ML16286A207

Massachusetts Institute of Technology (Mit) - Compliance Submissions, Self- Guarantee Agreement Pursuant to 10 CFR Part 50, 10 CFR Part 70 and NUREG-1757, Vol.3

ML16286A207
Person / Time
Site:	07000938, MIT Nuclear Research Reactor
Issue date:	09/30/2016
From:	Ruiz I Massachusetts Institute of Technology (MIT)
To:	Ty Naquin Office of Nuclear Material Safety and Safeguards, Office of Nuclear Reactor Regulation
References
Download: ML16286A207 (67)

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l*lii MAssACHUSETTS INSTITUTE OF TECHNOLOGY Israel Ruiz Executive Vice President and Treasurer 77 Massachusetts Avenue, Building 4-204 Cambridge, Massachusetts 02 I 39-4 307 Phone 617-253-4495 Email iruiz@mit.edu September 30, 2016 U.S. Nuclear Regulatory Commission Office of Nuclear Material Safety and Safeguards 11545 Rockville Pike Two White Flint Building Mailstop 2WF-04D46 Rockville, Maryland 20852 Attention: Tyrone Naquin Via Federal Express Re: Compliance Submissions, Self- Guarantee Agreement Pursuant to 10 CFR Part 50, 10 CFR Part 70 and NUREG-1757, Vol.3

Dear Mr. Naquin:

In my capacity as the Executive Vice President and Treasurer of the Massachusetts Institute of Technology ("MIT"), a nonprofit university, I serve as MIT's Chief Financial Officer. This letter is in support of MIT's use of the self-guarantee financial test to demonstrate financial assurance, as specified in 10 CFR Part 70 and 10 CFR Part 72, as ongoing compliance with MIT's Self-Guarantee Agreement, dated May 3, 2010 (the "Agreement"), and approved by the Nuclear Regulatory Commission on July 16, 2010.

In order to demonstrate ongoing compliance with the Agreement and 10 CFR Part 70 and 10 CFR Part 72, and MIT's ability to self-guarantee the decommissioning of th_e following facilities owned or operated by MIT, the current cost estimates or certified amounts for decommissioning each facility, so guaranteed, are shown below, along with their calculation (if applicable), and supporting attachments are enclosed:

Certified Amounts or Name of Facility License Number Location of Facility Current Cost Estimates MIT SNM-986 77 Massachusetts Ave. $1,125,000.00 Cambridge, MA 02139 MIT Research Reactor R-37 138 Albany St. $36,594,000.00 Cambridge, MA 02139 A. License No. SNM-986 Based upon the applicable quantities of special nuclear materials stored at this facility, in accordance with 10 C.F.R. 70.25(d), MIT must guarantee the statutory minimum of $1,125,000 for the proper disposal of these materials.

B. License No. R-37

1. Justification for 2005 $23M Decommissioning Estimate:

Duke Engineering provided MIT with a cost estimate of $23.0M. That study was completed in November 2001. It included a 10% contingency. Inflation was quite low and for some sectors of the economy slightly negative for the years 2001-2005. Accordingly, for our 2006 submittal, we used the uninflated detailed Duke estimate which was $23.0M. For 2008, we provided an estimate of $29.8 million, based on separate inflation factors applied against the labor costs, using the NUREG-1307, Rev. 12, Page D.1, Example 2,(Northeast Region) of 1.40 (labor) and 1.72 (burial).

2. Decommissioning Estimate for 2017:

For 2017, we estimate the decommissioning cost of the MIT Reactor to be $36.6 million. This figure is obtained by taking the $23.0M Duke estimate as a base and inflating it for both the cost of labor and burial as shown below:

Duke Study 23,000,000 %Total NU REG Inflater 36,594,000.00 Inflation Model Labor Portion 20,470,000 89% Labor 1.5301 31,321,000.00*

Burial Portion 2,530,000 11% Burial 2.0840 5,273,000.00*

Please note that labor was 89% of the total estimate and burial was 11%. The inflater figures are obtained from NUREG-1307, Rev. 15, Page D.l, Example 2 (Appendix D). We take the date of completion of the Duke study to be 2002 as this is closest to the actual date of November 2001. For labor, the cost index is 2.52 in 2012 and 1.862 for 2002. We assume that cost increases are linear through 2017 and obtain:

(1.862+ ((2.52-1.862)/ (2012-2002))(2017-2002)) =2.849 The inflation factor for 2017 as compared to 2002 is therefore 2.849/1.862 or 1.5301. Hence, the labor portion of the cost is ($20.5M) (1.5301) or $31.321 million. For burial, the same approach is used to yield a factor of 37 .35, an inflation factor of 2.0840 and a cost of $5.27 million (*Please refer to Attachment 1-Calculations adjusted due to rounding.).

I hereby certify that MIT is currently a going concern, and that it possesses positive tangible net worth in the amount of $17 .1 billion, as of the fiscal 'year ending on June 30, 2016. This figure is derived from MIT's independently audited, year-end financial statements and footnotes for the latest completed fiscal year, which is enclosed. MIT's independent auditor, PricewaterhouseCoopers, has included its review of this letter, which is also enclosed.

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

MIT satisfies the following self-guarantee test:

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

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

Rating: AAA Name of rating service: Standard & Poor's Financial Services LLC

2. Date of issuance of bonds: August 2, 2016

3. Description and date of maturity of bonds:

Amount Interest Rate Maturity Date Description _

$500,000,000 3.885% July 1, 2116 Taxable Series E

4. Is the rating specified on line 1 "A" or better? Yes I hereby certify that the content of this letter is true and correct to the best of my knowledge.

Signature-~--."

1

..-=--++-,__ _ _ _ _ _ _ __

Name: Israel Ruiz

Title:

Executive Vice President and Treasurer (Chief Financial Officer)

Date:

Enclosures

ATTACHMENT 1 NRC Decommissioning Estimate 2017 Duke Study (2002) 23,000,000.00 NRC Inflation Model 2017 lnflator 36,594,000.00 Labor Portion 20,470,000.00 89% Labor 1.5301 31 ,321 ,000.00 Burial portion 2,530,000.00 11% Burial 2.0840 5,273,000.00 2006 2017 LABOR 2.384 2.849 1.28 1.5301 BURIAL 25.4385 37.35 1.42 2.0840 4136 15.1

_L pwc Report of Independent Accountants To the Corporation of Massachusetts Institute of Technology:

We have performed the procedures included in the Consolidated NMAA Decommissioning Guidance -

Financial Assurance, Recordkeeping, and Timeliness (NUREG-1757, Volume 3, Revision 1, Appendix A) and enumerated below, which were agreed to by management of Massachusetts Institute of Technology

("the Institute"), solely to assist you in evaluating the Institute's compliance with the Nuclear Regulatory Commission's financial assurance regulations, 10 CFR Part 70 and 72 with respect to NRC MIT licenses SNM-986 and R-37. Management is responsible for the Institute's compliance with those regulations. This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose.

The procedures and associated findings performed in relation to the CFO's Letter dated September 30, 2016 are as follows:

1. We confirmed that the total tangible net worth in the CFO's Letter agrees with total net assets contained in the Institute's financial statements for the year ended June 30, 2016, which we have audited in accordance with auditing standards generally accepted in the United States of America and have issued our report thereon dated September 9, 2016. A tie-out of the financial statements to the CFO's Letter is shown in the accompanying schedule to this report.

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

3. We mathematically checked the totals in the accompanying schedule and recomputed the current cost estimates of decommissioning for each facility listed per the CFO's Letter.

4. We compared the bond ratings in the CFO's Letter to the information obtained from external, publically available source as follows:

Rating Rating per the per CFO's External Letter Source External Source AAA AAA www.standardandnoors.com

5. A requirement in 10 CFR 30 App E II.C.(1) is the accountant must evaluate the licensee's off-balance sheet transactions and provide an opinion on whether those transactions could materially adversely affect the licensee's ability to pay for decommissioning costs. However, the guidelines PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Boston, MA 02210 T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us

I I

_L pwc established by the American Institute of Certified Public Accountants (AICPA) prohibit an accountant from rendering an opinion of the type required by the regulation cited above. As a result, we have inquired of management as to the existence of any off-balance sheet arrangements. Management provided us with a schedule of all known off-balance sheet arrangements totaling approximately

$3,036,214,000 as of June 30, 2016. We recalculated the total figure of off-balance sheet arrangements for mathematical accuracy. We also confirmed that the total of the all known off-balance sheet arrangements included in the schedule provided by management is less than the tangible net worth reported in the CFO's Letter.

No exceptions were noted.

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

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

October 4, 2016

_L pwc Schedule for Reconciling Amounts Contained in Chief Financial Officer's Letter with Amounts in Financial Statements (in thousands of dollars)

Massachusetts Institute of Technology Year Ended June 30, 2016 Per Financial PerCFO's Statements Letter Total net worth Tancible net worth 17,134,502

S&PGlobal Ratings RatingsDirect Massachusetts Institute of Technology; Private Coll/Univ -

General Obligation Primary Credit Analyst:

Jessica A Matsumori, San Francisco ( 1) 415-371-5083; jessica.matsumori@spglobal.com Secondary

Contact:

Jamie L Seman, San Francisco; Jamie.Seman@spglobal.com Table Of Contents Rationale Outlook Enterprise Profile Financial Profile Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 1 1680526 I 302491962

Massachusetts Institute of Technology; Private Coll/Univ - General Obligation Credit Profile US$500.0 mil taxable bnds dtd 07 /29/2016 due 07 /01 /2116 Long Term Rating AAA/Stable New Massachusetts Development Finance Agency, Massachusetts Massachusetts Inst of Tech, Massachusetts Massachusetts Hlth & Educl Faes Auth (Massachusetts Inst of Tech) ser K,L, I,N Long Term Rating AAA/Stable Affirmed Rationale S&P Global Ratings assigned its 'AAA' long-term rating to the Massachusetts Institute of Technology's (MIT) taxable bonds, series E. In addition, S&P Global Ratings affirmed its 'AAA' and 'AAA/ A-1 +' long-term ratings on Massachusetts Institute of Technology's (MIT) existing debt, some of which was issued by the Massachusetts Development Finance Agency {formerly known as the Massachusetts Health and Educational Facilities Authority). The outlook, where applicable, is stable.

The 'AAA' rating reflects our view of MIT's extremely strong enterprise profile, characterized by incredible demand for its programs, exceptional student quality, a geographically diverse student body, and impressive management and governance oversight. We assessed the college's financial profile as very strong, with a substantial endowment and a track record of excellent operating performance. We also note MIT's relatively high debt burden compared to those of peers and the substantial capital plans for deferred maintenance including infrastructure and renewal. Combined, these factors lead to an indicative stand-alone credit profile of 'aa+ .' In accordance with our criteria, the final rating can be within one notch of the indicative credit level. In our opinion, the 'AAA' rating on the college's bonds better reflects MIT's exceptional cash and investments relative to its outstanding debt.

The 'A-1 +'short-term rating reflects our view of MIT's general credit strengths and considerable experience in managing its own liquidity. MIT is providing its own liquidity to support its $250 million of series J-1 (swapped to fixed rate) and J-2 variable-rate demand bonds (VRDBs). We believe MIT demonstrates sufficient liquid assets of high credit quality--largely in U.S. Treasuries--as well as a bank line that it can use, among other things, to cover the purchase price of VRDBs if any of the bonds are tendered but not successfully remarketed. Availability of liquid assets is sufficient, in our opinion, with same-day liquidity comprising high-quality U.S. government securities and cash. In our view, MIT has demonstrated the policies and procedures necessary to provide self-liquidity.

The 'AAA' rating is further supported by the institute's:

• Status as a pre-eminent research institute with more than $1.5 billion in research revenues in fiscal 2015;

• Very large and growing endowment and similar funds of $13.69 billion as of June 30, 2015;

• Significant demand, excellent student quality, and increasingly competitive admissions; and WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 2 1680526 I 302491962

Massachusetts Institute of Technology; Private Coll/Univ - General Obligation

• Robust operating performance, supported by good revenue diversity and the demonstrated ability to raise funds.

Offsetting factors include our view of MIT's:

• Good financial resource ratios relative to peers, with expendable resources of $14. 7 billion in fiscal 2015, equal to 4.3x operations and 4.3x pro forma debt;

• Generally flat to declining federal grant and research funding for the overall sector;

• Relatively high, but still manageable, debt levels, with an uneven repayment structure and a slightly above-average annual debt burden of 6.3%; and

• Substantial capital and strategic plans and deferred maintenance needs, though additional debt is not expected until 2020.

We expect the series E bonds will be issued as taxable, fixed-rate obligations with a 30 - 100-year maturity. As with MIT's existing debt, we expect the series E taxable bonds to be an unsecured general obligation of the institute.

Following this issuance, MIT will have a total of $3.289 billion of long-term debt outstanding, including about $177 million drawn under a $500 million bank line of credit. We understand that the institute uses this line opportunistically and periodically for various funding purposes. MIT's debt structure includes a number of bullet maturities, which make debt service quite uneven from year to year. However, the institute's maximum annual debt service (MADS) during the next 30 years is $379.6 million, while overall MADS of $837.7 million (24.7% offiscal 2015 expenses) for the organization's total debt occurs in 2111 at the maturation of its century bonds. If we assume level debt service and a 30-year financing term is assumed, estimated average annual debt service of the institute's total debt (assuming a 30-year maturity, a 5% interest rate, and even debt service) is approximately $214 million, which we consider to be moderately above average, at 6.3% of fiscal 2015 expenses.

Rating above the sovereign MIT's bonds are eligible to be rated above the sovereign because we believe the institution can maintain better credit characteristics than the U.S. under a stress scenario. Under the criteria, "Ratings Above The Sovereign: Corporate And Government Ratings--Methodology And Assumptions," U.S. colleges and universities are considered to have moderate sensitivity to country risk. MIT's revenues are the sole source of security on the bonds. The institutional framework in the U.S. is predictable, with institutions like MIT having significant autonomy, independent treasury management, and no history of government intervention. Financial flexibility is supported by the institute's large endowment, which has a substantial market value and is invested globally, and diverse revenue sources.

Outlook The stable outlook reflects our expectation that, during the two-year outlook period, MIT will maintain its excellent demand characteristics, exceptional operating performance, and robust fundraising results. The outlook also reflects our expectation that the institute's deferred maintenance will decrease over time.

Downside scenario Credit factors that could lead to a lower rating within the outlook period include an unexpected deterioration in MIT's demand profile or operating performance. We do not anticipate the institute will issue additional debt within the outlook period.

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Massachusetts Institute of Technology; Private Coll/Univ - General Obligation Enterprise Profile Industry risk Industry risk addresses the higher education sector's overall cyclicality and competitive risk and growth by applying various stress scenarios and evaluating barriers to entry, levels and trends of profitability, substitution risk, and growth trends observed in the industry. We believe the higher education sector represents a low credit risk when compared with other industries and sectors.

Economic fundamentals The institute has good geographic diversity, drawing students nationally and internationally. Approximately 93% of students come from outside the state. As such, our assessment of MIT's economic fundamentals is anchored by the U.S. GDP per capita.

Market position and demand MIT is a private, nonsectarian, co-educational, nonprofit institution of higher education. MIT is organized into five schools: architecture and planning; engineering; humanities, arts, and social sciences; management; and science. MIT is one of the pre-eminent research institutes in the world, composed of major interdisciplinary organizations, as well as three off-campus research facilities in Massachusetts: Lincoln Laboratory in Lexington, Haystack Observatory in Tyngsborough, and the Bates Linear Accelerator Center in Middleton. MIT operates the Lincoln Laboratory as a federally funded research and development center focused on advanced electronics. In fiscal 2015, MIT's research activities were approximately $1.5 billion in revenue, including the campus, Lincoln Laboratory, and Singapore-MIT Alliance for Research and Technology.

MIT maintains an impressive enrollment and demand profile characterized by very modest increases in recent years.

According to year-to-date admissions data for fall 2015, full-time-equivalent enrollment is 11,231, up slightly from 11, 117 in fall 2014. In our view, the college is highly selective, student quality is exceptional, and the geographical draw is diverse with 92.5% of students coming from out of state. There are no current plans to add new schools or significantly change the academic mission or structure of the institute. MIT is actively engaged with international partners but has no plans to increase its physical footprint globally The college has significant admissions flexibility, admitting just 8.3% of its 18,306 freshman applicants in fall 2015. Its matriculation rate continues to improve and was a high 73% in fall 2015. Student quality is excellent, with an average freshman SAT score of 1510 (excluding the writing test) and an ACT score of 34.0, both of which are well above the national averages of 1010 and 20.9, respectively. The freshman-to-sophomore retention rate is outstanding, in our view, at 98%. The six-year graduation rate is also excellent, at 92%.

Total tuition, room, and board charges for the 2015-2016 academic year was $60,434, or a 3.8% increase from the prior academic year, which we view as competitive with those of peer institutions. Total charges are projected to increase by 3.8% for the 2016-2017 academic year. We consider the tuition discount rate high, at about 45.8%, but it has remained fairly stable over the past five academic years.

In our view, MIT has an exceptional fundraising history in terms of successful campaigns and annual giving. The WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 4 1680526 J 302491962

Massachusetts Institute of Technology; Private Coll/Univ - General Obligation institute's most recent campaign, "Campaign for a Better World," announced in May 2016, has raised over half of its

$5.0 billion goal. The campaign is raising funds for education, research, and innovation.

Management and governance MIT's senior management team is very stable, and has been led by President L. Rafael Reif since 2012. The MIT Corp.,

a 78-member board composed of national leaders in science, engineering, industry, education, and public service governs the institute. The institute also maintains an executive committee, which is a subset of the corporation and has responsibility for the general administration of the institute. The committee meets frequently and oversees MIT's strategic and capital plans. Management prepares interim, full-accrual results on a quarterly basis, which the corporation's Risk and Audit Committee reviews regularly throughout the year. We view the preparation and review of interim financial statements as a best practice for the industry. Recent changes to the senior management team include the dean for graduate education (Blanche Staton), vice president and dean for student life (Suzy Nelson), vice president for open learning (Sanjay Sarma), senior vice president and secretary of the corporation (R. Gregory Morgan), and vice president for resource development (Julie Lucas).

MIT maintains strategic theses that drive capital and fundraising priorities. The institute's strategic priorities are assessed and updated regularly and contain measurable deliverables that are overseen by the executive committee.

The executive committee also approves and monitors the budget in the context of a multiyear strategic financial plan.

One of MIT's strengths, in our opinion, is its financial management, with a demonstrated ability to fundraise and to provide effective oversight and management of its budget, which has led to consistent operating surpluses. In our view, the management team manages the institute's financial profile prudently and efficiently to maximize operating outcomes.

Financial Profile Financial management policies MIT has extensive financial policies, including formal policies for endowment, investments, and debt, which we view favorably. We consider the institute's budgeting to be conservative and note that financial performance metrics are evaluated based on budgets submitted by each of the institute's academic and administrative departments. Interim financial statements are generated on a full-accrual basis, which we consider a best practice.

The institute meets standard annual disclosure requirements. The financial policies assessment is neutral, reflecting our opinion that the organization's financial policies are not likely to negatively affect its future ability to pay debt service. Our analysis of financial policies includes a review of the organization's financial reporting and disclosure, investment allocation and liquidity, debt profile, contingent liabilities, and legal structure, and a comparison of these policies with those of comparable organizations.

Financial performance MIT's financial performance is consistently positive on a full-accrual basis, which we consider a credit strength and believe is a function of high demand, financial controls, and the payout of its endowment. MIT generated an operating surplus in fiscal 2015, and we expect another surplus in fiscal 2016, though likely somewhat less than fiscal 2015 levels.

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Massachusetts Institute of Technology; Private Coll/Univ - General Obligation For the fiscal year ended June 30, 2015, the operating surplus was $179.6 million, a 5.3% margin relative to operating expenses. This is lower than the $205.8 million (6.5% margin) produced in fiscal 2014. The operating revenue base in fiscal 2015 was $3.5 billion. We view the institute's revenue as diverse, and in fiscal 2015, they included 15% from student tuition and fee revenues, 29% from research, 30% from investment support, 15% from gifts, and 12% from fees and services. In fiscal 2015, the spending rate on endowed funds was 4.5%.

Available resources MIT's available resources are consistent with 'AAA' rating category medians. Fiscal 2015 expendable resources of

$14.7 billion equaled 4.3x adjusted operating expenses and 4.3x proforma debt. Total cash and investments of $17.85 billion as offiscal 2015 equaled 5.26x adjusted operating expenses and 5.22x proforma debt. We expect these ratios will continue to improve given the institute's healthy operating margins, and we expect any increase in debt to be commensurate with an increase in resources such that financial resource measures remain consistent with the 'AAA' category.

MIT Investment Management Co. (MITIMCo) manages the institute's investment assets under the supervision of a separate MITIMCo board. MIT's endowment assets totaled $13.69 billion as of June 30, 2015, an 8.7% increase over the previous year. The investments in pool A produced a 13.2% return for fiscal 2015. Of $17.5 billion of total long-term investments as of June 30, 2015, $3.6 billion, or 20.8%, were considered level 1, or active market securities, which we consider to be the most liquid. Management reports that MIT's asset allocation has been stable and is tracking close to the policy. As of June 30, 2016, MIT held same-day liquid investments of about $950 million. MIT uses a Tobin rule endowment distribution policy based 80% on the previous year's spending and 20% on the endowment's market value.

Endowment spending for operations in fiscal 2015 was $545.9 million, or approximately 4.0% of the endowment's year-end value. The annual endowment draw equaled approximately 18.8% of the institute's adjusted operating revenues for fiscal 2015, which is less than those of some of its peers.

MIT holds investments in two primary asset pools: pool A, composed of its long-term endowment investments, and pool C, composed of short-term, high-quality investments for working capital and for holding various reserves. As of June 30, 2015, MIT had total unfunded capital calls of approximately $2.0 billion. The unfunded commitment amount represents a moderate 14.6% of market value of endowment, which is lower than those of some of MIT's peers.

Debt and contingent liabilities Total proforma debt for the institute is approximately $3.289 billion, including about $177 million drawn under a $500 million bank line of credit. We understand that the institute uses this line opportunistically and periodically for various funding purposes. MIT remains conservative in its use of variable-rate debt exposure, net of swaps, compared with its peers. Of the total debt, a small portion is variable-rate debt {10% or $343 million), with the remainder fixed rate. All debt is an unsecured general obligation of MIT. In our opinion, MIT has sufficient liquidity to fund its VRDBs.

S&P Global Ratings believes the institute's swap portfolio poses very low risk to the credit rating overall, with a low degree of involuntary termination risk due to limited termination events other than those permissible, moderate counterparty risk, and the swap portfolio's sound economic viability during stressful economic cycles. MIT has one interest rate swap with US Bank. The agreement is a $125 million floating-to-fixed rate swap that synthetically fixes the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 6 1680526 I 302491962

Massachusetts Institute of Technology; Private Coll/Univ - General Obligation series J-1 bonds at 4.91%, with MIT receiving a rate equal to the Securities Industry and Financial Markets Assn.

(SIFMA} index less 15 basis points; the agreement terminates on maturity in 2031. As of June 30, 2016, this swap had a notional amount and fair value of $125 million and negative $63.4 million, respectively.

MIT has a defined-benefit and defined-contribution retirement plan for employees. Its defined-benefit plan is well funded, with a $7.5 million contribution in 2015. MIT had $53.2 million in accrued defined-benefit liabilities net of assets and $45,000 in accrued postemployment benefit obligations net of assets as of June 30, 2015, which we view as a manageable level of exposure.

Massachusetts Institute of Technology Fiscal year ended 'June 30, Medians Private Colleges &

2016 2015 2014 2013 2012 Universities 'AAA' 2015 Enrollment and demand Headcount 11,331 11,319 11,301 11,189 10,894 MNR Full-time equivalent 11,231 11,177 11,237 11,075 10,763 11,757 Freshman acceptance rate (%) 8.3 7.9 8.2 8.9 9.7 10.1 Freshman matriculation rate 73.0 72.1 72.1 70.1 64.6 MNR

(%)

Undergraduates as a% of total 40.0 39.9 40.1 40.2 40.2 45.7 enrollment (%)

Freshman retention(%) 98.0 98.7 98.0 97.8 97.4 98.0 Graduation rates (five years) 92.0 91.0 89.2 89.2 91.3 MNR

(%)

Income statement Adjusted operating revenue N.A. 3,571,051 3,395,622 3,445,321 3,242,005 MNR

{$000s)

Adjusted operating expense N.A. 3,391,401 3,189,816 3,167,303 2,996,295 MNR

($000s)

Net operating income ($000s) N.A. 179,650 205,806 278,018 245,710 MNR Net operating margin (%) N.A. 5.30 6.45 8.78 8.20 4.77 Change in unrestricted net N.A. 604,127 966,176 916,439 (18,764) MNR assets ($000s)

Tuition discount (%) N.A. 45.8 45.5 45.5 47.7 40.2 Tuition dependence (%) N.A. 17.1 17.5 16.5 16.3 MNR Student dependence (%) N.A. 20.5 21.1 19.8 19.6 30.5 Research dependence (%) N.A. 43.2 43.9 45.6 46.3 MNR Endownientandinvestment N.A. 18.8 18.4 17.3 16.9 MNR income dependence (%)

Debt Outstanding debt ($000s) N.A. 2,922,231 2,918,901 2,428,215 2,460,002 1,757,988 Proposed debt ($000s) N.A. 500,000 N.A. N.A. N.A. MNR Total pro forma debt ($000s) N.A. 3,422,231 N.A. N.A. N.A. MNR Pro forma MADS N.A. 213982 N.A. N.A. N.A. MNR Current debt service burden N.A. 20.60 5.09 4.51 3.46 MNR

(%)

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Massachusetts Institute of Technology; Private Coll/Univ - General Obligation Massachusetts Institute of Technology (cont.)

Fiscal year ended June 30, Medians Private Colleges &

2016 2015 2014 2013 2012 Universities 'AAA' 2015 Current MADS burden (%) N.A. 24.11 25.64 25.01 26.43 5.61 Proforma MADS burden (%) N.A. 6.3 N.A. N.A. N.A. MNR Financial resource ratios Endowment market value N.A. 13,687,939 12,425,131 10,857,976 10,149,564 8,613,547

($000s)

Cash and investments ($000s) N.A. 17,851,446 16,526,515 14,130,013 13,087,243 MNR Unrestricted net assets ($000s} N.A. 7,071,258 6,467,131 5,500,955 4,584,516 MNR Expendable resources ($000s) N.A. 14,724,624 13,479,986 11,057,197 9,844,361 MNR Cash and investments to N.A. 526.4 518.1 446.1 436.8 878.9 operations (%)

Cash and investments to debt N.A. 610.9 566.2 581.9 532.0 803.7

(%)

Cash and investments to pro N.A. 521.6 N.A. N.A. N.A. MNR forma debt(%)

Expendable resources to N.A. 434.2 422.6 349.1 328.6 677.5 operations (%)

Expendable resources to debt N.A. 503.9 461.8 455.4 400.2 648.3

(%)

Expendable resources to pro N.A. 430.3 N.A. N.A. N.A. MNR forma debt (%)

Average age of plant (years) N.A. 9.3 9.1 8.8 8.4 12.1 N.A.--Not available. MNR--Median not reported. MADS-Maximum annual debt service. Total adjusted operating revenue =unrestricted revenue less realized and unrealized gains/losses and financial aid. Total adjusted operating expense = unrestricted expense plus financial aid expense.

Net operating margin= lOO*(net adjusted operating income/adjusted operating expense). Student dependence= lOO*(gross tuition revenue+

auxiliary revenue) I adjusted operating revenue. Current debt service burden= !OO*(current debt service expense/adjusted operating expenses).

Current MADS burden= lOO*(maximum annual debt service expense/adjusted operating expenses). Cash and investments= cash+ short-term

& long-term investments. Expendable resources = unrestricted net assets + temp. restricted net assets - (net PPE- outstanding debt). Average age of plant= accumulated depreciation/depreciation & amortization expense.

Related Criteria And Research Related Criteria e General Criteria: Methodology: Not-For-Profit Public And Private Colleges And Universities, Jan. 6, 2016

• USPF Criteria: Commercial Paper, VRDO, And Self-Liquidity, July 3, 2007

• Ratings Above The Sovereign: Corporate And Government Ratings-Methodology And Assumptions, Nov. 19, 2013

• USPF Criteria: Assigning Issue Credit Ratings Of Operating Entities, May 20, 2015

• Criteria: Use of CreditWatch And Outlooks, Sept. 14, 2009 Ratings Detail (As Of July 22, 2016)

Massachusetts Institute of Technology taxable medium term nts Series B Long Term Rating AAA/Stable Affirmed Massachusetts Development Finance Agency, Massachusetts Massachusetts Inst of Tech, Massachusetts WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 8 1680526 I 302491962

Massachusetts Institute of Technology; Private Coll/Univ - General Obligation Ratings Detail (As Of July 22, 2016) (cont.)

Massachusetts Dev Fin Agy (Massachusetts Institute of Technology) rev bnds ser 2008-0 Long Term Rating AAA/Stable Affirmed Massachusetts Dev Fin Agy (Massachusetts Institute of Technology) VRDBs ser J-1, J-2 Long Term Rating AAA/ A-1 +/Stable Affirmed WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 9 1680526 I 302491962

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r ro::~ - - - - --

I Report of the Treasurer for the year ended lllil Massachusetts June 30, 2016 Institute of Technology

Report of the Treasurer for the year ended June 30, 2016 IIii~ Massachusetts Institute of Technology

The Corporation 2015-2016 as ofJune 30, 2016 Chairman: Robert B. Millard*

President: L. Rafael Reif+'

Executive Vice President and Treasurer: Israel Ruiz*

Senior Vice President and Secretary of the Corporation: R. Gregory Morgan Life Members Shirley A. Jackson; James A. Champy*; Denis A. Bovin*; A. Neil Pappalardo*; Judy C. Lewent; Edie N. Goldenberg; Susan E. Whitehead*; Brian G.R. Hughes; L. Robert Johnson; Gururaj Deshpande; Barrie R. Zesiger*; John A. Thain*; Susan Hockfield; Lawrence K. Fish*; Diane B. Greene; Charlene C. Kabcenell; Henri A. Termeer*; Barry Lam; Mohammed Jameel (on leave).

Members Theresa M. Stone; John W Jarve; Mark P. Gorenberg; Mark R. Epstein; Alan G. Spoon; R. Erich Caulfield; Megan J. Smith (on leave); Abigail P. Johnson; Diana C. Walsh*; Victor J. Menezes; Ursula M. Burns; Rafael del Pino; K. Anne Street; Leonard H. Schrank; R. Gregory Turner; Eve J. Higginbotham; Alia Whitney-]ohnson; Phillip T. Ragon; Paul R. Marcus; Philip C. T.

Ng; Arunas A. Chesonis; Fariborz Maseeh; Tanguy Chau; Bruce N. Anderson; Patricia R. Callahan; Neil E. Rasmussen; Carmen M. Thain; David L. desJardins; Vanu G. Bose; Paul M. Kominers; Alan M. Leventhal; Viktor F. Vekselberg; Ilene S.

Gordon; Eran Broshy; Ronald A. Williams; Alan M. Dachs; Samantha O'Keefe; Donald E. Shobrys; Roger C. Altman; Leslie C. Dewan; Jeffrey S. Halis; Jean Hammond; Ray A. Rothrock; Jeffrey L. Silverman.

President of the Association of Alumni and Alumnae John D. Chisholm Representatives of the Commonwealth Governor: Charles D. Baker, Jr.

Chief Justice of the Supreme Judicial Court: Ralph D. Gants Secretary of Education: James A. Peyser Life Members Emeriti and Emeritae lrfoee duPont, Jr.; D. Reid Weedon, Jr.; Colby H. Chandler; Carl M. Mueller; Louis W Cabot; Christian]. Matthew; Paul M.

Cook; William S. Edgerly; Frank Press; Edward E. David, Jr.; Emily V. Wade; George N. Hatsopoulos; Mary Frances Wagley; Michael M. Koerner; Morris Tanenbaum; W Gerald Austen; Richard P. Simmons; Morris Chang; Paul E. Gray; Alexander W Dreyfoos, Jr.; Ronald A. Kurtz; DuWayne J. Peterson, Jr.; Raymond S. Stata; Brit J. d'Arbeloff; Gordon M. Binder; Dana G.

Mead; Arthur Gelb; Norman E. Gaut; Robert A. Muh; James H. Simons; Samuel W Bodman, III; John S. Reed; David H.

Koch; Robert M. Metcalfe; John K. Castle; Arthur J. Samberg; Kenan E. Sahin.

Members' names are listed in chronological order of election to each category.

• Member ofthe Executive Committee

Table of Contents

• Report of the Treasurer ......................................... 1-6

• Consolidated Financial Statements The consolidatedfinancial statements summarize the finances ofMITfor the fiscal years 2015 and 2016.

Consolidated Statements of Financial Position .................................. 7 Consolidated Statement of Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Consolidated Statements of Cash Flows ....................................... 9 Notes to Consolidated Financial Statements ................................... 10-40 Report of the Independent Auditors ......................................... 41

• Additional Information Five-Year Trend Analysis (Unaudited) - Financial Highlights ...................... 42-44 Cover photo commemorates the centennial anniversary of MIT's move to Cambridge, Massachusetts.

Pictured: the MIT June 14, 1916, dedication exercises in Great Court new buildings.

This page intentionally left blank.

Report of the Treasurer To the Members of the Corporation As MIT celebrated the anniversary o f its 1916 move, the D e-partment o f Mathematics moved back into a newly renovated Si-During fiscal 2016, the Institute continued to push the bound- mons Building (Building 2), representing the first major renewal aries o f discovery and innovation, reinvent the educatio nal of one of the iconic 100-year-old Beaux Arts buildings designed exp erience, and reimagine the campu s despite a challenging by William Welles Bosworth at the heart of the MIT campus. To economic environment. MIT closed the year with net assets of complement east campus design efforts and the ongoing renewal

$17,134.5 million and net operating results of $7 6.9 million, and of the main campus, MIT has continued to advance a formal MIT's pooled investments produced a return o f 0.8 percent. planning process for the west and nor thwest areas of campus.

In accordance with MIT's distribution policy, the endowment's inves tment income and gains are distributed for spending in Addressing deferred maintenance has been prioritized as an inte-a manner that enables stable operations while preserving its gral part of overall campus renewal, and fi scal 2016 was the first long-term purchasing power. In fi scal 2016, this distribution to year in recent decades that a reduction in the deferred mainte-operations exceeded the investment return and this, alo ng with nance backlog was realized, with 80 percent of campus builillngs increases in pos tretirement benefit liabilities, contributed to the benefitting from this program . In connection with our campus 3.4 percent decrease in net assets. Still, the Institute maintains renewal efforts, we are continuing to improve the MIT nerwork a sound financial p osition resulting from a number of years of (MITnet) to increase resiliency and enable higher bandwidth sustained solid inves tment p erformance and managed expenses. connectivity. This pas t year, the Institute invested in the modern-This strength has enabled MIT to continue to inves t in strategic ization of our in formation technology (IT) systems and in fra-initiatives while securing MIT's future and core mission. structure, adopting cloud architecture and a sofrware as a service (SaaS) delivery model. T hese improvements will ensure tha t the The year is marked by a number o f significant achievements. In MIT communi ty has dependable high-speed connectivity and May, the Cambridge Planning Board vo ted unanimously to ap- access to information and services both on and off campus.

prove MIT's special permits as part o f its "Planned Unit D evel-opment" in the Kendall Square area . The approval, a milestone In O ctober, MIT released its five-year multifaceted Plan for reached during the centennial celebra tion of MIT's move from Ac tion on Climate Change. The Institute has committed to re-Boston to Cambridge, paves the way for MIT to develop the east ducing campus carbon emission s by at least 32 percent by 2030, campus over the next decade with a seamless integration o f aca- and has stated an aspirational goal o f reaching carbon neutrality demic and commercial uses. A century after physically relocating as soon as possible. To help advance these plans, sustainability MIT's campus, the Kendall project allows us to create a destina- working groups are aligning campus operations for our build-tion for bo th the MIT community and Cambridge residents, an ings, stormwater, landscape, and laboratories along a core set of environment capable o f unleashing a new era of groundbreaking sustainability principles, setting a strong found ation for rigorous illscovery and economic growth across the region. goal setting, measuremen t, and verification moving forward .

It is critical to continue to maintain the campus builillngs and MIT com memorated the centennial with an expansive o ffering infrastructure to a high standard to enable the unparalleled work o f public events and activities. Highlights included the May 7 of MIT's exceptional faculty and students.

Moving D ay celebration, a reimagining o f the 1916 ceremo-nial crossing o f the Bucentaur barge that carried the Institute's In February, 100 years after Albert E instein preillcted the charter across the Charles to MIT's new home in Cambridge. exis tence of gravitational waves, scientists at the Laser Inter-In conjunction with this event, on May 6 the Institu te for mally ferometer Gravitational-wave Observatory (UGO) announced launched the public phase of the Campaign for a Better World, a they had observed ripples in the fa bric of space-time, decoded bold initiative aimed at raising $5 billion to advance MIT's work the gravitational wave signal, and determined its source. And in addressing some of the world's greatest challenges. this pas t spring, the Advanced Functional Fabrics o f America (AFFoA) Institute, a nonprofit foun ded by MIT, won a national Summary of Key Financial Highlights (IO-year trend)

(in millions ofdollars) 2007 2008 2009 20 10 20 11 20 12 20 13 2014 2015 201 6 O perating Revenues 2, 180 2,408 2,644 2,663 2,75 1 2,990 3, 187 3,124 3,29 1 3,427 O perating Expenses 2,208 2,294 2,46 1 2,383 2,57 1 2,744 2,909 2,919 3, 111 3,350 Operati ng Resul ts (28) 11 4 183 280 180 246 278 206 180 77 Net Assets 12,695 12,770 9,946 10,324 12,388 12,799 14, 133 16,3 15 17,739 17, 135 Endowment 9,943 9,948 7, 880 8,3 17 9,7 13 10, 150 10,858 12,425 13,475 13, 182 Net Borrowings 1,075 1,332 1,730 1,723 2,456 2,449 2,4 17 2,904 2,905 2,892

SUMMARY

competition for federal funding to create the most modern that all universities located within the Commonwealth report manufacturing innovation institute to accelerate innovatio n in accumulated market gains o n both permanently and temporar-manufacturing involving fibers and textiles. ily restricted net assets as temporarily restricted net assets until appropriated for use.

Strong financial results realized in recent years, as depicted in the Summary of Key Financial Highlights table, have enabled us to Unrestricted net assets decreased $464.2 million, or 6.4 percent, make significant progress in our campus and IT renewal plans. to $6,839.5 million, primarily due to pension-related charges The proceeds from bo nds, together with our fundraising ef- other than net periodic benefit costs.

forts, will permit us to continue to advance the ongoing campus renewal program and provide for MIT's future of unbo unded Investments innovation, discovery, and knowledge.

Investments at fair value were $17,478.4 millio n as of fi scal The following are additional details regarding MIT's fi scal 2016 year-end 2016, a decrease of $275. 7 million, or 1.6 percent.

consolidated financial statements: Consolidated Statements of The consolidated financial statements include both realized and Financial Position, Consolidated Statement of Activities, and unrealized gains and losses o n investm ents and other assets.

Consolidated Statements of Cash Flows. These amounts totaled a net gain o f $242. 6 millio n in fi scal 2016, and $1,65 1.6 millio n in fi scal 2015. The decrease in th e Consolidated Statements of Financial Position value of investments as of fiscal year-end 2016 was substan-tially driven by distributio n o f accumulated inves tment gains The discussion in this section highlights key elements o f MIT's wruch was $589.4 millio n in fi scal 2016.

financial position- net assets; investments; endowment; land, buildings, and equipment; postretirement benefit assets and li- MIT's inves tment policy is based on the primary goal of generat-abilities; and borrowings. ing rugh real rates of return without exceptional volatility. To reduce volatility, the portfolio is broadly diversified. To gener-Net Assets ate rugh real rates of return, MIT's investment policy favors equi ty inves tments over fi xed income instruments and is heavily Total net asse ts decreased to $17,134.5 million, a decrease o f weighted toward less efficient markets such as private equi ty, real 3.4 percent from fi scal 2015. et assets are presented in three estate, and real assets. MIT primarily inves ts through external distinct categories to recognize the significant ways in which uni- fund managers, thereby allowing MIT to access the best invest-versities are different fro m profit-making organizations. These ment talent globally. By identifying a wide variety of top-tier categories reflect the nature of the restrictions placed on gifts by inves tment managers with specific competencies, MIT is able do nors. to construct a broadly diversified portfolio while accessing deep sector expertise. D ecision au thori ty for the selection of manag-ers, direct investments, and asset allocation resides with MIT's Net Assets $millions Investment Management Company (MITIMCo) . The Board of 20,000 -*. . . - - - - - - - - - - - - -- -----, Directors of MITIMCo holds four regularl y scheduled meetings 18,000 -1=====:::;;;;======r=;:;;;:17=,13=5:--4 during the fiscal year where investment policy, performance, and 16,000 -1=======---i asse t allocation are reviewed.

Endowment 10,000 -

8,000 -

6,000 - Endowment $millions 4,000 - 16,000 ~-------------------.

2,000 -

14,000 +-============='

0-2012 2013 2014 2015 2016 12,000 -!"'-"=======

• Permanently

• Temporarily D Unrestricted 10,000 Restricted Restricted 8,000 6,000 In fi scal 2016, permanently restricted net assets increased $202.3 4,000 millio n, or 7.0 percent, to $3,084.2 millio n, primarily due to new 2,000 gifts and pledges made and net investment gains on perma-nently restricted, separately held endowment fund s. Temporarily restricted net assets decreased $342.6 million, or 4.5 percent, to 2012 2013 2014 2015 2016

$7,210.8 million, primarily due to endowment gains distributed for spending. The Commonwealth of Massachusetts requires 2 MIT REPORT OF THE TREASURER 2016

Endowment assets, the largest compo nent of total investments, equipped wim me most advanced fabrication tools and materials are managed to maximize total investment return relative to processing capabilities to enable the Institute's nanotechnology, appropriate risk. The market value of investments in endow- materials, and engineering systems research. Nearby, Building 31 ment fund s, excluding pledges for endowed purposes, totaled is being modernized while addressing programming needs for

$13,1 81.S million as of fi scal year-end 2016, a decrease of 2.2 the Department of Aeronautics and Astronautics and me De-percent compared to a total of $13,474.7 million last year. partment of Mechanical E ngineering. This building supports me activities of approximately lSO faculty, students, and researchers.

This year, MIT's pooled investments (Pool A) produced a return Botl1 MIT.nano and Building 31 are also expected to achieve of 0.8 percent. Inves tment income and a portion of gains are LEED Gold certification. In close proximi ty, the Samuel Tak distributed for spending in a manner that preserves the long- Lee Building (9) is currently under renovation for occupancy in term purchasing power of the endowment. Endowment funds September. The proj ect includes extensive renovations to the invested in Pool A, MIT's primary inves tment pool, receive dis- second floor and less extensive work for flo ors mree, four and tributions based on relative ownership, which is valued monthly. fi ve. Lastly, tl1e renovation of Building NW23 located on Albany Street was completed as the new home for me Department of Land , Buildings, and Equipment Facilities groups of Campus Services, Campus Construction, Maintenance and Utilities, and the Office o f Campus Planning, Land, buildings, and equipment had a net book value of $3,092.4 and is now occupied.

million as of fiscal year-end 2016, an increase of $270.1 million, or 9.6 percent, from $2,822.3 million the previous year, mainly As noted above, addressing deferred maintenance has been pri-driven by expenditures for research and educational facilities. oritized as an integral part o f overall campus renewal, and fi scal During fiscal 2016, new construction and major renovation 2016 was tl1e first year in recent decades that a reduction in the projects placed into service totaled $3S6 .9 million. The Institute deferred maintenance backlog was realized. We partnered with currently has a total of 1S9 capital proj ects under construction over 30 departments across campus to accomplish improve-with a cumulative cost of $260.3 million. ments to student residences, research laboratories, classrooms, and office spaces. As a result of these investments, the campus-In May, MIT was presented with six preservation award s from wide facility condition index (FCI), which is me ratio of deferred the Cambridge Historical Commission for tl1e renovation o f maintenance to replace ment value, decreased from 0.27 in Janu-the Simo ns Building (2), the Morris and Sophie Chang Building ary 2014 to 0.24 in May 2016, and 17 renovations achieved the (ES2), the Kresge Auditorium (W16), the MIT Chapel (W1S),

Institute target FCI of 0.1 S or less.

Building NW23, and the Du Pont G ymnasium (\'(131). Con-structed in 1938 as the Massachusetts headquarters for the Lever In accordance with MIT 2030, a flexible framework mat guides Brothers Company, Building ES2 was the original home to the and supports the Institute's ongoing physical and financial Sloan School of Management. This historic building under- stewardship, MIT expects future pressure on o perating results went a complete renovation and was named in honor of Morris due to increasing depreciatio n costs associated with me above Chang 'S2, SM '53 , ME 'SS and Sophie Chang, whose generous and anticipated capital projects that ac tively address current and gift made the renovation possible. The expanded Samberg Con- future academic needs and opportunities.

ference Center located on the sixth and seventh levels opened in February. As noted above, Building 2, home to the D epartment Postretirement Benefit Assets and Liabilities of Mathematics and p ortio n s of Chemistry, was fully renova ted in the first major renewal project of the main group buildings. A The defined benefit pensio n plan had assets of $3,332.2 million substantial restoration of the Kresge Auditorium has revitalized as of fiscal year-end 2016, a decrease of $46.3 million from this gathering space, and tl1e MIT Chapel was fully renewed to $3,378 .S million as of fi scal year-end 201 S. The plan's projected better support the needs of the community. liabilities were $3,79S.3 million as of fiscal year-end 2016, up

$363.6 millio n from $3,431.7 million a year earlier, resulting in Enabling work has begun for Kendall Square development, and a net pension liability of $463 .1 million and $S3.2 million as of impacted units are being relocated to accommodate this work. fiscal year-end 2016 and 201 S, respectively. MIT also maintains a MIT's Theater Arts program currently occupies the Rinaldi Tile postretirement welfare benefit plan that covers retiree expenses Building (E33), as well as spaces in Walker Memorial, Building associated wim medical and life insurance benefits. This plan had 4, Building 10, and the Kresge Auditorium. With E33 slated for assets of $S49.2 million as of fiscal year-end 2016, an increase demolitio n, me Theater Arts program will be consolidated in of $0.3 millio n from $S48.9 million as of fiscal year-end 201 S.

a former warehouse at 34S Vassar Street (W97), which is now The plans projected liabilities were $S82.1 millio n as of fi scal under renovation. Building W98, located at 12 Emily Street, is year-end 2016, up $33.1 millio n from $S49.0 million a year ear-also being renovated as the new home to me Sea Grant program, lier, resulting in a net benefits liability of $32.9 million.

and is targeted for occupancy in January 2017. In addition to Sea Grant, the building will accommodate me Advanced Functional Fibers of America (AFFoA) space. Born projects are expected to The changes in asset values of both plans, relatively small in fi s-achieve LEED Gold certification. cal 2016, were a functio n o f payments made to beneficiaries and investment performance. The increases in liabilities experienced MIT.nano is proceeding on schedule and is on track to open by bo th plans were driven by declines in discount rates. The dis-in June of 2018. This world-class five-story structure will be count rates for each plan were derived by identifying a meoretical

SUMMARY

3

settlement portfolio of high-quality corporate bond s sufficient Consolidated Statement of Activities to provide for the plan's projected benefit obligations. The year-over-year discount rates dropped 56 and 51 basis points as o f Operating Activities June 30 for the defin ed benefit pension plan and retiree welfare benefit plan, respectively, due to the prevailing interest rate envi-ronment at fiscal year-end 2016.

Operating Activities $millions The combined plans' fiscal 2016 underfunded status was $496.0 4,000 million, an increase of $442.8 million from $53.2 millio n as o f fi scal year-end 2015, driven primarily by the change in discount 3,500 -+==============,

ra tes. On an accounting basis in fiscal 2015, the defined benefit 3,000 pensio n plan had a funding level of 98.5 percent, and the pos tre-tirement welfare benefit plan had a funding level of 99.9 percent. 2,500 In accordance with the Institute's funding strategy to ensure the long-term strength o f these plans, the Institute designated contributions o f $83 .0 million to the defin ed benefit pensio n 1,500 plan and $18.9 million to the postretirement welfare benefit 1,000 plan during fiscal 2016. These co ntributions, combined with actual investment performance, changes in certain demographic 500 assumptions, and changes in the discount rates mentio ned previ-0 ously, resulted in a funding status o f 87.8 percent for the defin ed 2012 2013 2014 2015 2016 benefi t pension plan and 94.3 percent fo r the postretiremen t

• Revenues

• Expenses welfare benefit plan as of fi scal year-end 2016 . The inves tments of both plans' assets are managed by MITIMCo.

E ffective as of fis cal year-end 2015, MIT revised its mor tality This past year, MIT inves ted in the modernization of our assumptio ns used to determine the pro jected benefit o bliga- information technology (IT) systems and infras tructure, adopt-tions of the defined benefit pension and postretirement welfare ing cloud architecture and web-based platforms. In D ecember, benefit plans. The revised assumptions were derived fro m the Info rmation Sys tems and Technology (IS&T) migrated MIT's mortality tables published by the Society o f Actuaries in Octo- SAP infrastructure to SAP's HANA E nterprise Cloud environ-ber 2014. The change in mortality ass umptions for both plans ment, providing improved performance and laying the founda-resulted in an increase of $267.9 millio n in the proj ected benefit tio n for real-time reporting access to transactio nal data stored obligations as o f fi scal year-end 2015. In addition to this change, in SAP and deployment of mobile-native web applicatio ns fo r MIT engaged its actuary to perform a comprehensive review and administrative applicatio ns. To date, 32 percent of IS&T man-experience stud y o f certain demographic assumptions for bo th aged servers have been migrated to cloud infras tructure, and 100 plans that resulted in a decrease o f $33 .9 million in the projected percent will be moved by 2018, releasing space while address-benefit obligations as o f fi scal year-end 2015. ing operatio nal risk witl1 geographical diversity and improved redundancy. We are continuing to improve the MIT network MIT also offers a 401 (k) plan to its employees, which is no t (MITnet) to increase resiliency and enable higher bandwidth re Aected in the Consolidated State ments of Financial Positio n.

connectivity to cloud providers, as well as dram atically increas-Assets in this plan are inves ted at the direction of participan ts ing the connectivity with Northern Crossroads, a consortium in an array of inves tment fu nds. The plan's investment market of higher education and research institutions in the N ortl1east, value was $3,891 .1 millio n as of fi scal year-end.

from 20 gigabits per second to 200 gigabits per second . These improvements ensure that tl1e MIT co mmunity has dependable Net Borrowings high-speed connectivity and access to in fo rmation and services In fiscal year 2016, net borrowings decreased $12.5 millio n, or 0.4 bo th o n and off campus.

percent. No new debt was issued during fiscal 2016. H owever, in MIT ended the year with a surplus fro m operations o f $76.9 July 2016, MIT issued $500.0 million in Series E Taxable Bo nds, millio n. This is $102.7 millio n, or 57.2 percent, lower than tl1e maturing in 211 6 and yielding 3.885 percent. This yield marks an fiscal 2015 result, in significant part related to the previo usly all-time low for the costs of a 100-year bond. The proceeds from mentioned investments in in fo rmatio n technology and facilities these bonds will be used to further advance MIT's ongoing cam -

expansion and moderniza tion. Operating revenues increased pus renewal and development program, including academic and

$136.1 millio n, or 4.1 percent, to $3,426.8 million in fi scal 2016, research capital projects within the MIT 2030 framework.

while operating expenses increased $238.8 million, or 7.7 per-MIT's fi nancial strength is reviewed periodically by bo th Mood y's cent, to a total of $3,349.9 million . Year-over-year comparisons Investors Service and Standard & Poor's Rating Services. In July of operating revenues and expenses are presented on the graph 2016, these agencies rated the most recent bond issuance and above.

reaffirmed MIT's credit as Aaa" and AAA," their highest ra ting levels.

4 MIT REPORT OF T HE TREASURER 20 16

Operating Revenues of Defense recently approved funding for two new facilities for Lincoln Laboratory. The Lincoln Laboratory West Laboratory project includes construction of the compound semiconductor Revenues laboratory/ microsystems integration facility and the engineering Net Asset Reclasses prototyping facility. The moderate increase in SMART research Auxiliaries 3% Net Tuition 3%

is the net result of certain interdisciplinary research groups 10%

winding down and renewing.

Support from Investments 21 % MIT's modified total direct research expenditures, which form the basis for recovery of indirect costs, decreased by $51.8 mil-lion, or 5.0 percent, in fiscal 2016.

Other Programs 3% While research and net tuition support more than half of MIT's operating revenue, the Institute also experienced significant Fees & growth in support from investments. Support from investments Service s 5% increased $60.1 million, or 8.9 percent, primarily due to an increase in the endowment distribution. The effective spend-Gifts for Current Use ing rate on endowed funds was 4.4 percent, or 5.1 percent on a 5% three-year-average basis, in fiscal 2016. G ifts and bequests for SMART Research current use decreased $59.6 million, or 26.9 percent, due to a few 1% exceptionally large gifts received in fiscal 2015.

Operating Expenses MIT's operating revenues include tuition, research, unrestricted MIT's operating expenses include salaries and wages, employee gifts and bequests for current use, fees and services, other pro-benefits, supplies and services, subrecipient agreements, utilities, grams, endowment distributio n and income from other invest-rent and repairs, depreciation, and interest. Operating expenses ments, auxiliaries, and payments o n pledges for unrestricted pur-grew to $3,349.9 millio n, an increase of $238.8 million, or 7.7 poses (included within net asset reclassifications and transfers) .

percent.

Tuition revenue for graduate, undergraduate and nondegree ex-ecutive programs net of financial aid grew by $8.2 million, or 2.5 percent, to $340.0 million. The growth in undergraduate tuition revenue was driven by a 3.8 percent increase in tuition rates and Depreciation Interest 4

% Expenses a 0.3 percent increase in student population. Financial aid for 5%

Utilities , Rent undergraduate students increased by 5.2 percent to $97.3 million. & Repa irs Financial aid for graduate students grew by 5.5 percent to $198.1 6%

million. Subrecipient Agreements Research revenues for on-campus departments, labs, and centers 4%

at MIT increased $35.8 million, or 5.4 percent, to $701.4 mil-lion. Research revenues for Lincoln Laboratory increased $76.7 million, or 8.7 percent, to $956.0 million, and for the Singapore-MIT Alliance for Research and Technology (SMART), increased

$1.1 million, or 3.4 percent, to $32.8 million.

T he growth rate in MIT's campus research is being driven by both Federal and non-Federal sponsors. Federally sponsored Salaries & Wages

& Employee Benefits research revenue increased by 3.7 percent compared to the 49%

prior fiscal year, with the largest increase being related to the National Aeronautics and Space Administration. on-Federally sponsored research increased by 6.6 percent, primarily driven by industrial and non-profit sponsors. The increase in Lincoln Laboratory research is the result of increased Federal funding Overall Institute salary expenses rose 6.5 percent while em-from the Department of D efense. D uring fi scal 2015, the Air ployee benefits expenses rose 0.8 percent. Campus average Force renewed the contract for operation of Lincoln Laboratory salary increases were 3.2 percent while headcount grew by 3.0 for an initial term of five years with an option to extend for an percent. The relatively moderate employee benefits growth is a additional five years, acknowledging the long-term value of the result of increases in health, medical, employment taxes, and the Laboratory in service to national security. Also, the Department supplemental 401 (k) retirement plan being almost entirely offset by decreases in defined benefit pension and retiree health costs.

SUMMARY

5

These decreases were due to higher discount rates, changes in the Institute's endowment spending policy, o ffset by spending retirement rates, and better-than-expected inves tment returns on capital projects and purchases of inves tments, in fi scal 2016.

experienced in fi scal 2015, which determined 2016 operating Cash provided by fin ancing activities was $104.9 millio n in fi scal costs in this area. 2016, drive n primarily by endowed contributions.

During fi scal 2016, expenses related to supplies and services in- MIT's full co nsolidated financial statements and foo tno tes, fur-creased $128.1 million, or 13.4 percent, to $1,084.2 millio n. The ther describing our financial position, ac tivities, and cas h flows expense growth in this area was driven by an increase in research through June 30, 2016, are included o n the fo llowing pages.

activi ties, inves tments in IT systems and infras tructure, and spe-cial events related to the Campaign for a Better World launch, as Closing Remarks well as the MIT centennial eve nt.

A century ago, MIT m ade a mos t daring and pio neering move Non-Operating Revenues , Gains, and Losses in relocating its campus fro m Boston to Cambridge. The move Summary paid o ff in extraordinary ways, enabling not only a rem arkable transitio n from an importan t regional institutio n to a premier N on-operating activities resulted in a $654.4 million decrease glo bal research university, but also the birth of a preeminent in-in MIT's fi scal 2016 net assets, which to taled $17,134.5 million. novation ecosystem around the campus. The recent approvals to The two principal drivers of the decrease were the endowment commence construction of five new buildings in Kendall Square spending distribution net o f investment appreciatio n, to taling open the door to attract the next wave of innovative companies

$346.8 million, and post retirement plan changes o ther than net and to strengthen collaborations across the region. We approach periodic benefit costs of $503.7 million. the future with tremendous optimism about all that we ho pe to acco mplish together as we imagine the next 100 years of innova-Gifts and Pledges tio n.

Gifts to MIT support scholarships, fellowships, professorships, We begin fi scal 201 7 o n a sound financial foundation with th e research, educatio nal programming, and student life activities, resources needed to enable MIT's future and the fl exibility to as well as construction and renovation of buildings. Gift and pursue groundbreaking initiatives. I have the greatest enthusi-pledge revenue for fi scal 2016 totaled $469.2 million, a decrease as m about the impact MIT will co ntinue to have in addressing of 5.0 p ercent from the fi scal 201 5 to tal of $493.7 million . Gifts the world's great challenges, and the Institute's potential will be from individuals represented 52.4 percent of new gifts and further strengthened by the Campaign fo r a Better World.

pledges in fi scal 2016, up from 35.3 percent in fi scal 2015. Gifts fro m found atio ns represented 37.4 percent of new gifts and I am grateful to our students, faculty, staff, alumni, fri ends, and pledges in fi scal 2016, up from 26. 3 percent in fi scal 2015. Gifts members o f the MIT Corporation for their unwavering commit-fro m corporations and o ther sources represented 10.2 percent ment to realizing this future toge ther.

of new gifts and pledges in fi scal 2016, down from 38.4 percent in fiscal 201 5. New gifts and pledges for research and education Respectfully submitted, were the largest categories of contributio ns for fiscal 2016.

Consolidated Statements of Cash Flows The consolidated statement of cash flows divides cash-inflows and outflows into three categories: operating, investing, and fi-nancing. Although this divisio n is a requirement of generally ac-cepted accounting principles (G AAP), when reviewing the cas h Israel Ruiz fl ow of a nonprofi t organization such as MIT, it is impo rtant to Executive Vice President and Treasurer no te the inves ting activities as presented in the cash fl ow are an September 9, 2016 integral part o f operatio ns, since a large portion o f operating ac tivity is funded through distributions from pooled investments.

N et op erating cas h fl ow consumed $323.0 million in fi scal 2016. N et operating cas h fl ow resulted fro m a to tal decrease in net assets, adjusted for no n-cash items (depreciatio n and net gain on inves tments and o ther asse ts, etc.), offset by changes in working capital, excluding cas h and deb t. T he net of pledges receivable, acco unts receivable, accounts payable, and other op-erating assets and liabilities used $8.5 millio n of operating cash flow in fi scal 2016. N e t inves ting activities provided $349.5 mil-lion in cash due to proceeds fr o m sales of inves tmen ts to cover 6 MIT REPORT OF T H E T REASU RER 201 6

Massachusetts Institute of Technology Consolidated Statements of Financial Position at June 30, 2016 and 2015 (in thousands ofdollars) 2016 2015 Assets Cash .............................................................. . $ 449,008 $ 317,682 Accounts receivable, net ............................................... . 201,012 172,522 Pledges receivable, net, at fair value ....................................... . 609,065 558,095 Contracts in progress, principally US Government ........................... . 80,803 66,440 Deferred charges, inventories, and other assets .............................. . 136,065 136,275 Student notes receivable, net ............................................ . 42,137 45,678 Investments, at fair value ............................................... . 17,478,438 17,754,155 Noncontrolling interests ............................................... . 205,421 232,415 Land, buildings, and equipment (at cost of $4,572,257 for June 2016; $4,186,490 for June 2015), net of accumulated depreciation .............................. . 3,092,429 2,822,312 Total assets ......................................................... . $ 22,294,378 $ 22,105,574 Liabilities and Net Assets Liabilities:

Accounts payable, accruals, and other liabilities ........................... . 528,688 436,288 Liabilities due under life income fund agreements, at fair value ............... . 145,216 141,946 Deferred revenue and other credits ..................................... . 136,426 151,933 Advance payments ................................................. . 435,220 422,675 Borrowings, net of unamortized issuance costs ............................ . 2,892,093 2,904,559 Government advances for student loans ................................. . 36,173 35,561 Accrued benefit liabilities ............................................ . 496,029 53,233 Liabilities associated with investments .................................. . 490,031 220,391 Total liabilities ...................................................... . 5,159,876 4,366,586 Net Assets:

Unrestricted net assets controlled by the Institute .......................... . 6,634,100 7,071,258 Unrestricted net .assets attributable to noncontrolling interests ................ . 205,421 232,415 Total unrestricted net assets .......................................... . 6,839,521 7,303,673 Temporarily restricted ............................................... . 7,210,822 7,553,447 Permanently restricted .............................................. . 3,084,159 2,881,868 Total net assets ...................................................... . 17,134,502 17,738,988 Total liabilities and net assets .......................................... . $ 22,294,378 $ 22,105,574 The accompanying notes are an integral part ofthe consolidated financial statements.

CONSOLIDATED FINANCIAL STATEMENTS 7

Massachusetts Institute of Technology Consolidated Statement of Activities for the year ended June 30, 2016 (with summarized financial information for the year ended June 30, 2015) 2016 Total Temporarily Permanently I (in thousands ofdollars) Unrestricted Restricted Restricted 2016 2015 Operating Activities Operating Revenues Tuition and similar revenues, net of discount of

$295,419 in 2016 and $280,282 in 2015 .... $ 340,005 $ - $ - $ 340,005 $ 331,819 Research revenues:

Campus ............................ 701,417 701,417 665,583 Lincoln ............................. 955,994 955,994 879,327 SMART ............................ 32,818 32,818 31,737 Total research revenues ................... 1,690,229 1,690,229 1,576,647 Gifts and bequests for current use ........... 162,257 162,257 221,820 Fees and services ........................ 183,020 183,020 160,962 Other programs ......................... 98,837 98,837 101,293 Support from investments:

Endowment ......................... 588,708 588,708 545,861 Other investments .................... 142,720 142,720 125,498 Total support from investments ............. 731,428 731,428 671,359 Auxiliary enterprises ..................... 117,460 117,460 120,946 Net asset reclassifications and transfers ....... 103,601 103,601 105,923 Total operating revenues .................. $ 3,426,837 $ - $ - $ 3,426,837 $ 3,290,769 Operating Expenses Salaries and wages ....................... $ 1,335,024 $ - $ - $ 1,335,024 $ 1,253,353 Employee benefits ....................... 311,557 311,557 309,195 Supplies and services ..................... 1,084,219 1,084,219 956,078 Subrecipient agreements .................. 139,913 139,913 140,417 Utilities, rent, and repairs ................. 204,265 204,265 186,905 Depreciation ........................... 158,443 158,443 146,239 Interest expense ......................... 116,478 116,478 118,932 Total operating expenses .................. 3,349,899 3,349,899 3,111,119 Results of operations ........ : ............ $ 76,938 $ - $ - $ 76,938 $ 179,650 Non-Operating Activities Pledge revenue .......................... $ - $ 125,872 $ 71,950 $ 197,822 $ 195,205 Gifts and bequests ....................... 109,083 109,083 76,665 Investment income ...................... 1,635 3,130 4,765 4,385 Net gain on investments and other assets ...... 243,019 (22,908) 22,442 242,553 1,651,600 Distribution of accumulated investment gains .. (216,306) (373,096) (589,402) (516,793)

Net change in life income funds ............ (1,069) (1,849) (9,000) (11,918) (19,197)

Postretirement plan changes other than net periodic benefit cost .................... (503,732) (503,732) 13,314 Net asset reclassifications and transfers ....... (36,008) (72,279) 4,686 (103,601) (105,923)

Total non-operating activities .............. (514,096) (342,625) 202,291 (654,430) 1,299,256 (Decrease) increase in net assets controlled by the Institute (437,158) (342,625) 202,291 (577,492) 1,478,906 Change in net assets attributable to noncontrolling interests ................. (26,994) (26,994) (55,410)

Net assets at the beginning of the year ........ 7,303,673 7,553,447 2,881,868 17,738,988 16,315,492 Net assets at the end of the year. ........... $ 6,839,521 $ 7,210,822 $ 3,084,159 $ 17,134,502 $ 17,738,988 The accompanying notes are an integral part ofthe consolidated financial statements.

8 MIT REPORT OF THE TREASURER 2016

Massachusetts Institute of Technology Consolidated Statements of Cash Flows for the years ended June 30, 2016 and 2015 (in thousands ofdollars) 2016 2015 Cash Flow from Operating Activities (Decrease) increase in net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (604,486) $ 1,423,496 Adjustments to reconcile change in net assets to net cash used in operating activities:

Net gain on investments and other assets ................................... . . (242,553) (1,651,600)

Change in accrued benefits liabilities ...................................... . 442,796 4,403 Depreciation ........................................................ . 158,443 146,239 Donated securities received .............................................. . (37,893) (47, 153)

Proceeds from sale of donated securities .................................... . 23,448 34,226 Net gain (loss) on life income funds ....................................... . 8,580 (9,844)

Change in noncontrolling interests ........................................ . 26,994 55,410 Amortization of bond premiums and discounts and other adjustments ............ . 9,601 (2,101)

Change in operating assets and liabilities:

Pledges receivable ..................................................... . (50,970) (67,759)

Accounts receivable ................................................... . (28,490) 23,022 Contracts in progress .................................................. . (14,363) (1,114)

Deferred charges, inventories, and other assets ............................... . 210 (9,459)

Accounts payable, accruals, and other liabilities, excluding building and equipment accruals 84,768 10,981 Liabilities due under life income fund agreements ............................ . 3,270 38,870 Deferred revenue and other credits ........................................ . (15,507) 18,645 Advance payments .................................................... . 12,545 30,461 Reclassify investment income .............................................. . (4,765) (4,385)

Reclassify contributions restricted for long-term investment ....................... . (94,638) (63,738)

Net cash used in operating activities ......................................... . (323,010) (71,400)

Cash Flow from Investing Activities Purchase ofland, buildings, and equipment ................................... . (424,543) (332,275)

Purchases of investments .................................................. . (22,221,841) (23,018,625)

Proceeds from sale of investments ........................................... . 23,001,121 23,409,764 Student notes issued ................................... * .................. . (17,941) (19,024)

Collections from student notes ............................................. . 12,665 21,224 Net cash provided by investing activities ...................................... . 349,461 61,064 Cash Flow from Financing Activities Contributions restricted for investment in endowment ........................... . 94,638 63,738 Proceeds from sale of donated securities restricted for endowment .................. . 14,445 12,928 Increase in investment income for restricted purposes ............................ . 4,765 4,385 Proceeds from borrowings ................................................. . 518,500 Repayment of borrowings ................................................. . (9,585) (569,816)

Increase in government advances for student loans .............................. . 612 524 Net cash provided by financing activities ...................................... . 104,875 30,259 Net increase in cash ...................................................... . 131,326 19,923 Cash at the beginning of the year . . . . ....................................... . 317,682 297,759 Cash at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 449,008 $ 317,682

=

The accompanying notes are an integral part ofthe consolidated financial statements.

CONSOLIDATED FINANCIAL STATEMENTS 9

Notes to Consolidated Financial Statements A. Accounting Policies Basis of Presentation related accumulated gains in accordance with the principles of "Fund Accounting." Gifts are recorded in fund accounts and The accompanying financial statements have been prepared in investment income is distributed to funds annually. Income accordance with generally accepted accounting principles (GAAP) distributed to funds may be a combination of capital apprecia-in the United States of America. The consolidated financial state-tion and yield pursuant to MIT's total return investment and ments (financial statements) include MIT and its wholly owned spending policies. Each year, the Executive Committee of the subsidiaries.

Corporation approves the rates of distribution of investment Net assets, revenues, expenses, and gains and losses are classified return to the funds from MIT's investment pools. (See Note J for into three categories based on the existence or absence of donor- further information on income distributed to funds.)

imposed restrictions. The categories are permanently restricted, MIT's operations include tuition, research revenues, unrestricted temporarily restricted, and unrestricted net assets. Unconditional gifts and bequests for current use, fees and services, other pro-promises to give (pledges) are recorded as receivables and revenues grams, endowment distribution and income from other invest-within the appropriate net asset category.

ments, auxiliary revenues, net asset reclassifications and transfers, Permanently restricted net assets include gifts, pledges, trusts and and operating expenditures. Results of operations are displayed in remainder interests, and income and gains that are required by the Consolidated Statement of Activities.

donors to be permanently retained. Pledges, trusts, and remainder interests are reported at their estimated fair values. Tax Status Temporarily restricted net assets include gifts, pledges, trusts and MIT is a nonprofit organization that is tax-exempt under remainder interests, and income and gains that can be expended Section 501 (c) (3) of the Internal Revenue Code, originally but for which restrictions have not yet been met. Such restric- recognized in October 1926, with the most recent affirmation tions include purpose restrictions where donors have specified letter dated July 2001.

the purpose for which the net assets are to be spent, or time US GAAP requires MIT to evaluate tax positions taken by the restrictions imposed by donors or implied by the nature of the Institute and recognize a tax liability (or asset) if the Institute has gift (capital projects, pledges to be paid in the future, life income taken an uncertain position that more likely than not would not funds), or by interpretations oflaw (net gains on permanently be sustained upon examination by the IRS. MIT has analyzed the restricted gifts that have not been appropriated for spending). tax positions taken and has concluded that as ofJune 30, 2016, Gifts specified for the acquisition or construction oflong-lived there are no significant uncertain positions taken or expected to assets are reported as temporarily restricted net assets until the be taken that would require recognition of a liability (or asset) or monies are expended and the buildings are put into use, at which disclosure in the financial statements.

point they are reclassified to unrestricted net assets. Net unreal-ized losses on permanently restricted endowment funds for which Cash the book value exceeds market value are recorded as a reduction to unrestricted net assets. Certain cash balances, totaling $122.3 million and $116.4 mil-lion at June 30, 2016 and 2015, respectively, are restricted for use Unrestricted net assets are all the remaining net assets of MIT. under certain sponsored research agreements or are held on behalf Donor-restricted gifts and unexpended restricted endowment of a related party.

income that are received and either spent, or the restriction is The Institute had approximately $432.1 million and $316.1 mil-otherwise met within the same year, are reported as unrestricted lion at June 30, 2016 and 2015, respectively, of its cash accounts revenue. Gifts of long-lived assets are reported as unrestricted with a single institution. The Institute has not experienced any revenue.

losses associated with deposits at this institution.

Net asset reclassifications and transfers consist primarily of payments on unrestricted pledges and use of building funds in Advance Payments accordance with donor restrictions for buildings put into use Amounts received by MIT from the US Government, corpora-during the year. Expirations of temporary restrictions on net tions, industrial sources, foundations, and other non-MIT assets, release of permanent restrictions by a donor, and change sponsors under the terms of agreements that generally require of restrictions imposed by donors are also reported as reclas-the exchange of assets, rights, or privileges between MIT and the sifications of net assets among unrestricted, temporarily, and sponsor are recorded as advance payments. Revenue is recognized permanently restricted net assets.

as MIT fulfills the terms of the agreements.

MIT administers its various funds, including endowments, funds functioning as endowments, school or departmental funds, and 10 MIT REPORT OF THE TREASURER 2016

A. Accounting Policies (continued}

Land, Buildings, and Equipment Depreciation expense was $158.4 million in 2016 and $146.2 million in 2015. Net interest expense of$9.5 million and $6.6 Land, buildings, and equipment are shown at cost when pur-million was capitalized during 2016 and 2015, respectively, in chased or at fair value as of the date of a gift when received as connection with MIT's construction projects.

gifts, net of accumulated depreciation. When expended, costs associated with the construction of new facilities are shown as Tuition and Student Support .

construction in progress until such projects are completed and put into use. Depreciation is computed on a straight-line basis Tuition and similar revenues, shown in Table 2 below, include tuition over the estimated useful lives of 25 to 50 years for buildings, 3 to and fees in degree programs as well as tuition and fees for executive 25 years for equipment, and 4 to 6 years for software. and continuing education programs at MIT.

Fully depreciated assets were removed from the financial state-Table 2. Tuition and Similar Revenues ments in the amount of $39.4 million and $34.3 million during 2016 and 2015, respectively. Land, buildings, and equipment at (in thousands ofdollars) 2016 2015 June 30, 2016 and 2015 are shown in Table 1 below. Undergraduate and graduate programs .............. . $ 590,415 $ 569,982 Table 1. Land, Buildings, and Equipment Executive and continuing education programs ...... . 45,009 42,119 Total ................... . 635, 424 612,101 (in thousands ofdollars) 2016 2015 (295,419) (280,282)

Less: tuition discount ...... .

Land ................. . $ 83,610 $ 78,528 Nettuitionandsimilarrevenues $ 340,005 $ 331,819 Land improvements ...... . 64,434 64,525 Educational buildings .... . 3,737,492 3,382,438 Equipment ............ . 289,980 271,326 Tuition support is awarded to undergraduate students by MIT Software .............. . 56,021 44,711 based on need. Graduate students are provided with tuition sup-Total ................. . 4,231,537 3,841,528 port in connection with research assistance, teaching assistance, Less: accumulated depreciation (1,479,828) (1,364, 178) and fellowship appointments. Tuition support from MIT sources Construction in progress ... 336;033 337,018 is displayed as tuition discount. Total student support granted 4,687 7,944 to students was $520.5 million and $498.5 million in 2016 and Software projects in progress Net land, buildings, and

---

2015, respectively. Of that amount, $163.5 million in 2016 and equipment. . . . . . . . . . . . $ 3,092,429 $ 2,822,312 $161.4 million in 2015 was aid from sponsors. Components of student support are detailed in Table 3 below.

Table 3. Student Support 2016 2015 I Total I I Total I Institute External Student Institute External Student (in thousands ofdollars) Sources Sponsors Support Sources Sponsors Support Undergraduate tuition support .... $ 97,262 $ 15,640 $ 112,902 $ 92,488 $ 14,660 $ 107,148 Graduate tuition support......... 198,157 60,287 258,444 187,794 59,567 247,361 Fellow stipends ................ 22,718 16,013 38,731 21,469 17,290 38,759 Student employment ............ 38,876 71,516 110,392 35,417 69,844 105,261 Total ........................ $ 357,013 $ 163,456 $ 520,469 $ 337,168 $ 161,361 $ 498,529 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11

A. Accounting Policies (continued)

Sponsored Research MIT records items of collections as gifts at nominal value. They are received for educational purposes and most are displayed Direct and indirect categories of research revenues are shown in throughout MIT. In general, collections are not disposed of for Table 4 below.

financial gain or otherwise encumbered in any manner.

Table 4. Research Revenues Life Income Funds MIT's life income fund agreements with donors consist primarily (in thousands ofdollars) 2016 2015 of irrevocable charitable gift annuities, pooled income funds, and Direct: charitable remainder trusts for w!i-ich MIT serves as trustee. Assets are invested and payments are made to donors and other benefi-Campus ......... . $ 513,991 $ 482,563 ciaries in accordance with the respective agreements. MIT records Lincoln .......... . 908,506 844,588 the assets that are associated with each life income fund at fair value Sl\1ART ......... . 32,416 31,620 and records as liabilities the present value of the estimated future Total direct ......... . 1,454,913 1,358,771 payments at current interest rates to be made to the donors and Indirect: beneficiaries under these agreements. A rollforward of liabilities due Campus ......... . $ 187,426 $ 183,020 under life income fund agreements is presented in Table 5 below.

Lincoln .......... . 47,488 34,739 Sl\1ART ......... . 402 117 Total indirect ....... . 235,316 217,876 Table 5. Liabilities Due Under Life Income Funds Total research revenues $ i,690,229 $ 1,576,647 (in thousands ofdollars) 2016 2015 Revenue associated with contracts and grants is recognized as Balance at the beginning of the year $ 141,946 $ 103,076 related costs are incurred. The capital costs of buildings and Addition for new gifts .......... 8,592 14,612 equipment are depreciated over their estimated life cycle, and the Termination and payments to sponsored research recovery allowance for depreciation is treated beneficiaries . . . . . . . . . . . . . . . . (14,993) (14,984) as indirect research revenue. MIT has recorded reimbursement Net investment and actuarial gain 9,671 39,242 of indirect costs relating to sponsored research at negotiated fixed Balance at end of the year ...... $ 145,216 $ 141,946 billing rates. The revenue generated by the negotiated rates is ad-justed each fiscal year to reflect any variance between the negoti-ated fixed rates and rates based on actual cost. The actual cost rate Accounts Payable, Accruals, and Other Liabilities is audited by the Defense Contract Audit Agency (DCAA) and a final fixed-rate agreement is signed by the US Government and MIT's accounts payable, accruals, and other liabilities totaled MIT. The variance between the negotiated fixed rate and the final $528.7 million and $436.3 million at June 30, 2016 and 2015, audited rate results in a carryforward (over- or under-recovery). respectively. These totals included accrued vacation of $81.6 mil-The carryforward is included in the calculation of negotiated fixed lion at June 30, 2016 and $62.5 million at June 30, 2015.

billing rates in future years. Any adjustment in the rate is charged or credited to unrestricted net assets.

Recently Adopted Accounting Standards On July l, 2015, MIT early adopted new guidance related to Gifts and Pledges Presentation ofDebt Issuance Costs. This guidance requires MIT to Gifts and pledges are recognized when received. Gifts of securi- present unamortized debt issuance costs as an offset to borrowings ties are recorded at their fair value at the date of contribution. within the liabilities section of the balance sheet, rather than as Donated securities received totaled $37.9 million and $47.2 other assets within the assets section of the balance sheet, and million in 2016 and 2015, respectively, and are shown separately must be applied retrospectively. As a result, $17.7 million has in the Consolidated Statements of Cash Flows. Gifts of equipment been reclassified from the Deferred charges, inventories, and other received from manufacturers and other donors are put into use and assets line to the Borrowings line in the 2015 comparative results recorded by MIT at fair value. Gifts of equipment totaled $0.4 column for MIT's Consolidated Statements of Financial Position.

million in 2016 and $0.3 mlllion in 2015. Pledges in the amount The change in presentation has also been appropriately reflected 0

of $609. l million and $ 558.1 million were recorded as receivables in the Borrowings table shown in Footnote F.

at June 30, 2016 and 2015, respectively, with the revenue assigned to the appropriate classification of restriction. Pledges consist of unconditional written promises to contribute to MIT in the future and are recorded after discounting the future cash flows to the present value.

12 MIT REPORT OF THE TREASURER 2016

A. Accounting Policies (continued)

On July 1, 2014, MIT early adopted new guidance about Fair Reclassifications Value Measurement and Disclosures for Investments in Certain Certain June 30, 2015 balances and amounts previously re-Entities That Calculate Net Asset Value per Share (or Its Equivalent).

ported have been reclassified to conform to the June 30, 2016 This guidance requires MIT to show investments that use net presentation.

asset value (NAY) as a practical expedient for valuation purposes separately from other investments categorized in the fair value Subsequent Events hierarchy described in Footnote B. This disclosure change can be In July 2016, MIT issued $500.0 million of taxable bonds, Series seen in the investment leveling tables shown in Footnotes B and I E, with a fixed interest rate of 3.885 percent and a maturity date for both fiscal years 2016 and 2015.

ofJuly 1, 2116. The new taxable debt will be used to further ad-Noncontrolling Interests vance MIT's ongoing campus renewal and development program, including academic and research capital projects within the MIT MIT is the general partner for several private equity funds and 2030 framework.

has displayed the noncontrolling interests on the Consolidated Statements of Financial Position. MIT has evaluated subsequent events through September 9, 2016, the date on which the financial statements were issued.

Non-Cash Items There were no subsequent events other than the above debt Non-cash transactions excluded from the Consolidated issuance that occurred after the balance sheet date that have a Statements of Cash Flows include $7.6 million and $13.3 million material impact on MIT's financial statements.

of accrued liabilities related to plant and equipment purchases for Summarized Information 2016 and 2015, respectively.

The Consolidated Statements of Activities includes certain prior Use of Estimates year summarized comparative information in total but not by The preparation of financial statements in conformity with GAAP net asset class. Such information does not include sufficient requires management to make estimates and assumptions that detail to constitute a presentation in conformity with accounting affect the reported amounts of assets and liabilities, contingent as- principles generally accepted in the United States of America.

sets and liabilities at the date of the financial statements, and the Accordingly, such information should be read in conjunction reported amounts of revenues and expenses during the reporting with MIT's financial statements for the year ended June 30, period. Actual results could differ from those estimates. 2015, from which the summarized information was derived.

B. Investments Investment transactions are accounted for on the trade date. The following describes the hierarchy of inputs used to measure Dividend income is recorded on the ex-dividend date. Realized fair value and the primary valuation methodologies used by MIT gains and losses are recorded by MIT using the average cost for financial instruments measured at fair value on a recurring basis. For limited partnerships, the realized gain/loss is calculated basis. The three levels of inputs are as follows:

once the entire cost basis is distributed back to MIT or using

• Level 1 - Quoted prices in active markets for identical assets or information provided by managers with respect to the character liabilities. Market price data is generally obtained from relevant of a distribution as being a gain or return of capital.

exchanges or dealer markets.

MIT values its investments in accordance with the principles of

• Level 2 - Inputs other than Level 1 that are observable, either accounting standards which establish a hierarchy of valuation directly or indirectly, such as quoted prices for similar assets or inputs based on the extent to which the inputs are observable in liabilities, quoted prices in markets that are not active, or other the marketplace. Observable inputs reflect market data obtained inputs that are observable or can be corroborated by observable from sources independent of the reporting entity. Unobservable market data for substantially the same term of the assets or inputs reflect the entity's own assumptions about how market liabilities. Inputs are obtained from various sources including participants would value an asset or liability based on the best market participants, dealers, and brokers.

information available. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize

• Level 3 - Unobservable inputs that are supported by little or the use of unobservable inputs. MIT follows a fair value hierarchy no market activity and that are significant to the fair value of the based on three levels of inputs, of which the first two are assets or liabilities.

considered observable and the last is unobservable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13

B. Investments (continued)

A financial instrument's categorization within the valuation As a practical expedient, MIT is permitted under GAAP to hierarchy is based upon the lowest level of input that is significant estimate the fair value of its investments with external managers to the fair value measurement. Market information is considered using the external managers' reported NAV without further when determining the proper categorization of the investment's adjustment unless MIT expects to sell the investment at a value fair value measurement within the fair valuation hierarchy. other than NAV or the NAV is not calculated in accordance with GAAP.

Table 6 presents MIT's investments at fair value as of]une 30, 2016 and 2015, respectively, grouped by the valuation hierarchy Level 3 investments are valued by MIT based upon valuation as defined earlier in this note. Investments that use NAV as a information received from the relevant entity, which may practical expedient for valuation purposes are shown separately. include last trade information, third-party appraisals of real estate, or valuations prepared in connection with the Transfers between levels are recognized at the beginning of the administration of an employee stock ownership plan. MIT may reporting period. The 2016 transfers from Level 1 to Level 2 also utilize industry standard valuation techniques, including totaled $60.0 million and transfers from Level 2 to Level 1 discounted cash flow models. The significant unobservable totaled $10.4 million. The 2015 transfers from Level 1 to Level inputs used in the fair value measurements of MIT's direct 3 totaled $0.1 million, and transfers from Level 1 to Level 2 investments may include their cost of capital, and equity and totaled $9 .6 million.

industry risk premiums. Significant increases or decreases in Cash and cash equivalents include cash, money market funds, these inputs in isolation may result in a significantly lower repurchase agreements, and negotiable certificates of deposit and or higher fair value measurement, respectively. Split-interest are valued at cost, which approximates fair value. Instruments agreements are generally valued at the present value of the listed or traded on a securities exchange are valued at the last future distributions expected to be received over the term of the quoted price on the primary exchange where the securities are agreement.

traded.

Over-the-counter positions, such as interest rate and total return Investments in non-exchange-traded debt are primarily valued swaps, credit default swaps, options, exchange agreements, and using independent pricing sources that use broker quotes or interest rate cap and floor agreements, are valued using broker models using observable market inputs. Investments managed quotes or models using market observable inputs. Because the by external managers include investments in (i) absolute return; swaps and other over-the-counter derivative instruments have (ii) domestic, foreign, and private equity; (iii) real estate; and (iv) inputs that can usually be corroborated by observable market real asset commingled funds. The fair value of securities held in data, they are generally classified within Level 2.

external investment funds that do not have readily determinable MIT finances certain real estate investments to optimize the use fair values are determined by the external managers based upon of invested capital in support of the Institute's mission. These industry-standard valuation approaches that require varying financings are shown as a separate line item called Liabilities degrees of judgment, taking into consideration, among other associated with investments in the consolidated Statements of things, the cost of the securities, valuations and transactions of Financial Position. In prior years, they were netted into the line comparable public companies, the securities' estimated future for Investments, at fair value. Amounts for all previous years cash flow streams, and the prices of recent significant placements shown throughout the full Report of the Treasurer have been of securities of the same issuer. Using these valuations, most of reclassified to conform to the current year's presentation.

these external managers calculate MIT's capital account or NAV in accordance with, or in a manner consistent with, GAAP's fair value principles.

14 MIT REPORT OF THE TREASURER 2016

8. Investments (continued)

Table 6. Investments Quoted Prices in Significant Other Significant NAV as Practical Active Markets Observable Inputs Unobservable Inputs Expedient Total Fair (in thousands ofdollars) (Level 1) (Level 2) (Level 3) (NAY) Value Fiscal Year 2016

.. Cash and cash equivalents ........ $ 939,555 $ - $ - $ - $ 939,555 US Treasury ................... 890,588 890,588 US Government agency.......... 169,007 169,007 Domestic bonds . . . . . . . . . . . . . . . 12,004 308,817 104,048 424,869 Foreign bonds . . . . . . . . . . . . . . . . . 21 68,384 68,405 Common equity:

Long domestic . . . . . . . . . . . . . . 221,868 95,120 316,988 Long foreign ................ 423,752 60,044 483,796 Short foreign ............... (5) (5)

Equity:**

Absolute return ............. 1,816,975 1,816,975 Domestic .................. 1,561,519 1,561,519 Foreign .................... 3,521,507 3,521,507 Private .................... 3,190,794 3,190,794 Real estate* . . . . . . . . . . . . . . . . . . . 6,446 2,495,176 840,443 3,342,065 Real assets** . . . . . . . . . . . . . . . . . . 275 680,566 680,841 Split-interest agreements ......... 126,832 126,832 Other ....................... 4,925 2,809 7,734 Derivatives . . . . . . . . . . . . . . . . . . . 33 (6320652 (63,0322 Investments, at fair value ......... $ 2,499,187 $ 543,187 $ 2,824,260 $ 11,611,804 $ 17,478,438 Liabilities associated with investments:

Real estate*** . . . . . . . . . . . . . . . (49020312 (49020312 Net investments ............... $ 2,499,187 $ 543,187 $ 2,334,229 $ 11,611,804 $ 16,988,407 Fiscal Year 2015 Cash and cash equivalents ........ $ 2,028,407 $ - $ - $ - $ 2,028,407 US Treasury ................... 795,335 795,335 US Government agency.......... 70,493 70,493 Domestic bonds ............... 11,917 84,072 101,763 197,752 Foreign bonds ................. 21 24,582 24,603 Common equity:

Long domestic .............. 243,677 67,096 310,773 Long foreign ................ 567,394 4,159 571,553 Short foreign ............... (6) (6)

Equity:**

Absolute return ............. 1,734,169 1,734,169 Domestic .................. 1,880,487 1,880,487 Foreign .................... 3,504,707 3,504,707 Private .................... 3,132,869 3,132,869 Real estate* . . . . . . . . . . . . . . . . . . . 19 6,282 1,985,878 785,536 2,777,715 Real assets** . . . . . . . . . . .. . . . . . . 1,260 605,612 606,872 Split-interest agreements ......... 146,405 146,405 Other ....................... 3,985 3,956 7,941 Derivatives . . . . . . . . . . . . . . . . . . . 47 (3529672 (3529202 Investments, at fair value ......... $ 3,650,796 $ 153,621 $ 2,306,358 $ 11,643,380 $ 17,754,155 Liabilities associated with investments:

Real estate*** . . . . . . . . . . . . . . . (22023912 (22023912 Net investments ............... $ 3,650,796 $ 153!621 $ 2!085~67 $ 11i643~80 $ 17,533!764

• Real estate includes direct investments and investments held through commingled vehicles.

• • Real assets and equity categories include commingled vehicles that invest in these types ofinvestments.

• • • Interest rates range from 3. 75% and 4.54%. Maturities range from calendar years 2023 and 2035. Principal payments range from $5. 6 million in fiscal year 2017 to $3.4 million in fiscal year 2036.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15

B. Investments (continued)

Table 7 below is a rollforward of the investments classified by MIT within Level 3 of the fair value hierarchy defined earlier in this footnote at June 30, 2016 and 2015.

Table 7. Rollforward of Level 3 Investments Fair Value Realized Gains Unrealized Fair Value (in thousands ofdollars) Beginning (Losses) Gains (Losses) Purchases Sales Transfers Ending Fiscal Year 2016 Domestic bonds ...... $ 101,763 $ - $ - $ 12,040 $ (9,755) $ - $ 104,048 Common equity:

67,096 28,024 7 (7) 95,120 Long domestic .....

119 (119)

Short domestic .....

1,985,878 33,254 381,977 184,991 (90,924) 2,495,176 Real estate ..........

1,260 (13,070) 12,085 275 Real assets ...........

146,405 5,329 (10,750) 17,214 (31,366) 126,832 Split-interest agreements Other .............. 3,956 179 32 (1,358) 2,809 Investments, at fair value $ 2,306,358 $ 25,692 $ 411,368 $ 214,371 $ (133,529) $ - $ 2,824,260 Real estate liabilities ... (220,391) (269,640) (490,031)

Net investments ...... $ 2,085,967 $ 25,692 $ 411,368 $ (55,269) $ (133,529) $ - $ 2,334,229 Fiscal Year 2015

$ 97,254 $ - $ - $ 13,276 $ (8,767) $ - $ 101,763 Domestic bonds ......

Common equity:

178,921 402 (104,853) 600 (7,989) 15 67,096 Long domestic .....

Short domestic .....

1,773,267 76,933 289,303 193,540 (347,265) JOO 1,985,878 Real estate ...........

10,464 (9,204) 1,260 Real assets . . .........

147,182 3,902 3,396 1,298 (9,373) 146,405 Split-interest agreements Other .............. 9,721 (183) 78 3 (5,663) 3,956 Investments, at fair value $ 2,216,809 $ 81,054 $ 178,720 $ 208,717 $ (379,057) $ 115 $ 2,306,358 Real estate liabilities ... (231,188) (75,000) 85,797 (220,391)

Net investments ...... $ 1,985,621 $ 81,054 $ 178,720 $ 133,717 $ (293,260) $ 115 $ 2,085,967 All net realized and unrealized gains and losses relating to MIT enters into short sales whereby it sells securities that may financial instruments held by MIT shown in Table 6 are reflected or may not be owned by MIT in anticipation of a decline in the in the Consolidated Statement of Activities. Cumulative price of such securities or in order to hedge portfolio positions.

unrealized gains related to Level 3 investments totaled $1,360.3 Cash collateral and certain securities owned by MIT were held million and $948.9 million as of June 30, 2016 and 2015, at counterparty brokers to collateralize these positions and are respectively. The net change in unrealized gains (losses) related to included in investments on the Consolidated Statemen.ts of Level 3 investments held by MIT at June 30, 2016, and June 30, Financial Position.

2015, are disclosed in Table 7.

16 MIT REPORT OF THE TREASURER 2016

B. Investments (continued)

Table 8 below sets forth a summary of valuation techniques and quantitative information utilized in determining the fair value of MIT's Level 3 investments as ofJune 30, 2016 and 2015.

Table 8. Level 3 Valuation Techniques Asset Type Fair Value at Fair Value at Unobservable 2016 2015 (in thousands ofdollars) June 30, 2016 June 30, 2015 Valuation Technique Input Rates Rates Real estate ........... $ 2,495,176 $ 1,985,878 Discounted cash flow Discount Rate 5-8.5% 4.8-9.0%

Equity securities ...... 78,727 50,653 Discounted cash flow Discount Rate 13.5% 15.3%

Split-interest agreements 81,268 110,722 Net present value Discount Rate 2.05% 2.25%

Real assets . . . . . . . .... 275 1,260 Discounted cash flow Discount 25.0% 20.0%

Other illiquid assets .... 505 426 Varies Varies Varies Varies Total assets .......... $ 22655~51 $ 22148~39 Certain investments in real estate, equities, and private respect to its investments in private equity and real estate funds.

investments may be subject to restrictions that (i) limit MIT's Distributions are made when sales of assets are made within these ability to withdraw capital after such investment; and (ii) funds and the investment cycle for these funds can be as long may limit the amount that may be withdrawn as of a given as 15 to 20 years. These restrictions may limit MIT's ability to redemption date. Most absolute return, domestic equity, and respond quickly to changes in market conditions. MIT does have foreign equity commingled funds limit withdrawals to monthly, various sources ofliquidity at its disposal, including cash, cash quarterly, or other periods, and may require notice periods. In equivalents, marketable debt and equity securities, and lines of addition, certain of these funds are able to designate a portion of credit.

the investments as illiquid in "side-pockets," and these funds may Details on the current redemption terms and restrictions by asset not be available for withdrawal until liquidated by the investing class and type of investment are provided in Table 9 below.

fund. Generally, MIT has no discretion as to withdrawal with Table 9. Unfunded Commitments 2016 2015 Asset Class Unfunded Unfunded Redemption Redemption (in thousands ofdollars) Commitments Fair Value Commitments Fair Value Terms Restrictions Equity:

Domestic........ $ 1,789 $ 1,561,519 $ 1,923 $ 1,880,487 Redemption terms range Lock-up provisions from 4 months with 45 days range from none to notice to 25 months with 3 6 months; 2 funds months notice and 2 closed- are not redeemable end funds not available for redemption Foreign ......... . 36,200 3,521,507 56,640 3,504,707 Redemption terms range Lock-up provisions from daily with 28 days range from none to notice to closed-end funds not redeemable which are not redeemable Absolute return ... 125,866 1,816,975 218,025 1,734,169 Redemption terms range Lock-up provisions from 45 days with 2 months range from none to notice to closed-end funds not redeemable that are not redeemable Private ......... . 1,567,427 3,190,794 1,131,554 3,132,869 Closed-end funds not Not redeemable available for redemption Real estate . . . . . . . ... 574,443 840,443 483,951 785,536 Closed-end funds not Not redeemable available for redemption Real assets . . . . ..... . 156,591 680,566 116,346 605,612 Redemption terms range Lock-up provisions from 9 months with 1 day range from none to notice to closed-end funds not redeemable which are not redeemable Total. . . . . . . . . . . . . . $ 2,462,316 $ 11,611,804 $ 2,008,439 $ 11,643,380 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17

B. Investments (continued)

MIT performs ongoing due diligence to determine that investments in external managers. The Committee is composed investment fair value is reasonable as of]une 30, 2016 and of senior personnel and contains members who are independent 2015. In particular, to ensure that the valuation techniques for of investment functions. The Committee meets annually, or more investments that are categorized within the fair value hierarchy frequently, as needed. Members of the Valuation Committee are fair, consistent, and verifiable, MIT has established a report annually to MIT's Risk and Audit Committee. The Valuation Committee (the "Committee") that oversees the methods described previously in this footnote may produce a valuation processes and procedures and ensures that the policies fair value that may not be indicative of net realizable value or are fair and consistently applied. The Committee is responsible reflective of future fair values. While MIT believes its valuation for conducting annual reviews of the valuation policies, methods are appropriate and consistent with those of other evaluating the overall fairness and consistent application of the market participants, the use of different methodologies or valuation policies, and performing specific reviews of certain assumptions to determine the fair value of certain financial valuations reported. The Committee performs due diligence over instruments could result in a different estimate of fair value at the the external managers and, based on this review, substantiates reporting date.

NAV as a practical expedient for estimates of fair value of its C. Derivative Financial Instruments and Collateral MIT maintains an interest rate swap agreement to manage the holder can either notify the seller of its intention to exercise or interest cost and risk associated with a portion of its variable rate let the option expire. An interest rate cap places a ceiling on a debt, described in Note F. Under the agreement, MIT pays a floating rate of interest on a specified notional principal amount fixed rate of 4.91 percent and receives a payment indexed to the for a specific term. The buyer of the cap uses the cap contract to Securities Industry and Financial Market Associ~tion (SIFMA) on limit its maximum interest rate exposure. If the buy~r's floating a notional amount of $125.0 million. At June 30, 2016, the swap rate rises above the cap strike, the cap contract provides for agreement had a total fair value of ($63.4) million and at June 30, payments from the seller to the buyer of the cap for the difference 2015 had a fair value of ($48.1) million. This swap had a total net between the floating rate and the cap strike. If the floating rate loss for 2016 of $15.3 million and a total net loss of $6.8 million remains below the cap strike, no payments are required. The for 2015. The notional amount of this derivative is not recorded cap buyer is required to pay an upfront fee or premium for on MIT's Consolidated Statements of Financial Position. the cap. The cap premium charged by the seller depends upon the market's assessment of the probability that rates will move For its investment management, MIT uses a variety of financial through the cap strike over the time horizon of the deal. The instruments with off-balance sheet risk involving contractual or payoff is expected to occur in extreme market conditions that optional commitments for future settlement. MIT uses these would negatively impact MIT's other assets.

instruments primarily to manage its exposure to extreme market events and fluctuations in asset classes or currencies. Instruments Table 10 summarizes the notional exposure and net ending fair utilized include futures, total return and credit default swaps, value relative to the financial instruments with off-balance sheet and interest rate cap and swaption agreements. The futures are risk as of]une 30, 2016 and 2015, related to MIT's investment exchange-traded and the swap, swaptions, and cap agreements are management. Derivatives held by limited partnerships and executed over the counter. commingled investment vehicles pose no off-balance sheet risk to MIT due to the limited liability structure of these investments.

Total return swaps involve commitments to pay interest in To manage the counterparty credit exposure of MIT's direct exchange for a market-linked return based on notional amounts.

off-balance sheet financial instruments, MIT requires collateral To the extent the total return of the security or index underlying to the maximum extent possible under normal trading practices.

the transaction exceeds or falls short of the offsetting interest rate Collateral is moved on a daily basis as required by fluctuations obligation, MIT will respectively receive a payment from or make in the market. The collateral is generally in the form of debt a payment to the counterparty.

obligations issued by the US Treasury or cash. In the event of MIT's portfolio of interest rate caps and swaptions is designed for counterparty default, MIT has the right to use the collateral to protection from significant increases in interest rates. An interest offset the loss associated with the replacement of the agreements.

rate swaption is an option to enter into an interest rate swap MIT enters into arrangements only with counterparties believed agreement on pre-set terms at a future date. The purchaser and to be creditworthy. On June 30, 2016, cash collateral and certain seller of the swaption agree on the expiration date, option type, securities owned by MIT were held at counterparty brokers to exercise style, the terms of the underlying swap, and the type collateralize these positions and are included in investments on of settlement. As the expiration date approaches, the swaption the Consolidated Statements of Financial Position.

18 MIT REPORT OF THE TREASURER 2016

C. Derivative Financial Instruments and Collateral (continued)

Table 10. Derivative Financial Instruments Notional Exposure I I Net Ending Net Gain (in thousands ofdollars) Long Shorr Fair Value* (Loss)**

c Fiscal Year 2016 Fixed income instruments:

t Fixed income futures ..................... $ 14,100 $ (3,100) $ 33 $

Options on interest rate exchange agreements .. 1,532,000 1,956 (6,844)

Interest rate caps and floors ................ 1,000,000 (96)

Total fixed income instruments ................ 2,546,100 (3,100) 1,989 (6,940)

Commodity and index instruments:

Equity index swaps ....................... (83,563) 351 44,083 Total commodity and index instruments ......... (83,563) 351 44,083 Credit instruments ......................... (102,494) (1,990) 126 2016Total ............................... $ 2,546,100 $ (189,157) $ 350 $ 37,269 Fiscal Year 2015 Fixed income instruments:

Fixed income futures ..................... $ 3,500 $ (3,400) $ 47 $ (82)

Options on interest rate exchange agreements .. 1,702,000 8,800 (10,476)

Interest rate caps and floors ................ 1,000,000 96 (485)

Total fixed inccihi.e instruments ............... , 2,705,500 (3,400) 8,943 (11,043)

Commodity and index instruments:

Equity index swaps ....................... (212,335) 5,046 (25,954)

Total commodity and index instruments ......... (212,335) 5,046 (25,954)

Credit instruments ......................... (73,203) (1,829) 9 2015 Total ............................... $ 2,705,500 $ (288,938) $ 12,160 $ (36,988)

• The fair value ofall credit derivative instruments is reflected in investments at fair value in the Consolidated Statements ofFinancial Position.

• **Net gain (loss) ofthe credit derivative instruments is located in the non-operating section as net gain (loss) on investments and other assets in the Consolidated Statement ofActivities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19

C. Derivative Financial Instruments and Collateral (continued)

Table 11 below provides further details related to MIT's credit the underlying issuer. Upon this event, the cash payment which instruments and summarizes the notional amounts and fair value the buyer receives is equal to the clearing price established by of the purchased and written credit derivatives, classified by the an auction of credit default swap claims, which is designed to expiration terms and the external credit ratings of the reference approximate the recovery value of an unsecured claim on the obligations at June 30, 2016 and 2015. issuer in default. The swap will last for a predetermined amount of time, typically five years. Upon termination of the swap, the The act of entering into a credit default swap contract is often buyer is no longer obligated to make any premium payments and ~*

referred to as "buying protection" or "selling protection on an there is no other exchange of capital. \:~\

underlying reference obligation. The buyer is obligated to make premium payments to the seller over the term of the contract in l,.I

~-

return for a contingent payment upon the occurrence of a credit event with respect to the underlying obligation. The seller bears the obligation to "protect" the buyer in the event of default of Table 11. Credit Derivative Instruments Purchased Protection Written Protection Notional Amount I I I I Offsetting Net Net Written Purchased Years to Maturity Written Purchased Written Credit Notional Purchased Notional Credit Credit Protection (in thousands ofdoll.ars) Amounts Fair Value* < 5 Years 5-10 Years Amounts Protection Protection Fair Value Fiscal Year 2016 Credit rating on underlying or index:

A-to AAA .............. $ 37,499 $ 785 $ 37,499 $ $ - $ - $ $

BBB- to BBB+ ........... 64,995 1,205 64,995 2016Total **.**...*...* $ 102,494 $ 1,990 $ 102,494 $ - $ - $ - $ - $

Fiscal Year 2015 Credit rating on underlying or index:

A-to AAA .............. $ 44,571 $ (1,109) $ 10,000 $ 34,571 $ - $ - $ $

BBB- to BBB+ ........... 28,632 (720) 5,175 23,457 2015 Total ....***..***. $ 73,203 $ (1,829) $ 15,175 $ 58,028 $ - $ - $ - $

i,

• The fair value ofall credit derivative instruments is reflected in investments atfair value in the Consolidated Statements ofFinancial Position.

20 MIT REPORT OF THE TREASURER 2016

C. Derivative Financial Instruments and Collateral (continued)

Counterparty risk may be partially or completely mitigated collateralized contractually or otherwise, there is the risk of through master netting agreements included within an loss from counterparty non-performance. As ofJune 30, 2016, International Swap and Derivatives Association, Inc. ("ISDA") MIT has elected not to offset recognized assets and liabilities Master Agreement between MIT and each of its counterparties. in the Statements of Financial Position Investments Table. The The ISDA Master Agreement allows MIT to offset with the following tables, 12 and 13, summarize the effect that offsetting counterparty certain derivative instruments' payables and/ of recognized assets and liabilities could have in the Statements of or receivables with collateral held with each counterparty. To Financial Position Investments Table.

the extent amounts due from the counterparties are not fully Table 12. Offsetting of Financial and Derivative Assets and Liabilities 2016 2015 I II I Cash/Treasury Cash/Treasury Collateral Collateral Posted/ Gross Posted/

(in thousands ofdollars) Gross Amount (Received) Net Amount Amount (Received) Net Amount Assets Counterparty A ............. $ 820 $ (726) $ 94 $ 4,184 $ (4,386) $ (202)

Counterparty B ............. 50,000 (51,052) (1,052) 59,895 (61,220) (1,325)

Counterparty C. ............ - - - - - -

Counterparty D ............ - - - - - -

Counterparty E ............. - - - - - -

Counterparty F ............. 6 - 6 - - -

Counterparty G ............. 18,753 (19,143) (390) 30,088 (31,004) (916)

Counterparty H ............ - - - - - -

Counterparty I ............. - - - - - -

Counterparty J ............. - - - - - -

Counterparty K ............. 1,488 (1,925) (437) 9,759 (12,495) (2,736)

Counterparty L. . . . . . . . ..... - - - - - -

Total assets ................ 71,067 (72,846) (1,779) 103,926 (109,105) (5,179)

Liabilities Counterparty A ............. (396) 410 14 (2) - (2)

Counterparty B ............. - - - - - -

Counterparty C ............. (43) 70 27 (201) - (201)

Counterparty D ............ (533) 721 188 (470) 721 251 Counterparty E ............. (47) - (47) - - -

Counterparty F . . . . . . . . ..... - - - - - -

Counterparty G ............. - - - (48,081) - (48,081)

Counterparty H ............ (63,382) - (63,382) - - -

Counterparty I ............. (342) 420 78 (316) 420 104 Counterparty J . . . . . . . . . .... (448) 680 232 (369) 415 46 Counterparty K ............. - - - - - -

Counterparty L ............. (189) 400 211 (470) 720 250 Total liabilities ............. (65,380) 2,701 (62,679) (49,909) 2,276 (47,633)

Total assets and liabilities, net $ 52687 $ {702145) $ {642458) $ 542017 $ {1062829) $ {522812)

Maximum risk of loss from counterparty credit risk on over- counterparties to an over-the-counter derivative to terminate the the-counter derivatives is generally the aggregate unrealized contract prior to maturity in the event either party fails to meet appreciation in excess of any collateral pledged by the the terms in the ISDA Master Agreements. This would cause an counterparty. ISDA Master Agreements allow MIT or the accelerated payment of net liability, if owed to the counterparty.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21

C. Derivative Financial Instruments and Collateral (continued)

Table 13 below reconciles the net recognized assets and liabilities, as shown in Table 12, to derivative financial instruments as shown in Table 6.

Table 13. Reconciliation of Financial and Derivative Assets and Liabilities (in thousands ofdollars) 2016 2015 Derivatives from Table 6 ............................................ . $ (63,032) $ (35,920)

Repurchase agreements ............................................. . 68,752 89,984 Fixed income futures ............................................... . (33) (47)

Total ........................................................... . $ 5,687 $ 54,017

==

D. Pledges Receivable Table 14 below shows the time periods in which pledges A review of pledges is periodically made with regard to receivable at June 30, 2016 and 2015 are expected to be realized. collectability. As a result, the allowance for pledges that may not be fulfilled is adjusted, and some pledges have been cancelled and Table 14. Pledges Re.ceivable are no longer recorded in the financial statements. Pledges are discounted in the amount of$22.l million and $35.5 million in (in thousands ofdollars) 2016 2015 2016 and 2015, respectively. MIT has gross conditional pledges, not recorded, for the promotion of education and research of In one year orless ....... *.... $ 239,245 $ 192,149 $82.8 million and $76.6 million in 2016 and 2015, respectively.

Between one year and five years 407,825 393,518 More than five years .... *..... 34,218 Pledges receivable are classified as Level 3 under the valuation 29,415 Less: allowance for unfulfilled hierarchy described in Note B.

pledges .................. (67,420) (61,790) Table 15 below is a rollforward of the pledges receivable at June Pledges receivable, net ....... $ 609,065 $ 558,095 30, 2016 and 2015.

Table 15. Rollforward of Pledges Receivable (in thousands ofdollars) 2016 2015 Balance at beginning of the year ............................................... . $ 558,095 $ 490,336 New pledges .............................................................. . 190,641 201,495 Pledge payments received .................................................... . (146,852) (127,446)

Decrease in pledge discount .................................................. . 12,811 1,230 Increase in reserve for unfulfilled pledges. . . . . . . . . . . . . . . . . . . ...................... . (5,630) (7,520)

Balance at the end of the year ................................................ . $ 609,065 $ 558,095

==

22 MIT REPORTOF1BE TREASURER 2016 -

E. Student Notes Receivable Table 16 below details the components of student notes receivable at June 30, 2016 and 2015.

Table 16. Student Notes Receivable (in thousands ofdollars) 2016 2015 Institute-funded student notes receivable .......................................... . $ 12,627 $ 12,894 Perkins student notes receivable ................................................. . 32,510 35,784 Total student notes receivable .................................................. . 45,137

---

48,678 Less: allowance for doubtful accounts ............................................ . (3,000) (3,000)

Student notes receivable, net . ................................................. . $ 42,137 $ 45,678

==

Perkins student notes receivable are funded by the US Factors also considered by management when performing its Government and by MIT. Those funds advanced by the US assessment, in addition to general economic conditions and the Government for this program are ultimately refundable to other factors described above, included, but were not limited to, the US Government and are classified as liabilities in US a detailed review of the aging of the student loan receivable and a Government advances for student loans in the Consolidated review of the default rate by loan category in comparison to prior Statements of Financial Position. Due to the nature and terms years. The level of the allowance is adjusted based on the results of of the student loans, which are subject to significant restrictions, management's analysis.

it is not feasible to determine the fair value of such loans.

Loans less than 120 days delinquent are deemed to have a Allowance for Credit Losses minimal delay in payment and are generally not written off but are reserved in accordance with the terms discussed above. Loans Management regularly assesses the adequacy of the allowance for more than 120 days delinquent are subject to standard collection credit losses by performing ongoing evaluations of the student practices, including litigation. Only loans that are deemed loan portfolio, including such factors as the differing economic uncollectible are written off and this only occurs after several risks associated with each loan category, the financial condition years of unsuccessful collection, including placement at more of specific borrowers, the economic environment in which the than one external collection agency.

borrowers operate, the level of delinquent loans, the value of any collateral, and, where applicable, the existence of any guarantees Considering the other factors already discussed herein, or indemnifications. MIT's Perkins loans receivable represents the management considers the allowance for credit losses at June 30, amounts due from current and former students under the Federal 2016 and 2015 to be prudent and reasonable. Furthermore, MIT's Perkins Loan Program. Loans disbursed under the Federal Perkins allowance is general in nature and is available to absorb losses from Loan Program are able to be assigned to the US Government in any loan category. Management maintains an allowance of $3.0 certain non-repayment situations. In these situations, the Federal million for credit losses and is confident that this is sufficient to portion of the loan balance is guaranteed. absorb credit losses inherent in the portfolio as of that date.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23

F. Net Borrowings MIT's outstanding borrowings at June 30, 2016 and 2015 are shown in Table 17 below.

Table 17. Net Borrowings (in thousands ofdollars I due dates are calendar based I par values as of2016) 2016 2015 Educational plant Massachusetts Development Finance Agency (MassDevelopment):

Series I, 5.20%, due 2028, par value $30,000 ............................... . $ 30,665 $ 30,723 Series J-1, variable rate, due 2031, par value $125,000 ........................ . 125,000 125,000 Series J-2, variable rate, due 2031, par value $125,000 ........................ . 125,000 125,000 Series K, 5.25%-5.5%, due 2012-2032, par value $203,500 .................... . 212,317 213,010 Series L, 3.0%-5.25%, due 2004-2033, par value $141,670 .................... . 149,668 150,357 Series M, 5.25%, due 2014-2030, par value $122,000 ........................ . 119,750 130,264 Series 0, 4.0%-5.0%, due 2017, par value $88,000 .......................... . 88,000 89,117 Total MassDevelopment .............................................. . $ 850,400 $ 863,471 Medium Term Notes Series A, 7.125% due 2026, par value $17,415 ............. . 17,375 17,371 Medium Term Notes Series A, 7.25%, due 2096, par value $45,604 .............. . 45,455 45,451 Taxable Bonds, Series B, 5~600/o, due 2111, par value $750,000* ................ . 747,050 747,019 Taxable Bonds, Series C, 4.68%, due 2114, par value $550,000* ................ . 550,000 550,000 Taxable Bonds, Series D, 2.051-3.959%, due 2019-2038, par value $522,410 ...... . 522,410 522,410 Notes payable to bank, variable rate, due 2017 .............................. . 113,033 113,033 Total taxable . ....................................................... . $ 1,995,323 $ 1,995,284 Total educational plant ............................................... . $ 2,845,723 $ 2,858,755 Other 63,476 Notes payable to bank, variable rate, due 2017 .............................. .

Total borrowings .................................................... . $ 2,909,199

-63,476

-$- - -2,922,231 --

---

~~-

Unamortized debt issuance costs ......................................... . (17,106) (17,672)

Total borrowings net of unamortized debt issuance cost .................... . $ 2,892,093 $ 2,904,559

=

• The proceeds ofTaxable Bonds, Series Band C were in the process ofbeing invested in physical assets in 2015 and 2016, with unused bakmces held as investments.

Fair value of the outstanding debt is approximately 24 and 9 percent greater than the carrying value in 2016 and 2015, respectively. It is classified as Level 3 under the valuation hierarchy described in Note B. Fair value is based on estimates using current interest rates available for similarly rated debt of the same remaining maturities for tax-exempt debt and rates for recent trades for taxable debt.

24 MIT REPORT OF THE TREASURER 2016

F. Net Borrowings (continued)

The aggregate amounts of debt payments and sinking fund Variable interest rates at June 30, 2016 are shown in Table 19 requirements for each of the next five fiscal years are shown in below.

Table 18 below.

Table 18. Debt Principal Obligations Table 19. Variable Interest Rates (in thousands ofdollars) (in thousands ofdollars) Amount Rate 2017 ............................. . $ 98,090 MassDevelopment Series J-1 .. $ 125,000 0.40%

2018 ............................. . 26,500 MassDevelopment Series J-2 .. 125,000 0.42%

2019 ............................. . 92,410 Notes payable to bank ....... 176,509 1.06%

2020 ............................. . 10,620 2021 ............................. . 11,180 In the event that MIT receives notice of any optional tender on its Series J-1 and Series J-2 variable-rate bonds, or if these bonds MIT maintains a line of credit with a major financial institution become subject to mandatory tender, the purchase price of the for an aggregate commitment of $500.0 million. As of June 30, bonds will be paid from the remarketing of such bonds. However, 2016, $323.5 million was available under this line of credit (see if the remarketing proceeds are insufficient, MIT will be obligated Notes payable on Table 17). The line of credit expires on March to purchase the bonds tendered at 100 percent of par on the 31, 2017. tender date.

Cash paid for interest on long-term debt in 2016 and 2015 was

$131.0 million and $128.9 million, respectively.

G. Commitments and Contingencies Federal Government Funding Leases MIT receives funding or reimbursement from Federal agencies At June 30, 2016, there were no capital lease obligations. MIT is for sponsored research under Government grants and contracts. committed under certain operating (rental) leases. Rent expense These grants and contracts provide for reimbursement of indirect incurred under operating lease obligations was $40.0 million and costs based on rates negotiated with the Office of Naval Research $41.3 million in 2016 and 2015, respectively. Future minimum (ONR), MIT's cognizant Federal agency. MIT's indirect cost payments under operating leases are shown in Table 20 below.

reimbursements have been based on fixed rates with carryforward of under- or over-recoveries. At June 30, 2016 and 2015, MIT recorded a net over-recovery of $24.7 million and $19.5 million, Table 20. Lease Obligations respectively. (in thousands ofdollars) 2017 ......................... . $ 44,361 The DCM is responsible for auditing indirect charges to grants 2018 ......................... . 44,501 and contracts in support of ONR's negotiating responsibility. 41,452 2019 ......................... .

MIT has final audited rates through 2009. MIT's 2016 research 2020 ......................... . 27,697 revenues of $1,690.2 million include reimbursement of indirect costs of $235.3 million, which includes the adjustment for the 2021 ......................... . 26,573 variance between the indirect cost income determined by the fixed rates and actual costs for 2016. In 2015, research revenues Investments were $1,576.6 million, which included reimbursement of indi- As of June 30, 2016, $12.6 million of investments were pledged rect costs of$217.9 million. as collateral to various suppliers and Government agencies.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25

G. Commitments and Contingencies (continued)

Future Construction involve funding from foreign governments. These agreements subject MIT to greater financial risk than do its normal opera-MIT has contracted for educational plant in the amount of tions. In the opinion of management, the likelihood of realiza-

$389.3 million at June 30, 2016. It is expected that the resources tion of increased financial risks by MIT under these agreements to satisfy these commitments will be provided from unexpended is remote.

plant funds, anticipated gifts, bond proceeds, and unrestricted funds. MIT will be committing additional resources to planned General major construction projects and improvements to the current infrastructure over the next several years. MIT is subject to certain other legal proceedings and claims that arise in the normal course of operations. In the opinion of Related Entities management, the ultimate outcome of these actions will not have a material effect on MIT's financial position.

MIT has entered into agreements, including collaborations with third-party not-for-profit and for-profit entities, for education, research, and technology transfers. Some of these agreements H. Functional Expense Classification MIT's expenditures on a functional basis are shown in Table 21 below.

Table 21. Expenditures by Functional Classification (in thousands ofdollars) 2016 2015 General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ . $ 858,441 $ 763,680 Instruction and unsponsored research ............................................. . 854,595 811,495 Sponsored research ........................................................... . 1,479,158 1,386,334 Auxiliary enterprises .......................................................... . 141,437 134,076 Operation of Alumni Association ................................................ . 16,268 15,534 Total operating expenses ...................................................... . $ 3,349,899 $ 3,111,119 I. Retirement Benefits MIT offers a defined benefit plan and a defined contribution sufficient assets to meet future benefit requirements. There were plan to its employees. The plans cover substantially all MIT designated contributions of $83.0 million and $7.5 million to employees. the defined benefit plan in 2016 and 2015, respectively. MIT also designated contributions of $18.9 million and $28.7 million MIT also offers a postretirement welfare benefit plan (certain to the postretirement welfare benefit plan in 2016 and 2015, healthcare and life insurance benefits) for retired employees.

respectively. The employer contributions to the Retiree Welfare Substantially all MIT employees may become eligible for those Benefit Plan (RWBP) decreased in 2016 mainly due to an .

benefits if they reach a qualifying retirement age while working increase in prescription drug rebates from drug manufacturers for_MIT. The healthcare coJilponent of the welfare plan is paid and more medical claims being directly paid by RWBP.

for in part by retirees, their covered dependents, and beneficiaries.

Benefits are provided through various insurance companies For the defined contribution plan, the amount contributed and whose charges are based either on the claims and administrative expenses recognized during 2016 and 2015 were $55.2 million expenses paid during the year or annual insured premiums. and $51.5 million, respectively.

The life insurance component of the welfare plan includes basic For purposes of calculating net periodic cost, plan amendments life insurance and supplemental life insurance. The basic life for the defined benefit plan are amortized on a straight-line basis insurance plan is non-contributory and covers the retiree only.

over the average future service of active participants at the date of The supplemental life insurance plan is paid for by the retiree.

the amendment. Plan amendments to the postretirement welfare MIT maintains a trust to pay for postretirement welfare benefits.

benefit plan are amortized on a straight-line basis over the average MIT contributes to the defined benefit plan amounts that are future service to full eligibility of active participants at the date of actuarially determined to provide the retirement plan with amendment.

26 MIT REPORT OF THE TREASURER 2016

I. Retirement Benefits (continued)

Cumulative gains and losses (including changes in assumptions) Components of Net Periodic Benefit Cost in excess of 10 percent of the greater of the projected benefit Table 22 below summarizes the components of net periodic obligation or the market-related value of assets for both the benefit cost recognized in operating activity and other amounts defined benefit plan and the postretirement welfare benefit recognized in non-operating activity in unrestricted net assets for plan are amortized over the average future service of active the years ended June 30, 2016 and 2015.

participants. The annual amortization shall not be less than the total amount of unrecognized gains and losses up to $1.0 million.

Table 22. Components of Net Periodic Benefit Cost Defined Benefit Plan Postretirement Welfare Benefit Plan (in thousands ofdollars) 2016 2015 II 2016 2015 Components of net periodic benefit cost recognized in operating activity:

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,464 $ 80,840 $ 25,097 $ 25,950 Interest cost .............................. : .... 158,983 141,805 25,478 24,453 Expected return on plan assets ..................... (243,615) (223,648) (34,703) (30,623)

Amortization of net actuarial loss .................. 20,088 24,596 1,000 6,064 Amortization of prior service cost .................. 953 953 (2,801) (2,801)

Net periodic benefit cost recognized in operating activity $ 21,873 $ 24,546 $ 14,071 $ 23,043 Other amounts recognized in non-operating activity in unrestricted net assets:

Current year actuarial loss (gain) ................... 492,083 56,748 30,889 (41,250)

Amortization of actuarial gain ..................... (20,088) (24,596) (1,000) (6,064)

Amortization of prior service cost .................. (953) (953) 2,801 2,801 Total other amounts recognized in non-operating activity $ 471,042 $ 31,199 $ 32,690 $ (44,513)

Total recognized. .............................. ~ 492~15 ~ 55,745 $ 46,761 ~ (21,470)

The estimated net actuarial loss and prior service cost for the actuarial loss and prior service cost (credit) for the postretirement defined benefit plan that will be amortized from unrestricted net welfare benefit plan that will be amortized from unrestricted net assets into net periodic benefit cost during the next fiscal year are assets into net periodic benefit cost during the next fiscal year are

$33.2 million and $1.0 million, respectively. The estimated net $1.0 million and $(2.8) million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27

I. Retirement Benefits (continued)

Cumulative amounts recognized as non-operating changes in unrestricted net assets are summarized in Table 23 below for the years ended June 30, 2016 and 2015.

Table 23. Cumulative Amounts Recognized in Unrestricted Net Assets Defined Benefit Plan Postretirement Welfare Benefit Plan (in thousands ofdollars) 2016 2015 11 2016 2015 Amounts recognized in unrestricted net assets consist of:

Net actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 787,874 $ 315,879 $ 39,515 $ 9,626 Prior service cost (credit) ......................... . 973 1,926 (10,615) (13,416)

Total cumulative amounts recognized in unrestricted net assets $ 788,847 $ 317,805 $ 28,900 $ (3,790)

=

Benefit Obligations and Fair Value of Assets Table 24 below summarizes the benefit obligations, plan assets, and amounts recognized in the Consolidated Statements of Financial Position for MIT's retirement benefit plans. MIT uses a June 30 measurement date for its defined benefit and postretirement welfare benefit plans.

Table 24. Projected Benefit Obligations and Fair Value of Assets Defined Benefit Plan Postretirement Welfare Benefit Plan I II I (in thousands ofdollars) 2016 2015 2016 2015 Change in projected benefit obligations:

Projected benefit obligations at beginning of year $ 3,431,688 $ 3,140,704 $ 548,965 $ 539,262 Service cost ................................. 85,464 80,840 25,097 25,950 Interest cost ................................ 158,983 141,805 25,478 24,453 Retiree contributions ......................... 5,543 4,881 Net benefit payments, transfers, and other expenses (138,464) (113,739) (28,396) (30,506)

Employer Group Waiver Plan (EGWP) reimbursement 5,053 6,273 Assumption changes and actuarial net loss (gain) .... 257,663 182,078 344 (21,348)

Projected benefit obligations at end of the year ....** $ 3,795,334 $ 3,431,688 $ 582,084 $ 548,965 Change in plan assets:

Fair value of plan assets at beginning of the year ..... 3,378,500 3,135,764 548,920 495,372 Actual return on plan assets .................... 9,197 348,975 4,160 50,522 Employer contributions ....................... 83,000 7,500 18,929 28,651 Retiree contributions ......................... 5,543 4,881 Net benefit payments, transfers, and other expenses (138,464) (113,739) (28,396) (30,506)

Fair value of plan assets at end of the year .........* 3,332,233 3,378,500 549,156 548,920 Unfunded status at end of the year ................ $ (463,101) $ (53,188) $ (32,928) $ (45)

Amounts recognized in the Consolidated Statements of Financial Position consist of:

Total accrued benefit liabilities ....*............*. $ (463,101) $ (53,188) $ (32,928) $ (45) 28 MIT REPORT OF THE TREASURER 2016

I. Retirement Benefits (continued)

Assumptions and Healthcare Trend Rates The accumulated benefit obligation for MIT's defined benefit Table 25 below summarizes assumptions and healthcare plan was $3,608.5 million and $3,075.9 million at June 30, 2016 trend rates. The expected long-term rate of return assumption and 2015, respectively. represents the expected average rate of earnings on the funds invested or to be invested to provide for the benefits included in MIT provides retiree drug coverage through an Employer Group the benefit obligation. The long-term rate of return assumption Waiver Plan (EGWP). Under EGWP, the cost of drug coverage is determined based on a number of factors, including hisrorical is offset through direct federal subsidies, brand-name drug market index returns, the anticipated long-term asset allocation discounts, and reinsurance reimbursements.

of the plans, historical plan return data, plan expenses, and the potential to outperform market index returns.

Table 25. Assumptions Defined Benefit Plan Postretirement Welfare Benefit Plan (in thousands ofdollars) 2016 2015 II 2016 2015 Assumptions used to determine benefit obligation as of June30:

Discount rate ............................... . 4.06% 4.62% 4.03% 4.54%

Rate of compensation increase* ................. . 4.00% 4.00%

Assumptions used to determine net periodic benefit cost for the year ended June 30:

Discount rate ............................... . 4.62% 4.50% 4.54% 4.43%

Expected long-term return on plan assets .......... . 8.00% 8.00% 7.00% 7.00%

Rate of compensation increase* ................. . 4.00% 4.00%

Assumed healthcare cost trend rates:

Healthcare cost trend rate assumed for next year ..... 6.00% 6.50%

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) ..................... . 4.75% 4.75%

Year the rate reaches the ultimate trend rate ........ . 2021 2021

• The average rate ofsalary increase is assumed to be 4.00% for 2017 and thereafter.

As an indicator of sensitivity, a one percentage point change in the assumed healthcare cost trend rate would affect 2016 as shown in Table 26 below.

Table 26. Healthcare Cost Trend Rate Sensitivity 1% Point 1% Point (in thousands ofdollars) Increase Decrease Effect on 2016 postretirement service and interest cost ........................... . $ 9,423 $ (7,447)

Effect on postretirement benefit obligation as of]une 30, 2016 .............. : ...... . 85,651 (70,238)

Plan Investments Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within The investment objectives for the assets of the plans are to prudent risk parameters. Risk management practices include minimize expected funding contributions and to meet or exceed the use of external investment managers, the maintenance of a the rate of return assumed for plan funding purposes over the portfolio diversified by asset class, investment approach, security long term. The nature and duration of benefit obligations, along holdings, and the maintenance of sufficient liquidity to meet with assumptions concerning asset class returns and return benefit obligations as they come due.

correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29

I. Retirement Benefits (continued)

Tables 27A and 27B present investments at fair value of MIT's defined benefit plan and postretirement welfare benefit plan, which are included in plan net assets as ofJune 30, 2016 and 2015, grouped by the valuation hierarchy detailed in Note B. The investment values in these tables exclude certain items included in the assets shown in Table 24. The 2016 transfers from Level 1 to Level 2 totaled

$21.8 million and $3.5 million for the defined benefit plan and postretirement benefit plan, respectively. The 2016 transfers from Level 2 to Level 1 totaled $2.4 million and $0.3 million for the defined benefit plan and the postretirement benefit plan, respectively.

There were no transfers in and out of Level 1 and Level 2 fair value measurements in 2015.

Table 27 A. Defined Benefit Plan Investments Quoted Prices in Significant Other Significant NAV as Practical Active Markets Observable Inputs Unobservable Inputs Expedient Total Fair (in thousands ofdollars) (Level 1) (Level 2) (Level 3) [NAV] Value Fiscal Year 2016 Cash and cash equivalents .... $ 154,852 $ - $ - $ $ 154,852 US Treasury ............... 304,281 304,281 US Government agency...... 8,701 8,701 Domestic bonds ........... 13 13 Foreign bonds ............. 6,973 6,973 Common equity:

Long domestic .......... 42,147 53 42,200 Long foreign ............ 80,573 21,844 102,417 Equity:*

Absolute return ......... 352,188 352,188 Domestic .............. 407,180 407,180 Foreign ................ 792,305 792,305 Private ................ 661,125 661,125 Real estate* ............... 1,492 277,671 279,163 Real assets* ............... 119,031 119,031 Other ............. , ..... 9,420 589 10,009 Derivatives ............... 44 777 821 Total plan investments . ..... $ 5921809 $ 38J08 $ 642 $ 21609~00 $ 3J41J59 Fiscal Year 2015 Cash and cash equivalents .... $ 204,917 $ - $ - $ $ 204,917 US Treasury ............... 298,529 298,529 US Government agency...... 11,183 11,183 Foreign bonds ............. 144 144 Domestic bonds ...........

Common equity:

Long domestic .......... 32,253 74 32,327 Long foreign ............ 122,483 902 123,385 Equity:*

Absolute return ......... 334,619 334,619 Domestic .............. 504,042 504,042 Foreign ................ 809,825 809,825 Private ................ 629,042 629,042 Real estate* ............... 1,466 273,468 274,934 Real assets* ............... 261 133,386 133,647 Other ................... 5,069 760 5,829 Derivatives ............... 13 1,209 1,222 Total plan investments . ..... $ 663J64 $ 14~04 $ 1!095 $ 2!684J82 $ 3,363!645

• Real assets, real estate, and equity categories include commingled vehicles that invest in these types ofinvestments.

30 MIT REPORT OF THE TREASURER 2016

I. Retirement Benefits (continued)

Table 278. Postretirement Welfare Benefit Plan Investments Quoted Prices in Significant Other Significant Measured at Net Active Markets Observable Inputs Unobservable Inputs Asset Value Total Fair (in thousands ofdollars) (Level 1) (Level 2) (Level 3) [NAY] Value Fiscal Year 2016 Cash and cash equivalents ... $ 29,733 $ - $ - $ $ 29,733 Domestic bonds .......... 76,019 76,019 Foreign bonds ............ 498 498 Common equity:

Long domestic ......... 15,771 15,771 Long foreign ........... 10,356 3,524 13,880 Equity:*

Absolute return ........ 67,327 67,327 Domestic ............. 75,578 75,578 Foreign ............... 180,830 180,830 Private ............... 60,008 60,008 Real estate ............... 204 22,968 23,172 Real assets* .............. 4,574 4,574 Other .................. 695 695 Derivatives . . . . . . . . . . . ...

Total plan investments ..... $ 562759 $ 802041 $ - $ 411J85 $ 5482085 Fiscal Year 2015 Cash and cash equivalents ... $ 18,502 $ - $ $ $ 18,502 Domestic bonds .......... 71,428 71,428 Foreign bonds ............ 10 10 Common equity:

Long domestic ......... 25,177 25,177 Long foreign ........... 18,098 123 18,221 Equity:*

Absolute return ........ 68,771 68,771 Domestic ............. 79,074 79,074 Foreign ............... 194,610 194,610 Private ............... 48,593 48,593 Real estate . . . . . . . . ....... 200 20,362 20,562 Real assets* .............. 3,763 3,763 Other .................. 362 362 Derivatives ..............

Total plan investments . .... $ 622139 $ 712761 $ $ 4152173 $ 5492073

• Real assets and equity categories include commingled vehicles that invest in these types ofinvestments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31

I. Retirement Benefits {continued)

Table 28 below is a rollforward of the investments classified by MIT's defined benefit plan within Level 3 of the fair value hierarchy defined in Note Bas at June 30, 2016 and 2015.

Table 28. Rollforward of Level 3 Investments Realized Unrealized Fair Value Gains Gains Fair Value (in thousands ofdollars) Beginning (Losses) (Losses) Purchases Sales Transfers Ending Defined Benefit Plan Fiscal Year 2016 Common equity:

Long domestic ..... $ 74 $ - $ (21) $ - $ - $ - $ 53 Real assets ........... 261 (3,438) 3,177 Other .............. 760 (171) 589 Total ............... $ 1,095 $ (3,438) $ 2,985 $ - $ - $ - $ 642 Fiscal Year 2015 Common equity:

Long domestic ..... $ 909 $ - $ (835) $ - $ - $ - $ 74 Real assets ........... 2,706 (2,445) 261 Other .............. 1,191 (431) 760 Total ............... $ 4,806 $ - $ (3,711) $ - $ - $ - $ 1,095 32 MIT REPORT OF THE TREASURER 2016

I. Retirement Benefits (continued)

The plans have made investments in various long-lived partnerships, and in other cases have entered into contractual arrangements that may limit their ability to initiate redemptions due to notice periods, lock-ups, and gates. Details on estimated remaining life and current redemption terms and restrictions by asset class and type of investment for both the defined benefit plan and postretirement welfare benefit plan are provided in Table 29 below as of]une 30, 2016 and 2015.

Table 29. Unfunded Commitments 2016 2015 Unfunded 11 Unfunded Redemption Redemption (in thousands ofdollars) Commitments Fair Value Commitments Fair Value Terms Restrictions Defined Benefit Plan Equity:

Domestic ......... $ 403 $ 407,180 $ 433 $ 504,042 Redemption terms range from 4 Lock-up months with 60 days notice to provisions range 25 months with 3 months notice from none to 26 and 2 closed-end funds not months; 2 funds available for redemption are not redeemable Foreign .......... 54,781 792,305 12,710 809,825. Redemption terms range from Lock-up daily with 28 days notice to 13 provisions range months with 3 months notice from none to 44 and I closed-end fund not months; I fund is available for redemption not redeemable Absolute return ... 39,851 352,188 65,457 334,619 Redemption terms range from Lock-up 4 months with 30 days notice provisions range to closed-end funds that are not from none to not redeemable redeemable Private .......... 318,779 661,125 232,650 629,042 Closed-end funds not available Not redeemable for redemption Real estate . . . . . . . . . . 150,325 277,671 133,612 273,468 Closed-end funds not available Not redeemable for redemption Real assets . . . . . . . . . . 38,282 119,031 30,602 133,386 Redemption terms range from Lock-up 9 months with 1 day notice to provisions range closed-end funds which are not from none to not redeemable redeemable Total .............. $ 602,421 $ 2,609,500 $ 475,464 $ 2,684,382 Postretirement Welfare Benefit Plan Equity:

Domestic ........ $ 45 $ 75,578 $ 48 $ 79,074 Redemption terms range from Lock-up 4 months with 60 days notice provisions range to 25 months with 3 months from none to 26 notice and I closed-end fund not months; 1 fund is available for redemption not redeemable Foreign ...... ; ... 8,269 180,830 2,000 194,610 Redemption terms range from Lock-up 45 days with JO days notice to provisions range 13 months with 3 months notice from none to 44 with I closed-end fund not months; 1 fund is available for redemption not redeemable Absolute return ... 3,852 67,327 7,393 68,771 Redemption terms range from Lock-up 4 months with 30 days notice provisions range to closed-end funds that are not from none to not redeemable redeemable Private .......... 46,563 60,008 30,742 48,593 Closed-end funds not available Not redeemable for redemption Real estate .......... 19,460 22,968 16,083 20,362 Closed-end funds not available Not redeemable for redemption Real assets .......... 5,586 4,574 3,889 3,763 Closed-end funds not available Not redeemable for redemption Total ...........**. $ 83,775 $ 411,285 $ 60,155 $ 415,173 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33

I. Retirement Benefits (continued)

Target allocations and weighted-average asset allocations of the investment portfolio for the MIT defined benefit plan and postretirement welfare benefit plan at June 30, 2016 and 2015 are shown in Table 30 below.

Table 30. Plan Investment Allocation Defined Benefit Plan Postretirement Welfare Benefit Plan 2016Target 2016Target Allocation 2016 2015 Allocation 2016 2015 Cash and cash equivalents ......... 0-10% 5% 6% 0-10% 6% 3%

Fixed income ................... 3-13% 10% 9% 10-20% 14% 13%

Equities ....................... 33.5-83.5% 62% 63% 37-87% 63% 66%

Marketable alternatives ........... 7.5-17.5% 11% 10% 9.5-19.5% 12% 13%

Real assets ..................... 1-11% 4% 4% 0-5.5% 1% 1%

Real estate ..................... 5-15% 8% 8% 0-8% 4% 4%

Total ......................... 100% 100% 100% 100%

Table 31 below summarizes the notional exposure and net ending fair value of derivative financial instruments held by the MIT defined benefit plan at June 30, 2016 and 2015. Refer to Note C for a detailed discussion regarding derivative financial instruments.

Table 31. Derivative Financial Instruments for Defined Benefit Plan Notional Exposure Net Ending Fair Net Gain (in thousands ofdollars) Long Short Value Amount (Loss)

Fiscal Year 2016 Equity instruments:

Equity options .......................... $ 24 $ $ 4 $

Total equity instruments .................... 24 4 Fixed income instruments:

Fixed income futures .................... 5,900 (900) 44 Total fixed income instruments ............... 5,900 (900) 44 Commodity and index instruments: ...........

Equity index swaps ...................... (28,043) 773 12,736 Total commodity and index instruments ........ (28,043) 773 12,736 2016Total .............................. $ 5~24 $ (28~43} $ 821 $ 122736 Fiscal Year 2015 Equity instruments:

Equity options .......................... $ $ $ $

Total equity instruments ....................

Fixed income instruments:

Fixed income futures .................... 2,500 (1,000) 13 (23)

Total fixed income instruments ............... 2,500 (1,000) 13 (23)

Commodity and index instruments:

Equity index swaps ...................... (50,851) 1,209 (10,835)

Total commodity and index instruments ........ (50,851) 1,209 (10,835) 2015Total .............................. $ 2~00 $ {512851} $ 1J22 $ {102858}

34 MIT REPORT OF THE TREASURER 2016

I. Retirement Benefits (continued)

Counterparty risk may be partially or completely mitigated To the extent amounts due from the counterparties are not fully through master netting agreements included within an collateralized contractually or otherwise, there is the risk of loss International Swap and Derivatives Association, Inc. ("ISDA") from counterparty non-performance. As ofJune 30, 2016, the Master Agreement between the Plan and each of its counterparties. defined benefit plan has elected not to offset recognized assets and The ISDA Master Agreement allows the Plan to offset with the liabilities. The following tables, 32 and 33, summarize the effect counterparty certain derivative instruments' payables and/or that offsetting of recognized assets and liabilities could have on the receivables with collateral held with each counterparty. investments held by the defined benefit plan.

Table 32. Offsetting of Financial and Derivative Assets and Liabilities 2016 2015 Cash/Treasury II Cash/Treasury Collateral Collateral Gross Posted/ Net Gross Posted/ Net (in thousands ofdollars) Amount (Received) Amount Amount (Received) Amount Assets Counterparty A ................ $ 773 $ (974) $ (201) $ 1,209 $ (2,950) $ (l,741)

Total assets ................... $ 773 $ (974) $ (201) $ 1,209 $ (2,950) $ (1,741)

Liabilities Counterparty A. . . . . . . . ........ $ $ - $ $ $ - $

Total liabilities ................

Total assets and liabilities, net . ... $ 773 $ (974) $ (201) $ 1,209 $ (2,950) $ (1,741)

Maximum risk ofloss from counterparty credit risk on over- the terms in the ISDA Master Agreements. This would cause an the-counter derivatives is generally the aggregate unrealized accelerated payment of net liability, if owed to the counterparty.

appreciation in excess of any collateral pledged by the Table 33 below reconciles the net recognized assets and liabilities, counterparty. ISDA Master Agreements allow the Plan or the as shown in Table 32, to derivative financial instruments as shown counterparties to an over-the-counter derivative to terminate the in Table 27A.

contract prior to maturity in the event either party fails to meet Table 33. Reconciliation of Financial and Derivative Assets and Liabilities (in thousands ofdollars) 2016 2015 Derivatives from Table 27A .............................................. . $ 821 $ 1,222 Fixed income futures ................................................... . (44) (13)

Equity options ........................................................ . (4)

Total ............................................................... . $ 773 $ . 1,209

=

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35

I. Retirement Benefits (continued)

Expected Future Benefit Payments Table 34 below reflects total expected benefit payments for the defined benefit and postretirement welfare benefit plans over the In fiscal 2017, MIT expects to make contributions of$33.l next ten years. These payments have been estimated based on the million and $4.4 million to its defined benefit pension plan same assumptions used to measure MIT's benefit obligations at and postretirement welfare benefit plan, respectively. These June 30, 2016.

contributions have been estimated based on the same assumptions used to measure MIT's benefit obligations at June 30, 2016.

Table 34. Expected Future Benefit Payments (in thousands ofdollars) Pension Benefits Other Benefits*

2017 ......................................................... . $ 140,825 $ 25,516 2018 ......................................................... . 151,164 27,584 2019 ......................................................... . 158,248 29,341 2020 ......................................................... . 165,653 30,831 2021 ......................................................... . 173,511 32,361 2022-2026 .................................................... . 980,675 184,757

• Other Benefits reflects the total net benefits expected to be paidfrom the plans (e.g., gross benefit reimbursement ojfiet by retiree contributions).

36 MIT REPORT OF THE TREASURER 2016

J. Components of Net Assets and Endowment Table 35 below presents the total net assets composition as of endowment and invested with the endowment funds. A large June 30, 2016. The amounts listed in the unrestricted category component of temporarily restricted net assets in other invested under endowment funds are those gifts and other funds received funds is pledges, the majority of which will be reclassified to over the years that MIT designated as funds functioning as unrestricted net assets when cash is received.

Table 35. Total Net Asset Composition 2016 Temporarily Permanently (in thousands ofdollars) Unrestricted Restricted Restricted Total 2015 Total Endowment Funds General purpose . . . . . . ............. $ 870,064 $ 1,065,097 $ 236,540 $ 2,171,701 $ 2,243,829 Departments and research . . . . . . ...... 611,592 1,029,438 635,170 2,276,200 2,331,345 Library .......................... 11,619 25,313 20,283 57,215 51,810 Salaries and wages . . . . .............. 535,916 2,557,316 717,217 3,810,449 3,930,799 Graduate general . . . . . .............. 86,096 148,119 105,080 339,295 344,361 Graduate departments . . . . . . . . ....... 138,416 349,490 278,728 766,634 744,126 Undergraduate .................... 219,247 1,088,344 369,167 1,676,758 1,724,986 Prizes ................. *........... 8,430 30,567 20,600 59,597 61,885 Miscellaneous . . . . . . . . . . . . . . . . . .... 1,117,010 217,395 326,435 1,660,840 1,664,495 Investment income held for distribution 362,826 362,826 377,107 Endowment funds before pledges ...... 3,961,216 6,511,079 2,709,220 13,181,515 13,474,743 Pledges .......................... 251,521 251,521 213,196 Total endowment funds . ............ 3,961,216 6,511,079 2,960,741 13,433,036 13,687,939 Other Invested Funds Student loan funds ................. 19,923 18,397 38,320 38,314 Building funds ..................... 51,657 60,326 111,983 103,990 Designated purposes:

Departments and research . . ....... 343,927 1,024 344,951 355,371 Other purposes .................. 411,278 13,982 425,260 460,264 Life income funds . . . . . . . . . . . ....... 4,913 32,291 105,021 142,225 146,927 Pledges .......................... 357,544 357,544 344,899 Other funds available for current expenses 1,156,331 234,576 1,390,907 1,671,830 Funds expended for educational plant ... 684,855 684,855 697,039 Total other invested funds ........... 2,672,884 699,743 123,418 3,496,045 3,818,634 Noncontrolling interests ............. 205,421 205,421 232,415 Total net assets .................... $ 6,839,521 $ 7,210,822 $ 3,084,159 $ 17,134,502 $ 17,738,988 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37

J. Components of Net Assets and Endowment (continued)

MIT's endowment consists of approximately 3,800 individual this interpretation, MIT has not changed the way permanently funds established for a variety of purposes and includes both restricted net assets are classified. (See Note A for further infor-donor-restricted endowment funds and funds designated by the mation on net asset classification.) The remaining portion of the Executive Committee of the MIT Corporation (Executive Com- donor-restricted endowment fund that is not classified in perma-mittee) to function as endowment, as shown in Table 36 below. nently restricted net assets is classified as temporarily restricted As required by GAAP, net assets associated with endowment net assets until those amounts are appropriated for expenditure funds, including funds designated by the Executive Committee in a manner consistent with the standard of prudence prescribed to function as endowments, are classified and reported based on by UPMIFA. In accordance with UPMIFA, the Executive Com-the existence or absence of donor-imposed restrictions. mittee considers the following factors in making a determination The Executive Committee has interpreted the Massachusetts- to appropriate or accumulate endowment funds:

enacted version of Uniform Prudent Management oflnstitu- i. the duration and preservation of the fund tional Funds Act (UPMIFA) as allowing MIT to appropriate for ii. the purposes of MIT and the endowment fund expenditure or accumulate so much of an endowment fund as iii. general economic conditions MIT determines is prudent for the uses, benefits, purposes, and iv. the possible effects of inflation and deflation duration for which the endowment fund is established, subject v. the expected total return from income and the to the intent of the donor as expressed in the gift instrument. appreciation of investments Unless stated otherwise in the gift instrument, the assets in an vi. other resources of MIT endowment fund shall be donor-restricted assets until appropri- vii. the investment policies of MIT ated for expenditure by the Executive Committee. As a result of Table 36. Endowment Net Asset Composition by Type of Fund Temporarily Permanently (in thousands ofdollars) Unrestricted Restricted Restricted Total Fiscal Year 2016 Donor-restricted endowment funds ............. $ (395) $ 6,511,079 $ 2,960,741 $ 9,471,425 Board-designated endowment funds ............ 3,961,611 3,961,611 totalertdoWnientfiittds ..................... $ 3,96i,216 $ 6;511,Q79 $ 2,960;741 $ 13,433,036 Fiscal Year 2015 Donor-restricted endowment funds ............. $ $ 6,889,791 $ 2,754,618 $ 9,644,409 Board-designated endowment funds ............ 4,043,530 4,043,530 TotalendoWIDentfunds ..................... $ 4,043,530 $ 6,889,791 $ 2,754,618 $ 13,687,939 Underwater Endowment Funds From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the value of the initial and subsequent donor gift amounts (underwater). When underwater endowment funds exist, they are classified as a reduc-tion of unrestricted net assets. Total underwater endowment funds reported in unrestricted net assets were $0.4 million as ofJune 30, 2016. There were no underwater endowment funds reported in unrestricted net assets as ofJune 30, 2015.

38 lyfIT REPORT OF THE TREASURER 2016

J. Components of Net Assets and Endowment (continued)

Table 37 below reflects changes in unrestricted, temporarily restricted, and permanently restricted endowment net assets for fiscal year 2016 and 2015, respectively.

Table 37. Changes in Endowment Net Assets Temporarily Permanently (in thousands ofdollars) Unrestricted Restricted Restricted Total Fiscal Year 2016 Endowment net assets, July 1, 2015 ................ $ 4,043,530 $ 6,889,791 $ 2,754,618 $ 13,687,939 Investment return:

Investment income ........................... 20,731 43,822 11,093 75,646 Net appreciation (realized and unrealized) ......... 4,586 (22,820) 22,442 4,208 Total investment return .......................... 25,317 21,002 33,535 79,854 Contributions ................................. 140,012 140,012 Appropriation of endowment assets for expenditure .... (178,367) (402,378) (7,963) (588,708)

Other changes:

Underwater gain adjustment ................... (395) 395 Net asset reclassifications and transfers to create board-designated endowment funds ................. 71,131 2,269 40,539 113,939 Endowment net assets, June 30, 2016 . ............. $ 3,961,216 $ 6,511,079 $ 2,960,741 $ 13,433,036 Fiscal Year 2015 Endowment net assets, July l, 2014 ................ $ 3,709,574 $ 6,169,847 $ 2,710,357 $ 12,589,778 Investment return:

Investment income ........................... 29,346 63,752 7,738 100,836 Net appreciation (realized and unrealized) ......... 448,256 1,029,171 (100,887) 1,376,540 Total investment return .......................... 477,602 1,092,923 (93,149) 1,477,376 Contributions ................................. 88,376 88,376 Appropriation of endowment assets for expenditure .... (165,768) (375,259) (4,834) (545,861)

Other changes:

Underwater gain adjustment ...................

Net asset reclassifications and transfers to create board-designated endowment funds ................. 22,122 2,280 53,868 78,270 Endowment net assets, June 30, 2015 . ............. $ 4,043,530 $ 6,889,791 $ 2,754,618 $ 13,687,939 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39

J. Components of Net Assets and Endowment (continued)

Endowment Investment and Spending Policies million at June 30, 2016 and $1,652.2 million at June 30, 2015.

Certain endowed assets are also maintained in separately invested MIT's investment policy is based on the primary goal of maxi-funds. These separately invested funds totaled $214.5 million mizing return relative to appropriate risk such that performance and $176.3 million at June 30, 2016 and 2015, respectively.

exceeds appropriate benchmark returns at the total pool, asset class, and individual manager levels. To achieve its long-term MIT has adopted spending policies designed to provide a rate-of-return objectives, MIT relies on a total return strategy predictable stream of funding to programs supported by its in which investment returns are realized through both capital investments while maintaining the purchasing power of assets.

appreciation (realized and unrealized gains) and current yield For pooled investments, the Executive Committee of the Cor-(interest and dividends). MIT targets a diversified asset alloca- poration votes to distribute funds for operational support from tion that places greater emphasis on equity-based investments to general investments. In accordance with MIT's spending policy, achieve its long-term objectives within prudent risk constraints. these distributions are funded from both investment income and market appreciation. The distribution rates were $69.29 and The Institute's primary investment pool, Pool A, is principally

$65.33 per Pool A unit as of June 30, 2016 and 2015, respec-for endowment and funds functioning as endowment. Pool A tively. For separately invested endowment funds, only the annual operates as a mutual fund with units purchased and redeemed investment income generated is distributed for spending.

based on the previous month's unit market value. The total market value of Pool A was $14,448.3 million at June 30, 2016 and $14,921.5 million at June 30, 2015. Pool A included non-endowed operating and life income funds totaling $1,479.2 40 MIT REPORT OF THE TREA:SURER 2016

pwc Report of the Independent Auditors To the Risk and Audit Committee of the Massachusetts Institute of Technology:

We have audited the accompanying consolidated financial statements, as listed in the accompanying table of contents, of the Massachusetts Institute of Technology (the "Institute"), which comprise the consolidated statements of financial position as of June 30, 2016 and 2015 and the related consolidated statement of activities for the year ended June 30, 2016, and statements of cash flows for the years ended June 30, 2016 and 2015.

Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the 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 the 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 our 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, we consider internal control relevant to the Institute'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 Institute'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.

Opinion In our opinion, the consolidated financial statements, as listed in the accompanying table of contents, present fairly in all material respects, the financial position of the Massachusetts Institute of Technology at June 30, 2016 and 2015 and the changes in their net assets for the year ended June 30, 2016 and their cash flows for the years ended June 30, 2016 and 2015 in accordance with accounting principles generally accepted in the United States of America.

Other Matter We previously audited the consolidated statement of financial position as of June 30, 2015, and the related consolidated statement of activities, and cash flows for the year then ended (not presented herein), and in our report dated September 11, 2015, we expressed an unmodified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying summarized financial information as of June 30, 2015 and for the year then ended is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived.

September 9, 2016 1---------------------------------------------------------------------

1 PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, MA 02210 T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us REPORT OF THE INDEPENDENT AUDITORS 41

Massachusetts Institute of Technology Five-Year Trend Analysis (Unaudited} - Financial Highlights (in thousands ofdollars) 2016 2015 2014 2013 2012 Financial Position Investments, at fair value ................. $ 17,478,438 $ 17,754,155 $ 16,459,944 $ 13,912,100 $ 12,847,866 Land, buildings, and equipment, at cost less accumulated depreciation ............... 3,092,429 2,822,312 2,624,271 2,516,264 2,497,711 Borrowings, net of unamortized issuance costs 2,892,093 2,904,559 2,903,586 2,417,483 2,448,649 Total assets ........................... 22,294,378 22,105,574 20,574,670 17,791,108 16,727,405 Total liabilities ......................... 5,159,876 4,366,586 4,259,178 3,658,234 3,928,061 Unrestricted net assets ................... 6,839,521 7,303,673 6,754,956 5,775,618 4,888,952 Temporarily restricted net assets ........... 7,210,822 7,553,447 6,718,225 5,644,291 5,297,554 Permanently restricted net assets ........... 3,084,159 2,881,868 2,842,311 2,712,965 2,612,838 Total net assets ........................ 17,134,502 17,738,988 16,315,492 14,132,874 12,799,344 Total endowment funds before pledges ...... 13,181,515 13,474,743 12,425,131 10,857,976 10,149,564 Principal Sources of Revenues Tuition and similar revenues .............. $ 635,424 $ 612,101 $ 595,801 $ 568,957 $ 527,702 Research revenues:

Campus direct ...................... 513,991 482,563 475,382 473,220 471,155 Campus indirect ..................... 187,426 183,020 188,136 188,742 183,200 Lincoln Laboratory direct .............. 908,506 844,588 791,292 860,190 819,645 Lincoln Laboratory indirect ............ 47,488 34,739 37,367 30,783 25,263 SMART direct ...................... 32,416 31,620 31,519 47,332 28,311 SMART indirect..................... 402 117 98 193 276 Gift, bequests, and pledges ............... 469,162 493,690 452,655 325,018 433,424 Net gain on investments and other assets ..... 242,553 1,651,600 2,152,933 1,164,164 738,308 Investment income and distributions ........ 736,193 675,744 634,454 604,753 554,627 Principal Purposes of Expenditures Total operating expenditures .............. $ 3,349,899 $ 3,111,119 $ 2,918,517 $ 2,908,577 $ 2,744,586 General and administrative ............... 858,441 763,680 713,103 681,505 604,320 Instruction and unsponsored research ....... 854,595 811,495 777,382 692,032 673,851 Direct cost of sponsored research current dollars ............................. 1,479,158 1,386,334 1,283,189 1,397,857 1,335,638 Direct cost of sponsored research constant dollars (2012 = 100) ................... 1,410,410 1,332,962 1,242,770 1,374,972 1,335,638 42 MIT REPORT OF THE TREASURER 2016

Massachusetts Institute of Technology Five-Year Trend Analysis (Unaudited)- Financial Highlights (continued)

(in thousands ofdollars) 2016 2015 2014 2013 2012 Research Revenues Campus Federal Government sponsored:

Health and Human Services ........... $ 113,522 $ 116,469 $ 115,075 $ 119,908 $ 133,687 Department of Defense . . . . . . . ....... 131,625 125,854 122,761 127,967 117,458 Department of Energy ............... 84,419 81,528 88,451 88,988 90,940 National Science Foundation .......... 82,161 78,953 78,979 79,255 81,487 National Aeronautics and Space Administration 49,664 41,740 32,062 29,835 30,204 Other Federal . . . . . . . . . . . . . . . . . . . . . . 15,738 15,435 17,610 19,994 18,807 Total Federal ........................ 477,129 459,979 454,938 465,947 472,583 Non-Federally sponsored:

State/local/foreign governments ........ 28,495 27,951 28,967 33,429 38,273 Nonprofits ........................ 84,015 78,667 72,118 58,227 48,373 Industry ......................... 128,309 119,238 112,379 106,447 109,745 Total non-Federal .................... 240,819 225,856 213,464 198,103 196,391 Total Federal and non-Federal ........... 717,948 685,835 668,402 664,050 668,974 F&A and other adjustments ............ (16,531) (20,252) (4,884) (2,088) (14,619)

Total campus ........................ 701,417 665,583 663,518 661,962 654,355 Lincoln Laboratory Federal Government sponsored .......... 920,272 886,637 809,011 882,462 844,202 Non-Federally sponsored ............... 6,355 3,609 2,333 1,622 2,023 F&A and other adjustments ............ 29,367 (10,919) 17,315 6,889 (1,317)

Total Lincoln Laboratory ............... 955,994 879,327 828,659 890,973 844,908 SMART<AJ Non-Federally sponsored ............... 32,818 31,737 31,617 47,525 28,587 Total SMART ....................... 32,818 31,737 31,617 47,525 28,587 Total research revenues ............... $ 1,690,229 $ 1,576,647 $ 1,523,794 $ 1,600,460 $ 1,527,850 (AJ The amounts represent research that has predominantly taken place in Singapore.

FIVE-YEAR TREND ANALYSIS 43

Massachusetts Institute of Technology Five-Year Trend Analysis (Unaudited) - Financial Highlights (continued) 2016 2015 2014 2013 2012 Students Undergraduate:

Full-time ...................... 4,492 4,476 4,499 4,480 4,354 Part-time ...................... 35 36 29 23 30 Undergraduate applications:

Applicants ..................... 18,306 18,356 18,989 18,109 17,909 Accepted ...................... 1,519 1,447 1,548 1,620 1,742 Acceptance rate . . . . . . . .......... 8% 8% 8% 9% 10%

Enrolled ....................... 1,106 1,043 1,115 1,135 1,126 Yield .......................... 73% 72% 72% 70% 65%

Freslunen ranking in the top 10% of their class 98% 97% 99% 98% 97%

Average SAT Scores (math and verbal) 1,493 1,500 1,492 1,481 1,472 Graduate:

Full-time ...................... 6,689 6,630 6,639 6,537 6,342 Part-time ...................... 115 177 134 149 168 Graduate applications:

Applicants ..................... 23,750 24,468 24,029 22,588 22,219 Accepted ...................... 3,307 3,718 3,320 3,504 3,306 Acceptance rate ................. 14% 15% 14% 16% 15%

Enrolled ....................... 2,165 2,441 2,163 2,229 2,118 Yield .......................... 65% 66% 65% 64% 64%

Tuition (in dollars)

Tuition and fees .................... $ 46,704 $ 45,016 $ 43,498 $ 42,050 $ 40,732 Average room and board ............. 13,730 13,224 12,744 12,188 11,775 Student Support (in thousands ofdollars)

Undergraduate tuition support ........ $ 112,902 $ 107,148 $ 103,076 $ 101,831 $ 102,081 Graduate tuition support ............. 258,444 247,361 240,022 226,158 215,702 Fellowship stipends ................. 38,731 38,759 38,792 36,173 33,263 Student loans ...................... 7,263 8,348 9,095 9,669 9,556 Student employment ................ 110,392 105,261 99,890 96,446 90,135 Total student support .............. $ 527,732 $ 506,877 $ 490,875 $ 470;277 $ 450,737 Faculty and Staff (including unpaid appointments)

Faculty .......................... 1,036 1,021 1,030 1,022 1,018 Staff and fellows ................... 14,732 14,307 13,787 13,416 13,109 44 MIT REPORT OF THE TREASURER 2016

Report of the Treasurer Massachusetts for the year ended June 30, 2016 l'lil Institute of Technology