ML16286A207

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

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

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

Dear Mr. Naquin:

In my capacity as the Executive Vice President and Treasurer of the Massachusetts Institute of Technology ("MIT"), a nonprofit university, I serve as MIT's Chief Financial Officer. This letter is in support of MIT's use of the self-guarantee financial test to demonstrate financial assurance, as specified in 10 CFR Part 70 and 10 CFR Part 72, as ongoing compliance with MIT's Self-Guarantee Agreement, dated May 3, 2010 (the "Agreement"), and approved by the Nuclear Regulatory Commission on July 16, 2010. In order to demonstrate ongoing compliance with the Agreement and 10 CFR Part 70 and 10 CFR Part 72, and MIT's ability to self-guarantee the decommissioning of th_e following facilities owned or operated by MIT, the current cost estimates or certified amounts for decommissioning each facility, so guaranteed, are shown below, along with their calculation (if applicable), and supporting attachments are enclosed: Name of Facility MIT License Number SNM-986 MIT Research Reactor R-37 A. License No. SNM-986 Location of Facility 77 Massachusetts Ave. Cambridge, MA 02139 138 Albany St. Cambridge, MA 02139 Certified Amounts or Current Cost Estimates $1,125,000.00 $36,594,000.00 Based upon the applicable quantities of special nuclear materials stored at this facility, in accordance with 10 C.F.R. 70.25(d), MIT must guarantee the statutory minimum of $1,125,000 for the proper disposal of these materials. B. License No. R-37

1. Justification for 2005 $23M Decommissioning Estimate: Duke Engineering provided MIT with a cost estimate of $23.0M. That study was completed in November 2001. It included a 10% contingency. Inflation was quite low and for some sectors of the economy slightly negative for the years 2001-2005. Accordingly, for our 2006 submittal, we used the uninflated detailed Duke estimate which was $23.0M. For 2008, we provided an estimate of $29.8 million, based on separate inflation factors applied against the labor costs, using the NUREG-1307, Rev. 12, Page D.1, Example 2,(Northeast Region) of 1.40 (labor) and 1.72 (burial). 2. Decommissioning Estimate for 2017: For 2017, we estimate the decommissioning cost of the MIT Reactor to be $36.6 million. This figure is obtained by taking the $23.0M Duke estimate as a base and inflating it for both the cost of labor and burial as shown below: Duke Study 23,000,000 %Total NU REG Inflater 36,594,000.00 Inflation Model Labor Portion 20,470,000 89% Labor 1.5301 31,321,000.00* Burial Portion 2,530,000 11% Burial 2.0840 5,273,000.00* Please note that labor was 89% of the total estimate and burial was 11%. The inflater figures are obtained from NUREG-1307, Rev. 15, Page D.l, Example 2 (Appendix D). We take the date of completion of the Duke study to be 2002 as this is closest to the actual date of November 2001. For labor, the cost index is 2.52 in 2012 and 1.862 for 2002. We assume that cost increases are linear through 2017 and obtain: (1.862+ ((2.52-1.862)/ (2012-2002))(2017-2002)) = 2.849 The inflation factor for 2017 as compared to 2002 is therefore 2.849/1.862 or 1.5301. Hence, the labor portion of the cost is ($20.5M) (1.5301) or $31.321 million. For burial, the same approach is used to yield a factor of 37 .35, an inflation factor of 2.0840 and a cost of $5.27 million (*Please refer to Attachment 1-Calculations adjusted due to rounding.). I hereby certify that MIT is currently a going concern, and that it possesses positive tangible net worth in the amount of $17 .1 billion, as of the fiscal 'year ending on June 30, 2016. This figure is derived from MIT's independently audited, year-end financial statements and footnotes for the latest completed fiscal year, which is enclosed. MIT's independent auditor, PricewaterhouseCoopers, has included its review of this letter, which is also enclosed. MIT is not required to file a Form 10-K with the U.S. Securities and Exchange Commission for the latest fiscal year. MIT satisfies the following self-guarantee test:

Page 3 MIT Self-Guarantee, Decommissioning Expenses License Nos. R-37 and SNM-986 1. Current bond rating of most recent uninsured, uncollateralized, and unencumbered issuance of this institution: Rating: AAA Name of rating service: Standard & Poor's Financial Services LLC 2. Date of issuance of bonds: August 2, 2016 3. Description and date of maturity of bonds: Amount Interest Rate Maturity Date Description _ $500,000,000 3.885% July 1, 2116 Taxable Series E 4. Is the rating specified on line 1 "A" or better? Yes I hereby certify that the content of this letter is true and correct to the best of my knowledge. ..-=--++-,_1 ________ _ Name: Title: Date: Enclosures Israel Ruiz Executive Vice President and Treasurer (Chief Financial Officer)

ATTACHMENT 1 NRC Decommissioning Estimate 2017 Duke Study (2002) 23,000,000.00 Labor Portion 20,470,000.00 Burial portion 2,530,000.00 89% 11% LABOR BURIAL NRC Inflation Model 2017 Labor Burial 413615.1 2006 2.384 1.28 25.4385 1.42 lnflator 36,594,000.00 1.5301 31,321,000.00 2.0840 5,273,000.00 2017 2.849 1.5301 37.35 2.0840

_L pwc Report of Independent Accountants To the Corporation of Massachusetts Institute of Technology: We have performed the procedures included in the Consolidated NMAA Decommissioning Guidance -Financial Assurance, Recordkeeping, and Timeliness (NUREG-1757, Volume 3, Revision 1, Appendix A) and enumerated below, which were agreed to by management of Massachusetts Institute of Technology ("the Institute"), solely to assist you in evaluating the Institute's compliance with the Nuclear Regulatory Commission's financial assurance regulations, 10 CFR Part 70 and 72 with respect to NRC MIT licenses SNM-986 and R-37. Management is responsible for the Institute's compliance with those regulations. This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures and associated findings performed in relation to the CFO's Letter dated September 30, 2016 are as follows: 1. We confirmed that the total tangible net worth in the CFO's Letter agrees with total net assets contained in the Institute's financial statements for the year ended June 30, 2016, which we have audited in accordance with auditing standards generally accepted in the United States of America and have issued our report thereon dated September 9, 2016. A tie-out of the financial statements to the CFO's Letter is shown in the accompanying schedule to this report. 2. We inquired of management as to the existence of any reconciling items between the CFO's Letter and the audited financial statements noting that there are none; 3. We mathematically checked the totals in the accompanying schedule and recomputed the current cost estimates of decommissioning for each facility listed per the CFO's Letter. 4. We compared the bond ratings in the CFO's Letter to the information obtained from external, publically available source as follows: Rating Rating per the per CFO's External Letter Source External Source AAA AAA www.standardandnoors.com 5. A requirement in 10 CFR 30 App E II.C.(1) is the accountant must evaluate the licensee's balance sheet transactions and provide an opinion on whether those transactions could materially adversely affect the licensee's ability to pay for decommissioning costs. However, the guidelines PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Boston, MA 02210 T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us

_L pwc established by the American Institute of Certified Public Accountants (AICP A) prohibit an accountant from rendering an opinion of the type required by the regulation cited above. As a result, we have inquired of management as to the existence of any off-balance sheet arrangements. Management provided us with a schedule of all known off-balance sheet arrangements totaling approximately $3,036,214,000 as of June 30, 2016. We recalculated the total figure of off-balance sheet arrangements for mathematical accuracy. We also confirmed that the total of the all known balance sheet arrangements included in the schedule provided by management is less than the tangible net worth reported in the CFO's Letter. No exceptions were noted. We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on compliance with the regulations. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of management and the Corporation of Massachusetts Institute of Technology and the Nuclear Regulatory Commission, and is not intended to be and should not be used by anyone other than these specified parties. October 4, 2016 -I I !

_L pwc Schedule for Reconciling Amounts Contained in Chief Financial Officer's Letter with Amounts in Financial Statements (in thousands of dollars) Massachusetts Institute of Technology Year Ended June 30, 2016 Total net worth Tancible net worth Per Financial Statements PerCFO's Letter 17,134,502 S&PGlobal Ratings RatingsDirect Massachusetts Institute of Technology; Private Coll/Univ -General Obligation Primary Credit Analyst: Jessica A Matsumori, San Francisco ( 1) 415-371-5083; jessica.matsumori@spglobal.com Secondary Contact: Jamie L Seman, San Francisco; Jamie.Seman@spglobal.com Table Of Contents Rationale Outlook Enterprise Profile Financial Profile Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 1 1680526 I 302491962 Massachusetts Institute of Technology; Private Coll/Univ -General Obligation Credit Profile US$500.0 mil taxable bnds dtd 07 /29/2016 due 07 /01 /2116 Long Term Rating AAA/Stable Massachusetts Development Finance Agency, Massachusetts Massachusetts Inst of Tech, Massachusetts Massachusetts Hlth & Educl Faes Auth (Massachusetts Inst of Tech) ser K,L, I,N Long Term Rating AAA/Stable Rationale New Affirmed S&P Global Ratings assigned its 'AAA' long-term rating to the Massachusetts Institute of Technology's (MIT) taxable bonds, series E. In addition, S&P Global Ratings affirmed its 'AAA' and 'AAA/ A-1 +' long-term ratings on Massachusetts Institute of Technology's (MIT) existing debt, some of which was issued by the Massachusetts Development Finance Agency {formerly known as the Massachusetts Health and Educational Facilities Authority). The outlook, where applicable, is stable. The 'AAA' rating reflects our view of MIT's extremely strong enterprise profile, characterized by incredible demand for its programs, exceptional student quality, a geographically diverse student body, and impressive management and governance oversight. We assessed the college's financial profile as very strong, with a substantial endowment and a track record of excellent operating performance. We also note MIT's relatively high debt burden compared to those of peers and the substantial capital plans for deferred maintenance including infrastructure and renewal. Combined, these factors lead to an indicative stand-alone credit profile of 'aa+ .' In accordance with our criteria, the final rating can be within one notch of the indicative credit level. In our opinion, the 'AAA' rating on the college's bonds better reflects MIT's exceptional cash and investments relative to its outstanding debt. The 'A-1 +'short-term rating reflects our view of MIT's general credit strengths and considerable experience in managing its own liquidity. MIT is providing its own liquidity to support its $250 million of series J-1 (swapped to fixed rate) and J-2 variable-rate demand bonds (VRDBs). We believe MIT demonstrates sufficient liquid assets of high credit quality--largely in U.S. Treasuries--as well as a bank line that it can use, among other things, to cover the purchase price of VRDBs if any of the bonds are tendered but not successfully remarketed. Availability of liquid assets is sufficient, in our opinion, with same-day liquidity comprising high-quality U.S. government securities and cash. In our view, MIT has demonstrated the policies and procedures necessary to provide self-liquidity. The 'AAA' rating is further supported by the institute's:

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

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

• Significant demand, excellent student quality, and increasingly competitive admissions; and WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 2 1680526 I 302491962 Massachusetts Institute of Technology; Private Coll/Univ -General Obligation

• Robust operating performance, supported by good revenue diversity and the demonstrated ability to raise funds. Offsetting factors include our view of MIT's:

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

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

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

• Substantial capital and strategic plans and deferred maintenance needs, though additional debt is not expected until 2020. We expect the series E bonds will be issued as taxable, fixed-rate obligations with a 30 -100-year maturity. As with MIT's existing debt, we expect the series E taxable bonds to be an unsecured general obligation of the institute. Following this issuance, MIT will have a total of $3.289 billion of long-term debt outstanding, including about $177 million drawn under a $500 million bank line of credit. We understand that the institute uses this line opportunistically and periodically for various funding purposes. MIT's debt structure includes a number of bullet maturities, which make debt service quite uneven from year to year. However, the institute's maximum annual debt service (MADS) during the next 30 years is $379.6 million, while overall MADS of $837.7 million (24.7% offiscal 2015 expenses) for the organization's total debt occurs in 2111 at the maturation of its century bonds. If we assume level debt service and a 30-year financing term is assumed, estimated average annual debt service of the institute's total debt (assuming a 30-year maturity, a 5% interest rate, and even debt service) is approximately $214 million, which we consider to be moderately above average, at 6.3% of fiscal 2015 expenses. Rating above the sovereign MIT's bonds are eligible to be rated above the sovereign because we believe the institution can maintain better credit characteristics than the U.S. under a stress scenario. Under the criteria, "Ratings Above The Sovereign: Corporate And Government Ratings--Methodology And Assumptions," U.S. colleges and universities are considered to have moderate sensitivity to country risk. MIT's revenues are the sole source of security on the bonds. The institutional framework in the U.S. is predictable, with institutions like MIT having significant autonomy, independent treasury management, and no history of government intervention. Financial flexibility is supported by the institute's large endowment, which has a substantial market value and is invested globally, and diverse revenue sources. Outlook The stable outlook reflects our expectation that, during the two-year outlook period, MIT will maintain its excellent demand characteristics, exceptional operating performance, and robust fundraising results. The outlook also reflects our expectation that the institute's deferred maintenance will decrease over time. Downside scenario Credit factors that could lead to a lower rating within the outlook period include an unexpected deterioration in MIT's demand profile or operating performance. We do not anticipate the institute will issue additional debt within the outlook period. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 3 1680526 I 302491962 Massachusetts Institute of Technology; Private Coll/Univ -General Obligation Enterprise Profile Industry risk Industry risk addresses the higher education sector's overall cyclicality and competitive risk and growth by applying various stress scenarios and evaluating barriers to entry, levels and trends of profitability, substitution risk, and growth trends observed in the industry. We believe the higher education sector represents a low credit risk when compared with other industries and sectors. Economic fundamentals The institute has good geographic diversity, drawing students nationally and internationally. Approximately 93% of students come from outside the state. As such, our assessment of MIT's economic fundamentals is anchored by the U.S. GDP per capita. Market position and demand MIT is a private, nonsectarian, co-educational, nonprofit institution of higher education. MIT is organized into five schools: architecture and planning; engineering; humanities, arts, and social sciences; management; and science. MIT is one of the pre-eminent research institutes in the world, composed of major interdisciplinary organizations, as well as three off-campus research facilities in Massachusetts: Lincoln Laboratory in Lexington, Haystack Observatory in Tyngsborough, and the Bates Linear Accelerator Center in Middleton. MIT operates the Lincoln Laboratory as a federally funded research and development center focused on advanced electronics. In fiscal 2015, MIT's research activities were approximately $1.5 billion in revenue, including the campus, Lincoln Laboratory, and Singapore-MIT Alliance for Research and Technology. MIT maintains an impressive enrollment and demand profile characterized by very modest increases in recent years. According to year-to-date admissions data for fall 2015, full-time-equivalent enrollment is 11,231, up slightly from 11, 117 in fall 2014. In our view, the college is highly selective, student quality is exceptional, and the geographical draw is diverse with 92.5% of students coming from out of state. There are no current plans to add new schools or significantly change the academic mission or structure of the institute. MIT is actively engaged with international partners but has no plans to increase its physical footprint globally The college has significant admissions flexibility, admitting just 8.3% of its 18,306 freshman applicants in fall 2015. Its matriculation rate continues to improve and was a high 73% in fall 2015. Student quality is excellent, with an average freshman SAT score of 1510 (excluding the writing test) and an ACT score of 34.0, both of which are well above the national averages of 1010 and 20.9, respectively. The freshman-to-sophomore retention rate is outstanding, in our view, at 98%. The six-year graduation rate is also excellent, at 92%. Total tuition, room, and board charges for the 2015-2016 academic year was $60,434, or a 3.8% increase from the prior academic year, which we view as competitive with those of peer institutions. Total charges are projected to increase by 3.8% for the 2016-2017 academic year. We consider the tuition discount rate high, at about 45.8%, but it has remained fairly stable over the past five academic years. In our view, MIT has an exceptional fundraising history in terms of successful campaigns and annual giving. The WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 4 1680526 J 302491962 Massachusetts Institute of Technology; Private Coll/Univ -General Obligation institute's most recent campaign, "Campaign for a Better World," announced in May 2016, has raised over half of its $5.0 billion goal. The campaign is raising funds for education, research, and innovation. Management and governance MIT's senior management team is very stable, and has been led by President L. Rafael Reif since 2012. The MIT Corp., a 78-member board composed of national leaders in science, engineering, industry, education, and public service governs the institute. The institute also maintains an executive committee, which is a subset of the corporation and has responsibility for the general administration of the institute. The committee meets frequently and oversees MIT's strategic and capital plans. Management prepares interim, full-accrual results on a quarterly basis, which the corporation's Risk and Audit Committee reviews regularly throughout the year. We view the preparation and review of interim financial statements as a best practice for the industry. Recent changes to the senior management team include the dean for graduate education (Blanche Staton), vice president and dean for student life (Suzy Nelson), vice president for open learning (Sanjay Sarma), senior vice president and secretary of the corporation (R. Gregory Morgan), and vice president for resource development (Julie Lucas). MIT maintains strategic theses that drive capital and fundraising priorities. The institute's strategic priorities are assessed and updated regularly and contain measurable deliverables that are overseen by the executive committee. The executive committee also approves and monitors the budget in the context of a multiyear strategic financial plan. One of MIT's strengths, in our opinion, is its financial management, with a demonstrated ability to fundraise and to provide effective oversight and management of its budget, which has led to consistent operating surpluses. In our view, the management team manages the institute's financial profile prudently and efficiently to maximize operating outcomes. Financial Profile Financial management policies MIT has extensive financial policies, including formal policies for endowment, investments, and debt, which we view favorably. We consider the institute's budgeting to be conservative and note that financial performance metrics are evaluated based on budgets submitted by each of the institute's academic and administrative departments. Interim financial statements are generated on a full-accrual basis, which we consider a best practice. The institute meets standard annual disclosure requirements. The financial policies assessment is neutral, reflecting our opinion that the organization's financial policies are not likely to negatively affect its future ability to pay debt service. Our analysis of financial policies includes a review of the organization's financial reporting and disclosure, investment allocation and liquidity, debt profile, contingent liabilities, and legal structure, and a comparison of these policies with those of comparable organizations. Financial performance MIT's financial performance is consistently positive on a full-accrual basis, which we consider a credit strength and believe is a function of high demand, financial controls, and the payout of its endowment. MIT generated an operating surplus in fiscal 2015, and we expect another surplus in fiscal 2016, though likely somewhat less than fiscal 2015 levels. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 5 16sos26 I 302491962 Massachusetts Institute of Technology; Private Coll/Univ -General Obligation For the fiscal year ended June 30, 2015, the operating surplus was $179.6 million, a 5.3% margin relative to operating expenses. This is lower than the $205.8 million (6.5% margin) produced in fiscal 2014. The operating revenue base in fiscal 2015 was $3.5 billion. We view the institute's revenue as diverse, and in fiscal 2015, they included 15% from student tuition and fee revenues, 29% from research, 30% from investment support, 15% from gifts, and 12% from fees and services. In fiscal 2015, the spending rate on endowed funds was 4.5%. Available resources MIT's available resources are consistent with 'AAA' rating category medians. Fiscal 2015 expendable resources of $14.7 billion equaled 4.3x adjusted operating expenses and 4.3x proforma debt. Total cash and investments of $17.85 billion as offiscal 2015 equaled 5.26x adjusted operating expenses and 5.22x proforma debt. We expect these ratios will continue to improve given the institute's healthy operating margins, and we expect any increase in debt to be commensurate with an increase in resources such that financial resource measures remain consistent with the 'AAA' category. MIT Investment Management Co. (MITIMCo) manages the institute's investment assets under the supervision of a separate MITIMCo board. MIT's endowment assets totaled $13.69 billion as of June 30, 2015, an 8.7% increase over the previous year. The investments in pool A produced a 13.2% return for fiscal 2015. Of $17.5 billion of total long-term investments as of June 30, 2015, $3.6 billion, or 20.8%, were considered level 1, or active market securities, which we consider to be the most liquid. Management reports that MIT's asset allocation has been stable and is tracking close to the policy. As of June 30, 2016, MIT held same-day liquid investments of about $950 million. MIT uses a Tobin rule endowment distribution policy based 80% on the previous year's spending and 20% on the endowment's market value. Endowment spending for operations in fiscal 2015 was $545.9 million, or approximately 4.0% of the endowment's year-end value. The annual endowment draw equaled approximately 18.8% of the institute's adjusted operating revenues for fiscal 2015, which is less than those of some of its peers. MIT holds investments in two primary asset pools: pool A, composed of its long-term endowment investments, and pool C, composed of short-term, high-quality investments for working capital and for holding various reserves. As of June 30, 2015, MIT had total unfunded capital calls of approximately $2.0 billion. The unfunded commitment amount represents a moderate 14.6% of market value of endowment, which is lower than those of some of MIT's peers. Debt and contingent liabilities Total proforma debt for the institute is approximately $3.289 billion, including about $177 million drawn under a $500 million bank line of credit. We understand that the institute uses this line opportunistically and periodically for various funding purposes. MIT remains conservative in its use of variable-rate debt exposure, net of swaps, compared with its peers. Of the total debt, a small portion is variable-rate debt {10% or $343 million), with the remainder fixed rate. All debt is an unsecured general obligation of MIT. In our opinion, MIT has sufficient liquidity to fund its VRDBs. S&P Global Ratings believes the institute's swap portfolio poses very low risk to the credit rating overall, with a low degree of involuntary termination risk due to limited termination events other than those permissible, moderate counterparty risk, and the swap portfolio's sound economic viability during stressful economic cycles. MIT has one interest rate swap with US Bank. The agreement is a $125 million floating-to-fixed rate swap that synthetically fixes the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 6 1680526 I 302491962 Massachusetts Institute of Technology; Private Coll/Univ -General Obligation series J-1 bonds at 4.91%, with MIT receiving a rate equal to the Securities Industry and Financial Markets Assn. (SIFMA} index less 15 basis points; the agreement terminates on maturity in 2031. As of June 30, 2016, this swap had a notional amount and fair value of $125 million and negative $63.4 million, respectively. MIT has a defined-benefit and defined-contribution retirement plan for employees. Its defined-benefit plan is well funded, with a $7.5 million contribution in 2015. MIT had $53.2 million in accrued defined-benefit liabilities net of assets and $45,000 in accrued postemployment benefit obligations net of assets as of June 30, 2015, which we view as a manageable level of exposure. Massachusetts Institute of Technology Fiscal year ended 'June 30, 2016 2015 2014 2013 Enrollment and demand Headcount 11,331 11,319 11,301 11,189 Full-time equivalent 11,231 11,177 11,237 11,075 Freshman acceptance rate (%) 8.3 7.9 8.2 8.9 Freshman matriculation rate 73.0 72.1 72.1 70.1 (%) Undergraduates as a% of total 40.0 39.9 40.1 40.2 enrollment (%) Freshman retention(%) 98.0 98.7 98.0 97.8 Graduation rates (five years) 92.0 91.0 89.2 89.2 (%) Income statement Adjusted operating revenue N.A. 3,571,051 3,395,622 3,445,321 {$000s) Adjusted operating expense N.A. 3,391,401 3,189,816 3,167,303 ($000s) Net operating income ($000s) N.A. 179,650 205,806 278,018 Net operating margin (%) N.A. 5.30 6.45 8.78 Change in unrestricted net N.A. 604,127 966,176 916,439 assets ($000s) Tuition discount (%) N.A. 45.8 45.5 45.5 Tuition dependence (%) N.A. 17.1 17.5 16.5 Student dependence (%) N.A. 20.5 21.1 19.8 Research dependence (%) N.A. 43.2 43.9 45.6 Endownientandinvestment N.A. 18.8 18.4 17.3 income dependence (%) Debt Outstanding debt ($000s) N.A. 2,922,231 2,918,901 2,428,215 Proposed debt ($000s) N.A. 500,000 N.A. N.A. Total pro forma debt ($000s) N.A. 3,422,231 N.A. N.A. Pro forma MADS N.A. 213982 N.A. N.A. Current debt service burden N.A. 20.60 5.09 4.51 (%) WWW.STANDARDANDPOORS.COM/RATINGSDIRECT 2012 10,894 10,763 9.7 64.6 40.2 97.4 91.3 3,242,005 2,996,295 245,710 8.20 (18,764) 47.7 16.3 19.6 46.3 16.9 2,460,002 N.A. N.A. N.A. 3.46 Medians Private Colleges & Universities 'AAA' 2015 MNR 11,757 10.1 MNR 45.7 98.0 MNR MNR MNR MNR 4.77 MNR 40.2 MNR 30.5 MNR MNR 1,757,988 MNR MNR MNR MNR JULY 22, 2016 7 1680526 I 302491962 Massachusetts Institute of Technology; Private Coll/Univ -General Obligation Massachusetts Institute of Technology (cont.) Fiscal year ended June 30, Medians Private Colleges & 2016 2015 2014 2013 2012 Universities 'AAA' 2015 Current MADS burden (%) N.A. 24.11 25.64 25.01 26.43 5.61 Proforma MADS burden (%) N.A. 6.3 N.A. N.A. N.A. MNR Financial resource ratios Endowment market value N.A. 13,687,939 12,425,131 10,857,976 10,149,564 8,613,547 ($000s) Cash and investments ($000s) N.A. 17,851,446 16,526,515 14,130,013 13,087,243 MNR Unrestricted net assets ($000s} N.A. 7,071,258 6,467,131 5,500,955 4,584,516 MNR Expendable resources ($000s) N.A. 14,724,624 13,479,986 11,057,197 9,844,361 MNR Cash and investments to N.A. 526.4 518.1 446.1 436.8 878.9 operations (%) Cash and investments to debt N.A. 610.9 566.2 581.9 532.0 803.7 (%) Cash and investments to pro N.A. 521.6 N.A. N.A. N.A. MNR forma debt(%) Expendable resources to N.A. 434.2 422.6 349.1 328.6 677.5 operations (%) Expendable resources to debt N.A. 503.9 461.8 455.4 400.2 648.3 (%) Expendable resources to pro N.A. 430.3 N.A. N.A. N.A. MNR forma debt (%) Average age of plant (years) N.A. 9.3 9.1 8.8 8.4 12.1 N.A.--Not available. MNR--Median not reported. MADS-Maximum annual debt service. Total adjusted operating revenue =unrestricted revenue less realized and unrealized gains/losses and financial aid. Total adjusted operating expense = unrestricted expense plus financial aid expense. Net operating margin= lOO*(net adjusted operating income/adjusted operating expense). Student dependence= lOO*(gross tuition revenue+ auxiliary revenue) I adjusted operating revenue. Current debt service burden= !OO*(current debt service expense/adjusted operating expenses). Current MADS burden= lOO*(maximum annual debt service expense/adjusted operating expenses). Cash and investments= cash+ short-term & long-term investments. Expendable resources = unrestricted net assets + temp. restricted net assets -(net PPE-outstanding debt). Average age of plant= accumulated depreciation/depreciation & amortization expense. Related Criteria And Research Related Criteria e General Criteria: Methodology: Not-For-Profit Public And Private Colleges And Universities, Jan. 6, 2016

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

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

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

• Criteria: Use of CreditWatch And Outlooks, Sept. 14, 2009 Ratings Detail (As Of July 22, 2016) Massachusetts Institute of Technology taxable medium term nts Series B Long Term Rating AAA/Stable Massachusetts Development Finance Agency, Massachusetts Massachusetts Inst of Tech, Massachusetts WWW.STANDARDANDPOORS.COM/RATINGSDIRECT Affirmed JULY 22, 2016 8 1680526 I 302491962 Massachusetts Institute of Technology; Private Coll/Univ -General Obligation Ratings Detail (As Of July 22, 2016) (cont.) Massachusetts Dev Fin Agy (Massachusetts Institute of Technology) rev bnds ser 2008-0 Long Term Rating AAA/Stable Affirmed Massachusetts Dev Fin Agy (Massachusetts Institute of Technology) VRDBs ser J-1, J-2 Long Term Rating AAA/ A-1 +/Stable Affirmed WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 9 1680526 I 302491962 Copyright© 2016 by S&P Global Market Intelligence, a division of S&P Global Inc. All rights reserved. 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WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 22, 2016 10 1680526 I 302491962 r ------I Report of the Treasurer for the year ended June 30, 2016 lllil Massachusetts Institute of Technology Report of the Treasurer for the year ended June 30, 2016 I Massachusetts Institute of Technology The Corporation 2015-2016 as ofJune 30, 2016 Chairman: Robert B. Millard* President: L. Rafael Reif+' Executive Vice President and Treasurer: Israel Ruiz* Senior Vice President and Secretary of the Corporation: R. Gregory Morgan Life Members Shirley A. Jackson; James A. Champy*; Denis A. Bovin*; A. Neil Pappalardo*; Judy C. Lewent; Edie N. Goldenberg; Susan E. Whitehead*; Brian G.R. Hughes; L. Robert Johnson; Gururaj Deshpande; Barrie R. Zesiger*; John A. Thain*; Susan Hockfield; Lawrence K. Fish*; Diane B. Greene; Charlene C. Kabcenell; Henri A. Termeer*; Barry Lam; Mohammed Jameel (on leave). Members Theresa M. Stone; John W Jarve; Mark P. Gorenberg; Mark R. Epstein; Alan G. Spoon; R. Erich Caulfield; Megan J. Smith (on leave); Abigail P. Johnson; Diana C. Walsh*; Victor J. Menezes; Ursula M. Burns; Rafael del Pino; K. Anne Street; Leonard H. Schrank; R. Gregory Turner; Eve J. Higginbotham; Alia Whitney-] ohnson; Phillip T. Ragon; Paul R. Marcus; Philip C. T. Ng; Arunas A. Chesonis; Fariborz Maseeh; Tanguy Chau; Bruce N. Anderson; Patricia R. Callahan; Neil E. Rasmussen; Carmen M. Thain; David L. desJardins; Vanu G. Bose; Paul M. Kominers; Alan M. Leventhal; Viktor F. Vekselberg; Ilene S. Gordon; Eran Broshy; Ronald A. Williams; Alan M. Dachs; Samantha O'Keefe; Donald E. Shobrys; Roger C. Altman; Leslie C. Dewan; Jeffrey S. Halis; Jean Hammond; Ray A. Rothrock; Jeffrey L. Silverman. President of the Association of Alumni and Alumnae John D. Chisholm Representatives of the Commonwealth Governor: Charles D. Baker, Jr. Chief Justice of the Supreme Judicial Court: Ralph D. Gants Secretary of Education: James A. Peyser Life Members Emeriti and Emeritae lrfoee duPont, Jr.; D. Reid Weedon, Jr.; Colby H. Chandler; Carl M. Mueller; Louis W Cabot; Christian]. Matthew; Paul M. Cook; William S. Edgerly; Frank Press; Edward E. David, Jr.; Emily V. Wade; George N. Hatsopoulos; Mary Frances Wagley; Michael M. Koerner; Morris Tanenbaum; W Gerald Austen; Richard P. Simmons; Morris Chang; Paul E. Gray; Alexander W Dreyfoos, Jr.; Ronald A. Kurtz; Du Wayne J. Peterson, Jr.; Raymond S. Stata; Brit J. d'Arbeloff; Gordon M. Binder; Dana G. Mead; Arthur Gelb; Norman E. Gaut; Robert A. Muh; James H. Simons; Samuel W Bodman, III; John S. Reed; David H. Koch; Robert M. Metcalfe; John K. Castle; Arthur J. Samberg; Kenan E. Sahin. Members' names are listed in chronological order of election to each category. *Member of the Executive Committee Table of Contents

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

• Consolidated Financial Statements The consolidated financial statements summarize the finances of MIT for the fiscal years 2015 and 2016. Consolidated Statements of Financial Position .................................. 7 Consolidated Statement of Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Consolidated Statements of Cash Flows ....................................... 9 Notes to Consolidated Financial Statements ................................... 10-40 Report of the Independent Auditors ......................................... 41

• Additional Information Five-Year Trend Analysis (Unaudited) -Financial Highlights ...................... 42-44 Cover photo commemorates the centennial anniversary of MIT's move to Cambridge, Massachusetts. Pictured: the MIT June 14, 1916, dedication exercises in Great Court new buildings.

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Report of the Treasurer To the Members of the Corporation During fiscal 2016, the Institute continued to push the boundaries of discovery and innovation, reinvent the educational experience, and reimagine the campus despite a challenging economic environment. MIT closed the year with net assets of $17,134.5 million and net operating results of $76.9 million, and MIT's pooled investments produced a return of 0.8 percent. In accordance with MIT's distribution policy, the endowment's investment income and gains are distributed for spending in a manner that enables stable operations while preserving its long-term purchasing power. In fiscal 2016, this distribution to operations exceeded the investment return and this, along with increases in postretirement benefit liabilities, contributed to the 3.4 percent decrease in net assets. Still, the Institute maintains a sound financial position resulting from a number of years of sustained solid investment performance and managed expenses. This strength has enabled MIT to continue to invest in strategic initiatives while securing MIT's future and core mission. The year is marked by a number of significant achievements. In May, the Cambridge Planning Board voted unanimously to approve MIT's special permits as part of its "Planned Unit Development" in the Kendall Square area. The approval, a milestone reached during the centennial celebration of MIT's move from Boston to Cambridge, paves the way for MIT to develop the east campus over the next decade with a seamless integration of acdemic and commercial uses. A century after physically relocating MIT's campus, the Kendall project allows us to create a destintion for both the MIT community and Cambridge residents, an environment capable of unleashing a new era of groundbreaking illscovery and economic growth across the region. MIT commemorated the centennial with an expansive offering of public events and activities. Highlights included the May 7 Moving Day celebration, a reimagining of the 1916 ceremo-nial crossing of the Bucentaur barge that carried the Institute's charter across the Charles to MIT's new home in Cambridge. In conjunction with this event, on May 6 the Institute formally launched the public phase of the Campaign for a Better World, a bold initiative aimed at raising $5 billion to advance MIT's work in addressing some of the world's greatest challenges. Summary of Key Financial Highlights (IO-year trend) (in millions of dollars) 2007 2008 2009 As MIT celebrated the anniversary of its 1916 move, the Department of Mathematics moved back into a newly renovated Simons Building (Building 2), representing the first major renewal of one of the iconic 100-year-old Beaux Arts buildings designed by William Welles Bosworth at the heart of the MIT campus. To complement east campus design efforts and the ongoing renewal of the main campus, MIT has continued to advance a formal planning process for the west and northwest areas of campus. Addressing deferred maintenance has been prioritized as an integral part of overall campus renewal, and fiscal 2016 was the first year in recent decades that a reduction in the deferred maintnance backlog was realized, with 80 percent of campus builillngs benefitting from this program. In connection with our campus renewal efforts, we are continuing to improve the MIT nerwork (MITnet) to increase resiliency and enable higher bandwidth connectivity. This past year, the Institute invested in the modernization of our information technology (IT) systems and instructure, adopting cloud architecture and a sofrware as a service (SaaS) delivery model. These improvements will ensure that the MIT community has dependable high-speed connectivity and access to information and services both on and off campus. In October, MIT released its five-year multifaceted Plan for Action on Climate Change. The Institute has committed to rducing campus carbon emissions by at least 32 percent by 2030, and has stated an aspirational goal of reaching carbon neutrality as soon as possible. To help advance these plans, sustainability working groups are aligning campus operations for our buildings, stormwater, landscape, and laboratories along a core set of sustainability principles, setting a strong foundation for rigorous goal setting, measurement, and verification moving forward. It is critical to continue to maintain the campus builillngs and infrastructure to a high standard to enable the unparalleled work of MIT's exceptional faculty and students. In February, 100 years after Albert Einstein preillcted the existence of gravitational waves, scientists at the Laser Interferometer Gravitational-wave Observatory (UGO) announced they had observed ripples in the fabric of space-time, decoded the gravitational wave signal, and determined its source. And this past spring, the Advanced Functional Fabrics of America (AFFoA) Institute, a nonprofit founded by MIT, won a national 2010 2011 2012 2013 2014 2015 2016 Operating Revenues 2,180 2,408 2,644 2,663 2,751 2,990 3,187 3,124 3,291 3,427 Operating Expenses 2,208 2,294 2,461 2,383 2,571 2,744 2,909 2,919 3, 111 3,350 Operating Results (28) 114 183 280 180 246 278 206 180 77 Net Assets 12,695 12,770 9,946 10,324 12,388 12,799 14,133 16,315 17,739 17,135 Endowment 9,943 9,948 7,880 8,317 9,713 10, 150 10,858 12,425 13,475 13,182 Net Borrowings 1,075 1,332 1,730 1,723 2,456 2,449 2,417 2,904 2,905 2,892 SUMMARY competition for federal funding to create the most modern manufacturing innovation institute to accelerate innovation in manufacturing involving fibers and textiles. Strong financial results realized in recent years, as depicted in the Summary of Key Financial Highlights table, have enabled us to make significant progress in our campus and IT renewal plans. The proceeds from bonds, together with our fundraising efforts, will permit us to continue to advance the ongoing campus renewal program and provide for MIT's future of unbounded innovation, discovery, and knowledge. The following are additional details regarding MIT's fiscal 2016 consolidated financial statements: Consolidated Statements of Financial Position, Consolidated Statement of Activities, and Consolidated Statements of Cash Flows. Consolidated Statements of Financial Position The discussion in this section highlights key elements of MIT's financial position-net assets; investments; endowment; land, buildings, and equipment; postretirement benefit assets and liabilities; and borrowings. Net Assets Total net assets decreased to $17,134.5 million, a decrease of 3.4 percent from fiscal 2015. et assets are presented in three distinct categories to recognize the significant ways in which universities are different from profit-making organizations. These categories reflect the nature of the restrictions placed on gifts by donors. Net Assets $millions 20,000 -*...-------------------, 18,000 -1=====:::;;;;======r=;:;;;:17=,13=5:--4 16,000 -1=======---i 10,000 -8,000 -6,000 -4,000 -2,000 2012 2013 2014 2015 2016

• Permanently

• Temporarily D Unrestricted Restricted Restricted In fiscal 2016, permanently restricted net assets increased $202.3 million, or 7.0 percent, to $3,084.2 million, primarily due to new gifts and pledges made and net investment gains on permnently restricted, separately held endowment funds. Temporarily restricted net assets decreased $342.6 million, or 4.5 percent, to $7,210.8 million, primarily due to endowment gains distributed for spending. The Commonwealth of Massachusetts requires 2 that all universities located within the Commonwealth report accumulated market gains on both permanently and tempily restricted net assets as temporarily restricted net assets until appropriated for use. Unrestricted net assets decreased $464.2 million, or 6.4 percent, to $6,839.5 million, primarily due to pension-related charges other than net periodic benefit costs. Investments Investments at fair value were $17,478.4 million as of fiscal year-end 2016, a decrease of $275.7 million, or 1.6 percent. The consolidated financial statements include both realized and unrealized gains and losses on investments and other assets. These amounts totaled a net gain of $242.6 million in fiscal 2016, and $1,651.6 million in fiscal 2015. The decrease in the value of investments as of fiscal year-end 2016 was substantially driven by distribution of accumulated investment gains wruch was $589.4 million in fiscal 2016. MIT's investment policy is based on the primary goal of gening rugh real rates of return without exceptional volatility. To reduce volatility, the portfolio is broadly diversified. To gener-ate rugh real rates of return, MIT's investment policy favors equity investments over fixed income instruments and is heavily weighted toward less efficient markets such as private equity, real estate, and real assets. MIT primarily invests through external fund managers, thereby allowing MIT to access the best invment talent globally. By identifying a wide variety of top-tier investment managers with specific competencies, MIT is able to construct a broadly diversified portfolio while accessing deep sector expertise. Decision authority for the selection of maners, direct investments, and asset allocation resides with MIT's Investment Management Company (MITIMCo). The Board of Directors of MITIMCo holds four regularly scheduled meetings during the fiscal year where investment policy, performance, and asset allocation are reviewed. Endowment Endowment $millions 16,000 14,000 +-=============' 12,000 -!"'-"======= 10,000 8,000 6,000 4,000 2,000 2012 2013 2014 2015 2016 MIT REPORT OF THE TREASURER 2016 Endowment assets, the largest component of total investments, are managed to maximize total investment return relative to appropriate risk. The market value of investments in ment funds, excluding pledges for endowed purposes, totaled $13,181.S million as of fiscal year-end 2016, a decrease of 2.2 percent compared to a total of $13,474.7 million last year. This year, MIT's pooled investments (Pool A) produced a return of 0.8 percent. Investment income and a portion of gains are distributed for spending in a manner that preserves the term purchasing power of the endowment. Endowment funds invested in Pool A, MIT's primary investment pool, receive ditributions based on relative ownership, which is valued monthly. Land, Buildings, and Equipment Land, buildings, and equipment had a net book value of $3,092.4 million as of fiscal year-end 2016, an increase of $270.1 million, or 9.6 percent, from $2,822.3 million the previous year, mainly driven by expenditures for research and educational facilities. During fiscal 2016, new construction and major renovation projects placed into service totaled $3S6.9 million. The Institute currently has a total of 1S9 capital projects under construction with a cumulative cost of $260.3 million. In May, MIT was presented with six preservation awards from the Cambridge Historical Commission for tl1e renovation of the Simons Building (2), the Morris and Sophie Chang Building (ES2), the Kresge Auditorium (W16), the MIT Chapel (W1S), Building NW23, and the Du Pont Gymnasium (\'(131). structed in 1938 as the Massachusetts headquarters for the Lever Brothers Company, Building ES2 was the original home to the Sloan School of Management. This historic building went a complete renovation and was named in honor of Morris Chang 'S2, SM '53, ME 'SS and Sophie Chang, whose generous gift made the renovation possible. The expanded Samberg ference Center located on the sixth and seventh levels opened in February. As noted above, Building 2, home to the Department of Mathematics and portions of Chemistry, was fully renovated in the first major renewal project of the main group buildings. A substantial restoration of the Kresge Auditorium has revitalized this gathering space, and tl1e MIT Chapel was fully renewed to better support the needs of the community. Enabling work has begun for Kendall Square development, and impacted units are being relocated to accommodate this work. MIT's Theater Arts program currently occupies the Rinaldi Tile Building (E33), as well as spaces in Walker Memorial, Building 4, Building 10, and the Kresge Auditorium. With E33 slated for demolition, me Theater Arts program will be consolidated in a former warehouse at 34S Vassar Street (W97), which is now under renovation. Building W98, located at 12 Emily Street, is also being renovated as the new home to me Sea Grant program, and is targeted for occupancy in January 2017. In addition to Sea Grant, the building will accommodate me Advanced Functional Fibers of America (AFFoA) space. Born projects are expected to achieve LEED Gold certification. MIT.nano is proceeding on schedule and is on track to open in June of 2018. This world-class five-story structure will be SUMMARY equipped wim me most advanced fabrication tools and materials processing capabilities to enable the Institute's nanotechnology, materials, and engineering systems research. Nearby, Building 31 is being modernized while addressing programming needs for the Department of Aeronautics and Astronautics and me Department of Mechanical Engineering. This building supports me activities of approximately lSO faculty, students, and researchers. Botl1 MIT.nano and Building 31 are also expected to achieve LEED Gold certification. In close proximity, the Samuel Tak Lee Building (9) is currently under renovation for occupancy in September. The project includes extensive renovations to the second floor and less extensive work for floors mree, four and five. Lastly, tl1e renovation of Building NW23 located on Albany Street was completed as the new home for me Department of Facilities groups of Campus Services, Campus Construction, Maintenance and Utilities, and the Office of Campus Planning, and is now occupied. As noted above, addressing deferred maintenance has been prioritized as an integral part of overall campus renewal, and fiscal 2016 was tl1e first year in recent decades that a reduction in the deferred maintenance backlog was realized. We partnered with over 30 departments across campus to accomplish improvements to student residences, research laboratories, classrooms, and office spaces. As a result of these investments, the campuswide facility condition index (FCI), which is me ratio of deferred maintenance to replacement value, decreased from 0.27 in ary 2014 to 0.24 in May 2016, and 17 renovations achieved the Institute target FCI of 0.1 S or less. In accordance with MIT 2030, a flexible framework mat guides and supports the Institute's ongoing physical and financial stewardship, MIT expects future pressure on operating results due to increasing depreciation costs associated with me above and anticipated capital projects that actively address current and future academic needs and opportunities. Postretirement Benefit Assets and Liabilities The defined benefit pension plan had assets of $3,332.2 million as of fiscal year-end 2016, a decrease of $46.3 million from $3,378.S million as of fiscal year-end 201 S. The plan's projected liabilities were $3,79S.3 million as of fiscal year-end 2016, up $363.6 million from $3,431.7 million a year earlier, resulting in a net pension liability of $463.1 million and $S3.2 million as of fiscal year-end 2016 and 201 S, respectively. MIT also maintains a postretirement welfare benefit plan that covers retiree expenses associated wim medical and life insurance benefits. This plan had assets of $S49.2 million as of fiscal year-end 2016, an increase of $0.3 million from $S48.9 million as of fiscal year-end 201 S. The plans projected liabilities were $S82.1 million as of fiscal year-end 2016, up $33.1 million from $S49.0 million a year lier, resulting in a net benefits liability of $32.9 million. The changes in asset values of both plans, relatively small in fical 2016, were a function of payments made to beneficiaries and investment performance. The increases in liabilities experienced by both plans were driven by declines in discount rates. The discount rates for each plan were derived by identifying a meoretical 3 settlement portfolio of high-quality corporate bonds sufficient to provide for the plan's projected benefit obligations. The yearover-year discount rates dropped 56 and 51 basis points as of June 30 for the defined benefit pension plan and retiree welfare benefit plan, respectively, due to the prevailing interest rate environment at fiscal year-end 2016. The combined plans' fiscal 2016 underfunded status was $496.0 million, an increase of $442.8 million from $53.2 million as of fiscal year-end 2015, driven primarily by the change in discount rates. On an accounting basis in fiscal 2015, the defined benefit pension plan had a funding level of 98.5 percent, and the postretirement welfare benefit plan had a funding level of 99.9 percent. In accordance with the Institute's funding strategy to ensure the long-term strength of these plans, the Institute designated contributions of $83.0 million to the defined benefit pension plan and $18.9 million to the postretirement welfare benefit plan during fiscal 2016. These contributions, combined with actual investment performance, changes in certain demographic assumptions, and changes in the discount rates mentioned prevously, resulted in a funding status of 87.8 percent for the defined benefit pension plan and 94.3 percent for the postretirement welfare benefit plan as of fiscal year-end 2016. The investments of both plans' assets are managed by MITIMCo. Effective as of fiscal year-end 2015, MIT revised its mortality assumptions used to determine the projected benefit oblitions of the defined benefit pension and postretirement welfare benefit plans. The revised assumptions were derived from the mortality tables published by the Society of Actuaries in October 2014. The change in mortality assumptions for both plans resulted in an increase of $267.9 million in the projected benefit obligations as of fiscal year-end 2015. In addition to this change, MIT engaged its actuary to perform a comprehensive review and experience study of certain demographic assumptions for both plans that resulted in a decrease of $33.9 million in the projected benefit obligations as of fiscal year-end 2015. MIT also offers a 401 (k) plan to its employees, which is not reAected 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 plan's investment market value was $3,891.1 million as of fiscal year-end. Net Borrowings In fiscal year 2016, net borrowings decreased $12.5 million, or 0.4 percent. No new debt was issued during fiscal 2016. However, in July 2016, MIT issued $500.0 million in Series E Taxable Bonds, maturing in 2116 and yielding 3.885 percent. This yield marks an all-time low for the costs of a 100-year bond. The proceeds from these bonds will be used to further advance MIT's ongoing campus renewal and development program, including academic and research capital projects within the MIT 2030 framework. MIT's financial strength is reviewed periodically by both Moody's Investors Service and Standard & Poor's Rating Services. In July 2016, these agencies rated the most recent bond issuance and reaffirmed MIT's credit as Aaa" and AAA," their highest rating levels. 4 Consolidated Statement of Activities Operating Activities Operating Activities $millions 4,000 3,500 -+==============, 3,000 2,500 1,500 1,000 500 0 2012 2013 2014 2015 2016

• Revenues

• Expenses This past year, MIT invested in the modernization of our information technology (IT) systems and infrastructure, adopting cloud architecture and web-based platforms. In December, Information Systems and Technology (IS&T) migrated MIT's SAP infrastructure to SAP's HANA Enterprise Cloud environment, providing improved performance and laying the foundation for real-time reporting access to transactional data stored in SAP and deployment of mobile-native web applications for administrative applications. To date, 32 percent of IS&T managed servers have been migrated to cloud infrastructure, and 100 percent will be moved by 2018, releasing space while addring operational risk witl1 geographical diversity and improved redundancy. We are continuing to improve the MIT network (MITnet) to increase resiliency and enable higher bandwidth connectivity to cloud providers, as well as dramatically ining the connectivity with Northern Crossroads, a consortium of higher education and research institutions in the Nortl1east, from 20 gigabits per second to 200 gigabits per second. These improvements ensure that tl1e MIT community has dependable high-speed connectivity and access to information and services both on and off campus. MIT ended the year with a surplus from operations of $76.9 million. This is $102.7 million, or 57.2 percent, lower than tl1e fiscal 2015 result, in significant part related to the previously mentioned investments in information technology and facilities expansion and modernization. Operating revenues increased $136.1 million, or 4.1 percent, to $3,426.8 million in fiscal 2016, while operating expenses increased $238.8 million, or 7.7 percent, to a total of $3,349.9 million. Year-over-year comparisons of operating revenues and expenses are presented on the graph above. MIT REPORT OF THE TREASURER 2016 Operating Revenues Revenues Net Asset Reclasses Auxiliaries 3% Support from Investments 21% Other Programs 3% Fees & Services 5% 3% Gifts for Current Use 5% SMART Research 1% Net Tuition 10% MIT's operating revenues include tuition, research, unrestricted gifts and bequests for current use, fees and services, other grams, endowment distribution and income from other iments, auxiliaries, and payments on pledges for unrestricted poses (included within net asset reclassifications and transfers). Tuition revenue for graduate, undergraduate and nondegree ecutive programs net of financial aid grew by $8.2 million, or 2.5 percent, to $340.0 million. The growth in undergraduate tuition revenue was driven by a 3.8 percent increase in tuition rates and a 0.3 percent increase in student population. Financial aid for undergraduate students increased by 5.2 percent to $97.3 million. Financial aid for graduate students grew by 5.5 percent to $198.1 million. Research revenues for on-campus departments, labs, and centers at MIT increased $35.8 million, or 5.4 percent, to $701.4 lion. Research revenues for Lincoln Laboratory increased $76.7 million, or 8.7 percent, to $956.0 million, and for the MIT Alliance for Research and Technology (SMART), increased $1.1 million, or 3.4 percent, to $32.8 million. The growth rate in MIT's campus research is being driven by both Federal and non-Federal sponsors. Federally sponsored research revenue increased by 3.7 percent compared to the prior fiscal year, with the largest increase being related to the National Aeronautics and Space Administration. on-Federally sponsored research increased by 6.6 percent, primarily driven by industrial and non-profit sponsors. The increase in Lincoln Laboratory research is the result of increased Federal funding from the Department of Defense. During fiscal 2015, the Air Force renewed the contract for operation of Lincoln Laboratory for an initial term of five years with an option to extend for an additional five years, acknowledging the long-term value of the Laboratory in service to national security. Also, the Department SUMMARY of Defense recently approved funding for two new facilities for Lincoln Laboratory. The Lincoln Laboratory West Laboratory project includes construction of the compound semiconductor laboratory/microsystems integration facility and the engineering prototyping facility. The moderate increase in SMART research is the net result of certain interdisciplinary research groups winding down and renewing. MIT's modified total direct research expenditures, which form the basis for recovery of indirect costs, decreased by $51.8 lion, or 5.0 percent, in fiscal 2016. While research and net tuition support more than half of MIT's operating revenue, the Institute also experienced significant growth in support from investments. Support from investments increased $60.1 million, or 8. 9 percent, primarily due to an increase in the endowment distribution. The effective spend-ing rate on endowed funds was 4.4 percent, or 5.1 percent on a three-year-average basis, in fiscal 2016. Gifts and bequests for current use decreased $59.6 million, or 26.9 percent, due to a few exceptionally large gifts received in fiscal 2015. Operating Expenses MIT's operating expenses include salaries and wages, employee benefits, supplies and services, subrecipient agreements, utilities, rent and repairs, depreciation, and interest. Operating expenses grew to $3,349.9 million, an increase of $238.8 million, or 7.7 percent. Interest Depreciation 4% 5% Utilities, Rent & Repairs 6% Subrecipient Agreements 4% Expenses Salaries & Wages & Employee Benefits 49% Overall Institute salary expenses rose 6.5 percent while ployee benefits expenses rose 0.8 percent. Campus average salary increases were 3.2 percent while headcount grew by 3.0 percent. The relatively moderate employee benefits growth is a result of increases in health, medical, employment taxes, and the supplemental 401 (k) retirement plan being almost entirely offset by decreases in defined benefit pension and retiree health costs. 5 These decreases were due to higher discount rates, changes in retirement rates, and better-than-expected investment returns experienced in fiscal 2015, which determined 2016 operating costs in this area. During fiscal 2016, expenses related to supplies and services increased $128.1 million, or 13.4 percent, to $1,084.2 million. The expense growth in this area was driven by an increase in research activities, investments in IT systems and infrastructure, and spcial events related to the Campaign for a Better World launch, as well as the MIT centennial event. Non-Operating Revenues, Gains, and Losses Summary Non-operating activities resulted in a $654.4 million decrease in MIT's fiscal 2016 net assets, which totaled $17,134.5 million. The two principal drivers of the decrease were the endowment spending distribution net of investment appreciation, totaling $346.8 million, and post retirement plan changes other than net periodic benefit costs of $503.7 million. Gifts and Pledges Gifts to MIT support scholarships, fellowships, professorships, research, educational programming, and student life activities, as well as construction and renovation of buildings. Gift and pledge revenue for fiscal 2016 totaled $469.2 million, a decrease of 5.0 percent from the fiscal 2015 total of $493.7 million. Gifts from individuals represented 52.4 percent of new gifts and pledges in fiscal 2016, up from 35.3 percent in fiscal 2015. Gifts from foundations represented 37.4 percent of new gifts and pledges in fiscal 2016, up from 26.3 percent in fiscal 2015. Gifts from corporations and other sources represented 10.2 percent of new gifts and pledges in fiscal 2016, down from 38.4 percent in fiscal 2015. New gifts and pledges for research and education were the largest categories of contributions for fiscal 2016. Consolidated Statements of Cash Flows The consolidated statement of cash flows divides cash-inflows and outflows into three categories: operating, investing, and financing. Although this division is a requirement of generally cepted accounting principles (GAAP), when reviewing the cash flow of a nonprofit organization such as MIT, it is important to note the investing activities as presented in the cash flow are an integral part of operations, since a large portion of operating activity is funded through distributions from pooled investments. Net operating cash flow consumed $323.0 million in fiscal 2016. Net operating cash flow resulted from a total decrease in net assets, adjusted for non-cash items (depreciation and net gain on investments and other assets, etc.), offset by changes in working capital, excluding cash and debt. The net of pledges receivable, accounts receivable, accounts payable, and other operating assets and liabilities used $8.5 million of operating cash flow in fiscal 2016. Net investing activities provided $349.5 million in cash due to proceeds from sales of investments to cover 6 the Institute's endowment spending policy, offset by spending on capital projects and purchases of investments, in fiscal 2016. Cash provided by financing activities was $104.9 million in fiscal 2016, driven primarily by endowed contributions. MIT's full consolidated financial statements and footnotes, further describing our financial position, activities, and cash flows through June 30, 2016, are included on the following pages. Closing Remarks A century ago, MIT made a most daring and pioneering move in relocating its campus from Boston to Cambridge. The move paid off in extraordinary ways, enabling not only a remarkable transition from an important regional institution to a premier global research university, but also the birth of a preeminent innovation ecosystem around the campus. The recent approvals to commence construction of five new buildings in Kendall Square open the door to attract the next wave of innovative companies and to strengthen collaborations across the region. We approach the future with tremendous optimism about all that we hope to accomplish together as we imagine the next 100 years of inntion. We begin fiscal 2017 on a sound financial foundation with the resources needed to enable MIT's future and the flexibility to pursue groundbreaking initiatives. I have the greatest enthusiasm about the impact MIT will continue to have in addressing the world's great challenges, and the Institute's potential will be further strengthened by the Campaign for a Better World. I am grateful to our students, faculty, staff, alumni, friends, and members of the MIT Corporation for their unwavering commitment to realizing this future together. Respectfully submitted, Israel Ruiz Executive Vice President and Treasurer September 9, 2016 MIT REPORT OF THE TREASURER 2016 Massachusetts Institute of Technology Consolidated Statements of Financial Position at June 30, 2016 and 2015 (in thousands of dollars) Assets Cash .............................................................. . Accounts receivable, net ............................................... . Pledges receivable, net, at fair value ....................................... . Contracts in progress, principally US Government ........................... . Deferred charges, inventories, and other assets .............................. . Student notes receivable, net ............................................ . Investments, at fair value ............................................... . Noncontrolling interests ............................................... . Land, buildings, and equipment (at cost of $4,572,257 for June 2016; $4,186,490 for June 2015), net of accumulated depreciation .............................. . Total assets ......................................................... . Liabilities and Net Assets Liabilities: Accounts payable, accruals, and other liabilities ........................... . Liabilities due under life income fund agreements, at fair value ............... . Deferred revenue and other credits ..................................... . Advance payments ................................................. . Borrowings, net of unamortized issuance costs ............................ . Government advances for student loans ................................. . Accrued benefit liabilities ............................................ . Liabilities associated with investments .................................. . Total liabilities ...................................................... . Net Assets: Unrestricted net assets controlled by the Institute .......................... . Unrestricted net .assets attributable to noncontrolling interests ................ . Total unrestricted net assets .......................................... . Temporarily restricted ............................................... . Permanently restricted .............................................. . Total net assets ...................................................... . Total liabilities and net assets .......................................... . The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED FINANCIAL STATEMENTS $ $ $ 2016 2015 449,008 $ 317,682 201,012 172,522 609,065 558,095 80,803 66,440 136,065 136,275 42,137 45,678 17,478,438 17,754,155 205,421 232,415 3,092,429 2,822,312 22,294,378 $ 22,105,574 528,688 436,288 145,216 141,946 136,426 151,933 435,220 422,675 2,892,093 2,904,559 36,173 35,561 496,029 53,233 490,031 220,391 5,159,876 4,366,586 6,634,100 7,071,258 205,421 232,415 6,839,521 7,303,673 7,210,822 7,553,447 3,084,159 2,881,868 17,134,502 17,738,988 22,294,378 $ 22,105,574 7 Massachusetts Institute of Technology Consolidated Statement of Activities for the year ended June 30, 2016 (with summarized financial information for the year ended June 30, 2015) 2016 Total Temporarily Permanently I (in thousands of dollars) Unrestricted Restricted Restricted 2016 2015 Operating Activities Operating Revenues Tuition and similar revenues, net of discount of $295,419 in 2016 and $280,282 in 2015 .... $ 340,005 $ -$ -$ 340,005 $ 331,819 Research revenues: Campus ............................ 701,417 701,417 665,583 Lincoln ............................. 955,994 955,994 879,327 SMART ............................ 32,818 32,818 31,737 Total research revenues ................... 1,690,229 1,690,229 1,576,647 Gifts and bequests for current use ........... 162,257 162,257 221,820 Fees and services ........................ 183,020 183,020 160,962 Other programs ......................... 98,837 98,837 101,293 Support from investments: Endowment ......................... 588,708 588,708 545,861 Other investments .................... 142,720 142,720 125,498 Total support from investments ............. 731,428 731,428 671,359 Auxiliary enterprises ..................... 117,460 117,460 120,946 Net asset reclassifications and transfers ....... 103,601 103,601 105,923 Total operating revenues .................. $ 3,426,837 $ -$ -$ 3,426,837 $ 3,290,769 Operating Expenses Salaries and wages ....................... $ 1,335,024 $ -$ -$ 1,335,024 $ 1,253,353 Employee benefits ....................... 311,557 311,557 309,195 Supplies and services ..................... 1,084,219 1,084,219 956,078 Subrecipient agreements .................. 139,913 139,913 140,417 Utilities, rent, and repairs ................. 204,265 204,265 186,905 Depreciation ........................... 158,443 158,443 146,239 Interest expense ......................... 116,478 116,478 118,932 Total operating expenses .................. 3,349,899 3,349,899 3,111,119 Results of operations ........ : ............ $ 76,938 $ -$ -$ 76,938 $ 179,650 Non-Operating Activities Pledge revenue .......................... $ -$ 125,872 $ 71,950 $ 197,822 $ 195,205 Gifts and bequests ....................... 109,083 109,083 76,665 Investment income ...................... 1,635 3,130 4,765 4,385 Net gain on investments and other assets ...... 243,019 (22,908) 22,442 242,553 1,651,600 Distribution of accumulated investment gains .. (216,306) (373,096) (589,402) (516,793) Net change in life income funds ............ (1,069) (1,849) (9,000) (11,918) (19,197) Postretirement plan changes other than net periodic benefit cost .................... (503,732) (503,732) 13,314 Net asset reclassifications and transfers ....... (36,008) (72,279) 4,686 (103,601) (105,923) Total non-operating activities .............. (514,096) (342,625) 202,291 (654,430) 1,299,256 (Decrease) increase in net assets controlled by the Institute (437,158) (342,625) 202,291 (577,492) 1,478,906 Change in net assets attributable to noncontrolling interests ................. (26,994) (26,994) (55,410) Net assets at the beginning of the year ........ 7,303,673 7,553,447 2,881,868 17,738,988 16,315,492 Net assets at the end of the year ............ $ 6,839,521 $ 7,210,822 $ 3,084,159 $ 17,134,502 $ 17,738,988 The accompanying notes are an integral part of the consolidated financial statements. 8 MIT REPORT OF THE TREASURER 2016 Massachusetts Institute of Technology Consolidated Statements of Cash Flows for the years ended June 30, 2016 and 2015 (in thousands of dollars) Cash Flow from Operating Activities (Decrease) increase in net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Adjustments to reconcile change in net assets to net cash used in operating activities: Net gain on investments and other assets ................................... . Change in accrued benefits liabilities ...................................... . Depreciation ........................................................ . Donated securities received .............................................. . Proceeds from sale of donated securities .................................... . Net gain (loss) on life income funds ....................................... . Change in noncontrolling interests ........................................ . Amortization of bond premiums and discounts and other adjustments ............ . Change in operating assets and liabilities: Pledges receivable ..................................................... . Accounts receivable ................................................... . Contracts in progress .................................................. . Deferred charges, inventories, and other assets ............................... . Accounts payable, accruals, and other liabilities, excluding building and equipment accruals Liabilities due under life income fund agreements ............................ . Deferred revenue and other credits ........................................ . Advance payments .................................................... . Reclassify investment income .............................................. . Reclassify contributions restricted for long-term investment ....................... . Net cash used in operating activities ......................................... . Cash Flow from Investing Activities Purchase ofland, buildings, and equipment ................................... . Purchases of investments .................................................. . Proceeds from sale of investments ........................................... . Student notes issued ................................... * .................. . Collections from student notes ............................................. . Net cash provided by investing activities ...................................... . Cash Flow from Financing Activities Contributions restricted for investment in endowment ........................... . Proceeds from sale of donated securities restricted for endowment .................. . Increase in investment income for restricted purposes ............................ . Proceeds from borrowings ................................................. . Repayment of borrowings ................................................. . Increase in government advances for student loans .............................. . Net cash provided by financing activities ...................................... . Net increase in cash ...................................................... . Cash at the beginning of the year . . . . ....................................... . Cash at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED FINANCIAL STATEMENTS 2016 (604,486) $ . (242,553) 442,796 158,443 (37,893) 23,448 8,580 26,994 9,601 (50,970) (28,490) (14,363) 210 84,768 3,270 (15,507) 12,545 (4,765) (94,638) (323,010) (424,543) (22,221,841) 23,001,121 (17,941) 12,665 349,461 94,638 14,445 4,765 2015 1,423,496 (1,651,600) 4,403 146,239 (47, 153) 34,226 (9,844) 55,410 (2,101) (67,759) 23,022 (1,114) (9,459) 10,981 38,870 18,645 30,461 (4,385) (63,738) (71,400) (332,275) (23,018,625) 23,409,764 (19,024) 21,224 61,064 63,738 12,928 4,385 518,500 (9,585) (569,816) 612 524 104,875 30,259 131,326 19,923 317,682 297,759 449,008 $ 317,682 ========= 9 Notes to Consolidated Financial Statements A. Accounting Policies Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America. The consolidated financial ments (financial statements) include MIT and its wholly owned subsidiaries. Net assets, revenues, expenses, and gains and losses are classified into three categories based on the existence or absence of imposed restrictions. The categories are permanently restricted, temporarily restricted, and unrestricted net assets. Unconditional promises to give (pledges) are recorded as receivables and revenues within the appropriate net asset category. Permanently restricted net assets include gifts, pledges, trusts and remainder interests, and income and gains that are required by donors to be permanently retained. Pledges, trusts, and remainder interests are reported at their estimated fair values. Temporarily restricted net assets include gifts, pledges, trusts and remainder interests, and income and gains that can be expended but for which restrictions have not yet been met. Such tions include purpose restrictions where donors have specified the purpose for which the net assets are to be spent, or time restrictions imposed by donors or implied by the nature of the gift (capital projects, pledges to be paid in the future, life income funds), or by interpretations oflaw (net gains on permanently restricted gifts that have not been appropriated for spending). Gifts specified for the acquisition or construction oflong-lived assets are reported as temporarily restricted net assets until the monies are expended and the buildings are put into use, at which point they are reclassified to unrestricted net assets. Net ized losses on permanently restricted endowment funds for which the book value exceeds market value are recorded as a reduction to unrestricted net assets. Unrestricted net assets are all the remaining net assets of MIT. Donor-restricted gifts and unexpended restricted endowment income that are received and either spent, or the restriction is otherwise met within the same year, are reported as unrestricted revenue. Gifts of long-lived assets are reported as unrestricted revenue. Net asset reclassifications and transfers consist primarily of payments on unrestricted pledges and use of building funds in accordance with donor restrictions for buildings put into use during the year. Expirations of temporary restrictions on net assets, release of permanent restrictions by a donor, and change of restrictions imposed by donors are also reported as sifications of net assets among unrestricted, temporarily, and permanently restricted net assets. MIT administers its various funds, including endowments, funds functioning as endowments, school or departmental funds, and 10 related accumulated gains in accordance with the principles of "Fund Accounting." Gifts are recorded in fund accounts and investment income is distributed to funds annually. Income distributed to funds may be a combination of capital tion and yield pursuant to MIT's total return investment and spending policies. Each year, the Executive Committee of the Corporation approves the rates of distribution of investment return to the funds from MIT's investment pools. (See Note J for further information on income distributed to funds.) MIT's operations include tuition, research revenues, unrestricted gifts and bequests for current use, fees and services, other grams, endowment distribution and income from other ments, auxiliary revenues, net asset reclassifications and transfers, and operating expenditures. Results of operations are displayed in the Consolidated Statement of Activities. Tax Status MIT is a nonprofit organization that is tax-exempt under Section 501 (c) (3) of the Internal Revenue Code, originally recognized in October 1926, with the most recent affirmation letter dated July 2001. US GAAP requires MIT to evaluate tax positions taken by the Institute and recognize a tax liability (or asset) if the Institute has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. MIT has analyzed the tax positions taken and has concluded that as ofJune 30, 2016, there are no significant uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. Cash Certain cash balances, totaling $122.3 million and $116.4 lion at June 30, 2016 and 2015, respectively, are restricted for use under certain sponsored research agreements or are held on behalf of a related party. The Institute had approximately $432.1 million and $316.1 lion at June 30, 2016 and 2015, respectively, of its cash accounts with a single institution. The Institute has not experienced any losses associated with deposits at this institution. Advance Payments Amounts received by MIT from the US Government, tions, industrial sources, foundations, and other non-MIT sponsors under the terms of agreements that generally require the exchange of assets, rights, or privileges between MIT and the sponsor are recorded as advance payments. Revenue is recognized as MIT fulfills the terms of the agreements. MIT REPORT OF THE TREASURER 2016 A. Accounting Policies (continued} Land, Buildings, and Equipment Land, buildings, and equipment are shown at cost when chased or at fair value as of the date of a gift when received as gifts, net of accumulated depreciation. When expended, costs associated with the construction of new facilities are shown as construction in progress until such projects are completed and put into use. Depreciation is computed on a straight-line basis over the estimated useful lives of 25 to 50 years for buildings, 3 to 25 years for equipment, and 4 to 6 years for software. Fully depreciated assets were removed from the financial ments in the amount of $39.4 million and $34.3 million during 2016 and 2015, respectively. Land, buildings, and equipment at June 30, 2016 and 2015 are shown in Table 1 below. Table 1. Land, Buildings, and Equipment (in thousands of dollars) Land ................. . Land improvements ...... . Educational buildings .... . Equipment ............ . Software .............. . Total ................. . Less: accumulated depreciation Construction in progress ... Software projects in progress 2016 $ 83,610 64,434 3,737,492 289,980 56,021 4,231,537 (1,479,828) 336;033 4,687 -----2015 $ 78,528 64,525 3,382,438 271,326 44,711 3,841,528 (1,364, 178) 337,018 7,944 Depreciation expense was $158.4 million in 2016 and $146.2 million in 2015. Net interest expense of$9.5 million and $6.6 million was capitalized during 2016 and 2015, respectively, in connection with MIT's construction projects. Tuition and Student Support . Tuition and similar revenues, shown in Table 2 below, include tuition and fees in degree programs as well as tuition and fees for executive and continuing education programs at MIT. Table 2. Tuition and Similar Revenues (in thousands of dollars) 2016 2015 Undergraduate and graduate programs .............. . $ 590,415 $ 569,982 Executive and continuing education programs ...... . 45,009 42,119 ---"'----Total ................... . 635, 424 612,101 Less: tuition discount ...... . (295,419) (280,282) Nettuitionandsimilarrevenues $ 340,005 $ 331,819 Tuition support is awarded to undergraduate students by MIT based on need. Graduate students are provided with tuition port in connection with research assistance, teaching assistance, and fellowship appointments. Tuition support from MIT sources is displayed as tuition discount. Total student support granted to students was $520.5 million and $498.5 million in 2016 and 2015, respectively. Of that amount, $163.5 million in 2016 and Net land, buildings, and equipment. . . . . . . . . . . . $ 3,092,429 $ 2,822,312 $161.4 million in 2015 was aid from sponsors. Components of student support are detailed in Table 3 below. Table 3. Student Support 2016 2015 I Total I I Total I Institute External Student Institute External Student (in thousands of dollars) Sources Sponsors Support Sources Sponsors Support Undergraduate tuition support .... $ 97,262 $ 15,640 $ 112,902 $ 92,488 $ 14,660 $ 107,148 Graduate tuition support ......... 198,157 60,287 258,444 187,794 59,567 247,361 Fellow stipends ................ 22,718 16,013 38,731 21,469 17,290 38,759 Student employment ............ 38,876 71,516 110,392 35,417 69,844 105,261 Total ........................ $ 357,013 $ 163,456 $ 520,469 $ 337,168 $ 161,361 $ 498,529 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11 A. Accounting Policies (continued) Sponsored Research Direct and indirect categories of research revenues are shown in Table 4 below. Table 4. Research Revenues (in thousands of dollars) Direct: Campus ......... . Lincoln .......... . Sl\1ART ......... . Total direct ......... . Indirect: Campus ......... . Lincoln .......... . Sl\1ART ......... . Total indirect ....... . Total research revenues 2016 $ 513,991 $ 908,506 32,416 1,454,913 $ 187,426 $ 47,488 402 235,316 $ i,690,229 $ 2015 482,563 844,588 31,620 1,358,771 183,020 34,739 117 217,876 1,576,647 Revenue associated with contracts and grants is recognized as related costs are incurred. The capital costs of buildings and equipment are depreciated over their estimated life cycle, and the sponsored research recovery allowance for depreciation is treated as indirect research revenue. MIT has recorded reimbursement of indirect costs relating to sponsored research at negotiated fixed billing rates. The revenue generated by the negotiated rates is justed each fiscal year to reflect any variance between the ated fixed rates and rates based on actual cost. The 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 negotiated fixed rate and the final audited rate results in a carryforward (over-or under-recovery). The carryforward is included in the calculation of negotiated fixed billing rates in future years. Any adjustment in the rate is charged or credited to unrestricted net assets. Gifts and Pledges Gifts and pledges are recognized when received. Gifts of securi-ties are recorded at their fair value at the date of contribution. Donated securities received totaled $37.9 million and $47.2 million in 2016 and 2015, respectively, and are shown separately in the Consolidated Statements of Cash Flows. Gifts of equipment received from manufacturers and other donors are put into use and recorded by MIT at fair value. Gifts of equipment totaled $0.4 million in 2016 and $0.3 mlllion in 2015. Pledges in the amount of $609. l million and $0558.1 million were recorded as receivables at June 30, 2016 and 2015, respectively, with the revenue assigned to the appropriate classification of restriction. Pledges consist of unconditional written promises to contribute to MIT in the future and are recorded after discounting the future cash flows to the present value. 12 MIT records items of collections as gifts at nominal value. They are received for educational purposes and most are displayed throughout MIT. In general, collections are not disposed of for financial gain or otherwise encumbered in any manner. Life Income Funds MIT's life income fund agreements with donors consist primarily of irrevocable charitable gift annuities, pooled income funds, and charitable remainder trusts for w!i-ich MIT serves as trustee. Assets are invested and payments are made to donors and other ciaries in accordance with the respective agreements. MIT records the assets that are associated with each life income fund at fair value and records as liabilities the present value of the estimated future payments at current interest rates to be made to the donors and beneficiaries under these agreements. A rollforward of liabilities due under life income fund agreements is presented in Table 5 below. Table 5. Liabilities Due Under Life Income Funds (in thousands of dollars) 2016 2015 Balance at the beginning of the year $ 141,946 $ 103,076 Addition for new gifts .......... 8,592 14,612 Termination and payments to beneficiaries . . . . . . . . . . . . . . . . (14,993) (14,984) Net investment and actuarial gain 9,671 39,242 Balance at end of the year ...... $ 145,216 $ 141,946 Accounts Payable, Accruals, and Other Liabilities MIT's accounts payable, accruals, and other liabilities totaled $528.7 million and $436.3 million at June 30, 2016 and 2015, respectively. These totals included accrued vacation of $81.6 lion at June 30, 2016 and $62.5 million at June 30, 2015. Recently Adopted Accounting Standards On July l, 2015, MIT early adopted new guidance related to Presentation of Debt Issuance Costs. This guidance requires MIT to present unamortized debt issuance costs as an offset to borrowings within the liabilities section of the balance sheet, rather than as other assets within the assets section of the balance sheet, and must be applied retrospectively. As a result, $17.7 million has been reclassified from the Deferred charges, inventories, and other assets line to the Borrowings line in the 2015 comparative results column for MIT's Consolidated Statements of Financial Position. The change in presentation has also been appropriately reflected in the Borrowings table shown in Footnote F. MIT REPORT OF THE TREASURER 2016 A. Accounting Policies (continued) On July 1, 2014, MIT early adopted new guidance about Fair Value Measurement and Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This guidance requires MIT to show investments that use net asset value (NAY) as a practical expedient for valuation purposes separately from other investments categorized in the fair value hierarchy described in Footnote B. This disclosure change can be seen in the investment leveling tables shown in Footnotes B and I for both fiscal years 2016 and 2015. Noncontrolling Interests MIT is the general partner for several private equity funds and has displayed the noncontrolling interests on the Consolidated Statements of Financial Position. Non-Cash Items Non-cash transactions excluded from the Consolidated Statements of Cash Flows include $7.6 million and $13.3 million of accrued liabilities related to plant and equipment purchases for 2016 and 2015, respectively. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent sets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B. Investments Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date. Realized gains and losses are recorded by MIT using the average cost basis. For limited partnerships, the realized gain/loss is calculated once the entire cost basis is distributed back to MIT or using information provided by managers with respect to the character of a distribution as being a gain or return of capital. MIT values its investments in accordance with the principles of accounting standards which establish a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity's own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. MIT follows a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last is unobservable. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reclassifications Certain June 30, 2015 balances and amounts previously ported have been reclassified to conform to the June 30, 2016 presentation. Subsequent Events In July 2016, MIT issued $500.0 million of taxable bonds, Series E, with a fixed interest rate of 3.885 percent and a maturity date ofJuly 1, 2116. The new taxable debt will be used to further vance MIT's ongoing campus renewal and development program, including academic and research capital projects within the MIT 2030 framework. MIT has evaluated subsequent events through September 9, 2016, the date on which the financial statements were issued. There were no subsequent events other than the above debt issuance that occurred after the balance sheet date that have a material impact on MIT's financial statements. Summarized Information The Consolidated Statements of Activities includes certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with MIT's financial statements for the year ended June 30, 2015, from which the summarized information was derived. The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by MIT for financial instruments measured at fair value on a recurring basis. The three levels of inputs are as follows:

• Level 1 -Quoted prices in active markets for identical assets or liabilities. Market price data is generally obtained from relevant exchanges or dealer markets.

• Level 2 -Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities. Inputs are obtained from various sources including market participants, dealers, and brokers.

• Level 3 -Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 13 B. Investments (continued) A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Market information is considered when determining the proper categorization of the investment's fair value measurement within the fair valuation hierarchy. Table 6 presents MIT's investments at fair value as of]une 30, 2016 and 2015, respectively, grouped by the valuation hierarchy as defined earlier in this note. Investments that use NAV as a practical expedient for valuation purposes are shown separately. Transfers between levels are recognized at the beginning of the reporting period. The 2016 transfers from Level 1 to Level 2 totaled $60.0 million and transfers from Level 2 to Level 1 totaled $10.4 million. The 2015 transfers from Level 1 to Level 3 totaled $0.1 million, and transfers from Level 1 to Level 2 totaled $9 .6 million. Cash and cash equivalents include cash, money market funds, repurchase agreements, and negotiable certificates of 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. Investments in non-exchange-traded debt are primarily valued using independent pricing sources that use broker quotes or models using observable market inputs. Investments managed by external managers include investments in (i) absolute return; (ii) domestic, foreign, and private equity; (iii) real estate; and (iv) real asset commingled funds. The fair value of securities held in external investment funds that do not have readily determinable fair values are determined by the external managers based upon industry-standard valuation approaches that require varying degrees of judgment, taking into consideration, among other things, the cost of the securities, valuations and transactions of comparable public companies, the securities' estimated future cash flow streams, and the prices of recent significant placements of securities of the same issuer. Using these valuations, most of these external managers calculate MIT's capital account or NAV in accordance with, or in a manner consistent with, GAAP's fair value principles. 14 As a practical expedient, MIT is permitted under GAAP to estimate the fair value of its investments with external managers using the external managers' reported NAV without further adjustment unless MIT expects to sell the investment at a value other than NAV or the NAV is not calculated in accordance with GAAP. Level 3 investments are valued by MIT based upon valuation information received from the relevant entity, which may include last trade information, third-party appraisals of real estate, or valuations prepared in connection with the administration of an employee stock ownership plan. MIT may also utilize industry standard valuation techniques, including discounted cash flow models. The significant unobservable inputs used in the fair value measurements of MIT's direct investments may include their cost of capital, and equity and industry risk premiums. Significant increases or decreases in these inputs in isolation may result in a significantly lower or higher fair value measurement, respectively. Split-interest agreements are generally valued at the present value of the future distributions expected to be received over the term of the agreement. Over-the-counter positions, such as interest rate and total return swaps, credit default swaps, options, exchange agreements, and interest rate cap and floor agreements, are valued using broker quotes or models using market observable inputs. Because the swaps and other over-the-counter derivative instruments have inputs that can usually be corroborated by observable market data, they are generally classified within Level 2. MIT finances certain real estate investments to optimize the use of invested capital in support of the Institute's mission. These financings are shown as a separate line item called Liabilities associated with investments in the consolidated Statements of Financial Position. In prior years, they were netted into the line for Investments, at fair value. Amounts for all previous years shown throughout the full Report of the Treasurer have been reclassified to conform to the current year's presentation. MIT REPORT OF THE TREASURER 2016

8. Investments (continued) Table 6. Investments Quoted Prices in Significant Other Significant NAV as Practical Active Markets Observable Inputs Unobservable Inputs Expedient Total Fair (in thousands of dollars) (Level 1) (Level 2) (Level 3) (NAY) Value Fiscal Year 2016 Cash and cash equivalents ........ $ 939,555 $ -$ -$ -$ 939,555 .. US Treasury ................... 890,588 890,588 US Government agency .......... 169,007 169,007 Domestic bonds . . . . . . . . . . . . . . . 12,004 308,817 104,048 424,869 Foreign bonds . . . . . . . . . . . . . . . . . 21 68,384 68,405 Common equity: 221,868 316,988 Long domestic . . . . . . . . . . . . . . 95,120 Long foreign ................ 423,752 60,044 483,796 Short foreign ............... (5) (5) Equity:** 1,816,975 1,816,975 Absolute return ............. Domestic .................. 1,561,519 1,561,519 Foreign .................... 3,521,507 3,521,507 Private .................... 3,190,794 3,190,794 Real estate* . . . . . . . . . . . . . . . . . . . 6,446 2,495,176 840,443 3,342,065 Real assets** . . . . . . . . . . . . . . . . . . 275 680,566 680,841 Split-interest agreements ......... 126,832 126,832 Other ....................... 4,925 2,809 7,734 Derivatives . . . . . . . . . . . . . . . . . . . 33 (6320652 (63,0322 Investments, at fair value ......... $ 2,499,187 $ 543,187 $ 2,824,260 $ 11,611,804 $ 17,478,438 Liabilities associated with investments: Real estate*** . . . . . . . . . . . . . . . (49020312 (49020312 Net investments ............... $ 2,499,187 $ 543,187 $ 2,334,229 $ 11,611,804 $ 16,988,407 Fiscal Year 2015 Cash and cash equivalents ........ $ 2,028,407 $ -$ -$ -$ 2,028,407 US Treasury ................... 795,335 795,335 US Government agency .......... 70,493 70,493 Domestic bonds ............... 11,917 84,072 101,763 197,752 Foreign bonds ................. 21 24,582 24,603 Common equity: 243,677 67,096 Long domestic .............. 310,773 Long foreign ................ 567,394 4,159 571,553 Short foreign ............... (6) (6) Equity:** 1,734,169 1,734,169 Absolute return ............. Domestic .................. 1,880,487 1,880,487 Foreign .................... 3,504,707 3,504,707 Private .................... 3,132,869 3,132,869 Real estate* . . . . . . . . . . . . . . . . . . . 19 6,282 1,985,878 785,536 2,777,715 Real assets** . . . . . . . . . . .. . . . . . . 1,260 605,612 606,872 Split-interest agreements ......... 146,405 146,405 Other ....................... 3,985 3,956 7,941 Derivatives . . . . . . . . . . . . . . . . . . . 47 (3529672 (3529202 Investments, at fair value ......... $ 3,650,796 $ 153,621 $ 2,306,358 $ 11,643,380 $ 17,754,155 Liabilities associated with investments: Real estate*** . . . . . . . . . . . . . . . (22023912 (22023912 Net investments ............... $ 3,650,796 $ 153!621 $ $ $ 17,533!764 *Real estate includes direct investments and investments held through commingled vehicles. **Real assets and equity categories include commingled vehicles that invest in these types of investments. ***Interest rates range from 3. 75% and 4.54%. Maturities range from calendar years 2023 and 2035. Principal payments range from $5. 6 million in fiscal year 2017 to $3.4 million in fiscal year 2036. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15 B. Investments (continued) Table 7 below is a rollforward of the investments classified by MIT within Level 3 of the fair value hierarchy defined earlier in this footnote at June 30, 2016 and 2015. Table 7. Rollforward of Level 3 Investments Fair Value Realized Gains Unrealized Fair Value (in thousands of dollars) Beginning (Losses) Gains (Losses) Purchases Sales Transfers Ending Fiscal Year 2016 Domestic bonds ...... $ 101,763 $ -$ Common equity: Long domestic ..... 67,096 Short domestic ..... Real estate 1,985,878 33,254 .......... Real assets ........... 1,260 (13,070) Split-interest agreements 146,405 5,329 Other .............. 3,956 179 Investments, at fair value $ 2,306,358 $ 25,692 $ Real estate liabilities ... (220,391) Net investments ...... $ 2,085,967 $ 25,692 $ Fiscal Year 2015 Domestic bonds ...... $ 97,254 $ -$ Common equity: Long domestic ..... 178,921 402 Short domestic ..... Real estate ........... 1,773,267 76,933 Real assets . . ......... 10,464 Split-interest agreements 147,182 3,902 Other .............. 9,721 (183) Investments, at fair value $ 2,216,809 $ 81,054 $ Real estate liabilities ... (231,188) Net investments ...... $ 1,985,621 $ 81,054 $ All net realized and unrealized gains and losses relating to financial instruments held by MIT shown in Table 6 are reflected in the Consolidated Statement of Activities. Cumulative unrealized gains related to Level 3 investments totaled $1,360.3 million and $948.9 million as of June 30, 2016 and 2015, respectively. The net change in unrealized gains (losses) related to Level 3 investments held by MIT at June 30, 2016, and June 30, 2015, are disclosed in Table 7. 16 -$ 12,040 $ (9,755) $ -$ 104,048 28,024 7 (7) 95,120 119 (119) 381,977 184,991 (90,924) 2,495,176 12,085 275 (10,750) 17,214 (31,366) 126,832 32 (1,358) 2,809 411,368 $ 214,371 $ (133,529) $ -$ 2,824,260 (269,640) (490,031) 411,368 $ (55,269) $ (133,529) $ -$ 2,334,229 -$ 13,276 $ (8,767) $ -$ 101,763 (104,853) 600 (7,989) 15 67,096 289,303 193,540 (347,265) JOO 1,985,878 (9,204) 1,260 3,396 1,298 (9,373) 146,405 78 3 (5,663) 3,956 178,720 $ 208,717 $ (379,057) $ 115 $ 2,306,358 (75,000) 85,797 (220,391) 178,720 $ 133,717 $ (293,260) $ 115 $ 2,085,967 MIT enters into short sales whereby it sells securities that may or may not be owned by MIT in anticipation of a decline in the price of such securities or in order to hedge portfolio positions. Cash collateral and certain securities owned by MIT were held at counterparty brokers to collateralize these positions and are included in investments on the Consolidated Statemen.ts of Financial Position. MIT REPORT OF THE TREASURER 2016 B. Investments (continued) Table 8 below sets forth a summary of valuation techniques and quantitative information utilized in determining the fair value of MIT's Level 3 investments as ofJune 30, 2016 and 2015. Table 8. Level 3 Valuation Techniques Asset Type Fair Value at Fair Value at (in thousands of dollars) June 30, 2016 June 30, 2015 Real estate ........... $ 2,495,176 $ 1,985,878 Equity securities ...... 78,727 50,653 Split-interest agreements 81,268 110,722 Real assets . . . . . . . .... 275 1,260 Other illiquid assets .... 505 426 Total assets .......... $ $ Certain investments in real estate, equities, and private investments may be subject to restrictions that (i) limit MIT's ability to withdraw capital after such investment; and (ii) may limit the amount that may be withdrawn as of a given redemption date. Most absolute return, domestic equity, and foreign equity commingled funds limit withdrawals to monthly, quarterly, or other periods, and may require notice periods. In addition, certain of these funds are able to designate a portion of the investments as illiquid in "side-pockets," and these funds may not be available for withdrawal until liquidated by the investing fund. Generally, MIT has no discretion as to withdrawal with Table 9. Unfunded Commitments 2016 Unobservable 2016 2015 Valuation Technique Input Rates Rates Discounted cash flow Discount Rate 5-8.5% 4.8-9.0% Discounted cash flow Discount Rate 13.5% 15.3% Net present value Discount Rate 2.05% 2.25% Discounted cash flow Discount 25.0% 20.0% Varies Varies Varies Varies respect to its investments in private equity and real estate 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 MIT's ability to respond quickly to changes in market conditions. MIT does have various sources ofliquidity at its disposal, including cash, cash equivalents, marketable debt and equity securities, and lines of credit. Details on the current redemption terms and restrictions by asset class and type of investment are provided in Table 9 below. 2015 Asset Class Unfunded Unfunded Redemption Terms Redemption Restrictions (in thousands of dollars) Commitments Fair Value Commitments Fair Value Equity: Domestic........ $ 1,789 $ 1,561,519 $ Foreign ......... . 36,200 3,521,507 Absolute return ... 125,866 1,816,975 Private ......... . 1,567,427 3,190,794 Real estate . . . . . . . ... 574,443 840,443 Real assets . . . . ..... . 156,591 680,566 1,923 $ 56,640 218,025 1,131,554 483,951 116,346 1,880,487 Redemption terms range Lock-up provisions from 4 months with 45 days range from none to notice to 25 months with 3 6 months; 2 funds months notice and 2 closed-are not redeemable end funds not available for 3,504,707 redemption Redemption terms range from daily with 28 days notice to closed-end funds which are not redeemable Lock-up provisions range from none to not redeemable 1,734,169 Redemption terms range Lock-up provisions from 45 days with 2 months range from none to notice to closed-end funds not redeemable that are not redeemable 3,132,869 Closed-end funds not Not redeemable available for redemption 785,536 Closed-end funds not Not redeemable available for redemption 605,612 Redemption terms range Lock-up provisions from 9 months with 1 day range from none to notice to closed-end funds not redeemable which are not redeemable Total. . . . . . . . . . . . . . $ 2,462,316 $ 11,611,804 $ 2,008,439 $ 11,643,380 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17 B. Investments (continued) MIT performs ongoing due diligence to determine that investment fair value is reasonable as of]une 30, 2016 and 2015. In particular, to ensure that the valuation techniques for investments that are categorized within the fair value hierarchy are fair, consistent, and verifiable, MIT has established a Valuation Committee (the "Committee") that oversees the valuation processes and procedures and ensures that the policies are fair and consistently applied. The Committee is responsible for conducting annual reviews of the valuation policies, evaluating the overall fairness and consistent application of the valuation policies, and performing specific reviews of certain valuations reported. The Committee performs due diligence over the external managers and, based on this review, substantiates NAV as a practical expedient for estimates of fair value of its investments in external managers. The Committee is composed of senior personnel and contains members who are independent of investment functions. The Committee meets annually, or more frequently, as needed. Members of the Valuation Committee report annually to MIT's Risk and Audit Committee. The methods described previously in this footnote may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. While MIT believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. C. Derivative Financial Instruments and Collateral MIT maintains an interest rate swap agreement to manage the interest cost and risk associated with a portion of its variable rate debt, described in Note F. Under the agreement, MIT pays a fixed rate of 4.91 percent and receives a payment indexed to the Securities Industry and Financial Market (SIFMA) on a notional amount of $125.0 million. At June 30, 2016, the swap agreement had a total fair value of ($63.4) million and at June 30, 2015 had a fair value of ($48.1) million. This swap had a total net loss for 2016 of $15.3 million and a total net loss of $6.8 million for 2015. The notional amount of this derivative is not recorded on MIT's Consolidated Statements of Financial Position. For its investment management, MIT uses a variety of financial instruments with off-balance sheet risk involving contractual or optional commitments for future settlement. MIT uses these instruments primarily to manage its exposure to extreme market events and fluctuations in asset classes or currencies. Instruments utilized include futures, total return and credit default swaps, and interest rate cap and swaption agreements. The futures are exchange-traded and the swap, swaptions, and cap agreements are executed over the counter. Total return swaps involve commitments to pay interest in exchange for a market-linked return based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, MIT will respectively receive a payment from or make a payment to the counterparty. MIT's portfolio of interest rate caps and swaptions is designed for protection from significant increases in interest rates. An interest rate swaption is an option to enter into an interest rate swap agreement on pre-set terms at a future date. The purchaser and seller of the swaption agree on the expiration date, option type, exercise style, the terms of the underlying swap, and the type of settlement. As the expiration date approaches, the swaption 18 holder can either notify the seller of its intention to exercise or let the option expire. An interest rate cap places a ceiling on a floating rate of interest on a specified notional principal amount for a specific term. The buyer of the cap uses the cap contract to limit its maximum interest rate exposure. If the floating rate rises above the cap strike, the cap contract provides for payments from the seller to the buyer of the cap for the difference between the floating rate and the cap strike. If the floating rate remains below the cap strike, no payments are required. The cap buyer is required to pay an upfront fee or premium for the cap. The cap premium charged by the seller depends upon the market's assessment of the probability that rates will move through the cap strike over the time horizon of the deal. The payoff is expected to occur in extreme market conditions that would negatively impact MIT's other assets. Table 10 summarizes the notional exposure and net ending fair value relative to the financial instruments with off-balance sheet risk as of]une 30, 2016 and 2015, related to MIT's investment management. Derivatives held by limited partnerships and commingled investment vehicles pose no off-balance sheet risk to MIT due to the limited liability structure of these investments. To manage the counterparty credit exposure of MIT's direct off-balance sheet financial instruments, MIT requires collateral to the maximum extent possible under normal trading practices. Collateral is moved on a daily basis as required by fluctuations in the market. The collateral is generally in the form of debt obligations issued by the US Treasury or cash. In the event of counterparty default, MIT has the right to use the collateral to offset the loss associated with the replacement of the agreements. MIT enters into arrangements only with counterparties believed to be creditworthy. On June 30, 2016, cash collateral and certain securities owned by MIT were held at counterparty brokers to collateralize these positions and are included in investments on the Consolidated Statements of Financial Position. MIT REPORT OF THE TREASURER 2016 C. Derivative Financial Instruments and Collateral (continued) Table 10. Derivative Financial Instruments Notional Exposure I I Net Ending Net Gain (in thousands of dollars) Long Shorr Fair Value* (Loss)** c Fiscal Year 2016 Fixed income instruments: t Fixed income futures ..................... $ 14,100 $ (3,100) $ 33 $ Options on interest rate exchange agreements .. 1,532,000 1,956 (6,844) Interest rate caps and floors ................ 1,000,000 (96) Total fixed income instruments ................ 2,546,100 (3,100) 1,989 (6,940) Commodity and index instruments: Equity index swaps ....................... (83,563) 351 44,083 Total commodity and index instruments ......... (83,563) 351 44,083 Credit instruments ......................... (102,494) (1,990) 126 2016Total ............................... $ 2,546,100 $ (189,157) $ 350 $ 37,269 Fiscal Year 2015 Fixed income instruments: Fixed income futures ..................... $ 3,500 $ (3,400) $ 47 $ (82) Options on interest rate exchange agreements .. 1,702,000 8,800 (10,476) Interest rate caps and floors ................ 1,000,000 96 (485) Total fixed inccihi.e instruments ............... , 2,705,500 (3,400) 8,943 (11,043) Commodity and index instruments: Equity index swaps ....................... (212,335) 5,046 (25,954) Total commodity and index instruments ......... (212,335) 5,046 (25,954) Credit instruments ......................... (73,203) (1,829) 9 2015 Total ............................... $ 2,705,500 $ (288,938) $ 12,160 $ (36,988)

• The fair value of all credit derivative instruments is reflected in investments at fair value in the Consolidated Statements of Financial Position. * **Net gain (loss) of the credit derivative instruments is located in the non-operating section as net gain (loss) on investments and other assets in the Consolidated Statement of Activities .

• NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 i, C. Derivative Financial Instruments and Collateral (continued) Table 11 below provides further details related to MIT's credit instruments and summarizes the notional amounts and fair value of the purchased and written credit derivatives, classified by the expiration terms and the external credit ratings of the reference obligations at June 30, 2016 and 2015. The act of entering into a credit default swap contract is often referred to as "buying protection" or "selling protection on an underlying reference obligation. The buyer is obligated to make premium payments to the seller over the term of the contract in return for a contingent payment upon the occurrence of a credit event with respect to the underlying obligation. The seller bears the obligation to "protect" the buyer in the event of default of Table 11. Credit Derivative Instruments Purchased Protection I the underlying issuer. Upon this event, the cash payment which the buyer receives is equal to the clearing price established by an auction of credit default swap claims, which is designed to approximate the recovery value of an unsecured claim on the issuer in default. The swap will last for a predetermined amount of time, typically five years. Upon termination of the swap, the buyer is no longer obligated to make any premium payments and there is no other exchange of capital. Written Protection Notional Amount I I Offsetting Net Net Written Purchased Years to Maturity Written Purchased Written Credit Notional Purchased Notional Credit Credit Protection (in thousands of doll.ars) Amounts Fair Value* < 5 Years 5-10 Years Amounts Protection Protection Fair Value Fiscal Year 2016 Credit rating on underlying or index: A-to AAA .............. $ 37,499 $ 785 $ 37,499 $ $ -$ -$ $ BBB-to BBB+ ........... 64,995 1,205 64,995 2016Total **.**...*...* $ 102,494 $ 1,990 $ 102,494 $ -$ -$ -$ -$ Fiscal Year 2015 Credit rating on underlying or index: A-to AAA .............. $ 44,571 $ (1,109) $ 10,000 $ 34,571 $ -$ -$ $ BBB-to BBB+ ........... 28,632 (720) 5,175 23,457 2015 Total ....***..***. $ 73,203 $ (1,829) $ 15,175 $ 58,028 $ -$ -$ -$

• The fair value of all credit derivative instruments is reflected in investments at fair value in the Consolidated Statements of Financial Position. I 20 MIT REPORT OF THE TREASURER 2016 l ,.I

• C. Derivative Financial Instruments and Collateral (continued) Counterparty risk may be partially or completely mitigated through master netting agreements included within an International Swap and Derivatives Association, Inc. ("ISDA") Master Agreement between MIT and each of its counterparties. The ISDA Master Agreement allows MIT to offset with the counterparty certain derivative instruments' payables and/ or receivables with collateral held with each counterparty. To the extent amounts due from the counterparties are not fully collateralized contractually or otherwise, there is the risk of loss from counterparty non-performance. As ofJune 30, 2016, MIT has elected not to offset recognized assets and liabilities in the Statements of Financial Position Investments Table. The following tables, 12 and 13, summarize the effect that offsetting of recognized assets and liabilities could have in the Statements of Financial Position Investments Table. Table 12. Offsetting of Financial and Derivative Assets and Liabilities 2016 2015 I I I I Cash/Treasury Cash/Treasury Collateral Collateral Posted/ Gross Posted/ (in thousands of dollars) Gross Amount (Received) Net Amount Amount (Received) Net Amount Assets Counterparty A ............. $ 820 $ (726) $ 94 $ 4,184 $ (4,386) $ (202) Counterparty B ............. 50,000 (51,052) (1,052) 59,895 (61,220) (1,325) Counterparty C. ............ ------Counterparty D ............ ------Counterparty E ............. ------Counterparty F ............. 6 --Counterparty G ............. 18,753 (19,143) (390) 30,088 (31,004) (916) Counterparty H ............ ------Counterparty I ............. ------Counterparty J ............. ------Counterparty K ............. 1,488 (1,925) (437) 9,759 (12,495) (2,736) Counterparty L. . . . . . . . ..... ------Total assets ................ 71,067 (72,846) (1,779) 103,926 (109,105) (5,179) Liabilities Counterparty A ............. (396) 410 14 (2) -(2) Counterparty B ............. ------Counterparty C ............. (43) 70 27 (201) -(201) Counterparty D ............ (533) 721 188 (470) 721 251 Counterparty E ............. (47) -(47) ---Counterparty F . . . . . . . . ..... ------Counterparty G ............. ---(48,081) -(48,081) Counterparty H ............ (63,382) -(63,382) ---Counterparty I ............. (342) 420 78 (316) 420 104 Counterparty J . . . . . . . . . .... (448) 680 232 (369) 415 46 Counterparty K ............. ------Counterparty L ............. (189) 400 211 (470) 720 250 Total liabilities ............. (65,380) 2,701 (62,679) (49,909) 2,276 (47,633) Total assets and liabilities, net $ 52687 $ {702145) $ {642458) $ 542017 $ {1062829) $ {522812) Maximum risk of loss from counterparty credit risk on the-counter derivatives is generally the aggregate unrealized appreciation in excess of any collateral pledged by the counterparty. ISDA Master Agreements allow MIT or the counterparties to an over-the-counter derivative to terminate the contract prior to maturity in the event either party fails to meet the terms in the ISDA Master Agreements. This would cause an accelerated payment of net liability, if owed to the counterparty. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 C. Derivative Financial Instruments and Collateral (continued) Table 13 below reconciles the net recognized assets and liabilities, as shown in Table 12, to derivative financial instruments as shown in Table 6. Table 13. Reconciliation of Financial and Derivative Assets and Liabilities (in thousands of dollars) 2016 2015 Derivatives from Table 6 ............................................ . $ (63,032) $ (35,920) Repurchase agreements ............................................. . 68,752 89,984 Fixed income futures ............................................... . (33) (47) Total ........................................................... . $ 5,687 $ 54,017 D. Pledges Receivable Table 14 below shows the time periods in which pledges receivable at June 30, 2016 and 2015 are expected to be realized. Table 14. Pledges Re.ceivable (in thousands of dollars) 2016 2015 In one year orless ....... * .... $ 239,245 $ 192,149 Between one year and five years 407,825 393,518 More than five years .... * ..... 29,415 34,218 Less: allowance for unfulfilled pledges .................. (67,420) (61,790) Pledges receivable, net ....... $ 609,065 $ 558,095 Table 15. Rollforward of Pledges Receivable (in thousands of dollars) ============ A review of pledges is periodically made with regard to collectability. As a result, the allowance for pledges that may not be fulfilled is adjusted, and some pledges have been cancelled and are no longer recorded in the financial statements. Pledges are discounted in the amount of$22.l million and $35.5 million in 2016 and 2015, respectively. MIT has gross conditional pledges, not recorded, for the promotion of education and research of $82.8 million and $76.6 million in 2016 and 2015, respectively. Pledges receivable are classified as Level 3 under the valuation hierarchy described in Note B. Table 15 below is a rollforward of the pledges receivable at June 30, 2016 and 2015. 2016 2015 Balance at beginning of the year ............................................... . $ 558,095 $ 490,336 New pledges .............................................................. . Pledge payments received .................................................... . Decrease in pledge discount .................................................. . Increase in reserve for unfulfilled pledges. . . . . . . . . . . . . . . . . . . ...................... . Balance at the end of the year ................................................ . 22 $ 190,641 (146,852) 12,811 (5,630) 609,065 201,495 (127,446) 1,230 (7,520) $ 558,095 ======== MIT REPORTOF1BE TREASURER 2016 -

E. Student Notes Receivable Table 16 below details the components of student notes receivable at June 30, 2016 and 2015. Table 16. Student Notes Receivable (in thousands of dollars) 2016 2015 Institute-funded student notes receivable .......................................... . $ 12,627 $ 12,894 Perkins student notes receivable ................................................. . 32,510 35,784 ------Total student notes receivable .................................................. . 45,137 48,678 Less: allowance for doubtful accounts ............................................ . (3,000) (3,000) ---'----'-Student notes receivable, net .................................................. . $ 42,137 $ 45,678 ======== Perkins student notes receivable are funded by the US Government and by MIT. Those funds advanced by the US Government for this program are ultimately refundable to the US Government and are classified as liabilities in US Government advances for student loans in the Consolidated Statements of Financial Position. Due to the nature and terms of the student loans, which are subject to significant restrictions, it is not feasible to determine the fair value of such loans. Allowance for Credit Losses Management regularly assesses the adequacy of the allowance for credit losses by performing ongoing evaluations of the student loan portfolio, including such factors as the differing economic risks associated with each loan category, the financial condition of specific borrowers, the economic environment in which the borrowers operate, the level of delinquent loans, the value of any collateral, and, where applicable, the existence of any guarantees or indemnifications. MIT's Perkins loans receivable represents the amounts due from current and former students under the Federal Perkins Loan Program. Loans disbursed under the Federal Perkins Loan Program are able to be assigned to the US Government in certain non-repayment situations. In these situations, the Federal portion of the loan balance is guaranteed. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Factors also considered by management when performing its assessment, in addition to general economic conditions and the other factors described above, included, but were not limited to, a detailed review of the aging of the student loan receivable and a review of the default rate by loan category in comparison to prior years. The level of the allowance is adjusted based on the results of management's analysis. Loans less than 120 days delinquent are deemed to have a minimal delay in payment and are generally not written off but are reserved in accordance with the terms discussed above. Loans more than 120 days delinquent are subject to standard collection practices, including litigation. Only loans that are deemed uncollectible are written off and this only occurs after several years of unsuccessful collection, including placement at more than one external collection agency. Considering the other factors already discussed herein, management considers the allowance for credit losses at June 30, 2016 and 2015 to be prudent and reasonable. Furthermore, MIT's allowance is general in nature and is available to absorb losses from any loan category. Management maintains an allowance of $3.0 million for credit losses and is confident that this is sufficient to absorb credit losses inherent in the portfolio as of that date. 23 F. Net Borrowings MIT's outstanding borrowings at June 30, 2016 and 2015 are shown in Table 17 below. Table 17. Net Borrowings (in thousands of dollars I due dates are calendar based I par values as of 2016) Educational plant Massachusetts Development Finance Agency (MassDevelopment): Series I, 5.20%, due 2028, par value $30,000 ............................... . $ Series J-1, variable rate, due 2031, par value $125,000 ........................ . Series J-2, variable rate, due 2031, par value $125,000 ........................ . Series K, 5.25%-5.5%, due 2012-2032, par value $203,500 .................... . Series L, 3.0%-5.25%, due 2004-2033, par value $141,670 .................... . Series M, 5.25%, due 2014-2030, par value $122,000 ........................ . Series 0, 4.0%-5.0%, due 2017, par value $88,000 .......................... . Total MassDevelopment .............................................. . $ Medium Term Notes Series A, 7.125% due 2026, par value $17,415 ............. . Medium Term Notes Series A, 7.25%, due 2096, par value $45,604 .............. . Taxable Bonds, Series B, due 2111, par value $750,000* ................ . Taxable Bonds, Series C, 4.68%, due 2114, par value $550,000* ................ . Taxable Bonds, Series D, 2.051-3.959%, due 2019-2038, par value $522,410 ...... . Notes payable to bank, variable rate, due 2017 .............................. . Total taxable ........................................................ . $ Total educational plant ............................................... . $ Other Notes payable to bank, variable rate, due 2017 .............................. . Total borrowings .................................................... . $ Unamortized debt issuance costs ......................................... . Total borrowings net of unamortized debt issuance cost .................... . $ 2016 30,665 125,000 125,000 212,317 149,668 119,750 88,000 850,400 17,375 45,455 747,050 550,000 522,410 113,033 1,995,323 2,845,723 $ $ $ $ 2015 30,723 125,000 125,000 213,010 150,357 130,264 89,117 863,471 17,371 45,451 747,019 550,000 522,410 113,033 1,995,284 2,858,755 63,476 63,476 -------2,909,199 $ 2,922,231 (17,106) (17,672) -------------2, 892, 093 $ 2,904,559 =============

• The proceeds of Taxable Bonds, Series Band C were in the process of being invested in physical assets in 2015 and 2016, with unused bakmces held as investments. Fair value of the outstanding debt is approximately 24 and 9 percent greater than the carrying value in 2016 and 2015, respectively. It is classified as Level 3 under the valuation hierarchy described in Note B. Fair value is based on estimates using current interest rates available for similarly rated debt of the same remaining maturities for tax-exempt debt and rates for recent trades for taxable debt. 24 MIT REPORT OF THE TREASURER 2016 F. Net Borrowings (continued) The aggregate amounts of debt payments and sinking fund requirements for each of the next five fiscal years are shown in Table 18 below. Table 18. Debt Principal Obligations (in thousands of dollars) 2017 ............................. . 2018 ............................. . 2019 ............................. . 2020 ............................. . 2021 ............................. . $ 98,090 26,500 92,410 10,620 11,180 MIT maintains a line of credit with a major financial institution for an aggregate commitment of $500.0 million. As of June 30, 2016, $323.5 million was available under this line of credit (see Notes payable on Table 17). The line of credit expires on March 31, 2017. Cash paid for interest on long-term debt in 2016 and 2015 was $131.0 million and $128.9 million, respectively. G. Commitments and Contingencies Federal Government Funding MIT receives funding or reimbursement from Federal agencies for sponsored research under Government grants and contracts. These grants and contracts provide for reimbursement of indirect costs based on rates negotiated with the Office of Naval Research (ONR), MIT's cognizant Federal agency. MIT's indirect cost reimbursements have been based on fixed rates with carryforward of under-or over-recoveries. At June 30, 2016 and 2015, MIT recorded a net over-recovery of $24.7 million and $19.5 million, respectively. The DCM is responsible for auditing indirect charges to grants and contracts in support of ONR's negotiating responsibility. MIT has final audited rates through 2009. MIT's 2016 research revenues of $1,690.2 million include reimbursement of indirect costs of $235.3 million, which includes the adjustment for the variance between the indirect cost income determined by the fixed rates and actual costs for 2016. In 2015, research revenues were $1,576.6 million, which included reimbursement of rect costs of$217.9 million. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Variable interest rates at June 30, 2016 are shown in Table 19 below. Table 19. Variable Interest Rates (in thousands of dollars) Amount Rate MassDevelopment Series J-1 .. $ 125,000 0.40% MassDevelopment Series J-2 .. 125,000 0.42% Notes payable to bank ....... 176,509 1.06% In the event that MIT receives notice of any optional tender on its Series J-1 and Series J-2 variable-rate bonds, or if these bonds become subject to mandatory tender, the purchase price of the bonds will be paid from the remarketing of such bonds. However, if the remarketing proceeds are insufficient, MIT will be obligated to purchase the bonds tendered at 100 percent of par on the tender date. Leases At June 30, 2016, there were no capital lease obligations. MIT is committed under certain operating (rental) leases. Rent expense incurred under operating lease obligations was $40.0 million and $41.3 million in 2016 and 2015, respectively. Future minimum payments under operating leases are shown in Table 20 below. Table 20. Lease Obligations (in thousands of dollars) 2017 ......................... . 2018 ......................... . 2019 ......................... . 2020 ......................... . 2021 ......................... . Investments $ 44,361 44,501 41,452 27,697 26,573 As of June 30, 2016, $12.6 million of investments were pledged as collateral to various suppliers and Government agencies. 25 G. Commitments and Contingencies (continued) Future Construction MIT has contracted for educational plant in the amount of $389.3 million at June 30, 2016. It is expected that the resources to satisfy these commitments will be provided from unexpended plant funds, anticipated gifts, bond proceeds, and unrestricted funds. MIT will be committing additional resources to planned major construction projects and improvements to the current infrastructure over the next several years. Related Entities MIT has entered into agreements, including collaborations with third-party not-for-profit and for-profit entities, for education, research, and technology transfers. Some of these agreements H. Functional Expense Classification involve funding from foreign governments. These agreements subject MIT to greater financial risk than do its normal tions. In the opinion of management, the likelihood of tion of increased financial risks by MIT under these 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 MIT's financial position. MIT's expenditures on a functional basis are shown in Table 21 below. Table 21. Expenditures by Functional Classification (in thousands of dollars) 2016 2015 General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ . $ 858,441 $ 763,680 Instruction and unsponsored research ............................................. . 854,595 811,495 Sponsored research ........................................................... . 1,479,158 1,386,334 Auxiliary enterprises .......................................................... . 141,437 134,076 Operation of Alumni Association ................................................ . 16,268 15,534 Total operating expenses ...................................................... . $ 3,349,899 $ 3,111,119 I. Retirement Benefits MIT offers a defined benefit plan and a defined contribution plan to its employees. The plans cover substantially all MIT employees. MIT also offers a postretirement welfare benefit plan (certain healthcare and life insurance benefits) for retired employees. Substantially all MIT employees may become eligible for those benefits if they reach a qualifying retirement age while working for_MIT. The healthcare coJilponent of the welfare plan is paid for in part by retirees, their covered dependents, and beneficiaries. Benefits are provided through various insurance companies whose charges are based either on the claims and administrative expenses paid during the year or annual insured premiums. The life insurance component of the welfare plan includes basic life insurance and supplemental life insurance. The basic life insurance plan is non-contributory and covers the retiree only. The supplemental life insurance plan is paid for by the retiree. MIT maintains a trust to pay for postretirement welfare benefits. MIT contributes to the defined benefit plan amounts that are actuarially determined to provide the retirement plan with 26 sufficient assets to meet future benefit requirements. There were designated contributions of $83.0 million and $7.5 million to the defined benefit plan in 2016 and 2015, respectively. MIT also designated contributions of $18.9 million and $28.7 million to the postretirement welfare benefit plan in 2016 and 2015, respectively. The employer contributions to the Retiree Welfare Benefit Plan (RWBP) decreased in 2016 mainly due to an . increase in prescription drug rebates from drug manufacturers and more medical claims being directly paid by RWBP. For the defined contribution plan, the amount contributed and expenses recognized during 2016 and 2015 were $55.2 million and $51.5 million, respectively. For purposes of calculating net periodic cost, plan amendments for the defined benefit plan are amortized on a straight-line basis over the average future service of active participants at the date of the amendment. Plan amendments to the postretirement welfare benefit plan are amortized on a straight-line basis over the average future service to full eligibility of active participants at the date of amendment. MIT REPORT OF THE TREASURER 2016 I. Retirement Benefits (continued) Cumulative gains and losses (including changes in assumptions) in excess of 10 percent of the greater of the projected benefit obligation or the market-related value of assets for both the defined benefit plan and the postretirement welfare benefit plan are amortized over the average future service of active participants. The annual amortization shall not be less than the total amount of unrecognized gains and losses up to $1.0 million. Components of Net Periodic Benefit Cost Table 22 below summarizes the components of net periodic benefit cost recognized in operating activity and other amounts recognized in non-operating activity in unrestricted net assets for the years ended June 30, 2016 and 2015. Table 22. Components of Net Periodic Benefit Cost (in thousands of dollars) Components of net periodic benefit cost recognized in operating activity: Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Interest cost .............................. : .... Expected return on plan assets ..................... Amortization of net actuarial loss .................. Amortization of prior service cost .................. Net periodic benefit cost recognized in operating activity $ Other amounts recognized in non-operating activity in unrestricted net assets: Current year actuarial loss (gain) ................... Amortization of actuarial gain ..................... Amortization of prior service cost .................. Total other amounts recognized in non-operating activity $ Total recognized ............................... The estimated net actuarial loss and prior service cost for the defined benefit plan that will be amortized from unrestricted net assets into net periodic benefit cost during the next fiscal year are $33.2 million and $1.0 million, respectively. The estimated net NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Defined Benefit Plan Postretirement Welfare Benefit Plan 2016 2015 I I 2016 2015 85,464 $ 80,840 $ 25,097 $ 25,950 158,983 141,805 25,478 24,453 (243,615) (223,648) (34,703) (30,623) 20,088 24,596 1,000 6,064 953 953 (2,801) (2,801) 21,873 $ 24,546 $ 14,071 $ 23,043 492,083 56,748 30,889 (41,250) (20,088) (24,596) (1,000) (6,064) (953) (953) 2,801 2,801 471,042 $ 31,199 $ 32,690 $ (44,513) 55,745 $ 46,761 (21,470) actuarial loss and prior service cost (credit) for the postretirement welfare benefit plan that will be amortized from unrestricted net assets into net periodic benefit cost during the next fiscal year are $1.0 million and $(2.8) million, respectively. 27 I. Retirement Benefits (continued) Cumulative amounts recognized as non-operating changes in unrestricted net assets are summarized in Table 23 below for the years ended June 30, 2016 and 2015. Table 23. Cumulative Amounts Recognized in Unrestricted Net Assets Defined Benefit Plan Postretirement Welfare Benefit Plan (in thousands of dollars) 2016 2015 11 2016 2015 Amounts recognized in unrestricted net assets consist of: Net actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 787,874 $ Prior service cost (credit) ......................... . 973 788,847 Total cumulative amounts recognized in unrestricted net assets $ ======= $ Benefit Obligations and Fair Value of Assets 315,879 $ 1,926 317,805 $ 39,515 (10,615) 28,900 $ $ 9,626 (13,416) (3,790) Table 24 below summarizes the benefit obligations, plan assets, and amounts recognized in the Consolidated Statements of Financial Position for MIT's retirement benefit plans. MIT uses a June 30 measurement date for its defined benefit and postretirement welfare benefit plans. Table 24. Projected Benefit Obligations and Fair Value of Assets Defined Benefit Plan Postretirement Welfare Benefit Plan I I I (in thousands of dollars) 2016 2015 2016 2015 Change in projected benefit obligations: Projected benefit obligations at beginning of year $ 3,431,688 $ 3,140,704 $ 548,965 $ 539,262 Service cost ................................. 85,464 80,840 25,097 25,950 Interest cost ................................ 158,983 141,805 25,478 24,453 Retiree contributions ......................... 5,543 4,881 Net benefit payments, transfers, and other expenses (138,464) (113,739) (28,396) (30,506) Employer Group Waiver Plan (EGWP) reimbursement 5,053 6,273 Assumption changes and actuarial net loss (gain) .... 257,663 182,078 344 (21,348) Projected benefit obligations at end of the year ....** $ 3,795,334 $ 3,431,688 $ 582,084 $ 548,965 Change in plan assets: Fair value of plan assets at beginning of the year ..... 3,378,500 3,135,764 548,920 495,372 Actual return on plan assets .................... 9,197 348,975 4,160 50,522 Employer contributions ....................... 83,000 7,500 18,929 28,651 Retiree contributions ......................... 5,543 4,881 Net benefit payments, transfers, and other expenses (138,464) (113,739) (28,396) (30,506) Fair value of plan assets at end of the year .........* 3,332,233 3,378,500 549,156 548,920 Unfunded status at end of the year ................ $ (463,101) $ (53,188) $ (32,928) $ (45) Amounts recognized in the Consolidated Statements of Financial Position consist of: Total accrued benefit liabilities ....*............*. $ (463,101) $ (53,188) $ (32,928) $ (45) I 28 MIT REPORT OF THE TREASURER 2016 I. Retirement Benefits (continued) The accumulated benefit obligation for MIT's defined benefit plan was $3,608.5 million and $3,075.9 million at June 30, 2016 and 2015, respectively. MIT provides retiree drug coverage through an Employer Group Waiver Plan (EGWP). Under EGWP, the cost of drug coverage is offset through direct federal subsidies, brand-name drug discounts, and reinsurance reimbursements. Table 25. Assumptions (in thousands of dollars) Assumptions used to determine benefit obligation as of June30: Discount rate ............................... . Rate of compensation increase* ................. . Assumptions used to determine net periodic benefit cost for the year ended June 30: Discount rate ............................... . Expected long-term return on plan assets .......... . Rate of compensation increase* ................. . Assumed healthcare cost trend rates: Healthcare cost trend rate assumed for next year ..... Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) ..................... . Year the rate reaches the ultimate trend rate ........ . Assumptions 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 hisrorical 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. Defined Benefit Plan 2016 2015 I I 4.06% 4.62% 4.00% 4.00% 4.62% 4.50% 8.00% 8.00% 4.00% 4.00% Postretirement Welfare Benefit Plan 2016 4.03% 4.54% 7.00% 6.00% 4.75% 2021 2015 4.54% 4.43% 7.00% 6.50% 4.75% 2021 *The average rate of salary increase is assumed to be 4.00% for 2017 and thereafter. As an indicator of sensitivity, a one percentage point change in the assumed healthcare cost trend rate would affect 2016 as shown in Table 26 below. Table 26. Healthcare Cost Trend Rate Sensitivity (in thousands of dollars) 1% Point Increase 1% Point Decrease Effect on 2016 postretirement service and interest cost ........................... . $ 9,423 $ (7,447) (70,238) Effect on postretirement benefit obligation as of]une 30, 2016 .............. : ...... . 85,651 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 29 I. Retirement Benefits (continued) Tables 27 A and 27B present investments at fair value of MIT's defined benefit plan and postretirement welfare benefit plan, which are included in plan net assets as ofJune 30, 2016 and 2015, grouped by the valuation hierarchy detailed in Note B. The investment values in these tables exclude certain items included in the assets shown in Table 24. The 2016 transfers from Level 1 to Level 2 totaled $21.8 million and $3.5 million for the defined benefit plan and postretirement benefit plan, respectively. The 2016 transfers from Level 2 to Level 1 totaled $2.4 million and $0.3 million for the defined benefit plan and the postretirement benefit plan, respectively. There were no transfers in and out of Level 1 and Level 2 fair value measurements in 2015. Table 27 A. Defined Benefit Plan Investments Quoted Prices in Significant Other Significant NAV as Practical Active Markets Observable Inputs Unobservable Inputs Expedient Total Fair (in thousands of dollars) (Level 1) (Level 2) (Level 3) [NAV] Value Fiscal Year 2016 Cash and cash equivalents .... $ 154,852 $ -$ -$ $ 154,852 US Treasury ............... 304,281 304,281 US Government agency ...... 8,701 8,701 Domestic bonds ........... 13 13 Foreign bonds ............. 6,973 6,973 Common equity: Long domestic .......... 42,147 53 42,200 Long foreign ............ 80,573 21,844 102,417 Equity:* Absolute return ......... 352,188 352,188 Domestic .............. 407,180 407,180 Foreign ................ 792,305 792,305 Private ................ 661,125 661,125 Real estate* ............... 1,492 277,671 279,163 Real assets* ............... 119,031 119,031 Other ............. , ..... 9,420 589 10,009 Derivatives ............... 44 777 821 Total plan investments ...... $ 5921809 $ 38J08 $ 642 $ $ 3J41J59 Fiscal Year 2015 Cash and cash equivalents .... $ 204,917 $ -$ -$ $ 204,917 US Treasury ............... 298,529 298,529 US Government agency ...... 11,183 11,183 Foreign bonds ............. 144 144 Domestic bonds ........... Common equity: Long domestic .......... 32,253 74 32,327 Long foreign ............ 122,483 902 123,385 Equity:* Absolute return ......... 334,619 334,619 Domestic .............. 504,042 504,042 Foreign ................ 809,825 809,825 Private ................ 629,042 629,042 Real estate* ............... 1,466 273,468 274,934 Real assets* ............... 261 133,386 133,647 Other ................... 5,069 760 5,829 Derivatives ............... 13 1,209 1,222 Total plan investments ...... $ 663J64 $ $ 1!095 $ 2!684J82 $ 3,363!645 *Real assets, real estate, and equity categories include commingled vehicles that invest in these types of investments. 30 MIT REPORT OF THE TREASURER 2016 I. Retirement Benefits (continued) Table 278. Postretirement Welfare Benefit Plan Investments Quoted Prices in Significant Other Significant Measured at Net Active Markets Observable Inputs Unobservable Inputs Asset Value Total Fair (in thousands of dollars) (Level 1) (Level 2) (Level 3) [NAY] Value Fiscal Year 2016 Cash and cash equivalents ... $ 29,733 $ -$ -$ $ 29,733 Domestic bonds .......... 76,019 76,019 Foreign bonds ............ 498 498 Common equity: Long domestic ......... 15,771 15,771 Long foreign ........... 10,356 3,524 13,880 Equity:* Absolute return ........ 67,327 67,327 Domestic ............. 75,578 75,578 Foreign ............... 180,830 180,830 Private ............... 60,008 60,008 Real estate ............... 204 22,968 23,172 Real assets* .............. 4,574 4,574 Other .................. 695 695 Derivatives . . . . . . . . . . . ... Total plan investments ..... $ 562759 $ 802041 $ -$ 411J85 $ 5482085 Fiscal Year 2015 Cash and cash equivalents ... $ 18,502 $ -$ $ $ 18,502 Domestic bonds .......... 71,428 71,428 Foreign bonds ............ 10 10 Common equity: Long domestic ......... 25,177 25,177 Long foreign ........... 18,098 123 18,221 Equity:* Absolute return ........ 68,771 68,771 Domestic ............. 79,074 79,074 Foreign ............... 194,610 194,610 Private ............... 48,593 48,593 Real estate . . . . . . . . ....... 200 20,362 20,562 Real assets* .............. 3,763 3,763 Other .................. 362 362 Derivatives .............. Total plan investments ..... $ 622139 $ 712761 $ $ 4152173 $ 5492073 *Real assets and equity categories include commingled vehicles that invest in these types of investments. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 I. Retirement Benefits {continued) Table 28 below is a rollforward of the investments classified by MIT's defined benefit plan within Level 3 of the fair value hierarchy defined in Note Bas at June 30, 2016 and 2015. Table 28. Rollforward of Level 3 Investments Realized Unrealized Fair Value Gains Gains Fair Value (in thousands of dollars) Beginning (Losses) (Losses) Purchases Sales Transfers Ending Defined Benefit Plan Fiscal Year 2016 Common equity: Long domestic ..... $ 74 $ -$ (21) $ -$ -$ -$ 53 Real assets ........... 261 (3,438) 3,177 Other .............. 760 (171) 589 Total ............... $ 1,095 $ (3,438) $ 2,985 $ -$ -$ -$ 642 Fiscal Year 2015 Common equity: Long domestic ..... $ 909 $ -$ (835) $ -$ -$ -$ 74 Real assets ........... 2,706 (2,445) 261 Other .............. 1,191 (431) 760 Total ............... $ 4,806 $ -$ (3,711) $ -$ -$ -$ 1,095 32 MIT REPORT OF THE TREASURER 2016 I. Retirement Benefits (continued) The plans have made investments in various long-lived partnerships, and in other cases have entered into contractual arrangements that may limit their ability to initiate redemptions due to notice periods, lock-ups, and gates. Details on estimated remaining life and current redemption terms and restrictions by asset class and type of investment for both the defined benefit plan and postretirement welfare benefit plan are provided in Table 29 below as of]une 30, 2016 and 2015. Table 29. Unfunded Commitments 2016 2015 Unfunded 11 Unfunded Redemption Redemption (in thousands of dollars) Commitments Fair Value Commitments Fair Value Terms Restrictions Defined Benefit Plan Equity: Domestic ......... $ 403 $ 407,180 $ 433 $ 504,042 Redemption terms range from 4 Lock-up months with 60 days notice to provisions range 25 months with 3 months notice from none to 26 and 2 closed-end funds not months; 2 funds available for redemption are not redeemable Foreign .......... 54,781 792,305 12,710 809,825. Redemption terms range from Lock-up daily with 28 days notice to 13 provisions range months with 3 months notice from none to 44 and I closed-end fund not months; I fund is available for redemption not redeemable Absolute return ... 39,851 352,188 65,457 334,619 Redemption terms range from Lock-up 4 months with 30 days notice provisions range to closed-end funds that are not from none to not redeemable redeemable Private .......... 318,779 661,125 232,650 629,042 Closed-end funds not available Not redeemable for redemption Real estate . . . . . . . . . . 150,325 277,671 133,612 273,468 Closed-end funds not available Not redeemable for redemption Real assets . . . . . . . . . . 38,282 119,031 30,602 133,386 Redemption terms range from Lock-up 9 months with 1 day notice to provisions range closed-end funds which are not from none to not redeemable redeemable Total .............. $ 602,421 $ 2,609,500 $ 475,464 $ 2,684,382 Postretirement Welfare Benefit Plan Equity: Domestic ........ $ 45 $ 75,578 $ 48 $ 79,074 Redemption terms range from Lock-up 4 months with 60 days notice provisions range to 25 months with 3 months from none to 26 notice and I closed-end fund not months; 1 fund is available for redemption not redeemable Foreign ...... ; ... 8,269 180,830 2,000 194,610 Redemption terms range from Lock-up 45 days with JO days notice to provisions range 13 months with 3 months notice from none to 44 with I closed-end fund not months; 1 fund is available for redemption not redeemable Absolute return ... 3,852 67,327 7,393 68,771 Redemption terms range from Lock-up 4 months with 30 days notice provisions range to closed-end funds that are not from none to not redeemable redeemable Private .......... 46,563 60,008 30,742 48,593 Closed-end funds not available Not redeemable for redemption Real estate .......... 19,460 22,968 16,083 20,362 Closed-end funds not available Not redeemable for redemption Real assets .......... 5,586 4,574 3,889 3,763 Closed-end funds not available Not redeemable for redemption Total ...........**. $ 83,775 $ 411,285 $ 60,155 $ 415,173 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33 I. Retirement Benefits (continued) Target allocations and weighted-average asset allocations of the investment portfolio for the MIT defined benefit plan and postretirement welfare benefit plan at June 30, 2016 and 2015 are shown in Table 30 below. Table 30. Plan Investment Allocation Defined Benefit Plan Postretirement Welfare Benefit Plan 2016Target 2016Target Allocation 2016 2015 Allocation 2016 2015 Cash and cash equivalents ......... 0-10% 5% 6% 0-10% 6% 3% Fixed income ................... 3-13% 10% 9% 10-20% 14% 13% Equities ....................... 33.5-83.5% 62% 63% 37-87% 63% 66% Marketable alternatives ........... 7.5-17.5% 11% 10% 9.5-19.5% 12% 13% Real assets ..................... 1-11% 4% 4% 0-5.5% 1% 1% Real estate ..................... 5-15% 8% 8% 0-8% 4% 4% Total ......................... 100% 100% 100% 100% Table 31 below summarizes the notional exposure and net ending fair value of derivative financial instruments held by the MIT defined benefit plan at June 30, 2016 and 2015. Refer to Note C for a detailed discussion regarding derivative financial instruments. Table 31. Derivative Financial Instruments for Defined Benefit Plan Notional Exposure Net Ending Fair Net Gain (in thousands of dollars) Long Short Value Amount (Loss) Fiscal Year 2016 Equity instruments: Equity options .......................... $ 24 $ $ 4 $ Total equity instruments .................... 24 4 Fixed income instruments: Fixed income futures .................... 5,900 (900) 44 Total fixed income instruments ............... 5,900 (900) 44 Commodity and index instruments: ........... Equity index swaps ...................... (28,043) 773 12,736 Total commodity and index instruments ........ (28,043) 773 12,736 2016Total .............................. $ $ $ 821 $ 122736 Fiscal Year 2015 Equity instruments: Equity options .......................... $ $ $ $ Total equity instruments .................... Fixed income instruments: Fixed income futures .................... 2,500 (1,000) 13 (23) Total fixed income instruments ............... 2,500 (1,000) 13 (23) Commodity and index instruments: Equity index swaps ...................... (50,851) 1,209 (10,835) Total commodity and index instruments ........ (50,851) 1,209 (10,835) 2015Total .............................. $ $ {512851} $ 1J22 $ {102858} 34 MIT REPORT OF THE TREASURER 2016 I. Retirement Benefits (continued) Counterparty risk may be partially or completely mitigated through master netting agreements included within an International Swap and Derivatives Association, Inc. ("ISDA") Master Agreement between the Plan and each of its counterparties. The ISDA Master Agreement allows the Plan to offset with the counterparty certain derivative instruments' payables and/or receivables with collateral held with each counterparty. To the extent amounts due from the counterparties are not fully collateralized contractually or otherwise, there is the risk of loss from counterparty non-performance. As ofJune 30, 2016, the defined benefit plan has elected not to offset recognized assets and liabilities. The following tables, 32 and 33, summarize the effect that offsetting of recognized assets and liabilities could have on the investments held by the defined benefit plan. Table 32. Offsetting of Financial and Derivative Assets and Liabilities 2016 2015 Cash/Treasury I I Cash/Treasury Collateral Collateral Gross Posted/ Net Gross Posted/ Net (in thousands of dollars) Amount (Received) Amount Amount (Received) Amount Assets Counterparty A ................ $ 773 $ (974) $ (201) $ 1,209 $ (2,950) $ (l,741) Total assets ................... $ 773 $ (974) $ (201) $ 1,209 $ (2,950) $ (1,741) Liabilities Counterparty A. . . . . . . . ........ $ $ -$ $ $ -$ Total liabilities ................ Total assets and liabilities, net .... $ 773 $ (974) $ (201) $ 1,209 $ (2,950) $ (1,741) Maximum risk ofloss from counterparty credit risk on the-counter derivatives is generally the aggregate unrealized appreciation in excess of any collateral pledged by the counterparty. ISDA Master Agreements allow the Plan or the counterparties to an over-the-counter derivative to terminate the contract prior to maturity in the event either party fails to meet the terms in the ISDA Master Agreements. This would cause an accelerated payment of net liability, if owed to the counterparty. Table 33 below reconciles the net recognized assets and liabilities, as shown in Table 32, to derivative financial instruments as shown in Table 27 A. Table 33. Reconciliation of Financial and Derivative Assets and Liabilities (in thousands of dollars) Derivatives from Table 27 A .............................................. . $ Fixed income futures ................................................... . Equity options ........................................................ . Total ............................................................... . $ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2016 821 $ (44) (4) 2015 1,222 (13) 773 $ . 1,209 ========= 35 I. Retirement Benefits (continued) Expected Future Benefit Payments In fiscal 2017, MIT expects to make contributions of$33.l million and $4.4 million to its defined benefit pension plan and postretirement welfare benefit plan, respectively. These contributions have been estimated based on the same assumptions used to measure MIT's benefit obligations at June 30, 2016. Table 34 below reflects total expected benefit payments for the defined benefit and postretirement welfare benefit plans over the next ten years. These payments have been estimated based on the same assumptions used to measure MIT's benefit obligations at June 30, 2016. Table 34. Expected Future Benefit Payments (in thousands of dollars) Pension Benefits Other Benefits* 2017 ......................................................... . $ 140,825 $ 25,516 2018 ......................................................... . 151,164 27,584 2019 ......................................................... . 158,248 29,341 2020 ......................................................... . 165,653 30,831 2021 ......................................................... . 173,511 32,361 2022-2026 .................................................... . 980,675 184,757

• Other Benefits reflects the total net benefits expected to be paid from the plans (e.g., gross benefit reimbursement ojfiet by retiree contributions). 36 MIT REPORT OF THE TREASURER 2016 J. Components of Net Assets and Endowment Table 35 below presents the total net assets composition as of endowment and invested with the endowment funds. A large June 30, 2016. The amounts listed in the unrestricted category component of temporarily restricted net assets in other invested under endowment funds are those gifts and other funds received funds is pledges, the majority of which will be reclassified to over the years that MIT designated as funds functioning as unrestricted net assets when cash is received. Table 35. Total Net Asset Composition 2016 Temporarily Permanently (in thousands of dollars) Unrestricted Restricted Restricted Total 2015 Total Endowment Funds General purpose . . . . . . ............. $ 870,064 $ 1,065,097 $ 236,540 $ 2,171,701 $ 2,243,829 Departments and research . . . . . . ...... 611,592 1,029,438 635,170 2,276,200 2,331,345 Library .......................... 11,619 25,313 20,283 57,215 51,810 Salaries and wages . . . . .............. 535,916 2,557,316 717,217 3,810,449 3,930,799 Graduate general . . . . . .............. 86,096 148,119 105,080 339,295 344,361 Graduate departments . . . . . . . . ....... 138,416 349,490 278,728 766,634 744,126 Undergraduate .................... 219,247 1,088,344 369,167 1,676,758 1,724,986 Prizes ................. * ........... 8,430 30,567 20,600 59,597 61,885 Miscellaneous . . . . . . . . . . . . . . . . . .... 1,117,010 217,395 326,435 1,660,840 1,664,495 Investment income held for distribution 362,826 362,826 377,107 Endowment funds before pledges ...... 3,961,216 6,511,079 2,709,220 13,181,515 13,474,743 Pledges .......................... 251,521 251,521 213,196 Total endowment funds ............. 3,961,216 6,511,079 2,960,741 13,433,036 13,687,939 Other Invested Funds Student loan funds ................. 19,923 18,397 38,320 38,314 Building funds ..................... 51,657 60,326 111,983 103,990 Designated purposes: Departments and research . . ....... 343,927 1,024 344,951 355,371 Other purposes .................. 411,278 13,982 425,260 460,264 Life income funds . . . . . . . . . . . ....... 4,913 32,291 105,021 142,225 146,927 Pledges .......................... 357,544 357,544 344,899 Other funds available for current expenses 1,156,331 234,576 1,390,907 1,671,830 Funds expended for educational plant ... 684,855 684,855 697,039 Total other invested funds ........... 2,672,884 699,743 123,418 3,496,045 3,818,634 Noncontrolling interests ............. 205,421 205,421 232,415 Total net assets .................... $ 6,839,521 $ 7,210,822 $ 3,084,159 $ 17,134,502 $ 17,738,988 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37 J. Components of Net Assets and Endowment (continued) MIT's endowment consists of approximately 3,800 individual funds established for a variety of purposes and includes both donor-restricted endowment funds and funds designated by the Executive Committee of the MIT Corporation (Executive mittee) to function as endowment, as shown in Table 36 below. As required by GAAP, net assets associated with endowment funds, including funds designated by the Executive Committee to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. The Executive Committee has interpreted the enacted version of Uniform Prudent Management tional Funds Act (UPMIFA) as allowing MIT to appropriate for expenditure or accumulate so much of an endowment fund as MIT determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established, subject to the intent of the donor as expressed in the gift instrument. Unless stated otherwise in the gift instrument, the assets in an endowment fund shall be donor-restricted assets until ated for expenditure by the Executive Committee. As a result of this interpretation, MIT has not changed the way permanently restricted net assets are classified. (See Note A for further mation on net asset classification.) The remaining portion of the donor-restricted endowment fund that is not classified in nently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Executive mittee considers the following factors in making a determination to appropriate or accumulate endowment funds: i. the duration and preservation of the fund ii. the purposes of MIT and the endowment fund iii. general economic conditions iv. the possible effects of inflation and deflation v. the expected total return from income and the appreciation of investments vi. other resources of MIT vii. the investment policies of MIT Table 36. Endowment Net Asset Composition by Type of Fund Temporarily Permanently (in thousands of dollars) Unrestricted Restricted Restricted Total Fiscal Year 2016 Donor-restricted endowment funds ............. $ (395) $ 6,511,079 $ 2,960,741 $ 9,471,425 Board-designated endowment funds ............ 3,961,611 3,961,611 totalertdoWnientfiittds ..................... $ 3,96i,216 $ " 6;511,Q79 $ 2,960;741 $ 13,433,036 Fiscal Year 2015 Donor-restricted endowment funds ............. $ $ 6,889,791 $ 2,754,618 $ 9,644,409 Board-designated endowment funds ............ 4,043,530 4,043,530 TotalendoWIDentfunds ..................... $ 4,043,530 $ 6,889,791 $ 2,754,618 $ 13,687,939 Underwater Endowment Funds From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the value of the initial and subsequent donor gift amounts (underwater). When underwater endowment funds exist, they are classified as a tion of unrestricted net assets. Total underwater endowment funds reported in unrestricted net assets were $0.4 million as ofJune 30, 2016. There were no underwater endowment funds reported in unrestricted net assets as ofJune 30, 2015. 38 lyfIT REPORT OF THE TREASURER 2016 J. Components of Net Assets and Endowment (continued) Table 37 below reflects changes in unrestricted, temporarily restricted, and permanently restricted endowment net assets for fiscal year 2016 and 2015, respectively. Table 37. Changes in Endowment Net Assets Temporarily Permanently (in thousands of dollars) Unrestricted Restricted Restricted Total Fiscal Year 2016 Endowment net assets, July 1, 2015 ................ $ 4,043,530 $ 6,889,791 $ 2,754,618 $ 13,687,939 Investment return: Investment income ........................... 20,731 43,822 11,093 75,646 Net appreciation (realized and unrealized) ......... 4,586 (22,820) 22,442 4,208 Total investment return .......................... 25,317 21,002 33,535 79,854 Contributions ................................. 140,012 140,012 Appropriation of endowment assets for expenditure .... (178,367) (402,378) (7,963) (588,708) Other changes: Underwater gain adjustment ................... (395) 395 Net asset reclassifications and transfers to create board-designated endowment funds ................. 71,131 2,269 40,539 113,939 Endowment net assets, June 30, 2016 .............. $ 3,961,216 $ 6,511,079 $ 2,960,741 $ 13,433,036 Fiscal Year 2015 Endowment net assets, July l, 2014 ................ $ 3,709,574 $ 6,169,847 $ 2,710,357 $ 12,589,778 Investment return: Investment income ........................... 29,346 63,752 7,738 100,836 Net appreciation (realized and unrealized) ......... 448,256 1,029,171 (100,887) 1,376,540 Total investment return .......................... 477,602 1,092,923 (93,149) 1,477,376 Contributions ................................. 88,376 88,376 Appropriation of endowment assets for expenditure .... (165,768) (375,259) (4,834) (545,861) Other changes: Underwater gain adjustment ................... Net asset reclassifications and transfers to create board-designated endowment funds ................. 22,122 2,280 53,868 78,270 Endowment net assets, June 30, 2015 .............. $ 4,043,530 $ 6,889,791 $ 2,754,618 $ 13,687,939 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39 J. Components of Net Assets and Endowment (continued) Endowment Investment and Spending Policies MIT's investment policy is based on the primary goal of mizing return relative to appropriate risk such that performance exceeds appropriate benchmark returns at the total pool, asset class, and individual manager levels. To achieve its long-term rate-of-return objectives, MIT relies on a total return strategy in which investment returns are realized through both capital appreciation (realized and unrealized gains) and current yield (interest and dividends). MIT targets a diversified asset tion that places greater emphasis on equity-based investments to achieve its long-term objectives within prudent risk constraints. The Institute's primary investment pool, Pool A, is principally for endowment and funds functioning as endowment. Pool A operates as a mutual fund with units purchased and redeemed based on the previous month's unit market value. The total market value of Pool A was $14,448.3 million at June 30, 2016 and $14,921.5 million at June 30, 2015. Pool A included endowed operating and life income funds totaling $1,479.2 40 million at June 30, 2016 and $1,652.2 million at June 30, 2015. Certain endowed assets are also maintained in separately invested funds. These separately invested funds totaled $214.5 million and $176.3 million at June 30, 2016 and 2015, respectively. MIT has adopted spending policies designed to provide a predictable stream of funding to programs supported by its investments while maintaining the purchasing power of assets. For pooled investments, the Executive Committee of the poration votes to distribute funds for operational support from general investments. In accordance with MIT's spending policy, these distributions are funded from both investment income and market appreciation. The distribution rates were $69.29 and $65.33 per Pool A unit as of June 30, 2016 and 2015, tively. For separately invested endowment funds, only the annual investment income generated is distributed for spending. MIT REPORT OF THE TREA:SURER 2016

_. pwc Report of the Independent Auditors To the Risk and Audit Committee of the Massachusetts Institute of Technology: We have audited the accompanying consolidated financial statements, as listed in the accompanying table of contents, of the Massachusetts Institute of Technology (the "Institute"), which comprise the consolidated statements of financial position as of June 30, 2016 and 2015 and the related consolidated statement of activities for the year ended June 30, 2016, and statements of cash flows for the years ended June 30, 2016 and 2015. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Institute's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Institute's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements, as listed in the accompanying table of contents, present fairly in all material respects, the financial position of the Massachusetts Institute of Technology at June 30, 2016 and 2015 and the changes in their net assets for the year ended June 30, 2016 and their cash flows for the years ended June 30, 2016 and 2015 in accordance with accounting principles generally accepted in the United States of America. Other Matter We previously audited the consolidated statement of financial position as of June 30, 2015, and the related consolidated statement of activities, and cash flows for the year then ended (not presented herein), and in our report dated September 11, 2015, we expressed an unmodified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying summarized financial information as of June 30, 2015 and for the year then ended is consistent, in all material respects, with the audited consolidated financial statements from which it has been derived. September 9, 2016 1---------------------------------------------------------------------1 PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, MA 02210 T: (617) 530 5000, F: (617) 530 5001, www.pwc.com/us REPORT OF THE INDEPENDENT AUDITORS 41 Massachusetts Institute of Technology Five-Year Trend Analysis (Unaudited} -Financial Highlights (in thousands of dollars) 2016 2015 2014 2013 2012 Financial Position Investments, at fair value ................. $ 17,478,438 $ 17,754,155 $ 16,459,944 $ 13,912,100 $ 12,847,866 Land, buildings, and equipment, at cost less accumulated depreciation ............... 3,092,429 2,822,312 2,624,271 2,516,264 2,497,711 Borrowings, net of unamortized issuance costs 2,892,093 2,904,559 2,903,586 2,417,483 2,448,649 Total assets ........................... 22,294,378 22,105,574 20,574,670 17,791,108 16,727,405 Total liabilities ......................... 5,159,876 4,366,586 4,259,178 3,658,234 3,928,061 Unrestricted net assets ................... 6,839,521 7,303,673 6,754,956 5,775,618 4,888,952 Temporarily restricted net assets ........... 7,210,822 7,553,447 6,718,225 5,644,291 5,297,554 Permanently restricted net assets ........... 3,084,159 2,881,868 2,842,311 2,712,965 2,612,838 Total net assets ........................ 17,134,502 17,738,988 16,315,492 14,132,874 12,799,344 Total endowment funds before pledges ...... 13,181,515 13,474,743 12,425,131 10,857,976 10,149,564 Principal Sources of Revenues Tuition and similar revenues .............. $ 635,424 $ 612,101 $ 595,801 $ 568,957 $ 527,702 Research revenues: Campus direct ...................... 513,991 482,563 475,382 473,220 471,155 Campus indirect ..................... 187,426 183,020 188,136 188,742 183,200 Lincoln Laboratory direct .............. 908,506 844,588 791,292 860,190 819,645 Lincoln Laboratory indirect ............ 47,488 34,739 37,367 30,783 25,263 SMART direct ...................... 32,416 31,620 31,519 47,332 28,311 SMART indirect ..................... 402 117 98 193 276 Gift, bequests, and pledges ............... 469,162 493,690 452,655 325,018 433,424 Net gain on investments and other assets ..... 242,553 1,651,600 2,152,933 1,164,164 738,308 Investment income and distributions ........ 736,193 675,744 634,454 604,753 554,627 Principal Purposes of Expenditures Total operating expenditures .............. $ 3,349,899 $ 3,111,119 $ 2,918,517 $ 2,908,577 $ 2,744,586 General and administrative ............... 858,441 763,680 713,103 681,505 604,320 Instruction and unsponsored research ....... 854,595 811,495 777,382 692,032 673,851 Direct cost of sponsored research current dollars ............................. 1,479,158 1,386,334 1,283,189 1,397,857 1,335,638 Direct cost of sponsored research constant dollars (2012 = 100) ................... 1,410,410 1,332,962 1,242,770 1,374,972 1,335,638 42 MIT REPORT OF THE TREASURER 2016 Massachusetts Institute of Technology Five-Year Trend Analysis (Unaudited)-Financial Highlights (continued) (in thousands of dollars) 2016 2015 2014 2013 2012 Research Revenues Campus Federal Government sponsored: Health and Human Services ........... $ 113,522 $ 116,469 $ 115,075 $ 119,908 $ 133,687 Department of Defense . . . . . . . ....... 131,625 125,854 122,761 127,967 117,458 Department of Energy ............... 84,419 81,528 88,451 88,988 90,940 National Science Foundation .......... 82,161 78,953 78,979 79,255 81,487 National Aeronautics and Space Administration 49,664 41,740 32,062 29,835 30,204 Other Federal . . . . . . . . . . . . . . . . . . . . . . 15,738 15,435 17,610 19,994 18,807 Total Federal ........................ 477,129 459,979 454,938 465,947 472,583 Non-Federally sponsored: State/local/foreign governments ........ 28,495 27,951 28,967 33,429 38,273 Nonprofits ........................ 84,015 78,667 72,118 58,227 48,373 Industry ......................... 128,309 119,238 112,379 106,447 109,745 Total non-Federal .................... 240,819 225,856 213,464 198,103 196,391 Total Federal and non-Federal ........... 717,948 685,835 668,402 664,050 668,974 F&A and other adjustments ............ (16,531) (20,252) (4,884) (2,088) (14,619) Total campus ........................ 701,417 665,583 663,518 661,962 654,355 Lincoln Laboratory Federal Government sponsored .......... 920,272 886,637 809,011 882,462 844,202 Non-Federally sponsored ............... 6,355 3,609 2,333 1,622 2,023 F&A and other adjustments ............ 29,367 (10,919) 17,315 6,889 (1,317) Total Lincoln Laboratory ............... 955,994 879,327 828,659 890,973 844,908 SMART<AJ Non-Federally sponsored ............... 32,818 31,737 31,617 47,525 28,587 Total SMART ....................... 32,818 31,737 31,617 47,525 28,587 Total research revenues ............... $ 1,690,229 $ 1,576,647 $ 1,523,794 $ 1,600,460 $ 1,527,850 (AJ The amounts represent research that has predominantly taken place in Singapore. FIVE-YEAR TREND ANALYSIS 43 Massachusetts Institute of Technology Five-Year Trend Analysis (Unaudited) -Financial Highlights (continued) 2016 2015 2014 2013 2012 Students Undergraduate: Full-time ...................... 4,492 4,476 4,499 4,480 4,354 Part-time ...................... 35 36 29 23 30 Undergraduate applications: Applicants ..................... 18,306 18,356 18,989 18,109 17,909 Accepted ...................... 1,519 1,447 1,548 1,620 1,742 Acceptance rate . . . . . . . .......... 8% 8% 8% 9% 10% Enrolled ....................... 1,106 1,043 1,115 1,135 1,126 Yield .......................... 73% 72% 72% 70% 65% Freslunen ranking in the top 10% of their class 98% 97% 99% 98% 97% Average SAT Scores (math and verbal) 1,493 1,500 1,492 1,481 1,472 Graduate: Full-time ...................... 6,689 6,630 6,639 6,537 6,342 Part-time ...................... 115 177 134 149 168 Graduate applications: Applicants ..................... 23,750 24,468 24,029 22,588 22,219 Accepted ...................... 3,307 3,718 3,320 3,504 3,306 Acceptance rate ................. 14% 15% 14% 16% 15% Enrolled ....................... 2,165 2,441 2,163 2,229 2,118 Yield .......................... 65% 66% 65% 64% 64% Tuition (in dollars) Tuition and fees .................... $ 46,704 $ 45,016 $ 43,498 $ 42,050 $ 40,732 Average room and board ............. 13,730 13,224 12,744 12,188 11,775 Student Support (in thousands of dollars) Undergraduate tuition support ........ $ 112,902 $ 107,148 $ 103,076 $ 101,831 $ 102,081 Graduate tuition support ............. 258,444 247,361 240,022 226,158 215,702 Fellowship stipends ................. 38,731 38,759 38,792 36,173 33,263 Student loans ...................... 7,263 8,348 9,095 9,669 9,556 Student employment ................ 110,392 105,261 99,890 96,446 90,135 Total student support .............. $ 527,732 $ 506,877 $ 490,875 $ 470;277 $ 450,737 Faculty and Staff (including unpaid appointments) Faculty .......................... 1,036 1,021 1,030 1,022 1,018 Staff and fellows ................... 14,732 14,307 13,787 13,416 13,109 44 MIT REPORT OF THE TREASURER 2016 Report of the Treasurer for the year ended June 30, 2016 l'lil Massachusetts Institute of Technology