ML20209C915

Mitr Requalification Program, as Currently Approved & in Effect

ML20209C915
Person / Time
Site:	MIT Nuclear Research Reactor
Issue date:	07/08/1999
From:	MASSACHUSETTS INSTITUTE OF TECHNOLOGY, CAMBRIDGE
To:
Shared Package
ML20209C896	List: ML20209C890 ML20209C910 ML20209C915 ML20209C923 ML20209C933
References
SR#--78-16, SR#-0-78-16, NUDOCS 9907120311
Download: ML20209C915 (39)

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MITR Requalification Program as currently approved and in effect i

s MITR Requalification Program as submitted on July 8,1999 ,

IS SAR Section 12.10 ,

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SAR APPDTDIX 13.C f.

REQUALIFICATION PROGRAM FOR LICENSED PERSONNEL 13.C.1 General The requalification program for licensed personnel shall consist of on-the-job training, annual examination, review board evaluations, and where dsficiencies have been exhibited, pre-planned lectures. The requalification program chall be conducted for a continuous period of two years, and upon conclusion ,

chall be promptly followed by successive requalification programs.

I 13.C.2 On-The-Job Training  !

n) Each licensed operator must manipulate the reactor controls and each 1 licensed senior operator either must manipulate the controls or direct the j cetivities of. individuals during reactor control manipulation during the term cf his license. The manipulations shall consist of at 1 cast 10 reactivity control manipulations in any combination of reactor startups, reactor shutdowns, reshimming i

U) cr power changes of 10% or greater, over a two year period. They shall take place ct intervals not to exceed 4 months.

b) The evaluation of the annual radiation emergency plan drill shall be

. i rcviewed and initialled by all licensed perstonel.

c) All licensed personnel shall review 'the contents of the abnormal and j cmergency procedures at least once during each requalification program I d) All licenred personnel shall receive a copy of all significant changes to the facility license and design, to standard, emergency and abnormal operating pr:cedures, and to administrative procedures.

F e) A systematic observation and evaluation of each licensed operator's or .

Cenior operator's (execpt for the Senior Review Board) performance during actual cr simulated emergency or abnormal situations must be conducted on an annual n

) basis.

S R # O .'18 16 JUL 111978'

SAR-13.C.3 Annual Examination ,

f Written examinations shall be administered annually to all licensed p:rators and senior operators with the exception of those members of the Srnior Review Board (see Section 13.C.4 ) who prepare, administer and grade tha examinations and thus shall be considered to have completed the examination r2quirements. In no case shall the number of persons exempt from taking the written exam exceed three (3). The examination will include questions taken '

from the following general areas:

A. Principles of Reactor Operation i

B. Features of Facility Design C. ~Ceneral Operating Characteristics .

D. Instruments and Controls E. Safety and Emergency Systems ' '

F. Standard and Emergency Operating Procedures *[ ]

i G. Radiation Control and Safety O E. Reactor Theory

1. Radioactive Materials Handling, Disposal and Hazards l

J. Specific Operating Characteristics K. Fuel Handling and Core Parameters L. Administrative Procedures, Conditions and Limitations The examination which is prepared for administration to Reactor Operator '

Lic nsees will be structured from questions on topics A through C. The l examination, which is formulated for administration to Senior Reactor Operator '. ,

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Liccusees, will consist of questions taken from topics B through L. The i

, questions formulated for this examination will be of a complexity at least -

cqual to questiona given at this specific facility during NRC administered ~

license examinations.

The Senior Refie:s Board shall annually review the results of al1 written

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cxaminations toge:.her with individual operator and senior operator evalu- .

JUL 111978 SR # O-78-16 .

I SAR 13.C-3 9 ctions (see Section 13.C.4 ) to assess the Requalifiention Pr: gram rnd to l

U(3d:termineifadditionalretrainingisrequiredtoupgradelicensedoperato cod senior operator knowl' edge.

The Senior Review Board shall structure an appropriate series of:

1. Lectures and/or )

2. Self-Study of reference materials and/or 1

3. Tutoring sessions ca may be indicated, to correct any deficiencies noted during the review process. ,

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13. C . 4 Review Board Evaluation Holders of operator licenses or senior operator licenses shall be eval-4 unted at least two months, but not more than four months, before the expira-tien date of the operator license (OL) or senior operator license (SOL), and ct such other times as a special evaluation may appear warranted.

k Operator Review Boards for holders of operator licenses shall consist of at  ;

j least two Senior Reactor Operators, the most senior to be chairman of the board.

The Senior Review Board for holders of senior operator licenses will consist cf the following:

-Director of Reactor Operations

-Reactor Superintendent .

-A licensed Senior Operator appointed by the Director of Operations The most senior member will be chairman of the board. Two 6*oard members shall constitute a quorum. No person shall sit on his own Review Board.

The Board shall review the licensee's knowledge of the plant and his

' performance of the job (safety functions only) as it relates to safe operation of the plant. The assesment procedure shall include:

a) Review annual eynminations taken since the last review, w,

SR # O-78-16 JUL 111978

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SAR 1 .C-4 1 b) Review of on-the-job training rec:rds.

c) Consideration of other occupational activities related to the reactor.

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d) Interviews with immediate supervisors as required.

e) Interview with the licensee.

The Board shall report in writing their assessment of the licensee to the Director of Reactor Operations (with a copy to the licensee) together with r:coumendations. In the case of the Director of Reactor. Operations, a copy of the assessment and recomendations vill be sent to the Director of the Nuclear Re:ctor Laboratory. The Board may recommend:

a) Continued reactor operation by the licensee b) Additional training in areas where deficiencies have been exhibited, c) Suspension from duties for which an OL or SOL is required.

The Director of Reactor Operations will act on the recommendation of the Board.:'In -the event of.', disagreement between the recommendations of..the Board

/'7 V and the action contemplated by the Director of Operations, the course determined by the Director of Operations to be more conservative will be followed. A record cf the disagreement will be sent to the Director, Nuclear Reactor Laboratory and I

l to the Chairman of the MITR Safeguards Committee for review and possible rreonsideration. l An accelerated training program will be provided for Reactor Operators and Senior Reactor Operators who score less than 70% overall on the annual examination. The individual will be removed from his licensed ddties and enrolled in an accelerated program. The course content and duration of the pro- ,

gram will depend on the individual's deficiencies. Upon completion of the .

program the person ranst demonstrate adequate proficiency by either a written or :..:

documented oral exam in the deficient categories. In addition, any licensed -

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SR // O-78-16 JUL 111978

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13.C-5 i' . .

P 4: on who scores less than 70% in any category on the annual exam shall be ratrained as' specified by the Senior Review Board.

13.C.5 Records and Record Retention ,

The following records will be retained for at least as long as an in- .

dividual is licensed:

1. Records of reactor control manipulations or supervision of . .

vanipulations. , ,

2.l Annual examination questions and answers.

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3. Review Board evaluations. ,

4. Documentation of additional training and testing required for Reactor Operatom and Senior Reactor Operators exhibiting' deficiencies'. ,

5. Review of the contents of the abnormal and emergency procedures.

6. To document significant changes to the facility and procedures, approved safety reviews vill be reviewed and initis11ed by all Ifcensed operators and senior operators.

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C' SR # O 16 JUL 111978 .

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of tha Traasurar 1

l O For the year enc ed June 30,1998  :

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M ITMassachusetts Institute of Technology

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TIIE CORPORATION 3997,9g l

1 Chairman: Alexander V. d'Arbeloff President: Charles M. Vest j Treasurer Glenn P. Strehle l Secrctary Kathryn A.Willmore 1 l

hfeMembers Paul M. Cook, Breene M. Kerr, Kenneth II. Olsen, W. Gerald Austen, Edward E. David, Jr., John S. Reed, Mary Frances Wagley, Emily V. Wade, Charles H. Spaulding, Shirley A. Jackson (on leave), Frank Press, Angus N.

MacDonald, Raymond S. Stata, Samuel W. Bodman, James A. Levitan, Alexander W. Dreyfoos, Jr., Morris Tanenbaum, Paul E. Gray, George N. Ilatsopoulos Members Denis A. Bovin, John M. Hennessy, Michael M. Koerner, Claudine B. Malone, FilFun S. Edgerly, Lawrence A.

Hough, Brian G.R. Ilughes. David H. Koch, Ronald A. Kurtz, John A. MoreficU Jr., Robert A. Muh, Kenichi Ohmae, Darcy D. Prather, James A. Champy, Edie N. Goldenberg, Richard A. Jacot,s, Judy C. Jewent, Patrick J.

McGovem, A. Neil Pappalardo, Peter M. Saint Germain, Richard P. Simmons, Mark Y.D. Wang, John K. Castle, Anhur Gelb, Barbara A. Gilchrest, Mark E. Lundstrom, Antonia D. Schuman, R. Gary Schweikhardt, George N.

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Dutzow, Josephine S. Jimenez, L. Robert Johnson, Dana G. Mead, Paul Rudovsky, Theresa M. Stone, R. Robert Wickham, Elliot K. Wolk, Gregory K. Arenson, Osic V. Combs, Jr., Nonnan E. Gaut, Lissa A. Martinez, DuWayne J.

Peterson, Jr., Gerhard H. Schulmeyer, Elisabeth A. Stock, Susan E. Whitehead, Robert E. Wilhelm President of the Association ofAlumni and Alumnae Robert M. Metcalfe I

Representatives ofthe Commonwealth Acting Govemor: The lionorable, ArFeo Paul Cellucci Chief Justice of the Supreme Judicial Court:1he Honorable Herbert P. Wilkins l

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LifeMembers Ementi l Cecil II. Green, George P. Gardner, Robert C. Gunness, Laurance S. Rockefeller, Luis A. Ferre, Semon E. Knudsen, l Irende du Pont, Jr., J. Kenneth Jamieson, John C. Haas, George W. Thorn, Ralph Landau, Carl M. Mueller, Richard l L. Terrell, D. Reid Weedon, Jr., Ellmore C. Patterson, Frank T. Cary, Norman B. Leventhal, liarold J. Muckley, Duvid S. Saxon, Colby H. Chandler, Mitchell W. Spellman, Joseph U, Gavin, Jr., Edward O. Vetter. T. A. Wilson, m Louis W. Cabot, Christian J. Matthew lioward W. Johnson i \

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TABLE OF CONTENTS i

5-11 Report of the Treasurer 12 Distribution of Investment Income to Funds FiveYearTrend Analysis 14-15 18 Financial Statements and Additional Information 19 ScheduleA Statement of Financial Position 20 Schedule B Statement of Activities 21 Schedule C Statement of Operations and Other Changes in Unrestricted Nel Assets 22 Schedule D Statement of Cash Flows 23-30 Notes to Financial Statements 31 Report ofIndependent Accountants 32 33 Glossary for Financial Statements List of Tables 7

Table 1 Increase in Net Assets After investment Gains Table 2 Gifts, Grants, and Bequests 8 Table 3 Value of Endowment Funds By Purpose, 8 9

Table 4 investments List of Figures 16 Figure 1 Compound Growth Rates of Selected MIT Data 16 Figure 2 Income From Imtstments Distributed to Funds 17 Figure 3 Instruction and Unsponsored Research 17 Figure 4 Endowment and Other Investments at Market O

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Report of the Treasurer bc ToMembers ofthe Corpomtion Introduction Despite only modest growth in tuition and sponsored research revenues, the overall financial results of the Institute were favorable last year as measured by the increase in the market value of invested assets. The operating results produced an additional need for general funds of $4.2 million, a decrease from the $4.9 million in the prior year. The Generally Accepted Accounting Principles (OAAP) definition of unrestricted results includes market gains in unrestricted net assets and does not include as an expense the amounts act aside for facilities and certain resuve strengthening. Accordingly, under GAAP, there was an increase in unrestricted net assets of $256.4 million. De value of all net assets increased by $781.8 million to a new high of $4,676.0 million. Our financial strength ranks with a small number of very successful corporations and institutions.

He Institute's publicly held debt continues to be rated triple A by both Moody's and Standard and Poor's.

Schedule A - Statements of Financial Position ne Statement of Financial Position is the balance sheet of the Institute at June 30,1998. The investment assets are reported at market value while other assets are valued based on amortized cost. De assets less the liabilities result in net assets which is comparable to stockholders' equity in a for-profit corporation. Dunng the past year, the net assets increased by 20.1 percent.

Net assets, divided into three difTerent categories, recognizes the significant way in which universities are different frorc a profit-making concern - Mff receives gifts restricted as to purpose and assumes a fiduciary responsibility for their proper use. .

Net assets are categorized into three groups according to the nature of the restrictions placed on gifts by donors. Rese are p described as follows:

Permanently restricted net assets are those gifts for which the original principal can never be spent. Bey comprise gifts and pledges to true endowinent together with assets held in trust, such as life income plans, which, when paid or matured, will go to the endowment. De increase of $57.1 million to a total of $639.7 million primarily reficcts the inflow of gifts and pledges to restricted endowtnent funds and the gain on investments.

Temporarily restricted net assets are those gifts which ultimately can become available to meet the expenses of operations or capital expenditures. They require an event or lapse of time to take place before they are available for spending. Over ninety percent of the assets in this category result from the accumulated market gains held in permanently restricted endowment funds. It also includes pledges, except those to permanently restricted endowinent funds, gifts for construction projects which have not been completed, and life income funds which, upon maturity, will be available for spending. De increase of $468.4 million to a total of $1,831.8 million primarily results from the increase in the market value of securities held in restricted funds.

Unrestricted net assets comprise all the remaining economic resources available to the Institute. His dermition of unrestricted net assets is quite broad api covers assets which need to be maintained to generate future investment income. It includes current funds received from donors for restricted purposes which, under the accounting rules, are categorized as unrestricted if the Institute spends equivalent unrestricted funds for the same purpose. Endowment and Similar Funds categorized as unrestricted in Note I include all those gifts received since our founding which the Institute dermed as funds functioning as endowment. Unrestricted net assets total $2,004.5 million and are 42.9 percent of total net assets.

Pledges receivable of $112.8 million have been recorded as an asset as required by GAAP with the corresponding addition to temporarily or permanciuly restricted net assets. He increase during 1998 of $22.9 million was due to several large new pledges. Pledges have been discounted to present value as detailed in Note A.

Schedule B - Statements of Activities f De changes in the balance sheet during the year for the three categories of net assets is detailed in Schedule B -

(s Statement ofActivities.

De increase in unrestricted net assets of $256.4 million was caused entirely by $268.2 million in net investment gains.

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The rr . .sset reclassifications result primarily from the collection of pledges and the use of building furns for construction and other project costs.

He investment gains resulting from permanently restricted endowment funds are categorized as tamporarily restricted as they might be distributed for spending in future years for the purposes given. Such distributions would take place un Institute's endowment income spending policies and be consistent with the Massachusetts Management ofInstitutional Funds Act.

Pledges, gifts to be received in future years, are recorded as pennanently restricted if th: gift is to be for an endowment purpose defined, or restricted, by the donor. If, however, the pledge is defined as either on expendable gift for a r purpose or an unrestricted gifl, then the pledge is categorized as temporarily restricted. Mhen the gift in the form of a payment is actually received and its purpose restriction met, then the temporarily restrict)d pledge is reduced by the gift and the net asset is reclassified as an unrestricted asset.

Schedule C- Statements of Operations and Other Changes in Unrestricted Nc: Assets His statement details the Institute's operating revenues by source and the operating crpenses by major functional classification. Total operating revenues were 51,219.3 million, and $1,175.0 million in 1998 and 1997, respectively.

Scholarship and fellowship grants are accounted for as a reduction in tuition revenue as required by the Audit Guide Total than as an expense. Scholarships and fellowships were 560.1 millian, a decrease of $2.6 million or 4.1 percent.

undergraduate scholarships were 531.6 million, a decrease of 5 .4 raillion or 1.3 percent. Graduate fellowships were $28 million, a decrease of $2.1 milhon or 6.9 percent. The unrestricted operating funds to support these scholarships and fellowships in 1997-98 were $14.9 million (512.3 million for undergraduates and $2.6 million for graduate students), a decrease of 6.3 percent from the previous year total of 515.9 million (512.9 million for undergraduates and $3.0 million f graduate students). The decline in need for unrestricted operating funds was caused by a reduction in the calculation for undergraduates and increases in other funding sources fbr graduate students. Tuition and other income, net of scho and fellowship grants, was 5170.3 million in 1998, an increase of 510.1 million or 6.3 percent.

De research revenues of Departmental and Interdepartmental Laboratories, almost all on campus, were $384.1 million in 1997-98 as compr .d to 5387.9 million in the prior year, a decrease of 1.0 percent. Industry is MIT's leading sponsor of research on campus with a volume of 574.0 million, a decrease of 1.6 percent after two years oflarge increases. The second larFect source of research revenue is the Department of Energy with 570.3 million, which is a small decrease from 1997's volume. De Department of Defense is the third largest source with total research volume of $64.8 million, a decrease of 4 6 percent. Total research from all non Federal sources increased by 4.6 percent to 5111.9 million.

The research revenues at the Lincoln Laboratory increased to $364.8 million in 1998 from $352.6 million in 1997, an increase of 3.5 percent The difference letween the research revenues and the direct cost of sponsored research is used to fund indirect costs which are the facilities and administrative costs applicable to both research and instruction. As research revenues grow more slowly than other sources of revenues, it causes a continued inucase in the, proportion of indirect costs that must be paid from unrestricted resources such as tuition and general funds.

Revenues also include the net funding of current operations from non operating sources such as expendable gifts, investment income and gains on investments. The net funding of current operations increased by $20.6 million or 15.1 percent in 1998.

Operating expenses increased 3.7 percent or 543.7 million in 1998. His increase was due to compensation and employee tenefits and the increased cost of maintaining MIT's Physical Plant.

Investment income, defined as dividends, interest and rents, increased by 15.6 percent to 586.5 million in 1998 because of  ;

l an increase in interest income from fixed income securities and rental income from real estate The increase in net assets includes both realized and unrealized gains on investments. A different view of current period results would te a review of the net increase or decrease in the net asset value of Institute funds excluding net investments gains during 1998. His measure shows what the change in net assets would have teen without the increased value of the capital market. De following tabic displays the net increase in fund balances in this fashion:

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Table 1 i Increase in Net Assets After Investment Gains (m thousands ofdollars)

Temporarily Permanently Unrestnaed Restrined Restriaed Total increaseinNat Assets $2%,372 $468,361 $57,064 $781,797 Dedua:

Nat tnvestment amins 268.186 407.126 29 2 ,8 spl,D9 )

I lacrease in Net Assets Escluding .

Net Inessment Gelas 5(11,814) 561,235 $M,826 Sa6,247 l

'i Results of Operations j The Institute does not use the GAAP accounting model for internal management reportmg. De difference between the

$256.4 million net change in unrestricted net assets reported for financial statement purposes in Schedule C and the results of operations of $(4.2) million deserves explanation. De largest difference is the net invNnent gains of $268.2 million, of which $223.5 million was reinvested and $44.7 million was distributed to funds. The future cost of facilities and renovations -

plus the reserve strengthening increased general funds by $18.9 million. Also, departmental controlled funds increased by J

$38.2 million from unrestricted activity.

Schedule D. Statements of Cash Flows his statement explains the change in the cash balances of the Institute from the end of the preceding par to Ge end of the ' '

current year. The statement starts with the overall change in net assets for the par, then adds back expenses and other transactions which did not require cash, and then explains the changes in the specific balance sheet items. Receivables and payables are crened when transactions are booked for reporting purposes, but cash has not yet been received or paid. A positive adjustment for accounts receivable during the year reflects the net decrease in receivables. In a similar manner, a positive adjustment in accounts payable reflect an increase in payables.

Distribution of Investment income to Funds (see schedule immediately following the Treasurer's discussion) his schedule, not subject to audit, describes the distribution of investment income in the general investments and separately invested funds and the sources of earnings distributed. It also describes the purposes to which such income was distributed and used. De investment income reported before distribution includes all dividends, interest and rents camed and the market appreciation relates only to that earned on this income reserve during the year. The market appreciation on all funds distributed for spending includes $44.7 million from the accumulated realized gains, almost identical to the prior year.

Gifts Gifts to the Institute set new secords in 1997-98 by every measure Gifts are reported as either " Gins and bequests" or

" Pledges"in Schedule B. De total amounts of gifts for all classes of net assets were 3158.5 million and $128.8 million for 1998 and 1997 respectively. Gifts and bequests by this measure excludes payments on pledges made in earlier pars and records life income gifts only at their actuarial present value for Institute purposes. Gifts are divided into the three categories of net assets. It is noted that all pledges to unrestricted net assets are shown as temporarily restricted, since the funds are not yet available for spending.

The traditional method of reporting total gifts of cash, securities, real estate and equipment set a new record of $137.9 million, as compared to the previous par's total of $130.3 million. His method records gifts only when received and paid .l rather than recognizing the present value of certain gifts when they are pledged. For comparison purposes, Table 2 of Gifts, Grants and Dequests that was presented prior to the implementation three years ago of FAS No. I16 is included below with the gifts to life income plans shown at their actuarial presend value to the Institute. His table includes both new gifts and gifts received as payments on pledges nude in prior pars.

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l Table 2 Gifts, Grants, and Bequests (in thousands ofdollars) 1998 1997 Gifts: 5 43,459 5 31,1 "

for endowment 3,572 31,014 for buildings 5,444 6,527 for life income plans 10 23 for student loans 57,208 52,712 for current funds-restricted 6,262 7,810 for current funds-unrestricted 10.788 7.541 Ofequipment 135,708 127,839 Total gifts to funds 2.238 2.48)

Grants-in-aid 5130,322 5137,946 Total In addition, there is $112.8 million in pledges outstanding, net of a present value discount of 511.0 million, at June 30 1998.

The F ifts reported ly the Alumni /ae Fund totaled $28.7 million, a new record and an increase of 7.9 percent ab prior year. These gifts are recorded on the Institute's records when assets are transferred by donors to the Ins Endowment and Similar Funds The merket value of all the endowment and similar funds totaled 53,678.1 million at year end as compared to $3,023.6 million in the prior year, an increase of 5654.5 million or 21.6 percent on a restated basis. He market value at June includes 53,566.9 million, held in Pool A of the general investments and 5111.2 million held in separately invested fun nis measure of endowment is identical to that in Note i except that the present value F of pled es to endowment funds is excluded as the payments have not yet been received.

De endowment assets are manaful to maximize total investment return relative to appropriate risk. Income is distributed for spending to existing funds in a mannet that retains for reinvestment those amounts that are not less than the am needed to match the growth rate of inflation over time. A continuous inflow of gitis to endowment funds is also needed to increase the growth of income above inflation and help offset the slow growth of operating revenues from other sources.

Endowrnent funds in Pool A rective income based on the number of units held by such funds. Gifts and transfers receiv units based on cunent market value. As a result, it is the market value which is the appropriate measure of the proportion of endowment income that is distributed to each caleFory of funds. De following table provides information on the endowment funds specified by the purpose supponed: ,

Table 3 Value of Endowment Funds by Purpose (in shousands ofds!!ars)

June 30,1998 Market Value Unrestricted purposes (general) $ 782,147 548,274 Departments and research 11,878 Library Salaries (professorships, etc.) 1,181,775 Graduate fellowships-general 48,5 II Graduate fellowships-depanmental 125,036 Undergraduate scholarships 491,990 11,421 Prizes 339.919 Miscellaneous 3,540,951 Subtotal Investment income held for distribution to funds !37.176 13,678,127 Total 8

C Investments Total investments at market value were $4,370.3 million, an increase of $733.5 million or 20.2 percent from last year. His increase compares with an increase of $719.7 million in the previous year and represents the eighth comiecutive year in %ich the market value of total investments has increased. Total invested assets at market value have now increased -

. approximately $2.2 billion over the last five years as a result of gifts and market appreciation.

Table 4 t~

lavestments (un shousands ofdollars)

June 30,1998 June 30,1997 Beek Market Baek Meest  ;

General lavestments Cash equivalents $ 104,600 $ 104,600 $ ~ 72,177 5 72,328 699,613 715,966 667,288 671,791 Fixed income 1,716,914 3,002,215 1,518,016 2,443,875 Equities Real Estate:

11 eld for present or future academic use 38,492 38,485 42,485 42.542 lleid for investrnent or other purposes' 107.020 162.742 104.070 139.048 2 466.639 4,024,80s 2,404,036 3,369,584 Tesal 8eneralinvenesnents 149,656 166,034 119,411 136,120 -

Separately invested 110,342 151,762 92,306 124,368 Life income funds Receivables /payables arising from securities Transactions 28.521 28 521 6.710 6.710 52.955,15e 54,370,325 52422,463 53,636,782-Totalinseetniente A ' '!his table excludes students' notes receivsble, amounts due from educational plant fundr, cash, receivables and payables, and other habihties.

8 At values determined by professional appraisers.

De general investments at market value were $4,024.0 million, an increase of $634.4 million or 19.4 percent from l last year, his increase compares with an increase of $639.4 million in the previms year. General investments at market value have now increased approximately $2 billion over the last five years. His increme in the general investments resulted substantially from gifts and market appreciation. Dere was a net reduction in borrowings of $16.9 million, as further detailed in Schedule D.

De balance between fixed income and equity investments changed slightly during the year. Equity investments, at market value, were 74.6 percent of the general investments at year-end, an increase from 72.5 percent at the prior year-end.  ;

Realized gains in the general investments during the year included $270.4 million from equities and $7.4 million from fixed j income securities. De $558.3 million increase in market value of equities in the general investments resulted prunarily from j market action: The $76.4 million increase in market value of fixed income securities and cash equivalents resulted primarily  !

l from a net investment of cash.

The decrease of $4.0 million in the book value of real estate held for possible future academic use was due primarily i' to a reclassification of the book value of real estate held for investment or other purposes. The increase in book value of $3.0 million in real estate held for investment or other purposes was primarily due to the noted reclassification and modest capital i improvements less depreciation. De market value of real estate held for investment or other purposes increased $23.7 million, l or 17 percent, and resulted from the noted reclassification and increases in the appraised value of these properties, reflecting  !

full occupancy and lease turnover at higher market rates. De income from real estate held for investment or other purposes i increased by $2.0 million to $11.7 million, or 20.6 pen;ent from the previous year, due primarily to lease turnovers at higher market rates and new lease revenue from the further development of University Park at MIT.

De Investment and Executive Committees of the Corporation have contimied the practice whereby spending by funds in the general investments may come from both investment income and realized market gains, and in the separately invested f-funds only from investment incomec his distribution for spending policy is consistent with the investment policy for the l general investments which focuses on total investment retum, a combination of both capital appreciation and investment

[bj. income from interest, dividends, and rents. In 1998, the amount distributed for spending from the general investment endowment funds totaled $108.5 million, an increase of 7.3 percent from the $101.1 million c'istributed in 1997. De 1998 amount distributed for spending from the general investment endowment funds included $44.7 million from realized gains, or l 41.2 percent of the total distributed to those funds < In 1997, the comparable amount distributed to general investment i

endowment funds included $44.6 million from investment gains, or 44.1 percent of the total distributed to those funds. De 9  ;

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i 1998 amount available for total endownent spending (Pool A and SeparatelyInvested Endowment Funds)was $110.4 million, a 6.9 percent increase over the $103.3 million made available in 1997. His is detailed in the schedule of Distribution of Investment income to Funds on page 12. )

ne investments held by the separately invested funds increased by $29.9 million to a market value of $166.0 million.

His increase resulted from a combination of additions to perpetual trusts held outside Mff of $15.1 million, net additions to other funds, and market appreciation.

De hivestments held by the life income funds increased $27.4 million to a market value of $151.8 million. The increase resultest from $11.9 million of current year gins, before actuarial adjustment, transfers to the general investments of

$1.3 million, rnd market appreciation.

huestrnent income in the form of dividends, interest, and rents (after administrative expenses) was $92.0 million as shown in the schedule of Distribution of Investment income to Funds on page 12. His compares to $80.0 million of investn.cnt income in the previous year and represented an increase of 15.0 percent. This mesure of investment income does not include any investment gains. He amount distributed for spending to endowment funds included investment gains. The investment income earned by the current invested funds was fully distributed.

The reserve of investment income held for distribution, which is invested with the general investment funds, was not availed of for distribution to endowment funds. This reserve had a book value of $25.8 million and a market value of million on June 30,1998.

He Investment Committee held three regularly scheduled meetings during the fiscal year, under the chairmanship of Samuel W. Bodman. The Wellington Management Company continued as the primary investment manager and advisor for publicly traded securities, both domestic and intemational. He investment Committee continued the investment program of domestic public-equity investments in smaller capitalization companies through four other investi cd management firms. The investment program in non-marketable and marketable alternative investments in both the domestic and intemational markets was expanded. Non-marketable alternatives include investments such as venture capital. Marketable attematives include investments in event arbitrage and hedge funds. He alternative investments are typically managed by several independent organizations through pooled investment funds.

Plant ne book value of the educational plant assets was $572.3 million at Jure 30,1998 up from $536.0 million at June 30, 1997. This change includes $88.3 million of net additions to educational plant olTset by $52.0 million of net depreciation charges.

Major projects completes during the year included the reconstruction of the Dorrance Building and the Information Systems Buildmg on Massachusetts Avenue. The renovation of the first floor of the former lleinz Building for R.O.T.C. , the r.econd and the third floor of Building 2 for the Chemistry Department, and the first floor of the llomberg Building for Student Services were also completed. He construction of the Central Utility Chiller was also completed. Renovations of the Kresge Auditorium, M 1 T. Chapel, and Baker llouse are all under way. ,

Total indebtedness for educational plant at June 30,1998 was $273.7 milhon of which $142.0 million is tax-exempt debt ,

financed through the Massachusetts llealth and Educational Facilitics Authority. Such indebtedness decreased by $19.6 l million during the year.

General The strong growth in net assets during the past year and over longer time periods has added greatly to the financial strength of the Institute. Until recently, the rate of tuition increases has been greater than the overall rete of salary increases.

In addition, we have benefited over the past decade from large increases in both gifts and in research support from non-Federal sources relative to the very malest growth from Federal sponsors. As a result, the proportion of the Institute's campus operating budget supported by Federal sponsored research has declined and was approximately 49.8 percent last year. His is  !

expected to decline further in the new year, it is particularly adverse as the Institute can no longer include the tuition for l research and teaching assistants in the benefits rate applied to all salaries, including those charged to sponsored research costs.

l The greater dependence on private resources will continue and the economic factors that afTect such support will have a larger influence on our revenues. Investment income available for spending and new gifts are particularly influenced by longer term trends in securities markets. His increased dependence occurs at the same time as the Institute faces large budget l increases to support new buildings and the costs of renovating and maintaining our existing facilities. We also continue to I

absorb the adverse impact of very slow growth in sponsored research revenues and continued Federal efforts to reduce the portion of Facilities and Administrative costs paid by research sponsors. Our ability to attract outstanding faculty, students and 10 1 l

I

1

. 1 I

1 staff is afTected by competitive pressures caused by new initiatives and rising resources at othen institutions combined with a relatively tight employment market in many professions.

)

(V /

An intense planning process over the past six months led by the President with senior omcers and a subgroup of the i Executive Committee has looked closely at these issues. This has enabled a much fuller understanding of both the challenges  !

and the resources available to meet our objectives. Favorable investment returns together with rising distributions for spending )

and strong fundraising results are necessary for success. j ne outcome will depend on the contimied wise leadership of our administration and faculty. He full support and involvem-nt of the Corporation members will greatly help to achieve our goals.

4 Allan DufTerd, Deputy Treasurer and Director ofInvestments, continues to head our investment activities and provided the narrative in the investments section of this report. James Morgan, Controller, and Stefano Falconi, Director of Finance, with their staffs provided the support necessary for the preparation of this report. E. Jane Griflin, the Executive Assistant in my l

omce, has been ofinvaluable help to both me and my predecessor in its preparation over the past forty years.

This is the twenty-third consecutive Treasurer's Report I have presented to the members of the Corporation at the Annual Meeting. I leave to my successors both the responsibility and the pleasure of reporting to you at future meetings. Thank you for your strong support and thoughtful guidance.

1 Respectfully submitted, 1

~

Glenn P. Strehle Vice President for Finance and Treasurer ip) b September 4,1998 v

i1

MAESACilUSETTS INSTITUTE OF TECilNOIDGY DISTRIBUTION OF INVESTMENT INCOME TO FUNDS ,

for the years ended June 30,19A and 1997 (in shousands ofdouars)

(unaudited)

Separately General Invested 1997 1998 Investments Funds investment income before distribution:

S 96,829 $ 114,367 $ 114,367 $ -

balance beginning of year, at market ..

79,977 (a) 91,972 (a) 86,698 5,274 current year investment income -

17.762 22.809 22.809 -

market appreciation _ ,

194,568 229,148 223,874 5,274 Total before distribution .

Distribu+ ion:

Income distributed:

(79,977) (91,972) (86,698) (5,274)

From current years earnings -

From prior years earnings . (224)

From accumulated realized gains on investments - regular distribution. (44.582) (44.682) (44.682)

Total distnbution to funds before (124,783) (136,654) (131,380) (5,274) special distribution .

Special distribution (20.000) (10.000) (10.000)

(144,783) (146.654) (141,380) (5,274)

• Total distribution to funds less: reduction in accumulated gains on 64.582 54.682 54.682 -

investments .

(80.201) (91.972) (86,698) (5,274)

Total distributed from investment income Investment income held for distnbution to funds, balance end of year . S 114.367 S 137,176 S 137.176 S -

Dalances include:

Funds functioning as endowment . $ 114,367 S 137,176 5 137,176 $ -

Current invested funds -

S 114.307 5 137.176 5 137,176 S -

Total -

' Total distribution to funds:

Endowment funds:

Uud for operations S 72,746 5 75,950 $ 75,347 5 603 Used for scholarships and fellowships 17,341 17,623 17,500 123 Used for other charges - 693 821 821 -

Added to principal.. 2,633 5,982 5,543 439 Added to unexpended balances ofendowment I1,009 2,595 2,351 244 income .

(1.095) 7.449 6.909 540 Transferred to other funds 103.327 110.420 108.471 1,949 Other funds:

Life income funds . 3 3 3 .

Building funds 2,981 4.228 3,950 278 Other expendable funds 38.472 32.003 28.956 3.047 41,456 36,234 32.909 3,325 Total distribution to fonds . $ 144.783 $ 146.654 S 141.380 5 5.274 (a)lactudes agency funds which are not reported on Schedule D.

17

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l Figure 1 Compound Growth Rates of Selected MIT Data Versus the Consumer Price index (CPI) 1988 1998 Percent 14 12 10 HIT 8

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.,en

'~

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Figure 2 income From investments Distributed to Funds (Consumer Price index 1989=100)

Dollars (m mdl:ons) 160 i

140 Current Dollars 120 100 _

Constant Dollars 80 60 1996 1997 1998 9

1990 1991 1992 1993 1994 1995 1989 Fiscal Year 16

I O l-Instruction and Unsponsored Research (Consumer Price index 1999=100) .

Dollars (m emitions) 300 270 Current Dollars 240 -

210 180 --

150 -

1990 1991 1992 1993 1994 1995 1906 1997

• 1998*

1989 Fiscal Year O

• Exckr :ng the functional abocatum of depreciatkm and other expenus Figure 4 Endowment and Other investments at Market (Consumer Price index 1989=100)

Donars (m minons) 4,750 4,000 Current Dollars 3,250 2,500 Constant Dollars 1,750 O 1,000 1992 1993 1994 1995 1996 1997 1998 1989 1990 1991 Fiscal Year 17

r- -

1 O

FINANCIAL STATEMENTS AND ADDITIONALINFORMATION FINANCIAL STATEMENTS The financial statements summanze the finances of the Institute during the fiscal years 1997-98.

19 ScheduleA 7he Statements of Financial Position (Balance Sheets) at June 30,1998 and 1997 summarizes the assets, liabilities, and net assets.

Schedy 'e B 20 The Statements of Activities for the years ended June 30,1998 and 1997 shows the changes in unrestricted, temporarily restricted, and permanently restricted net assets during the year.

21 Schedule C ne Statements of Operations tud Other Changes in Unrestricted Net Asacts for the years ended June 30,1998 and 1997, displays the unrestriacd revenues and funds used to meet operating expenses and other charges to operations.

22 Scheduled ne Statements of Cash Flows for the years ended June 30,1998 and 1997 explains the change in the cash talances of the Institute from the end of fiscal par 1997 to the end of fiscal year 1998.

23 30 Notes to FinancialStatements Report ofindependent Accountants 3l Glossary 32 33 O

18

f* -

( MASSACHUSETTS INSTITUTE OF TECHNOIAGY STATEMENTS OF FINANCIAL POSITION st Juae 30,1998 and 1997 (en shousands ofdelines)

Schedule A i

1998 1997 ASSETS 5 57,398 $ -- 25,942 Cash .... -- .

127,285 i 118,% 3 Accounts receivable, net , .

I12,841 89,989 Pledges receivable, net .

Contracts in progress, principally U.S.

29,494 29,787 Governrnent .-

39,886 47,999 Deferred charges, inventories and other assets .

66,247 63,644 Students' notes receivable, net .

4,370,325 3,636,782 Investments, at fair value -

Land, buildingr, and equipment, at cost, net of 572,290 535,980 accumulated depreciation -

5 5.367,444 - S 4,$57,408 Total assets .

LIABILITIES AND NET ASSETS Liabilities:

Accounts payable, accruals and other liabilities.. . .

$ 228,433 $- 204,663 51,193 50,757 Withholdings, deposits and other credits .

Advance payments, primarily US Govemment, 86,038 66,017 industrials and foundations _

297,170 314,027 Borrowings - bo.wis and notes payable -

28,577 27,708 Government advances for student toens -

691,411 663,I72 Totalliabilities -

Net Assets (Note I):

2,004,514 1,748,142 Unrestricted 1,831,841 1,363,480 Temporarily restricted - -

839,678 782,614 Permanently restricted .

4,676,033 3,894,236 Total net assets . . ..... -.

5 5,367,444 5 4,557,408 Totalliabilities and net assets . . . . , .

he accompanying notes cw an insegmlpart of thefnoncial statements.

O 19.

1 MASSAGIUSETTS INSTITUTE OF TEGINOLOGY STATEMENTS OF ACTIVITIES for the yenn ended June 30,1998 and 1997 (m thousands ofdollars)

Schedule B 1998 1997 CIIANGES IN UNRESTRICTED NET ASSETS:

Reve, ucs and otner additions:

Tunion and other income, net of discount of

$ 170,340 $ 160,267

$60,109 in 1998 and $62,665 in 1997__ 740,472 748,929 Research revenues... 56,892 69,925 Gint, and bequests - 74,853 86,513 Investment income - 254,825 268,186 Net gains on investments - 85,228 90,461 Fees, services, and miscellaneous receipt 41,872 42,833 Auxiliary activities (1,456) 524 Net change in life income funds 13,227 16,155 Net asset reclassifications . 1,479,872 1,440,174 Total revenue. and other additions -

Expenses and other deductions: 1,179,848 1,223,500 Operating expenses . 256,372 260,326 increase in unrestricted net assets .

CilANGES IN TEMPORARILY RESTRICTED NET ASSETS: 32,453 4,727 Gifts and bequests 4,917 41,292 Pledges . 538 1,853 Investment income .. ISI 692 Fees, services, and mir:cIlaneous receipts _

407,126 286,487 Net gains on investments (4,262) 191 Net change in life income funds -

(15,246) (13,564)

Net asset reclassifications ;

468,361 278,994 Increase in temporarily restricted net assets..

CilANGES IN PERMANENTLY RESTRICTED NET ASSETS: 27,255 22,400 Gifts and bequests -

5,501 22,007 Pledges 5,231 20,238 Net gainsoninvestments - 22,835 Fees, services, and miscellaneous receipts -

6,576 6,532 Net change in life income funds .

3,258 2,616 Investment income-- 337 (909)

Net asset reclassifications 86,813 57,064 increase in permanently restricted net assets.

781,797 626,133 Increase in net asnets .

3.894.236 3.268,103 Net assets at the beginning of the year-S 4.676,033 S 3.894.236 Net assets at the end of the year -

O The accompanying notes are an integralpart of thejinancialstatements.

20

o

/

MASSACHUSETTS INSTITUTE OF TECHNOLOGY STATEMENTS OF OPERATIONS AND OTHER CHANGES IN UNRESTRICTED NET ASSETS for the years ended June M,1998 and 1997 (as densands ofdedlers)

Schedule C 1998 1997 RESULTS OF OPERATIONS:

OPERATING REVENUES:

Tuition and other income, net of disccant of

$ 170,340 $ 160,267

$60,109 in 1998 and $62,665 in 1997-Research revermes:

384,146 387,880 Campus -

364,783 352,592 ,

Lincoln Laboratory -

7,994 7,700 Oins and bequests used in operations--

90,461 85,228 Fees, services, and misc. receipts.

41,872 42,833 Auxiliary enterprises.

2,7% 2,155 Net asset reclassification.

156,948 136.327 Net funding of current operstmns

{T

-(j Total 1.219,340 1,174,982 OPERATING EXPENSES:

285,005 255,000 Instruction and unsponsored research .

624,439 620,871 Sponsored rencarch 261,712 253,715 Generaland administrative -

44,430 42,833 Auxiliary enterprises 7,914 7,429 Operation of alumni association 1,223,500 1,179,848 Total Results of operations -

(4,160) (4.866)

NON-OPERATING ACflVITIES:

268,186 254,825 Net gains on investments 48,898 62,225 Oins and bequests received added to fund balwa 86,513 74,853 Investment incorne 524 (1,456)

Net change in life income funds.--

13,359 II,fl72 Net asset reclassifications ,

Trender to fund current operations. (156,948) (I%,327) 260,532 265,192 -

Totalaoneperstmg activities

$ 256,372 $ 260,326 Net change in unrestricted not assets. . . . . _

/

\

X' _ /

The accompanymg notes are an integralpart ofthefinanesal statements.

21 -

MASSACIIUSETTS INSTITUTE OF TECilNOLOGY I STATEMENTS OF CASil FLOWS for the years erided June 30,1998 and 1997 (un thousands ofdollars)

Schedule D 1998 1997 CASil 11,0W FROM OPERATING ACTIVITIES: 5 626,133

$ 781,797 Increase in net assets..

Adjustments to reconcile change in net assets to net cash provided by operating activities: (546,543)

(695,550)

Net gains.. 46,627 51,983 Depreciation .. . . . .

377 287 Student loan cancellations.. (10,788)

(7,541)

Gifts of equipment and securities . (18,026)

(17,893)

Net gains on life irwome funds..

Change in operating assets and liabilities:

(22,852) (959)

Pledges receivabic .. (10,481) 8,322 Accounts receivable . 20,673 293 Contracts in progress . 8,935 8,113 Defened charges, inventories, and other assets . . . . . 11,771 23,770 Accounts payable, accruals, and other liablihtes . 7,052 436 Withholdings, deposits, and other credits .

20,021 (3,293)

Advances and unexpendedFrants .

(3,258) (6,805)

Reclassify investment income .

Reclassify contributions restricted for long-term (31,981)

(54.853) investment . 92.692 93.075 Net cash received from operating activities .

CASil FI,0W FROM INVF. STING ACTIVITIES:

(80,752) (80,376)

Purchase of land, buildings, and equipment -

(3,394,238) (2,414,155)

Purchase ofinveatments 2,259,047 3,374,138 Proceeds from sale ofinvestments . (12,073)

(12,055)

Student notes issued 7,423 9.165 Collections from student notes .

1103.742) (240.114)

Net cash used in investing activities .

CASil FLOW FROM FINANCING ACTIVITIES:

Proceeds from contributies restricted for; ,

19,950 23,264 investment in endowment ..

2,305 29,449 investment in plant .

5.454 6.412 Investment in other .

54.853 31.981 Total proceeds from contributions ..

Increase in investment income for restricted 6,805 3,258 purposes ..

Proceeds from borrowings, bonds, and 96,205 133,563 notes payable .

Repayment of bormwings, bonds, and (113,062) (22,146) notes payable 869 597 Increase in Govemment advance for student loans..

42.123 150,800 Net cash received from financing activities . ..

31,456 3.358 Net increase in cash 22,584 Cash at the be8i nning of the par _ 25.942 5 57,398 5 25.942 _

Cash at the end of the year .

The accompanying notes are an integrolpart of thefinancialstatenwnt.s.

22

, 1 NOTES TO FINANCIAL STATEMENTS -

v) A. ACCOUNTING POLICIES BASIS OF PRESENTATION

' ne accompanying financial statements have been prepared in accordance with Genaally Accepted Accounting Principles (OAAP).

Net assets, revenues, ex, nises, gains, and losses are classified into three categories based on the existence or abmae of donor-imposed restrictic 1,. The categoria are permanently restricted, temporarily restricted, and unrestricted net assets.

' Unconditional promises to give (pledges) are recorded as receivables and revenues within the appropriate net asset . l category. See Note I for further information on the composition of the net assets in these three categories. l 1

Permanently restricted net assets include gifts, pledges, trusts and remainder interests, mcome and gains which are required by donors to be permanently retained. Pledges, trusts and remainder interests are reported at their estunated fair market values. See note on gifts and pledges on page 24.

Temporarily restricted net assets include gifts, pledges, trusts and iem& der interests, income and gains which can be '

expended but for which restrictions have not yet been met. Such restrictit.ns include purpose restrictions where donors have specified the purpose for which the net assets are to be spent, or time 5 estrictions imposed by donors or implied by the nature of the gift (capital projects, pledges to be paid in the future, liie income funds) or by interpretations of law (gains available for appropriation but not appropriated in the current period).

Unrestricted net assets are all the remaining net assets of the Institute.

Donor-restricted gifts which are received and either spent or deemed spent within the same year are reported as j unrestncted revenue. Gifts oflong-lived assets are reported as unrestricted revenue. Gifts specified for the acquisition or i construction orlong-lived assets are reported as unrestricted net assets when the assets are placed in service, j ne Institute administers its various funds, including endowments, funds functioning as endowment, school or i departmental funds and related accumulated gains in accordance with the principles of " fund accounting." Gifts are recorded in fund accounts and investment income is distributed to funds annually. Income distributed to funds may be a combination of capital appreciation and yield pursuant to the Institute's total retum investment policy. Each year, the Investment and Executive Committees of the Corporation approve the rates of distribution of investment income to the funds from the Institute's investment pools. See Note B for further information on income distributed to funds.

He Institute operates in accordance with a budget plan approved and monitored by the Executive Committee. In addition to tuition and research revenues received to meet operating expenses, the budget contemplates the appropriation of  ;

approved amounts from available funds of the schools, departments and general Institute funds. Any shortfall is met by I identification of additional avaitable funds, including unrest icted current year gifts.

In order to display the results of operations as described above, a Statement of Operations and Other Changes in Unrestricted Net Assets is presented. Operations include tuition, research, and auxiliary revenues and approved funds availed of to meet operating expenses.

De gifts, investment income, and miscellaneous receipts for scholarships and fellowships is less than the total amount of l expenditures for this student support. This difference is funded by the Institute's operating budget. Scholarships and fellowships are accounted for as a reduction of gross tuition. j ne Institute is a non-profit organization which is tax exempt under Section 501(c)(3) of the Internal Revenue Code. J CASH Current banking arrangements do not require outstanding checks to be funded until actually presented for payment.

Outstanding checks in the amount of 5%2 million and $36.2 million in 1998 and 1997, respectively, are, therefore, l recorded in accounts payable until such time as the banks present them for payment. j SPONSORED RESEARCH Revenue associated with contracts and grams is recognized as related costs are incurred. The capital costs of buildings  ;

lp/

A" and equipment are depreciated over their life cycle and the sponsored research recovery allowance for depreciation is treated as unrestricted income, ne Institute has recorded reimbursement ofindirect costs relating to sponsored research I

at predetermined fixed billing rates. He booked income generated by the predetermined rates is adjusted at the close of  !

cach fiscal year to reflect any variance between the predetermined rates and rates based on actual cost. De actual cost rate is audited by the Defense Contract Audit Agency (DCAA) and a final fixed rate agreement is signed by the i

23

Government and the Institute. De variance between the predetermined fixed rate and the final audited rate results in a carryforward (over or under recovery). De carryforward will be included in the calculation of predetermined fixed billing rates in future years. Any adjustment in the rate is charged /(credited) to unrestricted net assets.

LAND, EUILDINGS, AND EQUIPMENT Land, buildings, and equipment are shown at cost or fair value as of the date of a gifl, net of accumulated depreciation.

When extended, costs associated with the construction of new facilities are shown as construction in progress until such pojects are completed. Depreciation is computed on a straight-line basis over the estimated useful lives of 25 to 50 years for buildings and 3 to 25 years for equipment. Fully depreciated buildings and equipment are removed from Oc financial statemen.s. These amounts totaled $26.5 million and $36.3 million during 1998 and 1997, respectively. In addition, depreciatim relating to various service facilities and equipment are charged directly to the appropriate operating unit expensrs. Land, buildings and equipment are as follows at June 30:

1998 1997 (in thousands of dollars)

Land 5 30,% 7 $ 30,%7 Educational buildings 454,066 387,773 80,381 80,839 Dormitories Medical, athletic, and recreational buildings 70,832 70,832 22,770 22,688 Other Equipment _259.551 257.393 918,567 850,492 Total Less: accumulated depreciation (365,050) (339,566)

Construction in progress 18.773 25.054 Land, buildings, and equipment $5 /2,290 5535,980 Depreciation expense, presented net, comprises:

1998 1997 (in thousands of dollars)

Total depreciation expense $ 51,983 $ 46,627 Less: Depreciation charged directly to operating units (9,992) (9,336)

Capitalized equipment charged directly to operating units f14.055) f14.807)

Net deprecistion 5 27,936 5 22,484 GIFTS AND PLEDGES Gifts, including unconditional promises to give, are recognized when received. Gins of securities are recorded at their fair market value at the date of contribution. Gifts of equipment during 1998 and 1997 totaling $7.5 million and $10.8 million respectively, from manufacturers and other donors were put into use and recorded by the Institute during the respective fiscal years. Pledges in the amount of $112.8 million and $90.0 million are recorded as receivables with the revenue assigned to the appropriate category of restriction for 1998 and 1997 respectively. Pledges consist of unconditional wTitten or oral promises to contribute to the Institute in the future. Pledges are recorded after discounting to the present value of the future cash flows.

Pledges neceivable at June 30,1998 are expected to be realized in the following time frame:

(in thousands ofdollars)

In one year or less $ 45,254 Between one year and five years 33,075 More than five years 40,512 Less allowance for unfulfilled pledges (6.000)

Pledges receivable, net of discount $112,841 A review of pledges has been made with regard to individual collectibility. As a result, some pledges have either been canceled or are no longer recorded in the statements. There were no conditional promises received. In addition, the pledge receivable is discounted in the amount of $11.0 million which is determined using a discount rate based on the seasoned U.S. Treasury rate.

24

De Institute records' items of collections as a ,, .. at nominal value. %ey are received for educational purposes and generally displayed throughout the institute. Dey are not disposed of for fmancial gain or otherwise encumbered in any manner.

(/

USE OF ESTIMATES De preparation of fmancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that alTect the reponed amounts of assets and liabilities and disclosure of contingent ,

assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

RECLASSIFICATIONS Certain June 30,1997 balances previously reported have been reclassified to conform with June 30,1998 presentation.

B. INVESTMENTS Total market value ofinvestments approximated $4.4 billion and $3.6 billion at June 30,1998 and 1997, respectively De market values ofinvestments are generally determined based upe quoted market prices or estimated fair values provided L ;d by extemal investment managers. Such amounts also include market values of cenain ret! estate, which was de by professional appraisers, and cash equivalents invested in money market funds, commercial paper, banker W-and negotiable certificates of deposit, maturing within 30 days.

Investmenis (in shousands ofdollars)

June 30,1998 June 30,1997 Book Market Book Market Generalinvestments Cash equivalents $ 104,600 $ 104,600 $ .72,177 $ 72,328 699,613 715,966 667,288 671,791 Fixed income 1,716,914 3,002,215 1,518,016 2,443,875 Equities Real Estate:

' (mV) licid for present or future academic use 38,492 38,485 42,485 42,542 139.048 licid for investment or other purposes 107.020 162.742 _ . 04.070 Total generalinvestments 2,666,639 4,024,008 2. M,036 3,369,584 149,656 166,034 119,411 136,120 Separately invested 110,342 151,762 92,306 124,368 Life income funds Receivables /psyables arising from securities 28.521 28.521 6.710 6.710 transactions Totalinvestments 52,955,158 54,370,325 52,622,463 53,636,782 De Institute pools a substantial portion of its investments into two major investrnent pools, Pool A principally for endowment and funds functioning as endowment and Pool C, principally for investment of current funds of the schools and departments and institute temporary funds. Shares in Pool A, like a mutual fund, are purchased and redeemed at the fair value of the share units as determined each month end. De total market value ro Pool A approximated $3.7 billion and

$2.9 billion at June 30,1998 and 1997 respectively. De unit market valees at June 30,1998 and 1997 respectively were

$576.2822 and $480.4594. On a unit basis, the ownership assigned to each net asset classification at June 30,1998 and 1997 was as follows:

1998 1997 Unrestricted 2,047,097 2,014,970 Temporarily restricted -

Permanently restricted 4.142.4 % 4.092.495 Totas units 6,189,593 6,107,465 Fund balances in Pool C are at the dollar amount " deposited" and earn income at rates as determined by the Executive Committee, with reference to short-term money market rates.

,in w

2$,

N

ne following schedule summarues the total investment gains (losses) by classification of net assets for the year ended June 30:

(in thou. sands ofdollars)

Temporarily Permanently 1998 Unrestricted Restricted Restricted Total

$132,337 $149,212 $19,478 $301,027 Realized Gains increase in Net 135.849 257.914 760 394.523 Unrealized Gains 5268,186 5407,126 520,238 5695,550 Total Temporarily Pemianently 1997 Unrestricted Restricted Restricted Total

$137,179 $140,480 $2,487 $280,146 Realized Gains Increase in Net 117.646 146.007 2.744 266.397 Unrealized Gains 5254,825 5286,487 55,231 5546,543 Total ne Investment and Executive Committees of the Corporation have approved the practice whereby spending by funds in the General Investments may come from both investment income and realized market gains. The policy of focusing on total investment return, a combination of both capital appreciation and investment income from interest, dividends and rents, is consistent with this spending policy. Although a portion of accumulated realized gains and losses are reported as part of the Institute's unrestricted resources, their use is availed of in a manner consistent with the Institute's spending policy and long term goal of preservation of the endowment. ne distribution rate on Pool A is declared by the Investment and Executive Committees each year for the upcoming new fiscal year. Pertinent information is as follows:

1998 1997 Pool A - Distribution per unit $17.55 $16.70 Pool C - Declared rate before other distributions 4.0% 4.0%

ne total distribution to funds was $146.7 million in 1998 and 5144.8 million in 1997 and included accumulated investment gains of $44.7 million and $44.6 million, respectively. , Investment income is reported net of related expenses of $8.2 million and 55.7 million in 1998 and 1997, respectively.

He Institute has recorded perpetual trusts held by outside trustees of 553.2 million for 1998 and $38.2 million for 1997.

He perpetual trusts are included in investments reported above.

Realized gains and losses are recorded by the Institute using the average cost basis. Investment transactions are recorded on trade date. Net gains and losses are classified as unrestricted net assets unless they are restricted ly the donor or the law. Net gains on permanently restricted gifts are classified as temporarily restricted until appropriated for spending by the Institute in accordance with the Massachusetts Management of Institutional Funds Act and guidance from the Massachusetts Attorney General.

C. DERIVATIVE INSTRUMENTS As of June 30,1998 the Institute held covered call options of $.3 million that had a market value of $.9 mi!! ion. Covered call options are sold as part of the Institute's investment strategy to obtain the best return on assets.

From time to time the Institute will enter into various forward currency exchanFe contracts solely as partial o!Tset of exchange note movements affecting the U.S. dollar value of portfolio holdings of bonds denominated in foreign currencies.

These contracts obligate the Institute to deliver currencies at specified future dates in return for U.S. dollars at fixed exchange rates %c Institute did not have any forward currency exchange contracts outstanding at June 30,1998.

26

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l D. STUDENT LOAN FUNDS

/3, Perkins National Direct Student Loan Funds of $28.6 million and $27.7 million at June 30,1998 and 1997, respectively,

( / are uhimately refundable to the United States Government, and are classified as liabilities. The allowance for doubtful notes receivable was 5.9 million and $1.1 million in 1998 and 1997, respectively. Due to the nature and terms of the student loans which are subject to significant testrictions, it is not practicable to detennine the fair value of such loans.

{

E. BORROWINGS-BONDS AND NOTES PAYABLE I Bonds and Notes Payable consist of the following at June 30,1998 and 1997: l (in thousands ofdollars) 1998 1997 EDUCA710NAL PLANf Massachusetts llealth and Educational Facilities Authority (MllEFA) 5 1,600* 5 2,000*

Series A, lease purchase obligations (Note F) 3,125 " ' 3,650 " * ,

Series B,5%, due 1998-2003 2,850 "

• 3,120 " '

Series C,5-6.2%, due 1998-2006 1,134 Series E,8%, due 1998-2000 756

- 25,000 j Series 0, variable, due 2021 73,732 76,232 i Series 11,3.25 5%,due 1998-2023 59 949 -

l Series 1,4.83-4.97%, due 2028 :1 142,012 " 1I1,136u Total MHEFA \

Medium Tenn Notes Series A,7.125% due 2026 39,164 49,670 )

72,006 74,692 l Medium Term Notes Series A,7.25% due 2096 13,256 47,250 i Notes payable to bank, variable percent, due 1999 {

Notes payable Student Loan Marketing Association '

7.289 10.612 (SLMA), variable percent.due 1998-2000 273,726 293,360 )

Total Educational Plant l

/Nj SnJDENT LOANS

( Notes payable SLMA, variable percent, due 1997

- 20,000 Notes payable to bank, variable percent, doe 1998 23.000 -

23,000 20,000 Total Student loans OTIIER Massachusetts llealth and Educational Facilities 444 667 Authority Series E,8%, due 1998 2000 5297,170 5314,027 Total Bonds and Notes Payable

• 'Ihe Institute rewives interest supplenwnts from the Department of flousing and Urban DA,-.;; with respect to this issue.

" At June 30,1998 the Institute had pledged securities with a market value of $50.$ million, annual unrestricted operating revenue of $8.1 million, and certain other project revenue to comply with the temis of the bond indentures.

"'Certain land and buildings are pledged as collaterat for MilEFA Series B and C txmds.

7hc aggregate amount oflong-term debt payments and sinking fund requirements for each of the next five years is:

(in thousands ofdollars) 1999 543,563 2000 8,388 2001 6,718 2002 5,285 2003 5,110 Cash paid for interest on long-term debt in 1998 and 1997 was $13.2 million and $14.6 million respectively. Variable id-rest rates were as follows at June 30,1998:

Notes payable to bank (Educational Plant) 5.84 %

Notes payable to SLMA 5.94 %

(~N Notes payable to bank (Student Loan) 5 84 %

()

MIT maintained unused line of credit totaling 558.0 million at June 30,1998 and 1997, 27

De carrymg value of the outstanding debt approximates fair value based on estimates using current interest rates available for similarly rated detd of the same remaining maturities.

O F. COMMITMENTS AND CONTINGENCIES

1. The Institute receives fimding or reimbursement from Federal Government agencies for sponsored research under Government grants and contracts. These grants and contracts provide for reimbursement of indirect costs based on rates negotiated with the Office of Naval Research (ONR), the Institute's cognizant Federal agency. The Institute's indirect cost reimbursements have been based on fixed rates with carryforswd of under or over recoveries.

The DCAA is responsible for auditing both direct and indirect charges to grants and contracts in support of ONR's negotiating responsibility. ne Institute has final audited rates through the 1997 fiscal year. The Institute's 1998 research revenues of $748.9 million include reimbursement ofindirect costs of $132.1 million which includes the adjustment of the variance between the indirect cost income generated from the predetermined rates and rates based on actual 1998 costs.

2. %c Institute is subject to certain other legal proceedings and claims which arise in the normal course of operations. In the opinion of management, the ultimate outcome of these actions will not have a materia. effect on the Institute's fmancial position.

3. De Institute is committed under real estate leases. Rent expense was $19.1 million and $17.8 million in 1998 and 1997, respectively. Certain leases expiring in 1998 are subject to renewal or may be renewed. Future minimum payments under operating leases are as follows:

(in rhousands ofdollars) 1999 $19,832 2000 20,140 2001 20,464 2002 20,804 2003 21,161

4. He Institute is committed to invest approximately $530.8 million in private equity and other alternative investments over the next five years.

5. De Institute is committed for Educational Plant in the amount of $32.0 million at June 30,1998. It is expected that the resources to satisfy these commitments will be provided from unexpended plant funds, anticipated gifts, and unrestricted {

j funds. i G. RETIREMENT BENEFITS ne Institute offers retirement and post retirement benefits to its employees. The Massachusetts Institute ofTechnology Retirement Plan (the " Retirement Plan") has two components: a defined benefit plan and a defined contribution plan. He Retirement Plan covers substantially all employees of the Institute. The Institute contributes to the defined benefit plan amounts which are actuarially determined to provide the Retirement Plan with suflicient assets to meet future benefit requirements.

In addition to providing pension benefits, the Institute provides certain health care and life insurance benefits for retired i

employees. Substantially all of the Institute's employees may become eligible for those benefits if they reach a qualifying retirement age while working for the Institute. Retiree health plans are paid fr in part by employee contributions, which .

are adjusted annually. Benefits are provided through various insurance companies whose charges are based either on the benefits paid during the year or annual premiums. Health benefits are provided to retirees, their covered dependents, and beneficiaries. Substantially all retiree life insurance plans are non-contributory and cover the retiree only. He Institute amortizes the past service amount relating to the accumulated postrctirement benefit obligation for retiree costs and transition over the allowable 20-year period. The Institute maintains a trust to which it has contributed the postretirement health care and life insurance costs on the accrual basis.

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!I ne following provides detail changes in benefits obligations, component of benefit costs and wighted-average l , 'd assumptions.

j ,i (in shousands cfdollars)

Pension Benefits Otter Benefits 1998 1997 1998 1997 Change in Benefit Obligation

$1,134,913 $ 962,651 $158,845 $149,670 Benefit obligation at beginning of year 29,589 24,075 2,978 2,819 Service cost 89,418 77,737 12,133 11,394 Interest cost

- - 1,157 1,209 Retiree contributions (68,118) 8,275 (13,972) (12,.531)

Net benefit payment and transfers Assumption changes and actuarial net gains 73.590 62.175 _ 8.293 _ 6.284

$1,259,392 $1,134,913 $169,434 5158,845 Benefit obligation at end of year Change in plan assets

$1,378,906 $1,095,828 $97,941 $79,254 Fair value of plan assets at beginning of year 272,403 20,182 17,358 Actual return on plan assets 307.181

- 2,400 12,189 12,651 Employer contributions

- - 1,157 1,209 Retiree contributions (68.118) 8.275 (13.972) (12.531)

Net benefit payments and transfers

$1,617,969 $1,378,906 $117,497 $97,941 Fair value of plan assets at end of year

$358,577 $243,993 $(51,937) $(60,904)

Funded stseus (36,748) (42,873) 71,633 76,409 Unrecognized net transition liability /(asset) 3,593 3,961 6,289 8,425 Unrecognized prior senice costs x (25.959) (23.904)

(326.955) (204.858)  ;

i i Unrecognized net (gain) loss id (Accruedyprepaid benefit cost 5 (1,533) $ 223 $ 26 $ 26 j Component of net periodic benefit cost

$29,589 $24,075 $2,978 $2,819 Service cost 89,418 77,737 12,133 11,394 Interest cost (109,889) (93,151) (9,118) (7,439) l Expected return on plan assets (6,125) (6,125) 4,776 4,776 l Amortization of transition amount Amortization of unrecognized net (gain) (1,604) (1,059) (716) (1,035) l 367 368 2.136 2.136 Amortization of prior service cost 5 1,756 $ 1,845 512,189 $12,651 Net benefit cost l

l Weighted-sverage assumptions as of June 30 7.25 % 7.75 % 7.25 % 7.75 %

Discount rate 9.25 % 9.25 % 9.25 % 9.25 %

Expected return on plan assets Average compensation increase 6.00 % 6.00 %

For measurement purposes a 6.0 percent annual rate ofincrease in per capita cost of covered health care benefits was assumed for 1999 which declines to 5.5 percent for 2000 and beyond for prior to age 65. De annual rate ofincrease for age 65 and older was assumed at 5.5 percent for 1999 and beyond. Assumed health care cost trend rates have a significant efTect on the amount reported for health care plans. A one-percentage point change in the assumed health care trend rate would have the following efTect:

Effect of 1% change in assumed health care trend on: 1 % increase 1% decrease Senice cost plus interest cost f 1,315 $ (1,222)

Accumulated postretirement benefit obligation 16,276 (15,081)

The costs recognized during 1998 and 1997 related to the defined contribution components of the Retirerrent Plan were

$21.2 million and $19.6 million respectively.

29

A

}L ACCOUNTS PAYABLE, ACCRUAlli AND OTilER LIABILITIES The Institute's accounts payable, accruals and other liabilities consisted of the following at June 30:

1998 1997 (in thousands ofdoHars)

$111,375 $103,610 Accounts payable and accruals 27,922 25,948 Accrued vacations 15,684 13,709 Accounts payable U.S. Govermnent 73A52 61.396 Life interest funds

$228,433 $204,663 Totat The Institute is currently self-insured for Long Tenn Disability and unemployment compensation and provides reserves totaling $7A million and $6.4 million for 1998 and 1997, respectively, to cover claims.

L COMPONENTS OF NET ASSETS The following table presents the three categories of net assets by purpose as of June 30,1998 (in thousands of dollara).

7he amounts listed in the unrestricted column labeled Endowment Funds Principal are those gifts received over the years which the Institute designated as funds functioning as endowment and imested with the endowment funds. The larger components of temporarily restricted net assets are (1) pledges, which will be reclassified to unrestricted net assets wh cash is received and (2) accumulated net gains on investments of gifts which the donor required to be permanently retained, such gains will be reclassified to unrestricted net assets when appropriated for spending in accordance with the Institute's spending policy and the Massachusetts Management of Institutional Funds Act and guidance from the Massachnsetts Attorney General.

Fund Category Unrestricted Temporarily Permanently Total Fund Rotricted Restricted Endowment Fund Principle General Purpose 5 392,523 $ 324,777 5 64,847 5 782,147 203,800 223,244 121,230 548,274 Departments and Research 4,199 5,884 1,795 11,878 Library 185,095 668,772 327,908 1,181,775 Salaries and Wages 3,199 31,835 13,477 48,511 Graduate General 21,431 57,458 46,147 125,036 Graduate Departments 77,076 286,828 128,086 491,990 Undergraduate 3,455 5,240 2,726 11,421 Prizes

- - 35,639 35,639 Pledges 246,316 70,138 23,465 339,919 Miscellaneous 137.176 - - 137.176 Investment income held for distribution 765,320 3,713,766 Total Endowment Funds 1,274,270 , 1,674,176 Other Invested Funds 2,192 - 17,206 19,398 Student Loan Funds 55,189 47,533 - 102,722  ;

13uilding Funds Designated Purposes:

148,087 - - 148,0'87 Departments and Research 38,367 - - 38,367 4 Other Purposes 33,174 - - 33,174 Reserve Funds 5,207 34,539 38,564 78,310 LifeIncome Funds

- 58,614 18,588 77,202 Pledges Accumulated net gains 99.141 16.979 - 116.120 l 381,357 157,665 74,358 613,380 l Total Other Invested Funds available for current expenses 119A77 - - 119A77  !

1,775,104 1,831,84I 839,678 4,446,623 Total Funds Funds expended for Educational Plant 229A10 - -

229A19

$2,004,514 51,831,841 5839,678 54,676,033 Total Net Assets at Market 30 i

o 6

)

$ \

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.G. .

REPORT OF INDEPENDENT ACCOUNTANTS To the Auditing Committee ofMassachusetts institute ofTechnology:

In our opinion, the accompanying statements of fmancial position and the related statements of activities, operations and other changes in unrestricted net assets, and cash flows present fairly, in all material respects, the financial j

position of Massachusetts Institute of Technology at June 30,1998 and 1997, and the changes in its net assets and its '

cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial

. statements are the responsibility of the Institute's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in ned.a with generally auditing standards which require that we plan and perfonn the audit to obtain reasonable assurance about whether the fmancial statements are free of material misstatement. An audit includes emnining; on a test basis, evidence supporting the amounts and disclosures in the fmancial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

4 l

e> MY&mh &

Boston, Massachusetts September 1,1998 v).

i 31 I

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GLOSSARY FOR FINANCIAL STATEMENTS Agency Funds-Amounts held as custodian or fiscal agent for afliliates such as alumni and student orgamza Appropriations Among Funds-authorned transfer of resources between fund groups.

Auxiliary Aclivities-refers to the operations of Dining and llousing and MIT Press.

Book Value-the cost ofinvestment. Bonds purchased at other than maturity value have a book value of amortized cost. The cost of real estate investments includes both the original cost and the capitalized cost of any improvements.

He book value of gifts and other receipts is the cash or fair market value at the time of receipt.

Borrowings-eepresent mortgage bonds and notes payable to external agencies, institutions, and others.

Current Funds--expendable resources held for meeting current restricted or unrestricted expenses.

Endowment and Similar Funds-encompasses both endowment funds and funds functioning as endowment.

Endowment f unds are gifts and bequests where the donor has stipulated, as a condition of the gift, that the principal is to remain inviolate in perpetuity and is to be invested for the purpose of producing present and future income.

Funds functioning as endowment are gifts, bequests, and other receipts that had no restrictions as to the expenditure of principal, which the Institute designated as additions to endowment for the present. See Net Assets.

Educational Plant Funds-funds invested and those available for investment in educational plant, as well as applicable mortgage bonds and notes payable.

Espendable Donor-Restricted Gifts-Donor restricted gills which are received and either spent or deemed spent withir. the same year.

Fair Market Value-ne amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. If a quoted market price is availabic for a financial instnnnent, the fair market value to be used is the product of the number of trading units of the instrument times the market price per unit.

Fund-an entity consisting of assets, liabilities, and fund balance. De assets and income must be invested or spent in accordance with the designated purpose of the fund.

Fund Accounting by MIT-ne accounting for each fund includes both the balance sheet and the statement of income and expenses. ne use of individual fund accounting assures the donors and others who provide these financial resources that the stated purposes of the fund are being met. MIT has thousands ofindividual funds that have been established, including many during the past year. ,

General Investments-assets of funds that have been pooled for investment purposes. Ecsc pools are Pool A (endowment and similar funds) and Pool C (current invested and operating funds).

Life Income Funds-gifts for investment with income payable to one or more beneficiaries during their lives. Upon the tennination oflife interests, the principal becomes available for Institute purposes, which may be designated by the donor.

Market Value-the fair market value on the statement date. Real estate held for investment is carried at appraised value, and certain assets are canied at book value or nominal value when value cannot readily be determined.

O 32

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Net Assets-the assets remaining after all liabilities have been deducted. Net assets are catesonzed into three groups according to the nature of the restrictions placed on the gifts by donors. Permanently Restricted Net Assets are those gifts for which the original principal ran never be spent. They comprise gifts to tnae er4ree.nt outstandmg pledges and assets held in trust which, when paid or matured, will go to the endowment, and gifts which are required to be used for student loans. Temporarily Restricted Net Assets are those gifts which will ultimately become available for operations or capital expenditures. They require some event or lapse of time to take place before they are available for spending. They include pledges, gifts of real estate not yet sold, gifts for construction projects which have not been completed and certain life income funds which, upon maturity, will be available for spending.

Unrestricted Net Assets comprise all of the remaining economic resources available to the Institute.

Permanent Funds-funds designated by the donor as unexpendabic.

Plant Funde-see Educational Plant Funds.

Pledge-a written or oral agreement to contribute cash or other assets to the Institute. A pledge may be either conditional or unconditional. Conditional Pledge specifies a future and uncertain event whose occurrence, or failure to occur, releases the promisor from its obligation. Unconditional Pledge is a promise to give that depends only on the passage of time or a demand by the promisee for performance.

Restricted-resources, the use of which has been designated by a donor.

I I

Separately InvesteJ Funds-funds held by or for the Institute and maintained in separate portfolios for investment purposes.

Student loan Funds-resources loaned to students or available for such loans.

Unrestricted-resources that are available for the general purposes of tig Institute, and are not restricted by donors as to use.

(

1 33 )

a