ML12003A258

Pennsylvania State University'S Audited Financial Statements - Year Ending June 30, 2011

ML12003A258
Person / Time
Site:	07000013, Pennsylvania State University
Issue date:	12/20/2011
From:	Doncsecz J Pennsylvania State Univ, University Park, PA
To:	Ryder C NRC/NMSS/FCSS/FCLD/FMB, Office of Nuclear Reactor Regulation
References
Download: ML12003A258 (43)

Text

(814) 865-1355 PENN STATE (814) 863-0701 Joseph J. Doncsecz The Pennsylvania State University Associate Vice President for Finance and Corporate Controller 408 Old Main University Park, PA 16802-1505 December 20, 2011 Christopher Ryder Licensing Project Manager U.S. Nuclear Regulatory Commission Fuel Cycle Safety and Safeguards Fuel Manufacturing Branch Washington, DC 20555-0001 Mail Stop EBB 2 C40M Re: Audited Financial Statements - Year Ending June 30, 2011 License numbers:

R-2 Breazeale Nuclear Reactor, Docket 050-0005 SNM-95 Docket 70-13

Dear Mr. Ryder,

Attached is The Pennsylvania State University's Audited Financial Statements for last fiscal year. An electronic version can be found at http://www.controller.psu.edu/Divisions/ControllersOffice/reports.html To show compliance with the financial tests of IOCFR30 Appendix A, The Pennsylvania State University certifies that PSU has:

(i) A bond rating of AA as issued by Standard and Poor's and a bond rating of Aal as issued by Moody's, (ii) Tangible net worth each at least six times the current decommissioning cost estimates for all uses of radioactive material, (iii) Tangible net worth of at least $10 million, and (iv)' Assets located in the United States amounting to at least 90 percent of the total assets or at least six times the current decommissioning cost estimates for the total of all facilities.

Also attached is PSU's Self-Guarantee Agreement for Financial Assurance for Cost of Decommissioning Activities.

Please contact Eric Boeldt at 814-865-6391 or ejb6@psu.edu if you have any questions.

Thank you.

Joseph J. Doncsecz Associate Vice President for Finance and Corporate Controller cc: Eric Boeldt, Radiation Safety Officer Mark Trump, Associate Director, Radiation Science and Engineering Center An Equal Opportunity University

The Pennsylvania State University Financial Assurance for Cost of Decommissioning Activities Self-Guarantee Agreement Guarantee made by The Pennsylvania State University, a nonprofit university, organized under the laws of the Commonwealth of Pennsylvania, herein referred to as "guarantor," to the U. S.

Nuclear Regulatory Commission, on behalf of the university as licensee.

Recitals

1. The guarantor has full authority and capacity to enter into this self-guarantee by the bylaws of the Trustees of the Pennsylvania State University.

2. This self-guarantee is being issued to comply with regulations issued by NRC, an agency of the U. S. Government, pursuant to the Atomic Energy Act of 1954, as amended, and the Energy Reorganization Act of 1974. NRC has promulgated regulations in Title 10, Chapter I of the Code of FederalRegulations, Parts 50 and 70, which require that a holder of, or an applicant for, a materials license issued pursuant to 10 CFR Parts 5,0 and 70 provide assurance that funds will be available when needed for required decommissioning activities.

3. The self-guarantee is issued to provide financial assurance for decommissioning activities for the licenses and facilities shown.

Certified Amounts or License # License Description Current Cost Estimates and Docket # and method 2011 R-2 Research Reactor 2001 estimate of $7,141,464 050-0005 plus 5% per year increase. $11,632,692 SNM-95 Special Nuclear Material for research and 70-113 teaching. December 2009 estimate of $19,500 decommissioning costs.

Sub total $11,652,192 25% contingency fund $2,913,048 Total Estimated Costs: $14,565,240

4. The guarantor meets or exceeds the following financial test criteria for a nonprofit university that issues bonds. Specifically, the current rating for our most recent uninsured, uncollateralized, and unencumbered bond issuance was AA as issued by Standard & Poor's, and agrees to comply with all notification requirements as specified in 10 CFR Part 50, 70, and Appendix A to 10 CFR Part 30

5. The guarantor does not have a parent company holding majority control of its voting stock.

6. Decommissioning activities as used below refer to the activities required by 10 CFR Part 50 and 70 for decommissioning of the facilities identified above.

7. Pursuant to the guarantor's authority to enter into this guarantee, the guarantor guarantees to the NRC that the guarantor shall:

(a) carry out the required decommissioning activities, as required by the licenses listed above.

8. The guarantor agrees to submit revised financial statements, financial test data annually within 180 days of the close of its fiscal year.

9. The guarantor agrees that if, at the end of any fiscal year before termination of this self-guarantee, it fails to meet the self-guarantee financial test criteria, it shall send within 90 days of the end of the fiscal year, by certified mail, notice to the NRC that it intends to provide alternative financial assurance as specified in 10 CFR Part 30.

Within 120 days after the end of the fiscal year, the guarantor shall establish such financial assurance.

10. {deleted}

11. The guarantor agrees that if it determines, at any time other than as described in Recital 9, that it no longer meets the self-guarantee financial test criteria or it is disallowed from continuing as a self-guarantor, it shall establish alternative financial assurance as specified in 10 CFR Parts 50 and 70 within 30 days.

12. The guarantor, as well as its successors and assigns and agrees to remain bound jointly and severally under this guarantee notwithstanding any or all of the following:

amendment or modification of the license or NRC-approved decommissioning funding plan for that facility, the extension or reduction of the time of performance of required activities, or any other modification or alteration of an obligation of the licensee pursuant to 10 CFR Parts 50 and 70.

13. The guarantor agrees that it shall be liable for all litigation costs incurred by the NRC in any successful effort to enforce the agreement against the guarantor.

14. The guarantor agrees to remain bound under this self-guarantee for as long as it, as licensee, must comply with the applicaible financial assurance requirements of 10 CFR Part 50 and 70, for the previously listed facilities, except that the guarantor may cancel this self-guarantee by sending notice by certified mail to the NRC, such cancellation to become effective not before an alternative financial assurance mechanism has been put in place by the guarantor

15. The guarantor agrees that if it, as licensee, fails to provide alternative financial assurance as specified in 10 CFR Parts 50 and 70 and obtain written approval of 2

4 , -

such assurance from the NRC within 90 days after a notice of cancellation by the guarantor is received by the NRC from the guarantor, the guarantor shall make full payment under the self-guarantee.

16. The' guarantor expressly waives notice of acceptance of this self-guarantee by the NRC. The guarantor also expressly waives notice of amendments or modifications of the decommissioning requirements.

17. If the guarantor files financial reports with the U.S. Securities and Exchange Commission, then it shall promptly submit them to its independent auditor and to NRC during each year in which this self guarantee is in effect.

18. The guarantor agrees that if, at any time before termination of this self-guarantee, its most recent bond issuance ceases to be rated in the category of "A" or above by either Standard & Poor's or Moody's, it shall provide notice in writing of such fact to NRC within 20 days after publication of the change by the rating service.

I hereby certify that this self-guarantee is true and correct to the best of my knowledge.

Effective date- \ I* )1 Thi Pennsylvania State University:

ose.ph J. Doncsecz Ass"ciate Vice President for Finance an~dy.Corporate Controller 3

Th Penylai StaeUiest Fica ea EneJue3,21

THE PENNSYLVANIA STATE UNIVERSITY UNIVERSITY OFFICERS as of October 18, 2011 GRAHAM B. SPANIER President RODNEY A. ERICKSON Executive Vice President and Provost RODNEY P. KIRSCH

..Senior Vice President for Development and Alumni Relations HAROLD L. PAZ Chief Executive Officer, Penn State Milton S.

Hershey Medical Center; Senior Vice President for Health Affairs; and Dean, Penn State College of Medicine GARY C. SCHULTZ Interim Senior Vice President for Finance and Business, and Treasurer

CONTENTS Operating Revenues by Source 2 Operating Expenses by Function 3 Letter of Transmittal 4 Independent Auditors' Report 5 Consolidated Financial Statements:

Statements of Financial Position 6 Statements of Activities 8 Statements of Cash Flows 10 Notes to Consolidated Financial Statements 11

OPERATING REVENUES BY SOURCE ($4.6 billion)

For the Year Ended June 30, 2011

($ in Millions)

Government grants and contracts

$563.4 Auxiliary enterprises (12.4%) $363.8

~~(8.0%

Commonwealth of Pennsylvania appropriation I /(7.3 7333.9

%)

Private gifts, grants and Medical contracts Center $328.9

$1,181.7 (7.2%)

(25.9%)

Recovery of indirect costs

$145.9 (3.2%)

Endowment spending

- and other investment income

$117.2 (2.6%)

Tuition and fees, net of discount

$1,432.4 (31.4%)

2

OPERATING EXPENSES BY FUNCTION ($4.1 billion)"

For the Year Ended June 30, 2011

($ in Millions)

Institutional support Student Auxiliary $271.0 services Public enterprises (6.6%) $160.0 service

$316.6 (3.9%)

$99.0 (7.6%) (2.4%)

Academic support

$31.8 (7.7%)

A Medical Center Research $1,144.4

$725.3 (27.6%)

(17.5%)

Instruction

$1,105.5 (26.7%)

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(814) 865-1355 (814) 863-0701 PENNSTATE Joseph J. Doncsecz The Pennsylvania State University Associate Vice President for Finance and Corporate Controller 408 Old Main University Park, PA 16802-1505 October 18, 2011 Dr. Graham Spanier, President The Pennsylvania State University

Dear Dr. Spanier:

The audited consolidated financial statements of The Pennsylvania State University and subsidiaries (the "University") for the fiscal year ended June 30, 2011 are presented on the accompanying pages. These financial statements represent a complete and permanent record of the finances of the University for the year.

These financial statements have been audited by Deloitte & Touche LLP, independent auditors, and their report has been made a part of this record.

Respectfully submitted, Joseph J. Doncsecz Associate Vice President for Finance and Corporate Controller G ultz Interim ior Vice Pre en for Finance and Business/Treasurer An Equal Opportunity University 4

Deloitte Deloitte & Touche LLP 1700 Market Street Philadelphia, PA 19103-3984 USA Tel. 215 246 2300 Fax 215 569 2441 www.deloitte com INDEPENDENT AUDITORS REPORT To the Board of Trustees of The Pennsylvania State University University Park, Pennsylvania We have audited the accompanying consolidated statements of financial position of The Pennsylvania State University and subsidiaries (the "University") as of June 30,2011 and 2010, and the related consolidated statements of activities and cash flows for the years then ended. These consolidated financial statements are the responsibility of the University's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the University as of June 30, 2011 and 2010, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

October 18,2011 5 Member of Deloitte Touche Tohmatsu

THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ASSETS JUNE 30, 2011 AND 2010 (in thousands)

June 30, 2011 June 30, 2010 Current assets:

Cash and cash equivalents $ 1,569,015 $ 1,203,486 Short-term investments 219,483 202,487 Deposits held by bond trustees 54,905 191,340 Deposits held for others 24,453 25,972 Accounts receivable, net of allowances of $48,096 and $25,571 365,308 395,039 Contributions receivable, net 69,610 55,752 Loans to students, net of allowances of $369 and $396 7,364 7,076 Inventories 36,045 31,872 Prepaid expenses and other assets 89,565 70,845 Investments held under securities lending program 219,524 249,959 Total current assets 2,655,272 2,433,828 Noncurrent assets:

Deposits held by bond trustees 4,746 6,676 Contributions receivable, net 157,459 158,408 Loans to students, net of allowances of $2,384 and $2,647 47,630 49,002 Deferred bond costs, net 6,748 7,260 Total investment in plant, net 3,372,005 3,151,655 Beneficial interest in perpetual trusts 12,843 11,400 Investments 3,443,905 2,909,271 Total noncurrent assets 7,045,336 6,293,672 Total assets See notes to consolidated financial statements.

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THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION LIABILITIES AND NET ASSETS JUNE 30, 2011 AND 2010 (in thousands)

June 30, 2011 June 30, 2010 Current Ilabllitlew Accounts payable and other accrued expenses $ 508,426 $ 454,482 Deferred revenue 233,132 222,654 Long-term debt 43,016 52,339 Present value of annuities payable 5,397 4,873 Accrued postretirement benefits 37,601 32,257 Liability under securities lending program 219,524 249,959 Total current liabilities 1,047,096 1,016,564 Noncurrent liabilities:

Deposits held incustody for others 52,618 52,783 Deferred revenue 12,004 14,521 Long-term debt 1,146,642 1,184,072 Present value of annuities payable 39,028 31,550 Accrued postretirement benefits 1,441,442 1,258,530 Refundable United States Government student loans 43,764 43,957 Other liabilities 141,908 143,870 Total noncurrent liabilities 2,877,406 2,729,283 Total liabilities 3,924,502 3,745,847 Net assets:

Unrestricted -

Undesignated 1,591 1,545 Designated for specific purposes 2,195,213 1,774,384 Net investment in plant 1,913,962 1,832,776 Total unrestricted - The Pennsylvania State University 4,110,766 3,608,705 Noncontrolling interest 694 657 Total unrestricted 4,111,460 3,609,362 Temporarily restricted 555,375 337,570 Permanently restricted 1,109,271 1,034,721 Total net assets 5,776,106 4,981,653 Total liabilities and net assets I 9,700,60Q 8 827.500 See notes to consolidated financial statements.

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THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30,2011 (in thousands)

Temporarily Permanently Unrestricted Restricted Restricted Total Op1mwang revenue and other sUlapprb Tuition and fees, net of discounts of $116,588 $ 1,432,398 $ $ $ 1,432,398 Commonwealth of Pennsylvania -

Appropriations 333,863 333,863 Special contracts 65,919 65,919 Department of General Services projects 46,801 46,801 United States Government grants and contracts 450,710 450,710 Private grants and contracts 170,890 170,890 Gifts and pledges 76,141 81,916 158,057 Endowment spending 65,964 65,964 Other investment income 50,958 284 51,242 Sales and services of educational activities 63,737 63,737 Recovery of indirect costs 145,855 145,855 Auxiliary enterprises 363,781 363,781 Medical Center revenue 1,181,732 1,181,732 Other sources 24,928 24,928 Net assets released from restrictions 40,145 (40,145)

Total operating revenues and other support 4,513,822 42,055 4,555,877 Operating expenses.

Educational and general-Instruction 1,105,503 1,105,503 Research 725,306 725,306 Public service 98,965 98,965 Academic support 318,771 318,771 Student services 160,006 160,006 Institutional support 270,982 270,982 Total educational and general 2,679,533 2,679,533 Auxiliary enterprises 316,617 316,617 Medical Center expense 1,144,462 1,144,462 Total operating expenses 4,140,612 4,140,612 Increase In net assets from operating activities 373,210 42,055 415,265 Nen.eperang actltles=

Gifts and pledges 77,867 77,867 Current year investment retums 162,243 177,541 6,190 345,974 Endowment appreciation utilized (28,539) (28,539)

Changes in funds held by others in perpetuity 712 1,419 2,131 Write-offs and disposals of assets (4,853) (4,853)

Actuarial adjustment on annuities payable (2,5031 (10,926) (13,429)

Increase in net assets from non-operating activities 128,851 175,750 74,550 379,151 Increase in net assets - The Pennsylvania State University 502,061 217,805 74,550 794,416 Non-oentselulng Interest Excess of revenues over expenses 37 - - 37 Increase in net assets non-controlling interest 37 * - 37 Increase Intotal net assets 502,098 217,805 74,550 794,453 Net assets at Me beginning of tMe year 3,609,362 337,570 1,034,721 4,981,653 Net assets at the end of the year $ 4,111,460 $ 555,375 $ 1,109,271 $ 5,776,106 See notes to consolidated financial statements.

THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2010 (in thousands)

Temporarily Permanently Unrestricted Restricted Restricted Total Operating revenue and other support:

Tuition and fees, net of discounts of $109,255 $ 1,353,614 $ $ $ 1,353,614 Commonwealth of Pennsylvania -

Appropriations 350,836 350,836 Special contracts 79,225 79,225 Department of General Services projects 91,824 91,824 United States Government grants and contracts 445,630 445,630 Private grants and contracts 173,032 173,032 Gifts and pledges 65,027 59,357 124,384 Endowment spending 63,401 63,401 Other investment income 53,069 545 53,614 Sales and services of educational activities 54,237 54,237 Recovery of indirect costs 142,092 142,092 Auxiliary enterprises 358,785 358,785 Medical Center revenue 1.027,218 1.027218 Other sources 13142 13,142 Net assets released from restrictions 26,705 (26,705)

Total operating revenues and other support 4,297,837 33,197 4,331,034 Operating expenem Educational and general -

Instruction 1,076,891 1,076,891 Research 742,190 742,190 Public service 96,355 96,355 Academic support 344,587 344,587 Student services 156,034 156,034 Institutional support 274,327 274,327 Total educational and general 2,690,384 2,690,384 Auxiliary enterprises 305,646 305,646 Medical Center expense 1,009,860 1,009,860 Total operating expenses 4,005,890 4,005,890 Increase in net assets from operating activities 291,947 33,197 325,144 Non-operating a*-Uvtte, Gifts and pledges - 60,483 60,483 Current year investment returns 166,277 59,079 4.894 230,250 Endowment appreciation utilized (30,586) (30,586)

Changes infunds held by others in perpetuity 549 351 900 Write-offs and disposals of assets (4,408) (4,408)

Actuarial adjustment on annuities payable 629 (4,987) (4,358)

Increase in net assets from non-operating activities 131,283 60,257 60,741 252,281 Increase in net assets -The Pennsylvania State University 423,230 93,454 60,741 577,425 Non-controlling Interest:

Acquisition adjustment 657 657 Increase in net assets - non-controlling interest 657 657 Increase in total net assets 423,887 93,454 60,741 578,082 Net a at th. beginning of the year 3,185,475 244,116 973,980 4,403,571 Net assets at the end of the year $ 3,609,362 $ 337,570 $ 1,034,721 $ 4,981,653 See notes to consolidated financial statements.

9

THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2011 AND 2010 (in thousands)

June 30, 2011 June 30, 2010 Cash flows from operating activities:

Increase in net assets $ 794,453 $ 578,082 Adjustments to reconcile change in net assets to net cash provided by operating activities:

Actuarial adjustment on annuities payable 13,428 4,358 Contributions restricted for long-term investment (156,224) (85,019)

Interest and dividends restricted for long-term investment (32,233) (23,467)

Net realized and unrealized gains on long-term investments (352,737) (235,936)

Depreciation expense 223,642 215,474 Amortization expense 563 560 Loss on early extinguishment of debt 803 Write-offs and disposals of assets 4,961 7,020 Contributions of land, buildings and equipment (2,787) (2,343)

Buildings and equipment provided by Pennsylvania Department of General Services (16) (152)

Contribution to government student loan funds 154 234 Provision for bad debts 56,920 27,297 (Increase)/decrease indeposits held for others 1,520 (700)

Increase inreceivables (44,620) (53,222)

Increase ininventories (4,171) (301)

Increase inprepaid expenses and other assets (10,815) (19,266)

Increasel(decrease) in accounts payable and other accrued expenses (1,328) 12,735 Increase indeferred revenue 7,961 2,893 Increase inaccrued postretirement benefits 188,256 246,603 Net cash provided by operating activities 687,730 674,850 Cash flows from Investing activities:

Purchase of land, buildings and equipment (424,404) (354,052)

(Increase)/decrease indeposits held by bond trustees 138,366 (65,476)

Advances on student loans (7,809) (7,909)

Collections on student loans 7,881 7,426 Decrease ininvestments held under securities lending program 30,435 3,737 Decrease inliability under securities lending program (30,435) (3,737)

Purchase of investments (40,211,674) (27,207,760)

Proceeds from sale of investments 40,047,416 26,864,199 Net cash used in investing activities (450,224) (763,572)

Cash flows from financing activities:

Contributions restricted for long-term investment 156,224 85,019 Interest and dividends restricted for long-term investment 32,233 23,467 Payments of annuity obligations (5,419) (4,892)

Proceeds from issuance of bonds 39,276 145,005 Bond issuance costs (399)

Principal payments on notes, bonds and capital leases (94,516) (51,804)

Proceeds related to government student loan funds, net of collection costs 624 606 Net cash provided by financing activities 128,023 197,401 Net increase in cash and cash equivalents 365,529 108,679 Cash and cash equivalents at the beginning of the year 1,203,486 1,094,807 Cash and cash equivalents at the end of the year $ 1,569,015 $ 1,203,486 Supplemental disclosures of cash flow information (Note 2)

See notes to consolidated financial statements.

10

THE PENNSYLVANIA STATE UNIVERSITY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30,2011 AND 2010

1. THE UNIVERSITY AND RELATED ENTITIES The Pennsylvania State University ("the University"), which was created as an instrumentality of the Commonwealth of Pennsylvania ("the Commonwealth" or "Pennsylvania"), is organized as a non-profit corporation under the laws of the Commonwealth. As Pennsylvania's land grant university, the University is committed to improving the lives of the people of Pennsylvania, the nation and the world through its integrated, tri-part mission of high-quality teaching, research and outreach.

Basis of Presentation The financial statements of the University include, on a consolidated basis, the combined financial statements of The Milton S. Hershey Medical Center ("TMSHMC" or "Medical Center"), a not-for-profit corporation and Penn State Hershey Health System, Inc. ("Health System") and The Corporation for Penn State and its subsidiaries ("the Corporation"). See Note 11 for additional information about TMSHMC and the Health System. The Corporation is a non-profit member corporation organized in 1985 for the exclusive purpose of benefiting and promoting the interests of the University, the Corporation's sole member. The Corporation's assets and revenues consist primarily of the assets and revenues of The Pennsylvania College of Technology

("Penn College"), a wholly-owned subsidiary of the Corporation. All significant transactions between the University, TMSHMC and the Corporation have been eliminated.

2.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accountinq The University's consolidated financial statements are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (GAAP). The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is the source of authoritative GAAP.

The University's consolidated financial statements include statements of financial position, activities and cash flows. In accordance with FASB ASC requirements, net assets and the changes in net assets are classified as permanently restricted, temporarily restricted or unrestricted.

Permanently restricted net assets consist primarily of the historical amounts of endowed gifts. Additionally, contributions receivable and remainder interests, which are required by donors to be permanently retained, are included at their estimated net present values.

Temporarily restricted net assets consist of contributions receivable and remainder interests whose ultimate use is not permanently restricted. In addition, the excess of current market value over the historical cost of permanently restricted endowments is classified as temporarily restricted net assets.

Unrestricted net assets are all the remaining net assets of the University. Net unrealized losses on permanently restricted endowment funds for which historical cost exceeds market value are recorded as a reduction to unrestricted net assets.

Revenue from temporarily restricted sources is reclassified as unrestricted revenue when the circumstances of the restriction have been fulfilled. Donor-restricted revenues whose restrictions are met within the same fiscal year are reported as unrestricted income.

11

Notes to Consolidated FinancialStatements Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts on the financial statements and the disclosure of contingencies and commitments. Actual results could differ from those estimates.

Revenue Recognition Tuition revenue is recognized in the fiscal year in which the substantial portion of the educational term occurs.

Institutional financial aid provided by the University for tuition and fees is reflected as a reduction of tuition and fee revenue. Revenues for auxiliary enterprises are recognized as the related goods and services are delivered and rendered. Grant revenues are recognized as the eligible grant activities are conducted.

Payments received in advance for tuition, goods and services are deferred.

Unconditional promises to give are recognized as revenues and receivables in the year made and consist of written or oral promises to contribute to the University in the future. Contributions receivable are recorded with the revenue assigned to the appropriate category of restriction. The amounts are present-valued based on timing of expected collections.

TMSHMC has agreements with third-party payors that provide for payments to TMSHMC at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined or such estimates change.

TMSHMC provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because TMSHMC does not pursue collection of amounts determined to qualify as charity care, they are not reported as net patient service revenue. The amount of charges forgone for services and supplies furnished under the Medical Center's charity care policy during 2011 and 2010 totaled approximately $35.4 million and $32.9 million, respectively.

Fair Value of Financial Instruments The University has provided fair value estimates for certain financial instruments in the notes to the financial statements. Fair value information presented in the financial statements is based on information available at June 30, 2011 and 2010. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and other accrued expenses approximate fair value because of the terms and relatively short maturity of these financial instruments. The carrying values of the University's loans to students are also reasonable estimates of their fair value, as the total outstanding loans to students as of June 30, 2011 and 2010 have been made at the rates available to students for similar loans at such times. Investments are reported at fair value as disclosed in Note 3. The fair value of the University's bonds payable is disclosed in Note 7. See Note 5 for further discussion of fair value measurements.

Cash Flows The following items are included as supplemental disclosure to the statements of cash flows for the years ended June 30:

(in thousands of dollars) 2011 2010 Interest paid $ 50,862 $ 43,970 Non-cash acquisitions of land, buildings and equipment 10,371 12,956 Cash and cash equivalents include certain investments in highly liquid instruments with initial maturities of 90 days or less, except for such assets held by the University's investment managers as part of their long-term 12

Notes to Consolidated FinancialStatements investment strategies. Short-term investments include other current investments held for general operating purposes with maturities greater than three months but less than 12 months.

Accounts Receivable Accounts receivable, net at June 30 consists of the following:

(in thousandsof dollars) 2011 2010 Grants and contracts, net of allowance of $1,260 and $860 $ 141,503 $ 134,998 Patient accounts receivable, net of allowance of $39,142 and $17,684 133,145 129,871 Student receivables, net of allowance of $4,258 and $4,018 34,053 41,965 Investment and interest receivable 30,558 34,891 Other, net of allowance of $3,436 and $3,009 26,049 53,314 Total accounts receivable, net $ 36,308 $ 395,039 Loans to Students Loans to students are disbursed to qualified students based on need and include loans granted by the University from institutional resources and under federal government loan programs. Students have a grace period until repayment is required based upon the earlier of graduation or no longer achieving at least half-time enrollment status. The grace period varies depending on the type of loan. Loans accrue interest after the grace period and are repaid directly to the University. Loans to students are uncollateralized and carry default risk. At June 30, 2011 and 2010, respectively, student loans represent 0.6% of total assets.

The availability of funds for loans under federal government revolving loan programs is dependent on reimbursements to the pool from repayments of outstanding loans. Funds advanced by the federal government of $43.8 million and $44.0 million at June 30, 2011 and 2010, respectively, are ultimately refundable to the government and are classified as liabilities in the consolidated statements of financial position. Outstanding loans cancelled under the program result in a reduction of the funds available to loan and a decrease in the liability to the federal government.

At June 30, 2011 and 2010, loans to students consisted of the following:

(in thousands of dollars) 2011 2010 Loans to students:

Federal government loan programs:

Perkins loan program 41,508 $ 42,580 Health Professions Student Loans and Loans for Disadvantaged Students 377 431 Federal government loan programs 41,885 43,011 Institutional loan programs 15,862 16,110 57,747 59,121 Less allowance for doubtful accounts:

Balance, beginning of year (3,043) (3,359)

Provision for doubtful accounts 290 316 Balance, end of year (2,753) (3,043)

Loans to students, net $ 56.078 13

Notes to ConsolidatedFinancialStatements Allowances for doubtful accounts are established based on prior collection experience and current economic factors which, in management's judgment, could influence the ability of loan recipients to repay the amounts according to the terms of the loan. Further, the University does not evaluate credit quality of student loans receivable after the initial approval of the loan. Loans to students are considered past due when payment is not received by the due date, and interest continues to accrue until the loan is paid in full or written off. When loans to students are deemed uncollectible, an allowance for doubtful accounts is established.

The University considers the age of the amounts outstanding in determining the collectability of loans to students. The aging of the loans to students based on days delinquent and the related allowance for doubtful accounts at June 30, 2011 and 2010 are as follows:

(in thousands of dollars) 30 days Over or less 31-60 days 61-90 days 91 days Total 2011 Loans to students:

Federal government loan programs $ 40,470 $ 603 $ 48 $ 764 $ 41,885 Institutional loan programs 15,358 273 42 189 15,862 Total loans to students 876 90 953 57,747 Allowance for doubtful accounts:

Federal government loan programs (1,771)

Institutional loan programs (982)

Total allowance for doubtful accounts Total loans to students, net (in thousands of dollars) 30 days Over or less 31-60 days 61-90 days 91 days Total 2010 Loans to students:

Federal government loan programs $ 41,010 $ 817 $ 93 $ 1,091 $ 43,011 Institutional loan programs 15,647 201 22 240 16,110 Total loans to students 115 1,331 59,121 Allowance for doubtful accounts:

Federal government loan programs (2,003)

Institutional loan programs (1,040)

Total allowance for doubtful accounts Total loans to students, net Inventories Inventories are stated at cost, generally on the first-in, first-out basis, which is lower than market.

14

Notes to ConsolidatedFinancialStatements Investments The University's noncurrent investments represent the University's endowment and other investments held for general operating purposes. The University's investments are reported at fair value in the accompanying financial statements. Investments in equity securities with readily determinable fair values and all investments in debt securities are reported at fair values with gains and losses included in the consolidated statements of activities. In the management of investments, the University authorizes certain of its investment managers to purchase derivative securities to attain a desired market position; and the University may directly invest in derivative securities to attain a desired market position. The University does not trade or issue derivative financial instruments other than through the investment management practices noted above. The University records derivative securities at fair value with gains and losses reflected in the consolidated statements of activities.

The estimated fair value amounts for marketable debt and equity securities held by the University have been reviewed by the University and determined using available market information as supplied by the various financial institutions that act as trustees or custodians for the University. For non-liquid holdings, generally limited partnership investments in private real estate, venture capital, private equity, natural resources, and private debt, estimated fair value is determined based upon financial information provided by the general partner. This financial information includes assumptions and methods that were reviewed by University management. The University believes that the estimated fair value is a reasonable estimate of market value as of June 30, 2011 and 2010. Because the limited partnerships are not readily marketable, the estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a ready market existed, and such differences could be material.

Income on operating investments and income used for the annual distribution under the annual spending policy for endowments are reported in operating revenues within the consolidated statement of activities.

Beneficial Interest in Perpetual Trusts The University is the beneficiary of certain perpetual trusts held and administered by outside trustees. The fair value of these trust assets has been recorded as permanently restricted net assets and related beneficial interest in perpetual trusts in the consolidated financial statements.

Investment in Plant Total investment in plant as of June 30 is comprised of the following:

(in thousands of dollars) 2011 2010 Land $ 110,409 $ 107,382 Buildings 4,449,942 4,093,137 Improvements other than buildings 502,542 485,613 Equipment 979,857 938,440 Total plant 6,042,750 5,624,572 Less accumulated depreciation (2,670,745) (2,472,917)

Total investment in plant, net $ ?32.0 $___*JL5655 The value of land, buildings, and equipment is recorded at cost or, if received as gifts, at fair value at date of gift. The University does not capitalize the cost of library books. Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Useful lives range from 10 to 50 years for buildings, 10 to 20 years for improvements other than buildings, and 3 to 20 years for equipment. The University has certain building and equipment lease agreements in effect which are considered capital leases that are included as long-term debt in the statements of financial position. These leases have been capitalized at the net present value of the minimum lease payments. Buildings and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. The capitalized cost and accumulated depreciation of the leases at June 30, 2011 and 2010 was

$101.8 million and $27.6 million, and $99.2 million and $21.7 million, respectively.

15

Notes to ConsolidatedFinancialStatements Asset Retirement Obligations Under ASC 410-20, Asset Retirement and Environmental Obligations - Asset Retirement Obligations, organizations must accrue for costs related to legal obligations to perform certain activities in connection with retirement, disposal, or abandonment of assets. The obligation to perform the asset retirement activity is not conditional even though the timing or method may be conditional.

The University has identified asbestos abatement and the decommissioning of the Breazeale Nuclear Reactor as conditional asset retirement obligations. These obligations are reported as part of other non-current liabilities within the consolidated statement of financial position. The following table details the change in liabilities for the years ended June 30:

(in thousands of dollars)

Balance as of June 30, 2009 $ 55,647 Accretion expense 2,873 Liabilities settled (1,057)

Balance as of June 30, 2010 57,463 Accretion expense/

change in assumptions 4,780 Liabilities settled (1,973)

Balance as of June 30, 2011 Income Taxes The University files U.S. federal and state tax returns. The statute of limitations on the University's federal returns generally remains open for three years following the year they are filed. In accordance with ASC 740 Income Taxes Topic, the University continues to evaluate tax positions and has determined there is no material impact on the University financial statements.

Recent Accounting Pronouncements In April 2009, the FASB issued new ASC guidance for not-for-profit entities regarding mergers and acquisitions. This guidance defines a combination of one or more other not-for-profit entities, business or nonprofit activities as either a merger or acquisition. It also establishes principles and requirements in determining whether a not-for-profit entity combination is a merger or acquisition, applies the carryover method in accounting for mergers, applies the acquisition method in accounting for acquisitions, including which of the combining entities is the acquirer, and requires enhanced disclosures about the merger or acquisition. In addition, it amends existing FASB ASC Guidance on goodwill and other intangible assets and noncontrolling interests in consolidated financial statements to make previous guidance that was only applicable to for-profit entities applicable to not-for-profit entities. In January 2010, the FASB issued ASC guidance to clarify the scope of noncontrolling interests in consolidated financial statements related to a decrease in ownership provisions. This guidance was effective for the University beginning July 1, 2010 as it relates to acquisitions and mergers. On July 1, 2010, the University adopted the above guidance that established accounting and reporting standards for the noncontrolling interests in a subsidiary. This accounting and reporting standard requires entities that prepare consolidated financial statements to: (a) present noncontrolling interests as a component of net assets, separate from the parent's net assets; (b) separately present the amount of consolidated excess of revenues over expenses attributed to noncontrolling interests in the statements of activities; and (c) require an entity to provide sufficient disclosures that identify and clearly distinguish between interests of the parent and interests of noncontrolling owners. Such presentation is reflected in the University's consolidated financial statements.

16

Notes to Consolidated FinancialStatements In January 2010, the FASB issued ASC guidance that amends current disclosure requirements under the existing fair value accounting standard. It requires entities to disclose separately the amounts of significant transfers into and out of Level 1 and Level 2 fair value measurements along with the reasons for those transfers. In addition, it also requires entities to present separately information about purchases, sales, issuances, and settlements on a gross basis rather than as one net number in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). This guidance is effective for the University beginning on July 1, 2010 except for Level 3 fair value measurement disclosure that is effective July 1, 2011. As there were no transfers between Level 1 and Level 2 investments, there was no impact to the consolidated financial statements.

In August 2010, the FASB issued ASU 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries, which requires a Healthcare Organization ("HCO") to present a liability related to medical malpractice claims (and other contingent claims) gross; such a liability would not be offset against related insurance recoveries unless the criteria in ASC 210-20 for offsetting were met. This guidance is effective for annual reporting periods beginning after December 15, 2010 and would require a cumulative-effect adjustment to opening unrestricted net assets in the period of adoption if a difference exists between any liabilities and insurance receivables recorded upon the adoption of the guidance. The University is currently assessing the impact of adopting this guidance on its consolidated financial statements.

In July 2010, the FASB issued ASU 2010-23, Health Care Entities (Topic 954): Measuring Charity Care for Disclosure a consensus of the FASB Emerging Issues Task Force, which requires a HCO to disclose its policy for providing charity care and the amount of charity care provided. In addition, the ASU requires that the amount of charity care be based on the direct and indirect costs of providing charity care. The ASU also requires disclosure of funds received to offset or subsidize charity services provided. This guidance is effective for annual reporting periods beginning after December 15, 2010, and must be applied retrospectively. The University is currently assessing the impact of adopting this guidance on its consolidated financial statements.

In July 2011, the FASB issued ASU 2011-07, Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Entities. This ASU requires a HCO to change the presentation of its statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, a HCO is required to provide enhanced disclosure about its policies for recognizing revenue and assessing bad debts. The ASU also requires disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. This guidance is effective for annual reporting periods ending after December 15, 2012. The University is currently assessing the impact of adopting this guidance on its consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires more robust disclosure aimed at improving transparency by providing additional information to assist financial statement users in assessing an entity's credit risk exposures and evaluating the adequacy of its allowance for credit losses. This guidance is effective for the University beginning June 30, 2011 for disclosures as of the end of a reporting period.

17

Notes to ConsolidatedFinancialStatements

3. INVESTMENTS Investments by major category as of June 30 are summarized as follows:

(in thousandsof dollars) 2011 2010 Money markets $ 172,027 $ 157,193 Fixed income:

U.S. government/agency 892,659 892,175 U.S. corporate 524,413 493,493 Foreign 188,741 171,535 Other 306,152 182,902 Equities 918,265 694,491 Private capital 661,131 519,969 Investments held under securities lending program 219,524 249,959 Total $ 3,8822912 $ 3:361J717 Other fixed income investments consist of collateralized mortgage obligations, mortgage-backed securities and asset-backed securities. Equity investments are comprised of domestic and foreign common stocks.

Private capital consists primarily of interests in private real estate, venture capital, private equity, natural resources, private debt, and hedge fund limited partnerships.

Futures contracts, which are fully cash collateralized, comprise the University's directly held derivative instruments at June 30, 2011 and 2010, respectively, are marked to market daily and are included in the fair value of the University's investments The fair value of derivative instruments is included in the fair value of the University's investments within the money market category. Futures contracts have minimal credit risk because the counterparties are the exchanges themselves. Fully cash collateralized derivative securities comprised approximately 2.8% and 1.6% of total investments at June 30, 2011 and 2010.

Through an agreement with its primary investment custodian, the University participates in lending securities to brokers. Collateral is generally limited to cash, government securities, and irrevocable letters of credit.

Both the investment custodian and the security borrowers have the right to terminate a specific loan of securities at any time. The University receives lending fees and continues to earn interest and dividends on the loaned securities. At June 30, 2011 and 2010, the University held $219.5 million and $250.0 million, respectively, of short-term highly liquid investments as collateral deposits for the securities lending program.

The collateral is included as an asset and the obligation to return such collateral is presented as a liability in the consolidated statements of financial position. The securities on loan had an estimated fair value of $214.5 million and $244.4 million at June 30, 2011 and 2010, respectively. Effective September 7, 2011, the University is no longer participating in the securities lending program.

The following schedules summarize the investment return and its classification in the consolidated statement of activities for the years ended June 30:

(in thousands of dollars) Temporarily Permanently 2011 Unrestricted Restricted Restricted Total Dividends and interest $ 88,383 $ 284 $ 6,190 $ 94,857 Net realized gains 75,676 14,060 - 89,736 Net unrealized gains 86,567 163,481 - 250,048 Total returns $ 177,825 L$ 6_19Q $ 4344641 Temporarily Permanently 2010 Unrestricted Restricted Restricted Total Dividends and interest $ 77,661 $ 545 $ 4,894 $ 83,100 Net realized gains 49,755 2,271 - 52,026 Net unrealized gains 124,745 56,808 - 181,553 Total returns S 59,624 4 $ 316679 18

Notes to ConsolidatedFinancialStatements

4. ENDOWMENT NET ASSETS The University's endowment includes both donor-restricted endowment funds and funds designated to function as endowments. As required by GAAP, net assets associated with endowment funds, including funds designated to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions.

The ASC Not-for-Profit Entities Presentation of Financial Statements Subtopic (ASC Subtopic 958-205) provides guidance on the net asset classification of donor-restricted endowment funds for not-for-profit organizations subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act

("UPMIFA") and improves disclosure about an organization's endowment funds regardless of whether the organization is subject to UPMIFA. The Commonwealth of Pennsylvania has not adopted UPMIFA but rather has enacted Pennsylvania Act 141 ("PA Act 141"). PA Act 141 permits an organization's trustees to define income as a stipulated percentage of endowment assets (between 2% and 7% of the fair value of the assets averaged over a period of at least three preceding years) without regard to actual interest, dividend, or realized and unrealized gains.

The University has interpreted PA Act 141 to permit the University to spend the earnings of its endowment based on a total return approach, without regard to the fair value of the original gift. As a result of this interpretation, the University classifies as permanently restricted net assets the original value of gifts donated to the permanent endowment, the original value of subsequent gifts to the permanent endowment, and accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. Funds functioning as endowments are established at the direction of University management and are classified as unrestricted net assets due to the lack of external donor restrictions. Gains and losses attributable to permanent endowments are recorded as temporarily restricted net assets and gains and losses attributable to funds functioning as endowments are recorded as unrestricted net assets.

From time to time due to unfavorable market fluctuations, the fair value of some assets associated with individual donor-restricted endowment funds may fall below the level that donors require to be retained as a perpetual fund, while other assets are unaffected to the same extent and maintain or exceed the level required. The aggregate amount of deficiencies at June 30, 2011 and 2010 was $3.3 million and $31.7 million, respectively, reported in unrestricted net assets on the consolidated statement of activities.

Subsequent investment gains will be used to restore the balance up to the fair market value of the original gift. Subsequent gains above that amount will be recorded as temporarily restricted net assets.

Endowment net asset composition by type of fund as of June 30:

(in thousands of dollars) Temporarily Permanently 2011 Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (3,261) $ 314,769 $ 951,006 $ 1,262,514 Funds functioning as endowments 475,329 - - 475,329 Total net assets $ 726 $ 314,769 $ 951:006 $ 1,737,84a Temporarily Permanently 2010 Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (31,662) $ 157,325 $ 863,312 $ 988,975 Funds functioning as endowments 361,341 - - 361,341 Total net assets $ 3 $ $ 1,350.3 19

Notes to Consolidated FinancialStatements Changes in endowment net assets for the years ended June 30:

(in thousands of dollars) Temporarily Permanently 2011 Unrestricted Restricted Restricted Total Endowment net assets, beginning of the year $ 329,679 $ 157,325 $ 863,312 $ 1,350,316 Endowment return:

Endowment earnings 37,425 48 3,081 40,554 Net realized gains 28,539 13,318 41,857 Net unrealized gains 66,659 171,629 238,288 Reclassification of funds 28,401 with deficiencies (28,401)

Total endowment return 161,024 156,594 3,081 320,699 Contributions 850 84,613 85,463 Endowment spending (65,964) (65,964)

Transfers to create funds functioning as endowments 47,329 47,329 Endowment net assets, end of the year (in thousands of dollars) Temporarily Permanently 2010 Unrestricted Restricted Restricted Total Endowment net assets, beginning of the year $ 264,655 $ 101,838 $ 807,047 $ 1,173,540 Endowment return:

Endowment earnings 32,815 4,875 37,690 Net realized gains 30,842 782 31,624 Net unrealized gains 29,875 82,622 112,497 Reclassification of funds with deficiencies 27,991 (27,991)

Total endowment return 121,523 55,413 4,875 181,811 Contributions 74 51,390 51,464 Endowment spending (63,401) (63,401)

Transfers to create funds functioning as endowments 6,902 6,902 Endowment net assets, end of the year $ 1,35031-E The University has adopted investment and spending policies for endowment assets that attempt to provide a relatively predictable stream of funding to programs supported by its endowment while seeking to maintain, over time, the purchasing power of the endowment assets. The overall management objective for the University's pooled endowment funds is to preserve or grow the real (inflation-adjusted) purchasing power of the assets through a prudent long-term investment strategy. This objective would be achieved on a total return basis. Under these policies, as approved by the Board of Trustees and the Penn State Investment Council, the primary investment objective of the University's pooled endowment is to attain a real total return (net of investment management fees) that at least equals a total annual effective spending rate of 5.25% (program spending of 4.5% plus administrative costs of 0.75%) over the long term.

To satisfy its long-term rate-of-return objectives, the University relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The University targets diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. The endowment assets of the University are invested in a broad range of equities and fixed income securities, thereby limiting the market risk exposure in any one institution or individual investment.

20

Notes to Consolidated FinancialStatements The University has a policy of appropriating for distribution each year a certain percentage (4.5% for 2011 and 4.5% for 2010) of its pooled endowment fund's average fair market value over the prior five years preceding the fiscal year in which the distribution is planned. Accordingly, over the long term, the University expects the current spending policy to allow its endowment to provide generous current spending while preserving "intergenerational equity". This is consistent with the University's objective to maintain the purchasing power of the endowment assets held in perpetuity as well as to provide additional real growth through new gifts and investment returns.

5. FAIR VALUE MEASUREMENTS The University utilizes the following fair value hierarchy, which prioritizes into three broad levels, the inputs to valuation techniques used to measure fair value:

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the measurement date; Level 2 - Inputs other than unadjusted quoted prices that are observable for the asset or liability, directly or indirectly, including quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means.

Level 3 - Unobservable inputs that cannot be corroborated by observable market data.

In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The University's assessment of significance of a particular item to the fair value measurement in its entirety requires judgment, including consideration of inputs specific to the asset.

21

Notes to ConsolidatedFinancialStatements The following table presents information as of June 30, 2011 about the University's financial assets and liabilities that are measured at fair value on a recurring basis:

Quoted Prices in Significant Active Markets Other Significant For Identical Observable Unobservable Assets Inputs Inputs Total (in thousands of dollars) Level 1 Level 2 Level 3 Fair Value Assets:

Long-term Investment Pool:

Money markets 4,897 $ 124,806 $ $ 129,703 Fixed income U.S. government/agency 68,454 23,580 92,034 U.S. corporate 3,388 103,733 107,121 Foreign 1,004 42,186 43,190 Other 13,770 13,770 Equities 578,847 262,730 841,577 Private capital 134,587 520,605 655,192 Total $ 705,392 $ 520,605 $ 1,882,W Operating investments:

Money markets 23,662 $ 18,662 $ - $ 42,324 Fixed income U.S. government/agency 400,147 400,365 113 800,625 U.S. corporate 11,158 406,134 417,292 Foreign 4,135 141,416 145,551 Other 290,216 2,166 292,382 Equities 75,142 519 1,027 76,688 Private capital 5,939 5,939 Total $ 9,245 $ 1,780,801 Investments held under securities lending program $ - $ $ 219,524 $ 219,524 Deposits held by bond trustees:

Money markets $ 54,905 $ $ $ 54,905 Fixed income U.S. government/agency 4,746 4,746

$ 59,651 Total $ 5,90 $ 4,746 Beneficial interest in perpetual trusts $ - $ $ 12,843 $ 12,843 Liabilities:

Present value of annuities payable $ - $ $ 44,425 $ 44,425 Liability under securities lending program - $ $ 219,524 $ 219,524 22

Notes to ConsolidatedFinancialStatements The following table presents information as of June 30, 2010 about the University's financial assets and liabilities that are measured at fair value on a recurring basis:

Quoted Prices in Significant Active Markets Other Significant For Identical Observable Unobservable Assets Inputs Inputs Total (in thousands of dollars) Level 1 Level 2 Level 3 Fair Value Assets:

Long-term Investment Pool:

Money markets $ 158 $ 76,764 $ $ 76,922 Fixed income U.S. government/agency 113,994 15,968 129,962 U.S. corporate 11,640 85,060 96,700 Foreign 2,737 5,523 8,260 Other 6,804 6,804 Equities 479,967 156,596 636,563 Private capital 102,882 413,870 516,752 Total $ 449,597 $ _413,70: $ 1,471,963 Operating investments:

Money markets $ 37,701 $ 42,570 $ - $ 80,271 Fixed income U.S. government/agency 334,924 427,187 102 762,213 U.S. corporate 8,607 388,186 396,793 Foreign 3,116 160,159 163,275 Other 174,193 1,905 176,098 Equities 54,468 17 3,443 57,928 Private capital 3,217 3,217

$ 8,667 $ 1.639,79 Total $ 1,92,312 Investments held under securities lending program $ $ - $ 249,959 $ 249,959 Deposits held by bond trustees:

Money markets $ 121,342 $ $ 121,342 Fixed income U.S. government/agency 69,998 6,676 76,674

$ 191,340 $ 198,016 Total Beneficial interest in perpetual trusts $ -$

$ 11,400 $ 11,400 Liabilities:

Present value of annuities payable $ - $ $ 36,423 $ 36,423 Liability under securities lending program $ $ $ 249,959 $ 249,959 23

Notes to Consolidated FinancialStatements The Long-term Investment Pool (LTIP) is a mutual fund-like vehicle used for investing the University's endowment funds, funds functioning as endowments, and other operating funds that are expected to be held long-term. A share method of accounting for the LTIP is utilized by the University. Each participating fund enters into and withdraws from the LTIP based on monthly share values. At June 30, 2011 and 2010, fair value of endowment funds and funds functioning as endowments within the LTIP totaled $1,737.8 million and $1,350.3 million, respectively. At June 30, 2011 and 2010, fair value of operating funds included in the LTIP totaled $144.8 million and $121.7 million, respectively.

The following tables present information related to changes in Level 3 for each category of assets and liabilities for year ended June 30, 2011:

Investments Held Under Beneficial (in thousands of dollars) Long-term Operating Securities Interest in Investment Pool Investments Lending Perpetual Trusts Assets:

Beginning balance $ 413,870 $ 8,667 $ 249,959 $ 11,400 Total realized and unrealized gains/(losses) 97,994 (196) 1,443 Purchases and settlements 8,741 1,552 (30,435)

Transfers in/(out) of Level 3 (778)

$ 9,245 Ending balance $ 12,M Liability Present Value Under of Annuities Securities Payable Lending Liabilities:

Beginning balance $ 36,423 $ 249,959 Actuarial adjustment of liability 2,680 Gifts and severances 5,322 Purchases and settlements (30,435)

Ending balance $ 44,425 $21J9524 The following tables present information related to changes in Level 3 for each category of assets and liabilities for year ended June 30, 2010:

Investments Held Under Beneficial (in thousandsof dollars) Long-term Operating Securities Interest in Investment Pool Investments Lending Perpetual Trusts Assets:

Beginning balance $ 597,400 $ 355,926 $ 253,696 $ 11,025 Total realized and unrealized gains/(losses) 93,438 27,154 375 Purchases and settlements (38,734) (218,399) (3,737)

Transfers in/(out) of Level 3 (238,234) (156,014)

$ 8,667 Ending balance $ 413,870 $ 249.K $11A~

Liability Present Value Under of Annuities Securities Payable Lending Liabilities:

Beginning balance $ 36,966 $ 253,696 Actuarial adjustment of liability (294)

Gifts and severances (249)

Purchases and settlements (3,737)

Ending balance $ 36,423 24

Notes to Consolidated FinancialStatements The following table presents the fair value and redemption frequency for those investments whose fair value is not readily determinable and is estimated using the net asset value per share or its equivalent as of June 30, 2011:

Unfunded Redemption Redemption (in thousands of dollars) Fair Value Commitment Frequency Notice Period Commingled Funds:

Non-U.S. Equity $ 201,602 Daily/Monthly 5-15 days Subtotal $ 201,602 Marketable Investment Partnerships:

Absolute Return $ 23,691 Quarterly 60 days Quarterly/

Private Debt 61,084 Semi Annual 60-90 days Directional Long/Short 79,756 Quarterly 30-65 days Subtotal $ 164,531 Non-Marketable Investment Partnerships:

Private Real Estate $ 79,978 $ 20,394 Venture Capital 95,009 91,759 Private Equity 227,632 83,398 Natural Resources 68,094 38,224 Private Debt 21,232 5,800 Subtotal $ 491,945 $ 239,575 Total $ 858,078 $ 239,575 The following table presents the fair value and redemption frequency for those investments whose fair value is not readily determinable and is estimated using the net asset value per share or its equivalent as of June 30, 2010:

Unfunded Redemption Redemption (in thousands of dollars) Fair Value Commitment Frequency Notice Period Commingled Funds:

Non-U.S. Equity $ 156,596 Daily/Monthly 5-15 days Fixed Income 131,592 Daily 5 days Subtotal $ 288,188 Marketable Investment Partnerships:

Absolute Return $ 22,202 Quarterly 60 days Quarterly/

Private Debt 54,607 Semi Annual 60-90 days Directional Long/Short 51,897 Quarterly 30-65 days Subtotal $ 128,706 Non-Marketable Investment Partnerships:

Private Real Estate $ 56,203 $ 30,902 Venture Capital 69,567 80,349 Private Equity 185,470 79,396 Natural Resources 54,720 25,473 Private Debt 25,302 2,013 Subtotal $ 391,262 $ 218,133 Total 25

Notes to Consolidated FinancialStatements Commingled funds include investments that aggregate assets from multiple investors and are managed collectively following a prescribed strategy. Redemptions vary from daily to monthly with required notification of 30 days or less. The non-U.S. equity strategy is invested in developed and developing countries outside of the United States, and spans the entire equity capitalization spectrum. These collective portfolios preclude the need to obtain securities registration in foreign countries.

Marketable Investment Partnerships include several hedge funds whose underlying positions are traded via public securities markets. Liquidity terms range from quarterly to semi-annually with advance notification for redemption ranging from 30 to 90 days. The fair values of the investments for each fund in this category have been estimated using the net asset value of the ownership interest in partner's capital. Three major investment strategies are included within this category. Absolute Return is comprised primarily of equity long/short and multi-strategy arbitrage strategies. Private Debt is comprised of credit securities rated below investment grade in addition to non-rated debt. Directional Long/Short is comprised primarily of equity long/short strategies in both U.S. and non-U.S. markets.

Nonmarketable Investment Partnerships include several private capital funds. The fair values of the investments for each fund in this category have been estimated using the net asset value of the ownership interest in partner's capital and cannot be redeemed. Realizations from each fund are received as the underlying investments are liquidated or distributed, typically within 10 years after initial commitment.

Unfunded commitments represent remaining commitments for which capital calls have not been exercised as of June 30, 2011 and 2010, respectively. Five major investment strategies are included within this category.

Private Real Estate includes properties primarily located in the U.S. Venture Capital includes non-public startups and enterprises in early stages of growth located globally. Private Equity includes buyouts of previously public companies as well as enterprises that are planning to go public in the near future, including funds focusing on opportunities outside the U.S. Natural Resources largely include companies primarily involved in natural gas in addition to a variety of other natural resources. Private Debt includes private credit securities rated below investment grade as well as non-rated debt.

6. CONTRIBUTIONS RECEIVABLE Contributions receivable are summarized as follows as of June 30:

(in thousands of dollars) 2011 2010 In one year or less $ 76,640 $ 60,895 Between one year and five years 92,869 97,942 More than five years 125,732 119,605 295,241 278,442 Less allowance (6,107) (3,656)

Less discount (62,065) (60,626)

Contributions receivable, net 227,019 $60 Contributions receivable are discounted at rates ranging from 0.19% to 3.57% and 0.32% to 3.36% at June 30, 2011 and 2010, respectively. The discount rates for prior periods ranged from 0.51% to 6.28%.

At June 30, 2011 and 2010, the University has received bequest intentions and certain other conditional promises to give of $58.1 million and $39.0 million, respectively. These intentions and conditional promises to give are not included in the consolidated financial statements.

The following table summarizes the change in contributions receivable, net during the year ended June 30, 2011:

(in thousandsof dollars)

Balance beginning of year $ 214,160 New pledges 130,412 Collections on pledges (113,613)

Increase in allowance (2,451)

Increase in unamortized discounts (1,439)

Balance at the end of year 26

Notes to Consolidated FinancialStatements

7. LONG-TERM DEBT The various bond issues, note payable and capital lease obligations that are included in long-term debt in the statements of financial position consist of the following:

(in thousands of dollars) 2011 2010 The Pennsylvania State University Bonds Series 2010 $ 135,035 $ 135,035 Series 2009A 125,850 131,460 Series 2009B 74,235 74,235 Series 2008A 77,670 77,670 Series 2008B 5,775 6,630 Series 2007A 89,150 89,640 Series 2007B 68,880 71,395 Series 2005 89,560 91,395 Series 2004A 55,385 56,580 Refunding Series 2003 18,140 20,280 Series of 2002 100,000 100,000 Refunding Series 2002 70,670 84,130 Refunding Series 2001 9,290 Pennsylvania Higher Educational Facilities Authority University Revenue Bonds (issued for The Pennsylvania State University)

Series 2006 3,940 4,125 Series 2004 4,375 4,595 Series 2002 4,720 5,050 Lycoming County Authority College Revenue Bonds (issued for Penn College)

Series 2011 39,050 Series 2008 55,000 55,000 Series 2005 12,875 13,535 Series 2002 28,550 28,930 Series 2000 39,305 Series 1993 8,750 10,500 Total bonds payable 1,067,610 1,108,780 Unamortized bond premiums 42,203 44,261 Note payable and capital leases Note payable 2,000 Capital lease obligations 79,845 81,370 Total notes payable and capital leases 79,845 83,370 Total long-term debt $ 1,189,658 $ 1235Am 27

Notes to ConsolidatedFinancialStatements Interest rate Debt issuance mode Interest rates Payment ranges and maturity (in thousands of dollars)

The Pennsylvania State University Bonds

$3,655 to $6,280 through March 2030 with $21,805 and $44,245 due March Series 2010 Fixed 3.375% - 5.00% 2035 and 2040 Series 2009A Fixed 4.00% - 5.00% $5,775 to $9,320 through March 2029 Series 2009B Variable 0.30% June 2031 Series 2008A Fixed 5.00% $1,840 to $7,695 through August 2029 Series 2008B Fixed 3.25% - 3.75% $885 to $1,050 through August 2016

$505 to $700 through August 2022, with

$11,115 and $70,905 due August 2028 Series 2007A Fixed 3.65% - 4.50% and 2036 Series 2007B Fixed 4.25% - 5.25% $2,625 to $5,955 through August 2027

$1,895 to $2,745 through September 2019 with $15,990, $20,550, and $32,485 Series 2005 Fixed 3.125% - 5.00% due September 2024, 2029, and 2034

$1,250 to $1,825 through September 2019, with $10,625, $13,635, and $17,515 Series 2004A Fixed 3.625% - 5.00% due September 2024, 2029, and 2034 Refunding Series 2003 Fixed 4.00% - 5.25% $2,250 to $2,970 through March 2018 Series of 2002 Variable 0.07% March 2032 Refunding Series 2002 Fixed 5.25% $4,585 to $16,540 through August 2016 Refunding Series 2001 Fixed 5.25% Paid in full during 2011 Pennsylvania Higher Education Facilities Authority ("PHEFA") University Revenue Bonds

$195 to $280 through 2020, with $1,610 Series 2006 Fixed 3.80% - 5.125%* due September 2025

$230 to $325 through 2019, with $1,905 Series 2004 Fixed 3.85% - 5.00%* due September 2024

$345 to $425 due through 2017, Series 2002 Fixed 4.10% - 5.00%* with $2,435 due March 2022

• Annual interest costs to the University for interest rates greater than 3.00% are subsidized by PHEFA.

Lycoming County Authority College Revenue Bonds Series 2011 Fixed 3.00% - 5.50% $70 to $5,230 through July 2030 Series 2008 Fixed 3.50% - 5.50% $1,455 to $4,140 through October 2037 Series 2005 Fixed 4.00% - 5.00% $505 to $1,855 through January 2025 Series 2002 Fixed 4.40% - 5.25% $460 to 2,775 through 2032 Series 2000 Fixed 4.80% - 5.00% Paid in full during 2011 Series 1993 Fixed 6.10% - 6.15% $450 to $578 through November 2015 The Series 2011 bonds are Lycoming County Authority (the "Authority") College Revenue Bonds issued by Penn College in June 2011 for the purpose of refunding $39.3 million of the Authority's College Revenue Bonds Series 2000. The Series 2000 bonds were paid in full during 2011.

The Series 2010 bonds are general obligation bonds issued in May 2010 for the purpose of funding various construction and renovation projects. The Series 2010 Bonds are subject to early redemption provisions, at the option of the University, beginning March 2021. The bonds maturing on March 2035 and 2040 are subject to sinking fund redemption.

The Series 2009B Bonds are currently paying interest on a variable rate basis at a long term rate for the period June 1, 2011 through May 31, 2012. The University has the option to convert to another variable rate (daily, weekly, monthly or flexible) or to a fixed rate basis (such rates are generally determined on a market basis) at respective conversion dates. The bonds currently pay interest at 0.30% with adjustment on the respective date to the rate the remarketing agent believes will cause the bonds to have a market value equal to the principal.

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Notes to ConsolidatedFinancialStatements The 2009B bondholders have the right to tender bonds on the purchase dates while such bonds bear interest at the daily, weekly or monthly rate. The 2009B Bonds were issued subject to the self-liquidity program established by the University on the date of issuance pursuant to which the University will provide liquidity for the 2009B Bonds from its general funds in the event of insufficient remarketing proceeds.

The Series of 2002 bonds currently pay interest on a variable rate basis in the weekly mode; however, the University has the option to convert to another variable rate (daily, monthly, flexible, semiannual or long mode) or to a fixed rate basis. The bonds currently pay interest at 0.07% with adjustment on a weekly basis to the rate the remarketing agent believes will cause the bonds to have a market value equal to the principal amount up to a maximum of 12%. The bondholders have the right to tender bonds at interest rate reset dates. The University, therefore, entered into standby bond purchase agreement with a bank to provide liquidity in case of tender. The bonds are not subject to sinking fund redemption; however, the University has the option to redeem the bonds prior to their scheduled maturity.

Maturities and sinking fund requirements on bonds payable for each of the next five fiscal years and thereafter are summarized as follows:

Annual Year Installments (in thousands of dollars) 2012 $ 33,150 2013 34,675 2014 36,355 2015 38,545 2016 27,550 Thereafter 897,335

$1 .067.610 The fair value of the University's bonds payable is estimated based on current rates offered for similar issues with similar security, terms and maturities using available market information as supplied by the various financial institutions who act as trustees or custodians for the University. At June 30, 2011, the carrying value and estimated fair value of the University's bonds payable, including issuance premiums, are $1,109.8 million and

$1,121.5 million, respectively. At June 30, 2010, the carrying value and estimated fair value of the University's bonds payable, including issuance premiums, were $1,153.0 million and $1,168.3 million, respectively. Certain bond issues have associated issuance premiums, these issuance premiums total $42.2 million and $44.3 million at June 30, 2011 and 2010, respectively and are presented within the statement of financial position as long-term debt. These issuance premiums will be amortized over the term of the respective outstanding bonds.

Capital leases The University has certain building and equipment lease agreements in effect which are considered capital leases. Future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of June 30, 2011 are as follows:

Year (in thousands of dollars) 2012 $ 12,515 2013 11,391 2014 9,882 2015 8,801 2016 8,113 Thereafter 146,825 Total minimum lease payments 197,527 Less imputed interest (117,682)

Capital lease obligation 79,845 Current portion 7,175 Long-term portion $ Mm 29

Notes to Consolidated FinancialStatements

8. OPERATING LEASES The University has certain lease agreements in effect which are considered operating leases. During the year ended June 30, 2011, the University recorded expenses of $20.0 million for leased equipment and $21.6 million for leased building space. During the year ended June 30, 2010, the University recorded expenses of

$21.3 million for leased equipment and $21.4 million for leased building space.

Future minimum lease payments under operating leases as of June 30, 2011 are as follows:

Year (in thousandsof dollars) 2012 $ 19,010 2013 15,643 2014 13,018 2015 11,253 2016 9,268 Thereafter 57,175 Total minimum lease payments $ 125,367

9. RETIREMENT BENEFITS The University provides retirement benefits for substantially all regular employees, primarily through either contributory defined benefit plans administered by the Commonwealth of Pennsylvania State Employees' Retirement System and The Public School Employees' Retirement System or defined contribution plans administered by the Teachers Insurance and Annuity Association - College Retirement Equity Fund and Fidelity Investments. The University is billed for its share of the estimated actuarial cost of the defined benefit plans ($14.8 million and $11.0 million for the years ended June 30, 2011 and 2010, respectively). The University's total cost for retirement benefits, included in expenses, is $118.7 million and $110.5 million for the years ended June 30, 2011 and 2010, respectively.

10. POSTRETIREMENT BENEFITS The University sponsors a retiree medical plan covering eligible retirees and eligible dependents. For the 2011 benefit plan year, this program includes a Preferred Provider Organization ("PPO") plan for retirees and their dependents who are not eligible for Medicare, a Medicare Advantage PPO plan and a Medicare Supplement plan. In addition, the University provides retiree life insurance benefits at no cost to the retiree.

Employees who were hired prior to January 1, 2010 are eligible for medical coverage and life insurance after they retire if either of the following requirements are satisfied:

• they are at least age 60 and have at least 15 years of regular full-time employment and participation in a University-sponsored medical plan immediately preceding the retirement date

• regardless of age, if they have at least 25 years of regular full-time service. The last 10 of those 25 years of University service must be continuous and they must participate in a University -sponsored medical plan during the last 10 years immediately preceding the retirement date.

The retiree PPO medical plan and the life insurance coverage are self-funded programs, and all medical claims, death benefits and other expenses are paid from the unrestricted net assets of the University. The Medicare Advantage PPO plan and the Medicare Supplement plan are fully insured. The retirees pay varying amounts for coverage under the medical plan.

For those employees who were hired after December 31, 2009, the University will contribute funds each month on their behalf to a retirement healthcare savings plan. This plan is designed to help pay for qualified medical and health-related expenses in retirement, including the purchase of a health insurance policy.

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Notes to Consolidated FinancialStatements Retirees will be eligible to access their Penn State Retirement Savings Account when they are no longer actively employed at Penn State and have satisfied either of the following requirements:

" completed 25 years of continuous full-time service and are age 60 or older

• completed a minimum of 15 years of continuous full-time service and are age 65 or older.

Included in unrestricted net assets at June 30, 2011 and 2010 are the following amounts that have not yet been recognized in net periodic postretirement cost: unrecognized prior service cost (benefit) of ($129.7) million and ($151.4) million and unrecognized actuarial loss of $579.1 million and $521.8 million, respectively.

The following sets forth the plan's benefit obligation, plan assets and funded status reconciled with the amounts recognized in the University's consolidated statements of financial position at June 30:

Change in benefit obligation:

(in thousands of dollars) 2011 2010 Benefit obligation at beginning of year $ 1,290,787 $ 1,044,185 Service cost 57,030 42,216 Interest cost 76,285 66,363 Actuarial (gain)/Ioss (58,555) 32,068 Benefits paid (37,849) (35,479)

Plan assumptions 151,345 141,434 Benefit obligation at end of year $ 1.47904 Change in plan assets:

(in thousands of dollars) 2011 2010 Fair value of plan assets at beginning of year $ $

Employer contributions 37,849 35,479 Benefits paid (37.849) (35,479)

Fair value of plan assets at end of year Funded status $ (1,479,043) $ (1,290,787)

Unrecognized prior service cost (benefit)

Unrecognized net actuarial loss Accrued postretirement benefit expense $ (1.479.04 Net periodic postretirement cost includes the following components for the years ended June 30:

(in thousands of dollars) 2011 2010 Service cost $ 57,030 $ 42,216 Interest cost 76,285 66,363 Amortization of prior service cost (21,673) (21,651)

Amortization of unrecognized net loss 35,497 20,187 Net periodic postretirement cost $ 147,139 $ 10 The assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation was 9.00% and 8.00% for the years ended June 30, 2011 and 2010, respectively, reduced by 0.50% per year to a fixed level of 5.00%. The weighted average postretirement benefit obligation discount rate was 5.75%

and 5.50% for the years ended June 30, 2011 and 2010, respectively.

If the healthcare cost trend rate assumptions were increased by 1% in each year, the accumulated postretirement benefit obligation would be increased by $448.6 million and $234.8 million as of June 30, 2011 and 2010, respectively. The effect of this change on the sum of the service cost and interest cost components of the net periodic postretirement benefit cost would be an increase of $46.1 million and $22.4 million as of June 30, 2011 and 2010, respectively. If the healthcare cost trend rate assumptions were decreased by 1% in 31

Notes to ConsolidatedFinancialStatements each year, the accumulated postretirement benefit obligation would be decreased by $242.6 million and

$186.3 million as of June 30, 2011 and 2010, respectively. The effect of this change on the sum of the service cost and interest cost components of the net periodic postretirement benefit cost would be a decrease of

$25.3 million and $17.4 million as of June 30, 2011 and 2010, respectively.

Gains and losses in excess of 10% of the accumulated postretirement benefit obligation are amortized over the average future service to assumed retirement of active participants.

Postretirement benefits expected to be paid for the years ended June 30 are as follows:

(in thousandsof dollars) 2012 $ 44,858 2013 48,303 2014 53,244 2015 57,559 2016 62,063 2017-21 373,155

11. THE MILTON S. HERSHEY MEDICAL CENTER AND PENN STATE HERSHEY HEALTH SYSTEM The University's wholly-owned subsidiary, TMSHMC, owns the assets of the clinical enterprise of the Hershey Medical Center complex. The University owns the Hershey Medical Center complex, including all buildings and land occupied by the Medical Center and operates the College of Medicine. The clinical facilities of the Hershey Medical Center complex are leased to TMSHMC and TMSHMC makes certain payments to support the College of Medicine.

The Health System is a corporate investor in healthcare joint ventures, which are supportive of the missions of the Medical Center. The Health System was organized in 1995 as a wholly-owned subsidiary of the Corporation for the purpose of organizing components of an integrated health care delivery system. In 2010, the Health System recorded $657,000 of non-controlling interest related to the acquisition of additional ownership interest in a joint venture. This is recorded in the net assets within the consolidated statements of financial position.

12. CONTINGENCIES AND COMMITMENTS Contractual Obligations The University has contractual obligations for the construction of new buildings and for additions to existing buildings in the amount of $630.9 million of which $494.8 million has been paid or accrued as of June 30, 2011. The contract costs are being financed from available resources and from borrowings.

Letters of Credit The University has available letters of credit in the amount of $16.0 million and $17.4 million as of June 30, 2011 and 2010, respectively. These letters of credit are used primarily to comply with minimum state and federal regulatory laws that govern various University activities. The fair value of these letters of credit approximates contract values based on the nature of the fee arrangements with the issuing banks.

Guarantees The University has a contract with a third party whereby the third party acts as an agent of the University in connection with procurement of electricity. The University guarantees the payment of the obligations of the third party incurred on behalf of the University to counterparties. No liabilities related to guarantees have been recorded as of June 30, 2011.

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Notes to ConsolidatedFinancialStatements Self-Insurance The University has a coordinated program of commercial and self-insurance for medical malpractice claims at TMSHMC through the use of a qualified trust and a domestic captive insurance company in combination with a self-insured retention layer and is supplementing this program through participation in the Pennsylvania Medical Care Availability and Reduction of Error Fund ("Mcare Fund"), in accordance with Pennsylvania law.

An estimate of the present value, discounted at 3% at June 30, 2011 and 2010, respectively, of the medical malpractice claims liability in the amount of $66.6 million and $71.4 million is recorded as of June 30, 2011 and 2010, respectively.

On July 1, 2003, TMSHMC became self-insured for all medical malpractice claims asserted on or after July 1, 2003, for all amounts that are below the coverage of the TMSHMC's excess insurance policies and not included in the insurance coverage of the Mcare Fund. Under the self-insurance program, TMSHMC is required to maintain a malpractice trust fund in an amount at least equal to the expected loss of known claims.

The balance of this trust fund was $21.0 million and $22.3 million at June 30, 2011 and 2010, respectively.

TMSHMC intends to fund any claims due during the next year from cash flows from operations.

With approval from the Pennsylvania Department of Labor and Industry ("PA-DLI"), the University elected to self-insure potential obligations applicable to workers' compensation. Certain claims under the program are contractually administered by a private agency. The University purchased insurance coverage for excess obligations over $600,000 per incident. An estimate of the self-insured workers' compensation claims liability in the amount of $13.1 million and $14.1 million, discounted at 1.25%, is recorded as of June 30, 2011 and 2010, respectively. The University has established a trust fund, in the amount of $12.4 million and $12.2 million at June 30, 2011 and 2010, respectively, as required by PA-DLI, to provide for the payment of claims under this self-insurance program. TMSHMC is self-insured for workers' compensation claims and has purchased an excess policy through a commercial insurer which covers individual claims in excess of

$500,000 per incident for workers' compensation claims.

The University and TMSHMC are self-insured for certain health care benefits provided to employees. The University and TMSHMC have purchased excess policies which cover employee health benefit claims in excess of $500,000 and $350,000 per employee per year, respectively. The University and TMSHMC provide for reported claims and claims incurred but not reported.

Litigation and Contingencies Various legal proceedings have arisen in the course of conducting University business. The outcome of such litigation is not expected to have a material effect on the financial position of the University.

Based on its operation of the Medical Center (see Note 11), the University, like the healthcare industry, is subject to numerous laws and regulations of federal, state and local governments. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions.

Recently, government reviews of healthcare providers for compliance with regulations have increased.

Although the University believes it has done its best to comply with these numerous regulations, such government reviews could result in significant repayments of previously billed and collected revenues from patient services.

13. SUBSEQUENT EVENTS The University has evaluated subsequent events through October 18, 2011, the date when the financial statements were available to be issued. It did not identify any subsequent events other than as disclosed in Note 3 to the consolidated financial statements.

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THE PENNSYLVANIA STATE UNIVERSITY BOARD OF TRUSTEES as of June 30, 2011 APPOINTED MEMBERS ELECTED BY BOARD REPRESENTING BY THE GOVERNOR EX OFFICIO BUSINESS AND INDUSTRY ALVINH. CLEMENS THOMAS W. CORBETT JR. JAMES S. BROADHURST Past Chairman and Chief Executive Officer Governor Chairman The Provident Commonwealth of Pennsylvania* Eatn Park Hospitality Group, Incorporated MARK H.DAMBLY GRAHAM B. SPANIER KENNETH C. FRAZIER President President of the University President & Chief Executive Officer Peonrose Properties, LLC Merck & Company, Incorporated GEORGE D. GREIG MICHAEL DIBERARDINIS Secretary EDWARD R. HINTZ, JR.

Deputy Mayor for Environmental and Pennsylvania Department of Agriculture President Community Resources, City of Philadelphia; Hintz Capital Management, Incorporated Commissioner, Department of Parks and Recreation RICHARD J. ALLAN Secretary KAREN B. PEETZ RODNEY P. HUGHES Pennsylvania Department of Vice Chairman, CEO of Financial Markets and Graduate Student Conservation and Natural Resources Treasury Services, Bank of New York Mellon The Pennsylvania State University RONALD J. TOMALIS LINDA B. STRUMPF IRA M. LUBERT Secretary Retired Chief Investment Officer Chairman and Co-founder Pennsylvania Department of Education The Helmsley Charitable Trust Independence Capital Partners and Lubert Adler Partners L.P. JOHN P. SURMA Chairman and Chief Executive Officer PAULH. SILVIS United States Steel Corporation Head Coach SilcoTek ELECTED ELECTED BY DELEGATES FROM BY ALUMNI AGRICULTURAL SOCIETIES MARIANNE E. ALEXANDER DAVID R. JONES 1 KEITH W. ECKEL President Emerita of the Assistant Managing Editor (Retired) - - Sole Proprietor and President Public Leadership Education Network '~The New h'prhTimes 4,- Fred W. Eckel and Sons Farms, Incorporated and CEO of Big Spoon Enterprises DAVIDM. JOYNER SAMUEL E. HAYES, JR.

H. JESSE ARNELLE Corporate Medical Director andPartner Attorney Occupational Athletics Incorporated BARRON L. HETHERINGTON Special Advisor to the Governor, PA Department STEPHANIE N. DEVINEY JOEL N. MYERS of Agriculture; Owner, B & R Farms Attorney at Law President Fox Rothschild LLP AccuWeather, Incorporated BETSY E. HUBER Immediate Past Master, Pennsylvania State Grange STEVE A. GARBAN ANNE RILEY Senior Vice President for Finance and Teacher KEITH E. MASSER Operations/Treasurer Emeritus Chairman & Chief Executive Officer The Pennsylvania State University PAUL V. SUHEY Sterman Masser, Incorporated Orthopedic Surgeon Martin & Suhey Orthopedics- CARL T. SHAFFER President Pennsylvania Farm Bureau EMERITI TRUSTEES CHARLES C. BROSIUS J. LLOYD HUCK CECILE M.SPRINGER Retired President Retired Chairman of the Board President, Springer Associates Marlboro Mushrooms Merck and Company, Incorporated HELEN 0. WISE WALTER J. CONTI EDWARD P. JUNKER III Former Deputy Chief of Staff for Retired Owner Retired Vice Chairman Programs and Secretary of the Cabinet Cross Keys Inn/Pipersville Inn PNC Bank Corporation Governor's Office DONALD M. COOK, JR. ROGER A. MADIGAN BOYD E. WOLFF Retired President Retired State Senator Retired, Owner and Operator SEMCOR, Incorporated 23rd Senatorial District Wolfden Farms MARIAN U. BARASH COPPERSMITH ROBERT D. METZGAR QUENTIN E. WOOD Retired Chairman of the Board Former President Retired Chairman of the Board and The Barash Group North Penn Pipe & Supply. Incorporated Chief Executive Officer Quaker State Corporation ROBERT M. FREY BARRY K. ROBINSON Attomey-at-Law Attorney-at-Law EDWARD P. ZEMPRELLI Frey &Tiley, PC. Attorney L. J. ROWELL, JR.

Retired Chairman and Chief Executive Officer Provident Mutual LifeInsurance