ML16363A364
| ML16363A364 | |
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| Site: | 07000113, Pennsylvania State University |
| Issue date: | 12/19/2016 |
| From: | Pennsylvania State Univ, University Park, PA |
| To: | Office of Nuclear Material Safety and Safeguards |
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Text
ATTACHMENT A-Penn State University Audited Financial Statements Document transmitted contains confidential financial information - withhold under 10 CFR 2.390.
When separated from enclosures this document is uncontrolled.
Penn State Audited Financial Statements The Pennsylvania State University Fiscal Year Ended June 30, 2016
THE PENNSYLVANIA STATE UNIVERSITY UNIVERSITY OFFICERS as of October 21, 2016 ERIC J. BARRON President STEPHEN S. DUNHAM Vice President and General Counsel DAVID J. GRAY Senior Vice President for Finance and Businessffreasurer A. CRAIG HILLEMEIER Chief Executive Officer, Penn State Milton S.
Hershey Medical Center; Senior Vice President for Health Affairs, Penn State University; and Dean, Penn State College of Medicine NICHOLAS P. JONES Executive Vice President and Provost RODNEY P. KIRSCH Senior Vice President for Development and Alumni Relations
CONTENTS Operating Revenues by Source 2 Operating Expenses by Function 3 Letter of Transmittal 5 Independent Auditors' Report 6 Consolidated Financial Statements:
Statements of Financial Position 8 Statements of Activities 10 Statements of Cash Flows 12 Notes to Consolidated Financial Statements 13 I
__J
OPERATING REVENUES BY SOURCE ($5.8 billion)
For the Year Ended June 30, 2016
($ in millions)
Government grants and contracts
$596.l (10.4%)
Auxiliary enterprises S445.6 Tuition and fees, net of discount
$1,727.8 (30.0%)
Commonwea1th of Pennsylvania appropriation
$294.9 (5.1%)
Private gifts, grants and contracts
$248.3 (4.3%)
Endowment spending and other investment income
$182.7 (3.2%)
Recovery of indirect costs
$163.3 (2.8%)
sources
$109.5 (1.9%)
Health System Sl,996.S (34.6°/.)
2
OPERATING EXPENSES BY FUNCTION ($5.4 billion)
For the Year Ended June 30, 2016
($ in millions)
Research
$799.2 (14.7%)
Auxiliary enterprises
$416.6 (7.7%)
Instruction Academic support
$1,326.6 $405.2 (24.4%) (7.4%)
Institutional support
$371.2 (6.8%1)
(3.5%)
Health System Sl,843.2 (33.9o/o) 3
(814) 865-1355 PennState FAX: (814) 863-0701 Joseph J._ Doncsecz The Pennsylvania State University Associate Vice President for Finance 408 Old Main and Corporate Controller University Park, PA 16802-1505 October 21, 2016 Dr. Eric J. Barron, President The Pennsylvania State University
Dear Dr. Barrqn:
The audited consolidated financial statements of The Pennsylvania State University and subsidie;tries (the "University") for the fiscal years ended June 30, 2016 arid 2015 are presented on the accompanying pages, These financial statements represent a complete and permanent record of t_he of finances th_e University as of and for the years then ended. .
These financial statements have been audited by Deloitte & Touche LLP, independent auditors, and their report has been made a part of this record.
Respectfully submitted, HJ;~*
Joseph J. Doricsecz Associate Vice President for Finance and Corporate Controller
- b>JY4 David J. Gray Senior Vice President for Finance and Business, and Treasurer "Penn State is committed to affirmative action, equai opportunity and the diversity of its workforC(l."
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Deloitte & Touche LLP Deloitteo 1700 Market Street Philadelphia, PA 19103-3984 USA Tel: +1 215 246 2300 Fax: +12155692441 www.deloitte.com INDEPENDENT AUDITORS' REPORT To the Board ofTrust~es of The Pennsylvania State University University Park, Pennsylvania We have audited the accompanying consolidated financial statements of The Pennsylvania State University and its subsidiaiies (the "University"), which comprise the consolidated statements of financial position as of June 30, 2016 and 2015, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility Our responsibilitY is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the University's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University's internal control. Accordingly, we express no such opinion. An audit also include;;
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.
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Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the University as of June 30, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. '-
October 21, 2016 7
THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ASSETS JUNE 30, 2016 AND 2015 (in thousands)
June 30, 2016 June 30, 2015 Current assets:
Cash and cash equivalents $ 1,395,514 $ 859,009 Short-term investments 371,363 383,756 Deposits held by bond trustees 109,739 61,262 Deposits held for others 10,240 9,622 Accounts receivable, net of allowances of $83,942 and $72, 190 496, 100 554,309 Contributions receivable, net 54,565 56,058 Loans to students, net of allowances of $419 and $481 9,304 6,105 Inventories 42,472 . 36,745 Prepaid expenses and other assets 110,995 194,395 Total current assets 2,600,292 2,161,261 Noncurrent assets:
Deposits held by bond trustees 21,348 448 Contributions receivable, net 124,988 - 134,924 Loans to students, net of allowances of $2, 107 and $2,675 51,602 55,038 Total investment in plant, net 4,590,311 4, 188,312 Beneficial interest in perpetual trusts 14,558 15,471 Investments 5,279,950 5,684,125 Other assets 97,932 74,807 Total noncurrent assets 10,180,689 10,153,125 Total assets $12,780,981 $12,314,386 See notes to consolidated financial statements.
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THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION LIABILITIES AND NET ASSETS JUNE 30, 2016 AND 2015 (in thousands)
June 30, 2016 June 30, 2015 Current liabilities:
Accounts payable and other accrued expenses $ 596,027 $ 619,502 Deferred revenue 314,682 285,880 Long-term debt 40,729 37,071 Present value of annuities payable 6,361 5,594 Accrued postretirement benefits 52,665 53,857 Total current liabilities 1,010,464 1,001,904 Noncurrent liabilities:
Deposits held in custody for others 35,710 32,422 Deferred revenue 1,477 1,939 Long-term debt 1,130,547 978,971 Present value of annuities payable . 47,498 43,127 Accrued postretirement benefits 2,095,857 2,037,229 Refundable United States Government student loans 47,687 47,105 Other liabilities 204,797 198,191 Total noncurrent liabilities 3,563,573 3,338,984 Total liabilities 4,574,037 4,340,888 Net assets:
Unrestricted -
Undesignated 1,658 1,605 Designated for specific purposes 3,144,389 3,142,477 Net investment in plant 2,987,299 2,733,135 Total unrestricted - The Pennsylvania State University 6,133,346 5,877,217 Noncontrolling interest 3,687 1,560 Total unrestricted 6,137,033 5,878,777 Temporarily restricted 551,073 660,614 Permanently restricted 1,518,838 1,434, 107 Total net assets 8,206,944 7,973,498 Total liabilities and net assets . $12,780,981 $12,314,386 See notes to consolidated financial statements.
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THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2016 (in thousands)
Temporarily Permanently Unrestricted Restricted Restricted Total Operating revenues and other support:
Tuition and fees, net of discounts of $178,312 $ 1,727,826 $ $ $ 1,727,826 Commonwealth of Pennsylvania -
Appropriations 294,949 294,949 Special contracts 74,239 74,239 Department ot'General Services projects 41,406 41,406 United States Government grants and contracts 480,463 480,463 Private grants and contracts 169,980 169,980 Gifts and pledges 66,824 11,507 78,331 Endowment spending 95,439 95,439 Other investment income 85,336 1,937 87,273 Sales and services of educational activities 76,051 76,051 Recovery of indirect costs 163,302 163,302 Auxiliary enterprises 445,562 445,562 Health System revenue 1,996,546 1,996,546 Other sources 33,442 33,442 Net assets released from restrictions 12,220 (12,220)
Total operating revenues and other support 5,763,585 1,224 5,764,809 Operating expenses:
Educational and general -
Instruction 1,326,628 1,326,628 Research 799,237 799,237 Public service 87,440 87,440 Academic support 405,207 405,207 Student service's 193,891 193,891 Institutional support 371,203 371,203 Total educational and general 3,183,606 3, 183,606 Auxiliary enterprises 416,600 416,600 Health System expense 1,843, 196 1,843, 196 Total operating expenses 5,443,402 5,443,402 Increase in net assets from operating activities 320,183 1,224 321,407 Nonoperating activities:
Gifts and pledges 75,317 75,317 Current year investment returns (25,789) (114,512) 10,020 (130,281)
Endowment appreciation utilized (69,619) (69,619)
Changes in funds held by others in perpetuity 3 (931) (928)
Acquisition of restricted net assets 4,730 10,862 15,592 Write-offs and disposals of assets (10,287) (10,287)
Nonperiodic change in postretirement benefit plan 41,641 41,641 Actuarial adjustment on annuities payable (986) (10,537) (11,523)
Increase (decrease) in net assets from nonoperating activities (64,054) (110,765) 84,731 (90,088) lncre<ise (decrease) in net assets *The Pennsylvania State University 256,129 (109,541) 84,731 231,319 Noncontrolling interest:
Excess of revenues over expenses 2,127 2,127 Increase in net assets
- noncontrolling interest 2,127 2,127 Increase (decrease) in total net assets 258,256 (109,541) 84,731 233,446 Net assets at the beginning of the year 5,878,777 660,614 1,434,107 7,973,498 Net assets at the end of the year $ 6,137,033 $ 551,073 $ 1,518,838 $ 8,206,944 See notes to consolidated financial statements.
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THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2015 (in thousands)
Temporarily Permanently Unrestricted Restricted Restricted Total Operating revenues and other support:
Tuition and fees, net of discounts of $168,455 $ 1,696,729 $ $ $ 1,696,729 Commonwealth of Pennsylvania -
Appropriations 277,931 277,931 Special contracts 64,221 64,221 Department of General Services projects 57,631 57,631 United States Government grants and contracts 462,089 462,089 Private grants and contracts 178,258 178,258 Gifts and pledges 86,017 158 . 86,175 Endowment spending 83,958 83,958 Other investment income 114,259 1,869 116,128 Sales and services of educational activities 70,970 70,970 Recovery of indirect costs 149,338 149,338 Auxiliary enterprises 427'.,782 427,782 Health System revenue 1,596,230 1,596,230 Other sources 25,960 25,960 Net assets released from restrictions 4,355 (4,355)
Total operating revenues and other support . 5,295,728 (2,328) 5,293,400 Operating expenses:
Educational and general -
Instruction 1,272,778 1,272,778 Research 765,864 765,864 Public service 77,806 77,806 Academic support 357,962 357,962 Student services 182,957 182,957 Institutional support 369,967 369,967 Total educational and general 3,027,334 3,027,334 Auxiliary enterprises 380,711 380,711 Health System expense 1,494,296 1,494,296 Total operating expenses 4,902,341 4,902,341 Increase (decrease) in net assets from operating activities 393,387 (2,328) 391,059 Nonoperating activities:
Gifts and pledges 92,396 92,396 Current year investment returns (8,892) (29,299) 11,680 (26,511)
Endowment appreciation utilized (57,445) (57,445)
Changes in funds heid by others in perpetuity 207 (107) 100 Write-offs and disposals of assets (5,645) (5,645)
Nonperiodic change in postretirement benefit plan (101,391) (101,391)
Actuarial adjustment on annuities payable (2,206) (983) (3,189)
Increase (decrease) in net assets from nonoperating activities (173,373) (31,298) 102,986 (101,685)
Increase (decrease) in net assets - The Pennsylvania State University 220,014 (33,626) 102,986 289,374 Noncontrolling interest:
Excess of revenues over expenses 599 599 Increase in net assets - noncontrolling interest 599 599 Increase (decrease) in total net assets 220,613 (33,626) 102,986 289,973 Net assets at the beginning of the year 5,658,164 694 240 1,331,121 7,683,525 Net assets at the end of the year $ 5,878,777 $ 660,614 $ 1,434,107 $ 7,973,498 See notes to consolidated financial statements.
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THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED .JUNE 30, 2016 AND 2015 (in thousands)
June 30, 2016 June 30, 2015 Cash flows from operating activities:
Increase in net assets $ 233,446 $ 289,973 Adjustments to reconcile change in net assets to net cash provided by operating activities -
Actuarial adjustment on annuities payable* 11,523 3,282 Contributions restricted for long-term investment (100,877) (117,825)
Interest and dividends restricted for long-term investment (75,605) (25,819)
Net realized and unrealized losses (gains) on long-term investments 83,251 . (22,856)
Depreciation expense 331,193 295,734 Amortization expense (371) (119)
Loss (gain) on early extinguishment of debt 6,405 (1.722)
Write-offs and disposals of assets 11,043 5,203 Contributions of land, buildings and equipment (3,946) (2,528)
Buildings and equipment provided by Pennsylvania Department of General Services (95)
Contribution to government student loan funds 154 154 Provision for bad debts 68,655 53,341 (Increase) decrease in deposits held for others (618) 47,392 Increase in receivables (35,868) (32,552)
Increase in inventories (1,317) (1,412)
Increase in prepaid expenses and other assets (44,735) (143,214)
Increase (decrease) in accounts payable and other accrued expenses 39,572 (10,894)
Increase in deferred revenue 25,390 15,511 Increase in accrued postretirement benefits 57,436 190,680 Net cash provided by operating activities 604,636 542,329 Cash flows from investing activities:
Purchase of land, buildings and equipment (597,267) (520,425)
Increase in deposits held by bond trustees (69,377) (59,159)
Advances on student loans (10,766) (10,723)
Collections on student loans 10,618 9,562 Proceeds from sale of donated financial assets 522 . 504.
Purchase of investments (4,475,766) (11,679,210)
Proceeds from sale of investments 4,789,221 11,373, 167 Net cash used in investing activities (352,815) (886,284)
Cash flows from financing activities:
Contributions restricted for long-term investment 100,877 117,825 Interest and dividends restricted for long-term investment 75,605 25,819 Payments of annuity obligations (6,385) (5,711)
Proceeds from long-term debt 437,193 230,883 Bond issuance costs (201)
Principal payments on long-term debt (323,335) (194,617)
Proceeds related to government student loan funds, net of collection costs 729 437 Net cash provided by financing activities 284,684 174,435 Net increase (decrease) in cash and cash equivalents 536,505 (169,520)
Cash and CjlSh equivalents at the beginning of the year 859,009 1,028,529 Cash and cash equivalents at the end of the year $ 1,395,514 $ 859,009 Supplemental disclosures of cash flow information (Note 2)
See notes to consolidated financial statements.
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THE PENNSYLVANIA STATE UNIVERSITY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED .JUNE 30, 2016 AND 2015 .
- 1. THE UNIVERSITY AND RELATED ENTITIES The Pennsylvania State University ("the University); which was created as an instrumentality of the Commonwealth of Pennsylvania ("the Commonwealth" or "Pennsylvania"), is organized as a non-profit corporation under the laws of the Commonwealth. As Pennsylvania's land grant university, the University is committed to improving the lives of the people of Pennsylvania, the nation and the world through its integrated, tri-part mission of high-quality teaching, research and outreach.
Basis of Presentation The financial statements of the University include, on a consolidated basis, the consolidated and combined financial statements of Penn State Health ("the Health System"), a Pennsylvania non-profit corporation; and its wholly owned subsidiaries, including the Milton S. Hershey Medical Center ("TMSHMC" or "the Medical Center"), Saint Joseph's Regional Health Network and Medical Group ("SJRHN/SJMG"), and Nittany Health, Inc. ("Nittany Health") (formerly Penn State Hershey Health System, Inc.), and The Corporation for Penn State and its subsidiaries ("the Corporation"). See Note 11 for additional information about the Health System. The Corporation is a non-profit member corporation organized in 1985 for the exclusive purpose of benefiting and promoting the interests of the University, the Corporation's sole member. The Corporation's financial statements consist primarily of the assets and revenues of The Pennsylvania College of Technology ("Penn College"), a wholly owned subsidiary of the Corporation. All transactions between the University, the Health System, and the Corporation have been eliminated.
- 2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The University's consolidated financial statements are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (GAAP). The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is the source of authoritative GAAP.
The University's consolidated financial statements include statements of financial position, activities and cash flows. In accordance with FASB ASC requirements, net assets and the changes in net assets are classified as permanently restricted, temporarily restricted or unrestricted.
Permanently restricted net assets consist primarily of the historical amounts of endowed gifts. Additionally, contributions receivable and remainder interests, which are required by donors to be permanently retained, are included at their estimated net present values.
Temporarily restricted net assets consist of contributions receivable and remainder interests whose ultimate use is not permanently restricted. In addition, the excess of current market value over the historical cost of permanently restricted endowments is classified as temporarily restricted net assets.
Unrestricted net assets are all the remaining net assets of the University. Net unrealized losses on permanently restricted endowment funds for which historical cost exceeds market value are recorded as a reduction to unrestricted net assets.
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Notes to Consolidated Financial Statements Revenue from temporarily restricted sources is reclassified as unrestricted revenue when the circumstances of the restriction have been fulfilled. Donor-restricted revenues whose restrictions are met within the same fiscal year are reported as unrestricted income.
Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts on the financial statements and the disclosure of contingencies and commitments. Actual results could differ from those estimates.
Revenue Recognition Tuition revenue is recognized in the fiscal year in which the substantial portion of the educational term occurs.
Institutional financial aid provided by the University for tuition and fees is reflected as a reduction of tuition and fee revenue. Revenues for auxiliary enterprises are recognized as the related goods and services are delivered and rendered. Grant revenues are recognized as the eligible grant activities are conducted.
Payments received in advance for tuition, goods and services are deferred.
Unconditional promises to give are recognized as revenues and receivables in the year made and consist of written or oral promises to contribute to the University in the future. Contributions receivable are recorded with the revenue assigned to the appropriate category of restriction. The amounts are present valued based on timing of expected collections.
The Health System has agreements with third-party payers that provide for payments to its subsidiaries at amounts different from their established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payers and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payers. In addition, net patient service revenue is net of provision for bad debts of $62.4 million and
$46.6 million for the years ended June 30, 2016 and 2015, respectively. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined or such estimates change.
The subsidiaries of the Health System provide care to patients who meet certain criteria under its charity care policy without charge or at amounts less than established rates. The Health System does not pursue collection of amounts determined to qualify as charity care; they are not reported as net patient service revenue. The amounts of direct and indirect costs for services and supplies furnished under the Health System's charity care policy totaled approximately $17.7 million and $20.8 million for the years ended June 30, 2016 and 2015, respectively, and is based on a ratio of the Health System's operational costs to its gross charges. The amount of charges foregone for services and supplies furnished under the Health System's charity policy during 2016 and 2015 totaled approximately $53.0 million and $61.1 million, respectively.
Fair Value of Financial Instruments The University has provided fair value estimates for certain financial instruments in the notes to the financial statements. Fair value information presented in the financial statements is based on information available at June 30, 2016 and 2015. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and other accrued expenses approximate fair value because of the terms and relatively short maturity of these financial instruments. The carrying values of the University's loans to students are also reasonable estimates of their fair value, as the total outstanding loans to students as of June 30, 2016 and 2015 have been made at the rates available to students for similar loans at such times. Investments are reported at fair value as disclosed in Note 3. The fair value of the University's bonds payable is disclosed in Note 7. See Note 5 for further discussion of fair value measurements.
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Notes to Consolidated Financial Statements Cash Flows The following items are included as supplemental disclosure to the statements of cash flows for the years ended June 30:
(in thousands of dollars) 2016 2015 Interest paid $ 43,039 $ 46,208 Non-cash acquisitions of land, buildings and equipment 131,778 7,437 Capitalized costs accrued related to construction are $80.8 million and $60.2 million as of June 30, 2016 and 2015, respectively. Taxes paid for 2016 and 2015 are considered immaterial. Cash and cash equivalents include certain investments in highly liquid instruments with initial maturities of 90 days or less, except for such assets held by the University's investment managers as part of their long~term investment strategies. Short-term investments include other current investments held for general operating purposes with maturities greater than 3 months but less than 12 months.
During the year ended June 30, 2016, the Health System finalized the $113.5 million acquisition of SJRHN/SJMG, recorded in prepaid expenses and other assets at June 30, 2015. Of the $113.5 million,
$104.4 million relates to property, plant and equipment and is included in 2016 non-cash acquisitions of land, buildings and equipment in the table above. See further discussion related to the acquisition in Note 11.
Accounts Receivable Accounts receivable, net at June 30 consists of the following: *
(in thousands of dollars)
Grants and contracts, net of allowance of $1,211 and $1,211 $ 173,067 $ 167, 170 Patient accounts receivable, net of allowance of $68,743 and $58,212 226,381 222,476 Student receivables, net of allowance of $7,930 and $7,287 27,183 33,694 Investment and interest receivable 12,665 81,814 Other, net of allowance of $6,058 and $5,480 56 804 49155 Total accounts receivable, net $ 496 100 $ 554,309 The University maintains allowances for doubtful accounts to reflect management's best estimate of probable losses inherent in receivable balances. Management determines the allowances for doubtful accounts based on known factors, historical experience, and other currently available evidence. Receivables are written off when management determines they will not be collected.
Related to patient accounts receivable associated with services provided to patients who have third-party coverage, management analyzes contractually due amounts and provides an allowance for doubtful accounts (for example, for expected uncollectible deductibles and copayments or for payers who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables from self-pay patients, the subsidiaries of the Health System record a provision for bad debts in the period of service on the basis of past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. In estimating the allowance for doubtful accounts, account age is taken into consideration. The difference between the standard rates (or the discounted rates if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts.
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Notes to Consolidated Financial Statements Loans to Students Loans to students are disbursed to qualified students based on need and include loans granted by the University from institutional resources and under federal government loan programs. Students have a grace period until repayment is required based upon the earlier of graduation or no longer achieving at least half-time enrollment status. The grace period varies depending on the type of loan. Loans accrue interest after the g'race period and are repaid directly to the University. Loans to students are uncollateralized and carry default risk. At June 30, 2016 and 2015, student loans represent 0.5% of total assets.
The availability of funds for loans under federal government revolving loan programs is dependent on reimbursements to the pool from repayments of outstanding loans. Funds advanced by the federal government of $47.7 million and $47.1 million at June 30, 2016 and 2015, respectively, are ultimately refundable to the government and are classified as liabilities in the consolidated statements of financial position. Outstanding loans cancelled under the program result in a reduction of the funds available to loan and a decrease in the liability to the federal government.
Loans to students consisted of the following at June 30:
(in thousands of dollars)
Loans to students:
Federal government loan programs:
Perkins loan program $ 44,381 $ 44,541 Health Professions Student Loans and Loans for Disadvantaged Students 49 91 Federal government loan programs 44,430 44,632
.Institutional loan programs 19 002 19 667 63,432 64,299 Less allowance for doubtful account&:
Balance, beginning of year (3, 156) (2,703)
Provision for doubtful accounts 630 (453)
Balance, end of year (2,526) (3, 156)
Loans to students, net $ 60,906 $ 61, 143 Allowances for doubtful accounts are established based on prior collection experience and current economic factors which, in management's judgment, could influence the ability of loan recipients to repay the amounts according to the terms of the loan. Further, the University does not evaluate credit quality of student loans receivable after the initial approval of the loan. Loans to students are considered past due when payment is not received by the due date, and interest continues to accrue until the loan is paid in full or written off. When loans to students are deemed uncollectible, an allowance for doubtful accounts is established. Further, the University does not evaluate the credit quality of the student loans receivable after the initial approval and calculation of the loans.
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Notes to Consolidated Financial Statements The University considers the age of the amounts outstanding in determining the collectability of loans to students. The aging of the loans to students based on days delinquent and the related allowance for doubtful accounts at June 30 are as follows:
(in thousands of dollars) 45 days76-105 Over or less 46-75 days days 105 days 2016 Loans to students:
Federal government loan programs $ 37,547 $ $ 20 $ 6,835 $ 44,430 Institutional loan programs 16. 194 15 2,766 19.002 Total loans to students 53,741 55 35 9,601 63,432 Allowance for doubtful accounts:
Federal government loan programs (441)
Institutional loan programs (2,085)
Total allowance for doubtful accounts (2.526)
Total loans to students, net $ 60,906 (in thousands of dollars) 45 days76-105 Over or less 46-75 days days 105 days 2015 Loans to students:
Federal government loan programs $ 38,588 $ 34 $ 28 $ 5,982 $ 44,632 Institutional loan programs 17,435 13 12 2,207 19,667 Total loans to students 56,023 47 40 8,189 64,299 Allowance for doubtful accounts:
Federal government loan programs (872)
Institutional loan programs (2,284)
Total allowance for doubtful accounts (3, 156)
Total loans to students, net $ 61,143 Inventories Inventories are stated at the lower of cost or market, generally on the first-in, first-out basis.
Investments The University's noncurrent investments represent the University's endowment and other investments held for general operating purposes. The University's investments are reported at fair value in the accompanying financial statements. Investments in equity securities with readily determinable fair values and all investments in debt securities are reported at fair values with gains and losses included in the consolidated statements of activities. In the management of investments, the University authorizes certain investment managers to purchase derivative securities to attain a desired market position; and the University may directly invest in derivative securities to attain a desired market position. The University does not trade or issue derivative.
financial instruments other than through the investment management practices noted above. The University 17
Notes to Consolidated Financial Statements records derivative securities at fair value with gains and losses reflected in the consolidated statements of activities.
The estimated fair value amounts for marketable debt, equity and fixed income securities held by the University have been reviewed by the University and determined using available market information as supplied by the various financial institutions that act as trustees or custodians for the University. For non-liquid holdings, generally limited partnership investments in private real estate, venture capital, private equity, natural resources, and private debt, estimated fair value is determined based upon financial information provided by the general partner. This financial information includes assumptions and methods that were reviewed by University management. The University believes that the estimated fair value is a reasonable estimate of market value as of June 30, 2016 and 2015. Because the limited partnerships are not readily marketable, the estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a ready market existed, and such differences could be material.
Income on operating investments and income used for the annual distribution under the annual spending policy for endowments are reported in operating revenues within the consolidated statement of activities.
Beneficial Interest in Perpetual Trusts The University is the beneficiary of certain perpetual trusts held and administered by outside trustees. The fair value of these trust assets has been recorded as permanently restricted net assets and related beneficial interest in perpetual trusts in the consolidated financial statements.
Investment in Plant Total investment in plant as of June 30 is comprised of the following:
(in thousands of dollars) 2016 2015 Land $ 133,473 $ 126,790 Buildings 6,272,904 5,731,089 Improvements other than buildings 650,696 632,938 Equipment 1,382,532 1,261 ,088 Total plant 8,439,605 7,751,905 Less accumulated depreciation (3,849,294) (3,563,593)
Total investment in plant, net $ 4.590.311 $ 4.188.312 The value of land, buildings, and equipment is recorded at cost or, if received as gifts, at fair value at date of gift. The University does not capitalize the cost of library books. Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Useful lives range from 4 to 50 years for buildings, 10 to 20 years for improvements other than buildings, and 1 to 20 years for equipment. Depreciation expense was $331.2 million and $295.7 million for the fiscal years ended June 30, 2016 and 2015, respectively. The University has certain building and equipment lease agreements in effect which are considered capital leases that are included as long-term debt in the statements of financial position. These leases have been capitalized at the lower of fair market value or net present value of the minimum lease payments. Buildings and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease terms or the estimated useful lives of the assets. The capitalized cost and accumulated depreciation of the leases at June 30, 2016 and 2015 was $169.2 million and $72.5 million, and $137.5 million and $57.7 million, respectively.
18 I
Notes to Consolidated Financial Statements Accounts Payable and Other Accrued Expenses Accounts payable and other accrued expenses at June 30 consist of the following:
(in thousands of dollars) 2016 2015 Accounts payable (non-Health System) $ 248,897 $ 301,075 Health System accounts payable and other accrued expenses 268,324 230,422 Accrued payroll and other related liabilities 64,690 60,505 Accrued payment under the Endowment Act (NCAA fine) 12,000 Accrued bond interest 9,027 10,736 Student deposits 5 089 4 764 Total accounts payable and other accrued expenses $ 596,027 ~ 619,502 In January 2015, the University entered into a Settlement Agreement (the "Agreement") in a lawsuit filed by certain current and former Commonwealth officials against the National Collegiate Athletic Association (NCAA), to which the University had been added as a party. Under the Agreement, the Consent Decree dated July 23, 2012 was repealed. The University simultaneously entered into Superseding Agreement with the NCAA which stated that the Consent Decree was dissolved. The two Agreements removed the original
$60 million fine and replaced it with the University's commitment of $60 million for activities and programs related to child abuse. Under the Agreements, the University paid $48 million to the Commonwealth, with $36 million paid in 2015 and another $12 million paid in 2016. Under the Superseding Agreement, the University created a $12 million endowment for activities and programs related to child sexual abuse. This amount is included in permanently restricted net assets at June 30, 2016 and 2015, and in permanently restricted gifts and pledges iri the consolidated statement of activities for the year ended June 30, 2015.
Impairment of Long-Lived Assets Long-lived assets, which include investment in plant and definite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. An impairment loss is recognized in change in net assets in the period that the impairment occurs.
Asset Retirement Obligations The University has recognized liabilities for asset retirement obligations. The University has identified asbestos abatement and the decommissioning of the Breazeale Nuclear Reactor as conditional asset retirement obligations. These obligations are reported as part of other noncurrent liabilities within the consolidated statement of financial position. The following table details the change in liabilities for the years ended June 30:
(in thousands of dollars)
Balance as of June 30, 2014 $ 66,333 Accretion expense 7,242 Liabilities settled (1,990)
Balance as of June 30, 2015 71,585 Accretion expense 5,539 Liabilities settled (3,022)
Balance as of June 30, 2016 $ 74, 102 Annuities Payable Annuities payable consist of annuity payments currently due and the actuarial amount of annuities payable.
The actuarial amount of annuities payable is the present value of the aggregate liability for annuity payments over the expected lives of the beneficiaries.
19
Notes to Consolidated Financial Statements Net Assets Net assets consist of the following at June 30:
(in thousands of dollars) 2016 2015 Unrestricted net assets $ 6,137,033 $ 5,878,777 Temporarily restricted net assets:
Future contributions $ 124,003 $ 121,654 Annuity and life income funds 21,587 26,240 Contributions for property, plant and equipment 5,876 12, 187 Term endowments and accumulated endowment gains 399,607 500,533 Total temporarily restricted net assets $ 551,073 $ 660,614 Permanently restricted net assets:
Future contributions $ 100,641 $ 119,822 Annuity and life income funds 37,356 25,513
- Student loan funds 16,560 16,037 Perpetual trusts and other funds 22,444 22,897 Endowment funds 1,341,837 1,249,838 Total permanently restricted net assets $ 1,518,838 $ 1,434,107 Total net assets $ 8,206,944 $ 7,973,498 Income Taxes The University files U.S. federal and state tax returns. The statute of limitations on the University's federal returns generally remains open for three years following the year they are filed. In accordance with ASC 740 Income Taxes Topic, the University continues to evaluate tax positions and has determined there is no material impact on the University financial statements.
Recent Accounting Pronouncements In May 2014, the FASS issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." This guidance clarifies the principles for recognizing revenue that (1) removes inconsistencies and weaknesses in revenue requirements, (2) provides a more robust framework for addressing revenue issues, (3) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (4) provides more useful information to users of financial statements through improved disclosure requirements, and (5) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. In August 2015, the FASS issued ASU 2015-14, "Revenue from Contracts with Customers; Deferral of the Effective Date." This guidance defers the effective date of the original ASU. This guidance is now effective for the University beginning July 1, 2018. The University has not yet evaluated the impact this guidance may have on its.
consolidated financial statements.
- In February 2015, the FASS issued ASU 2015-02, "Consolidation; Amendments to the Consolidation Analysis." This update provides enhanced guidance for entities to apply in performing consolidation analyses. This guidance is effective for the University beginning July 1, 2016 with early adoption permitted.
The University has not yet evaluated the impact this guidance may have on its consolidated financial statements.
In April 2015, the FASS issued ASU 2015-03, "Interest- Imputation oflnterest; Simplifying the Presentation of Debt Issuance Costs." This guidance requires entities to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Although effective beginning July 1, 2016, the University has elected to early adopt this guidance during the year ended June 30, 2016. This guidance was applied retrospectively for the year ended June 30, 2015, causing $0.4 million to be reported as a reduction in current long-term debt (previously reported in prepaid expenses and other assets) and $5.1 million to be 20
Notes to Consolidated Financial Statements reported as a reduction in noncurrent long-term debt (previously reported as deferred bond costs, net) on the statement of financial position. In addition, the disclosures in Note 7 have been modified to conform to this new guidance. The adoption of this guidance had no impact on the University's net assets or changes in net assets as of and for the year ended June 30, 2015.
In May 2015, the FASS issued ASU 2015-07, "Fair Value Measurements; Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." This guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. In addition, this guidance removes the requirement to make certain disclosures for all investments that are eiigible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. Although effective beginning July 1, 2016, the University has elected to early adopt this guidance during the year ended June 30, 2016.
The June 30, 2015 fair value disclosures in Note 5 have been modified to conform to this new guidance.
In July 2015, the FASS issued ASU 2015-11, "Inventory; Simplifying the Measurement of Inventory." This guidance requires entities to measure inventory within the scope of the update at the lower of cost and net realizable value. This guidance is effective for the University beginning July 1, 2017 with early adoption permitted. The University has n'ot yet evaluated the impact this guidance may have on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall; Recognition and Measurement of Financial Assets and Financial Liabilities." This guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for the University beginning July 1, 2018. The University has not yet evaluated the impact this guidance may have on its consolidated financial statements.
In.February 2016, the FASB issues ASU 2016-02, "Leases." This guidance requires substantial changes to lease accounting to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and this guidance is the recognition of lease assets and lease liabilities by less~es for those leases classified as operating under previous GAAP. This guidance is effective for the University beginning July 1, 2019 with early adoption permitted. The University has not yet evaluated the impact this guidance may have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-14, "Not-for-Profit Entities; Presentation of Financial Statements of Not-for-Profit Entities." This guidance amends the requirements for financial statements and notes in Topic 958, Not-for-Profit Entities. The most significant amendment requires a not-for-profit entity
("NFP") to present on the face of the statement of financial position amounts for two classes of net assets at the end of the period, rather than for the currently required three classes. That is, an NFP will report amounts for net assets with donor restrictions and net assets without donor restrictions, as well as the currently required amount for total net assets. This guidance is effective for the University beginning July 1, 2018 with early adoption permitted. The University has not yet evaluated the impact this guidance may have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows; Classification of Certain Cash Receipts and Cash Payments." This update provides guidance on eight specific cash flows issues with the objective of reducing the existing diversity in practice. This guidance is effective for the University beginning July 1, 2018 with early adoption permitted. ThE.l University has not yet evaluated the impact this guidance may have on its consolidated financial statements.
21
Notes to Consolidated Financial Statements
- 3. INVESTMENTS Investments by major category as of June 30 are summarized as follows:
(in thousands of dollars) 2016 2015 Money markets $ 93,741 $ 361,971 Fixed income:
U.S. governmenUagency 1,158,474 1,217,340 U.S. corporate 908,609 915,709 Foreign 199,586 250, 122 Other 243,678 278,163 Equities 1,566,626 1,769,561 Private capital 1,480,599 1,275,015 Total $ 5,651,313 $ 6.067.881 Other fixed income investments consist of collateralized mortgage obligations, mortgage-backed securities and asset-backed securities. Equity investments are comprised of domestic and foreign common stocks. Private capital consists primarily of interests in private real estate, venture capital, private equity, natural resources, private debt, commodities and hedge fund limited partnerships.
Futures contracts, which are fully cash collateralized, comprise the University's directly held derivative instruments at June 30, 2016 and 2015, are marked to market daily, and are included in the fair value of the University's investments. The fair value of derivative instruments is included in the fair value of the University's investments within the money market category. Futures contracts have minimal credit risk because the counterparties are the exchanges themselves. Fully cash collateralized derivative securities comprised $4.4 million, 0.08% of total investments, and $159.9 million, 2.6% of total investments at June 30, 2016 and 2015, respectively. The University's derivatives consist of S&P 500 futures at June 30, 2016 and 2015 and are employed as a low cost, passive investment vehicle with daily liquidity which allows the University to maintain desired market exposure in light of irregular cash flows.
The following schedules summarize the investment return and its classification in the consolidated statement of activities for the years ended June 30:
(in thousands of dollars) Temporarily Permanently 2016 Unrestricted Restricted Restricted Total Dividends and interest $ 111,156 $ 1,937 $ 10,020 $ 123, 113 Net realized gains (losses) 62,289 (17,965) 44,324 Net unrealized losses (88,078) (96,547) (184,625)
Total returns $ 85 367 $ (112.575) $ 10.020 $ (17.188)
(in thousands of dollars) Temporarily Permanently 2015 Unrestricted Restricted Restricted Total Dividends and interest $ 140,772 $ 1,869 $ 11,680 $ 154,321 Net realized gains 69,673 31,399 101,072 Net unrealized losses (78,565) (60,698) (139,263)
Total returns $ 131,880 $ (27.430) $ 11.680 $ 116,130
- 4. ENDOWMENT NET ASSETS The University's endowment includes both donor-restricted endowment funds and funds designated to function as endowments. As required by GAAP, net assets associated with endowment funds, including funds designated to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions.
22
Notes to Consolidated Financial Statements
- The ASC Not-for-Profit Entities Presentation of Financial Statements Subtopic (ASC Subtopic 958-205) provides guidance on the net asset classification of donor-restricted endowment funds for not-for-profit organizations subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act
("UPMIFA") and improves disclosure about an organization's endowment funds regardless of whether the organization is subject to UPMIFA. The Commonwealth of Pennsylvania has not adopted UPMIFA but rather has enacted Pennsylvania Act 141 ("PA Act 141"). PA Act 141 permits an organization's trustees to define income as a stipulated percentage of endowment assets (between 2% and 7% of the fair value of the assets averaged over a period of at least three preceding years) without regard to actual interest, dividend, or realized and unrealized gains.
The University has interpreted PA Act 141 to permit the University to spend the earnings of its endowment based on a total return approach, without regard to the fair value of the original gift. As a result of this interpretation, the University classifies as permanently restricted net assets the original value of gifts donated to the permanent endowment, the original value of subsequent gifts to the permanent endowment, and accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. Funds functioning as endowments are established at the direction of University management and are classified as unrestricted net assets due to the lack of external donor restrictions. Gains and losses attributable to permanent endowments are recorded as temporarily restricted net assets and gains and losses attributable to funds functioning as endowments are recorded as unrestricted net assets.
From time to time, due to unfavorable market fluctuations, the fair value of some assets associated with individual donor-restricted endowment funds may fall below the level that donors require to be retained as a perpetual fund, while other assets are unaffected to the same extent and maintain or exceed the level required. The aggregate amount of deficiencies at June 30, 2016 and 2015 was $7.4 million and $1.5 million, respectively, reported in unrestricted net assets on the consolidated statement of activities. Subsequent investment gains will be used to restore the balance up to the fair market value of the original gift. Subsequent gains above that amount will be recorded as temporarily restricted net assets.
Endowment net asset composition by type of fund as of June 30:
(in thousands of dollars) Temporarily Permanently 2016 Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (7,353) $ 398,384 $ 1,330,966 $ 1,721,997 Funds functioning as endowments 594,587 594,587 Total net assets $ 587,234 $ 398,384 s 1,330,966 s 2,316,584 (in thousands of dollars) Temporarily Permanently 2015 Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (1,454) $ 500,533 $ 1,249,838 $ 1,748,917 Funds functioning as endowments 619,873 619,873 Total net assets s 618,419 s 500,533 s 1,249,838 s 2,368,790 23
Notes to Consolidated Financial Statements Changes in endowment net assets for the years ended June 30:
(in thousands of dollars) Temporarily Permanently 2016 Unrestricted Restrided Restricted Total
. Endowment net assets, beginning of the year $ 618,419 $ 500,533 $ 1,249,838 $ 2,368,790 Endowment return:
Endowment earnings 25,820 19 3,727 29,566 Net realized gains (losses) 63,939 (17,736) 46,203 Net unrealized losses (30,090) (91,831) (121,921)
Reclassification of funds with deficiencies (5,899) 5 899 Total endowment return 53 770 (103,649) 3 727 (46,152)
Contributions 1,500 77,401 78,901 Endowment spending (95,439) (95,439)
Transfers to create funds functioning as endowments 10 484 10 484 Endowment net assets, end of the year $ 587.234 $ 398.384 $ 1 330.966 $ 2.316 584 (in thousands of dollars) Temporarily Permanently 2015 Unrestricted Restricted Restricted Total Endowment net assets, beginning of the year $ 595,779 $ 521,680 $ 1,146,955 $ 2,264,414 Endowment return:
Endowment earnings 26,513 20 4, 191 30,724 Net realized gains 68,228 31,039 99,267 Net unrealized losses (18,085) (53,257) (71,342)
Reclassification of funds with deficiencies (495) 495 Total endowment return 76 161 (21,703) 4 191 58 649 Contributions 556 98,692 99,248 Endowment spending (83,958) (83,958)
Transfers to create funds functioning as endowments 30437 30437 Endowment net assets, end of the year $ 618,419 $ 500,533 $ 1,249,838 $ 2,368,790 Not included above are the endowment net assets of subsidiaries of $14.7 million and $12.8 million as of June 30, 2016 and 2015, respectively.
The University has adopted investment and spending policies for endowment assets that attempt to provide a relatively predictable stream of funding to programs supported by its endowment while seeking to maintain, over time, the purchasing power of the endowment assets. The overall management objective for the University's pooled endowment funds is to preserve or grow the real (inflation-adjusted) purchasing power of the assets through a prudent long-term investment strategy. This objective would be achieved on a total return basis. Under these policies, as approved by the Board of Trustees and the Penn State Investment Council, the primary investment objective of the University's pooled endowment is to attain a real total return (net of investment management fees) that at least equals a total annual effective spending rate of 5.25% (program spending of 4.5% plus administrative costs of 0.75%) over the long term.
T.o satisfy its long-term rate-of-return objectives, the University relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The University targets diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. The endowment assets of the University are invested in a broad range of equities and fixed income securities, thereby limiting the market risk exposure in any one institution or individual investment.
24
Notes to Consolidated Financial Statements The University has a policy of appropriating for distribution each year a certain percentage (4.5% for 2016 and 2015) of its pooled endowment fund's average fair market value over the prior five years preceding the fiscal year in which the distribution is planned. Accordingly, over the long term, the University expects the current spending policy to allow its endowment to provide generous current spending while preserving "intergenerational equity". This is consistent with the University's objective to maintain the purchasing power of the endowment assets held in perpetuity as well as to provide additional real growth through new gifts and investment returns.
- 5. FAIR VALUE MEASUREMENTS The University utilizes the following fair value hierarchy, which prioritizes into three broad levels the inputs to valuation techniques used to measure fair value:
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the measurement date. Such instruments valued at Level 1 primarily consist of securities that are directly held and actively traded in public markets.
Level 2 - Inputs other than unadjusted quoted prices that are observable for the asset or liability, directly or indirectly, including quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means.
Level 3 - Unobservable inputs that cannot be corroborated by observable market data.
In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The University's assessment of significance of a particular item to the fair value measurement in its entirety requires judgment, including consideration of inputs specific to the asset.
25
Notes to Consolidated Financial Statements The following table presents information as of June 30, 2016 about the University's financial assets. and liabilities that are measured at fair value on a recurring basis:
Quoted Prices in Significant Active Markets Other Significant For Identical Observable Unobservable Assets Inputs Inputs Total (in thousands of dollars) Level 1 Level2 Level3 Fair Value Assets:
Long-term Investment Pool:
Money markets $ 84,516 $ $ $ 84,516 Fixed income U.S. governmenUagency 284,969 15,881 300,850 U.S. corporate 190,065 190,065 Foreign 115,349 115,349 Other 40,035 40,035 Equities 823,912 102 341 926,253 Total $ 1,193,397 $ 463,671 $ $ 1,657.068 Operating investments:
Money markets $ 9,215 $ 10 $ $ 9,225 Fixed income U.S. governmenUagency 615,449 242,175 857,624 U.S. corporate 79,241 639,303 718,544 Foreign 11,272 72,965 84,237 Other 25, 114 178,529 203,643 Equities 127,318 59 4 214 131 591 Total $ 867,609 $ 1,133,041 $ 4,214 $ 2,004,864 Deposits held by bond trustees:
Money markets $ 130,639 $ $ $ 130,639 Fixed income U.S. governmenUagency 448 448 Total $. 130,639 $ 448 $ $ 131,087 Beneficial interest in perpetual trusts $ $ $ 14,558 $ 14,558 Liabilities:
Present value of annuities payable $ $ $ 53,859 $ 53,859 26
Notes to Consolidated Financial Statements The following table presents information as of June 30, 2015 about the University's financial assets and liabilities that are measured at fair value on a recurring basis:
Quoted Prices in Significant Active Markets Other Significant For Identical Observable Unobservable Assets Inputs Inputs Total (in thousands of dollars) Level 1 Level2 Level3 Fair Value Assets:
Long-term Investment Pool:
Money markets $ 119,969 $ 230,018 $ $ 349,987 Fixed income U.S. governmenUagency 59,206 27,727 86,933 U.S. corporate 101,055 101,055 Foreign 59,849 128,644 188,493 Other 10,206 10,206 .
Equities . 1,082,042 1.082.042 Total $ 1,321,066 $ 497,650 ,,,.,,$==== $ 1.818 716 Operating investments:
Money markets $ 9,555 $ 2,429 $ $ 11,984 Fixed income U.S. governmenUagency 678,931 451,476 1,130,407 U.S. corporate 82,979 731,675 814,654 Foreign 11,970 49,659 61,629 Other 19,903. 244,409 3,645 267,957 Equities 110 917 2134 113,051 Total $ 914 255 $ 1.479,648 =$==="5""',7""'7"""9 $ 2,399,682 Deposits held by bond trustees:
Money markets $ 61,262 $ $ $ 61,262 Fixed income U.S. governmenUagency 448 448 Total ~$===='6~1~.2""6~2 ~$~~~=4=4~8 ~$==== $ 61,710 Beneficial interest in perpetual trusts $ $ $ 15,471 $ 15,471 Liabilities:
Present value of annuities payable $ $ $ 48,721 $ 48,721 The fair value tables above exclude investments of $1,989.4 million and $1,849.5 million as of June 30, 2016 and 2015, respectively, which are measured at NAV and are not classified in the fair value hierarchy.
The Long-term Investment Pool (LTIP) is a mutual fund-like vehicle used for inve~ting the University's endowment funds, funds functioning as endowments, and other operating funds that are expected to be held long-term. A share method of accounting for the LTIP is utilized by the University. Each participating fund enters into and withdraws from the LTIP based on monthly share values. At June 30, 2016 and 2015, fair value of endowment funds and funds functioning as endowments within the LTIP totaled $2,362.2 million and $2,395.9 million, respectively. At June 30, 2016 and 2015, fair value of operating funds included in the LTIP totaled $1,280.0 million and $1,262.9 million, respectively.
27
Notes to Consolidated Financial Statements The following tables present information related to changes in Level 3 for each category of assets and liabilities for year ended June 30, 2016:
- Beneficial (in thousands of dollars) Operating Interest in Investments Peq2etual Trusts Assets:
Beginning balance $ 5,779 $ 15,471 Total realized and unrealized gains (losses) 502 (913)
Purchases 599 Sales (2,666)
Ending balance $ 4,214 $ 14,558 Present Value of Annuities Payable Liabilities:
Beginning balance $ 48,721 Actuarial adjustment of liability (1,556)
Gifts 6,886 Sales (192)
Ending balance $ 53,859 The following tables present information related to changes in Level 3 for each category of assets and liabilities for year ended June 30, 2015:
Beneficial (in thousands of dollars) Operating Interest in Investments Perpetual Trusts Assets:
Beginning balance $ 5,638 $ 15,498 Total realized and unrealized gains {losses) 118 (27)
Purchases 300 Sales (277).
Ending balance $ 5 779 $ 15.471 Present Value of Annuities Payable Liabilities:
Beginning balance $ 51,151 Actuarial adjustment of liability 5,350 Gifts 1,765 Sales (9,545)
Ending balance $ 48,721 There were no transfers of assets between Level 3 and Level 2 and between Level 1 and Level 2 in 2016 and 2015.
28
Notes to Consolidated Financial Statements The following table presents the fair value and redemption frequency for those investments whose fair value is not readily determinable and is estimated using the net asset value per share or its equivalent as of June 30, 2016:
Unfunded Redemption Redemption (in thousands of dollars) Fair Value Commitment Frequency Notice Period Commingled Funds: Quarterly/
Non-U.S. Equity $ 508,782 Daily/Monthly 5-90 days Subtotal $ 508.782 Marketable Investment Partnerships:
Absolute Return $ 30,811 Quarterly 60 days Quarterly/
Distressed Debt 53,557 Semi Annual 60-90 days Commodities 94,795 Monthly 30-60 days Opportunistic 186,635 Quarterly 30 days Directional Long/Short 287,482 Monthly 30 days Subtotal $ 653,280 Non-Marketable Investment Partnerships:
Private Real Estate $ 97,089 $ 47,140 Venture Capital 271,898 152,374 Private Equity 248,969 280,331 Natural Resources 116,307 38,988 Private Debt 93 056 68 541 Subtotal =-$_ _8=2=7"""',3'-'-1-=-9 $ 587,374 Total $ 1,989,381 $ 587.374 The following table presents the fair value and redemption frequency for those investments whose fair value is not readily determinable and is estimated using the net asset value per share or its equivalent as of June 30, 2015:
Unfunded Redemption Redemption (in thousands of dollars) Fair Value Commitment Frequency Notice Period Commingled Funds: Quarterly/
Non-U.S. Equity ~ 570,948 Daily/Monthly 5-90 days Subtotal ~ 570,948 Marketable Investment Partnerships:
Absolute Return $ 30,260 Quarterly 65 days Quarterly/
Distressed Debt 56,106 Semi Annual 60-90 days Commodities 99,039 Monthly 30-60 days Opportunistic 175,102 Quarterly 30 days Directional Long/Short 107,327 Monthly 30 days Subtotal $. 467,834 Non-Marketable Investment Partnerships:
Private Real Estate $ 103,372 $ 38,678 Venture Capital 269,321 107,731 Private Equity 240,539 219,965 Natural Resources 118,463 86,371 Private Debt 79 006 69 864 Subtotal ~$__8_1_0~,7_0_1 $ 522,609 Total $ 1,849,483 $ 522,609 29
Notes to Consolidated Financial Statements Commingled Funds include investments that aggregate assets from multiple investors and are managed collectively following a prescribed strategy. Redemptions vary from daily to quarterly with required notification of 90 days or less. The non-U.S. equity strategy is invested in developed and developing countries outside of the United States, and spans the ~mtire equity capitalization spectrum. These collective portfolios preclude the need to obtain securities registration in foreign countries.
Marketable Investment Partnerships include several hedge funds whose underlying positions are traded via public securities markets. Liquidity terms range from quarterly to annually with advance notification for redemption ranging from 30 to 90 days. The fair values of the investments for each fund in this category have been estimated using the net asset value of the LTl P's share holdings in the fund. Five major investment strategies are included within this category. Absolute Return refers to relative value strategies. Directional refers to equity long/short strategies in both U.S. and non-U.S. markets. Opportunistic refers to global multi-strategy. Distressed Debt refers to securities rated below investment grade, along with non-rated debt.
Commodities refer to publicly traded commodity instruments primarily including futures and options.
Nonmarketable Investment Partnerships include limited partnership interests in a variety of illiquid investments. The fair values of the investments for each fund in this category have been estimated using the net asset value of the LTIP's ownership interest in partner's capital and cannot be redeemed. Realizations from each fund are received as the underlying investments are liquidated or distributed, typically within 10 years after initial commitment. Unfunded commitments represent remaining commitments of the LTIP's drawdown funds as of June 30, 2016 and 2015. Five major investment strategies are included within this category. Private Real Estate includes properties primarily located in the U.S. Venture Capital includes non-public startups and enterprises ifl early stages of growth located globally. Private Equity includes buyouts of previously public companies as well as enterprises that are planning to go public in the near future, including funds focusing on opportunities outside the U.S. Natural Resources largely include companies primarily involved in oil and natural gas in addition to a variety of other natural resources. Private Debt includes global private credit securities rated below investment grade as well as non-rated debt.
- 6. CONTRIBUTIONS RECEIVABLE Contributions receivable are summarized as follows as of June 30:
(in thousands of dollars) 2016 2015 In one year or less $ 59,567 $ 63,293 Between one year and five years 63,646 67,504 More than five years 113 277 126 815 Contributions receivable, gross 236,490 257,612 Less allowance (4,065) (6,350)
Less discount (52,872) (60,280)
Contributions receivable, net $ 179,553 $ 190,982 Contributions receivable are discounted at rates ranging from 0.45% to 1.69% and 0.28% to 2.59% at June 30, 2016 and 2015, respectively. The discount rates for prior periods ranged from 0.15% to 6.28%.
At June 30, 2016 and 2015, the University has received bequest intentions and certain other conditional promises to give of $97.7 million and $96.8 million, respectively. These intentions and conditional promises to give are not included in the consolidated financial statements.
The following table summarizes the change in contributions receivable, net during the year ended June 30, 2016:
(in thousands of dollars)
Balance at the beginning of year $ 190,982 New pledges 35,510 Collections on pledges (56,633)
Decrease in allowance 2,285 Decrease in unamortized discounts 7 409 Balance at the end of year $ 179,553 30
Notes to Consolidated Financial Statements
- 7. LONG-TERM DEBT The various bond issues, notes payable and capital lease obligations that are included in long-term debt in the statements of financial position consist of the following at June 30:
(in thousands of dollars) 2016 2015 The Pennsylvania State University Bonds Series 2016A $ 122,165 $
Series 20168 229,775 Series 2015A 65,210 65,210 Series 20158 111,580 116,955 Series 2010 135,035 135,035 Series 2009A 101,295 Series 20098 74,235 74,235 Series 2008A 77,670 Series 2008B 1,050 2,060 Series 2007A 87,045 Series 2007B 54,415 57,600 Refunding Series 2002 4,835 9,420 Pennsylvania Higher Educational Facilities Authority University Revenue Bonds (issued for The Pennsylvania State University)
Series 2006 2,890 3,115 Series 2004 3,125 3,395 Series 2002 2,860 3,265 Lycoming County Authority College Revenue Bonds (issued for Penn College)
Series 2015 7,660 8,840 Series 2012 24,685 24,685 Series 2011 37,880 38,550 Series 2008 55,000 55,000 Total bonds payable 932,400 863,375 Unamortized bond premiums 118,332 55,136 Unamortized deferred bond costs (5,267) (5,527)
Notes payable and capital leases Notes payable 29,000 20,000 Capital lease obligations 96 811 83,058 Total notes payable and capital leases 125,811 103,058 Total long-term debt $ 1,171,276 $ 1,016,042 31
Notes to Consolidated Financial Statements Interest rate Debt issuance mode interest rates Payment ranges and maturity (in thousands of dollars)
The Pennsylvania State University Bonds
$2,585 to $6,465 through September Series 2016A Fixed 4.00% - 5.00% 2036, with $37,520 due September 2041
$7, 165 to $22, 195 through September Series 20168 Fixed 4.00% - 5.00% 2036
$1,430 to $3,445 through September Series 2015A Fixed 2.00% - 5.00% 2035, with $20,000 due September 2040
$3,580 to $8,435 through September Series 20158 Fixed 2.00% - 5.00% 2035
$3,655 to $6,595 through March 2030, with $21,805 and $44,245 due March Series 2010 Fixed 3.375% - 5.00% 2035 and 2040 Series 20098 Variable 0.66% June 2031 Series 20088 Fixed 3.75% $1,050 due August 2016 Series 20078 Fixed 5.00% - 5.25% $3,350 to $5,955 through August 2027 Refunding Series 2002 Fixed 5.25%. $4,835 due August 2016 Pennsylvania Higher Educational Facilities Authority ("PHEFA") University Revenue Bonds
$235 to $280 through September 2020, Series 2006 Fixed 4.20% - 5.125%* with $1,610 due September 2025
$285 to $325 through September 2019, Series 2004 Fixed 4.55% - 5.00%* with $1,905 due September 2024
$425 due March 2017, with $2,435 due Series 2002 Fixed 4.60% - 5.00%* March 2022
- Annual interest costs to the Unh.ersity for interest rates greater than 3.00% are subsidized by PHEFA.
Lycoming County Authority College Revenue Bonds Series 2015 Fixed 2.00% - 5.00% . $465 to $1,590 through January 2025 Series 2012 Fixed 2.00% - 5.00% $410 to $2,635 through May 2032 Series 2011 Fixed 3.00% - 5.50% $70 to $5,230 through July 2030 Series 2008 Fixed 3.50% - 5.50% $1,455 to $4, 140 through October 2037 The Series 2016A Bonds are general obligation bonds issued in June 2016 for the purpose of financing various construction and renovation projects. The Series 2016A Bonds are subject to early redemption provisions, at the option of the University, beginning September 2026. The bonds maturing in September 2041 are subject to mandatory sinking fund redemption.
The Series 2016B Bonds are general obligation bonds issued in June 2016 for the purpose of financing the current refunding and defeasance of all of the outstanding Series 2007A Bonds and the advance refunding and defeasance of all of the outstanding Series 2008A and Series 2009A Bonds. The Series 2016B Bonds are subject to early redemption provisions, at the option of the University, beginning September 2026. In conjunction with the issuance of the Series 2016B Bonds, the University legally defeased the Series 2007A Bonds, 2008A Bonds, and 2009A Bonds by irrevocably depositing the required funds in an escrow fund to be used to pay the interest accrued, maturing principal, and redemption price of the refunded bonds.
The Series 2009B Bonds are currently paying interest on a variable rate basis at a long term rate for the period
. June 1, 2016 through May 31, 2017. The University has the option to convert to another variable rate (daily, weekly, monthly or flexible) or to a fixed rate basis (such rates are generally determined on a market basis) at respective conversion dates. The bonds currently pay interest at 0.66% with adjustment on the respective date to the rate the remarketing agent believes will cause the bonds to have a market value equal to the principal.
The 2009B bondholders have the right to tender bonds on the purchase dates while such bonds bear interest at 32
Notes to Consolidated Financial Statements the daily, weekly or monthly rate. The 2009B Bonds were issued subject to the self-liquidity program established by the University on the date of issuance pursuant to which the University will provide liquidity for the 2009B Bonds from its general funds in the event of insufficient remarketing proceeds.
The University has complied with all financial debt covenants for the years ended June 30, 2016 and 2015.
Maturities and sinking fund requirements on bonds payable for each of the next five fiscal years and thereafter are summarized as follows:
Annual Installments (in thousands of dollars) 2017 $ 21,980 2018 28,195 2019 30,460 2020 32,580 2021 32,615 Thereafter 786,570
$ 932:400 The fair value of the University's bonds payable is estimated based on current rates offered for similar issues with similar security, terms and maturities using available market information as supplied by the various financial institutions who act as trustees or custodians for the University. At June 30, 2016, the carrying value and estimated fair value of the University's bonds payable, including issuance premiums and deferred bond costs, are $1,045.5 million and $1, 102.6 million, respectively. At June 30, 2015, the carrying value and estimated fair value of the University's bonds payable, including issuance premiums and deferred bond costs, were $913.0 million and $952.0 million, respectively. Certain bond issues have associated issuance premiums; these issuance premiums total $118.3 million and $55.1 million at June 30, 2016 and 2015, respectively and are presented within the statement of financial position as long-term debt. These issuance premiums will be amortized over the term of the respective outstanding bonds. Certain bond issues have associated deferred bond costs; these deferred bond costs total $5.3 million and $5.5 million at June 30, 2016 and 2015, respectively and are presented within the statement of financial position as a reduction in long-term debt. These deferred bond costs will be amortized over the term of the respective outstanding bonds.
Notes payable and capital leases The University has three notes payable included within the consolidated statements of financial position at June 30, 2016 with balances of $9.0 million, $10.0 million, and $10.0 million. These notes have payments due annually through June 2024, June 2025, and March 2026 and bear interest at 2.60%, 2.85%, and 2.80%,
respectively. The current portion of payments due under these notes totals $2.0 million at June 30, 2016.
The University has certain building and equipment lease agreements in effect which are considered capital leases. Future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of June 30, 2016 are as follows:
Year (in thousands of dollars) 2017 $ 18,773 2018 16,416 2019 13,623 2020 10,523 2021 8,442 Thereafter 129,205 Total minimum lease payments 196,982 Less imputed interest (100, 171)
Capital lease obligation 96,811 Current portion 11 188 Long-term portion $ 85 623 33
Notes to Consolidated Financial Statements
- 8. OPERATING LEASES The University has certain lease agreements in effect which are considered operating leases. During the year ended June 30, 2016, the University recorded expenses of $22.0 million for leased equipment and $27.7 million for leased building space. During the year ended June 30, 2015, the University recorded expenses of
$19.2 million for leased equipment and $25.2 million for leased building space.
Future minimum lease payments under operating leases as of June 30, 2016 are as follows:
(in thousands of dollars) 2017 $ 23,800 2018 16.,715 2019 13,323 2020 10,407 2021 7,412 Thereafter 39,503 Total minimum lease payments $ 111.160
- 9. RETIREMENT BENEFITS The University provides retirement benefits for substantially all regular employees, primarily through either contributory defined benefit plans administered by the Commonwealth of Pennsylvania State Employees' Retirement System ("SERS") and The Public School Employees' Retirement System or defined contribution plans administered by the Teachers Insurance and Annuity Association - College Retirement Equity Fund and Fidelity Investments. The University is billed for its share of the estimated actuarial cost of the defined benefit plans ($85.9 million and $67.8 million for the years ended June 30, 2016 and 2015, respectively). The University's total cost for retirement benefits, included in expenses, is $219.4 million and $190.8 million for the years ende_d June 30; 2016 and 2015, respectively.
The SERS is the administratot of a cost-sharing, multi-employer retirement system established by the
- Commonwealth of Pennsylvania to provide pension benefits for employees of state government and certain independent agencies. As provided by statute, the SERS Board of Trustees has exclusive control and management responsibility of the funds and full power to invest the funds. The SERS funding policy provides for periodic member contributions at statutory rates and employer contributions at actuarially determined rates (expressed as a percentage of annual gross pay) that are sufficient to accumulate assets to pay benefits when due. The University's contributions to this plan for the years ended June 30, 2016 and 2015 were $84.1 million and $66.4 million, respectively, and represent approximately 5.7% of total contributions to the plan based on
- projections for fiscal year 2016. The plan is funded at less than 65% with the funded ratio of the plan at 58.0%
as of December 31, 2015.
- 10. POSTRETIREMENT BENEFITS The University sponsors a retiree medical plan covering eligible retirees and eligible dependents. This program includes a Preferred Provider Organization ("PPO") plan for retirees and their dependents who are not eligible for Medicare, a Medicare Advantage PPO plan and a Medicare Supplement plan. In addition, the University provides certain retiree life insurance benefits to the retiree.
Employees who were hired prior to January 1, 2010 are eligible for medical coverage after they retire if either of the following requirements are satisfied:
- they are at least age 60 and have at least 15 years of regular full-time employment and participation in a University-sponsored medical plan immediately preceding the retirement date
- regardless of age, if they have at least 25 years of regular full-time service. The last 10 of those 25 years of University service must be continuous and they must participate in a University-sponsored medical plan during the last 10 years immediately preceding the retirement date.
34
Notes to Consolidated Financial Statements Effective January 1, 2016, any non-union employee who retires on or before December 31, 2020 will receive a $5,000 term life insurance policy benefit at no cost to the employee. If a non-union employee retires after December 31, 2020, no life insurance benefit is provided. For union employees, a $5,000 term life insurance policy is provided at no cost to the employee regardless of their retirement date.
The retiree PPO medical plan and the life insurance coverage are self-funded programs, and all medical claims, death benefits and other expenses are paid from the unrestricted net assets of the University. The Medicare Advantage PPO plan is fully-insured; the Medicare Supplement plan is self-insured. The retirees pay varying amounts for coverage under the medical plan.
For those employees who were hired after December 31, 2009, the University will contribute funds each month on their behalf to a Retirement Healthcare Savings Plan. This plan is designed to help pay for qualified medical and health-related expenses in retirement, including the purchase of a health insurance policy.
Retirees will be eligible to access their Retirement Healthcare Savings Plan account when they are no longer actively employed at Penn State and have satisfied either of the following requirements:
- completed 25 years of continuous full-time service and are age 60 or older
- completed a minimum of 15 years of continuous full-time service and are age 65 or older.
Included in unrestricted net assets at June 30, 2016 and 2015 are the following amounts that have not yet been recognized in net periodic postretirement cost: unrecognized prior service cost (benefit) of ($21.0) million and ($42.9) million and unrecognized actuarial loss of $669.1 million and $732.5 million, respectively.
The following sets forth the plan's benefit obligation, plan assets and funded status reconciled with the amounts recognized in the University's consolidated statements of financial position at June 30:
Change in benefit obligation:
(in thousands of dollars) 2016 2015 Benefit obligation at beginning of year $ 2,091,086 $ 1,900,406 Service cost 44,524 46,800 Interest cost 88,671 78,812 Actuarial gain (199,832) (124,016)
Benefits paid (45,490) (45,123)
Plan assumptions 169 563 234,207 Benefit obligation at end of year $ 2,148,522 $ 2,091,086 Change in plan assets:
(in thousands of dollars) 2016 2015 Fair value of plan assets at beginning of year $ $
Employer contributions 45,490 45,123 Benefits paid (45,490) (45,123)
Fair value of plan assets at end of year $ $
Funded status $ (2, 148,522) $ (2,091,086)
Unrecognized prior service cost (benefit)
Unrecognized net actuarial loss Accrued postretirement benefit expense $ (2, 148,522) ~ (2,091,086) 35
Notes to Consolidated Financial Statements Net periodic postretirement cost includes the following components for the years ended June 30:
(in thousands of dollars) 2016 2015 Service cost $ 44,524 $ 46,800 Interest cost 88,671 78,812 Amortization of prior service cost (21,849) (21,722)
Amortization of unrecognized net loss 33,222 30 521 Net periodic postretirement cost $ 144 568 . ~$_ _~13~4~,4~1~1 The assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation was 7.00% and 7.25% for the years ended June 30, 2016 and 2015, respectively, reduced each year to an ultimate level of 5.00%. The weighted average postretirement benefit obligation discount rate was 4.21 % and 4.75% for the years ended June 30, 2016 and 2015, respectively.
If the healthcare cost trend rate assumptions were increased by 1% in each year, the accumulated postretirement benefit obligation would be increased by $461.2 million and $437.5 million as of June 30, 2016 and 2015, respectively. The effect of this change on the sum of the service cost and interest cost components of the net periodic postretirement benefit cost would be an increase of $32.4 million and $29.0 million as of June 30, 2016 and 2015, respectively. If the healthcare cost trend rate assumptions were decreased by 1% in each year, the accumulated postretirement benefit obligation would be decreased by $360.2 million and
$345.6 million as of June 30, 2016 and 2015, respectively. The effect of this change on the sum of the service cost and interest cost components of the net periodic postretirement benefit cost would be a decrease of
$24.4 million and $22.1 million as of June 30, 2016 and 2015, respectively.
Gains and losses in excess of 10% of the accumulated postretirement benefit obligation are amortized over the average future service to assumed retirement of active participants.
Postretirement benefits expected to be paid for the years ended June 30 are as follows:
(in thousands of dollars) 2017 $ 52,665 2018 57,042 2019 61,722 2020 66,157 2021 71,001 2022-26 433,607
- 11. PENN STATE HEALTH Penn State Health was organized exclusively for the charitable, educational, and scientific purposes as defined and limited by Section 501 (c)(3) of the Internal Revenue Code of 1986. The Health System's purpose is to promote, support and further the charitable, educational, and scientific purposes of the University. The Health System is controlled by and affiliated with the University. During 2015, the Health System was organized, with the University as the sole owner, to provide oversight and governance of an expanded health enterprise. The Health System will own, in whole or in part, health care facilities which could include hospitals, surgery centers, home health providers and similar organizations.
Medical Center In May 2016, the ownership of TMSHMC transferred from the University to the Health System. TMSHMC is a 527-bed, not-for-profit acljte care academic medical center located in Hershey, Pennsylvania. The University retains ownership of the buildings and land occupied by TMSHMC, which is co-located with the University's College of Medicine. The clinical facilities .of the Medical Center complex are leased to TMSHMC. TMSHMC makes certain payments to support the College of Medicine.
36
Notes to Consolidated Financial Statements Nittany Health In January 2016, the ownership of Nittany Health transferred from the University to the Health System.
Nittany Health is a corporate investor in healthcare joint ventures, which are supportive of the missions of the Health System. Nittany Health's objectives are consistent with the strategic objective to extend the range of healthcare services offered by and through the Health System over a broader geographic region. Nittany Health was organized in 1995 for the purpose of organizing components of an integrated health care delivery system. Nittany Health recorded non-controlling interest related to the acquisition of additional ownership interest in a joint venture. This non-controlling interest is recorded in net assets within the consolidated statements of financial position with a value at June 30, 2016 and 2015 of $3,687,000 and
$1,560,000, respectively.
Saint Joseph's Regional Health Network and Medical Group On June 30, 2015, the Health System received $113.5 million from the University to finance the purchase of SJRHN/SJMG, a Pennsylvania non-profit (nonstock) corporation and certain of its affiliates, with the Health System transferring funds on the same day. At June 30, 2015, the Health System recorded as prepaid expenses and other assets (current) the amount transferred on June 30, 2015 related to this transaction. The parties entered into closing agreements on June 30, 2015 and September 30, 2015, with an official acquisition date of July 1, 2015. On July 1, 2015, the Health System acquired SJRHN/SJMG.
SJRHN/$JMG is a 144-bed, not-for-profit acute care hospital that provides inpatient, outpatient, and emergency care services to the Berks County Region.
Pursuant to the Health System's purchase accounting for acquisitions policy, the total purchase for SJRHN/SJMG was allocated to both tangible/intangible assets and liabilities based upon their estimated fair values. There was no goodwill associated with this transaction. The following represents the allocation of the purchase price for the acquisition, as described above (in thousands):
Net accounts receivable $ 26,042 Property, plant & equipment 104,446 Intangible assets 1,489 Other assets 21,975 Liabilities assumed (24,812)
Temporarily restricted net assets (4,730)
Permanently restricted net assets (10,862)
Total net assets acquired $113,548 Total purchase price $113.548 On June 26, 2014, a letter of intent and term sheet (the "Agreement") was executed between the University, the Health System, and Pinnacle Health System. The purpose of the Agreement was to set forth certain non-binding understandings and certain binding agreements between the parties. The intent of the collaboration of the parties was to bring together a high-performing university medical center and a community health system that could provide increased access to a wider range of services and full spectrum of care to patients over a broad geographic base. Subsequent to June 30, 2016, as a result of various legal and regulatory challenges to the proposed transaction, the parties agreed to terminate the Agreement.
- 12. CONTINGENCIES AND COMMITMENTS Contractual Obligations The University has contractual obligations for the construction of new buildings and for additions to existing buildings in the amount of $1,144.8 million of which $964.9 million has been paid or accrued as of June 30, 2016. The contract costs are being financed from available resources and from borrowings.
37
Notes to Consolidated Financial Statements Letters of Credit The University has available letters of credit in the amount of $23.9 million and $20.6 million as of June 30, 2016 and 2015, respectively. These letters of credit are used primarily to comply with minimum state and federal regulatory laws that govern various University activities. The fair value of these letters of credit approximates contract values based on the nature of the fee arrangements with the issuing banks.
Guarantees The University has a contract with a third party whereby the third party acts as an agent of the University in connection with procurement of electricity. The University guarantees the payment of the obligations of the third party incurred on behalf of the University to counterparties. No liabilities related to guarantees have been recorded as of June 30, 2016.
Self-Insurance The University has a coordinated program of commercial and self-insurance for medical malpractice claims at TMSHMC through the use of a qualified trust and a domestic captive insurance company in combination with a self-insured retention layer and is supplementing this program through participation in the Pennsylvania Medical Care Availability and Reduction of Error Fund ("MCARE Fund"), in accordance with Pennsylvania law.
An estimate of the present value, discounted at 2% for the years ended June 30, 2016 and 2015, of the medical malpractice claims liability in the amount of $107.4 million and $109.1 million is recorded as of June 30, 2016 and 2015, respectively.
On July 1, 2003, TMSHMC became self-insured for all medical malpractice claims asserted on or after July 1, 2003, for all amounts that are below the coverage of the TMSHMC's excess insurance policies and not included in the insurance coverage of the MCARE Fund. Under the self-insurance program, TMSHMC is required to maintain a malpractice trust fund in an amount at least equal to the expected loss of known claims.
The balance of this trust fund was $21.5 million and $19.9 million at June 30, 2016 and 2015, respectively.
TMSHMC intends to fund any claims due during the next year from cash flows from operations.
With approval from the Pennsylvania Department of Labor and Industry ("PA-DLI"), the University elected to self-insure potential obligations applicable to Pennsylvania workers' compensation. Certain claims under the program are contractually administered by a private agency. The University purchased insurance coverage for excess obligations over $600,000 per incident. An estimate of the self-insured workers' compensation claims liability in the amount of $8.1 million and $8.6 million, discounted at 1.00% and 1.60%, respectively, is recorded as of June 30, 2016 and 2015, respectively. The University has established a trust fund, in the amount of $13.3 million and $13.0 million at June 30, 2016 and 2015, respectively, as required by PA-DLI, to provide for the payment of clairyis under this self-insurance program. TMSHMC is self-insured for workers' compensation claims and has purchased an excess policy through a commercial insurer which covers individual claims in excess of $750,000 per incident for workers' compensation claims.
The University and the Health System are self-insured for certain health care benefits provided to employees.
The University and the Health System have purchased excess policies which cover employee health benefit claims .in. excess of $600,000 and $575,000 per employee per year, respectively. The University and TMSHMC provide for reported claims and claims incurred but not reported.
Litigation and Contingencies In November 2011, the University was made aware of certain allegations in a Commonwealth of Pennsylvania Grand Jury presentment. Various legal proceedings and investigations have arisen as a result of such allegations, including criminal proceedings against former officers and employees of the University. Certain claims and civil litigation have been filed against the University with anticipation that other complaints could be filed.
As of June 30, 2016, the University has paid or accrued $93.0 million for 33 claims with $0.2 million and
$33.2 million included in institutional support within the consolidated statements of activities for the years ended June 30, 2016 and 2015, respectively. Additional claims could be paid in the future but without having knowledge of the number and nature of such claims the University is unable to predict the outcome 38
Notes to Consolidated Financial Statements of these matters or the ultimate legal and financial liability and at this time cannot reasonably estimate the possible loss or range of loss. Accordingly, no amounts have been accrued in the financial statements for these claims.
- In addition to the settlement costs, the University has incurred costs for the fiscal years ended June 30, 2016 and 2015 totaling $6.6 million and $14.7 million, respectively, for internal investigation, legal, communications and other related costs. These costs are included in institutional support within the consolidated statement of activities.
The University has submitted claims to insurance carriers at June 30, 2016 related to the claims that have been settled. Insurance reimbursements and direct payments of settlements amounts, fees and costs totaled $29.9 million as of the date on which the consolidated financial statements were issued. Additional insurance claims remain outstanding.
Based on its operation of the Health System (see Note 11 ), the University, like the rest of the healthcare industry, is subject to numerous laws and regulations of federal, state and local governments. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions. Recently, government reviews of healthcare providers for compliance with regulations have increased. Although the University believes it has done its best to comply with these numerous regulations, such government reviews could result in significant repayments of previously billed and collected revenues from patient services. Subsequent to June 30, 2015, the University received a notice from the Pennsylvania Department of Public Welfare alleging that the University had been overpaid $11.5 million under the Medicaid program for a prior fiscal period. The University had a liability recorded at June 30, 2015 on the consolidated statements of financial position and a corresponding reduction in Health System revenue on the consolidated statement of activity. This matter has been resolved as of June 30, 2016 with no payment made to the Commonwealth related to this matter. As such~ the liability has been reversed at June 30, 2016 and a corresponding increase in Health System revenue on the consolidated statement* of activity has been recorded.
On July 12, 2013, the University received a preliminary report from the U.S. Department of Education based on the program review of the University's compliance with the Clery Act, a federal law related to campus safety. The Department of Education will make a final program review determination after the process is complete. The outcome and financial impacts of the program review are unknown as of the date the consolidated financial statements were issued.
Various other legal proceedings have arisen in the normal course of conducting University business. The .
outcome of such litigation is not expected to have a material effect on the financial position of the University.
- 13. SUBSEQUENT EVENTS The University has evaluated subsequent events through October 21, 2016, the date on which the consolidated financial statements were issued. It did not identify any subsequent events to be disclosed other than those below or previously noted.
39
THE PENNSYLVANIA STATE UNIVERSITY BOARQ OF IRUS!EsS as of June 30, 2016 APPOINTED MEMBERS ELECTED BY BOARD REPRESENTING BY THE GOVERNOR EXOEACIO BUSINESS AND INDUSTRY CLIFFORD G. BENSON, JR. "ERIC J. BARRON RICHARD K. DANDREA Retired Chief Development Officer President Attorney Buffalo Sabres The Pennsylvania State University Eckert Seamans Cherin & Mellott. LLC
- Non.-VotingTrustee ROBERT CAPRETTO "THOMAS W. WOLF ROBERT E. FENZA Business Owner Governor Retired Chier Operating Officer Commonwealth or Pennsylvania Liberty Property Trust MARK H. DAMBLY "Non-Voting Trustee President IRA M. LUBERT PEDRO A. RIVERA Chairman and Cc>Founder, Independence Pennrose Properties, LLC Seaetary Capita I Partners and Lubert Adler Partners, L.P.
Pennsylvania Department of Education ALLISON S. GOLDSTEIN Graduate Assistant CYNTHIAA. DUNN DANIEL S. MEAD The Pennsylvania State University Secretary Former President and CEO Pennsylvania Department of Verizon Wireless PAUL H. SILVIS Conservation and Natural Resources Head Coach WALTER C. RAKOWICH SilcoTek RUSSELL C. REDDING Retired Chief ExecutiVe Officer Secretary Prologis ELLIOTT W. WEINSTEIN Pennsytvanla Department of Agrlcurture President MARY LEE SCHNEIDER
- 'WILLIAM S, SHIPLEY. Ill President and CEO Weinstein Realty Consultants Governor's Non-Voling Representative SG360' Seaelary of Policy and Planning
- Non-Voting Representative ELECTED ELECTED BY DELEGATES FROM BY ALUMNI AGRICULTURAL SOCIETIES EDWARD *TEo* B. BROWN, III AUCEW.POPE DONALD G. COTNER President & CEO Assoclate Professor Officer, Cotner Farms, lnc.
KETCHConsulting, Inc. Department of Psychology Partner, Don Cotner Farms, LP St John's University Partner, Boyd Station, LLP BARBARA L DORAN Director, Senior Portt'oDo Manager ROBERT J. TRIBECK KEITH W. ECKEL YorkBridge Wealth Partners Attorney Sole Proprietor and President Post Acute Medical, LLC Fred W. Eckel and Sons Farms, Incorporated ROBERT C. JUBEURER Partner, Obennayer, Rebmann, Maxwell & Hippe! IMMEDIATE PAST PRESIDENT CHRIS R. HOFFMAN ALUMNI ASSOCIATION Vice President ALBERT L LORD KAY L. SALVINO Pennsylvania Farm Bureau Marsh Wren, LLC STUDENT TRUSTEE M. AERAHAlol HARPSTER ANTHONY P. LUBRANO LUKE R. METAXAS Co-Owner, Evergreen Farms, Inc.
President, A.P. Lubrano & Company, Inc. Student The Pennsylvania State University BETSY E. HUBER RYAN J. MCCOMBIE President, The National Grange ACADEMIC TRUSTEE Retired, United Stales Navy DAVIDC.HAN KEITH E. MASSER Professor of Surgery and Radiology Chairman & Chief Exeo.rtlve Officer WILLJAlol E. OLDSEY Vice Chair for Education, Department o1 Surgery Independent Consullanl/Educallonal PubHshlng Sterman Masser, Incorporated Penn State Hershey Medical Center and College o1 Medicine ELECTED BY THE BOARD -AT-LARGE KATHLEEN L CASEY JULIE ANNA POTIS MATTHEW W. SCHUYLER Senior Advisor Executive Vice President and Treasurer Chief Human Resources Officer Patomak Global Partners, LLC American Farm Bureau Federation Hilton Worldwide EMERITI TRUSTEES MARIANNE E. ALEXANDER STEVE A. GARBAN BARRY K. ROBINSON President Emerita Senior Vice President for Finance Chier Counsel for Economic Affairs Public Leadership Education Network and Operations/Treasurer Emeritus U.S. Department of Commerce The Pennsylvania State University H. JESSE ARNELLE L J. ROWELL, JR.
SAMUEL H. HAYES, JR. -'--
Attorney Retired Chairman and Chief Executive Officer EDWARD R. HINTZ. JR.
CYNTHIAA. BALDWIN Provident Mutual Life Insurance President Retired Justice Hintz Capital Managemenl, Inc.
Supreme Court of Pennsylvania MR. CARL T. SHAEFER Owner: Cari T. Shaffer Farms DAVID R. JONES JAMES S. BROADHURST Retired Assistant Managing Editor Chairman CECILE M. SPRINGER TheNewYorkTrnes Eat'n Park Hospitality Group, lnoorporated President, Springer Associates EDWARD P. JUNKER 111.
CHARLES C. BROSIUS LINDA B. STRUMPF Retired Vice Chairman ReUred President PNC Bank Corporation Mart>oro Mushrooms PAUL V. SUHEY Orthopedic Surgeon ROGER A. MADIGAN WALTER J. CONTI Martin & Suhey Orthopedics Retired State ~nator Retired Owner 23rd Senatorial District Cross Keys lnn/Pipersville Inn HELEN D. WISE ROBERT D. METZGAR Retired Chief or Staff for Governor Casey DONALD M. COOK. JR. Former President Commonwealth of Pennsylvania ReUred President North Penn Pipe & Supply, Incorporated SEMCOR, Incorporated BOYD E. WOLFE JOEL N. MYERS Retired, Owner and Operator MARIAN U. BARASH COPPERSMITH President Wolfden FamlS Retired Chairman of the Board AccuWeather, Incorporated The Barash Group QUENTIN E. WOOD KAREN B. PEETZ Retired Chairman or lhe Board and ROBERT M. FREY President Chief Executive Officer Auomey-at-Law Bank of New York Mellon Quaker Slate Corporation Frey & Tiley, P.C.
ANNE RILEY EDWARD P. ZEMPRELLI Teacher Attorney
This publication is available in alternative media on request.
The University is committed to equal access to programs, facilities, admission and employment for all persons. It is the policy of the University to maintain an environment free of harassment and free of discrimination against any person because of age, race, color, ancestry, national origin, religion, creed, service in the uniformed services (as defined in state and federal law), veteran status, sex, sexual orientation, marital or family status, pregnancy, pregnancy-related conditions, physical or mental disability, gender, perceived gender, gender identity, genetic information or political ideas. Discriminatory conduct and harassment, as well as sexual misconduct and relationship violence, violates the dignity of individuals, impedes the realization of the University's educational mission, and will not be tolerated. Direct all inquiries regarding the nondiscrimination policy to Dr. Kenneth Lehrman Ill, Vice Provost for Affirmative Action, Affirmative Action Office, The Pennsylvania State University, 328 Boucke Building, University Park, PA 16802-5901, Email: kfl2@psu.edu, Tel (814) 863-0471.
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ATTACHMENT B-Penn State University Self-Guarantee Agreement Document transmitted contains confidential financial information - withhold under I 0 CFR 2.390.
When separated from enclosures this document is uncontrolled.
The Pennsylvania State University Financial Assurance for Cost of Decommissioning Activities Self-Guarantee Agreement with the Nuclear Regulatory Commission December 19, 2016 (Source: NUREG-1757, Vol. 3, Rev 1, Appendix A, Section A.9.12)
Guarantee made by The Pennsylvania State University, a nonprofit university, organized under the laws of the Commonwealth of Pennsylvania, herein referred to as "guarantor," to the U.S.
Nuclear Regulatory Commission, on behalf of the university as licensee.
The following licenses are covered under this guarantee:
License numbers: R-2 Breazeale Nuclear Reactor Docket 050-00005 SNM-95 Penn State University Docket 070-00113 Recitals
- 1. The guarantor has full authority and capacity to enter into this self-guarantee by the bylaws of the Trustees of the Pennsylvania State University.
- 2. . This self-guarantee is being issued to comply with regulations issued by NRC, an agency of the U.S. Government, pursuant to the Atomic Energy Act of 1954, as amended, and the Energy Reorganization Act of 1974. NRC has promulgated regulations in Title 10, Chapter I of the Code of Federal Regulations, Parts 30, 50, and 70, which require that a holder of, or an applicant for, a materials license issued pursuant to 10 CFR Parts 30, 50, and 70 provide assurance that funds will be available when needed for required decommissioning activities.
- 3. The self-guarantee is issued to provide financial assurance for decommissioning activities for the licenses and facilities shown. The decommissioning costs for these activities are as follows:
Certified Amounts or License# License Description Current Cost (Docket#) and Method Estimates - 2016
- Research Reactor 12/18/13 base estimate of R-2 $16,031,304 plus 5% per year compounded
$18,558,238 (050-00005) increase.
Special Nuclear Material 12/18/13 base SNM-95 estimate of $356,776 plus 5% per year $413,013 (070-00113) compounded increase.
'- Sub total $18,971,251
25% contingency fund $4,742,813 Total Estimated Costs: $23,714,064
- 4. The guarantor meets or exceeds the following financial test criteria for a nonprofit university that issues bonds, and agrees to comply with all notification requirements as specified in 10 CFR 30 and 10 CFR 30 Appendix E.
Financial Test: The current rating for our most recent uninsured, uncollateralized, and unencumbered bond issuance is AA as issued by Standard & Poor' s and Aal as issued by Moody's.
- 5. The guarantor does not have a parent company holding majority control of its voting stock.
- 6. Decommissioning activities as used below refer to the activities required. by 10 CFR Part 30, 50, and 70 for decommissioning of the facilities identified above.
- 7. Pursuant to the guarantor's authority to enter into this guarantee, the guarantor guarantees to the NRC that the guarantor shall:
(a) Carry out the required decommissioning activities, as required by the licenses listed above.
- 8. The guarantor agrees to submit revised financial statements, financial test data, and an auditor's special report and reconciling schedule annually within 180 days of the close of its fiscal year.
- 9. Not applicable.
- 10. The guarantor agrees that if, at the end of any fiscal year before termination_ of this self-guarantee, it fails to meet the self-guarantee financial test criteria, it shall send within 90 days of the end of the fiscal year, by certified mail, notice to the NRC that it intends to provide alternative financial assurance as specified in 10 CFR Part 30, 50, or 70. Within 120 days after the end of the fiscal year, the guarantor shall establish such financial assurance.
- 11. The guarantor also agrees to notify the NRC in writing in advance of any proposed change in or transfer of ownership of the licensed activity and to maintain this guarantee until the new licensee provides alternative financial assurance acceptable to the beneficiary.
- 12. The guarantor agrees that if it determines, at any time other than as described in Recital 10, that it no longer meets the self-guarantee financial test criteria or it is disallowed from continuing as a self-guarantor, it shall establish alternative financial assurance as specified in 10 CFR Parts 30, 50, or 70 within 30 days.
- 13. The guarantor, as well as its successors and assigns and agrees to remain bound 2
jointly and severally under this guarantee notwithstanding any or all of the following:
amendment or modification of the license or NRC-approved decommissioning funding plan for that facility, the extension or reduction of the time of performance of required activities, or any other modification or alteration of an obligation of the licensee pursuant to 10 CFR Parts 30, 50, or 70.
- 14. The guarantor agrees that it shall be liable for all litigation costs incurred by the NRC in any successful effort to enforce the agreement against the guarantor. Such litigation costs shall not be deducted from or otherwise reduce the financial assurance provided by this guarantee.
- 15. The guarantor agrees to remain bound under this self-guarantee for as long as it, as licensee, must comply with the applicable financial assurance requirements of 10 CFR Part 30, 50, or 70, for the previously listed facilities, except that the guarantor may cancel this self-guarantee by sending notice by certified mail to the NRC, such cancellation to become effective not before an alternative financial assurance mechanism has been put in place by the guarantor.
- 16. The guarantor agrees that if it, as licensee, fails to provide alternative financial assurance as specified in 10 CFR Part 30, 50, or 70 and obtain written approval of such assurance from the NRC within 90 days after a notice of cancellation by the guarantor is received by the NRC from the guarantor, the guarantor shall make full payment under the self-guarantee.
- 17. The guarantor expressly waives notice of acceptance of this self-guarantee by the NRC. The guarantor also expressly waives notice of amendments or modifications of the decommissioning requirements.
- 18. If the guarantor files financial reports with the U.S. Securities and Exchange Commission, then it shall promptly submit them to its independent auditor and to NRC during each year in which this self guarantee is in effect.
- 19. The guarantor agrees that if the guarantor admits in writing its inability to pay its debts generally, or makes a general assignment for the benefit of creditors, or any proceeding is instituted by or against the guarantor seeking to adjudicate it as bankrupt or insolvent, or seeking dissolution, liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency, or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian, or other similar official for the guarantor or for any substantial part of its property, or the guarantor takes any action to authorize or effect any of the actions stated in this paragraph, then the Commission may:
(a) Declare that the financial assurance guaranteed by the guarantee agreement is immediately due and payable to the standby trust set up to protect the public health and safety and the environment, without diligence, presentment, demand, protect, or any other notice of any kind, all of which are expressly 3
waived by guarantor; and (b) Exercise any and all of its other rights under applicable law .
. 20. The guarantor agrees to notify the NRC, in writing, immediately following the filing of a voluntary or involuntary petition for bankruptcy under any chapter of Title 11 (Bankruptcy) of the United States Code, or the occurrence of any other event listed in paragraph 19 of this guarantee and by or against the guarantor; the licensee; an entity (as that term is defined in 11 U.S.C. 101(14)) controlling the licensee or listing the license or licensees as property of the estate; or an affiliate (as that term is defined in 11 U.S.C. 101(2)) of the licensee. This notification must include: a description of the event, including major creditors, the amounts involved, and the actions taken to assure that the amount of funds guaranteed by the guarantee for decommissioning will be transferred to the standby trust as soon as possible; if a petition of bankruptcy was filed, the identity of the bankruptcy court in which the
- petition for bankruptcy was filed; and the date of filing of any petitions.
- 21. Not applicable.
- 22. The guarantor agrees that if, at any time before termination of this self-guarantee, its most recent bond issuance ceases to be rated in any category of "A-" and above by Standard and Poor' s or in any category of A3 and above by Moody's, the licensee will notify the Commission in writing within 20 days after publication of the change by the rating service.
I hereby certify that this self-guarantee is true and correct to the best of my knowledge.
Effective date: 12/19/2016 Pennsylvania State University:
Joseph J. Doncsecz Associate Vice President for Finance and Corporate Controller Signature of witness or notary: l\_bnna 0 .~lL..
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