ML20274A229
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Text
2020 Report of the Treasurer for the year ended June 30, 2020
Report of the Treasurer for the year ended June 30, 2020
The Corporation 2019-2020 as of June 30, 2020 Chairman: Robert B. Millard*
President: L. Rafael Reif*
Executive Vice President and Treasurer: Israel Ruiz*
Vice President and Secretary of the Corporation: Suzanne L. Glassburn Life Members Shirley A. Jackson; Denis A. Bovin*; Judy C. Lewent; Edie N. Goldenberg; Susan E. Whitehead*; Brian G. R.
Hughes; Gururaj Deshpande; Barrie R. Zesiger; John A. Thain*; Susan Hockfield; Diane B. Greene; Charlene C.
Kabcenell; Barry Lam; Mohammed Jameel (on leave); Megan J. Smith; Mark P. Gorenberg*; Ursula M. Burns*;
Abigail P. Johnson; Alan G. Spoon*; Roger C. Altman; John W. Jarve; Martin Y. Tang.
Members Kenneth Wang; Victor J. Menezes; Phillip T. Ragon; Philip C. T. Ng; Arunas A. Chesonis; Fariborz Maseeh; Paul R. Marcus; Carmen M. Thain; David L. desJardins; Alan M. Leventhal; Eran Broshy; Donald E. Shobrys; Leslie C. Dewan; Jeffrey S. Halis; Jean Hammond; Ray A. Rothrock; Jeffrey L. Silverman; Noubar B. Afeyan; John D.
Chisholm; Vrajesh Y. Modi; Songyee Yoon; Nancy C. Andrews*; Nicolas E. Chammas; José Antonio V.
Fernández; Perry Ha; David M. Siegel*; Anita Wu; Ash B. Carter; Temitope O. Lawani; Kiran Mazumdar-Shaw; Leslye Miller Fraser; Lubna S. Olayan; Charles Ong; Hyun-A C. Park; Colin O. Webb II; Wesley G. Bush; Patricia R. Callahan; Hala Fadel; Orit Gadiesh; Laird M. Malamed; Sarah Melvin; Neil E. Rasmussen; C. J.
Whelan III.
President of the Association of Alumni and Alumnae R. Erich Caulfield Representatives of the Commonwealth Governor: Charles D. Baker, Jr.
Chief Justice of the Supreme Judicial Court: Ralph D. Gants Secretary of Education: James A. Peyser Life Members Emeriti and Emeritae Irénée duPont Jr.; Colby H. Chandler; Carl M. Mueller; Louis W. Cabot; Paul M. Cook; William S. Edgerly; Emily V. Wade; Mary Frances Wagley; Michael M. Koerner; Morris Tanenbaum; W. Gerald Austen; Richard P.
Simmons; Morris Chang; Alexander W. Dreyfoos Jr.; Ronald A. Kurtz; DuWayne J. Peterson Jr.; Raymond S.
Stata; Brit J. dArbeloff; Gordon M. Binder; Arthur Gelb; Norman E. Gaut; Robert A. Muh; James H. Simons; John S. Reed; Bob Metcalfe; John K. Castle; Arthur J. Samberg; Kenan E. Sahin; L. Robert Johnson; A. Neil Pappalardo; James A. Champy; Mark R. Epstein; Theresa M. Stone; Diana C. Walsh; Lawrence K. Fish.
- Member of the Executive Committee
n TABLE OF C ONTENTS Report of the Treasurer ............................................................................................. 1-7 Report of Independent Auditors ............................................................................... 9 Consolidated Financial Statements Consolidated Statements of Financial Position ..................................................... 10 Consolidated Statement of Activities.................................................................... 11 Consolidated Statements of Cash Flows ............................................................... 12 Notes to Consolidated Financial Statements ......................................................... 13-45 Additional Information Five-Year Trend Analysis (Unaudited) - Financial Highlights ............................. 46-48
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Report of the Treasurer To the Members of the Corporation Prudent management of Institute resources and strong During fiscal 2020, the Institute demonstrated strong investment performance since the Great Recession of financial performance despite the profound challenges 2008-09 provide us with reserves to absorb a significant brought about by the COVID-19 pandemic. MIT closed the measure of COVID-related fiscal pressures without year with net assets of $24,216.9 million and net results of endangering MITs capacity to sustain its mission. The
$187.0 million. Pooled investments yielded a return of 8.3 Institute has leveraged these capabilities and will continue to percent, as measured using valuations received within one do so. But we must also continue to be disciplined and month of fiscal year-end.
cautious with our approach to ongoing fiscal management, This performance reflects the generosity of MITs donors mindful that we face significant uncertainties about the and friends in supporting the Institute with philanthropy and duration of the pandemic and the trajectory of success in investing contributions to sustain our mission. macroeconomic dynamics affecting the performance of our The Institutes ability to successfully steward MITs future endowment. The Institute has implemented targeted cost continues to be bolstered by the Campaign for a Better controls and moderated support from our endowment for World, with $5.7 billion raised as of the end of fiscal 2020, operations in fiscal 2021 to help provide resilience to adapt or 95 percent of the $6 billion expanded goal. The to a wide range of potential short- and long-term financial COVID-19 pandemic affected the Institutes finances impacts from COVID-19, and we continue to assess fiscal during the final few months of fiscal 2020, causing both strategies required to weather this unprecedented challenge.
revenue losses and decreased expenditures related to As we began to understand the magnitude of the pandemic reducing campus activity and moving quickly to remote and its impact on society, we came together as a community work and learning in early March to protect the health and to confront the enormous undertaking of maintaining safety of our community.
business continuity, fulfilling academic commitments, and We anticipate larger pressures on fiscal 2021 finances as we maintaining the research enterprise in the face of a global implement steps to operate the campus safely for those pandemic. The campus population was quickly de-densified faculty, staff, and students returning for limited classroom- to protect public health as undergraduate students vacated based instruction and the pursuit of research requiring residence halls, research was scaled back, and most staff access to campus laboratories and facilities, and otherwise members were compelled to work remotely.
to support our community during uniquely challenging The City of Cambridge implemented a temporary emergency times. These pressures include a loss of student-related construction moratorium on all construction activity to revenue as we mandate reduced density in residence halls to mitigate the impact of COVID-19, and all capital keep residents safe and provide financial relief to all construction activities on campus were paused in mid-March.
undergraduates through a $5,000 one-time grant to offset The suspension was later lifted, allowing campus their annual cost to attend MIT. The Institute is similarly construction to resume in June. Research activities ramped up incurring additional costs to meet faculty and staff childcare over the summer, and we have begun a new academic year needs that have been accentuated by the pandemic. We are while maintaining a posture of preparedness amidst highly investing in the capacity to perform over 100,000 COVID-uncertain conditions.
19 tests each month for those accessing the campus, as part of a comprehensive program to ensure a safe campus environment.
SUMMARY
OF KEY FINANCIAL HIGHLIGHTS (10-YEAR TREND)
(in millions of dollars) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Revenue 2,765 3,002 3,196 3,135 3,302 3,439 3,566 3,641 3,932 3,951 Expenses* 2,553 2,723 2,884 2,897 3,084 3,319 3,430 3,536 3,711 3,764 Net Results 212 279 312 237 218 120 136 105 221 187 Net Assets 12,106 12,495 13,858 16,028 17,507 16,929 19,125 21,517 22,769 24,217 Endowment 9,713 10,150 10,858 12,425 13,475 13,182 14,832 16,400 17,444 18,382 Net Borrowings 2,456 2,449 2,417 2,904 2,905 2,892 3,288 3,259 3,168 4,194
- Expenses include all components of net periodic benefit costs
SUMMARY
1
In the face of these immense challenges, MIT has Consolidated Statements of Financial Position demonstrated its excellence, accelerating the implementation The discussion in this section highlights key elements of of tools and practices to expeditiously enable online teaching MITs financial positionnet assets; investments and remote work activities, and successfully responding to including endowment; land, buildings, and equipment; disruptions in the supply chain. MIT Medical has put into postretirement benefit plan assets and liabilities; and practice a comprehensive COVID-19 testing program for the borrowings.
MIT community in collaboration with the Broad Institute, with the capacity to complete testing and contact tracing for Net Assets faculty, students, and staff returning to campus this fall.
As we work to address the immediate impacts of the pandemic, President Rafael Reif has charged Task Force 2021 and Beyond to develop the blueprints for building a better MIT for the post-pandemic world. Co-chaired by Chair of the Faculty Rick Danheiser and Vice President for Open Learning Sanjay Sarma, and comprised of approximately 150 faculty, staff, and students, the Task Force is organized into a series of working groups across four workstreams: academic, administrative, finance and data, and community and culture. Together, the community is reflecting on the unprecedented experiences of these past months, while working to imagine and create an even more inspired institute, capable of delivering on our aspirations for education, research, and innovation.
The following sections provide additional details regarding MITs fiscal 2020 financial statements: Consolidated Statements of Financial Position, Statement of Activities, and Statements of Cash Flows.
Total net assets increased to $24,216.9 million, an increase of Net results, as presented in MITs Statement of Activities, 6.4 percent from fiscal 2019. Net assets are presented in two is the measure to which the Institute manages its annual distinct categories to recognize the significant ways in which budget and is used in financial reports presented to MITs universities are different from profit-making organizations. The two categories reflect the nature of the restrictions placed on leadership, including the Executive Committee and the gifts by donors.
Corporation. It is a comprehensive measure of MITs annual financial performance, including operating activity In fiscal 2020, net assets with donor restrictions increased and all components of our annual retirement benefit costs $1,041.8 million, or 7.7 percent, to $14,634.9 million. The that serve as a basis for cost recovery. increase was primarily due to net return on donor-endowed investments and new donor-endowed gifts and pledges, The Statement of Activities also shows results of operations, partially offset by endowment gains distributed for spending.
a measure of ongoing activities, which excludes the impacts Net assets without donor restrictions increased $406.1 million, of the components of net periodic retirement benefit costs or 4.4 percent, to $9,582.0 million. The increase was primarily other than service costs, and results of operations before due to positive net results and net return on quasi-endowed and depreciation and interest, which is a valuable measure for the non-endowed investments, partially offset by investment gains Institute as it highlights the impacts of financing and capital distributed for spending and postretirement plan changes other development activities costs included in net results. than net periodic benefit costs.
2 MIT REPORT OF THE TREASURER 2020
Investments This year, MITs pooled investments (Pool A) produced a return of 8.3 percent, as measured using valuations received Investments at fair value were $24,364.7 million as of fiscal within one month of fiscal year-end. Investment income and year-end 2020, an increase of $2,281.5 million, or 10.3 a portion of gains are distributed for spending in a manner percent. The consolidated financial statements include both that preserves the long-term purchasing power of the realized and unrealized gains and losses on investments, as endowment. Endowment funds invested in Pool A, MITs well as dividends and interest income, all net of investment primary investment pool, receive distributions based on expenses. These amounts yielded a net return on relative ownership, which is valued monthly.
investments of $2,142.7 million in fiscal 2020, and $1,970.9 million in fiscal 2019. The increase in the value of Land, Buildings, and Equipment investments in both years was substantially driven by realized and unrealized gains on pooled investments. Land, buildings, and equipment had a net book value of
$4,306.8 million as of fiscal year-end 2020, an increase of MITs investment policy is based on the primary goal of $313.5 million, or 7.9 percent. The Institute had a total of generating high real rates of return without exceptional 134 capital projects under construction in fiscal 2020 with a volatility. To reduce volatility, the portfolio is broadly cumulative spend of $859.5 million. Though we have diversified. To generate high real rates of return, MITs adopted a more paced level of investment in our campus investment policy favors equity investments over fixed gated by fundraising for the coming decade, MIT continues income instruments and is heavily weighted toward less to realize significant improvements in campus infrastructure efficient markets. MIT primarily invests through external and the surrounding innovation ecosystem.
fund managers, thereby allowing the Institute to access the best investment talent globally. By identifying a wide variety As noted above, on March 18, 2020, the City of Cambridge of top-tier investment managers with specific competencies, implemented a temporary emergency construction MIT is able to construct a broadly diversified portfolio while moratorium on all construction activity to mitigate the accessing deep sector expertise. Decision authority for the impact of COVID-19, and as a result, all capital construction selection of managers, direct investments, and asset allocation activities on campus were paused at that time. This stoppage resides with MITs Investment Management Company was later lifted, allowing on-campus construction to resume (MITIMCo). The Board of Directors of MITIMCo holds four in early June. The Campus Construction team worked regularly scheduled meetings during the fiscal year in which tirelessly with the many contractors on campus to safely investment policy, performance, and asset allocation are pause capital construction projects in response to the reviewed. construction stoppage, and later to safely restart these projects.
Endowment (without pledges)
As a result of the stoppage, completion of key capital construction projects has been delayed. The Vassar Street undergraduate residence originally slated to open in September 2020 is now targeted for completion at the beginning of the 2021 calendar year. Further down Vassar Street, work is ongoing to refurbish the Central Utilities Plant (CUP), with completion delayed from October 2020 to April 2021. And the Kendall Square site containing a graduate student residence with 454 units, an MIT childcare facility, an Innovation and Entrepreneurship (I&E) Hub, and a new MIT Welcome Center, originally set to open in September 2020, is now targeted for completion in the late fall of 2020.
Despite these delays, the Kendall Square streetscape is quickly taking shape, and the Square is being transformed into a gateway to MITan urban, mixed-use district with a focus on strengthening community interaction and the areas innovation and academic ecosystems. Plans include outdoor Endowment assets, the largest component of total seating, public art, and a variety of landscapes and plantings investments, are managed to maximize total investment to activate the open spaces in Kendall Square at MIT with return relative to appropriate risk. The market value of year-round programming, offering the Cambridge, Kendall, investments in endowment funds, excluding pledges for and MIT communities opportunities for serendipitous endowed purposes, totaled $18,381.5 million as of fiscal interactions.
year-end 2020, an increase of 5.4 percent compared to a total of $17,443.8 million last year.
SUMMARY
3
The Engine Accelerator, Inc., initially launched in October Postretirement Benefit Assets and of 2016 to provide a home for tough-tech founders to create Liabilities the next generation of world-changing companies, has continued to gain momentum. Effective June 30, 2020, The The defined benefit pension plan provides a basic Engines first investment fund had invested in 25 retirement benefit to eligible MIT employees upon their companies, and The Engine is now raising its second retirement as monthly income for the rest of their lives.
investment fund. In order to accommodate this growth, This plan had assets of $4,278.1 million as of fiscal year-construction of The Engine expansion facility at 750 Main end 2020, an increase of $219.9 million from fiscal year-Street is underway. end 2019. The plans projected liabilities were $4,830.0 million as of fiscal year-end 2020, up $361.7 million from A renovation of the landmark Wright Brothers Wind a year earlier. This resulted in a $141.9 million increase in Tunnel is also in progress, and is expected to result in the net pension liabilities, totaling $551.9 million as of fiscal most advanced academic wind tunnel in the nation. In year-end 2020.
addition, the Hayden Library and Pierce Boathouse renovations are nearing completion. MIT also maintains a retiree welfare benefit plan that covers retiree expenses associated with medical and life MIT continues to demonstrate its commitment to improving insurance benefits. This plan had assets of $760.5 million housing for both graduate and undergraduate students. In as of fiscal year-end 2020, an increase of $49.4 million addition to the 450-bed residence hall that will soon open on from fiscal year-end 2019. The plans projected liabilities Vassar Street, and the new graduate student residence and were $668.5 million as of fiscal year-end 2020, up $55.0 childcare facility in Kendall Square, MIT announced that it million from a year earlier. This resulted in a net asset will soon begin to expand west campus housing options by position of $92.1 million at fiscal year-end 2020, a constructing a new building with 550 beds on the site of the decrease of $5.6 million.
West Lot parking area and Building W89. Once finished, this project will complete our 2017 pledge to add 950 graduate The changes in asset values of both plans in 2020 were student beds to our housing system. primarily a function of payments made to beneficiaries, investment performance, and contributions. The change in Design work continued during the construction stoppage. pension liabilities was driven by higher pension obligations Projects in design include a state-of-the-art building for due to one more year of benefits being earned by MITs MITs music program to be constructed in close proximity employees and decreases in the discount rates used to to Kresge Auditorium, the MIT Stephen A. Schwarzman discount expected future cash payments to MIT retirees. The College of Computing building to be located on Vassar discount rates for each plan were derived by identifying a Street on the site of Building 44, the addition to Building 54 theoretical settlement portfolio of high-quality corporate for the Department of Earth, Atmospheric and Planetary bonds sufficient to provide for the plans projected benefit Sciences, and the historic Metropolitan Warehouse, which obligations. The year-over-year discount rates decreased 41 will be home to the School of Architecture and Planning. and 43 basis points as of June 30 for the defined benefit pension plan and retiree welfare benefit plan, respectively, Addressing deferred maintenance continues to be prioritized due to the prevailing interest rate environment at fiscal year-as an integral part of the overall capital program. Fiscal 2016 end 2020.
was the first year in recent decades with a reduction in deferred maintenance, and progress has continued since that On a generally accepted accounting principles (GAAP) basis time. For the fifth consecutive year, MITs investment in at fiscal year-end 2020, the defined benefit pension plan had a campus renewal has had a positive impact on reducing funding level of 88.6 percent, down from 90.8 percent one deferred maintenance. The facility condition index (FCI), year earlier. The retiree welfare benefit plan had a funding which is the ratio of deferred maintenance to replacement level of 113.8 percent at fiscal year-end 2020, a decrease value, has decreased from 0.24 in fiscal 2016 to 0.18 at the from 115.9 percent one year earlier. There were no end of fiscal 2020. Large renovation projects and the designated contributions to the defined benefit pension plan, renewal of core infrastructure systems have been completed and there was a $1.5 million contribution to the retiree across much of the campus, reducing the backlog of deferred welfare benefit plan during fiscal 2020. The investments of maintenance to $1,449.1 million, which is a 2 percent both plans assets are managed by MITIMCo.
decrease from fiscal 2019. The replacement of Eastgate graduate student housing, which has high levels of deferred maintenance, with the new graduate student residence in Kendall Square will enable MIT to realize further reductions. At the end of fiscal 2020, the total campus backlog was equal to $112 per square foot, down from a peak of $150 per square foot in fiscal 2014.
4 MIT REPORT OF THE TREASURER 2020
MIT also offers a 401(k) plan to its employees, which is Revenues not reflected in the Consolidated Statements of Financial Position. Assets in this plan are invested at the direction of participants in an array of investment funds. The plans investment market value was $5,347.1 million as of fiscal year-end.
Borrowings In fiscal year 2020, borrowings increased $1,025.6 million, or 32.4 percent, to $4,194.0 million. The increase was primarily due to the issuance of new taxable bonds, Series F and G, for $300 million and $350 million, respectively, and new tax-exempt bonds, Series P for
$210 million, as well as a draw on a longstanding line of credit for an additional $250 million. The issuances of new taxable and tax-exempt bonds were planned borrowings to support capital construction. The line of credit draw was a strategic measure to bolster the Institutes short-term liquidity in light of the uncertain financial impacts of the pandemic. These increases were offset by principal payments of $66.4 million on the taxable Series D bonds, and $10.6 million on the tax- MITs operating revenues include tuition, research, exempt Series M bonds. contributions (expendable gifts and pledge payments),
fees and services, other programs, support from MITs financial strength is reviewed periodically by both investments, and auxiliary revenue.
Moodys Investors Service and S&P Global Ratings. In fiscal year 2020, the Institute maintained its Aaa and Tuition revenue for graduate and undergraduate programs, AAA ratings, respectively. combined with tuition revenue for non-degree programs, decreased by $9.1 million, or 2.4 percent, to $374.7 Consolidated Statement of Activities million. This change was driven by a decrease of $11.8 million, or 14.7 percent, in non-degree program revenue, Revenues and Expenses seen mostly in Executive Education at the Sloan School of Management. Undergraduate and graduate tuition increased $2.7 million, or 0.9 percent. Undergraduate tuition decreased $6.0 million, or 5.6 percent, as tuition at published rates grew by $3.7 million, or 1.6 percent, while financial aid grew by $9.7 million, or 7.5 percent. Graduate tuition increased by $8.7 million, or 4.4 percent, as tuition at published rates grew by $20.4 million, or 4.7 percent, while financial aid grew by $11.7 million, or 4.9 percent.
The increase in tuition at published rates for undergraduates was driven by a 3.7 percent tuition rate increase partially offset by a 1.7 percent decrease is enrollment. The increase in tuition at published rates for graduates was driven by a 3.7 percent tuition rate increase and slight increase in enrollment.
MIT ended fiscal 2020 with net results of $187.0 million.
This is $34.1 million, or 15.4 percent, less than the fiscal 2019 result. Operating revenues increased $18.7 million, or 0.5 percent, to $3,950.6 million, while operating expenses together with all other components of net periodic retirement benefit costs increased $52.8 million, or 1.4 percent, to
$3,763.6 million. Year-over-year comparisons of revenues and expenses are presented on the graph above.
SUMMARY
5
Research revenues increased $31.4 million, or 1.7 percent, to Overall Institute salary expenses rose 4.3 percent. Average
$1,864.3 million in 2020, driven by increases in direct and annualized salaries and wages for campus grew by 3.3 percent, indirect research revenues of $4.3 million and $27.1 million, while the number of full-time-equivalent employees increased respectively. Campus direct research revenue decreased $8.9 1.1 percent. Employee benefit expenses, together with all million, or 1.7 percent, driven by a slowdown in research components of net periodic benefit costs for the retirement activities in the last quarter of the fiscal year due to the plans, increased 6.8 percent, driven by increases in annual costs pandemic, as well as an increase in the portion of research associated with the defined benefit pension and the retiree activities funded by internal Institute sources. Federal welfare benefit plans, partially offset by a decrease in employee direct research activity decreased by 0.2 percent and non- medical costs, driven by a drop in utilization due to the federal research activity decreased by 0.7 percent. Lincoln pandemic.
direct research revenue increased $25.6 million, or 2.5 percent, driven by an increase in federal research activity. The During fiscal 2020, expenses related to supplies and services Singapore-MIT Alliance for Research and Technology decreased $2.2 million, or 0.2 percent, to $1,067.0 million.
(SMART) direct revenue decreased $12.3 million, or 27.4 Subrecipient agreements decreased $13.1 million, or 7.4 percent, due to a decrease in funding from the National percent, driven by fewer subawards at Lincoln and SMART.
Research Foundation of Singapore. The $27.1 million Utilities, rent, and repair expenses decreased $18.1 million, increase in indirect research revenue was due principally to or 7.9 percent, driven by a decrease in repair expenses at growth in recoverable costs. Lincoln. Depreciation expenses increased $3.4 million, or 1.7 percent. Interest expenses decreased $8.7 million, or 6.9 Support from investments increased $36.4 million, or 4.2 percent, driven by an increase in capitalized interest due to percent, primarily due to an increase in distribution from construction costs in Kendall Square.
pooled investments in support of operations. The effective spending rate on pooled investments funds was 4.3 percent, or 4.8 percent on a three-year-average basis, in fiscal 2020.
Other Revenues, Gains, and Losses Summary Operating contributions, which include gifts and bequests Other revenues, gains, and losses contributed $1,260.9 million for current use and expendable pledge payments, decreased towards MITs fiscal 2020 increase in net assets of $1,447.9
$22.2 million, or 5.5 percent. million. Other revenues, gains, and losses include net return on investments, contributions, and other changes, offset by Expenses changes in retirement plan obligations, and investment spending distribution. In fiscal 2020, net return on investments less spending distribution increased net assets by $1,230.8 million. Contributions revenue in other revenue, gains, and losses, which includes net current year pledge revenue and endowed gifts and bequests, increased net assets by $140.4 million, while changes in retirement plan obligations decreased net assets by $122.8 million.
Contributions Contributions to MIT provide support for scholarships, fellowships, professorships, research, educational programming, student life activities, and the construction and renovation of buildings. Gifts and pledges (contributions) for fiscal 2020 totaled $523.8 million, a decrease of 13.0 percent from the fiscal 2019 total of $602.1 million. Contributions from individuals represented 38.5 percent of new gifts and pledges in fiscal 2020, up from 35.4 percent in fiscal 2019. Contributions from foundations represented 44.9 percent of new gifts and pledges in fiscal 2020, down from 51.6 percent in fiscal 2019.
Contributions from corporations and other sources represented MITs operating expenses, combined with all other 16.6 percent of new gifts and pledges in fiscal 2020, up from components of net periodic retirement benefit costs, increased 13.1 percent in fiscal 2019. New gifts and pledges for research
$52.8 million, or 1.4 percent. These expenses include salaries and education were the largest categories of contributions for and wages; employee benefits; supplies and services; fiscal 2020.
subrecipient agreements; utilities, rent, and repairs; depreciation; and interest.
6 MIT REPORT OF THE TREASURER 2020
Consolidated Statements of Cash Flows Closing Remarks The consolidated statements of cash flows divide cash In closing, I want to express my deep gratitude for the inflows and outflows into three categories: operating, pioneering leadership of Israel Ruiz as Vice President for investing, and financing. Although this division is a Finance and Executive Vice President and Treasurer over the requirement of GAAP, when reviewing the cash flow past 12 years. His vision and determination helped MIT realize statement of a nonprofit organization such as MIT, it is far-reaching aspirations such as the revitalization of Kendall important to note the investing activities as presented in the Square and the creation of The Engine and the MIT Stephen A.
cash flow are an integral part of operations, since a large Schwarzman College of Computing. Israel likewise played a portion of operating activity is funded through distributions leading role in laying the strong fiscal foundation that has from pooled investments. In fiscal 2020, support from proven to be so important to our efforts to navigate the investments comprised 31.7 percent of overall campus challenges posed by COVID-19.
operating revenue.
MITs response to COVID-19, across every dimension, is itself Net operating activitieswhich result from a total a testament to the Institutes innovative and resilient spirit. Our increase in net assets adjusted for non-cash items in the community has rapidly adapted to new modes of learning and working, collaborating to sustain MITs mission in the face of a Statement of Activities (depreciation, net gain on pandemic. In observing this, it is difficult to be anything but investments, change in retirement plans net assets, etc.),
thoroughly optimistic that we will see these challenging times changes in certain non-cash assets and liabilities, and through to a bright future. With the unwavering commitment other reclassificationsconsumed $359.6 million of cash and support of our faculty, students, staff, alumni, friends, and in fiscal 2020. Net investing activities consumed $753.6 members of the Corporation, we continue to imagine an even million in cash, due to spending on capital projects and more inspired MIT intent on making a better world.
purchases of investments, partially offset by proceeds from sales of investments to cover the Institutes Respectfully submitted, endowment spending distribution. Cash provided by net financing activities was $1,157.6 million in fiscal 2020, driven primarily by proceeds from borrowings.
MITs full consolidated financial statements and notes further describing our financial position, activities, and Glen Shor cash flows through June 30, 2020, are included on the Interim Executive Vice President and Treasurer following pages. September 11, 2020
SUMMARY
7
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8 MIT REPORT OF THE TREASURER 2020
Report of Independent Auditors To the Members of the Corporation of the Massachusetts Institute of Technology:
We have audited the accompanying consolidated financial statements of the Massachusetts Institute of Technology and its subsidiaries (the Institute), which comprise the consolidated statements of financial position as of June 30, 2020 and 2019, and the related consolidated statement of activities for the year ended June 30, 2020 and statements of cash flows for the years ended June 30, 2020 and 2019.
Managements Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Institutes 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 Institutes internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Massachusetts Institute of Technology and its subsidiaries as of June 30, 2020 and 2019, the changes in their net assets for the year ended June 30, 2020, and their cash flows for the years ended June 30, 2020 and 2019 in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter As discussed in Note A to the consolidated financial statements, the Institute changed the manner in which it presents restricted cash and certain other cash balances within the statements of cash flows. Our opinion is not modified with respect to this matter.
Other Matter We previously audited the consolidated statement of financial position as of June 30, 2019, and the related consolidated statements of activities and of cash flows for the year then ended (the statement of activities is not presented herein), and in our report dated September 13, 2019, we expressed an unmodified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying summarized financial information as of June 30, 2019 and for the year then ended is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived.
September 11, 2020 PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, Massachusetts 02210 T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us REPORT OF THE INDEPENDENT AUDITORS 9
MASSACHUSETTS INSTITUTE OF TECHNOLOGY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION as of June 30, 2020 and 2019 (in thousands of dollars) 2020 2019 Assets Cash $ 572,448 $ 405,678 Accounts receivable, net 262,986 283,196 Pledges receivable, net, at fair value 620,340 583,383 Contracts in progress, principally US government 99,886 103,307 Deferred charges and other assets 186,360 201,131 Investments, at fair value 24,364,668 22,083,156 Net asset position - retiree welfare benefit plan 92,073 97,716 Land, buildings, and equipment (at cost of $6,334,817 for June 2020; $5,878,485 for June 2019), net of accumulated depreciation 4,306,769 3,993,253 Total assets $ 30,505,530 $ 27,750,820 Liabilities and Net Assets Liabilities:
Accounts payable, accruals, and other liabilities $ 646,072 $ 596,255 Deferred revenue and other credits 206,154 157,372 Advance payments 457,567 440,110 Liabilities due under life income fund agreements, at fair value 232,921 209,611 Borrowings, net of unamortized issuance costs 4,194,017 3,168,422 Net liability position - defined benefit pension plan 551,868 410,045 Total liabilities $ 6,288,599 $ 4,981,815 Net Assets:
Without donor restrictions 9,582,028 9,175,946 With donor restrictions 14,634,903 13,593,059 Total net assets $ 24,216,931 $ 22,769,005 Total liabilities and net assets $ 30,505,530 $ 27,750,820 The accompanying notes are an integral part of the consolidated financial statements.
10 MIT REPORT OF THE TREASURER 2020
MASSACHUSETTS INSTITUTE OF TECHNOLOGY CONSOLIDATED STATEMENT OF ACTIVITIES For the year ended June 30, 2020 (with summarized financial information for the year ended June 30, 2019) 2020 Total Without Donor With Donor (in thousands of dollars) Restrictions Restrictions 2020 2019 Operating Revenues Tuition and similar revenues, exclusive of financial aid of $387,338 in 2020 and $365,954 in 2019 $ 374,669 $ - $ 374,669 $ 383,736 Research revenues:
Campus 740,592 - 740,592 728,153 Lincoln 1,090,618 - 1,090,618 1,059,384 SMART 33,050 - 33,050 45,300 Total research revenues 1,864,260 - 1,864,260 1,832,837 Contributions 359,783 23,578 383,361 405,538 Fees and services 212,768 - 212,768 216,619 Other programs 87,711 - 87,711 79,632 Support from investments:
Endowment 737,202 - 737,202 699,333 Other investments 174,672 - 174,672 176,095 Total support from investments 911,874 - 911,874 875,428 Auxiliary enterprises 115,981 - 115,981 138,132 Total revenues $ 3,927,046 $ 23,578 $ 3,950,624 $ 3,931,922 Operating Expenses Salaries and wages $ 1,593,091 $ - $ 1,593,091 $ 1,527,709 Employee benefits 537,409 - 537,409 516,790 Supplies and services 1,066,952 - 1,066,952 1,069,183 Subrecipient agreements 164,095 - 164,095 177,168 Utilities, rent, and repairs 211,701 - 211,701 229,755 Total expenses before depreciation and interest 3,573,248 - 3,573,248 3,520,605 Results of operations before depreciation and interest 353,798 23,578 377,376 411,317 Depreciation 201,659 - 201,659 198,242 Interest expense 116,777 - 116,777 125,492 Results of operations 35,362 23,578 58,940 87,583 Net periodic benefit (cost) income other than service cost 128,066 - 128,066 133,542 Net results $ 163,428 $ 23,578 $ 187,006 $ 221,125 Other Revenues, Gains, and Losses Contributions $ - $ 140,390 $ 140,390 $ 196,558 Net return on investments 804,828 1,337,827 2,142,655 1,970,892 Distribution of accumulated investment gains (365,207) (546,667) (911,874) (875,428)
Other changes 13,702 (1,184) 12,518 148,973 Postretirement plan changes other than net periodic benefit cost (income) (122,769) - (122,769) (409,896)
Net asset reclassifications and transfers (87,900) 87,900 - -
Total other revenue, gains, and losses 242,654 1,018,266 1,260,920 1,031,099 Increase in net assets 406,082 1,041,844 1,447,926 1,252,224 Net assets at the beginning of the year 9,175,946 13,593,059 22,769,005 21,516,781 Net assets at the end of the year $ 9,582,028 $ 14,634,903 $ 24,216,931 $ 22,769,005 The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED FINANCIAL STATEMENTS 11
MASSACHUSETTS INSTITUTE OF TECHNOLOGY CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended June 30, 2020 and 2019 (in thousands of dollars) 2020 2019 Cash Flow from Operating Activities Increase in net assets $ 1,447,926 $ 1,252,224 Adjustments to reconcile change in net assets to net cash used in operating activities:
Net gain on investments (2,149,914) (1,776,949)
Change in retirement plan asset, net of accrued benefit liability 147,466 408,956 Depreciation 201,659 198,242 Net gain on life income funds (13,464) (14,960)
Amortization of bond premiums and discounts and other adjustments (2,315) (17,508)
Change in operating assets and liabilities:
Pledges receivable (36,957) (23,241)
Accounts receivable 15,492 (23,705)
Contracts in progress 3,421 (4,386)
Deferred charges and other assets 15,359 (15,116)
Accounts payable, accruals, and other liabilities, excluding building and equipment accruals 51,065 51,385 Liabilities due under life income fund agreements 43,057 40,090 Deferred revenue and other credits 57,756 34,470 Advance payments 17,457 (9,120)
Reclassification of donated securities (9,848) (43,286)
Reclassification of investment income for restricted purposes (5,028) (4,404)
Reclassification of contributions restricted for long-term investment (142,683) (185,885)
Net cash and restricted cash used in operating activities (359,551) (133,193)
Cash Flow from Investing Activities Purchase of land, buildings, and equipment (516,950) (495,164)
Purchases of investments (8,227,259) (8,068,067)
Proceeds from sale of investments 7,986,183 8,693,127 Student notes issued (5,143) (5,038)
Collections from student notes 9,586 10,478 Net cash and restricted cash (used in) provided by investing activities (753,583) 135,336 Cash Flow from Financing Activities Proceeds from sale of donated securities restricted for endowment 9,848 43,286 Investment income for restricted purposes 5,028 4,404 Contributions restricted for long-term investment 142,683 185,885 Payments to beneficiaries of life income funds (19,747) (17,928)
Proceeds from borrowings 1,105,742 -
Repayment of borrowings (77,030) (89,474)
Increase (decrease) in government advances for student loans (8,974) 338 Net cash and restricted cash provided by financing activities 1,157,550 126,511 Net increase in cash and restricted cash 44,416 128,654 Cash and restricted cash at the beginning of the year 984,542 855,888 Cash and restricted cash at the end of the year $ 1,028,958 $ 984,542 Supplemental Information on Cash and Restricted Cash:
Cash as shown in the statements of financial position $ 572,448 $ 405,678 Cash and restricted cash included in Investments (see Note B) 443,876 566,818 Restricted cash included in Other Assets (see Note G) 12,634 12,046 Total cash and restricted cash as shown on the Consolidated Statements of Cash Flows $ 1,028,958 $ 984,542 The accompanying notes are an integral part of the consolidated financial statements.
12 MIT REPORT OF THE TREASURER 2020
Notes to Consolidated Financial Statements A. Accounting Policies Basis of Presentation MIT administers its various funds, including endowments, The accompanying financial statements have been prepared funds functioning as endowments, school or departmental in accordance with generally accepted accounting principles funds, and related accumulated gains, in accordance with (GAAP) in the United States of America. The consolidated the principles of fund accounting. Gifts are recorded in financial statements (financial statements) include MIT and fund accounts, and investment income is distributed to its wholly owned subsidiaries. funds annually. Income distributed to funds may be a combination of capital appreciation and yield pursuant to Net assets, revenues, expenses, and gains and losses are MITs total return investment and spending policies. Each classified into two categories based on the existence or year, the Executive Committee of the Corporation absence of donor-imposed restrictions. The categories are net approves the rates of distribution of investment return to assets with donor restrictions and net assets without donor funds from MITs investment pools. See Note J for further restrictions.
information on income distributed to funds.
Net assets with donor restrictions include gifts, pledges, trusts MITs operating revenues include tuition, research, and remainder interests, and income and gains that are either contributions (expendable gifts and pledge payments),
required by donors to be permanently retained or for which fees and services, other programs, support from restrictions have not yet been met. Such restrictions include investments, and auxiliary revenue.
purpose restrictions where donors have specified the purpose for which the net assets are to be spent, or time restrictions Net results, as presented in MITs Statement of Activities, imposed by donors or implied by the nature of the gift (e.g., is the measure to which the Institute manages its annual capital projects, pledges to be paid in the future, life income budget and is used in financial reports presented to MITs funds), or by interpretations of law (net gains on donor- leadership, including the Executive Committee and the endowed gifts, where the gains have not yet been Corporation. It is a comprehensive measure of MITs appropriated for spending). Net assets without donor annual financial performance, including operating activity restrictions are all the remaining net assets of MIT. and the non-service cost components of net periodic benefit (costs) income that serve as a basis for cost Donor-restricted gifts and grants (including gifts of long-lived recovery.
assets) and distributed restricted endowment income, for which the restrictions are met within the same year of gift, The Statement of Activities also shows results of operations, grant, or distribution, are reported as revenue without donor a measure of ongoing activities, which excludes the impacts restrictions. Amounts for which the restrictions are not met of the components of net periodic retirement benefit (costs) within the same year of gift, grant, or distribution are income other than service costs, and results of operations reclassified to net assets with donor restrictions through the before depreciation and interest, which is a valuable net asset reclassifications and transfers line in the Statement measure for the Institute as it highlights the impacts of of Activities. These amounts are released back to net assets financing and capital development costs in net results.
without donor restrictions, through the net asset reclassification and transfers line, during the years in which the restrictions are met. Gifts specified for the acquisition or construction of long-lived assets are reported as net assets with donor restrictions until the monies are expended and the long-lived assets (i.e., buildings) are put into use, at which point they are reclassified to net assets without donor restrictions, also through the net asset reclassifications and transfers line.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13
A. Accounting Policies (continued)
Tax Status Land, Buildings, and Equipment MIT is a nonprofit organization that is tax-exempt under Land, buildings, and equipment are shown at cost when Section 501(c)(3) of the Internal Revenue Code, originally purchased, or at fair value as of the date of a gift when recognized in October 1926, with the most recent affirmation received as a gift, net of accumulated depreciation. When letter dated September 2017. expended, costs associated with the construction of new facilities are shown as construction in progress until such US GAAP requires MIT to evaluate tax positions taken by projects are completed and put into use. Depreciation is the Institute to recognize a tax liability (or asset) if the computed on a straight-line basis over the estimated useful Institute has taken an uncertain tax position that, more likely lives of 25 to 50 years for buildings, 3 to 25 years for than not, would not be sustained upon examination by the equipment, and 4 to 6 years for software.
IRS. MIT has analyzed the tax positions taken and has concluded that as of June 30, 2020, there are no significant Fully depreciated assets were removed from the financial uncertain positions taken or expected to be taken. statements in the amount of $59.4 million and $49.1 million during 2020 and 2019, respectively. Land, buildings, and Cash equipment as of June 30, 2020 and 2019 are shown in Table 1 below.
Certain cash balances, totaling $82.6 million and $65.4 million as of June 30, 2020 and 2019, respectively, are restricted for use under certain sponsored research TABLE 1. LAND, BUILDINGS, AND EQUIPMENT agreements or are held on behalf of a related party. These (in thousands of dollars) 2020 2019 amounts are included within the cash line in the Consolidated Statements of Financial Position. Land $ 107,557 $ 107,557 Land improvements 84,414 84,374 The Institute had approximately $561.7 million and $393.5 Educational buildings 4,787,262 4,682,090 million as of June 30, 2020 and 2019, respectively, of its Equipment 392,726 377,377 cash accounts with a single institution. The Institute has Software 52,757 60,408 not experienced any losses associated with deposits at this Total 5,424,716 5,311,806 institution. Less: accumulated depreciation (2,028,048) (1,885,232)
Construction in progress 909,979 562,740 Software projects in progress 122 3,939 Net land, buildings, and equipment $ 4,306,769 $ 3,993,253 Depreciation expense was $201.7 million in 2020 and $198.2 million in 2019. Net interest expense of $31.2 million and $17.9 million was capitalized during 2020 and 2019, respectively, in connection with MITs construction projects.
14 MIT REPORT OF THE TREASURER 2020
A. Accounting Policies (continued)
Tuition and Student Support Tuition and similar revenues, shown in Table 2 below, include tuition and fees for degree programs as well as tuition and fees for executive and continuing education programs at MIT. Tuition revenue is recognized over the period during which the courses are taken.
TABLE 2. TUITION AND SIMILAR REVENUES (in thousands of dollars) 2020 2019 Undergraduate and graduate programs* $ 306,287 $ 303,593 Executive and continuing education programs 68,382 80,143 Tuition and similar revenues $ 374,669 $ 383,736
- Undergraduate and graduate programs at published rates totaled $693,625 and $669,547 in 2020 and 2019, respectively, and financial aid applied to undergraduate and graduate programs was $387,338 and $365,954 in 2020 and 2019, respectively.
Tuition support shown in Table 3 below is awarded to undergraduate students by MIT based on need. Graduate students are provided with tuition support in connection with research assistance, teaching assistance, and fellowship appointments.
TABLE 3. STUDENT SUPPORT 2020 2019 Total Total Institute External Student Institute External Student (in thousands of dollars) Sources Sponsors Support Sources Sponsors Support Undergraduate tuition support $ 138,041 $ 19,503 $ 157,544 $ 128,365 $ 18,956 $ 147,321 Graduate tuition support 249,297 62,963 312,260 237,589 63,437 301,026 Fellowship stipends 29,982 15,098 45,080 28,509 16,470 44,979 Student employment 51,251 85,676 136,927 48,978 83,322 132,300 Total $ 468,571 $ 183,240 $ 651,811 $ 443,441 $ 182,185 $ 625,626 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15
A. Accounting Policies (continued)
Research Revenues and Advance Payments The revenue generated by the negotiated rates is adjusted each fiscal year to reflect any variance between the Direct and indirect categories of research revenues are negotiated fixed rates and rates based on actual cost. The shown in Table 4 below.
actual cost rate is audited by the Defense Contract Audit Agency (DCAA), and a final fixed-rate agreement is signed by the US government and MIT. The variance between the TABLE 4. RESEARCH REVENUES negotiated fixed rate and the final audited rate results in a (in thousands of dollars) 2020 2019 carryforward (over- or under-recovery). The carryforward is included in the calculation of negotiated fixed billing Direct: rates in future years. Any adjustment in the rate is charged Campus $ 529,410 $ 538,350 or credited to net assets without donor restrictions.
Lincoln 1,042,970 1,017,344 SMART 32,635 44,980 Gifts and Pledges (Contributions)
Total direct 1,605,015 1,600,674 Gifts and pledges (contributions) are recognized when MIT has an unconditional right to receive payment. Gifts of securities Total indirect 259,245 232,163 are recorded at their fair value at the date of contribution.
Total research revenues $ 1,864,260 $ 1,832,837 Donated securities received totaled $72.9 million and $116.9 million in 2020 and 2019, respectively. Gifts of equipment received from manufacturers and other donors are put into use and recorded by MIT at fair value. Gifts of equipment totaled Almost all of Lincoln and SMART research revenue, and a $10.9 million in 2020 and $0.7 million in 2019. Pledges consist portion of Campus research revenue, come from exchange of unconditional promises to contribute to MIT in the future.
contracts. Research revenue related to exchange contracts is Pledges are reported at their estimated fair values. Pledges recognized as MIT fulfills the terms of the agreements, receivable are classified as Level 3 under the valuation which generally span less than five years. Almost all of hierarchy described in Note B.
Campus research revenue, and a portion of Lincoln and SMART research revenue, comes from non-exchange Pledges, trusts, and remainder interests are reported at their contracts. Research revenue associated with non-exchange estimated fair values. MIT records items of collections as contracts is recognized as the qualified expenditures are gifts at nominal value. They are received for educational incurred. Research activities at Lincoln, for which the purposes, and most are displayed throughout MIT. In contractual performance obligations have not yet been met, general, collections are not disposed of for financial gain or totaled $752.3 million and $757.4 million as of 2020 and otherwise encumbered in any manner.
2019, respectively. Research activities on campus, which are contractually authorized by the sponsor, but for which costs Fees and Services, Auxiliary Enterprises, and have not yet been incurred, totaled $785.6 million and Other Programs
$763.9 million as of 2020 and 2019, respectively. For the majority of the revenue streams included in fees and services and auxiliary enterprises, revenue is recognized Advance payments are amounts received by MIT from over the period during which the services are provided.
sponsors under the terms of agreements that generally Other program revenue primarily consists of non-research require the exchange of assets, rights, or privileges between sponsored activities. Other program revenue related to MIT and the sponsor. Advance payments are made for exchange contracts is recognized as MIT fulfills the terms of activity that will occur in the near future, generally within the agreements, which generally span less than five years, the next fiscal year. The majority of these payments relate and other program revenue related to non-exchange to activity at Lincoln. contracts is recognized as the related costs are incurred.
Non-research sponsored activities, for which the contractual Indirect research revenue includes the portion of facilities and performance obligations have not yet been met, totaled administrative expenses that is attributed to research $211.4 million and $188.7 million as of June 30, 2020 and activities. MIT has recorded reimbursement of indirect costs 2019, respectively.
relating to sponsored research at negotiated fixed billing rates.
16 MIT REPORT OF THE TREASURER 2020
A. Accounting Policies (continued)
Life Income Funds The Institute has evaluated and applied the guidance on a modified prospective basis to the financial statements and MITs life income fund agreements with donors consist added the required additional revenue disclosures. The adoption primarily of irrevocable charitable gift annuities, pooled of this standard did not have a significant impact on the income funds, and charitable remainder trusts for which MIT Institutes financial statements.
serves as trustee. Assets are invested and payments are made to donors and other beneficiaries in accordance with the On July 1, 2018, the Institute adopted ASU No. 2014 respective agreements. MIT records the assets that are Revenue from Contracts with Customers (Topic 606), which associated with each life income fund at fair value and records outlines a single comprehensive standard for revenue as liabilities the present value of the estimated future recognition across all industries and supersedes most existing payments at current interest rates to be made to the donors and revenue recognition guidance. In addition, ASU 2014-09 beneficiaries under these agreements. Life income fund assets requires new and enhanced disclosures. These changes do not are included within investments in the Consolidated have a material impact on MITs financial statements.
Statements of Financial Position. A rollforward of liabilities due under life income fund agreements is presented in On July 1, 2018, the Institute adopted ASU No. 2017-07 Table 5 below. - Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance requires the service TABLE 5. LIABILITIES DUE UNDER LIFE INCOME FUNDS cost component of net periodic benefit costs for pension and (in thousands of dollars) 2020 2019 other postretirement benefits to be presented as a component part of employee benefit expense. The other components of net Balance at the beginning of the year $ 209,611 $ 187,449 periodic benefit costs, such as interest, expected return on plan Addition for new gifts 9,336 19,785 assets, and amortization of net actuarial gains and losses, are Termination and payments required to be presented outside of operating activities. This to beneficiaries (23,029) (22,682) change is reflected in the Institutes Statement of Activities.
Net investment and actuarial gain 37,003 25,059 Balance at end of the year $ 232,921 $ 209,611 On July 1, 2018, the Institute adopted ASU No. 2016 Not-for-Profit-Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit-Entities. This guidance is intended Recently Adopted Accounting Standards to improve the net asset classification requirements and the information presented in the financial statements and notes On July 1, 2019, the Institute adopted ASU 2016 about a not-for-profit entitys liquidity, financial performance, Statement of Cash Flows (Topic 230): Classification of and cash flows. The main provisions of this guidance include Certain Cash Receipts and Cash Payments, which provides presentation of two classes of net assets versus the previously clarification on classifying a variety of activities within the required three, and recognition of underwater endowment funds Statements of Cash Flows. The adoption of this standard did as a reduction in net assets with donor restrictions. The not have a material impact to the Institutes Statements of guidance also enhances disclosures for board-designated Cash Flows. amounts, composition of net assets without donor restrictions, liquidity, and expenses by both their natural and functional On July 1, 2019, the Institute adopted ASU 2016-18 classifications. These changes are reflected in the Institutes
- Statement of Cash Flows (Topic 230): Restricted Cash. financial statements and footnotes.
Under this new guidance, the Institute must identify all cash, cash equivalents, and amounts generally described as On July 1, 2018, the Institute adopted ASU 2018 Fair restricted cash or cash equivalents within the Statements of Value Measurement (Topic 820): Disclosure Framework -
Financial Position for inclusion in the beginning and ending Changes to the Disclosure Requirements for Fair Value totals within the Statements of Cash Flows. The Institute has Measurement. Following this new guidance, the Institute is no evaluated and applied this guidance on a retrospective basis longer required to disclose the amount of and reasons for and included all applicable cash balances within the transfers between Level 1 and Level 2 of the fair value Statements of Cash Flows. hierarchy. Additionally, the Institute has added to the disclosures in the Level 3 Valuation Techniques table to On July 1, 2018, the Institute adopted ASU No. 2018-include the weighted average of the unobservable inputs 08 - Not-for-Profit Entities (Topic 958): Clarifying the Scope presented therein. Lastly, for investments in certain entities that and Accounting Guidance for Contributions Received and calculate net asset value, the requirement to disclose the Contributions Made, which amends the accounting estimated period of time over which the underlying assets guidance related to (1) evaluating whether transactions might be liquidated is modified to only require disclosure if the should be accounted for as contributions or exchange investee has communicated the timing to the Institute or transactions, and (2) determining whether a contribution is announced the timing publicly.
conditional.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17
A. Accounting Policies (continued)
Non-Cash Items Subsequent Events Non-cash transactions excluded from the Consolidated MIT has evaluated subsequent events through September 11, Statements of Cash Flows include $33.6 million and $34.9 2020, the date on which the financial statements were issued.
million of accrued liabilities related to plant and equipment There were no subsequent events that occurred after the purchases as of June 30, 2020 and 2019, respectively. balance sheet date that have a material impact on MITs financial statements.
Use of Estimates Summarized Information The preparation of financial statements in conformity with GAAP requires management to make estimates and The Consolidated Statement of Activities includes certain assumptions that affect the reported amounts of assets and prior year summarized comparative information in total, liabilities, contingent assets and liabilities at the date of the but not by net asset class. Such information does not financial statements, and the reported amounts of revenues and include sufficient detail to constitute a presentation in expenses during the reporting period. Actual results could conformity with accounting principles generally accepted differ from those estimates. in the United States of America. Accordingly, such information should be read in conjunction with MITs Reclassifications financial statements for the year ended June 30, 2019, Certain June 30, 2019, balances and amounts previously from which the summarized information was derived.
reported have been reclassified to conform to the June 30, 2020, presentation.
18 MIT REPORT OF THE TREASURER 2020
B. Investments Investments are presented at fair value in accordance with MIT values its investments at fair value on the Consolidated GAAP. MIT performs ongoing due diligence to determine Statements of Financial Position in accordance with GAAP that the fair value of investments is reasonable. In particular, which establishes a hierarchy of valuation inputs based on to ensure that the valuation techniques for investments that the extent to which the inputs are observable in the are categorized within the fair value hierarchy are fair, marketplace. Observable inputs reflect market data obtained consistent, and verifiable, MIT has established a Valuation from sources independent of the reporting entity.
Committee (the Committee) that oversees the valuation Unobservable inputs reflect the entitys own assumptions processes and procedures and ensures that the policies are fair about how market participants would value an asset or and consistently applied. The Committee is responsible for liability based on the best information available. Valuation conducting annual reviews of the valuation policies, techniques used to measure fair value must maximize the evaluating the overall fairness and consistent application of use of observable inputs and minimize the use of the valuation policies, and performing specific reviews of unobservable inputs. MIT follows a fair value hierarchy certain reported valuations. The Committee performs due based on three levels of inputs, of which the first two are diligence over the external managers and, based on this considered observable and the last is unobservable.
review, substantiates the use of net asset value (NAV) as a The following describes the hierarchy of inputs used to practical expedient for estimates of fair value of its measure fair value and the primary valuation methodologies investments in externally managed funds. The Committee is used by MIT for financial instruments measured at fair value comprised of senior personnel with members who are on a recurring basis. The three levels of inputs are as follows:
independent of investment functions. The Committee meets biannually, or more frequently as needed. Members of the
- Level 1 - Valuations based upon observable inputs that Committee report annually to MITs Risk and Audit reflect quoted prices in active markets for identical assets Committee. The methods described in this note may produce and liabilities.
a fair value that may not be indicative of net realizable value
- Level 2 - Valuations based upon: (i) quoted market prices or reflective of future fair values. While MIT believes its for similar assets or liabilities in active markets; (ii) quoted valuation methods are appropriate and consistent with those prices for identical or similar assets or liabilities in markets of other market participants, the use of different that are not active; or (iii) other significant market-based methodologies or assumptions to determine the fair value of inputs, which are observable, either directly or indirectly.
certain financial instruments could result in a different estimate of fair value at the reporting date.
- Level 3 - Valuations based upon unobservable inputs that are significant to the overall fair value measurements.
Exchange and over-the-counter investment transactions are accounted for on the trade date. External fund investment Investments managed by external managers in fund transactions are accounted for on the settle date. Dividend structures are not readily marketable and are reported at fair income is recorded on the ex-dividend date. Interest and real value utilizing the most current information provided by the estate income are recorded on the accrual basis of external manager, subject to assessments that the information accounting. Realized gains and losses are recorded by MIT is representative of fair value and in consideration of any using the average cost method. For external funds, the factors deemed pertinent to the fair value measurement.
realized gains and losses are recognized subsequent to the These investments are shown in the NAV column of Table 6.
return of all capital invested. A financial instruments categorization within the valuation MIT may enter into short sales whereby it sells securities hierarchy is based upon the lowest level of input that is that may or may not be owned by MIT in anticipation of a significant to the fair value measurement. Market decline in the price of such securities or in order to hedge information is considered when determining the proper portfolio positions. Cash collateral and certain securities categorization of the investments fair value measurement owned by MIT may be held at counterparty brokers to within the fair valuation hierarchy.
collateralize these positions and are included in Cash and short-term investments include cash, money market investments on the Consolidated Statements of Financial Position and in restricted cash included in investments on funds, repurchase agreements, and negotiable certificates of the Statements of Cash Flows. deposit, and are valued at cost, which approximates fair value.
Instruments listed or traded on a securities exchange are valued at the last quoted price on the primary exchange where the securities are traded.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 19
B. Investments (continued)
Investments in non-exchange-traded debt are primarily Over-the-counter positions, such as interest rate and total valued using independent pricing sources that use broker return swaps, credit default swaps, options, exchange quotes or models using observable market inputs. agreements, and interest rate cap and floor agreements, are Investments managed by external managers include valued using broker quotes or models using market-observable investments in (i) absolute return; (ii) domestic, foreign, and inputs. Because the swaps and other over-the-counter private equity; (iii) real estate; and (iv) real asset derivative instruments have inputs that can usually be commingled funds. The fair value of securities held in corroborated by observable market data, they are generally external investment funds that do not have readily classified within Level 2. Derivatives usually include determinable fair values are determined by the external exchange traded derivatives, such as futures and options, and managers based upon industry-standard valuation are generally classified within Level 1.
approaches that require varying degrees of judgment, taking MIT leverages certain real estate investments to optimize the into consideration, among other things, the cost of the use of invested capital in support of the Institutes mission.
securities, valuations, and transactions of comparable public The liabilities associated with these financings are presented, companies, the securities estimated future cash flow on a net basis, with the investment balances on the associated streams, and the prices of recent significant placements of real estate asset found in Table 6. The liabilities associated securities of the same issuer. Using these valuations, most of with real estate investments were $331.3 million and $606.3 these external managers calculate MITs capital account or million in fiscal years 2020 and 2019, respectively. MITs NAV in accordance with, or in a manner consistent with, subsidiaries are separate legal entities, whose assets and credit GAAPs fair value principles. are not available to satisfy the liabilities of MIT as a stand-As a practical expedient, MIT is permitted under GAAP to alone entity. Also, the liabilities of MITs subsidiaries do not estimate the fair value of its investments with external constitute obligations of MIT as a stand-alone entity.
managers using the external managers reported NAV All net realized and unrealized gains and losses relating to without further adjustment, unless MIT expects to sell the financial instruments held by MIT shown in Table 6 are investment at a value other than NAV or the NAV is not reflected in the Consolidated Statement of Activities.
calculated in accordance with GAAP. Cumulative unrealized gains related to Level 3 investments Level 3 investments are valued by MIT based upon valuation totaled $1,549.7 million and $1,766.6 million as of June 30, information received from the relevant entity, which may 2020 and 2019, respectively.
include last trade information, third-party appraisals of real Certain investments in real estate, equities, and private estate, or valuations prepared in connection with the investments may be subject to restrictions that: (i) limit administration of an employee stock ownership plan. MIT MITs ability to withdraw capital after such investment; may also utilize industry standard valuation techniques, and (ii) may limit the amount that may be withdrawn as of including discounted cash flow models. The significant a given redemption date. Most absolute return, domestic unobservable inputs used in the fair value measurements of equity, and foreign equity commingled funds limit MITs direct investments may include their cost of capital and withdrawals to monthly, quarterly, or other periods, and equity and industry risk premiums. may require notice periods. In addition, certain of these Significant increases or decreases in these inputs in isolation funds are able to designate a portion of the investments as may result in a significantly lower or higher fair value illiquid in side-pockets, and these funds may not be measurement, respectively. Split-interest agreements are available for withdrawal until liquidated by the investing generally valued at the present value of the future fund. Generally, MIT has no discretion as to withdrawal distributions expected to be received over the term of the with respect to its investments in private equity, real estate, agreement. and real asset funds. Distributions are made when sales of assets are made within these funds and the investment cycle for these funds can be as long as 15 to 20 years.
These restrictions may limit MITs ability to respond quickly to changes in market conditions. However, MIT does have various sources of liquidity at its disposal. Refer to footnote E for further details.
20 MIT REPORT OF THE TREASURER 2020
B. Investments (continued)
Table 6 presents MITs investments at fair value as of June 30, 2020 and 2019, respectively, grouped by the valuation hierarchy as defined earlier in this note.
TABLE 6. INVESTMENTS (in thousands of dollars) Level 1 Level 2 Level 3 NAV Total Fair Value Fiscal Year 2020 Cash and short-term investments $ 567,092 $ 19,562 $ - $ - $ 586,654 US Treasury 1,881,118 - - - 1,881,118 US government agency - 268,878 - - 268,878 Domestic bonds 13,877 406,895 113,689 - 534,461 Foreign bonds 1,533 77,371 - - 78,904 Common equity:
Domestic 28,101 1 234,413 - 262,515 Foreign 472,971 - 13,502 - 486,473 Equity:**
Absolute return - - - 3,829,785 3,829,785 Domestic - - - 2,487,684 2,487,684 Foreign - - - 3,983,707 3,983,707 Private - - - 5,903,638 5,903,638 Real estate* 2,579 - 2,884,164 887,799 3,774,542 Real assets* - - 356 202,096 202,452 Split-interest agreements - - 78,322 - 78,322 Other - - 2,507 - 2,507 Derivatives 13 3,015 - - 3,028 Investments, at fair value $ 2,967,284 $ 775,722 3,326,953 $ 17,294,709 $ 24,364,668 Fiscal Year 2019 Cash and short-term investments $ 1,346,557 $ - $ - $ - $ 1,346,557 US Treasury 1,303,772 - - - 1,303,772 US government agency 635 119,688 - - 120,323 Domestic bonds 17,923 363,871 108,735 - 490,529 Foreign bonds 6,016 89,831 - - 95,847 Common equity:
Domestic 24,055 - 234,516 - 258,571 Foreign 361,095 - - - 361,095 Equity:**
Absolute return - - - 2,777,992 2,777,992 Domestic - - - 2,184,287 2,184,287 Foreign - - - 4,423,446 4,423,446 Private - - - 4,973,152 4,973,152 Real estate* 39,903 - 2,377,201 850,402 3,267,506 Real assets* - - 384 315,515 315,899 Split-interest agreements - - 159,098 - 159,098 Other 26 - 2,923 - 2,949 Derivatives (274) 2,407 - - 2,133 Investments, at fair value $ 3,099,708 $ 575,797 $ 2,882,857 $ 15,524,794 $ 22,083,156
- Includes direct investments and investments held through commingled vehicles.
- Includes commingled vehicles that invest in these type of investments.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21
B. Investments (continued)
Table 7 below is a rollforward of the investments classified by MIT within Level 3 of the fair value hierarchy defined earlier in this note as of June 30, 2020 and 2019.
TABLE 7. ROLLFORWARD OF LEVEL 3 INVESTMENTS Fair Value Realized Gains Unrealized Other Changes Fair Value (in thousands of dollars) Beginning (Losses) Gains (Losses) Purchases Sales and Transfers Ending Fiscal Year 2020 Domestic bonds $ 108,735 $ - $ - $ 12,581 $ (7,627) $ - $ 113,689 Common equity:
Domestic 234,516 1,198 (103) - (1,198) - 234,413 Foreign - - (1,179) 308 - 14,373 13,502 Real estate 2,377,201 447,658 (167,180) 664,959 (516,167) 77,693 2,884,164 Real assets 384 - (28) - - - 356 Split-interest agreements 159,098 190 (47,636) - (33,330) - 78,322 Other 2,923 - (691) 275 - - 2,507 Investments, at fair value $ 2,882,857 $ 449,046 $ (216,817) $ 678,123 $ (558,322) $ 92,066 $ 3,326,953 Fiscal Year 2019 Domestic bonds $ 104,896 $ - $ - $ 12,929 $ (9,090) $ - $ 108,735 Common equity:
Domestic 202,840 2,366 3,273 27,131 (2,371) 1,277 234,516 Foreign - - - - - - -
Real estate 2,385,683 697,689 (23,269) 759,841 (1,442,262) (481) 2,377,201 Real assets 184 - - 200 - - 384 Split-interest agreements 156,494 (160) 2,407 11 (107) 453 159,098 Other 4,216 (71) 72 - (1) (1,293) 2,923 Investments, at fair value $ 2,854,313 $ 699,824 $ (17,517) $ 800,112 $ (1,453,831) $ (44) $ 2,882,857 Table 8 below sets forth a summary of valuation techniques and quantitative information utilized in determining the fair value of MITs Level 3 investments as of June 30, 2020 and 2019.
TABLE 8. LEVEL 3 VALUATION TECHNIQUES 2020 Fair Value as of Fair Value as of Unobservable Weighted (in thousands of dollars) June 30, 2020 June 30, 2019 Valuation Technique Input 2020 Rates Average 2019 Rates Real estate $ 2,884,164 $ 2,377,201 Discounted cash flow Discount rate 4.75-8.25% 6.66% 4.75-8.5%
Capitalization rate Capitalization rate 4.25-7.0% 5.32% 4.25-7.0%
Equity securities 191,663 191,766 Discounted cash flow Discount rate 12.5% 12.5% 12.5%
Split-interest agreements 78,322 159,098 Net present value Discount rate 0.85% 0.85% 3.1%
Real assets 356 384 Discounted cash flow Discount rate 25.0% 25.0% 25.0%
Total assets $ 3,154,505 $ 2,728,449 Certain Level 3 assets totaling $172,448 and $154,408 as of June 30, 2020, and June 30, 2019, respectively, have been valued using unadjusted third party quotations and thus have been excluded from this table.
22 MIT REPORT OF THE TREASURER 2020
B. Investments (continued)
MIT has made investments in various long-lived partnerships, and in other cases has entered into contractual arrangements that may limit its ability to initiate redemptions due to notice periods, lock-ups, and gates. Details on estimated remaining term and current redemption terms and restrictions by asset class and type of investment are provided below in Table 9 as of June 30, 2020 and 2019.
TABLE 9. UNFUNDED COMMITMENTS 2020 2019 Unfunded Unfunded Redemption Redemption (in thousands of dollars) Commitments Fair Value Commitments Fair Value Terms Restrictions Equity:
Absolute return $ 76,043 $ 3,829,785 $ 100,834 $ 2,777,992 Ranges from 30 30 to 365 days days to 27 months³ Domestic¹ 51,757 2,487,684 23,152 2,184,287 Ranges from 2 30 to 90 days months to 25 months³ Foreign² - 3,983,707 51,675 4,423,446 Ranges from 0 to 180 days daily to 38 months³ Private 2,100,480 5,903,638 2,060,191 4,973,152 Closed-end Not Applicable funds not available for redemption Real estate 698,589 887,799 570,559 850,402 Closed-end Not Applicable funds not available for redemption Real assets 79,850 202,096 94,787 315,515 Ranges from 1 Lock up provision month to 4 ranges from none to months³ not redeemable Total $ 3,006,719 $ 17,294,709 $ 2,901,198 $ 15,524,794
¹Domestic funds include funds that have remaining lock-up provisions up to 36 months.
²Foreign funds include funds that have remaining lock-up provisions up to 33 months.
³Includes funds that are not available for redemption.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 23
C. Derivative Financial Instruments and Collateral For its investment management, MIT uses a variety of If the buyers floating rate rises above the cap strike, the financial instruments with off-balance sheet risk involving cap contract provides for payments from the seller to the contractual or optional commitments for future settlement. buyer of the cap for the difference between the floating MIT uses these instruments primarily to manage its exposure rate and the cap strike. If the floating rate remains below to extreme market events and fluctuations in asset classes or the cap strike, no payments are required. The cap buyer is currencies. Instruments utilized include fixed income futures, required to pay an upfront fee or premium for the cap.
options on interest rate exchange agreements, credit default The cap premium charged by the seller depends upon the swaps, equity, and index options. markets assessment of the probability that rates will move through the cap strike over the time horizon of the Total return swaps involve commitments to pay interest in deal. The payoff is expected to occur in extreme market exchange for a market-linked return based on notional conditions that would negatively impact MITs other amounts. To the extent the total return of the security or assets.
index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, MIT will respectively Derivatives held by limited partnerships and commingled receive a payment from or make a payment to the investment vehicles pose no off-balance sheet risk to MIT counterparty. due to the limited liability structure of these investments. To manage the counterparty credit exposure of MITs direct off-MITs portfolio of interest rate caps and swaptions is balance sheet financial instruments, MIT requires collateral to designed for protection from significant increases in interest the maximum extent possible under normal trading practices.
rates. An interest rate swaption is an option to enter into an Collateral is moved on a daily basis as required by interest rate swap agreement on pre-set terms at a future fluctuations in the market. The collateral is generally in the date. The purchaser and seller of the swaption agree on the form of debt obligations issued by the US Treasury or cash.
expiration date, option type, exercise style, the terms of the In the event of counterparty default, MIT has the right to use underlying swap, and the type of settlement. As the the collateral to offset the loss associated with the expiration date approaches, the swaption holder can either replacement of the agreements. MIT enters into arrangements notify the seller of its intention to exercise or let the option only with counterparties believed to be creditworthy. On June expire. An interest rate cap places a ceiling on a floating rate 30, 2020, cash collateral and certain securities owned by MIT of interest on a specified notional principal amount for a were held at counterparty brokers to collateralize these specific term. The buyer of the cap uses the cap contract to positions and are included in investments in the Consolidated limit its maximum interest rate exposure.
Statements of Financial Position.
24 MIT REPORT OF THE TREASURER 2020
C. Derivative Financial Instruments and Collateral (continued)
Table 10 summarizes the notional exposure and net ending fair value relative to the financial instruments with off-balance sheet risk as of June 30, 2020 and 2019, related to MITs investment management.
TABLE 10. DERIVATIVE FINANCIAL INSTRUMENTS Notional Exposure Net Ending Fair (in thousands of dollars) Long Short Value* Net Gain (Loss)**
Fiscal Year 2020 Fixed income and equity instruments:
Fixed income futures $ 19,100 $ (6,100) $ 13 $ 2 Options on interest rate exchange agreements 839,000 - 1 (24)
Equity options 53 - 43 43 Total fixed income and equity instruments 858,153 (6,100) 57 21 Index instruments:
Equity index swaps - (499,730) (321) (7,834)
Index options 299 - 3,407 397 Total index instruments 299 (499,730) 3,086 (7,437)
Credit instruments - (33,806) (115) 587 2020 Total $ 858,452 $ (539,636) $ 3,028 $ (6,829)
Fiscal Year 2019 Fixed income and equity instruments:
Fixed income futures $ 19,400 $ (10,400) $ (274) $ (1,021)
Options on interest rate exchange agreements 839,000 - 26 (1,061)
Equity options - - - -
Total fixed income and equity instruments 858,400 (10,400) (248) (2,082)
Index instruments:
Equity index swaps - - - 10,366 Index options 299 - 3,010 (343)
Total index instruments 299 - 3,010 10,023 Credit instruments - (31,130) (629) (276) 2019 Total $ 858,699 $ (41,530) $ 2,133 $ 7,665
- The fair value of all derivative financial instruments is reflected in investments at fair value in the Consolidated Statements of Financial Position.
- Net gain (loss) from the derivative financial instruments is located in other revenue, gains, and losses as net return on investments in the Consolidated Statement of Activities.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 25
C. Derivative Financial Instruments and Collateral (continued)
Table 11 below provides further details related to MITs credit underlying obligation. The seller bears the obligation to instruments and summarizes the notional amounts and fair value protect the buyer in the event of default of the underlying of the purchased credit derivatives, classified by the expiration issuer. Upon this event, the cash payment that the buyer terms and the external credit ratings of the reference obligations receives is equal to the clearing price established by an as of June 30, 2020 and 2019. auction of credit default swap claims, which is designed to approximate the recovery value of an unsecured claim on the The act of entering into a credit default swap contract is issuer in default. The swap will last for a predetermined often referred to as buying protection or selling amount of time, typically five years. Upon termination of the protection on an underlying reference obligation. The buyer swap, the buyer is no longer obligated to make any premium is obligated to make premium payments to the seller over the payments, and there is no other exchange of capital.
term of the contract in return for a contingent payment upon the occurrence of a credit event with respect to the TABLE 11. CREDIT DERIVATIVE INSTRUMENTS Purchased Protection Purchased Notional Notional Purchased Fair Amounts < 5 (in thousands of dollars) Amounts Value* Years to Maturity Fiscal Year 2020 Credit rating on underlying or index:
A- to AAA $ - $ - $ -
BBB- to BBB+ 33,806 (115) 33,806 2020 Total $ 33,806 $ (115) $ 33,806 Fiscal Year 2019 Credit rating on underlying or index:
A- to AAA $ 8,018 $ (226) $ 8,018 BBB- to BBB+ 23,112 (403) 23,112 2019 Total $ 31,130 $ (629) $ 31,130
- The fair value of all instruments is reflected in Investments, at fair value, in the Consolidated Statements of Financial Position.
26 MIT REPORT OF THE TREASURER 2020
C. Derivative Financial Instruments and Collateral (continued)
Counterparty risk may be partially or completely mitigated Maximum risk of loss from counterparty credit risk on through master netting agreements included within an over-the-counter derivatives is generally the aggregate International Swaps and Derivatives Association, Inc. unrealized appreciation in excess of any collateral (ISDA) Master Agreement between MIT and each of its pledged by the counterparty. ISDA Master Agreements counterparties. The ISDA Master Agreement allows MIT to allow MIT or the counterparties to an over-the-counter offset with the counterparty certain derivative instruments derivative to terminate the contract prior to maturity in payables and/or receivables with collateral held with/from the event either party fails to meet the terms in the ISDA each counterparty. To the extent amounts due from the Master Agreements. This would cause an accelerated counterparties are not fully collateralized, contractually or payment of net liability, if owed to the counterparty.
otherwise, there is the risk of loss from counterparty non-Tables 12 and 13 below summarize the effect that the performance.
offsetting of recognized assets and liabilities could have in the Consolidated Statements of Financial Position.
TABLE 12. OFFSETTING OF FINANCIAL AND DERIVATIVE ASSETS AND LIABILITIES 2020 2019 Cash/Treasury Cash/Treasury Collateral Collateral Posted Posted (in thousands of dollars) Gross Amount (Received) Net Amount Gross Amount (Received) Net Amount Assets Derivatives $ 3,645 $ (13,690) $ (10,045) $ 3,089 $ (3,344) $ (255)
Repurchase agreements 12,217 (5,068) 7,149 201,176 (206,468) (5,292)
Total assets 15,862 (18,758) (2,896) 204,265 (209,812) (5,547)
Liabilities Derivatives (630) 260 (370) (682) 420 (262)
Total liabilities (630) 260 (370) (682) 420 (262)
Total assets and liabilities, net $ 15,232 $ (18,498) $ (3,266) $ 203,583 $ (209,392) $ (5,809)
Table 13 below reconciles the net recognized assets and liabilities, as shown in Table 12, to derivative financial instruments as shown in Table 6.
TABLE 13. RECONCILIATION OF FINANCIAL AND DERIVATIVE ASSETS AND LIABILITIES (in thousands of dollars) 2020 2019 Derivatives from Table 6 $ 3,028 $ 2,133 Repurchase agreements 12,217 201,176 Fixed income futures (13) 274 Total $ 15,232 $ 203,583 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 27
D. Pledges Receivable conditional pledge amounts are broken out as follows:
Table 14 below shows the time periods in which pledges fundraising challenge of $157.9 million, building construction receivable as of June 30, 2020 and 2019, are expected to be progress of $137.7 million, foundation grants of $53.7 million, realized. and other of $18.0 million. As of June 30, 2019, conditional pledge amounts are broken out as follows: fundraising TABLE 14. PLEDGES RECEIVABLE challenge of $207.0 million, building construction progress of
$141.1 million, foundation grants of $32.5 million, and other of (in thousands of dollars) 2020 2019 $10.2 million.
In one year or less $ 316,174 $ 304,760 Table 15 below is a rollforward of pledges receivable as Between one year and five years 274,365 259,400 of June 30, 2020 and 2019.
More than five years 98,441 83,790 Less: allowance for unfulfilled pledges (68,640) (64,567)
Pledges receivable, net $ 620,340 $ 583,383 TABLE 15. ROLLFORWARD OF PLEDGES RECEIVABLE (in thousands of dollars) 2020 2019 A review of pledges is periodically made with regard to collectability. As a result, the allowance for unfulfilled Balance at beginning of the year $ 583,383 $ 560,142 pledges is adjusted, and some pledges have been cancelled New pledges 182,734 192,342 and are no longer recorded in the financial statements.
Pledge payments received (173,452) (186,960)
Pledges are discounted in the amount of $28.5 million and Change in pledge discount 31,751 20,420
$60.3 million in 2020 and 2019, respectively. The pledge Change in reserve for unfulfilled pledges (4,076) (2,561) discount rate ranges from fiscal year 2021 at 0.2 percent to fiscal year 2046 at 2.2 percent. MIT has gross conditional Balance at the end of the year $ 620,340 $ 583,383 pledges, not recorded, for the promotion of education and research of $367.4 million and $390.8 million in 2020 and 2019, respectively. Conditional pledges are categorized as follows: fundraising challenge, building construction progress, foundation grants, and other. As of June 30, 2020, 28 MIT REPORT OF THE TREASURER 2020
E. Liquidity Table 16 below details the Institutes financial assets and resources available to meet cash needs for general expenditures within one year of the date of the Consolidated Statements of Financial Position.
TABLE 16. LIQUIDITY AND AVAILABILITY OF RESOURCES (in thousands of dollars) 2020 2019 Financial assets:
Cash and liquid operating investments $ 2,190,390 $ 1,369,292 Accounts and notes receivable 241,281 256,773 Contributions receivable 201,527 196,310 Investments appropriated for spending in the following year 832,304 804,041 Total financial assets available within one year $ 3,465,502 $ 2,626,416 As part of MITs liquidity management strategy, financial assets are structured to be available as its general expenditures, liabilities, and other obligations come due. MIT invests its operating liquidity, which is comprised of cash and capital project funds in excess of daily requirements, in various investment vehicles. To help manage unanticipated liquidity needs, MIT also maintains a bank line of credit for $500.0 million, of which $137.0 million and $387.0 million was undrawn at June 30, 2020 and 2019, respectively (see Note F for further details on the line of credit).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 29
F. Net Borrowings MITs outstanding borrowings as of June 30, 2020 and 2019, are shown in Table 17 below.
TABLE 17. NET BORROWINGS (in thousands of dollars / due dates are calendar based / par values as of 2020) 2020 2019 Educational plant Massachusetts Development Finance Agency (MassDevelopment)
Series I, 5.20%, due 2028, par value $30,000 $ 30,432 $ 30,490 Series J-1, variable rate, due 2031, par value $125,000 125,000 125,000 Series J-2 variable rate, due 2031, par value $125,000 125,000 125,000 Series K, 5.5%, due 2022-2032, par value $177,000 183,268 183,905 Series L, 5.0%-5.25%, due 2023-2033, par value $115,670 121,149 121,686 Series M, 5.25%, due 2020-2030, par value $91,705 95,816 107,181 Series P, 5.0%, due 2050, par value $136,055 209,850 -
Total MassDevelopment 890,515 693,262 Taxable Medium Term Notes Series A, 7.125% due 2026, par value $17,415 17,390 17,386 Medium Term Notes Series A, 7.25%, due 2096, par value $45,604 45,472 45,468 Taxable Bonds, Series B, 5.60%, due 2111, par value $750,000 747,176 747,145 Taxable Bonds, Series C, 4.678%, due 2114, par value $550,000 550,000 550,000 Taxable Bonds, Series D, 2.051-3.959%, due 2026-2038, par value $456,000 456,000 522,410 Taxable Bonds, Series E, 3.885%, due 2116, par value $500,000 500,000 500,000 Taxable Bonds, Series F, 2.989%, due 2050, par value $300,000 300,000 -
Taxable Bonds, Series G, 2.294% due 2051, par value 350,000 350,000 -
Notes payable to bank, variable rate, due 2023 113,034 113,034 Total Taxable 3,079,072 2,495,443 Total educational plant* 3,969,587 3,188,705 Notes payable to bank, variable rate, due 2023** 250,000 -
Total Other 250,000 -
Total borrowings 4,219,587 3,188,705 Unamortized bond issuance costs (25,570) (20,283)
Total borrowings net of unamortized debt issuance cost $ 4,194,017 $ 3,168,422
- Proceeds from recent issuances were in the process of being invested in physical assets in 2019 and 2020 with unused balances held in investments.
- $250M of borrowing associated with line of credit is being held as a liquidity reserve in response to the COVID-19 crisis.
30 MIT REPORT OF THE TREASURER 2020
F. Net Borrowings (continued)
The aggregate amounts of debt payments and sinking fund Variable interest rates as of June 30, 2020, are shown in Table 19 requirements for each of the next five fiscal years are below.
shown in Table 18 below.
TABLE 19. VARIABLE INTEREST RATES TABLE 18. DEBT PRINCIPAL OBLIGATIONS (in thousands of dollars) Amount Rate (in thousands of dollars) MassDevelopment Series J-1 $ 125,000 1.06%
MassDevelopment Series J-2 125,000 1.12%
2021 $ 11,180 Notes payable to bank 363,034 1.49%
2022 11,765 2023 55,500 In the event that MIT receives notice of any optional tender 2024 51,455 on its Series J-1 and Series J-2 variable-rate bonds, or if these bonds become subject to mandatory tender, the 2025 12,385 purchase price of the bonds will be paid from the remarketing of such bonds. However, if the remarketing MIT maintains a line of credit with a major financial institution proceeds are insufficient, MIT will be obligated to purchase for an aggregate commitment of $500.0 million. As of June the bonds tendered at 100.0 percent of par on the tender date.
30, 2020, $137.0 million was available under this line of credit In the event that MIT is obligated to purchase the bonds, (see Table 17). The line of credit expires on March 31, 2023.
cash or short-term investments from liquid operating Cash paid for interest on long-term debt in 2020 and 2019 was investments would be used as a source of funds.
$138.3 million and $147.8 million, respectively.
MIT maintains an interest rate swap agreement to manage the interest cost and risk associated with a portion of the variable rate debt included in Table 19 above. Under the agreement, MIT pays a fixed rate of 4.91 percent and receives a payment indexed to the Securities Industry and Financial Market Association (SIFMA) index on a notional amount of $125.0 million. As of June 30, 2020 and 2019, the swap agreement had a fair value of ($61.0) million and ($48.8) million, respectively. The notional amount of this derivative is not recorded on MITs Consolidated Statements of Financial Position. This swap had a net loss of $12.2 million and $10.8 million in 2020 and 2019, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31
G. Commitments and Contingencies Federal Government Funding Assets Pledged as Collateral MIT receives funding or reimbursement from federal As of June 30, 2020, $12.6 million of assets were pledged as agencies for sponsored research under government grants collateral to various suppliers and government agencies. This and contracts. These grants and contracts provide for is classified as restricted cash on the Consolidated Statement reimbursement of indirect costs based on rates negotiated of Cash Flows.
with the Office of Naval Research (ONR), MITs cognizant federal agency. MITs indirect cost reimbursements are Future Construction based on fixed rates with carryforward of under- or over-recoveries. As of June 30, 2020 and 2019, MIT recorded a As of June 30, 2020, MIT had contractual obligations of net over-recovery of $10.2 million and $41.2 million, approximately $214.6 million in connection with educational respectively. plant construction projects. It is expected that the resources to satisfy these commitments will be provided from unexpended The DCAA is responsible for auditing indirect charges to grants plant funds, anticipated gifts, bond proceeds, and funds without and contracts in support of ONRs negotiating responsibility. donor restrictions.
The Institute has had its rates audited by DCAA through 2018.
Audits and negotiations for fiscal 2019 and forward are in progress. MITs 2020 research revenues of $1,864.3 million MIT has also made commitments related to the development of include reimbursement of indirect costs of $259.2 million. In its commercial real estate holdings in Kendall Square and to the 2019, research revenues were $1,832.8 million, which enhancement of its east campus gateway. At June 30, 2020, included reimbursement of indirect costs of $232.2 million. these commitments included approximately $341.0 million of contractual obligations related to the Kendall Square Initiative, Both years include adjustments for the variance between the and $144.2 million related to other commercial real estate indirect cost income determined by the fixed rates and actual projects. In addition, MIT and the federal government have costs.
entered into an agreement whereby MIT will construct a new transportation center on four of the 14 acres of federally owned Leases land located at the John Volpe National Transportation Systems As of June 30, 2020, there were no capital lease Center site in Kendall Square in exchange for the fee interest to and the right to redevelop the adjacent ten acres of land. The obligations. MIT has commitments under certain operating exchange will be executed upon completion of the construction (rental) leases. Rent expense incurred under operating lease of the new facility. MIT is committed to investing $750.0 obligations was $35.1 million in both 2020 and 2019.
million in the exchange phase of the project. As of June 30, Future minimum payments under operating leases are 2020, $90.0 million of costs related to the construction of the shown in Table 20 below. new facility have been incurred.
TABLE 20. LEASE OBLIGATIONS Related Entities (in thousands of dollars) MIT has entered into agreements, including collaborations with third-party not-for-profit and for-profit entities, for education, 2021 $ 36,587 research, and technology transfers. Some of these agreements 2022 39,694 involve funding from foreign governments. These agreements subject MIT to greater financial risk than do its normal 2023 41,063 operations. In the opinion of management, the likelihood of 2024 38,384 realization of increased financial risks by MIT under these 2025 35,309 agreements is remote.
General MIT is subject to certain other legal proceedings and claims that arise in the normal course of operations. In the opinion of management, the ultimate outcome of these actions will not have a material effect on MITs financial position.
32 MIT REPORT OF THE TREASURER 2020
H. Functional Expense Classification MITs expenditures on a functional basis for the years ended June 30, 2020 and 2019, are shown in Table 21 below.
TABLE 21. EXPENDITURES BY FUNCTIONAL CLASSIFICATION Instruction and General and unsponsored Sponsored (in thousands of dollars) administrative research research Total Fiscal Year 2020 Compensation $ 483,320 $ 598,880 $ 920,234 $ 2,002,434 Other operating 144,288 427,602 659,157 1,231,047 Space related 127,983 194,865 207,289 530,137 2020 Total $ 755,591 $ 1,221,347 $ 1,786,680 $ 3,763,618 Fiscal Year 2019 Compensation $ 472,471 $ 569,190 $ 869,296 $ 1,910,957 Other operating 137,741 447,433 661,177 1,246,351 Space related 158,830 191,753 202,906 553,489 2019 Total $ 769,042 $ 1,208,376 $ 1,733,379 $ 3,710,797 Expenses are presented by functional classification in alignment with the overall mission of the Institute. Each functional classification displays all expenses related to the underlying operation by natural classification. Natural expenses attributable to more than one functional expense category are allocated using reasonable cost allocation techniques. Depreciation and utilities, rent, and repair expenses are allocated directly and/or based on square footage. Interest expense on indebtedness is allocated to the functional categories that have benefited from the proceeds of the associated debt.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 33
I. Retirement Benefits MIT offers a defined benefit pension plan and a defined For the defined contribution plan, the amount contributed and contribution plan to its employees. The plans cover expenses recognized during 2020 and 2019 were $67.3 substantially all MIT employees. million and $64.0 million, respectively.
MIT also offers a retiree welfare benefit plan (certain For purposes of calculating net periodic benefit cost, plan healthcare and life insurance benefits) for retired employees. amendments for the defined benefit pension plan are Substantially all MIT employees may become eligible for amortized on a straight-line basis over the average future those benefits if they reach a qualifying retirement age while service of active participants at the date of the amendment.
working for MIT. The healthcare component of the welfare Plan amendments to the retiree welfare benefit plan are plan is paid for in part by retirees, their covered dependents, amortized on a straight-line basis over the average future and beneficiaries. Benefits are provided through various service to full eligibility of active participants at the date of insurance companies whose charges are based either on the amendment.
claims and administrative expenses paid during the year or Cumulative gains and losses (including changes in annual insured premiums. The life insurance component of assumptions) in excess of 10 percent of the greater of the the welfare plan includes basic life insurance and projected benefit obligation or the market-related value of supplemental life insurance. The basic life insurance plan is assets for both the defined benefit pension plan and the non-contributory and covers the retiree only. The retiree welfare benefit plan are amortized over the average supplemental life insurance plan is paid for by the retiree. future service of active participants. The annual amortization MIT maintains a trust to pay for the retiree welfare benefit shall not be less than the total amount of unrecognized gains plan. and losses up to $1.0 million.
MIT contributes to the defined benefit pension plan amounts Components of Net Periodic Benefit Cost that are actuarially determined to provide the retirement plan with sufficient assets to meet future benefit requirements. Table 22 below summarizes the components of net periodic There were no designated contributions to the defined benefit cost recognized in net results and other amounts benefit pension plan for 2020 and 2019. MIT designated recognized in other revenues, gains, and losses in net assets contributions of $1.5 million and $0.7 million to the retiree without donor restrictions for the years ended June 30, 2020 and welfare benefit plan in 2020 and 2019, respectively. 2019.
TABLE 22. COMPONENTS OF NET PERIODIC BENEFIT COST Defined Benefit Pension Plan Retiree Welfare Benefit Plan (in thousands of dollars) 2020 2019 2020 2019 Components of net periodic benefit cost recognized in net results:
Service cost $ 123,255 $ 106,779 $ 30,988 $ 26,491 Interest cost 169,792 173,331 24,309 25,761 Expected return on plan assets (298,900) (285,552) (50,605) (47,783)
Amortization of net actuarial loss (gain) 30,285 4,237 (1,000) (1,000)
Amortization of prior service cost (credit) 265 265 (2,212) (2,801)
Net periodic benefit cost (income) recognized in net results 24,697 (940) 1,480 668 Other amounts recognized in other revenues, gains, and losses Current year actuarial loss 147,676 387,429 2,431 23,168 Amortization of actuarial (loss) gain (30,285) (4,237) 1,000 1,000 Amortization of prior service (cost) credit (265) (265) 2,212 2,801 Total other amounts recognized in other revenues, gains, and losses 117,126 382,927 5,643 26,969 Total recognized $ 141,823 $ 381,987 $ 7,123 $ 27,637 34 MIT REPORT OF THE TREASURER 2020
I. Retirement Benefits (continued)
The estimated net actuarial loss and prior service cost for Cumulative amounts recognized in net assets without donor the defined benefit pension plan that will be amortized restrictions are summarized in Table 23 below for the years from net assets without donor restrictions into net periodic ended June 30, 2020 and 2019.
benefit cost during the next fiscal year are $44.5 million and $0.3 million, respectively. The estimated net actuarial gain and prior service credit for the retiree welfare benefit plan that will be amortized from net assets without donor restrictions into net periodic benefit cost during the next fiscal year are $1.0 million and zero, respectively.
TABLE 23. CUMULATIVE AMOUNTS RECOGNIZED IN NET ASSETS WITHOUT DONOR RESTRICTION Defined Benefit Pension Plan Retiree Welfare Benefit Plan (in thousands of dollars) 2020 2019 2020 2019 Amounts recognized in unrestricted net assets without donor restrictions consist of:
Net actuarial loss (gain) $ 799,836 $ 682,445 $ (91,671) $ (95,102)
Prior service cost (credit) 2,318 2,583 - (2,212)
Total cumulative amounts recognized in net assets without donor restrictions $ 802,154 $ 685,028 $ (91,671) $ (97,314)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 35
I. Retirement Benefits (continued)
Benefit Obligations and Fair Value of Assets benefit obligation. While the projected benefit obligation factors in future salary increases, the accumulated benefit Table 24 below summarizes the benefit obligations, plan assets, obligation does not. The accumulated benefit obligation of and amounts recognized in the Consolidated Statements of MITs defined benefit pension plan was $4,664.4 million Financial Position for MITs retirement benefit plans. MIT uses and $4,268.3 million as of June 30, 2020 and 2019, a June 30 measurement date for its defined benefit pension plan respectively.
and retiree welfare benefit plan.
MIT provides retiree drug coverage through an Employer The projected benefit obligation for the defined benefit Group Waiver Plan (EGWP). Under EGWP, the cost of drug pension plan, as shown in Table 24, was $4,830.0 million as coverage is offset through direct federal subsidies, brand-of June 30, 2020, up $361.7 million from a year earlier.
name drug discounts, and reinsurance reimbursements.
Another measure of the plans liabilities is the accumulated TABLE 24. PROJECTED BENEFIT OBLIGATIONS AND FAIR VALUE OF ASSETS Defined Benefit Pension Plan Retiree Welfare Benefit Plan (in thousands of dollars) 2020 2019 2020 2019 Change in projected benefit obligations:
Projected benefit obligations at beginning of year $ 4,468,263 $ 3,931,212 $ 613,441 $ 566,642 Service cost 123,255 106,779 30,988 26,491 Interest cost 169,792 173,332 24,309 25,762 Retiree contributions - - 8,159 7,443 Net benefit payments, transfers, and other expenses (161,473) (153,584) (35,125) (36,127)
Employer Group Waiver Plan (EGWP) reimbursement - - 9,223 5,057 Assumption changes and actuarial net loss 230,130 410,524 17,478 18,173 Projected benefit obligations at end of the year 4,829,967 4,468,263 668,473 613,441 Change in plan assets:
Fair value of plan assets at beginning of the year 4,058,218 3,903,154 711,157 691,328 Actual return on plan assets 381,354 308,648 65,652 42,788 Employer contributions - - 1,480 668 Employer Group Waiver Plan (EGWP) reimbursement - - 9,223 5,057 Retiree contributions - - 8,159 7,443 Net benefit payments, transfers, and other expenses (161,473) (153,584) (35,125) (36,127)
Fair value of plan assets at end of the year 4,278,099 4,058,218 760,546 711,157 (Unfunded) funded status at end of the year (551,868) (410,045) 92,073 97,716 Amounts recognized in the Consolidated Statements of Financial Position consist of:
Net (liabilities) assets $ (551,868) $ (410,045) $ 92,073 $ 97,716 36 MIT REPORT OF THE TREASURER 2020
I. Retirement Benefits (continued)
Assumptions for Financial Parameters and Healthcare Trend Rates Table 25 below summarizes assumptions and healthcare trend rates. The expected long-term rate of return assumption represents the expected average rate of earnings on the funds invested or to be invested to provide for the benefits included in the benefit obligation. The long-term rate of return assumption is determined based on a number of factors, including historical market index returns, the anticipated long-term asset allocation of the plans, historical plan return data, plan expenses, and the potential to outperform market index returns.
TABLE 25. ASSUMPTIONS Defined Benefit Pension Plan Retiree Welfare Benefit Plan (in thousands of dollars) 2020 2019 2020 2019 Assumptions used to determine benefit obligation as of June 30:
Discount rate 3.36% 3.77% 3.42% 3.85%
Rate of compensation increase* 0.00%/4.00% 4.00%
Assumptions used to determine net periodic benefit cost for the year ended June 30:
Discount rate 3.77% 4.38% 3.85% 4.44%
Expected long-term return on plan assets 7.75% 7.75% 7.50% 7.50%
Rate of compensation increase 4.00% 4.00%
Assumed health care cost trend rates:
Healthcare cost trend rate assumed for next year 6.50% 5.00%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 4.75% 4.75%
Year the rate reaches the ultimate trend rate 2025 2021
- It is assumed that there will be no salary increases or cost-of-living adjustments through 2022; normative rates apply thereafter.
As an indicator of sensitivity, a one percentage point change in the assumed healthcare cost trend rate would affect 2020s retiree welfare plan as shown in Table 26 below.
TABLE 26. HEALTHCARE COST TREND RATE SENSITIVITY (in thousands of dollars) 1% Point Increase 1% Point Decrease Effect on 2020 postretirement service and interest cost $ 10,833 $ (8,499)
Effect on postretirement benefit obligation as of June 30, 2020 103,391 (84,396)
Plan Investments The investment objectives for the assets of the plans are to minimize expected funding contributions and to meet or exceed the rate of return assumed for plan funding purposes over the long term. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives.
Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within prudent risk parameters. Risk management practices include the use of external investment managers, the maintenance of a portfolio diversified by asset class, investment approach, security holdings, and the maintenance of sufficient liquidity to meet benefit obligations as they come due.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 37
I. Retirement Benefits (continued)
Tables 27A and 27B present investments at fair value of MITs defined benefit pension plan and retiree welfare benefit plan, which are included in net assets available for benefits as of June 30, 2020 and 2019, grouped by the valuation hierarchy detailed in Note B. The investment values in these tables exclude certain items included in the assets and liabilities shown in Table 24.
TABLE 27A. DEFINED BENEFIT PENSION PLAN INVESTMENTS (in thousands of dollars) Level 1 Level 2 Level 3 NAV Total Fair Value Fiscal Year 2020 Cash and short-term investments $ 89,862 $ - $ - $ - $ 89,862 US Treasury 237,436 - - - 237,436 US government agency - 34,237 - - 34,237 Domestic bonds - - - - -
Common equity:
Domestic 28,382 - 74 - 28,456 Foreign 95,567 - - - 95,567 Equity:*
Absolute return - - - 700,276 700,276 Domestic - - - 504,414 504,414 Foreign - - - 1,003,706 1,003,706 Private - - - 1,309,936 1,309,936 Real estate* 1,059 - - 213,340 214,399 Real assets* - - - 48,754 48,754 Other - - 419 - 419 Derivatives 737 696 - - 1,433 Total plan investments $ 453,043 $ 34,933 $ 493 $ 3,780,426 $ 4,268,895 Fiscal Year 2019 Cash and short-term investments $ 93,000 $ - $ - $ - $ 93,000 US Treasury 329,996 - - - 329,996 US government agency - 40,136 - - 40,136 Domestic bonds - - - - -
Common equity:
Domestic 11,188 - 74 - 11,262 Foreign 62,546 - - - 62,546 Equity:*
Absolute return - - - 582,438 582,438 Domestic - - - 447,243 447,243 Foreign - - - 1,087,958 1,087,958 Private - - - 1,093,149 1,093,149 Real estate* 12,957 - - 220,185 233,142 Real assets* - - - 70,126 70,126 Other - - 419 - 419 Derivatives (101) 955 - - 854 Total plan investments $ 509,586 $ 41,091 $ 493 $ 3,501,099 $ 4,052,269
- Equity, real estate, and real assets categories include commingled vehicles that invest in these types of investments.
38 MIT REPORT OF THE TREASURER 2020
I. Retirement Benefits (continued)
TABLE 27B. RETIREE WELFARE BENEFIT PLAN INVESTMENTS (in thousands of dollars) Level 1 Level 2 Level 3 NAV Total Fair Value Fiscal Year 2020 Cash and short-term investments $ 36,610 $ - $ - $ - $ 36,610 US Treasury 58,187 - - - 58,187 US government agency - 8,387 - - 8,387 Domestic bonds - - - - -
Common equity:
Domestic 4,923 - - - 4,923 Foreign 16,988 - - - 16,988 Equity:*
Absolute return - - - 130,375 130,375 Domestic - - - 89,370 89,370 Foreign - - - 199,787 199,787 Private - - - 177,749 177,749 Real estate* 187 - - 28,570 28,757 Real assets* - - - 5,583 5,583 Derivatives 119 123 - - 242 Total plan investments $ 117,014 $ 8,510 $ - $ 631,434 $ 756,958 Fiscal Year 2019 Cash and short-term investments $ 22,770 $ - $ - $ - $ 22,770 US Treasury 75,768 - - - 75,768 US government agency - 9,753 - - 9,753 Common equity:
Domestic Foreign 1,882 - - - 1,882 Equity:* 10,507 - - - 10,507 Absolute return Domestic - - - 98,857 98,857 Foreign - - - 89,602 89,602 Private - - - 225,405 225,405 Real estate* - - - 139,971 139,971 Real assets* 1,306 - - 26,881 28,187 Other - - - 7,778 7,778 Derivatives (25) 161 - - 136 Total plan investments $ 112,208 $ 9,914 $ - $ 588,494 $ 710,616
- Equity, real estate, and real assets categories include commingled vehicles that invest in these types of investments.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 39
I. Retirement Benefits (continued)
The plans have made investments in various long-lived partnerships, and in other cases have entered into contractual arrangements that may limit their ability to initiate redemptions due to notice periods, lock-ups, and gates. Details on estimated remaining term and current redemption terms and restrictions by asset class and type of investment for both the defined benefit pension plan and retiree welfare benefit plan are provided in Table 28 below as of June 30, 2020 and 2019.
TABLE 28. UNFUNDED COMMITMENTS 2020 2019 Unfunded Unfunded Redemption (in thousands of dollars) Commitments Fair Value Commitments Fair Value Redemption Terms Restrictions Defined Benefit Pension Plan Equity:
Ranges from 4 months to Absolute return $ 22,323 $ 700,276 $ 29,770 $ 582,438 27 months³ 45 to 180 days Ranges from 4 months to Domestic¹ 396 504,414 398 447,243 25 months³ 30 to 90 days Ranges from 3 months to Foreign² - 1,003,706 37,612 1,087,958 24 months 30 to 91 days Closed-end funds not Private 380,663 1,309,936 382,755 1,093,149 available for redemption Not Applicable Closed-end funds not Real estate 155,389 213,340 142,042 220,185 available for redemption Not Applicable Closed-end funds not Real assets 18,233 48,754 22,196 70,126 available for redemption Not Applicable Total $ 577,004 $ 3,780,426 $ 614,773 $ 3,501,099 Retiree Welfare Benefit Plan Equity:
Ranges from 4 months to Absolute return $ 2,703 $ 130,375 $ 3,962 $ 98,857 27 months³ 45 to 180 days Ranges from 4 months to Domestic¹ 44 89,370 44 89,602 25 months³ 30 to 90 days Ranges from 3 months to Foreign² - 199,787 5,688 225,405 24 months 30 to 91 days Closed-end funds not Private 62,732 177,749 63,518 139,971 available for redemption Not Applicable Closed-end funds not Real estate 22,983 28,570 20,345 26,881 available for redemption Not Applicable Closed-end funds not Real assets 2,995 5,583 3,667 7,778 available for redemption Not Applicable Total $ 91,457 $ 631,434 $ 97,224 $ 588,494
¹Domestic funds include funds that have remaining lock-up provisions up to 36 months.
²Foreign funds include funds that have remaining lock-up provisions up to 7 months.
³Includes funds that are not available for redemption.
40 MIT REPORT OF THE TREASURER 2020
I. Retirement Benefits (continued)
Target allocations and weighted-average asset allocations of the investment portfolios for MITs defined benefit pension plan and retiree welfare benefit plan as of June 30, 2020 and 2019 are shown in Table 29 below.
TABLE 29. PLANNED INVESTMENT ALLOCATION Defined Benefit Pension Plan Retiree Welfare Benefit Plan 2020 Target 2020 Target Allocation 2020 2019 Allocation 2020 2019 Cash and short-term investments 0-10% 2% 2% 0-10% 5% 3%
Fixed income 3-13% 7% 9% 10-20% 9% 12%
Equities 37.5-87.5% 69% 67% 37-87% 64% 66%
Marketable alternatives 9-19% 16% 14% 9.5-19.5% 17% 14%
Real assets 0-8% 1% 2% 0-5.5% 1% 1%
Real estate 2.5-12.5% 5% 6% 0-8% 4% 4%
Total 100% 100% 100% 100%
Expected Future Benefit Payments Mortality rates are projected generationally from the base In fiscal 2021, MIT expects to contribute $26.0 million to its year of 2012 using Scale MP-2019.
defined benefit pension plan and expects to contribute $2.4 Table 30 below reflects the total expected benefit payments for million to the retiree welfare benefit plan. These the defined benefit pension plan and retiree welfare benefit plan contributions assume a 7.75 percent and 7.50 percent over the next 10 years. These payments have been estimated expected return on assets for the defined benefit pension plan based on the same assumptions used to measure MITs benefit and retiree welfare benefit plan, respectively. MIT has elected obligations as of June 30, 2020.
to adopt Pri-2012 mortality tables for employees and retirees issued by the Society of Actuaries (SOA) in October 2019.
TABLE 30. EXPECTED FUTURE BENEFIT PAYMENTS (in thousands of dollars) Pension Benefits Other Benefits*
2021 $ 178,723 $ 26,096 2022 191,190 28,998 2023 196,467 30,909 2024 201,927 32,488 2025 208,172 33,890 2026-2030 1,141,161 190,120
- Other Benefits reflect the total net benefits expected to be paid from the plans (e.g., gross benefit reimbursement offset by retiree contributions).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 41
J. Components of Net Assets and Endowment Tables 31A and 31B present the composition of net assets endowment funds. A large component of net assets with as of June 30, 2020, and June 30, 2019, respectively. The donor restriction in other invested funds is pledges, the amounts listed in the without donor restriction category majority of which will be reclassified to net assets without under the endowment funds sections are those gifts and donor restrictions when cash is received.
other funds received over the years that MIT designated as funds functioning as endowment and invested with the TABLE 31A. 2020 TOTAL NET ASSET COMPOSITION Without Donor With Donor (in thousands of dollars) Restrictions Restrictions Total Endowment Funds General purpose $ 1,120,415 $ 1,712,557 $ 2,832,972 Departments and research 933,024 2,524,714 3,457,738 Library 14,880 62,550 77,430 Salaries and wages 707,388 4,342,847 5,050,235 Graduate general 110,256 301,133 411,389 Graduate departments 220,360 937,844 1,158,204 Undergraduate 293,639 1,952,567 2,246,206 Prizes 11,832 67,555 79,387 Miscellaneous 1,459,540 1,143,778 2,603,318 Investment income held for distribution 464,639 - 464,639 Endowment funds before pledges 5,335,973 13,045,545 18,381,518 Pledges - 114,387 114,387 Total endowment funds 5,335,973 13,159,932 18,495,905 Other Invested Funds Student-related loan funds 18,509 32,115 50,624 Building funds 186,666 73,316 259,982 Designated purposes:
Departments and research 460,286 - 460,286 Other purposes 195,261 17,205 212,466 Life income funds and donor advised funds 30,968 185,937 216,905 Pledges - 505,953 505,953 Other funds available for current expenses 2,584,428 660,445 3,244,873 Funds for educational plant 769,937 - 769,937 Total other invested funds 4,246,055 1,474,971 5,721,026 Total net assets $ 9,582,028 $ 14,634,903 $ 24,216,931 42 MIT REPORT OF THE TREASURER 2020
J. Components of Net Assets and Endowment (continued)
TABLE 31B. 2019 TOTAL NET ASSET COMPOSITION Without Donor With Donor (in thousands of dollars) Restrictions Restrictions Total Endowment Funds General purpose $ 1,080,333 $ 1,659,769 $ 2,740,102 Departments and research 887,685 2,399,708 3,287,393 Library 14,348 59,746 74,094 Salaries and wages 677,594 4,170,306 4,847,900 Graduate general 106,312 286,439 392,751 Graduate departments 204,562 875,364 1,079,926 Undergraduate 283,109 1,861,021 2,144,130 Prizes 10,388 64,775 75,163 Miscellaneous 1,330,006 1,024,265 2,354,271 Investment income held for distribution 448,020 - 448,020 Endowment funds before pledges 5,042,357 12,401,393 17,443,750 Pledges - 125,578 125,578 Total endowment funds 5,042,357 12,526,971 17,569,328 Other Invested Funds Student-related loan funds 19,018 18,650 37,668 Building funds 201,860 80,530 282,390 Designated purposes:
Departments and research 423,830 - 423,830 Other purposes 217,280 18,064 235,344 Life income funds and donor advised funds 22,764 185,135 207,899 Pledges - 457,805 457,805 Other funds available for current expenses 2,539,706 305,904 2,845,610 Funds for educational plant 709,131 - 709,131 Total other invested funds 4,133,589 1,066,088 5,199,677 Total net assets $ 9,175,946 $ 13,593,059 $ 22,769,005 MITs endowment consists of approximately 4,300 subject to the intent of the donor as expressed in the gift individual funds established for a variety of purposes and instrument. Unless stated otherwise in the gift instrument, the includes both donor-restricted endowment funds and funds assets in an endowment fund shall be donor-restricted assets that function as endowments. As required by GAAP, net until appropriated for expenditure by the Executive assets associated with endowment funds, including funds Committee. In accordance with UPMIFA, the Executive designated to function as endowments, are classified and Committee considers the following factors in making a reported based on the existence or absence of donor- determination to appropriate or accumulate endowment funds:
imposed restrictions.
- i. the duration and preservation of the fund The Executive Committee has interpreted the ii. the purposes of MIT and the endowment fund Massachusetts-enacted version of the Uniform Prudent iii. general economic conditions Management of Institutional Funds Act (UPMIFA) as iv. the possible effects of inflation and deflation allowing MIT to appropriate for expenditure or v. the expected total return from income and the appreciation of accumulate so much of an endowment fund as MIT investments determines is prudent for the uses, benefits, purposes, and vi. other resources of MIT duration for which the endowment fund is established, vii. the investment policies of MIT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 43
J. Components of Net Assets and Endowment (continued)
Table 32 below reflects changes in endowment net assets without and with donor restrictions as of June 30, 2020 and 2019, respectively.
TABLE 32. CHANGES IN ENDOWMENT NET ASSETS Without Donor With Donor (in thousands of dollars) Restriction Restriction Total Fiscal Year 2020 Endowment net assets, July 1, 2019 $ 5,042,357 $ 12,526,971 $ 17,569,328 Investment return:
Net Investment income 3,481 11,652 15,133 Net appreciation (realized and unrealized) 484,684 1,123,005 1,607,689 Total investment return 488,165 1,134,657 1,622,822 Contributions - 103,436 103,436 Appropriation of endowment assets for expenditure (222,038) (515,164) (737,202)
Other changes:
Net asset reclassifications and transfers 27,489 (89,968) (62,479)
Endowment net assets, June 30, 2020 $ 5,335,973 $ 13,159,932 $ 18,495,905 Fiscal Year 2019 Endowment net assets, July 1, 2018 $ 4,806,349 $ 11,723,083 $ 16,529,432 Investment return:
Net Investment income 47,543 117,736 165,279 Net appreciation (realized and unrealized) 376,590 876,100 1,252,690 Total investment return 424,133 993,836 1,417,969 Contributions - 177,015 177,015 Appropriation of endowment assets for expenditure (208,439) (490,894) (699,333)
Other changes:
Net asset reclassifications and transfers 20,314 123,931 144,245 Endowment net assets, June 30, 2019 $ 5,042,357 $ 12,526,971 $ 17,569,328 Underwater Endowment Funds From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the value of the initial and subsequent donor gift amounts (underwater). When underwater endowment funds exist, they are classified as a reduction of net assets with donor restrictions. There were no underwater endowment funds reported in net assets with donor restrictions as of June 30, 2020, and June 30, 2019.
44 MIT REPORT OF THE TREASURER 2020
J. Components of Net Assets and Endowment (continued)
Endowment Investment and Spending Pool A operates as a mutual fund with units purchased and Policies redeemed based on the previous months unit market value.
Certain endowed assets are also maintained in separately MITs investment policy is based on the primary goal of invested funds.
maximizing return relative to appropriate risk such that performance exceeds appropriate benchmark returns at the MIT has adopted spending policies designed to provide a total pool, asset class, and individual manager levels. To predictable stream of funding to programs supported by its achieve its long-term rate-of-return objectives, MIT relies on investments while maintaining the purchasing power of a total return strategy in which investment returns are assets. For pooled investments, the Executive Committee of realized through both capital appreciation (realized and the Corporation votes to distribute funds for operational unrealized gains) and current yield (interest and dividends). support from general investments. In accordance with MIT targets a diversified asset allocation that places greater MITs spending policy, these distributions are funded from emphasis on equity-based investments to achieve its long- both investment income and market appreciation. The term objectives within prudent risk constraints. distribution rates were $81.80 and $77.90 per Pool A unit as of June 30, 2020 and 2019, respectively. For separately The Institutes primary investment pool, Pool A, is invested endowment funds, only the annual investment principally for endowment and funds functioning as income generated is distributed for spending. For any endowment. The effective spending rate on pooled underwater endowment funds, the distribution of funds for endowed funds was 4.3 percent, or 4.8 percent on a three-operational support is at the discretion of the Executive year-average basis, for both 2020 and 2019.
Committee.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 45
Massachusetts Institute of Technology Five-Year Trend Analysis (Unaudited) - Financial Highlights (in thousands of dollars) 2020 2019 2018 2017 2016 Financial Position Investments, at fair value $ 24,364,668 $ 22,083,156 $ 20,766,548 $ 19,077,677 $ 17,037,298 Land, buildings, and equipment, at cost less accumulated depreciation 4,306,769 3,993,253 3,684,377 3,397,070 3,092,429 Borrowings, net of unamortized issuance costs 4,194,017 3,168,422 3,259,389 3,287,545 2,892,093 Total assets 30,505,530 27,750,820 26,111,020 23,976,315 21,662,308 Total liabilities 6,288,599 4,981,815 4,594,239 4,851,257 4,733,227 Net assets without donor restriction 9,582,028 9,175,946 8,852,960 7,701,195 6,653,607 Net assets with donor restrictions 14,634,903 13,593,059 12,663,821 11,423,863 10,275,474 Total net assets 24,216,931 22,769,005 21,516,781 19,125,058 16,929,081 Total endowment funds before pledges 18,381,518 17,443,750 16,400,027 14,832,483 13,181,515 Principal Sources of Revenues Tuition and similar revenues, exclusive of financial aid $ 374,669 $ 383,736 $ 353,721 $ 361,476 $ 340,005 Research revenues:
Campus direct 529,410 538,350 510,254 496,877 516,283 Campus indirect 211,182 189,803 161,908 191,669 180,581 Lincoln Laboratory direct 1,042,970 1,017,344 947,295 929,348 921,377 Lincoln Laboratory indirect 47,648 42,040 33,997 39,909 34,617 SMART direct 32,635 44,980 41,988 32,981 32,415 SMART indirect 415 320 195 303 402 Contributions 523,751 602,096 481,817 594,471 474,959 Net return on investments 2,142,655 1,970,892 2,503,435 2,285,260 392,917 Distribution of investment returns 911,874 875,428 826,117 782,857 729,614 Principal Purposes of Expenditures Expenses* $ 3,763,618 $ 3,710,797 $ 3,536,400 $ 3,429,751 $ 3,318,536 Compensation 2,002,434 1,910,957 1,838,629 1,729,760 1,628,286 Other Operating 1,231,047 1,246,351 1,180,895 1,192,437 1,217,862 Space Related 530,137 553,489 516,876 507,554 472,388
- Expenses include total operating expenses and other components of net periodic benefit costs.
46 MIT REPORT OF THE TREASURER 2020
Massachusetts Institute of Technology Five-Year Trend Analysis (Unaudited) - Financial Highlights (continued)
(in thousands of dollars) 2020 2019 2018 2017 2016 Research Revenues Campus Federal government sponsored:
Health and Human Services $ 132,995 $ 134,773 $ 130,668 $ 111,835 $ 113,522 Department of Defense 131,832 136,743 123,513 130,372 131,624 Department of Energy 66,145 66,975 72,828 82,157 84,419 National Science Foundation 81,390 79,617 81,563 80,410 82,161 National Aeronautics and Space Administration 34,866 32,430 33,024 39,809 49,664 Other federal 14,239 14,180 12,902 17,043 15,738 Total federal 461,467 464,718 454,498 461,626 477,128 Non-federally sponsored:
State/local/foreign governments 20,596 21,052 24,471 25,686 28,495 Nonprofits 89,338 104,471 94,322 86,753 84,015 Industry 174,957 169,606 144,126 132,915 128,309 Total non-federal 284,891 295,129 262,919 245,354 240,819 Total federal and non-federal 746,358 759,847 717,417 706,980 717,947 F&A and other adjustments (5,766) (31,693) (45,255) (18,434) (21,083)
Total campus 740,592 728,154 672,162 688,546 696,864 Lincoln Laboratory Federal government sponsored 1,097,487 1,048,801 966,179 965,830 920,271 Non-federally sponsored 18,291 17,467 7,240 5,436 6,355 F&A and other adjustments (25,160) (6,884) 7,873 (2,009) 29,368 Total Lincoln Laboratory 1,090,618 1,059,384 981,292 969,257 955,994 SMART (A)
Non-federally sponsored 33,050 45,300 42,183 33,284 32,817 Total SMART 33,050 45,300 42,183 33,284 32,817 Total research revenues $ 1,864,260 $ 1,832,837 $ 1,695,637 $ 1,691,087 $ 1,685,675 (A)
The amounts represent research that has predominantly taken place in Singapore.
FIVE-YEAR TREND ANALYSIS 47
Massachusetts Institute of Technology Five-Year Trend Analysis (Unaudited) - Financial Highlights (continued) 2020 2019 2018 2017 2016 Students Undergraduate:
Full-time 4,501 4,557 4,510 4,476 4,492 Part-time 29 45 37 48 35 Undergraduate applications:
Applicants 21,312 21,706 20,247 19,020 18,306 Accepted 1,427 1,464 1,452 1,511 1,519 Acceptance rate 7% 7% 7% 8% 8%
Enrolled 1,102 1,114 1,097 1,110 1,106 Yield 77% 76% 76% 73% 73%
Freshmen ranking in the top 10% of their class 95% 98% 98% 97% 98%
Average SAT scores (math and verbal) 1,532 1,528 1,528 1,505 1,493 Graduate:
Full-time 6,862 6,845 6,671 6,707 6,689 Part-time 128 127 248 145 115 Graduate applications:
Applicants 29,114 28,826 27,634 26,463 23,750 Accepted 3,670 3,516 3,383 3,480 3,307 Acceptance rate 13% 12% 12% 13% 14%
Enrolled 2,312 2,321 2,208 2,277 2,165 Yield 63% 66% 65% 65% 65%
Tuition (in dollars)
Tuition and fees $ 53,450 $ 51,832 $ 49,892 $ 48,452 $ 46,704 Average room and board 16,390 15,510 14,720 14,210 13,730 Student Support (in thousands of dollars)
Undergraduate tuition support $ 157,544 $ 147,321 $ 137,936 $ 126,932 $ 112,902 Graduate tuition support 312,260 301,026 288,434 270,289 258,444 Fellowship stipends 45,080 44,979 42,309 39,518 38,731 Student employment 136,927 132,300 125,884 118,528 110,392 Total student support $ 651,811 $ 625,626 $ 594,563 $ 555,267 $ 520,469 Faculty and Staff (including unpaid appointments)
Faculty 1,067 1,056 1,047 1,040 1,036 Staff and fellows 15,584 15,366 15,212 15,077 14,732 48 MIT REPORT OF THE TREASURER 2020
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Report of the Treasurer for the year ended June 30, 2020