ML14364A125

University - Annual Financial Test Submittal and Self-Guarantee - Year Ending June 30, 2014

ML14364A125
Person / Time
Site:	07000113, Pennsylvania State University
Issue date:	12/23/2014
From:	Doncsecz J Pennsylvania State Univ
To:	Document Control Desk, Office of Nuclear Material Safety and Safeguards
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Download: ML14364A125 (48)

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% k (814) 865-1355 (814) 863-0701 PENNSTATE qW Joseph J. Doncsecz Associate Vice President for Finance and Corporate Controller The Pennsylvania State University 408 Old Main University Park, PA 16802-1505 December 23, 2014 Director, Office of Nuclear Material Safety and Safeguards U.S. Nuclear Regulatory Commission Document Control Desk 11555 Rockville Pike Rockville, Maryland 20852 - 2738 Subj: University - Annual Financial Test submittal and Self-Guarantee -

Year Ending June 30, 2014 License numbers: R-2 Breazeale Nuclear Reactor Docket 050-00005 SNM-95 Penn State University Docket 070-00113

Dear Sir or Madam,

Attachment A contains The Pennsylvania State University's Audited Financial Statements for the last fiscal year (July 1, 2013 through June 30, 2014). In addition to the enclosed report, an electronic version may also be found at http://controller.psu.edu/sites/default/files/users/controller/docs/FinStmts/2014FinStmts.pdf As required in 10 CFR 30.35.(f).(2), the financial test and self-guarantee method of 10 CFR 30 Appendix E will be used. The Pennsylvania State University certifies the following:

(i) 10 CFR 30 Appendix E Paragraph II.A.(1) - The University currently holds a rating for its most recent bond issuance of AA as issued by Standard and Poor's, and a bond rating of Aa2 as issued by Moody's, and (ii) The University is currently a going concern, and it possessed positive net assets in the amount of $7,683,525,000 at June 30, 2014. The calculation of the University's net assets at June 30, 2014 was derived from the University's independently audited, year-end financial statements and footnotes for the fiscal year ended June 30, 2013.

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

(iii) 10 CFR 30 Appendix E Paragraph II.C.(1) - Audited financial statements are attached. The Independent Accountant's Report on Applying Agreed-Upon Procedures will follow under separate cover the week of January 5, 2015.

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In addition, Attachment B contains Penn State University's Self-Guarantee Agreement for Financial Assurance for Cost of Decommissioning Activities.

Please contact Jeffrey Leavey at 814-865-3939 or JAL62@psu.edu if you have any questions.

Sincerely, Joseph J. Doncsecz Associate Vice President for Finance and Corporate Controller Attachment A - Audited financial statements Attachment B - Penn State University's self-guarantee agreement cc: Jeffrey Leavey, Radiation Safety Officer Mark Trump, Associate Director, Radiation Science and Engineering Center Jody Murawski, Corporate Controller's Office, University Park

ATTACHMENT A - Penn State University Audited Financial Statements PENSAT Vd'e Finacia tat-ent The~~~~

PnslanaSaeUirst Fsal Yar Ene Jun 3021

THE PENNSYLVANIA STATE UNIVERSITY UNIVERSITY OFFICERS as of November 14, 2014 ERIC J. BARRON President STEPHEN S. DUNHAM Vice President and General Counsel DAVID J. GRAY Senior Vice President for Finance and Business/Treasurer A. CRAIG HILLEMEIER Chief Executive Officer, Penn State Milton S.

Hershey Medical Center; Senior Vice President for Health Affairs, Penn State University; and Dean, Penn State College of Medicine NICHOLAS P. JONES 6 Executive Vice President and Provost RODNEY P. KIRSCH Senior Vice President for Development and Alumni Relations

CONTENTS Operating Revenues by Source 2 Operating Expenses by Function 3 Letter of Transmittal 5 Independent Auditors' Report 6 Consolidated Financial Statements:

Statements of Financial Position 8 Statements of Activities 10 Statements of Cash Flows 12 Notes to Consolidated Financial Statements 13

OPERATING REVENUES BY SOURCE ($5.1 billion)

For the Year Ended June 30, 2014

($ in millions)

Government grants and contracts

$632.8 (12.3%)

Private gifts, grants and contracts Medical Center $332.3

$1,470.9 (6.4%)

(28.6%) /

Commonwealth of Pennsylvania appropriation

$275.9 (5.3%)

Endowment spending and other investment income

$189.4 (3.7%)

Recovery of indirect costs

$149.0 (2.9%)

Other sources

$85.7 (1.7%)

Tuition and fees, net of discount

$1,606.1 (31.2%)

2

OPERATING EXPENSES BY FUNCTION ($4.6 billion)

For the Year Ended June 30, 2014

($ in millions)

Research

$775.3 (16.9%)

Auxiliary enterprises L $366.1 (8.0%)

Medical Center Academic

$1,351.1 / support (29.5%) $342.9 (7.5%)

Institutional support

$306.8 (6.7%)

! $171.5 (3.8%)

Student services Public service

$79.0 (1.7%)

Instruction

$1,186.9 (25.9%)

3

This Page is Intentionally Blank.

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(814) 865-1355 PENNSTATE (814) 863-0701 V Joseph J. Doncsecz Associate Vice President for Finance and Corporate Controller The Pennsylvania State University 408 Old Main University Park, PA 16802-1505 October 24, 2014 Dr. Eric J. Barron, President The Pennsylvania State University

Dear Dr. Barron:

The audited consolidated financial statements of The Pennsylvania State University and subsidiaries (the "University") for the fiscal years ended June 30, 2014 and 2013 are presented on the accompanying pages. These financial statements represent a complete and permanent record of the finances of the University as of and for the years then ended.

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, II Joseph J. Doncsecz Associate Vice President for Finance and Corporate Controller David J. Gr, Senior Vice for Finance and Business, and Treasurer An Equal Opportunity University 5

Deloitte Delome&Touche LLP 1700 Market Street Philadelphia, PA 19103-3984 USA Tel: +1 215 246-2300 Fax: +1 215 569-2441 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 financial statements of The Pennsylvania State University and its subsidiaries (the "University"), which comprise the consolidated statements of financial position as of June 30, 2014 and 2013, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors' Responsibility 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 consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the University's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Member of Deloitte Touche Tohmatsu 6

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the University as of June 30, 2014 and 2013, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

October 24, 2014 7

THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ASSETS JUNE 30, 2014 AND 2013 (in thousands)

June 30, 2014 June 30, 2013 Current assets:

Cash and cash equivalents $ 1,028,529 $ 983,256 Short-term investments 365,851 200,273 Deposits held for others 57,014 44,166 Accounts receivable, net of allowances of $72,957 and $66,974 527,213 492,404 Contributions receivable, net 63,573 50,411 Loans to students, net of allowances of $384 and $584 8,163 10,683 Inventories 35,484 31,406 Prepaid expenses and other assets 114,963 115,463 Total current assets 2,200,790 1,928,062 Noncurrent assets:

Deposits held by bond trustees 2,551 2,551 Contributions receivable, net 150,891 127,726 Loans to students, net of allowances of $2,319 and $2,497 52,654 48,161 Deferred bond costs, net 5,095 5,181 Total investment inplant, net 3,944,252 3,730,764 Beneficial interest inperpetual trusts 15,498 13,252 Investments 5,319,035 4,816,961 Other assets 19,841 17,958 Total noncurrent assets 9,509,817 8,762,554 Total assets $ 10.69.61 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, 2014 AND 2013 (in thousands)

June 30, 2014 June 30, 2013 Current liabilities:

Accounts payable and other accrued expenses $ 526,815 $ 660,096 Deferred revenue 271,684 264,727 Long-term debt 47,177 43,650.

Present value of annuities payable 5,597 5,276 Accrued postretirement benefits 53,350 51,390 Total current liabilities 904,623 1,025,139 Noncurrent liabilities:

Deposits held incustody for others 40,619 50,804 Deferred revenue 1,952 6,969 Long-term debt 934,311 961,758 Present value of annuities payable 45,554 36,979 Accrued postretirement benefits 1,847,056 1,643,651 Refundable United States Government student loans 46,318 45,300 Other liabilities 206,649 210,919 Total noncurrent liabilities 3,122,459 2,956,380 Total liabilities 4,027,082 3,981,519 Net assets:

Unrestricted -

Undesignated 1,637 1,635 Designated for specific purposes 3,182,328 2,757,846 Net investment in plant 2,473,238 2,246,228 Total unrestricted - The Pennsylvania State University 5,657,203 5,005,709 Noncontrolling interest 961 831 Total unrestricted 5,658,164 5,006,540 Temporarily restricted 694,240 484,375 Permanently restricted 1,331,121 1,218,182 Total net assets 7,683,525 6,709,097 Total liabilities and net assets $ 11.710.607 See notes to consolidated financial statements.

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THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2014 (in thousands)

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

Tuition and fees, net of discounts of $153,724 $ 1,606,079 $ $ $ 1,606,079 Commonwealth of Pennsylvania -

Appropriations 275,931 275,931 Special contracts 71,750 71,750 Department of General Services projects 82,337 82,337 United States Government grants and contracts 478,699 478,699 Private grants and contracts 184,722 184,722 Gifts and pledges 104,947 42,672 147,619 Endowment spending 75,383 - 75,383 Other investment income 113,349 674 114,023 Sales and services of educational activities 66,758 - 66,758 Recovery of indirect costs 148,988 148,988 Auxiliary enterprises 406,685 406,685 Medical Center revenue 1,470,925 1,470,925 Other sources 18,925 - 18,925 Net assets released from restrictions 25,649 (25,649)

Total operating revenues and other support 5,131,127 17,697 5,148,824 Operating expenses:

Educational and general -

Instruction 1,186,941 1,186,941 Research 775,321 775,321 Public service 78,960 78,960 Academic support 342,876 342,876 Student services 171,484 171,484 Institutional support 306,833 306,833 Total educational and general 2,862,415 2,862,415 Auxiliary enterprises 366,101 366,101 Medical Center expense 1,351,131 1,351,131 Total operating expenses 4,579,647 4,579,647 Increase in net assets from operating activities 551,480 17,697 569,177 Nonoperating activities:

Gifts and pledges 114,659 114,659 Current year investment returns 279,217 193,815 9,087 482,119 Endowment appreciation utilized (47,077) (47,077)

Changes infunds held by others in perpetuity 363 1,702 2,065 Write-offs and disposals of assets (5,141) (5,141)

Nonperiodic change in postretirement benefit plan (126,985) (126,985)

Actuarial adjustment on annuities payable (2,010) (12,509) (14,519)

Increase in net assets from nonoperating activities 100,014 192,168 112,939 405,121 Increase in net assets - The Pennsylvania State University 651,494 209,865 112,939 974,298 Noncontroilling interest:

Excess of revenues over expenses 130 130 Increase in net assets noncontrolling interest 130 130 Increase in total net assets 651,624 209,865 112,939 974,428 Net assets at the beginning of the year 5,006,540 484,375 1,218,182 6,709,097 Net assets at the end of the year $ 5,658,164 $ 694,240 $ 1,331,121 $ 7,683,525 See notes to consolidated financial statements.

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THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2013 (in thousands)

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

Tuition and fees, net of discounts of $127,987 $ 1,548,974 $ $ $ 1,548,974 Commonwealth of Pennsylvania -

Appropriations 272,431 272,431 Special contracts 65,712 65,712 Department of General Services projects 49,890 49,890 United States Government grants and contracts 503,517 503,517 Private grants and contracts 182,661 182,661 Gifts and pledges 74,454 16,827 91,281 Endowment spending 71,459 71,459 Other investment income 100,094 592 100,686 Sales and services of educational activities 66,054 66,054 Recovery of indirect costs 153,662 153,662 Auxiliary enterprises 378,290 378,290 Medical Center revenue 1,372,500 1,372,500 Other sources 15,998 15,998 Net assets released from restrictions 76,783 (76,783)

Total operating revenues and other support 4,932,479 (59,364) 4,873,115 Operating expenses:

Educational and general -

Instruction 1,129,431 1,129,431 Research 806,333 806,333 Public service 82,221 82,221 Academic support 327,327 327,327 Student services 167,061 167,061 Institutional support 376,602 376,602 Total educational and general 2,888,975 2,888,975 Auxiliary enterprises 347,606 347,606 Medical Center expense 1,232,710 1,232,710 Total operating expenses 4,469,291 4,469,291 Increasel(decrease) in net assets from operating activities 463,188 (59,364) 403,824 Nonoperating activities:

Gifts and pledges 68,521 68,521 Current year investment returns 56,633 62,315 8,103 127,051 Endowment appreciation utilized (35,180) (35,180)

Changes in funds held by others in perpetuity 424 353 777 Write-offs and disposals of assets (2,000) (2,000)

Nonperiodic change in postretirement benefit plan 283,416 283,416 Actuarial adjustment on annuities payable (1,208 (3,159) (4,367)

Increase in net assets from nonoperating activities 302,869 61,531 73,818 438,218 Increase in net assets - The Pennsylvania State University 766,057 2,167 73,818 842,042 Noncontrolling interest:

Excess of revenues over expenses 57-- 57 Increase in net assets noncontrolling interest 57-- 57 Increase in total net assets 766,114 2,167 73,818 842,099 Net assets at the beginning of the year 4,240,426 482,208 1,144,364 5,866,998 Net assets at the end of the year $ 5,006,540 $ 484,375 $ 1,218,182 $ 6,709,097 See notes to consolidated financial statements.

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THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2014 AND 2013 (in thousands)

June 30, 2014 June 30, 2013 Cash flows from operating activities:

Increase innet assets $ 974,428 $ 842,099 Adjustments to reconcile change innet assets to net cash provided by operating activities:

Actuarial adjustment on annuities payable 14,519 4,366 Contributions restricted for long-term investment (115,854) (100,126)

Interest and dividends restricted for long-term investment (60,684) (61,553)

Net realized and unrealized gains on long-term investments (512,770) (132,907)

Depreciation expense 275,369 251,407 Amortization expense 536 480 (Gain)/loss on early extinguishment of debt 25 (213)

Write-offs and disposals of assets 4,693 16,000 Contributions of land, buildings and equipment (27,089) (14,821)

Buildings and equipment provided by Pennsylvania Department of General Services (222) (1,293)

Contribution to government student loan funds 431 154 Provision for bad debts 54,115 49,433 Increase indeposits held for others (12,848) (40,601)

Increase inreceivables (132,791) (90,238)

Increase ininventories (4,013) (503)

(Increase)/decrease inprepaid expenses and other assets (5,725) 14,598 (Decrease)/increase inaccounts payable and other accrued expenses (68,638) 80,820 Increase indeferred revenue 1,184 18,564 Increase/(decrease) inaccrued postretirement benefits 205,365 (169,858)

Net cash provided by operating activities 590,031 665,808 Cash flows from investing activities:

Purchase of land, buildings and equipment (450,139) (434,933)

Advances on student loans (11,013) (9,836)

Collections on student loans 8,983 8,320 Proceeds from sale of donated financial assets 159 Purchase of investments (39,148,432) (40,907,840)

Proceeds from sale of investments 38,919,400 40,068,438 Net cash used in investing activities (681,042) (1,275,851)

Cash flows from financing activities:

Contributions restricted for long-term investment 115,854 100,126 Interest and dividends restricted for long-term investment 60,684 61,553 Payments of annuity obligations (5,620) (5,297)

Proceeds from notes payable 10,000 Principal payments on notes, bonds and capital leases (45,322) (163,604)

Proceeds related to government student loan funds, net of collection costs 688 658 Net cash provided by/(used in) financing activities 136,284 (6,564)

Net increase/(decrease) in cash and cash equivalents 45,273 (616,607)

Cash and cash equivalents at the beginning of the year 983,256 1,599,863 Cash and cash equivalents at the end of the year $ 1,028,529 $ 983,256 Supplemental disclosures of cash flow information (Note 2)

See notes to consolidated financial statements.

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THE PENNSYLVANIA STATE UNIVERSITY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2014 AND 2013

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 financial statements 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 Accounting 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.

Permanentlyrestricted 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.

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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 and Health System have agreements with third-party payors that provide for payments to TMSHMC and Health System at amounts different from their 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. In addition, net patient service revenue is net of provision for bad debts of $50.1 million and $43.6 million for the years ended June 30, 2014 and 2013, respectively. 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 established rates. The Medical Center does not pursue collection of amounts determined to qualify as charity care; they are not reported as net patient service revenue. The amounts of direct and indirect costs for services and supplies furnished under the Medical Center's charity care policy totaled approximately $20.2 million and $20.0 million for the years ended June 30, 2014 and 2013, respectively, and is based on a ratio of the Medical Center's operational costs to its gross charges. The amount of charges foregone for services and supplies furnished under the Medical Center's charity policy during 2014 and 2013 totaled approximately $56.3 million and $54.9 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, 2014 and 2013. 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, 2014 and 2013 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.

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Notes to ConsolidatedFinancialStatements 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) 2014 2013 Interest paid $ 44,673 $ 46,798 Non-cash acquisitions of land, buildings and equipment 38,470 32,723 Capitalized costs accrued related to construction are $46.2 million and $44.8 million as of June 30, 2014 and 2013, respectively. Taxes paid for 2014 and 2013 are considered immaterial. 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 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 thousands of dollars) 2014 2013 Grants and contracts, net of allowance of $1,211 and $1,241 $ 222,981 $ 166,963 Patient accounts receivable, net of allowance of $60,108 and $54,759 172,104 173,582 Student receivables, net of allowance of $6,689 and $6,434 30,946 33,178 Investment and interest receivable 58,765 78,419 Other, net of allowance of $4,949 and $4,540 42,417 40,262 Total accounts receivable, net $ 527,M1 $

The University maintains allowances for doubtful accounts to reflect management's best estimate of probable losses inherent in receivable balances. Management determines the allowances for doubtful accounts based on known factors, historical experience, and other currently available evidence. Receivables are written off when management determines they will not be collected.

Related to patient accounts receivable associated with services provided to patients who have third-party coverage, management analyzes contractually due amounts and provides an allowance for doubtful accounts (for example, for expected uncollectible deductibles and copayments or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables from self-pay patients the Medical Center and Health System records a provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. In estimating the allowance for doubtful accounts, account age is taken into consideration. The difference between the standard rates (or the discounted rates if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts.

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, 2014 and 2013, student loans represent 0.5% and 0.6% of total assets, respectively.

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Notes to ConsolidatedFinancialStatements 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 $46.3 million and $45.3 million at June 30, 2014 and 2013, 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, 2014 and 2013, loans to students consisted of the following:

(in thousandsof dollars) 2014 2013 Loans to students:

Federal government loan programs:

Perkins loan program $ 44,337 $ 42,789 Health Professions Student Loans and Loans for Disadvantaged Students 117 197 Federal government loan programs 44,454 42,986 Institutional loan programs 19,066 18,939 63,520 61,925 Less allowance for doubtful accounts:

Balance, beginning of year (3,081) (2,733)

Provision for doubtful accounts 378 (348)

Balance, end of year (2,703) (3,081)

Loans to students, net $ 60,817 $ 58,84 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, 2014 and 2013 are as follows:

(in thousands of dollars) 30 days Over or less 31-60 days 61-90 days 91 days Total 2014 Loans to students:

Federal government loan programs $ 42,955 $ 705 $ 64 $ 730 $ 44,454 Institutional loan programs 18,271 239 34 522 19,066 Total loans to students 944 98 1,252 Allowance for doubtful accounts:

Federal government loan programs (1,297)

Institutional loan programs (1,406)

Total allowance for doubtful accounts (2,703)

S60.8~17 Total loans to students, net 16

Notes to Consolidated FinancialStatements (in thousands of dollars) 30 days Over or less 31-60 days 61-90 days 91 days Total 2013 Loans to students:

Federal government loan programs $ 41,367 $ 656 $ 86 $ 877 $ 42,986 Institutional loan programs 18,310 280 23 326 18,939 Total loans to students 59,677 936 109 1,203 61,925 Allowance for doubtful accounts:

Federal government loan programs (1,432)

Institutional loan programs (1,649)

Total allowance for doubtful accounts (3,081)

Total loans to students, net $ 8*44 Inventories Inventories are stated at the lower of cost or market, generally on the first-in, first-out basis.

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 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, equity and fixed income 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, 2014 and 2013. 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.

17

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

(in thousands of dollars) 2014 2013 Land $ 123,532 $ 116,050 Buildings 5,354,902 5,043,463 Improvements other than buildings 587,492 559,877 Equipment 1,186,744 1,100,431 Total plant 7,252,670 6,819,821 Less accumulated depreciation (3,308,418) (3,089,057)

Total investment in plant, net $ 3,944,252 $ 3.3.6 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 4 to 50 years for buildings, 10 to 20 years for improvements other than buildings, and 1 to 20 years for equipment. Depreciation expense was $275.4 million and $251.4 million for the fiscal years ended June 30, 2014 and 2013, respectively. 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 lower of fair market value or 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, 2014 and 2013 was $127.9 million and $42.5 million, and $135.5 million and $41.8 million, respectively.

Accounts Payable and Other Accrued Expenses Accounts payable and other accrued expenses at June 30 consist of the following:

(in thousands of dollars) 2014 2013 Accounts payable (non-Medical Center) $ 231,910 $ 366,637 Medical Center accounts payable and other accrued expenses 186,570 187,667 Accrued payroll and other related liabilities 89,851 87,300 Accrued bond interest 13,093 13,674 Student deposits 5,391 4,818 Total accounts payable and other accrued expenses Impairment of Long-Lived Assets Long-lived assets, which include investment in plant and definite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. An impairment loss is recognized in change in net assets in the period that the impairment occurs.

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.

18

Notes to ConsolidatedFinancialStatements 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 noncurrent 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, 2012 $ 61,934 Accretion expense 7,651 Liabilities settled (4,293)

Balance as of June 30, 2013 65,292 Accretion expense 5,229 Liabilities settled (4,188)

Balance as of June 30, 2014 $ 66,33a Annuities Payable Annuities payable consist of annuity payments currently due and the actuarial amount of annuities payable.

The actuarial amount of annuities payable is the present value of the aggregate liability for annuity payments over the expected lives of the beneficiaries.

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 October 2012, the FASB issued ASU 2012-05, "Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classificationof the Sale Proceeds of Donated FinancialAssets in the Statement of Cash Flows."

This guidance provides clarification on how entities classify cash receipts arising from the sale of certain donated financial assets in the statement of cash flows. This guidance is effective for the University beginning July 1, 2013. The adoption of this guidance did not have a material impact on its consolidated statement of cash flows.

In January 2013, the FASB issued ASU 2013-01, "Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities." This guidance provides clarification on the scope of the offsetting disclosure requirements in ASU 2011-11. This guidance is effective for the University beginning July 1, 2013. The adoption of this guidance did not have a material impact on its consolidated financial statements.

In February 2013, the FASB issued ASU 2013-04, "Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date." This guidance requires entities to measure obligations resulting from the joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance is effective for the University beginning July 1, 2014 with early adoption permitted. The University has not yet evaluated the impact this guidance may have on its consolidated financial statements.

In April 2013, the FASB issued ASU 2013-06, "Services Received from Personnel of an Affiliate". This update specifies guidance for not-for-profit entities to apply in recognizing and measuring services received from personnel of an affiliate. This guidance is effective for the University beginning after June 15, 2014 with early adoption permitted. The University has not yet evaluated the impact this guidance may have on its consolidated financial statements.

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Notes to ConsolidatedFinancialStatements

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

(in thousands of dollars) 2014 2013 Money markets $ 213,878 $ 371,987 Fixed income:

U.S. government/agency 1,190,248 1,174,609 U.S. corporate 803,990 706,291 Foreign 408,364 372,515 Other 169,962 146,617 Equities 1,742,632 1,342,487 Private capital 1,155,812 902,728 Total $ 5.684.886 $ 5,017,2a4 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, commodities and hedge fund limited partnerships.

Futures contracts, which are fully cash collateralized, comprise the University's directly held derivative instruments at June 30, 2014 and 2013, 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 $172.8 million, 3.0% of total investments, and $270.5 million, 5.4% of total investments at June 30, 2014 and 2013, respectively. The University's derivatives consist of S&P 500 and Treasury futures and are employed as a low cost, passive investment vehicle with daily liquidity which allows the University to maintain desired market exposure in light of irregular cash flows.

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 2014 Unrestricted Restricted Restricted Total Dividends and interest $ 141,655 $ 674 $ 9,087 $ 151,416 Net realized gains 45,538 28,535 - 74,073 Net unrealized gains 233,679 165,280 398,959 Total returns $ 420,872 $ 194,489 $ 9_,08 $ 624,4 (in thousands of dollars) Temporarily Permanently 2013 Unrestricted Restricted Restricted Total Dividends and interest $ 136,373 $ 592 $ 8,103 $ 145,068 Net realized gains 38,563 21,898 - 60,461 Net unrealized gains 18,070 40,417 58,487 Total returns $ 193,0Q6 $ 62,907 $ 8,103 $ 264*1 20

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, 2014 and 2013 was $1.0 million and $2.5 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 2014 Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (959) $ 521,680 $ 1,146,955 $ 1,667,676 Funds functioning as endowments 596,738 - - 596,738 Total net assets $ 595,779 $ 5218 $ 114695 $ 22641 (in thousands of dollars) Temporarily Permanently 2013 Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (2,530) $ 338,970 $ 1,067,081 $ 1,403,521 Funds functioning as endowments 520,622 - - 520,622 Total net assets $ 518,092 $ 33 0 $ 1,067081 $ 1,924,14a 21

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

(in thousands of dollars) Temporarily Permanently 2014 Unrestricted Restricted Restricted Total Endowment net assets, beginning of the year $ 518,092 $ 338,970 $ 1,067,081 $ 1,924,143 Endowment return:

Endowment earnings 28,306 20 3,054 31,380 Net realized gains 47,077 28,374 75,451 Net unrealized gains 63,399 155,123 218,522 Reclassification of funds with deficiencies 1,571 (1,571)

Total endowment return 140,353 181,946 3,054 325,353 Contributions 764 76,820 77,584 Endowment spending (75,383) (75,383)

Transfers to create funds functioning as endowments 12,717 12,717 Endowment net assets, end of the year (in thousands of dollars) Temporarily Permanently 2013 Unrestricted Restricted Restricted Total Endowment net assets, beginning of the year $ 486,802 $ 284,539 $ 1,001,580 $ 1,772,921 Endowment return:

Endowment earnings 36,279 80 3,605 39,964 Net realized gains 35,180 21,351 56,531 Net unrealized losses 20,830 34,900 55,730 Reclassification of funds 2,405 with deficiencies (2,405)

Total endowment return 94,694 53,926 3,605 152,225 Contributions 505 61,896 62,401 Endowment spending (71,459) (71,459)

Transfers to create funds functioning as endowments 8,055 8,055 Endowment net assets, end of the year $ 38,ZQ $ 1,924,143 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.

The University has a policy of appropriating for distribution each year a certain percentage (4.5% for 2014 and 2013) of its pooled endowment fund's average fair market value over the prior five years preceding the 22

Notes to Consolidated FinancialStatements 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. Such instruments valued at Level 1, primarily consist of securities that are directly held and actively traded in public markets.

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 2 measures include University interests in certain debt instruments and commingled investment funds which NAV is used as a practical expedient. These funds are redeemable at NAV as of the measurement date, generally within 90 days.

Level 3 - Unobservable inputs that cannot be corroborated by observable market data. Level 3 instruments primarily consist of investment funds for which NAV is used as a practical expedient. The University does not have the ability to redeem the funds at NAV as of the measurement date.

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.

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Notes to Consolidated FinancialStatements The following table presents information as of June 30, 2014 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 $ 48,692 $ 160,388 $ $ 209,080 Fixed income U.S. government/agency 85,285 24,447 109,732 U.S. corporate 96,171 96,171 Foreign 64,007 187,203 251,210 Other 9,679 9,679 Equities 906,248 588,246 121,186 1,615,680 Private capital 397,295 751,380 1,148,675 Total $ 1,463,429 $ 872,566

$ 3.44.2 Operating investments:

Money markets 4,592 $ 206 $ - $ 4,798 Fixed income U.S. government/agency 646,086 434,286 144 1,080,516 U.S. corporate 44,646 663,173 707,819 Foreign 8,070 149,084 157,154 Other 10,627 146,451 3,205 160,283 Equities 124,989 1,963 126,952 Private capital 7,137 7,137 Total $ $ 12,449 S 2,244,659 839,010 $ 1,393,200 Deposits held by bond trustees:

Fixed income U.S. government/agency $ 2,551 $ 2,551

$ 2,551 Total Beneficial interest in perpetual trusts - $ $ 15,498 $ 15,498 Liabilities: $

Present value of annuities payable - $ $ 51,151 $ 51,151 24

Notes to ConsolidatedFinancialStatements The following table presents information as of June 30, 2013 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 $ 86,754 $ 261,667 $ - $ 348,421 Fixed income U.S. government/agency 84,168 29,967 114,135 U.S. corporate 4,229 83,480 87,709 Foreign 60,260 174,985 235,245 Other 8,913 8,913 Equities 822,353 373,406 63,157 1,258,916 Private capital 307,741 588,922 896,663 Total $ $ 1,240,152 $ 652.079 $ 2,950,002 1,057,764 Operating investments:

Money markets 23,360 $ 206 $ - $ 23,566 Fixed income U.S. government/agency 574,415 485,921 138 1,060,474 U.S. corporate 618,582 618,582 Foreign 137,270 137,270 Other 134,890 2,814 137,704 Equities 81,470 798 1,303 83,571 Private capital 6,065 6,065 Total $ 1,377.66_7 $ 10,320 $ 2,067,232 Deposits held by bond trustees:

Fixed income U.S. government/agency $ 2,551 $ 2,551 Total $ 2.551 Beneficial interest in perpetual trusts $ $ - $ 13,252 $ 13,252 Liabilities:

Present value of annuities payable $ $ 42,255 $ 42,255 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, 2014 and 2013, fair value of endowment funds and funds functioning as endowments within the LTIP totaled $2,294.6 million and $1,941.1 million, respectively. At June 30, 2014 and 2013, fair value of operating funds included in the LTIP totaled $1,145.6 million and $1,008.9 million, respectively.

25

Notes to Consolidated FinancialStatements The following tables present information related to changes in Level 3 for each category of assets and liabilities for year ended June 30, 2014:

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

Beginning balance $ 652,079 $ 10,320 $ 13,252 Total realized and unrealized gains 175,790 1,454 2,035 Purchases 175,566 747 291 Sales (130,869) (72) (80)

Transfers into (out of) Level 3 Ending balance $ 12,449 $ 15,49a Present Value of Annuities Payable Liabilities:

Beginning balance $ 42,255 Actuarial adjustment of liability (633)

Gifts 10,135 Sales (606)

Withdrawal from program Ending balance The following tables present information related to changes in Level 3 for each category of assets and liabilities for year ended June 30, 2013:

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

Beginning balance $ 607,407 $ 10,778 $ 12,891 Total realized and unrealized Gains/(losses) 60,065 (388) 361 Purchases 165,678 75 Sales (135,294) (145)

Transfers into (out of) Level 3 (45,777)

Ending balance $ 652,079 Present Value of Annuities Payable Liabilities:

Beginning balance $ 43,167 Actuarial adjustment of liability 4,679 Gifts 642 Sales (6,233)

Withdrawal from program Ending balance $ 42,255 For the year ended June 30, 2014, there were no transfers of assets between Level 3 and Level 2. For the year ended June 30, 2013, $45.8 million of Level 3 assets were transferred to Level 2 as a result of the expiration of lock-up periods for two marketable alternative funds; now these investments may be redeemed within 90 days of June 30.

There were no transfers of investments between Level 1 and Level 2 in 2014 and 2013.

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Notes to ConsolidatedFinancialStatements 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, 2014:

Unfunded Redemption Redemption (in thousandsof dollars) Fair Value Commitment Frequency Notice Period Commingled Funds: Quarterly/

Non-U.S. Equity $ 617,223 Daily/Monthly 5-90 days Subtotal $ 617,223 Marketable Investment Partnerships:

Absolute Return $ 17,135 Quarterly 65 days Quarterly/

Distressed Debt 58,506 Semi Annual 60-90 days Commodities 106,388 Monthly 30-60 days Opportunistic 171,103 Quarterly 30 days Directional Long/Short 62,818 Monthly 30 days Subtotal $ 415,950 Non-Marketable Investment Partnerships:

Private Real Estate $ 101,360 $ 45,193 Venture Capital 213,012 112,579 Private Equity 248,263 211,614 Natural Resources 131,240 77,675 Private Debt 45,987 51,040 Subtotal $ 739,862 $ 498,101 Total $ 1,773035 $ 4981 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, 2013:

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

Non-U.S. Equity $ 362,061 Daily/Monthly 5-90 days Subtotal $ 362,061 Marketable Investment Partnerships:

Absolute Return $ 20,173 Quarterly 65 days Quarterly/

Distressed Debt 52,152 Semi Annual 60-90 days Commodities 84,271 Monthly 30-60 days Opportunistic 140,181 Quarterly 30 days Directional Long/Short 27,580 Quarterly 30-90 days Subtotal $ 324,357 Non-Marketable Investment Partnerships:

Private Real Estate $ 88,567 $ 19,788 Venture Capital 144,712 83,095 Private Equity 234,203 141,606 Natural Resources 91,306 69,809 Private Debt 19,583 20,031 Subtotal $ 578,371 $ 334,329 Total $ 334,329 27

Notes to ConsolidatedFinancialStatements Commingled funds include investments that aggregate assets from multiple investors and are managed collectively following a prescribed strategy. Redemptions vary from daily to quarterly with required notification of 90 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. One commingled fund has 2 years remaining on a 3-year gate and a second is 50% redeemable in three years. The two make up approximately 12.9% and 6.8%, respectively of commingled portfolio.

Marketable Investment Funds include several hedge funds whose underlying positions are traded via public securities markets. Liquidity terms range from quarterly to 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 Long Term Investment Pool's (LTIP) share holdings in the fund.

Five major investment strategies are included within this category. Absolute Return refers to relative value strategies. Directional refers to equity long/short strategies in both U.S. and non-U.S. markets. Opportunistic refers to global multi-strategy. Distressed Debt refers to securities rated below investment grade, along with non-rated debt. Commodities refer to publicly traded commodity instruments primarily including futures and options.

Nonmarketable Investment Partnerships include limited partnership interests in a variety of illiquid investments. The fair values of the investments for each fund in this category have been estimated using the net asset value of the LTIP's 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 of the LTIP's drawdown funds as of June 30, 2014 and 2013, 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 oil and natural gas in addition to a variety of other natural resources. Private Debt includes global 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) 2014 2013 In one year or less $ 71,374 $ 57,002 Between one year and five years 79,253 63,742 More than five years 133,163 119,990 283,790 240,734 Less allowance (6,911) (5,704)

Less discount (62,415) (56,893)

Contributions receivable, net $ 214,46A $ 1 Contributions receivable are discounted at rates ranging from 0.11% to 2.81% and 0.15% to 2.87% at June 30, 2014 and 2013, respectively. The discount rates for prior periods ranged from 0.15% to 6.28%.

At June 30, 2014 and 2013, the University has received bequest intentions and certain other conditional promises to give of $98.2 million and $85.8 million, respectively. These intentions and conditional promises to give are not included in the consolidated financial statements.

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Notes to ConsolidatedFinancialStatements The following table summarizes the change in contributions receivable, net during the year ended June 30, 2014:

(in thousands of dollars)

Balance beginning of year $ 178,137 New pledges 115,112 Collections on pledges (72,056)

Increase in allowance (1,207)

Increase in unamortized discounts (5,522)

Balance at the end of year $ 214,464

7. LONG-TERM DEBT The various bond issues and capital lease obligations that are included in long-term debt in the statements of financial position consist of the following at June 30:

(in thousands of dollars) 2014 2013 The Pennsylvania State University Bonds Series 2010 $ 135,035 $ 135,035 Series 2009A 107,840 114,075 Series 2009B 74,235 74,235 Series 2008A 77,670 77,670 Series 2008B 3,035 3,980 Series 2007A 87,595 88,125 Series 2007B 60,630 63,515 Series 2005 83,650 85,700 Series 2004A 51,475 52,835 Refunding Series 2002 25,960 41,655 Pennsylvania Higher Educational Facilities Authority University Revenue Bonds (issued for The Pennsylvania State University)

Series 2006 3,335 3,545 Series 2004 3,655 3,905 Series 2002 3,650 4,020 Lycominq County Authority College Revenue Bonds (issued for Penn College)

Series 2012 24,685 24,685 Series 2011 39,050 39,050 Series 2008 55,000 55,000 Series 2005 10,060 11,085 Series 1993 3,500 5,250 Total bonds payable 850,060 883,365 Unamortized bond premiums 35,273 38,008 Note Payable and capital leases Note payable 10,000 Capital lease obligations 86,155 84,035 Total notes payable and capital leases 96,155 84,035 Total long-term debt 29

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 $6,595 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% $5,540 to $9,320 through March 2029 Series 2009B Variable 0.15% June 2031 Series 2008A Fixed 5.00% $1,840 to $7,695 through August 2029 Series 2008B Fixed 3.50% - 3.75% $975 to $1,050 through August 2016

$550 to $700 through August 2022, with

$11,115 and $70,905 due August 2028 Series 2007A Fixed 3.70% - 4.50% and 2036 Series 2007B Fixed 5.00% - 5.25% $3,030 to $5,955 through August 2027

$2,150 to $2,745 through September 2019 with $15,990, $20,550, and $32,485 Series 2005 Fixed 3.75% - 5.00% due September-2024, 2029, and 2035

$1,425 to $1,825 through September 2019, with $10,625, $13,635, and $17,515 Series 2004A Fixed 4.50% - 5.00% due September 2024, 2029, and 2034 Refunding Series 2002 Fixed 5.25% $4,585 to $16,540 through August 2016 Pennsylvania Higher Education Facilities Authority ("PHEFA") University Revenue Bonds

$220 to $280 through 2020, with $1,610 Series 2006 Fixed 4.10% - 5.125%* due September 2025

$260 to $325 through 2019, with $1,905 Series 2004 Fixed 4.30% - 5.00%* due September 2024

$385 to $425 due through 2017, Series 2002 Fixed 4.40% - 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 2012 Fixed 2.00% - 5.00% $410 to $2,635 through May 2032 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 5.00% $505 to $1,855 through January 2025 Series 1993 Fixed 6.15% $450 to $478 through November 2015 The Series 2009B Bonds are currently paying interest on a variable rate basis at a long term rate for the period June 1, 2014 through May 31, 2015. 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 0.15% 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.

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.

30

Notes to ConsolidatedFinancialStatements 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) 2015 $ 35,330 2016 24,320 2017 28,780 2018 24,455 2019 28,805 Thereafter 708,370

$ 850*06 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, 2014, the carrying value and estimated fair value of the University's bonds payable, including issuance premiums, are $885.3 million and

$917.8 million, respectively. At June 30, 2013, the carrying value and estimated fair value of the University's bonds payable, including issuance premiums, were $921.4 million and $939.4 million, respectively. Certain bond issues have associated issuance premiums, these issuance premiums total $35.3 million and $38.0 million at June 30, 2014 and 2013, 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.

Note payable and capital leases A $10 million note payable due annually through June 2024 is included within the consolidated statements of financial position at June 30, 2014. The note payable bears interest at 2.60%.

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, 2014 are as follows:

Year (in thousands of dollars) 2015 $ 15,010 2016 13,895 2017 12,888 2018 10,253 2019 8,244 Thereafter 132,232 Total minimum lease payments 192,522 Less imputed interest (106,367)

Capital lease obligation 86,155 Current portion 9,265 Long-term portion $ 76*9 31

Notes to ConsolidatedFinancialStatements

8. OPERATING LEASES The University has certain lease agreements in effect which are considered operating leases. During the year ended June 30, 2014, the University recorded expenses of $21.0 million for leased equipment and $24.7 million for leased building space. During the year ended June 30, 2013, the University recorded expenses of

$22.0 million for leased equipment and $22.6 million for leased building space.

Future minimum lease payments under operating leases as of June 30, 2014 are as follows:

Year (in thousands of dollars) 2015 $ 22,532 2016 16,534 2017 13,149 2018 10,057 2019 8,587 Thereafter 37,490 Total minimum lease payments $ 108,349

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 ($50.9 million and $35.9 million for the years ended June 30, 2014 and 2013, respectively). The University's total cost for retirement benefits, included in expenses, is $168.1 million and $146.6 million for the years ended June 30, 2014 and 2013, respectively.

10. POSTRETIREMENT BENEFITS The University sponsors a retiree medical plan covering eligible retirees and eligible dependents. 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 ConsolidatedFinancialStatements 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, 2014 and 2013 are the following amounts that have not yet been recognized in net periodic postretirement cost: unrecognized prior service cost (benefit) of ($64.6) million and ($86.3) million and unrecognized actuarial loss of $652.9 million and $547.6 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) 2014 2013 Benefit obligation at beginning of year $ 1,695,041 $ 1,864,899 Service cost 44,844 56,194 Interest cost 78,696 77,943 Actuarial gain (88,390) (95,754)

Benefits paid (47,661) (43,840)

Plan assumptions 217,876 (164,401)

Benefit obligation at end of year 1,900,406 $ 1,695,04 Change in plan assets:

(in thousands of dollars) 2014 2013 Fair value of plan assets at beginning of year $ $

Employer contributions 47,661 43,840 Benefits paid (47,661) (43,840)

Fair value of plan assets at end of year Funded status $ (1,900,406) $ (1,695,041)

Unrecognized prior service cost (benefit)

Unrecognized net actuarial loss Accrued postretirement benefit expense $ (1,695,0 Net periodic postretirement cost includes the following components for the years ended June 30:

(in thousands of dollars) 2014 2013 Service cost $ 44,844 $ 56,194 Interest cost 78,696 77,943 Amortization of prior service cost (21,699) (21,699)

Amortization of unrecognized net loss 24,200 44,960 Net periodic postretirement cost $ 126,041 $ 15739 The assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation was 7.50% and 8.00% for the years ended June 30, 2014 and 2013, respectively, reduced by 0.50% per year to a fixed level of 5.00%. The weighted average postretirement benefit obligation discount rate was 4.50%

and 5.00% for the years ended June 30, 2014 and 2013, respectively.

If the healthcare cost trend rate assumptions were increased by 1% in each year, the accumulated postretirement benefit obligation would be increased by $367.2 million and $318.1 million as of June 30, 2014 and 2013, 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 $27.4 million and $32.3 million as of June 30, 2014 and 2013, respectively. If the healthcare cost trend rate assumptions were decreased by 1% in 33

Notes to Consolidated FinancialStatements each year, the accumulated postretirement benefit obligation would be decreased by $294.3 million and

$256.6 million as of June 30, 2014 and 2013, 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

$21.0 million and $24.5 million as of June 30, 2014 and 2013, 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 thousands of dollars) 2015 $ 53,350 2016 58,513 2017 63,596 2018 68,020 2019 72,598 2020-24 429,097

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. 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. The Health System recorded non-controlling interest related to the acquisition of additional ownership interest in a joint venture. This noncontrolling interest is recorded in the net assets within the consolidated statements of financial position with a value at June 30, 2014 and 2013 of $961,000 and $831,000, respectively.

On June 26, 2014, a letter of intent and term sheet ("agreement") was executed between the University, the Medical Center, the Health System and Pinnacle Health System. The purpose of the agreement was to set forth certain non-binding understandings and certain binding agreements between the parties. The intent is to form a new Health Enterprise in central Pennsylvania. This new collaborative innovative enterprise would bring together a high-performing university medical center and a community health system. It would provide increased access to a wider range of services and full spectrum of care to patients over a broad geographic base. Both systems will continue to operate independently and as normal until an integration is finalized and all necessary approvals are obtained.

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 $814.6 million of which $619.8 million has been paid or accrued as of June 30, 2014. 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 $19.1 million and $20.5 million as of June 30, 2014 and 2013, 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.

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Notes to ConsolidatedFinancialStatements 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, 2014.

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 2% for the years ended June 30, 2014 and 2013, respectively, of the medical malpractice claims liability in the amount of $96.4 million and $96.7 million is recorded as of June 30, 2014 and 2013, 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 $19.7 million and $20.7 million at June 30, 2014 and 2013, 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 Pennsylvania 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 $10.1 million and $10.9 million, discounted at 0.75%, is recorded as of June 30, 2014 and 2013, respectively. The University has established a trust fund, in the amount of $12.8 million and $12.7 million at June 30, 2014 and 2013, 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 In November 2011, the University was made aware of certain allegations in a Commonwealth of Pennsylvania Grand Jury presentment. Various legal proceedings and investigations have arisen as a result of such allegations, including criminal proceedings against former officers and employees of the University. Certain claims and civil litigation have been filed against the University with anticipation that other complaints could be filed. The University accrued $59.7 million for 26 of 32 known claims at June 30, 2013 with such claims subsequently paid during fiscal year 2014. These costs were included in institutional support within the consolidated statement of activities. Two of the claims were deemed to have no merit through the due diligence process. Subsequently, the University has been notified of five additional claims, bringing known claims to 37, two of which were made known to the University subsequent to June 30, 2014. Without having knowledge of the number and nature of unknown claims and in view of the inherent difficulty of predicting the outcome of our remaining eleven known claims, each with their own unique circumstances that give rise to their alleged claims, and given the various stages of the proceedings, we are unable to predict the outcome of these matters or the ultimate legal and financial liability, and at this time cannot reasonably estimate the possible loss or range of loss. Accordingly, no amounts have been accrued in the 2014 financial statements for these claims although a loss is reasonably possible in future periods which could have a material adverse effect on our current and future financial position, results of operations and cash flows.

35

Notes to ConsolidatedFinancialStatements For the years ended June 30, 2014 and 2013, the University has incurred costs, net of insurance reimbursements totaling $15.6 million and $17.3 million, respectively, for internal investigation, legal, communications and other related costs. These costs are included in institutional support within the consolidated statement of activities. Insurance reimbursements for the years ended June 30, 2014 and 2013 totaled $64,000 and $249,000, respectively. Amounts paid directly by insurance carriers for the years ended June 30, 2014 and 2013 totaled $2,681,000 and $2,994,000, respectively.

The University has submitted claims to insurance carriers at June 30, 2014 related to the claims settled and certain legal costs incurred to date. Amounts of future insurance reimbursement are unknown as of June 30, 2014 and as a result no insurance recovery accruals have been recorded in the 2014 financial statements.

Based on its operation of the Medical Center (see Note 11), the University, like the rest of 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.

On July 12, 2013, the University received a preliminary report from the U.S. Department of Education based on the program review of the University's compliance with the Clery Act, a federal law related to campus safety. The Department of Education will make a final program review determination after the process is complete. The outcome and financial impacts of the program review are unknown as of the date the consolidated financial statements were issued.

Various other legal proceedings have arisen in the normal 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.

13. SUBSEQUENT EVENTS The University has evaluated subsequent events through October 24, 2014, the date on which the consolidated financial statements were issued. It did not identify any subsequent events to be disclosed other than those below or previously noted.

36

THE PENNSYLVANIA STATE UNIVERSITY BOARD OF TRUSTEES as of June 30, 2014 APPOINTED MEMBERS ELECTED BY BOARD REPRESENTING BY THE GOVERNOR EX OFFICIO BUSINESS AND INDUSTRY CLIFFORD G. BENSON, JR. ERIC J. BARRON JAMES S. BROADHURST Chief Development Officer President Chairman Buffalo Sabres The Pennsylvania State University Eat'n Park Hospitality Group. Incorporated KATHLEEN L. CASEY THOMAS W.CORBETT JR. RICHARD K. DANDREA Senior Advisor Governor Attorney Patomak Global Partners. LLC Commonwealth of Pennsylvania* Eckert Seamans Cherin & Mellott. LLC MARK H. DAMBLY CAROLYN C. DUMARESO KENNETH C. FRAZIER President Acting Secretary Chairman, President & Chief Executive Officer Pennrose Properties, LLC Pennsylvania Department of Education Merck & Company. Incorporated ALLISON S. GOLDSTEIN ELLEN M.FERRETTI EDWARD R. HINTZ, JR.

Graduate Assistant Secretary President The Pennsylvania State University Pennsylvania Department of Hintz Capital Management, Incorporated Conservation and Natural Resources TODD L. RUCCI KAREN B. PEETZ Government and Community Relations Officer GEORGE 0. GREIG President PAP Technologies Secretary Sank of New York Mellon Pennsylvania Department of Agriculture PAUL H. SILVIS LINDA B. STRUMPF Head Coach *JENNIFER BRANSTETTER Retired Chief Investment Officer SilcoTek Governor's Non-Voting Representative The Helmsley Charitable Trust Director of Policy and Planning Office of the Govemor ELECTED ELECTED BY DELEGATES FROM BY ALUMNI AGRICULTURAL SOCIETIES MARIANNE E. ALEXANDER RYAN J. MCCOMBIE DONALDG. COTNER President Emerita of the Retired, United Stated Navy President Public Leadership Education Network Cotner Farms, Inc.

JOEL N. MYERS H. JESSE ARNELLE President KEITH W. ECKEL Attorney AccuWeather, Incorporated Sole Proprietor and President Fred W. Eckel and Sons Farms, Incorporated EDWARD "TED" B. BROWN WILLIAM F. OLDSEY President & CEO Independent Consultant/Educetional Publishing; M.ABRAHAM HARPSTER KETCHConsulting, Inc. Operating Partner, Atlas Advisors Co-Owner. Evergreen Farms, Inc.

BARBARA L. DORAN ADAM J. TALIAFERRO BETSY E. HUBER Portfolio Manager/Private Wealth Advisor Healthcare Alliance Liaison Immediate Past Master, Pennsylvania State Grange Morgan Stanley Bristol Myers Squibb KEITH E. MASSER ANTHONY P. LUBRANO .4 Chairman & Chief Executive Officer President. AP. Lubrano & Company, Inc. Sterman Masser, Incorporated CARL T.SHAFFER

• President Pennsylvania Farm Bureau EMERITI TRUSTEES CYNTHIA A. BALDWIN STEVE A. GARBAN L. J. ROWELL, JR.

Retired Justice Senior Vice President for Finance Retired Chairman and Supreme Court of Pennsylvania and Operations/Treasurer Emeritus Chief Executive Officer The Pennsylvania State University Provident Mutual Life Insurance CHARLES C. BROSIUS Retired President DAVID R. JONES CECILE M. SPRINGER Marlboro Mushrooms Retired Assistant Managing Editor President, Springer Associates The New York Times WALTER J. CONTI HELEN D. WISE Retired Owner EDWARD P. JUNKER III Former Deputy Chief of Staff for Cross Keys InrnPipersville Inn Retired Vice Chairman Programs and Secretary of the Cabinet PNC Bank Corporation Governor's Office DONALD M. COOK, JR.

Retired President ROGER A. MADIGAN BOYD E. WOLFF SEMCOR, Incorporated Retired State Senator Retired, Owner and Operator 23rd Senatorial District Wolfden Farms MARIAN U. BARASH COPPERSMITH Retired Chairman of the Board ROBERT D. METZGAR QUENTIN E. WOOD The Barash Group Former President Retired Chairman of the Board and North Penn Pipe & Supply, Incorporated Chief Executive Officer ROBERT M. FREY Quaker State Corporation Attomey-at-Law ANNE RILEY Frey & riley. P.C. English Teacher EDWARD P. ZEMPRELLI Attorney BARRY K. ROBINSON Attorney-at-Law

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ATTACHMENT B - Penn State University Self-Guarantee Agreement I

The Pennsylvania State University Financial Assurance for Cost of Decommissioning Activities Self-Guarantee Agreement with the Nuclear Regulatory Commission December 23, 2014 (Source: NUREG-1757, Vol. 3, Rev 1, Appendix A, Section A.9.12)

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.

The following licenses are covered under this guarantee:

License numbers: R-2 Breazeale Nuclear Reactor Docket 050-00005 SNM-95 Penn State University Docket 070-00113 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 30, 50, and 70, which require that a holder of, or an applicant for, a materials license issued pursuant to 10 CFR Parts 30, 50, 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. The decommissioning costs for these activities are as follows:

Certified Amounts or License # License Description Current Cost (Docket #) and Method Estimates 2014 R-2 Research Reactor 12/18/13 base estimate of

$16,031,304 plus 5% per year increase. $16,832,869 (050-00005)

SNM-95 Special Nuclear Material 12/18/13 base (NM-01 estimate of $356,776 plus 5% per year $374,615 (070-00113) increase.

Sub total $17,207,484 25% contingency fund $4,301,871 Total Estimated Costs: $21,509,355

4. The guarantor meets or exceeds the following financial test criteria for a nonprofit university that issues bonds, and agrees to comply with all notification requirements as specified in 10 CFR 30 and 10 CFR 30 Appendix E.

Financial Test: The current rating for our most recent uninsured, uncollateralized, and unencumbered bond issuance is AA as issued by Standard & Poor's and Aa2 as issued by Moody's.

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 30, 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, and an auditor's special report and reconciling schedule annually within 180 days of the close of its fiscal year.

9. Not applicable.

10. 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, 50, or 70. Within 120 days after the end of the fiscal year, the guarantor shall establish such financial assurance.

11. The guarantor also agrees to notify the NRC in writing in advance of any proposed change in or transfer of ownership of the licensed activity and to maintain this guarantee until the new licensee provides alternative financial assurance acceptable to the beneficiary.

12. The guarantor agrees that if it determines, at any time other than as described in Recital 10, 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 30, 50, or 70 within 30 days.

13. 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 2

I licensee pursuant to 10 CFR Parts 30, 50, or 70.

14. 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. Such litigation costs shall not be deducted from or otherwise reduce the financial assurance provided by this guarantee.

15. The guarantor agrees to remain bound under this self-guarantee for as long as it, as licensee, must comply with the applicable financial assurance requirements of 10 CFR Part 30, 50, or 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.

16. The guarantor agrees that if it, as licensee, fails to provide alternative financial assurance as specified in 10 CFR Part 30, 50, or 70 and obtain written approval of 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.

17. 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.

18. 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.

19. The guarantor agrees that if the guarantor admits in writing its inability to pay its debts generally, or makes a general assignment for the benefit of creditors, or any proceeding is instituted by or against the guarantor seeking to adjudicate it as bankrupt or insolvent, or seeking dissolution, liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency, or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian, or other similar official for the guarantor or for any substantial part of its property, or the guarantor takes any action to authorize or effect any of the actions stated in this paragraph, then the Commission may:

(a) Declare that the financial assurance guaranteed by the guarantee agreement is immediately due and payable to the standby trust set up to protect the public health and safety and the environment, without diligence, presentment, demand, protect, or any other notice of any kind, all of which are expressly waived by guarantor; and 3

. I -.

(b) Exercise any and all of its other rights under applicable law.

20. The guarantor agrees to notify the NRC, in writing, immediately following the filing of a voluntary or involuntary petition for bankruptcy under any chapter of Title 11 (Bankruptcy) of the United States Code, or the occurrence of any other event listed in paragraph 19 of this guarantee and by or against the guarantor; the licensee; an entity (as that term is defined in 11 U.S.C. 101(14)) controlling the licensee or listing the license or licensees as property of the estate; or an affiliate (as that term is defined in 11 U.S.C. 101(2)) of the licensee. This notification must include: a description of the event, including major creditors, the amounts involved, and the actions taken to assure that the amount of funds guaranteed by the guarantee for decommissioning will be transferred to the standby trust as soon as possible; if a petition of bankruptcy was filed, the identity of the bankruptcy court in which the petition for bankruptcy was filed; and the date of filing of any petitions.

21. Not applicable.

22. The guarantor agrees that if, at any time before termination of this self-guarantee, its most recent bond issuance ceases to be rated in any category of "A-" and above by Standard and Poor's or in any category of "A3" and above by Moody's, the licensee will notify the Commission in writing 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: t ?-/ -- (//{L Pennsylvania State University:

Joseph J. Doncsecz Associate Vice President for Finance and Corporate Controller Signature of witness or notary: C.)ýP ýO. _-

4