projects will depend on philanthropic support as well as availability of real estate investments. Following the issuance of the Series B bonds, management does not anticipate borrowing for on-campus academic and research projects for at least five years.

MIT's large portfolio of institutional real estate is excluded from Moody's calculations of financial resources because we do not expect the Institute to liquidate large portions of these holdings under normal operating conditions. However, in the highly unlikely event that the Institute were to enter an extended period of financial stress, the ability to tap these real estate holdings provides an additional material credit strength not shown in the financial resource ratios.

Continued extraordinary philanthropic support should enable MIT to continue to make strategic investments in plant and programs as well as bolster its balance sheet. During FY 2008-2010, gifts per student have averaged a strong $30,000. MIT recently reported the receipt of a substantial gift of the majority of the stock of the privately held Bose Corporation. Additional information on the value of the gift is not available at this time. MIT remains successful in its current fundraising strategy of conducting smaller targeted campaigns, such as the initiatives to support student financial aid or particular capital projects. MIT's last fundraising initiative, the Campaign for MIT, concluded in 2006 and raised $2.05 billion compared to a goal of $2 billion.

Strong Investment Oversight And Adequate Liquidity The Institute's endowment is managed by the Massachusetts Institute of Technology's Investment Management Company (MITIMCo), a wholly owned subsidiary of MIT which is responsible for approximately $12.4 billion in investment assets, including endowed, excess working capital, and retirement plan assets as of June 30, 2010. MITIMCo staff consists of a staff of approximately 50 investment professionals and support staff. The company has its own MITIMCo Board which reports to MIT's Executive Committee. The asset allocation of the managed assets at March 31, 2011 included approximately: 25% in hedge funds, 24% in private equity, 12% in real estate, 10% in long-only international equity, 8% in long-only domestic equity, 8% in real assets, 6% in fixed income, 5%

in long-only emerging market equity, and 2% in cash. Although Moody's has not received full disclosure of the university's investment holdings, based on the information that we have received we believe the long-term investment pool is well diversified among managers and funds and remains less than 5% inyested with any one manager. Based on FY 2010 data, unfunded capital commitments of

$1.9 billion represent approximately 23% of total cash and investments.

6 MAY 9, 201i HIGH PROFILE NEW ISSUE:'MOODY'S ASSIGNS Aaa RATING TO THE MASSACHUSETTS INSTITUTE OF TECI-NOLOGY"'

6500 MILLION OF TAXABLE BONDS. SERIES B: OU LOOk REMAINS STABLE

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2007 2008 2009 2010 MIT's recent investment performance has experienced less volatility than market averages. For example, in FY 2010 the endowment returned 10.2% relative to the National Association of College and University Business Officer's average of 12% and FY 2009 declines of 17.1% compared favorably to the industry average of 19%. Management reports an estimated growth in endowment assets in the range of 10-15% for the first nine months of fiscal 2011. The range of performance reflects MIT's high allocation to alternative investments which, the fair value for which are received on a lagged quarterly basis.

MIT currently maintains adequate liquidity within the endowment and its working capital to support its treasury function and ongoing operations. Our evaluation of the university's liquidity incorporates a number of potential calls on the liquidity of the Institute, including its self-liquidity debt, endowment spending requirements, private investment capital calls, and the general operating needs of the university. We note that MIT's debt structure is moderately conservative, with 18% of debt issued in a variable rate demand mode and an interest rate swap agreement which would only require collateral posting if the Institute's rating were lowered six or more notches. As estimated as of June 30, 2010, MIT could have up to $1.9 billion of private investment capital calls over multiple years. Based on Moody's calculations, management reports unrestricted cash and investments available to be liquidated within one month of nearly $2.4 billion which would provide 5.5 times coverage of demand debt and more than one year's worth of operating expenses (377.5 days monthly days cash on hand).

We expect that MIT will maintain sufficient liquidity relative to potential demands even as it, like peers, begins to invest longer-term. In addition, MIT holds highly liquid working capital assets held outside of the endowment. A substantial and sustained thinning of the Institute's liquidity relative to its needs could pressure the rating.

Ample Self Liquidity And Capable Management Support VMIG 1 Rating On Series J-1 And J-2 Bonds The highest short-term rating ofVMIG I on $250 million of Series J-1 and J-2 bonds is based on MIT's strong internal liquidity and treasury management. Discounted daily liquidity includes $376 million of funds in a 2a-7 money market fund, $520 million of U.S. Treasury and Agency securities,

$64 million in repurchase agreements, and $37 million in P-I rated banks as of March 31, 2010.

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Discounted daily liquidity provides strong coverage of nearly 4.0 times of the weekly variable rate demand bonds. The university also holds nearly $1.1 billion in readily saleable equity holdings (not discounted) that could be liquidated within a week's time. MIT has extensive treasury experience in managing its investment and debt portfolio, ensuring timely draws on available liquidity in the event of failed remarketings of the bonds.

Outlook The rating outlook remains stable reflecting expectations of MIT's continued superior academic and research reputation, strong philanthropic support, ample liquidity, and lack of additional borrowing plans for campus academic and research purposes for at least five years. We expect the Institute's strong global reputation in its market segments will, if anything, increase over time.

What Could Make The Rating Go Up Not applicable What Could Make The Rating Go Down Failure to sustain a strong liquidity position relative to potential liquidity needs; dramatic increase in leverage due to increased borrowing or severe investment losses; substantial and sustained deterioration in research profile or student demand Key Indicators (Fall 2010 Enrollment, FY 2010 financial data)

Total Full-Time Equivalent Enrollment:

10,429 Students Freshmen Selectivity:

10.1%

Freshmen Matriculation:

63.7%

Expendable Financial Resources:

$7.2 billion Pro-Forma Direct Debt:

$2.4 billion (including $750 million of Series B bonds)

Monthly Liquidity:

$2.4 billion Expendable Financial Resources to Pro-Forma Debt:

3.0 times Expendable Financial Resources to Operations:

3.0 times Operating Cash Flow Margin:

16.4%

Average Debt Service Coverage:

6.7 times Monthly Days Cash on Hand:

377.5 days Reliance on Sponsored Research (% of Operating Revenue):

51.5%

Reliance on Investment Income (% of Operating Revenue):

20.0%

B MAY 9, 2011 HH1 ROFIm.[ NFW ISSU"L MOODY'S ASSICNS Aa, RAETINO TO TI-Q MASSA0.I.j rYS INSTITUTE Or TECHiNO.LO)CV' S500 MILLION OF IAXABLL BONDS, SERIES B; O T I OOK RE MAINS SrABLL.

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TI' LMiC NAr'JCE Rated Debt Series I, K, L, M, N, 0: Aaa Series B (Taxable): Aaa Series J-I and J-2: Aaa/VMIG I (self-liquidity)

Contacts Massachusetts Institute of Technology: Israel Ruiz at 617-253-4495 or Allen Marcum at 617-324-7207 Underwriter: Barclays Capital, John Augustine at 212-526-5436 or Jim Costello at 212-526-5730 Principal Methodology Used The principal methodology used in this rating was Moody's Rating Approach for Private Colleges and Universities published in September 2002.

Regulatory Disctosures Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit.

q MAY W 20H1 IG PROCI ~i.

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$750 million Key Ratios Debt Outstanding ($'000) 1,053,489 1,078,234 1,335,393 1,735,843 1,728,526 2,421,654 Unrestricted Financial Resources ($'000) 2,957,245 3,581,109 3,683,062 2,598,950 2,908,566 2,927,407 Expendable Financial Resources ($'000) 7,541,501 9,119,241 9,320,054 6,852,342 7,228,259 7,247,100 Total Financial Resources ($'000) 9,296,304 11,884,461 12,029,633 9,003,632 9,349,038 9,349,038 Total Cash & Investments ($S000) 9,571,499 11,152,886 11,389,535 9,321,122 10,002,482 10,002,482 Monthly Liquidity ($000) 1,609,958 2,356,502 2,356,502 Annual Liquidity ($000) 3,120,803 3,536,338 3,536,338 Operating Revenue ($'000) 2,210,866 2,289,792 2,480,928 2,626,955 2,658,063 2,658,063 Total Expenses ($'000) 2,181,696 2,207,621 2,301,687 2,461,286 2,382,566 2,382,566 Total Gift Revenue ($'000) 232,472 332,874 385,952 303,890 246,580 246,580 Average Gift Revenue (3yr avg) ($'000) 179,965 222,337 317,099 340,905 312,141 312,141 Market Total Enrollment FTE 10,079 10,044 10,173 10,276 10,429 10,429 Total Enrollment that is Undergraduate (%)

40.6 41.2 40.6 41.0 40.9 40.9 Primary Selectivity (%)

13.3 12.5 11.9 10.7 10.1 10.1 Primary Matriculation (%)

66.2 68.7 66.0 64.0 63.7 63.7 Net tuition per student ($)

19,615 20,761 22,810 21,369 23,190 23,190 Total tuition discount (%)

46.6 47.0 45.6 49.7 49.1 49.1 Capital Ratios Unrestricted financial resources-to-direct debt (x)

Expendable financial resources-to-direct debt (x)

Total financial resources-to-direct debt (x)

Total cash & investments-to-direct debt (x)

Direct Debt-per-Student (S)

Direct debt-to-cash flow (x)

Debt to Operating Revenues (x)

Debt service to operations (%)

MADS to operations (%)

Variable Rate Exposure - before Swaps (%)

Monthly Liquidity to Demand Debt (%)

Annual Liquidity to Demand Debt (%)

2.81 7.16 8.82 9.09 104,523 7.11 0.48 3.3 5.6 32.0 3.32 8.46 11.02 10.34 107,351 5.56 0.47 2.8 5.6 34.0 2.76 6.98 9.01 8.53 131,268 4.59 0.54 2.1 5.3 18.7 1.50 3.95 5.19 5.37 168,922 5.97 0.66 2.4 11.4 24.6 377.5 731.7 1.68 4.18 5.41 5.79 165,742 4.56 0.65 2.5 11.8 24.7 552.5 829.1 1.21 2.99 3.86 4.13 232,204 6.38 0.91 2.5 14.0 17.6 552.5 829.1 Capital Spending Ratio (x) 1.72 1.55 2.56 2.39 3.73 3.73

.Capital Expenses to Operations (%)

5.5 5.1 4.8 7.3 6.8 6.8 Age of plant (number of years) (x) 5.50 6.58 7.08 6.99 8.47 8.47 Balance Sheet Ratios Unrestricted financial resources-to-operations (x) 1.36 1.62 1.60 1.06 1.22 1.23 Expendable financial resources-to-operations (x) 3.46 4.13 4.05 2.78 3.03 3.04 Total Financial Resources-to-Operations (x) 4.26 5.38 5.23 3.66 3.92 3.92 Monthly Days Cash on Hand (x) 251.5 377.5 377.5 Annual Days Cash on Hand (x) 487.6 566.5 566.5 Total Financial Resources-per-Student (S) 922,344 1,183,240 1,182,506 876,181 896,446 896,446 10 MAY 9.

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Return on net assets (%)

Return on financial resources (%)

Return on Cash and Investments (%)

Sources of Revenue Tuition and Auxiliaries (%)

Investment Income (%)

Gifts (%)

Grants and contracts (%)

Other (%)

1.3 1.6

-4.7 9.3 2.88 1.67 1.60 3.19 17,855 47.5 16.6 i6.0 10.2 3.6 2.1

-3.6 10.6 3.86 1.97 1.77 3.26 22,136 45.3 26.2 27.8 9.9 7.2 4.0 0.3 13.6 6.88 2.75 2.13 4.29 31,171 45.8 0.6 1.2 3.6 6.3 5.7 0.1 13.2 5.98 1.23 1.76 5.46 33,175 47.4

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20)11 Outlook for US H-igler Educ.tion, Ia n1i.lry 2011 (1299)3,9)

Pa <n n vi Methcd oIo c for.riva[Q mlgc and Unive To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

11 MAY 9, 2011 IHIGH PROFILE NEW ISSUE: MOODY'S ASSIGNS Aaa RATING TO TH[ MASSACHUSETTS INSTITUTE or TECHNO( OGY'S S500 MILLION OF TAXABLE BONDS, SERIES 3. OUTLOOK REMAINS S1 ABLE

ma'U.S.

PUBLIC FINANCE

, contact., conrinuedfrom pa'e o

Report Number: 133044 Analyst Contacts:

NEW YORK 1.212.553.1653 Author Editors Karen Kedem Kimberly Tuby

.John C. Nelson 1.212.553.4096 John C. Nelson M*anarong Director - Public Finance lofsn.N elson:

eoodvs.corn Production Associate David Dombrovskis

© 2011 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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INVESTORS SERVICE 1?

MAYT. 2011 HIGH PROFILE NEW ISSUE: MOODY'S ASSIGNS Aaa RATING TO THr MIASSACHIJSrTTS INSTITUTE OF TECHNOLOGY'S

$500 MILLION OF TAXABLE BONDS, SEvIiES B; OUILOOI REMAINS SIABLE

pwc Report of Independent Auditors To the Board of Trustees of Massachusetts Institute of Technology:

We have performed the procedures enumerated below, which were agreed to by Massachusetts Institute of Technology ("the Institute"), NRC MIT licenses SNM-986 and R-37, solely to assist you in complying with the Nuclear Regulatory Commission's financial assurance regulations, 1o CFR Part 50 and 1o CFR Part 70. Management is responsible for the Institute's compliance with those regulations.

This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose.

The procedures and associated findings are as follows:

1. Confirmed that the tangible net worth in the CFO letter agrees with total net assets contained in the Institute's financial statements for the year ended June 30, 2011, which we have audited in accordance with auditing standards generally accepted in the United States of America and have issued our report thereon dated September 15, 2011;

2.

Inquired of management as to the existence of any reconciling items between the CFO's Letter and the audited financial statements noting that there are none; and

3.

Mathematically check the totals in the accompanying schedule, including the current cost estimates of decommissioning for each facility listed per the CFO's letter.

No exceptions were noted.

We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on compliance with the, regulations. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

This report is intended solely for the information and use of management and the Board of Trustees of Massachusetts Institute of Technology and the Nuclear Regulatory Commission, and is not intended to be and should not be used by anyone other than these specified parties.

October 14, 2011 PricewaterhouseCoopers LLP, 125 High Street, Boston, MA 02110 T: (617) 530 500o, F: (617) 530 5001, www. pwc.com/us

Report of the Treasurer for the year ended June 30, 2011 i'IiT Massachusetts Institute of Technology

The Corporation 2010-2011 as ofJune 30, 2011 Chairman: John S. Reed*

President: Susan Hockfield*

Executive Vice President and Treasurer: Theresa M. Stone*

Vice President for Institute Affairs and Secretary: Kirk D. Kolenbrander Life Members Shirley A. Jackson; David H. Koch; Patrick j. McGovern; Robert A. Muh; Denis A. Bovin*;.James A. Champy*; Judy C.

Lewent; A. Neil Pappalardo*; Arthur Gelb; Edie N. Goldenberg; Robert M. Metcalfe; Kenan E. Sahin; John K. Castle; Charles M. Vlest; Susan E. Whitehead; Brian G. R. Hughes; Norman E. Gaut; L. Robert Johnson; ArthurJ. Samberg*;

Gururaj Deshpande; Barrie R. Zesiger*; James H. Simons; John A. Thain.

Members Thomas P. Gerrity; Mark P. Gorenberg; Scott P. Marks, Jr.; Marjorie M.T. Yang; Alan G. Spoon; Lawrence K. Fish; Da-vid D. Ho; Robert B. Millard*; Carly S. Fiorina; Anita K. Jones*; Martin Y. Tang; Raymond C. Kurzweil; Kenneth Wang; David A. Berry; James A. Lash; Paul E Levy; Megan J. Smith; Henri A. Termeer; Chiquita V. White*; 0. Reid Ashe, Jr.;

John W Jarve; Harbo P. Jensen; Abigail P. Johnson; Frederick A. Middleton, Jr.; Barun Singh; Diana C. 'Walsh; Ursula M.

Burns; Diane B. Greene; Helen Greiner; Marta M. Luczynska; Victor J. Menezes; Antonia D. Schuman; Peter L. Slavin; Laura D. Tyson; Raja H.R. Bobbili; Rafael del Pino; Mohammed A. L. Jameel; Cleve L. Killingsworth; Alejandro Padilla; Tony Keng Yam Tan; Samuel W. Bodman; Sarah Stewart Johnson; Reginald Van Lee President of the Association of Alumni and Alumnae K. Anne Street Representatives of the Commonwealth Governor: Deval L. Patrick Chief Justice of the Supreme Judicial Court: Roderick L. Ireland Secretary of Education: S. Paul Reville Life Members Emeritus Ir~n~e duPont, Jr.; Norman B. Leventhal; George P. Gardner; Mitchell W Spellman; D. Reid Weedon, Jr.; Colby H.

Chandler; Carl M. Mueller; Louis XW Cabot; Christian J. Matthew; Paul M. Cook; William S. Edgerly; Frank Press; Edward E. David, Jr.; Emily V. Wade; Angus N. MacDonald; George N. Hatsopoulos; Charles H. Spaulding; Mary Frances Wagley; Michael M. Koerner; Morris Tanenbaum; Breene M. Kerr; W Gerald Austen; Richard P Simmons; Morris Chang; Paul E. Gray; Alexander W. Dreyfoos, Jr.; Ronald A. Kurtz; DuWayne J. Peterson, Jr.; Raymond S.

Stata; BritJ. d'Arbeloff; Gordon M. Binder; Dana G. Mead Members' names are listed in chronological order of election to each category.

• member of the Executive Committee

Table of Contents

" Report of theTreasurer..............................................

5-9

" Financial Statements The financial statements summarize the finances of MIT for the fiscal yeari 2010 and 2011.

Statem ents of Financial Position.............................................

11 Statem ents of Activities.................................................

12-13 Statem ents of Cash Flows...................................................

14 N otes to Financial Statem ents............................................

15-39 Report of Independent Auditors.............................................

41

• Additional Information Five-Year Trend Analysis................................................

42-44

Report of the Treasurer To Members of the Corporation In fiscal 2011, MIT continued to improve its financial strength as it celebrated and reflected on its 150 years as an Institute and took important steps to embrace its future thoughtfully and responsibly.

Over the 150 days leading up to commencement, the global MIT community celebrated MIT's 150 years of excellence and innovation. MIT marked this milestone with symposia, performances, exhibitions and gatherings, including the Sesquicentennial Convocation, through which we reflected on the Institute's past contributions and drew inspiration for our future. These events have reminded us that MIT serves as a beacon to the world as the embodiment of excellence in science, technology and entrepreneurship.

The Institute's financial strengthening can be highlighted in several ways.

On an ongoing basis, MIT's financial strength is mea-sured by its total net assets. This gauge of our net worth increased by 17.3 percent from fiscal 2010 to $12,105.7 million at June 30, 2011. Key elements of this balance sheet measure are investments, physical plant and other assets, offset by debt and other liabilities. This year's advance brings us closer to our historic peak of $12,770.0 million reached at fiscal 2008 year-end. The most important driver of this improvement was the excellent performance of our invested assets which are man-aged by our MIT Investment Management Company (MITIMCo).

For the fourth consecutive year, MIT's consolidated operating activities were in fiscal balance, generating a cumulative four-year surplus of revenues over expenses totaling $756.9 million. While our results of operations always reflect some timing differences between receipt and expenditure of funds in various units across MIT as well as endowment payout decisions, four successive years of operating surpluses since 2008 point to the fundamental overall financial discipline exercised by the MIT community. Importantly, in fiscal 2011, we completed the multi-year adjustment process required to sustain that balance after the 2008 market downturn.

These adjustments included a significant reduction in endowment payout accompanied by the final phase of our three-year, fifteen percent general budget rebasing.

The collaboration of faculty, staff, students and alumni to achieve those budget reductions and to develop nu-merous initiatives from the Institute-wide Planning Task Force has strengthened the fabric of MIT.

With respect to our physical resources, in fiscal 2011, we placed in service two important academic and research buildings, the Koch Institute for Integrative Cancer Research and the new building for the Sloan School of Management; and in recent weeks, the newly renovated Maseeh Hall (formerly XV1 or Ashdown House) wel-comed 468 undergraduates.

All three buildings opened on time and below their corn-bined $577.0 million budgets, thanks to strong partner-ships between our research and academic colleagues and our facilities and other staff professionals. Other capital projects, primarily renovations, have been, or are being, executed with similar success.

Looking to the future of MIT's physical resources, fiscal 2011 saw the launch of MIT 2030, which was presented to the Corporation last October. MIT 2030 provides a comprehensive framework, which will continuously evolve over time, to guide campus renovation and construction planning over the coming decades, and to form the basis of fundraising and MIT's borrowing plans to support capital projects and initiatives. MIT 2030 was developed through a multi-year process led by our academic leadership to envision the future of the Institute's academic and research mission and to identify the physical resources required to fulfill that mission.

In fiscal 2011, the debt portion of the funding to support the capital investments envisioned in the first decade of MIT 2030 was secured. In May 2011, MIT completed an historic issuance of $750 million of hundred-year taxable bonds, taking advantage not only of favorable interest rates but also unprecedented investor demand for MIT's AAA credit, which was affirmed based on the comprehensive view offered by the MIT 2030 framework.

These hundred-year bonds are a stable, low cost source of funds for campus renovation and construction, and, in conjunction with anticipated gift funding in about an equal amount, will enable the roughly $1.5 billion level of capital projects we deem actionable, given our current financial resources, to advance the first decade of the overall MIT 2030 campus vision.

Following are additional details on MIT's fiscal 2011 Statements of Financial Position and Statements of Activities.

SUMMARY

5

Statements of Financial Position The following discussion highlights key elements of MIT's financial position - net assets, investments, en-dowment, land, buildings and equipment, borrowings, retirement plan assets and accrued benefit liabilities.

Net Assets Total net assets increased to $12,105.7 million, up 17.3 percent from fiscal 2010 and approaching MIT's historic peak level achieved at fiscal year-end 2008 of $12,770.0 million.

Net assets are presented in three categories to recognize the significant ways in which universities are different from profit-making organizations. These categories reflect the nature of the restrictions placed on gifts by donors.

Permanently restricted net assets represent those gifts for which the original principal is to be preserved. This category includes gifts and pledges to true endowment together with assets held in trust, such as life income funds, which, when received or matured, will be added to the endowment. The increase in permanently restricted net assets of $356.0 million, or 16.9 percent, to a total of

$2,457.9 million, primarily reflects new gifts and pledges made to permanently restricted endowment funds.

Temporarily restricted net assets represent those gifts that ultimately can be used to fund operating or capital expenditures. They require an event or lapse of time to occur before they are available for spending.

Approximately 90 percent of the assets in this category are accumulated market gains on permanently restricted endowment funds. This category also includes pledges not permanently restricted, gifts for construction proj-ects that have not been completed and put into use, and life income funds, which, upon maturity, will be available for spending. The increase in temporarily restricted net assets of $581.5 million, or 13.0 percent, to a total of

$5,044.5 million, primarily resulted from the increase in the market value of assets held in permanently restricted funds. The Commonwealth of Massachusetts requires that all universities located within the Commonwealth report accumulated market gains on both permanently and temporarily restricted net assets as temporarily restricted net assets until appropriiated for use.

Unrestricted net assets comprise all the remaining economic resources available to MIT. This category includes MIT's working capital and those assets, desig-nated by MIT as "funds functioning as endowment," to be invested over the long term to generate support for MIT's operations and capital projects. Also included in this category are current funds received from donors for restricted purposes that, under generally accepted accounting principles (GAAP) in the United States of America, are categorized as unrestricted if MIT spends an equivalent amount of unrestricted funds for the same purpose. Unrestricted net assets increased $844.0 mil-lion, or 22.5 percent, to a total of $4,603.3 million. The increase in unrestricted net assets is due primarily to the increase in unrestricted endowment value, investment gain on other invested funds, release of temporarily restricted funds when the buildings are put into use and the improvement of the retirement plan's overfunded status. During fiscal 2010, unrestricted net assets were decreased by $4.8 million to offset investment losses on permanently restricted net assets where market value dropped below book value. These investment losses reversed in fiscal 2011 and an adjustment of $22.0 mil-lion was made to increase unrestricted net assets.

Investments Investments at fair value were $12,199.5 million atJune 30, 2011, an increase of $2,285.6 million, or 23.1 per-cent, from $9,913.9 million in the previous year. Over the past five years, total invested assets have increased to

$12,199.5 million from $9,500.2 million while distribu-tions for expenditures have totaled $2,367.1 million.

More specific information is included in Note B to the financial statements.

The financial statements include both realized and unrealized gains and losses on investments. Realized and unrealized gains and losses, including those related to the disposition of fixed assets, increased from a gain of

$784.3 million in fiscal 2010 to a gain of $1,483.7 million in fiscal 2011.

MIT's investment policy is based on the primary goal of generating high real rates of return without exceptional volatility. To reduce volatility, the portfolio is broadly diversified. To generate high real rates of return, MIT's investment policy favors equity investments over fixed income instruments and is heavily weighted towards inefficient markets such as private equity, real estate, and marketable alternatives. Marketable alternatives include investments in absolute return strategies, distressed debt, and hedge funds. Total asset allocation among equity, marketable alternatives, and real estate investments in fiscal 2011 was slightly lower than that in fiscal 2010.

Equity, marketable alternatives, and real estate invest-ments at market value were 81.1 percent of investments as of June 30, 2011, as compared to 83.7 percent at June 30, 2010.

MIT primarily invests through external fund managers, thereby allowing MIT to tap into the best investment talent globally. By identifying a wide variety of top-tier 6

MIT REPORT OF THE TREASURER 2011

investment managers with specific competencies, MIT is able to construct a broadly diversified portfolio while accessing deep sector expertise. Decisions regarding the selection of managers, direct investments, and asset allocation are conducted by MITIMCo. The Board of Directors of MITIMCo holds four regularly scheduled meetings during the fiscal year where investment policy, performance, and asset allocation are reviewed with MITIMCo professionals.

Endowment and Similar Funds Endowment assets are managed to maximize total invest-ment return relative to appropriate risk. The market value of investments in the endowment and similar funds, excluding pledges for endowed purposes, totaled

$9,712.6 million as of June 30, 2011 and $8,317.3 million as of June 30, 2010 and approached the peak year-end level reached in fiscal 2008 of $9,947.6 million This year, MIT's core Pool A endowment produced a return of 17.9 percent. Investment income and a por-tion of gains are distributed for spending in a manner that over the long term preserves for reinvestment an amount at least equal to annual inflation on the value of the investment at the beginning of that year. Endowment funds invested in Pool A, MIT's primary investment pool, receive distributions based on relative ownership which is valued monthly.

Land, Buildings, and Equipment Land, buildings and equipment had a net book value of

$2,451.5 million as of June 30, 2011, an increase of 5.3 percent from $2,327.8 million as of June 30, 2010, driven by expenditures for research and educational facilities, including the completion of the new 367,000 square-foot Koch Institute for Integrative Cancer Research as well as a new 217,000 square-foot building for the Sloan School of Management.

In addition to the buildings placed in service by fiscal year-end, the newly-renovated Fariborz Maseeh Hall welcomed students last month. This historic 1900 building at the corner of Massachusetts Avenue and Memorial Drive was constructed before MIT's move to Cambridge in 1916 and for many years served as graduate student housing, with the name of Ashdown House, before the completion of New Ashdown graduate dormitory, which opened in August 2008. Maseeh Hall supports the Institute's goal of returning MIT's undergraduate population to the 4,500 level. This major renovation was put on hold after the market downturn in 2008, but was subsequently made possible as funding was provided through generous gifts of alumni donors.

These three projects, among others, are part of ongoing campus development that adds state-of-the-art facilities for emerging areas of research, increases educational infrastructure to support residential and community life, and renews and renovates our existing physical resources.

MIT 2030 This year, we launched MIT 2030 as a comprehensive framework for planning for our physical resources. MIT 2030 grew out of a long term visioning process by MIT's academic leadership aimed at assuring MIT's premiere position in education and research in the coming decade.

MIT 2030 lays out options to provide the physical plat-form worthy of that mission. This framework makes pro-vision for new buildings where required for cutting edge science and technology research. In addition, MIT 2030 incorporates a strong commitment to campus renova-tion and renewal through proposed whole-building and Main Group section renovations, selective interventions in long-serving buildings, as well as broadly distributed updating of basic campus infrastructure. The aspirations for our physical resources set forth in MIT 2030 will take many years to achieve. As a first step, an actionable set of options for the 2010-2020 decade has been identified, carrying an estimated cost of $1.5 billion. Based on our current financial position, a program of that magnitude can be accomplished if funded equally by fundraising and debt.

An important dimension of the MIT 2030 process has been to integrate into the broad vision of our campus the campus neighborhood development activityv which is conducted by the MITIMCo real estate group. This program continues to achieve its goals of providing attractive commercial real estate returns for the endow-ment, improving the campus neighborhood and pro-viding opportunities for large and small companies and institutes to locate in close proximity to MIT.

Debt and Other Assets and Liabilities In May 2011, based on the MIT 2030 vision of capital programs for the coming decade, MIT took the oppor-tunity offered by the favorable interest rate environment and receptivity to MIT's AAA credit, which was affirmed based on the comprehensive view offered by the MIT 2030 framework, to issue an historic $750 million of hundred-year maturity taxable bonds. These funds will be held until required for capital projects envisioned in the 2010-2020 decade of MIT 2030. At fiscal year-end 2011, MIT's total borrowings, which primarily support completed or future capital projects, were $2,467.8 mil-lion, up from $1,728.5 million a year ago.

SUMMARY

7

MIT's defined benefit pension plan had assets of $2,572.3 million and liabilities of $2,458.6 million, resulting in a net pension asset of $113.7 million at fiscal year-end 2011. MIT also maintains a postretirement welfare benefit plan with assets of $311.6 million and liabilities of $509.8 million, resulting in a net benefits liability of

$198.2 million at fiscal year-end 2011. The funding status of both plans improved in fiscal 2011 primarily due to favorable investment results. The investments of both plans are managed by MITIMCo. MIT also offers a 401k plan to its employees, which is not reflected on the balance sheet, invested at the direction of participants in a broad array of investment funds.

Statements of Activities Operating Activities In fiscal 2011, we grew our research activity and main-tained excellence in our education mission while exer-cising expense control in core administrative areas. MIT ended the year with a surplus from operations of $179.5 million, $101.0 million lower than the fiscal 2010 result.

The MIT community has demonstrated its commitment to financial discipline by achieving an operating surplus in each of the past four years.

Operating revenues increased $87.5 million, or 3.3 percent, to $2,750.6 million, while operating expenses increased $188.6 million, or 7.9 percent, to a total of

$2,571.1 million.

Year-over-year comparisons of the components of operating results are influenced by fundamental trends, as well as such drivers as timing differences between receipt of revenues and related expenditures in various units across the Institute and policy decisions on endow-mient payout. The Operating Activities section of our Statements of Activities on pages 12 and 13 sets forth details on these trends. Some of the specific trends in various revenue and expense categories are described below.

Operating Revenues MIT's operating revenues include tuition, research, unrestricted gifts and bequests for current use, fees and services, other programs, investment income, the portion of net investment gains distributed to funds under MIT's spending policy, auxiliaries, and payments on pledges for unrestricted gifts.

Tuition revenue for graduate, undergraduate and non-degree executive programs net of financial aid grew by $15.2 million, or 6.4 percent, to $253.5 million.

Reflecting MIT's commitment to increasing the afford-ability of undergraduate education, financial aid for undergraduate students grew to $85.9 million, or 2.6 percent, from fiscal 2010, and has increased a total of

$31.4 million, or 57.6 percent, over the last five years.

MIT demonstrated strong growth in and diversity of research funding in fiscal 2011. Total research revenues increased to $1,447.2 million, up $77.6 million, or 5.7 percent, from the previous year. Of these amounts, campus labs and centers at MIT experienced a $14.8 million, or 2.4 percent, increase in research revenues to $618.9 million, and research revenues at Lincoln Laboratory totaled $804.8 million, an increase of $60.5 million, or 8.1 percent. The Singapore-MIT Alliance for Research and Technology (SMART) generated

$23.5 million of research revenue during fiscal 2011, an increase of $2.4 million, or 11.2 percent, for research activities taking place in Singapore. Cumulative research awards and other funding received via the American Recovery and Reinvestment Act of 2009 (ARRA) to-taled $150.4 million as of June 30, 2011. Of this figure, amounts expended for research in fiscal 2011 are in-cluded in the figures above.

Research revenues include reimbursement from sponsors for both direct and indirect (facilities and administration) costs. MIT's modified total direct research expenditures, which form the basis for recovery of indirect costs, increased by $52.9 million, or 6.8 percent.

Growth in MIT's campus research is being driven by both Federal and non-Federal sponsors. Total Federal sponsorship of research grew $31.6 million, or 7.2 percent, to $469.5 million. Research volume sponsored by the Department of Health and Human Services grew $8.1 million, or 5.6 percent, to $152.7 million.

Similarly, research volume sponsored by the Department of Defense increased $0.9 nmillion, or 0.8 percent, to

$107.8 million; Department of Energy volume grew by

$16.3 million, or 22.2 percent, to $89.6 million; National Science Foundation volume grew by $5.1 million, or 7.2 percent, to $74.9 million; and volume sponsored by the National Aeronautics and Space Administration decreased $2.5 million, or 8.3 percent, from last year to

$28.1 million.

Non-Federal funding for campus research increased by

$0.9 million, or 0.5 percent, to $178.2 million, with the greatest increase coming from industry sponsors, offset by a decrease in non-profit funding.

While research is our largest source of revenue, we expe-rienced growth in other revenue categories as well, the largest being revenues from fees and services at $199.0 million, an increase of 22.6 percent. MIT's investment income and gain distribution to support operations de-clined by $62.0 million to $496.8 million in fiscal 2011 as we implemented the planned payout reduction required 8

MIT REPORT OF THE TREASURER 201 1

to reach sustainable payout levels after the 2008 market downturn. The distribution rate on endowed funds was 5.3 percent, or 4.9 percent on a three-year-average basis, in fiscal 2011. Growth in MIT's combined revenue categories was sufficient to offset the endowment dis-tribution decrease and resulted in our overall operating revenue growth of 3.3 percent to $2,750.6 million.

Operating Expenses Operating expenses grew to $2,571.1 million, an increase of 7.9 percent. This consolidated result combines dif-fering underlying trends in units funded by the general Institute unrestricted budget, the research enterprise and expenditures from accumulated unit fund balances.

Overall Institute salary costs rose 4.1 percent while employee benefits costs rose 23.4 percent. The benefit increase results from amortization of pension investment losses of fiscal 2009 as required by US GAAP. Behind the overall salary increase, salaries funded centrally through the general Institute unrestricted budget remained flat, while salaries paid from research or designated funds grew.

Research expenses on campus and at Lincoln Laboratory grew at 4.6 percent and 7.1 percent, with salary growth in those units at 6.2 percent and 7.7 percent, respectively.

Expenditures from units' funds grew by 16.1 percent with salaries from this source growing 3.3 percent.

Expenses in administrative and educational units grew 6.9 percent. Salaries were flat as units completed planned reductions in their expense levels by imple-menting disciplined and targeted initiatives begun in fiscal 2009 as outgrowths of the Institute-wide Planning Task Force. Though the planned rebasing of budgets has been completed, we expect to reap additional benefits from the efforts of the Task Force as we adopt further improvements in administrative and operating practices in the coming years.

Expense increases were concentrated in operating categories other than salaries. Supplies and services grew by 10.7 percent; depreciation increased by 12.0 percent; and interest expense grew by 29.9 percent. The cost of utilities, rent and repairs declined by 8.8 percent primarily due to an adjustment to MIT's obligations for asset retirements.

Non-Operating Revenues, Gains and Losses Summary

'While operating activities contributed $179.5 million to MIT's increase in net assets, non-operating activi-ties added $1,601.9 million to MIT's final fiscal 2011 total net asset balance of $12,105.7 million. Growth in invested assets net of distribution, gifts and bequests, favorable pledge activity and improvements of funding status of retirement plans were the principal contributors to positive non-operating performance.

Gifts and Pledges As of June 30, 2011, the Campaign for Students had surpassed its goal of $500.0 million with over $578.0 mil-lion raised. The campaign was concluded concurrently with MIT's celebrations of its 150th anniversary. Gifts to the Campaign support scholarships, fellowships, educa-tional programming, and student life activities. Another important program, the MIT Energy Initiative (MITEI) now has received funds from 1,576 donors and has raised

$87.0 million in philanthropic dollars.

Gifts and pledges for fiscal 2011 totaled $522.4 million, an increase of 111.9 percent from the fiscal 2010 total of

$246.6 million. Gifts from individuals represented 65.5 percent of new gifts and pledges, up from 54.5 percent in the previous year. Gifts from foundations represented 14.7 percent of new gifts and pledges in fiscal 2011, down from 21.8 percent in the previous year. Gifts from corporations and other sources represented 19.8 percent, down from 23.7 percent in fiscal 2010. New gifts and pledges for general purposes were the largest category of gifts for fiscal 2011.

MIT's full financial statements and footnotes, describing our financial position and activities through June 30, 2011 are included on the following pages.

Closing Remarks This is my fifth and final report to the MIT Corporation as its Executive Vice President and Treasurer. It has been an honor and privilege to work with colleagues throughout the MIT community whose passion for the Institute and its mission assures its continued preemi-nence. I am deeply grateful to President Hockfield and to the Corporation for allowing me to serve the Institute in this position of trust.

In closing, on behalf of the Institute, I wish to thank the MIT community for its generous financial support, advice, and collaboration throughout the year and to reaffirm our optimism for the future.

Respectfully submitted, 5M4_ý Theresa M. Stone Executive Vice President and Treasurer September 15, 2011

SUMMARY

9

10 MIT REPORT OF THE TREASURER 2011

Massachusetts Institute of Technology Statements of Financial Position at June 30, 2011 and 2010 (in thousands of dolikn-,)

2011 2010 Assets C ash......................................................................

Accounts receivable, net......................................................

Pledges receivable, net, at fair value.............................................

Contracts in progress, principally U.S. Government...............................

Deferred charges, inventories and other assets....................................

Student notes receivable, net..................................................

Investm ents, at fair value......................................................

M inority interests...........................................................

Retirement plan asset-overfunded status.........................................

Land, buildings & equipment (at cost $3,406,169 for June 2011; $3,208,140 forJune 2010),

net of accum ulated depreciation..............................................

T otal assets..............................................................

Liabilities and Net Assets Liabilities:

Accounts payable, accruals and other liabilities....................................

Liabilities due under life income fund agreements, at fair value.......................

M inority interests...........................................................

D eferred revenue and other credits.............................................

A dvance paym ents...........................................................

B orrow ings.................................................................

Government advances for student loans..........................................

Accrued benefit liabilities.....................................................

T otal liabilities...........................................................

Net Assets:

U nrestricted................................................................

Tem porarily restricted........................................................

Perm anently restricted.......................................................

T otal net assets..........................................................

Total liabilities and net assets...............................................

131,221 261,206 422,965 68,411 70,127 49,757 12,199,451 282,041 113,715 2,451,479

$16,050,373 366,161 84,225 282,041 123,215 389,253 2,467,825 33,754 198,209 3,944,683 4,603,280 5,044,519 2,457,891 12,105,690

$ 16,050,373 133,973 203,116 412,310 68,344 54,306 49,496 9,913,877 230,433 18,841 2,327,810

$ 13,412,506 309,098 74,256 230,433 112,516 362,147 1,728,526 33,590 237,635 3,088,201 3,759,301 4,463,066 2,101,938 10,324,305

$13,412,506 The accompanying notes are an integral part of the financial statements.

FINANCIAL STATEMENTS I1I

Massachusetts Institute of Technology Statements of Activities for the years ended June 30, 2011 and 2010 (in thousands of dollars) r-Unrestricted -

F Temporarily Restricted 2011 2010 2011 2010 Operating Activities Operating Revenues:

Tuition and similar revenues, net of discount of

$240,299 in 2011 and $230,269 in 2010............

Research revenues:

D irect........................................

Indirect......................................

Total research revenues..........................

Gifts and bequests for current use....................

Fees and services..................................

O ther program s...................................

Investm ent incom e................................

Net gains on investments, distributed.................

Auxiliary enterprises...............................

Net asset reclassifications and transfers................

Total operating revenues............................

Operating Expenses:

Salaries and wages.................................

Em ployee benefits.................................

Supplies and services...............................

Subrecipient agreements............................

U tilities, rent, and repairs...........................

D epreciation.....................................

Interest expense...................................

Total operating expenses............................

Results of operations...............................

Non-Operating Revenues, Gains and Losses P ledges..........................................

G ifts and bequests.................................

Investm ent Incom e................................

Net gain on investments and other assets..............

Distribution of accumulated investment gains...........

Net change in life income funds......................

Pension-related charges other than net periodic pension benefit income (cost).....................

Transfer of net assets to The Broad Institute............

Net asset reclassifications and transfers................

Total non-operating activities........................

Increase in net assets...............................

Net assets at the beginning of the year................

Net assets at the end of the year......................

The acconipanying notes are an integral part of the financial statements.

253,478 1,250,388 196,818 1,447,206 111,114 198,971 87,133 117,004 379,793 100,135 55,813 2,750,647 1,006,458 223,568 898,284 120,977 131,539 116,385 73,936 2,571,147 179,500 573,528 (133,843) 2,406 105,408 116,980 664,479 843,979 3,759,301

$ 4,603,280 238,301 1,172,406 197,197 1,369,603 108,674 162,300 70,439 99,669 459,138 96,015 58,964 2,663,103 967,190 181,116 811,780 117,442 144,201 103,910 56,927 2,382,566 280,537 359,337 (152,081) 675 (238,137)

(90,975) 40,020 (81,161) 199,376 3,559,925

$ 3,759,301 97,807 7,401 1,226 898,180 (245,950) 8,731 (185,942) 581,453 581,453 4,463,066

$5,044,519 67,716 3,507 2,861 419,054 (307,057) 5,324 (1 2 9,3 54) 62,051 62,051 4,401,015

$ 4,463,066 1?

MIT REPORT OF THE TREASURER 2011

Massachusetts Institute of Technology Statements of Activities for the years ended June 30, 2011 and 2010 (in thousands of dollars) r-Permanently Restricted 1

Total 2011 2010 2011 2010 Operating Activities 253,478 1,250,388 196,818 1,447,206 111,114 198,971 87,133 117,004 379,793 100,135 55,813 2,750,647 12,770 293,317 7,480 11,961 17,276 13,149 355,953 355,953 2,101,938 2,457,891 28,651 38,032 4,442 5,957 9,038 30,370 116,490 116,490 1,985,448

$ 2,101,938 1,006,458 223,568 898,284 120,977 131,539 116,385 73,936 2,571,147 179,500 110,577 300,718 8,706 1,483,669 (379,793) 28,413 105,408 (55,813) 1,601,885 1,781,385 10,324,305

$ 12,105,690 S

238,301 1,172,406 197,197 1,369,603 108,674 162,300 70,439 99,669 459,138 96,015 58,964 2,663,103 967,190 181,116 811,780 117,442 144,201 103,910 56,927 2,382,566 280,537 96,367 41,539 7,303 784,348 (459,138) 15,037 (238,137)

(90,975)

(58,964) 97,380 377,917 9,946,388

$10,324,305 Operating Revenues:

Tuition and similar revenues, net of discount of

$240,299 in 2011 and $230,269 in 2010 Research revenues:

Direct Indirect Total research revenues Gifts and bequests for current use Fees and services Other programs Investment income Net gains on investments, distributed Auxiliary enterprises Net asset reclassifications and transfers Total operating revenues Operating Expenses:

Salaries and wages Employee benefits Supplies and services Subrecipient agreements Utilities, rent, and repairs Depreciation Interest expense Total operating expenses Results of operations Non-Operating Revenues, Gains and Losses Pledges Gifts and bequests Investment income Net gain on investments and other assets Distribution of accumulated investment gains Net change in life income funds Pension-related charges other than net periodic pension benefit income (cost)

Transfer of net assets to The Broad Institute Net asset reclassifications and transfers Total non-operating activities Increase in net assets Net assets at the beginning of the year Net assets at the end of the year The accompanying notes are an integral part of the financial statements.

FINANCIAL STATEMENTS 13

Massachusetts Institute of Technology Statements of Cash Flows for the years ended June 30, 2011 and 2010 (in thousands of dollars,)

2011 2010 Cash Flow from Operating Activities:

Increase in net assets.................................

Adjustments to reconcile change in net assets to net cash used in operating activities:

N et gain on investm ents...................................................

Change in retirement plan asset, net of change in accrued benefit liability...........

D epreciation............................................................

G ifts of securities........................................................

N et gain on life incom e funds..............................................

Transfer of land, buildings and equipment to The Broad Institute.................

Amortization of bond premiums and discounts and other adjustments..............

Change in operating assets and liabilities:

P ledges receivable........................................................

A ccounts receivable.......................................................

C ontracts in progress.....................................................

Deferred charges, inventories and other assets.................................

Accounts payable, accruals and other liabilities, excluding building and equipm ent accruals....................................................

Liabilities due under life income fund agreements..............................

Deferred revenue and other credits..........................................

A dvance paym ents........................................................

Reclassify investment income.............................................

Reclassify contributed securities received as payment on pledges.....................

Reclassify contributions restricted for long-term investment.........................

N et cash used in operating activities.......................................

Cash Flow from Investing Activities:

Purchase of land, buildings and equipment.......................................

Purchases of investm ents.....................................................

Proceeds from sale of investments, including contributed securities...................

Student notes issued.........................................................

Collections from student notes.................................................

Net cash (used in) provided by investing activities.........................

Cash Flow from Financing Activities:

Proceeds from contributions restricted for:

Investm ent in endowm ent.................................................

Investm ent in plant and other..............................................

Less: contributed securities, gifts for endowvment, plant and other.................

Total proceeds from contributions.........................................

Increase in investment income for restricted purposes..............................

Proceeds from borrowings....................................................

Repaym ent of borrowings.....................................................

Increase in government advances for student loans.................................

Net cash provided by financing activities...................................

N et (decrease) increase in cash.................................................

Cash at the beginning of the year...............................................

C ash at the end of the year....................................................

$ 1,781,385 (1,483,669)

(134,300) 116,385 (1,921)

(25,383)

(7,949)

(10,655)

(58,090)

(67)

(15,821) 68,948 9,969 10,699 27,106 (8,706)

(27,380)

(300,718)

(60,167)

(251,932)

(41,050,404) 40,570,574 (9,967) 9,282 (732,447) 293,317 7,401 (267,356) 33,362 8,706 750,000 (2,370) 164 789,862 (2,752) 133,973 131,221 377,917 (784,348) 209,499 103,910 (4,135)

(5,144) 82,563 (3,823) 52,426 37,908 17,477 9,246 4,765 1,650 (62,554) 18,851 (7,303)

(28,121)

(41,539)

(20,755)

(387,908)

(37,941,462) 38,373,562 (9,641) 8,863 43,414 38,032 3,507 (7,080) 34,459 7,303 (2,260) 249 39,751 62,410 71,563 133,973 The accompanying notes are an integral part of the financial statements.

14 MIT REPORT OF THE TREASURER 201 1

Notes to Financial Statements A. Accounting Policies Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America. The financial statements include MIT and its wholly-owned subsidiaries.

Net assets, revenues, expenses, gains and losses are classi-fied into three categories based on the existence or absence of donor-imposed restrictions. The categories are perma-nently restricted, temporarily restricted, and unrestricted net assets. Unconditional promises to give (pledges) are recorded as receivables and revenues within the appropriate net asset category.

Permanently restricted net assets include gifts, pledges, trusts and remainder interests, and income and gains that are required by donors to be permanently retained.

Pledges, trusts, and remainder interests are reported at their estimated fair values.

Temporarily restricted net assets include gifts, pledges, trusts and remainder interests, and income and gains that can be expended but for which restrictions have not yet been met. Such restrictions include purpose restrictions where donors have specified the purpose for which the net assets are to be spent, or time restrictions imposed by donors or implied by the nature of the gift (capital projects, pledges to be paid in the future, life income funds), or by interpretations of law (net gains on permanently restricted gifts that have not been appropriated for spending). Gifts specified for the acquisition or construction of long-lived assets are reported as temporarily restricted net assets until the monies are expended and the buildings are put into use, at which point they are reclassified to unrestricted net assets. Net unrealized losses on permanently restricted endowment funds for which the book value exceeds market value are recorded as a reduction to unrestricted net assets.

Unrestricted net assets are all the remaining net assets of MIT. Donor-restricted gifts and unexpended restricted endowment income that are received and either spent, or the restriction is otherwise met within the same year, are reported as unrestricted revenue. Gifts of long-lived assets are reported as unrestricted revenue.

Net asset reclassifications and transfers consist primarily of payments on unrestricted pledges and use of building funds in accordance with donor restrictions for buildings put into use during the year. Expirations of temporary restrictions on net assets, release of permanent restrictions by a donor, and change of restrictions imposed by donors are also reported as reclassifications of net assets among unrestricted, temporarily and permanently restricted net assets.

MIT administers its various funds, including endowments, funds functioning as endowments, school or departmental funds, and related accumulated gains in accordance with the principles of "Fund Accounting." Gifts are recorded in fund accounts and investment income is distributed to funds annually. Income distributed to funds may be a combination of capital appreciation and yield pursuant to MIT's total return investment and spending policies. Each year, the Executive Committee of the Corporation approves the rates of distribution of investment return to the funds from MIT's investment pools. See Note K for further information on income distributed to funds.

MIT's operations include tuition, research revenues, unrestricted gifts and bequests for current use, fees and services, other programs, investment income, the portion of net investment gains distributed to funds under MIT's spending policy, auxiliary revenues, payments on pledges for unrestricted gifts, and operating expenditures. Results of operations are displayed in the Statements of Activities.

MIT is a nonprofit organization that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code, originally recognized in October 1926, with the most recent affirma-tion letter dated July 2001.

Restricted Cash Certain cash balances, totaling $42.5 million and $83.1 million atJune 30, 2011 and 2010, respectively, are restricted for use under certain sponsored research agreements.

Sponsored Research Revenue associated with contracts and grants is recognized as related costs are incurred. The capital costs of buildings and equipment are depreciated over their estimated life cycle and the sponsored research recovery allowance for depreciation is treated as indirect research revenue. MIT has recorded reimbursement of indirect costs relating to sponsored research at negotiated fixed billing rates. The income generated by the negotiated rates is adjusted each fiscal year to reflect any variance between the negotiated fixed rates and rates based on actual cost. The actual cost rate is audited by the Defense Contract Audit Agency (DCAA) and a final fixed-rate agreement is signed by the U.S. Government and MIT. The variance between the negotiated fixed rate and the final audited rate results in a carry forward (over or under-recovery). The carry forward is included in the calculation of negotiated fixed billing rates in future years. Any adjustment in the rate is charged or credited to unrestricted net assets.

NOTES TO FINANCIAL STATEMENTS 15

A. Accounting Policies (continued)

Land, Buildings and Equipment Land, buildings and equipment are shown at cost when purchased or fair value as of the date of a gift when received as gifts, net of accumulated depreciation. When expended, costs associated with the construction of new facilities are shown as construction in progress until such projects are completed. Depreciation is computed on a straight-line basis over the estimated useful lives of 25 to 50 years for buildings, 3 to 25 years for equipment, and 4 to 6 years for software. Fully depreciated assets were removed from the financial statements in the amount of $37.5 million and

$98.2 million during 2011 and 2010, respectively. Land, buildings and equipment at June 30, 2011 and 2010 are shown in Table 1 below.

Table 1. Land, Buildings and Equipment (in thousands of dollars) 2011 2010 Depreciation expense was $116.4 million in 2011 and

$103.9 million in 2010. Net interest expense of $6.6 million and $17.6 million was capitalized during 2011 and 2010, respectively, in relation to MIT's construction projects.

Tuition and Financial Aid Tuition and similar revenues, shown in Table 2 below, include tuition and fees in degree programs as well as tuition and fees for executive and continuing education programs at MIT.

Table 2. Tuition and Similar Revenues (in thousand, of dollars) 2011 2010 Tuition revenue........

457,494 432,778 Executive and continuing education revenues.....

36,283 35,792 Total................

493,777 468,570 Less: tuition discount...

(240,299)

(230,269)

Net tuition & similar revenue..............

253,478 238,301 Tuition support is awarded to undergraduate students by MIT based on need. Graduate students are provided with tuition support in connection with research assistance, teaching assistance, and fellowship appointments. Total financial aid granted to students was $409.8 million and

$397.4 million in 2011 and 2010, respectively. Of that amount, $125.8 million in 2011 and $125.5 million in 2010 were aid from sponsors. Tuition support from MIT sources is displayed as tuition discount. Components of financial aid are detailed in Table 3 below.

L and.................

Land improvements.....

Educational buildings...

Equipment............

Software..............

Total................

Less: accumulated depreciation...........

Construction in progress..............

Software projects in progress..............

Land, buildings and equipment...........

59,598 60,795 2,936,816 164,909 29,938 3,252,056 59,598 61,830 2,425,618 149,320 36,733 2,733,099 (954,690)

(880,330) 142,788 11,325

$ 2,451,479 471,514 3,527

$2,327,810 Table 3. Financial Aid (in thousands of dollars) 1 2011 I

I 2010 1

Institute External Total sources sponsors financial aid Institute sources External Total sponsors financial aid Tuition support...........

Stipends.................

Student salaries...........

Total..................

$ 240,299 53,756 294,055 17,680 12,755 30,435 26,051 59,284 85,335

$ 284,030

$ 125,795 409,825

$ 230,269 15,850 25,820

$ 271,939 54,722 12,254 58,484

$ 125,460 284,991 28,104 84,304

$ 397,399 16 MIT REPORT OF THE TREASURER 201 I

A. Accounting Policies (continued)

Gifts and Pledges Gifts and pledges are recognized when received. Gifts of securities are recorded at their fair value at the date of con-tribution. Gifts of equipment received from manufacturers and other donors are put into use and recorded by MIT at fair value. Gifts of equipment totaled $0.4 million and

$0.6 million in 2011 and 2010, respectively. Pledges in the amount of $423.0 million and $412.3 million were recorded as receivables atJune 30, 2011 and 2010, respectively, with the revenue assigned to the appropriate classification of restriction. Pledges consist of unconditional writ-ten promises to contribute to MIT in the future and are recorded after discounting the future cash flows to the present value.

MIT records items of collections as gifts at nominal value.

They are received for educational purposes and most are displayed throughout MIT In general, collections are not disposed of for financial gain or otherwise encumbered in any manner.

Advance Payments Amounts received by MIT from the U.S. Government, corporations, industrial sources, foundations, and other non-MIT sponsors under the terms of agreements that generally require the exchange of assets, rights, or privileges between MIT and the sponsor are recorded as advance payments. Revenue is recognized when MIT fulfills the terms of the agreement.

Life Income Funds MIT's life income fund agreements with donors consist primarily of irrevocable charitable gift annuities, pooled income funds, and charitable remainder trusts for which MIT serves as trustee. Assets are invested and payments are made to donors and other beneficiaries in accordance with the respective agreements. MIT records the assets that are associated with each life income fund at fair value and records as liabilities the present value of the estimated future payments at current interest rates to be made to the donors and beneficiaries under these agreements.

A rollforward of liabilities due under life income fund agreements is presented in Table 4.

Recently Adopted Accounting Standards On July 1, 2010, MIT adopted new guidance enhancing the Fair Vahie Measurement standard. This standard requires further disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements, including the reasons for the transfers, and requires discussions of their fair value measurement disclosures on a disaggregated basis.

Refer to Note B for further details.

On July 1, 2010, MIT adopted the accounting standard, Credit Quality. This standard requires the disclosure about the credit quality of financing receivables and the related allowance for credit losses. The disclosures are included in Note E.

On July 1, 2009, MIT adopted the Fair Udlue Measurements standard for estimating the fair value of investments in investment companies (limited partnerships) that have a calculated value of their capital account or net asset value (NAV) in accordance with, or in a manner consistent with, US GAAP. As a practical expedient, MIT is permitted under US GAAP to estimate the fair value of an investment at the measurement date using the reported NAV without further adjustment unless the entity expects to sell the investment at a value other than NAV or the NAV is not calculated in accordance with US GAAP. MIT'S investments in private equity, real estate and marketable alternatives are fair-valued based on the most current NAV.

On July 1, 2009, MIT adopted the accounting standard, Disclosures about Derivative Instruments. This standard requires specific tabular disclosures presenting the fair value amounts of derivative instruments for assets and liabilities and their location on the balance sheet, as well as disclosure of derivative gains and losses and their location on the income statement. The new disclosure requirements call for specific fair value and gain/loss information by the derivative instrument's primary underlying risk exposure (for example, interest rate, credit, foreign exchange rate, or overall price) on a gross basis.

Table 4. Liabilities Due Under Life Income Funds (in thjousands of dollars) 2011 2010 Balance at beginning of year.......................................

74,256 72,606 Additions for new gifts...........................................

8,907 5,123 Terminations and payments to beneficiaries..........................

(12,164)

(10,845)

Net investment and actuarial gain..................................

13,226 7,372 Balance at end of year........................................

$ 84,225 74,256 NOTES TO FINANCIAL STATEMENTS 17

A. Accounting Policies (continued)

On July 1, 2009, MIT adopted the accounting standard, Disclosures about Postretirement Benefit Plan Assets. This standard provides guidance on expanded disclosures for plan assets of a defined benefit pension or other postretirement plan. The adoption has no impact on the valuation of MIT's postretirement benefit plans. It does however require additional disclosures included in Note J.

Minority Interests MIT is the general partner for several private equity funds and has displayed the noncontrolling interests as minority interests on the Statements of Financial Position.

Non-Cash Items Non-cash transactions excluded from the Statements of Cash Flows include the increase in minority interest of

$51.6 million and $62.1 million, as well as $23.2 million and $35.1 million of accrued liabilities related to plant and equipment purchases for 2011 and 2010, respectively.

Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications CertainJune 30, 2010 balances and amounts previously reported have been reclassified to conform to the June 30, 2011 presentation.

Subsequent Events MIT has evaluated subsequent events through September 15, 2011, the date the financial statements were issued.

There were no subsequent events that occurred after the balance sheet date that have a material impact on MIT's financial statements.

B. Investments Investment transactions are accounted for on the trade date. Realized gains and losses are recorded by MIT using the average cost basis. Dividend income is recorded on the ex-dividend date.

As discussed in Note A, MIT values its investments in accordance with the principles of accounting standards which establish a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity.

Unobservable inputs reflect the entity's own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. MIT follows a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.

The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by MIT for financial instruments measured at fair value on a recurring basis. The three levels of inputs are as follows:

• Level 1 - Quoted prices in active markets for identical assets or liabilities. Market price data is generally obtained from relevant exchange or dealer markets.

• Level 2 - Inputs other than Level I that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities. Inputs are obtained from various sources including market participants, dealers, and brokers.

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments may be classified as Level 2 when market information (observable net asset values) is available, yet the investment is not traded in an active market. Market information, including observable net asset values, subscription and redemption activity, if applicable, and the length of time until the investment will become redeemable are considered when determining the proper categorization of the investment's fair value measurement within the fair valuation hierarchy. Fund investments that have observable market inputs (published net asset values) and from which MIT has the ability to redeem within twelve months of June 30 are classified in the fair value hierarchy as Level 2.

Investment funds that have unobservable inputs or from which MIT does not have the ability to redeem within twelve months are classified in the fair value hierarchy as Level 3.

18 1MIT REPORT OF THE TREASURER 2011

B. Investments (continued)

Table 5 below presents MIT's investments at fair value as ofJune 30, 2011, grouped by the valuation hierarchy as defined in this note. There were no significant transfers in and out of Level 1 and Level 2 fair value measurements in 2011.

Table 5. Investments Quoted prices in active markets (in thousands of dollars)

(Level 1)

Significant other observable inputs (Level 2)

Significant un-observable inputs (Level 3)

Total fair value Fiscal year 2011 Cash and cash equivalents.............

Fixed incom e........................

Long equities.......................

Short equities.......................

M arketable alternatives................

R eal estate..........................

Perpetual trusts......................

Interest rate, credit &

other derivatives..................

Total investments...................

Fiscal year 2010 Cash and cash equivalents.............

Fixed incom e........................

Long equities.......................

Short equities.......................

M arketable alternatives................

R eal estate..........................

Perpetual trusts......................

Interest rate, credit &

other derivatives..................

Total investments...................

$ 1,175,776 601,874 1,664,111 (628,455) 319,03 156,42 (122 470,08 3

76,652 4

5,229,110 6

1,341,920 1,659,027 64,040 7

8

$ 8,370,749

$ 1,175,776 997,559 7,049,645 (628,577) 1,812,006 1,659,027 64,040 69,975

$12,199,451 (1,752)

$ 2,811,554 788,453 582,090 1,377,596 (518,545) 71,72

$ 1,017,14 126,108 137,280 415,808 73,40 4,130,24 1,399,08 1,352,64 53,13

$ 7,008,51 788,453 6

781,604 1

5,645,117 (518,545) 5 1,814,893 4

1,352,644 4

53,134 (3,423) 0

$ 9,913,877 (1,592)

$ 2,228,002 (1,831) 677,365 Cash and cash equivalents include cash, money market funds, repurchase agreements and negotiable certificates of deposit and are valued at cost, which approximates fair value. Fixed income investments include US government, agency, and other obligations. Fixed income investments are generally valued using independent pricing sources that use broker quotes or models using market observable inputs.

Equity investments include public equities and private equity investment funds. Public equities are generally valued based on the closing price listed on a public securities exchange. Marketable alternatives include investments in absolute return strategies, distressed debt, and hedge funds.

Private equity and marketable alternative investments generally consist of funds and limited partnerships managed by external managers. Securities held in these external investment vehicles that do not have readily determinable fair values are determined by the external managers and are based on appraisals or other estimates that require varying degrees of judgment. If no public market exists for the investment securities, the fair value is determined by the external managers taking into consideration, among other things, the cost of the securities, prices of recent significant placements of securities of the same issuer, and subsequent developments concerning the companies to which the securities relate. Using these valuations, most of these external managers calculate MIT's capital account or net asset value (NAV) in accordance with, or in a manner consistent with, US GAAP. As a practical expedient, MIT is permitted under US GAAP to estimate the fair value of its investments with external managers using the external NOTES TO FINANCIAL STATEMENTS 19

B. Investments (continued) managers' reported NAV without further adjustment unless MIT expects to sell the investment at a value other than NAV or the NAV is not calculated in accordance with US GAAP. Direct real estate holdings are valued at fair market value based on external appraisals. Perpetual trusts held by third parties are valued at the present value of the future distributions expected to be received over the term of the agreement. Over-the-counter positions such as interest rate swaps, credit default swaps, options, exchange agreements, and interest rate cap and floor agreements are valued using broker quotes or models using market observable inputs. Because the interest rate swaps and other derivative instruments have inputs that can generally be corroborated by market data, they are generally classified within Level 2.

The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. MIT has performed due diligence around its private equity and marketable alternative investments to ensure they are recorded at fair value as of June 30, 2011 and 2010.

Furthermore, while MIT believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Table 6 is a rollforward of the investments classified by MIT within Level 3 of the fair value hierarchy defined on page 18 atJune 30, 2011 and 2010.

All net realized and unrealized gains and losses relating to financial instruments held by MIT and shown in Table 5 are reflected in the Statements of Activities. Cumulative unrealized gains related to Level 3 investments totaled

$2,012.9 nmillion at June 30, 2011 and $1,260.0 million at June 30, 2010.

Table 6. Rollforward of Level 3 Investments (in thousands of dollars)

Marketable Equities alternatives Perpetual trusts Total investments Fixed income Real estate Fiscal year 2011 Fairvalue, July 1, 2010.....

$ 73,406 Realized gains (losses).....

(8)

Unrealized gains.........

919 Net purchases, sales, and settlements...........

2,335 Transfer of assets between levels Fair Value, June 30, 2011...

$ 76,652 Fiscal year 2010 Fair value, July 1, 2009.....

$ 63,833 Realized gains (losses).....

Unrealized gains.........

9,270 Net purchases, sales, and settlements...........

303 Transfer of assets between levels Fair Value, June 30, 2010... $ 73,406

$ 4,130,241 9,965 572,184 516,720

$ 5,229,110

$ 3,979,877 (46) 282,355 (113,178)

(18,767)

$ 4,130,241

$ 1,399,085 (1) 156,892 (165,830)

(48,226)

$1,341,920

$ 2,203,965 1,868 203,573 (594,513)

(415,808)

$ 1,399,085

$ 1,352,644 53,13 174,570 10,90 131,813

$ 1,659,027

$ 1,256,126 (389) 76,600

$ 64,04 34

$ 7,008,510 9,956 36 915,471 485,038 (48,226)

O0

$8,370,749

$ 47,61 5,51 18

$ 7,551,419 1,433 16 577,314 (687,081)

(434,575) 34

$7,008,510 20,307

$1,352,644

$ 53,13 MIT enters into short sales whereby it sells securities which may or may not be owned by MIT in anticipation of a decline in the price of such securities or in order to hedge portfolio positions. On June 30, 2011 and 2010, cash collateral and certain securities owned by MIT were held at counterparty brokers to collateralize these positions and are included in investments on the Statements of Financial Position.

Certain investments in real estate, equities, and private investments may be subject to restrictions that (i) limit MIT's ability to withdraw capital after such investment and (ii) may be subject to limitations that limit the amount that may be withdrawn as of a given redemption date.

Most marketable alternative investments are held in funds where withdrawal is limited to monthly, quarterly, or other periods, and may require notice periods. In addition, 20 MIT REPORT OF THE TREASURER 201 1

B. Investments (continued) certain of these funds are able to designate a portion of the investments as "illiquid" in "side-pockets," and these funds may not be available for withdrawal until liquidated by the investing fund. Generally, MIT has no discretion as to withdrawal with respect to its investment in private equity and real estate funds. Distributions are made when sales of assets are made within these funds and the investment cycle for these funds can be as long as fifteen to twenty years. These restrictions may limit MIT's ability to respond quickly to changes in market conditions. MIT does have various sources of internal liquidity at its disposal, including cash, cash equivalents, marketable debt and equity securities, and lines of credit.

The unfunded commitments that MIT has made to various investments at June 30, 2011 and 2010 are listed in Table 7 below. MIT expects these funds to be called currently and for a period to extend up to fifteen years.

Table 7. Unfunded Commitments (in thousands of dollars) 2011 2010 Equities....................

$ 1,275,577

$1,362,357 Marketable alternatives........

66,410 111,897 Real estate..................

510,321 456,656 Total unfunded commitments

$ 1,852,308

$1,930,910 C. Derivative Financial Instruments Effective July 1, 2009, MIT adopted an accounting standard which required entities to provide additional disclosures regarding derivative instruments held.

During the year ended June 30, 2011, MIT maintained two interest rate swap agreements to manage the interest cost and risk associated with its variable rate debt, further described in Note G. On June 5, 2011, one of these swap agreements expired. Under the terms of the expired agreement, MIT paid a fixed rate of 4.46% on a notional amount of $125 million and received a payment indexed to the Securities Industry and Financial Market Association (SIFMA) municipal swap index rate. Under the remaining agreement, MIT pays a fixed rate of 4.91% and receives a payment indexed to SIFMA on a notional amount of $125 million. AtJune 30, 2011, the remaining swap agreement had a total fair value of $(32.8) million and at June 30, 2010 had a fair value of $(35.5) million. This swap portfolio had a total net gain for 2011 of $7.7 million and had $4.9 million in losses for 2010. The notional amounts of these derivatives are not recorded on MIT's Statements of Financial Position.

For its investment management, MIT uses a variety of financial instruments with off-balance sheet risk involving contractual or optional commitments for future settlement.

MIT uses these instruments primarily to decrease its exposure to extreme market events and to partially offset exchange rate movements with respect to any currency exposure. These instruments include futures, credit default swaps, and interest rate cap and swaption agreements. The futures are exchange-traded and the swap, swaptions, and cap agreements are executed over the counter.

MIT's portfolio of interest rate caps and swaptions is designed for protection from significant increases in interest rates. An interest rate swaption is an option to enter into an interest rate swap agreement on pre-set terms at a future date. The purchaser and seller of the swaption agree on the expiration date, option type, exercise style, the terms of the underlying swap and the type of settlement. As the expiration date approaches, the swaption holder can either notify the seller of its intention to exercise or let the option expire. An interest rate cap places a ceiling on a floating rate of interest on a specified notional principal amount for a specific term. The buyer of the cap uses the cap contract to limit its maximum interest rate exposure. If the buyer's floating rate rises above the cap strike, the cap contract provides for payments from the seller to the buyer of the cap for the difference between the floating rate and the cap strike. If the floating rate remains below the cap strike, no payments are required. The cap buyer is required to pay an upfront fee or premium for the cap. The cap premium charged by the seller depends upon the market's assessment of the probability that rates will move through the cap strike over the time horizon of the deal. The payoff is expected to occur in extreme market conditions that would negatively impact other of MIT's assets.

Table 8 summarizes the notional exposure and net ending fair value relative to the financial instruments with off-balance sheet risk as of June 30, 2011 and 2010 related to MIT'S investment management.

NOTES TO FINANCIAL STATEMENTS 21

C. Derivative Financial Instruments (continued)

Table 8. Derivative Financial Instruments Notional exposure I

Net ending (in thousands of dollars)

Long Short fair value

• Net gain (loss)**

Fiscal year 2011 Fixed income instruments Fixed income futures......................

Options on interest rate exchange agreements Interest rate caps and floors..............

Total fixed income instruments...............

Currency instruments Currency forwards........................

Total currency instruments..................

2,500 1,284,436 2,884,777 4,171,713 61,541 61,541 15,993 15,993 (19,400)

(2,863,000)

(2,882,400)

(16,884)

(16,884)

(29,159)

(29,159)

(67) 2,715 50,947 53,595 (126)

(126)

(110)

(1,449)

(1,559) 459 2,612 5,413 8,484 (830)

(830)

(379)

(1,449)

(1,828)

Commodity instruments Commodity futures............

Equity index future Total commodity futures.........

Credit instruments..............

732,533 (2,617,037) 50,873 (5,561) 2011 T otal...............................

Fiscal year 2010 Fixed income instruments Fixed income futures......................

Options on interest rate exchange agreements.

Interest rate caps and floors................

Total fixed income instruments...............

Currency instruments Currency forwards........................

Total currency instruments..................

Commodity instruments Commodity futures.......................

Total commodity futures....................

$ 4,981,780 1,084,172 2,750,000 3,834,172 52,496 52,496 1,364 1,364 S(5,545,480)

(32,700)

(82,198)

(1,950,000)

(2,064,898)

$ 102,783 265 (526) 20,371 5,287 25,132 (1,494)

(17,547) 11,638 (7,403)

(1,007)

(1,007)

(3,424)

(3,424)

(53,829)

(1,333)

(53,829)

(1,333) 269 269 Credit instrum ents.........................

200,607 (1,553,312) 12,969 35,390 2010 T otal...............................

$ 4,088,639

$ (3,672,039) 37,037 23,556

• Tlhefifhi value of all derivative financial instrunments is reflected in investmnents at./air value in the Statements of Financial Position.

• • Net gain (loss) fioom the derivative financial instwuments is located in the non-operating section as net gain on investments and other assets in the Statements ofActivities.

MIT REPORT OF THE TREASURER 2011

C. Derivative Financial Instruments (continued)

Table 9 provides further details related to MIT's credit instruments. The act of entering into a credit default swap contract is often referred to as "buying protection" or "selling protection" on an underlying reference obligation.

The buyer is obligated to make premium payments to the seller over the term of the contract in return for a contingent payment upon the occurrence of a credit event with respect to the underlying obligation. The seller bears the obligation to "protect" the buyer in the event of default of the underlying issuer. Upon this event, the cash payment which the buyer receives is equal to the clearing price established by an auction of credit default swap claims, which is designed to approximate the recovery value of an unsecured claim on the issuer in default. The swap will last for a predetermined amount of time, typically five years.

Upon termination of the swap, the buyer is no longer obligated to make any premium payments and there is no other exchange of capital.

Financial instruments with off-balance sheet risk involve counterparty credit exposure. MIT requires collateral to the maximum extent possible under normal trading practices. Collateral is moved on a daily basis as required by fluctuations in the market. The collateral is generally in the form of debt obligations issued by the U.S. Treasury or cash. In the event of counterparty default, MIT has the right to use the collateral to offset the loss associated with the replacement of the agreements. MIT enters into arrangements only with counterparties believed to be creditworthy.

The following table summarizes the notional amounts and fair value of the purchased and written credit derivatives, classified by the expiration terms and the external credit ratings of the reference obligations atJune 30, 2011 and 2010.

Table 9. Credit Derivatives I

Purchased protection -

[

Written protection notional amount Purchased notional amounts Purchased Years to maturity fair value*

< 5 years 5-10 years Written Offsetting notional purchased amounts credit protection-Net written credit protection Net written credit protection fair value (in thousands of dollars)

Fiscal year 2011 Credit rating on underlying or index A-to AAA...............

BBB-to BBB+..............

Non-investment grade.......

N on-rated.................

ABX - AA index.............

861,248 917,741 25,000 20,000 60,515

$ (7,213)

(7,363) 914 (180) 34,367

$ 270,653 187,098

$ 590,595 730,643 25,000 20,000 60,515 2011 Total.............

$1.884.504 S 20.525

$ 457.751 S1.426.753

$732,533

$ (732,533)

$ 30,348 S 732,533 S (732,533)

$30,348

$ 200,607

$ (200,607)

$ 6,651

$ 200,607 S (200,607)

$ 6,651 Fiscal year 2010 Credit rating on underlying or index A-toAAA.................

BBB-to BBB+............

Non-investment grade.......

N on-rated.................

ABX - AA index.............

547,155 709,450 47,000 20,000 29,100

$ (3,897)

(6,819) 1,296 (292) 16,030 36,(000

$ 511,155 87,450 622,000 47,000 20,000 29,100 2010 Total..............

$1,352,705 S

6,318

$ 123,450

$1,229,255

• The fair value of all credit derivative instru ments is reflected in investments, atfeir value in the Statements of Financial Position.

• • Net gain (loss) of the credit derivative instruments is located in the non-operating section as net gain on investnents and other assets in the Statements of Activities.

NOTES TO FINANCIAL STATEMENTS 23

D. Pledges Receivable Table 10 below shows the time periods in which pledges receivable at June 30, 2011 and 2010 are expected to be realized.

Table 10. Pledges Receivable (in thousands of dollars) 2011 2010 A review of pledges is periodically made with regard to collectability. As a result, the allowance for pledges that may not be fulfilled is adjusted, and some pledges have been canceled and are no longer recorded in the financial state-ments. In addition, pledges are discounted in the amount of

$55.0 million and $59.0 million in 2011 and 2010, respec-tively. MIT has gross conditional pledges, not recorded, for the promotion of education and research in the amount of $26.9 million and $44.1 million as ofJune 30, 2011 and 2010, respectively.

Pledges receivable are classified as Level 3 under the valuation hierarchy described in Note B.

In one year or less......

Between one year and five years.............

More than five years....

Less: allowance for unfulfilled pledges......

Pledges receivable, net.................

109,181 187,608 173,776 (47,600) 99,057 193,666 165,997 (46,410)

$ 422,965 412,310 Table 11 below is a rollforward of the pledges receivable for 2011 and 2010.

Table 11. Rollforward of Pledges Receivable (in thousands of dollars) 2011 2010 Balance at beginning of year...............................................

412,310 464,736 N ew pledges...........................................................

107,830 61,630 Pledge paym ents received.................................................

(99,922)

(139,549)

Decrease in pledge discount...............................................

3,937 30,494 (Increase) decrease in reserve for unfulfilled pledges............................

(1,190) 5,470 Transfer to The Broad Institute............................................-

(10,471)

Balance at end of year...............................................

422,965 412,310 E. Student Notes Receivable Table 12 below details the components of student notes receivable at June 30, 2011 and 2010.

Table 12. Student Notes Receivable (in thousands of dollars) 2011 2010 Institute-funded student notes receivable.....................................

15,191 16,570 Perkins student notes receivable............................................

37,566 35,926 Total student notes receivable........................................

52,757 52,496 Less: allowance for doubtful accounts.......................................

(3,000)

(3,000)

Student notes receivable, net.........................................

49,757 49,496 24 24MIT REPORT OF THE TREASURER 201 1

E. Student Notes Receivable (continued)

Perkins student notes receivable are funded by the U.S.

Government and by MIT to the extent required by the Perkins National Direct Student Loan Program. Funds advanced by the U.S. Government for this program,

$33.8 million and $33.6 million atJune 30, 2011 and 2010, respectively, are ultimately refundable to the U.S.

Government and are classified as liabilities. Due to the nature and terms of the student loans, which are subject to significant restrictions, it is not feasible to determine the fair value of such loans.

Allowance for Credit Losses Management regularly assesses the adequacy of the allowance for credit losses by performing ongoing evaluations of the student loan portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the economic environment in which the bor-rowers operate, the level of delinquent loans, the value of any collateral and, where applicable, the existence of any guarantees or indenmifications. MIT's Perkins receivable represents the amounts due from current and former students under the Federal Perkins Loan Program. Loans disbursed under the Federal Perkins Loan program are able to be assigned to the U.S.

Government in certain non-repayment situations. In these situations the Federal portion of the loan balance is guaranteed.

Factors also considered by management when per-forming its assessment, in addition to general economic conditions and the other factors described above, in-cluded, but were not limited to, a detailed review of the aging of the student loan receivable detail and a review of the default rate by loan category in comparison to prior years. The level of the allowance is adjusted based on the results of management's analysis.

Loans less than 120 days delinquent are deemed to have a minimal delay in payment and are generally not written off but are reserved in accordance with the terms discussed above. Loans more than 120 days delinquent are subject to standard collection practices including litigation. Only loans that are deemed uncol-lectible are written off and this only occurs after several years of unsuccessful collection, including placement at more than one external collection agency.

Considering the other factors already discussed herein, management considers the allowance for credit losses at June 30, 2011 and 2010 to be prudent and reasonable.

Furthermore, MIT's allowance is general in nature and is available to absorb losses from any loan category.

Management believes that the allowance for credit losses atJune 30, 2011 is adequate to absorb credit losses inherent in the portfolio as of that date.

Changes in the allowance for credit losses for the year ended June 30, 2011 were as shown in the following table.

Table 13. Roilforward of Allowance for Credit Losses Student notes receivables (in thousands of dollars,)

Balance at beginning of year..............................................

Provision for credit losses................................................

N et charge-offs........................................................

Balance at end of year.................................................

3,000 171 (171) 3,000 NOTES TO FINANCIAL STATEMENTS 25

F Accounts Payable, Accruals and Other Liabilities MIT's accounts payable, accruals and other liabilities atJune 30, 2011 and 2010 are shown in Table 14 below.

Table 14. Accounts Payable, Accruals and Other Liabilities (in thousands of dollars) 2011 2010 Accounts payable and accruals.............................................

310,476 256,213 Accrued vacation........................................................

55,685 52,885 Total.............................................................

$ 366,161 309,098 G. Borrowings Table 15. Borrowings (in thousands of dollars / due dates are calendar based) 2011 2010 EDUCATIONAL PLANT Massachusetts Health and Educational Facilities Authority (MHEFA)

Series I, 4.75%-5.20%, due 2028, par value $59,200..........................

Series j-1, variable rate, due 2031.........................................

Series J-2, variable rate, due 2031.........................................

Series K, 5.25%-5.50%, due 2012-2032, par value $230,000...................

Series L, 3.0%-5.25%, due 2004-2033, par value $170,160.....................

Series M, 5.25%, due 2014-2030, par value $131,110.........................

Series N, 3.5%-5.0%, due 2014-2038, par value $325,195.....................

Series 0, 4.0%-6.0%, due 2016-2036, par value $266,460.....................

Total MHEFA...................................................

Medium Term Notes Series A, 7.125%, due 2026............................

Medium Term Notes Series A, 7.25%, due 2096.............................

Notes payable to bank, variable rate, due 2014...............................

Taxable Bonds, Series B, 5.60%, due 2111, par value $750,000 1.................

Total educational plant.............................................

OTHER Notes payable to bank, variable rate, due 2014...............................

Total borrowings..................................................

59,613 125,000 125,000 242,242 182,072 143,897 331,594 272,218 1,481,636 17,355 45,443 83,033 746,881 2,374,348 93,477 59,638 125,000 125,000 243,041 185,394 144,968 332,815 273,368 1,489,224 17,351 45,441 83,033 1,635,049 93,477

$ 2,467,825

$ 1,728,526 1 The proceeds of Taxable Bonds, Series B were held as liquid investments as ojf.June 30, 2011 and have not yet been invested in physical assets.

Fair value of the outstanding debt is approximately 5.0% and 7.0% greater than the carrying value in 2011 and 2010, respectively. Carrying value is based on estimates using current interest rates available for similarly rated debt of the same remaining maturities.

26 MIT REPORT OF THE TREASURER 2011

G. Borrowings (continued)

The aggregate amounts of debt payments and sinking fund requirements for each of the next five fiscal years are shown in Table 16 below.

Table 16. Debt Obligations (in thousands of dollars) 2012..................

2,490 2013..................

26,500 2014..................

202,509 2015..................

59,110 2016..................

9,585 MIT maintains a line of credit with a major financial institution for an aggregate commitment of $500.0 million.

As ofJune 30, 2011, $323.5 nmillion was available under this line of credit. The line of credit expires on March 28, 2014.

Cash paid for interest on long-term debt in 2011 and 2010 was $78.7 million and $79.4 million, respectively.

Variable interest rates at June 30, 2011 are shown in Table 17 below.

Table 17. Variable Interest Rates (in thousands of dollars)

Amount Rate MHEFA Series J-1.......

$ 125,000 0.04%

MHEFA Series J-2.......

125,000 0.04%

Notes payable to bank.....

176,510 1.21%

In the event that MIT receives notice of any optional tender on its Series J-1 and Series J-2 variable-rate bonds, or if these bonds become subject to mandatory tender, the purchase price of the bonds will be paid from the remarketing of such bonds. However, if the remarketing proceeds are insufficient, MIT will be obligated to purchase the bonds tendered at 100 percent of par on the tender date.

During 2011, MIT issued $750.0 million in taxable bonds at a rate of 5.6% for a period of 100 years. This will be used to finance a comprehensive strategy for the next phase of MIT's physical plant development.

H. Commitments and Contingencies Federal Government Funding MIT receives funding or reimbursement from Federal agencies for sponsored research under Government grants and contracts. These grants and contracts provide for reimbursement of indirect costs based on rates negotiated with the Office of Naval Research (ONR), MIT's cognizant Federal agency. MIT's indirect cost reimbursements have been based on fixed rates with carry forward of under or over-recoveries. AtJune 30, 2011 and 2010, MIT recorded a net over-recovery of $48.1 million and $12.3 million, respectively.

The DCAA is responsible for auditing indirect charges to grants and contracts in support of ONR's negotiating responsibility. MIT has final audited rates through 2009.

MIT's 2011 research revenues of $1,447.2 million include reimbursement of indirect costs of $196.8 million, which includes the adjustment for the variance between the indirect cost income determined by the fixed rates and actual costs for 2011. In 2010, research revenues were $1,369.6 million, which included reimbursement of indirect costs of $197.2 million.

Leases At June 30, 2011, there were no capital lease obligations.

MIT is committed under certain operating (rental) leases.

Rent expense incurred under operating lease obligations was $33.3 million and $33.1 million in 2011 and 2010, respectively. Future minimum payments under operating leases are shown in Table 18 below.

Table 18. Lease Obligations (in thousands of dollars) 2012..................

$ 31,815 2013..................

30,599 2014..................

23,458 2015..................

10,304 2016..................

8,335 Investments As of June 30, 2011, $9.3 million of investments were pledged as collateral to various supplier and government agencies.

NOTES TO FINANCIAL STATEMENTS 27

H. Commitments and Contingencies (continued)

Future Construction MIT has contracted for educational plant in the amount of $65.4 million atJune 30, 2011. It is expected that the resources to satisfy these commitments will be provided from unexpended plant funds, anticipated gifts, and unrestricted funds. MIT will be committing additional resources to planned major construction projects and improvements to the current infrastructure over the next several years.

Related Entities MIT has entered into agreements, including collaborations with third-party not-for-profit and for-profit entities, for education, research, and technology transfers. Some of these agreements involve funding from foreign governments.

These agreements subject MIT to greater financial risk than do its normal operations. In the opinion of management, the likelihood of realization of increased financial risks by MIT under these agreements is remote.

General MIT is subject to certain other legal proceedings and claims that arise in the normal course of operations. In the opinion of management, the ultimate outcome of these actions will not have a material effect on MIT's financial position.

1. Functional Expense Classification MIT's expenditures on a functional basis are shown in Table 19 below.

Table 19. Expenditures by Functional Classification (in thousands of dollars) 2011 2010 G eneral and adm inistrative................................................

Instruction and unsponsored research.......................................

Sponsored research......................................................

A uxiliary enterprises.....................................................

Operation of Alumni Association...........................................

Total operating expense.............................................

523,676 659,839 1,265,776 110,631 11,225

$ 2,571,147 461,186 613,345 1,192,041 104,489 11,505

$2,382,566 J. Retirement Benefits MIT offers a defined benefit plan and a defined con-tribution plan to its employees. The plans cover substan-tially all of MIT's employees.

MIT also provides retiree welfare benefits (certain health care and life insurance benefits) for retired employees.

Substantially all of MIT's employees may become eligible for those benefits if they reach a qualifying retirement age while working for MIT. Retiree health plans are paid for in part by retirees, their covered dependents, and beneficiaries. Benefits are provided through various insurance companies whose charges are based either on the claims and administrative expenses paid during the year or annual insured premiums.

Retiree life insurance plans are non-contributory and cover the retiree only. MIT maintains a trust to pay for retiree welfare benefits.

MIT contributes to the defined benefit plan amounts that are actuarially determined to provide the retirement plan with sufficient assets to meet future benefit requirements.

There were no contributions to the defined benefit plan in 2011 or 2010.

For purposes of calculating net periodic pension cost for the defined benefit plan, plan amendments are amortized on a straight-line basis over the average future service to expected retirement of active participants at the date of the amendment. Cumulative gains and losses (including changes in assumptions) in excess of 10 percent of the greater of the projected benefit obligation or the market-related value of assets are amortized over the average future service of active participants. The annual amortization shall not be less than the total amount of unrecognized gains and losses up to $1 million.

28 MIT REPORT OF THE TREASURER 2011

J. Retirement Benefits (continued)

The amount contributed and expenses recognized during 2011 and 2010 related to the defined contribution plan were

$40.8 million and $39.2 million, respectivelyW For purposes of calculating net periodic postretirement welfare benefit cost, a portion of the current obligation, related to the transition to the accounting standard Employer'rV Accounting for Postretirement Benefits Other than Pensions, is being amortized on a straight-line basis over 20 years from the date of adoption of that statement in 1994. Plan amendments are amortized on a straight-line basis over the average future service to full eligibility of active participants at the date of amendment. Cumulative gains and losses (including changes in assumptions) in excess of 10 percent of the greater of the plan's obligation or the market-related value of assets are amortized over the average future service of active participants. The annual amortization shall not be less than the total amount of unrecognized gains and losses up to $1 nfillion.

Components of Net Periodic Benefit (Income) Cost Table 20 summarizes the components of net periodic benefit (income) cost recognized in operating activity and other amounts recognized in non-operating activity in unrestricted net assets in the Statements of Activities for the years ended June 30, 2011 and 2010.

Table 20. Components of Net Periodic Benefit (Income) Cost Postretirement welfare Defined benefit plan benefit plan I

I I

2011 2010 2011 2010 (in thousands of dollars)

Components of net periodic benefit (income) cost Service cost...................................

Interest cost...................................

Expected return on plan assets....................

Amortization of transition amount.................

Amortization of net actuarial (gain) loss.............

Amortization of prior service cost.................

Net periodic benefit (income) cost recognized in operating activity............................

Other amounts recognized in non-operating activity in unrestricted net assets Current year actuarial (gain) loss..................

Amortization of actuarial gain (loss)................

Amortization of prior service cost.................

Amortization of transition obligation...............

59,892 134,756 (221,135)

(2,323) 2,180 (26,630)

(68,388) 2,323 (2,180)

(68,245)

(94,875) 54,179 131,994 (222,291) 19,957 27,380 (20,142) 4,776 10,266 3,556 16,581 25,901 (20,422) 4,776 4,409 3,556 (29,500) 2,180 (63,438) 183,119 29,500 (2,180) 45,793 (18,565)

(10,266)

(3,556)

(4,776) 34,801 40,438 (4,409)

(3,556)

(4,776)

Total other amounts recognized in non-operating activity....................................

Total recognized in Statements of Activities......

210,439

$ 147,001 (37,163) 27,697 8,630 62,498 The estimated net actuarial gain and prior service cost for the defined benefit plan that will be amortized from unrestricted net assets into net periodic benefit income during the next fiscal year are $1.0 million and $2.0 million, respectively. The estimated net actuarial loss and transition obligation for the postretirement welfare benefit plan that will be amortized from unrestricted net assets into net periodic benefit cost during the next fiscal year are $11.4 million and $4.8 million, respectively.

NOTES TO FINANCIAL STATEMENTS 29

J. Retirement Benefits (continued)

Cumulative amounts recognized as non-operating changes in unrestricted net assets are summarized in the following table for the years endedJune 30, 2011 and 2010.

Table 21. Cumulative Amounts Recognized in Unrestricted Net Assets Postretirement welfare benefit plan Defined benefit plan (in thousands of dollars) 2011 2010 I

2011 2010I Amounts recognized in unrestricted net assets consist of:

N et actuarial loss...............................

Prior service cost...............................

Transition liability..............................

Total cumulative amounts recognized in 126,184 192,248 156,141 184,972 6,821 9,002 3,556 9,551 14,327 unrestricted net assets.......................

133,005

$ 201,250 165,692

$ 202,855 Benefit Obligations and Fair Value of Assets Table 22 summarizes the benefit obligations, plan assets, and amounts recognized in the Statements of Financial Position for MIT's retirement benefit plans. MIT uses a June 30 measurement date for its defined benefit pension and postretirement welfare benefit plans.

Table 22. Projected Benefit Obligations and Fair Value of Assets Defined benefit plan Postretirement welfare benefit plan 2011 2010 (in thousands of dollars) 2011 2010 Change in projected benefit obligations Projected benefit obligations at beginning of year....

Service cost...................................

Interest cost...................................

Retiree contributions............................

Net benefit payments, transfers and other expenses...

Assumption changes and actuarial net loss...........

Projected benefit obligations at end of year......

Change in plan assets Fair value of plan assets at beginning of year.........

Actual return on plan assets......................

Employer contributions.........................

Retiree contributions............................

Net benefit payments, transfers and other expenses...

Fair value of plan assets at end of year...........

Funded (unfunded) status at end of year.........

Amounts recognized in the Statements of Financial Position consist of:

Benefit assets..................................

Benefit liability................................

T otal......................................

$ 2,293,877 59,892 134,756 (115,523) 85,590 2,458,592 2,312,718 375,112 (115,523) 2,572,307 113,715 113,715

$ 2,118,977 54,179 131,994 (117,535) 106,262 2,293,877 472,170 19,957 27,380 3,496 (23,574) 10,409 509,838 2,2 (1

2,3 84,819 234,535

.45,434 49,116 50,399 3,496

.17,535)

(25,917) 12,718 311,629 18,841

$ (198,209) 18,841 409,738 16,581 25,901 3,200 (23,474) 40,224 472,170 234,601 20,209 2,038 3,200 (25,513) 234,535

$ (237,635)

(237,635)

$ (237,635) 113,715 18,84 (198,209) 1

$ (198,209) 30 3MIT REPORT OF THE TREASURER 201 I

J. Retirement Benefits (continued)

The accumulated benefit obligation for MIT's defined benefit pension plan was $2,305.8 nmillion and $2,157.9 million at June 30, 2011 and 2010, respectively.

MIT has recognized the effect of the expected Medicare subsidy by reducing its accumulated postretirement benefit obligation by $64.6 million and $62.6 million as of June 30, 2011 and 2010, respectively. This initial reduction was recognized as an actuarial gain. Additionally, the service and interest cost components of postretirement benefits cost were reduced in 2011 and future periods.

Assumptions and Health Care Trend Rates The expected long-term rate of return assumption represents the expected average rate of earnings on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The long-term rate of return assumption is determined based on a number of factors, including historical market index returns, the anticipated long-term asset allocation of the plans, histori-cal plan return data, plan expenses and the potential to outperform market index returns.

Table 23. Assumptions Defined benefit plan 2011 2010 Postretirement welfare benefit plan 2011 2010 Assumptions used to determine benefit obligation as of June 30:

D iscount rate..................................

Rate of compensation increase I...................

Assumptions used to determine net periodic benefit (income) cost for year ended June 30:

D iscount rate..................................

Expected long-term return on plan assets...........

Rate of compensation increase...................

Assumed health care cost trend rates:

Health care cost trend rate assumed for next year.....

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate).........................

Year that the rate reaches the ultimate trend rate.....

5.65%

4.00%

5.84%

8.00%

4.00%

5.84%

4.00%

6.25%

8.00%

4.00%

5.56%

5.71%

7.00%

7.50%

5.00%

2018 5.71%

6.25%

7.00%

7.50%

5.00%

2015 The average rate of salaiy increase is asslumed to be 3% fr 2012, and 4% thereafte:

As an indicator of sensitivity, a one percentage point change in the assumed health care cost trend rate would effect 2011 as shown in Table 24 below.

Table 24. Health Care Cost Trend Rate Sensitivity (in thousands of dollars) 1 % point increase 1 % point decrease Effect on 2011 postretirement service and interest cost....................

$ 7,970

$ (6,439)

Effect on postretirement benefit obligation as of June 30, 2011..............

$$64,215

$ (52,361)

Plan Investments The investment objectives for the assets of the plans are to minimize expected funding contributions and to meet or exceed the rate of return assumed for plan funding purposes over the long term. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives.

Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within prudent risk parameters. Risk management practices include the use of external investment managers, the maintenance of a portfolio diversified by asset class, investment approach, security holdings, and the maintenance of sufficient liquidity to meet benefit obligations as they come due.

NOTES TO FINANCIAL STATEMENTS 31

J. Retirement Benefits (continued)

Table 25 presents investment at fair value of MIT's defined benefit plan and postretirement welfare benefit plan, which are included in plan net assets as ofJune 30, 2011 and 2010, grouped by the valuation hierarchy detailed in Note B. There were no significant transfers in and out of Level 1 and Level 2 fair value measurements in 2011.

Table 25. Plan Investments Quoted prices in active markets (in thousands of dollars)

(Level 1)

Significant other observable inputs (Level 2)

Significant un-observable inputs (Level 3)

Total fair value Defined Benefit Plan Fiscal year 2011 Cash and cash equivalents.............

Fixed incom e........................

E quities............................

M arketable alternatives................

R eal estate..........................

Interest rate futures..................

Total plan investment.................

Fiscal year 2010 Cash and cash equivalents.............

Fixed incom e........................

E quities............................

M arketable alternatives................

R eal estate..........................

Interest rate futures..................

Less: Amounts held in 401(h) accounts..

Total plan investment.................

Postretirement Welfare Benefit Plan Fiscal year 2011 Cash and cash equivalents.............

Fixed incom e........................

E quities............................

M arketable alternatives................

R eal estate..........................

Total plan investment.................

Fiscal year 2010 Cash and cash equivalents.............

Fixed incom e........................

E quities............................

M arketable alternatives................

R eal estate..........................

Total plan investment.................

34,644 188,705 220,211 (17) 443,543 17,594 196,123 325,635 (196) 539,156 75,077 192,537 228,546 496,160 893,35 444,38 282,40

$ 1,620,13 72 7,14 597,03 225,24

$ 1,549,42 65,130 112,441 42,150 34,644 263,782 1,306,099 4

672,930 4

282,404 (17) 9

$ 2,559,842 17,594 261,253

-9 1,165,225 2

639,182

-1 225,241 (196) 2

$ 2,308,299 (4,371) 2,303,928 219,721 4,382 52,957 57,339 4,211 21,779 25,990 67,730 76,603 34,183 178,516 52,857 73,176 5,488 131,521

$m 43,391 22,134 10,344 75,869 29,527 34,116 7,140 70,783 4,382 67,730 172,951 56,317 10,344 311,724 4,211 52,857 124,482 39,604 7,140 228,294 32 MIT REPORT OF THE TREASURER 2011

J. Retirement Benefits (continued)

Table 26 is a rollforward of the investments classified by MIT's defined benefit plan and postretirement welfare benefit plan within Level 3 of the fair value hierarchy defined in Note B as at June 30, 2011 and 2010.

Table 26. Rollforward of Level 3 Plan Investment Marketable Total (in thousands of dollars,)

Equities alternatives Real estate investments Defined Benefit Plan Fair value, July 1, 2010.................

Realized losses.......................

Unrealized gains.....................

Net purchases, sales, settlements.........

Transfers of assets between levels.........

Fair value, June 30, 2011..............

Fair value, July 1, 2009.................

Realized gains (losses).................

Unrealized gains (losses)...............

Net purchases, sales, settlements.........

Transfers of assets between levels.........

Fair value, June 30, 2010..............

Postretirement Welfare Benefit Plan Fair value, July 1, 2010.................

Realized losses.......................

Unrealized gains.....................

Net purchases, sales, settlements.........

Transfers of assets between levels.........

Fair value, June 30, 2011..............

Fair value, July 1, 2009.................

Realized gains (losses).................

Unrealized gains (losses)...............

Net purchases, sales, settlements.........

Transfers of assets between levels.........

Fair value, June 30, 2010..............

$ 727,149 (3,041) 92,678 97,421 (20,856)

$ 893,351

$ 718,968 (53) 21,745 (4,432)

(9,079)

$ 727,149

$ 597,032 225,241 54,558 (30,696)

(176,510)

$ 444,384

$ 625,515 755 34,408 (21,496)

(42,150)

$ 597,032 19,074 38,089 282,404 239,666 (38,337) 23,912 225,241

$ 1,549,422 (3,041) 166,310 104,814 (197,366)

$ 1,620,139

$ 1,584,149 702 17,816 (2,016)

(51,229)

$ 1,549,422 29,527 (3) 5,101 16,910 (8,145) 43,390 23,511 (5) 2,948 4,299 (1,226) 29,527 34,116 3,274 (1,241)

(14,014) 22,135 32,919 105 (1,365) 7,944 (5,487) 34,116 7,140 1,717 1,487 10,344 6,519 (108) 729 7,140 70,783 (3) 10,092 17,156 (22,159) 75,869 62,949 100 1,475 12,972 (6,713) 70,783 NOTES TO FINANCIAL STATEMENTS 33

J. Retirement Benefits (continued)

The unfunded commitments which MIT's defined benefit plan and postretirement welfare benefit plan have made to various investments as of June 30, 2011 and 2010 are listed in Table 27 below.

Table 27. Unfunded Commitments Defined benefit plan 2011 2010 Postretirement welfare benefit plan 2011 2010 (in thousands of doll/rs)

Equities............................

$ 254,057

$ 303,601

$ 20,253

$ 26,662 Marketable alternatives................

33,009 38,084 2,844 3,839 Real estate..........................

191,106 183,496 16,461 11,280 Total..............................

$ 478,172

$ 525,181

$ 39,558 S 41,781 Target allocations and weighted-average asset allocations of the investment portfolio for the MIT defined benefit plan and postretirement welfare benefit plan atJune 30, 2011 and 2010 are shown in Table 28.

Table 28. Plan Investment Allocation Defined benefit plan Postretirement welfare benefit plan Plan assets as of June 30 Plan assets as of June 30 Target I

Target Allocation 2011 2010 Allocation 2011 2010 Cash & cash equivalents.......

2%

1%

2%

2%

Fixed income................

8%

10%

11%

20%

23%

22%

Equities....................

48%

51%

50%

50%

55%

55%

Marketable alternatives........

33%

26%

28%

25%

17%

18%

Real estate..................

11%

11%

10%

5%

3%

3%

Total.....................

100%

100%

100%

100%

100%

100%

34 MIT REPORT OF THE TREASURER 201 1

J. Retirement Benefits (continued)

The following table summarizes the notional exposure regarding derivative financial instruments. The post-and net ending fair value of derivative financial instru-retirement welfare benefit plan did not have any out-ments held by the MIT defined benefit plan at June 30, standing derivative financial instruments at June 30, 2011 2011 and 2010. Refer to Note C for detailed discussion and 2010.

Table 29. Derivative Financial Instrument for Defined Benefit Plan Notional exposure Net ending fair (in thousands of dollars)

[

Long Short value amount Net loss Fiscal year 2011 Fixed income instruments Fixed income futures................

1,000 (6,600)

(17)

(179)

Total fixed income instruments..........

1,000 (6,600)

(17)

(179)

Currency and other instruments Currency forwards and other instruments 138 Total currency instruments...............

138 2011 Total.........................

1,000 (6,462)

(17)

(179)

Fiscal year 2010 Fixed income instruments Fixed income futures................

(11,900)

(196)

(649) 2010 Total.........................

(11,900)

(196)

(649)

Contributions Expected Future Benefit Payments MIT does not expect to contribute to its defined benefit Table 30 reflects total expected benefit payments for pension plan, and expects to contribute approximately $34.9 the defined benefit and postretirement welfare benefit million to its postretirement welfare benefit plan in 2012.

plans, as well as expected receipt of the federal subsidy.

These contributions have been estimated based on the same These payments have been estimated based on the same assumptions used to measure NUT's benefit obligations at assumptions used to measure MIT's benefit obligations at June 30, 2011. MIT also contributed $50.4 million and $2.0 June 30, 2011.

million to the postretirement welfare benefit plan in 2011 and 2010, respectively.

Table 30. Expected Future Benefit Payments Pension Other Federal (in thousands of dollars) benefits benefits' subsidy2 2012...........................................

$ 124,449 30,644 2,421 2013...........................................

135,456 33,260 2,681 2014...........................................

139,877 35,680 2,954 2015...........................................

144,080 37,955 3,216 2016...........................................

148,273 40,200 3,496 2017-20211......................................

803,934 232,511 21,544

'Other benefits reflect the total net benefits eapected to be paid froni the plans (i.e., gross benefit reimburs-enents o/fset by retiree contributions).

2Federal subsidy reflects the amount MIT is expected to receive fr'om the government and reflects MIT's expected drugs daims experience.

NOTES TO FINANCIAL STATEMENTS 35

K. Components of Net Assets and Endowment Table 31 below presents the three categories of net assets invested with the endowment funds. A large component by purpose as of June 30, 2011. The amounts listed in the of temporarily restricted net assets in other invested funds unrestricted column under endowment funds principal is pledges, the majority of which will be reclassified to are those gifts and other funds received over the years that unrestricted net assets when cash is received.

MIT designated as funds functioning as endowment and Table 31. Fund Category 20111 Temporarily Permanently 2010 (in thousands of dollars)

Unrestricted restricted restricted Total Total Endowment funds principal General purpose....................

Departments and research.............

L ibrary............................

Professorships......................

G raduate general....................

Graduate departments................

Undergraduate......................

P rizes.............................

M iscellaneous.......................

Investnent income held for distribution.

Endowment funds before pledges.......

P ledges............................

Total endowment funds.............

Other invested funds Student loan funds...................

Building funds......................

Designated purposes:

- Departments and research...........

- Other purposes....................

Reserve funds.......................

Real estate gifts held for sale...........

Life income funds...................

P ledges............................

Other funds available for current expenses Funds expended for educational plant...

Total other funds...................

Total net assets at fair value............

654,259 420,093 9,079 405,253 55,946 75,437 165,028 6,403 814,555 283,542 2,889,595 2,889,595 20,289 47,979 280,162 89,883 123,903 6,261 6,960 579,450 558,798 1,713,685

$ 4,603,280 787,370 697,712 15,908 1,856,041 93,359 220,755 775,685 19,582 132,339 4,598,751 4,598,751 48,257 46,903 282,019 68,589 445,768

$ 5,044,519 471,651 415,123 7,858 608,366 81,758 187,255 320,896 17,123 114,252 2,224,282 140,946 2,365,228

$ 1,913,280 1,532,928 32,845 2,869,660 231,063 483,447 1,261,609 43,108 1,061,146 283,542 9,712,628 140,946 9,853,574

$ 1,483,930 1,349,620 29,349 2,523,743 202,914 414,230 1,115,077 38,465 906,434 253,559 8,317,321 146,137 8,463,458 37,108 188,769 265,207 83,620 95,168 6,275 108,287 264,945 402,187 409,281 1,860,847

$10,324,305 16,343 36,632 96,236 76,320 92,663

$ 2,457,891 280,162 89,883 123,903 6,261 130,183 282,019 648,039 558,798 2,252,116

$ 12,105,690 36 MIT REPORT OF THE TREASURER 201 1

K. Components of Net Assets and Endowment (continued)

MIT's endowment consists of approximately 3,300 individual funds established for a variety of purposes and includes both donor-restricted endowment funds and funds designated by the Executive Committee of the MIT Corporation (Executive Committee) to function as endowment. As required by US GAAP, net assets associated with endowment funds, including funds designated by the Executive Committee to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions.

The Executive Committee of MIT has interpreted the Massachusetts-enacted version of Uniform Prudent Management of Institutional Funds Act (UPMIFA) as allowing MIT to appropriate for expenditure or accumulate so much of an endowment fund as MIT determines is prudent for the uses, benefits, purposes and duration for which the endowment fund is established, subject to the intent of the donor as expressed in the gift instrument.

Unless stated otherwise in the gift instrument, the assets in an endowment fund shall be donor-restricted assets until appropriated for expenditure by the Executive Committee.

As a result of this interpretation, MIT has not changed the way permanently restricted net assets are classified. See Note A for further information on net asset classification.

The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Executive Committee considers the following factors in making a determination to appropriate or accumulate endowment funds:

ii.

lii.

iV.

iv.

vi.

vii.

the duration and preservation of the fund the purposes of MIT and the endowment fund general economic conditions the possible effects of inflation and deflation the expected total return from income and the appreciation of investments other resources of MIT the investment policies of ALIT Table 32. Endowment Net Asset Composition by Type of Fund Temporarily Permanently Unrestricted restricted restricted (in thousands of dollars)

Total Fiscal year 2011 Donor-restricted endowment funds................

Board-designated endowment funds...............

Total endowment funds......................

Fiscal year 2010 Donor-restricted endowment funds................

Board-designated endowment funds...............

Total endowment funds......................

(7,071) 2,896,666

$ 2,889,595 S

(29,106) 2,527,534

$ 2,498,428 S 4,598,751

$ 4,598,751

$ 3,945,500

$ 3,945,500 S 2,365,228

$ 2,365,228

$ 2,019,530

$ 2,019,530 S 6,956,908 2,896,666

$ 9,853,574

$ 5,935,924 2,527,534

$ 8,463,458 NOTES TO FINANCIAL STATEMENTS 37

K. Components of Net Assets and Endowment (continued)

Table 3 3. Changes in Endowment Net Assets Temporarily Permanently Unrestricted restricted restricted (in thousands of dollars)

Total Fiscal year 2011 Endowment net assets, June 30, 2010..............

Investment return:

Investm ent incom e...........................

Net appreciation (realized and unrealized).........

Total investment return..........................

C ontributions.................................

Appropriation of endowment assets for expenditure...

Other changes:

Underwater gain adjustment....................

Net asset reclassifications and transfers to create board-designated endowment funds............

Endowment net assets, June 30, 2011...........

Fiscal year 2010 Endowment net assets, June 30, 2009..............

Investment return:

Investm ent incom e...........................

Net appreciation (realized and unrealized).........

Total investment return..........................

C ontributions.................................

Appropriation of endowment assets for expenditure...

Other changes:

Underwater loss adjustment and funds held for reinvestment........................

Net asset reclassifications and transfers to create board-designated endowment funds............

Endowment net assets, June 30, 2010...........

$ 2,498,428 24,744 423,568 448,312

$ 3,945,500

$ 2,019,530

$ 8,463,458 47,678 906,844 954,522 17,057 11,961 29,018 89,479 1,342,373 1,431,852 313,644 313,644 (134,428)

(300,831)

(9,577)

(444,836) 22,035 55,248

$ 2,889,595

$ 2,328,856 20,403 276,468 296,871 (22,035)

-21,595

$ 4,598,751

$ 3,807,297 42,293 414,261 456,554 12,613

$ 2,365,228 89,456

$ 9,853,574

$ 1,913,952

$ 8,050,105 8,406 5,957 14,363 71,102 696,686 767,788 58,815 58,815 (158,022)

(364,531)

(3,964)

(526,517)

(4,794) 35,517

$ 2,498,428 4,794 630 630 41,386

$ 3,945,500 35,734

$ 2,019,530 112,637

$ 8,463,458 Underwater Endowment Funds From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the value of the initial and subsequent donor gift amounts (underwater). When underwater endowment funds exist, they are classified as a reduction of unrestricted net assets. Total underwater endowment funds reported in unrestricted net assets were $7.1 million and $29.1 million as of June 30, 2011 and 2010, respectively. The underwater status of these funds resulted from unfavorable market fluctuations.

38 MIT REPORT OF THE TREASURER 201 1

K. Components of Net Assets and Endowment (continued)

Investment and Spending Policies MIT maintains its investments primarily in two investment pools: Pool A, principally for endowment and funds functioning as endowment, and Pool C, principally for investment of current funds of MIT's schools and departments and MIT's operating funds. Pool A operates as a mutual fund with units purchased and redeemed based on the previous month's unit market value of Pool A. The total market value of Pool A was $10,041.1 million at June 30, 2011 and $8,603.4 million atJune 30, 2010. Pool A includes certain operating and life income funds totaling

$754.5 million at June 30, 2011 and $454.7 million atJune 30, 2010. Certain assets are also maintained in separately invested funds. Separately invested funds totaled $424.4 million as of June 30, 2011 and $168.6 million as of June 30, 2010.

MIT has adopted endowment investment and spending policies designed to provide a predictable stream of funding to programs supported by its endowment while maintaining the purchasing power of endowment assets. An additional investment goal is to maximize return relative to appropriate risk such that performance exceeds appropriate benchmark returns at the total pool, asset class and individual manager levels.

To achieve its long-term rate-of-return objectives, MIT relies on a total return strategy in which investment returns are realized through both capital appreciation (realized and unrealized gains) and current yield (interest and dividends).

MIT targets a diversified asset allocation that places greater emphasis on equity-based investments to achieve its long-term objectives within prudent risk constraints.

The Executive Committee of the Corporation votes to distribute funds for operational support from general investments. In accordance with MIT's spending policy, these distributions are funded from both investment income and market appreciation. The distribution rates were $56.75 and $69.21 per Pool A unit as ofJune 30, 2011 and 2010, respectively. In 2011, the amount distributed for spending from Pool A and Pool C totaled $513.6 million, compared to $581.8 million distributed in the prior year. During 2011, distributions from separately invested funds were $10.5 million, compared to $4.2 million in 2010. The income earned in Pool C, or currently invested funds, was fully distributed. In addition to the aforementioned distributions, there was also a special distribution of $10.8 million from gains in Pool C in 2011. No such distribution was made in 2010.

L.The Broad Institute On July 1, 2009, The Broad Institute, previously a unit of MIT, became a separately incorporated entity. The Broad Institute is a research center located adjacent to the MIT campus. Before July 1, 2009, MIT administered The Broad Institute as a collaboration among MIT, Harvard University and its affiliated hospitals, and The XAqhitehead Institute for Biomedical Research. Following the separation, The Broad Institute is a self-administered collaboration of MIT, Harvard University, and its affiliated hospitals.

At separation on July 1, 2009, MIT transferred assets to the separately incorporated The Broad Institute.

NOTES TO FINANCIAL STATEMENTS 39

40 MIT REPORT OF THE TREASURER 2011

pwc Report of Independent Auditors To the Audit Committee of the Massachusetts Institute of Technology In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of activities and cash flows present fairly, in all material respects, the financial position of the Massachusetts Institute of Technology (the "Institute") at June 30, 2011 and 20o1, and the changes in their net assets and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Institute's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

September 15, 2011 PricewaterhouseCoopers LLP, 125 High Street, Boston, MA 02110 T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us REPORT OF INDEPENDENT AUDITORS 41

Massachusetts Institute of Technology Five-YearTrend Analysis - Financial Highlights (in thousands of dollars) 2011 2010 2009 2008 2007 Financial Position:

Investments, at fair value...............

Land, buildings, and equipment, at cost less accumulated depreciation Borrow ings..........................

Total assets..........................

Total liabilities.......................

Unrestricted net assets................

Temporarily restricted net assets.........

Permanently restricted net assets........

Total net assets.......................

Total endowment funds before pledges...

Principal Sources of Revenue:

Tuition and similar revenues............

Research revenues:

Cam pus direct....................

Campus indirect..................

Lincoln Laboratory direct...........

Lincoln Laboratory indirect.........

SM ART direct....................

SMART indirect..................

Gifts, bequests and pledges.............

Net gain (loss) on investments and other assets.

Investment income and distributions.....

Principal Purposes of Expenditures:

Total operating expenditures............

General and administrative.............

Instruction and unsponsored research....

Direct cost of sponsored research -

current dollars....................

Direct cost of sponsored research -

constant dollars (2007 = 100)........

$12,199,451 2,451,479 2,467,825 16,050,373 3,944,683 4,603,280 5,044,519 2,457,891 12,105,690 9,712,628 493,777

$ 9,913,877 2,327,810 1,728,526 13,412,506 3,088,201 3,759,301 4,463,066 2,101,938 10,324,305 8,317,321 468,570

$ 9,517,348 2,122,606 1,735,843 12,949,552 3,003,164 3,559,925 4,401,015 1,985,448 9,946,388 7,880,321 431,772 497,493 193,289 642,101 27,667 14,026 496 303,890 (1,854,380) 586,576

$ 2,461,286 497,043 680,848

$11,316,293 1,940,912 1,335,393 15,458,982 2,689,008 5,086,270 5,765,302 1,918,402 12,769,974 9,947,636 421,230

$11,068,922 1,745,196 1,078,234 14,946,369 2,251,065 5,216,844 5,684,006 1,794,454 12,695,304 9,943,111 394,652 456,416 162,497 770,672 34,111 23,300 210 522,409 1,483,668 505,503 431,611 172,525 719,883 24,449 20,912 223 246,580 784,348 566,110 448,065 173,455 587,076 32,611 3,857 106 385,952 154,765 422,457 407,650 163,148 573,696 32,234 332,874 1,673,275 331,242

$ 2,571,147 523,676 659,839

$ 2,382,566 461,186 613,345

$ 2,294,247 486,444 641,241

$ 2,201,696 482,527 608,423 1,265,776 1,192,041 1,167,036 1,054,474 1,001,144 1,168,737 1,122,756 1,109,842 1,016,797 1,001,144 42 4MIT REPORT OF THE TREASURER 2011

Massachusetts Institute of Technology Five-YearTrend Analysis - Financial Highlights (continued)

(in thousands of dollars) 2011 2010 2009 2008 2007 Research Revenues:(A)

Campus:

Federal government sponsored:

Health and Human Services............

Department of Defense................

Department of Energy................

National Science Foundation............

National Aeronautics and Space Administration..............

O ther Federal.......................

Total Federal........................

Non-Federally sponsored:

State/local/foreign governments.........

N on-profits.........................

Industry............................

Total non-Federal....................

Total Federal & non-Federal...........

F&A and other adjustments............

Total cam pus........................

Lincoln Laboratory:

Federal government sponsored..........

Non-Federally sponsored..............

F&A and other adjustments............

Total Lincoln Laboratory..............

SMART:-)

Non-Federal sponsored................

Total SM ART.......................

Total Research Revenues............

152,664 107,753 89,562 74,859 28,080 16,602 469,520 32,969 44,436 100,763 178,168 647,688 (28,775) 618,913 803,599 2,511 (1,327) 804,783 23,510 23,510 144,561 106,890 73,274 69,801 30,629 12,717 437,872 33,339 50,639 93,330 177,308 615,180 (11,044) 604,136 749,974 3,068 (8,710) 744,332 21,135 21,135 255,896 97,528 65,773 61,386 27,358 14,559 522,500 27,145 60,538 99,219 186,902 709,402 (18,620) 690,782 675,329 2,989 (8,550) 669,768 14,522 14,522 226,307 87,370 65,611 64,973 25,479 14,169 483,909 18,549 47,695 82,194 148,438 632,347 (10,827) 621,520 606,850 3,602 9,235 619,687 3,963 3,963 201,557 90,571 64,899 65,057 27,889 14,431 464,404 13,055 32,200 79,725 124,980 589,384 (18,586) 570,798 607,270 4,602 (5,942) 605,930

$1,176,728

$ 1,447,206

$ 1,369,603

$ 1,375,072

$ 1,245,170 cV The amounts in this table reflect revenues firom the original source of fmids and The Broad institute.

• The amounts represent research that has taken place in Singapore.

FIVE-YEAR TREND ANALYSIS 43

Massachusetts Institute of Technology Five-YearTrend Analysis - Financial Highlights (continued) 2011 2010 2009 2008 2007 Students:

Undergraduate Full-tim e........................

Part-tim e........................

Undergraduate Applications Applicants.......................

Accepted........................

Acceptance rate...................

Enrolled.........................

Y ield............................

Freshmen ranking in the top 10%

of their class...................

Average SAT scores (math and verbal)...............

Graduate Full-time......................

Part-tim e........................

Graduate applications Applicants.......................

Accepted........................

Acceptance rate...................

E nrolled.........................

Y ield............................

Tuition (in dollars):

Tuition and fees......................

Average room and board...............

Student Financial Aid:

(in thousands of dollars)

Undergraduate tuition support..........

Graduate tuition support...............

Fellowship stipends...................

Student loans........................

Student employnent..................

Total financial assistance.............

4,252 47 16,632 1,676 10%

1,067 64%

98%

1,473 6,108 159 22,139 3,431 15%

2,141 62%

4,201 31 15,663 1,676 11%

1,072 64%

95%

1,455 6,022 130 19,336 2,994 15%

1,939 65%

37,782 11,360 4,118 35 13,396 1,589 12%

1,048 66%

97%

1,453 5,991 155 17,323 3,215 19%

2,000 62%

36,390 10,860 4,119 53 12,445 1,553 12%

1,067 69%

97%

1,458 5,837 211 16,208 3,058 19%

1,823 60%

34,986 10,400 4,068 59 11,374 1,514 13%

1,002 66%

97%

1,461 5,924 202 15,968 3,002 19%

1,877 63%

33,600 9,950 39,212 11,234 92,060 201,995 30,435 9,968 85,335 419,793 89,813 195,178 28,104 9,641 84,304 407,040 78,534 187,732 27,509 9,641 82,287 385,703 70,157 174,847 25,647 8,766 78,892 358,309 65,529 172,021 25,020 8,962 77,732 349,264 Faculty and staff (including unpaid appointments):

Faculty.............................

Staff and fellows.....................

1,017 12,662 1,025 12,577 1,008 13,393 1,007 12,852 997 12,454 44 MIT REPORT OF THE TREASURER 2011