Annual Financial Report 2004 | www.suny.edu Board of Trustees Thomas F. Egan, Chairman Randy A. Daniels, Vice Chairman Steven L. Alfasi Aminy I. Audi Edward F. Cox John J. Cremins Candace de Russy Gordon R. Gross Stephanie A. Gross Lou Howard Pamela R. Jacobs Celine R. Paquette Ronald B. Stafford Patricia Elliott Stevens Harvey F. Wachsman Senior Management Robert L. King Chancellor Andrea E. Benshoff Special Assistant to the Chancellor Elizabeth D. Capaldi Vice Chancellor and Chief of Staff R. Wayne Diesel Vice Chancellor for Business and Industry Relations Carol W. Eaton Vice Chancellor for Community Colleges D. Andrew Edwards, Jr. University Counsel Wayne A. Locust Vice Chancellor for Enrollment and University Life John J. O’Connor Vice Chancellor and Secretary of the University David M. Richter Vice Chancellor and Chief Financial Officer Peter D. Salins Provost and Vice Chancellor for Academic Affairs Brian T. Stenson Vice Chancellor for Finance and Business Michael C. Trunzo Senior Associate Vice Chancellor for University Relations Kevin O’Donoghue University Auditor Patrick J. Wiater University Controller Robert L. King Message from the Chancellor It is with great pleasure that I present this year’s Annual Financial Report of the State University of New York. The information presented in the accompanying Annual Financial Report provides an overview of the State University’s financial condition and operating results for the year endedJune 30, 2004. Enrollment across the State University has grown to an all-time-high, and we are now educating more than 413,000 students, after eight straight years of growth - an increase of more than 10 percent since the fall of 1999. At the same time, the State University has improved the quality of its academic programs and is attracting more students with higher SAT scores, a testament to the hard work of our campus presidents, faculty, and staff. I am also pleased to report that several of the State University campuses earned high rankings in the 2005 America’s Best Colleges rankings from U.S. News & World Report. Sponsored research and program revenue increased for the eighth straight year, and in the 2004 fiscal year, rose by over $87 million, to an all-time high of over $858 million. Increases were achieved in grants and programs sponsored by federal and state governments and industry. This growth is the result of our creative and innovative faculty building partnerships to attract federal, state, and private funds. The State University also continues to serve as a key catalyst in generating new scientific breakthroughs, producing a high quality workforce, and enhancing economic development efforts across the State. Under the 2004-05 State budget, the State University received new multi-year capital funding authorizations totaling nearly $1.8 billion, for the five-year period through fiscal year 2008-09. Under this program, a majority of the funding supports critical maintenance needs to renovate and modernize existing State University facilities. Increased private support is critical to continued educational excellence and growth of the State University. In December 2000, I challenged our campuses to raise $1 billion in philanthropic support over four years. Thanks to the vigorous efforts of the 64 campus presidents and their fundraising and alumni relations teams the $1 billion goal was reached 18 months ahead of schedule. Building on this success, in March of 2004, we announced an even more ambitious fundraising effort, “The State University of New York $3 Billion Challenge.” The “Challenge” will help State University campuses enhance world-class academic and cultural programs, provide critical student support, attract and retain internationally recognized faculty, and advance intellectual inquiry and research. I am proud of the efforts and achievements the State University has made over the past several years, and believe that the ambitious goals we have established will enable us to meet the challenges ahead and, at the same time, create new opportunities. I am confident that all of us at the State University of New York will work together to maintain the State University’s status as a premier institution of public higher education in America. 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT 1 Management’s Discussion and Analysis Management’s discussion and analysis (the “MD&A”) provides a broad overview of the State University of New York’s (the “State University”) financial condition as of June 30, 2004 and 2003, the results of its operations for the years then ended, and significant changes from the previous years. Management has prepared the financial statements and related footnote disclosures along with this MD&A. The MD&A should be read in conjunction with the audited financial statements and related footnotes of the State University which directly follows the MD&A. For financial reporting purposes, the State University’s reporting entity consists of all sectors of the State University including the university centers, health science centers (including hospitals), colleges of arts and sciences, colleges of technology and agriculture, specialized colleges, statutory colleges (located at the campuses of Cornell and Alfred Universities), and central services, but excluding ommunity colleges. The financial statements also include the financial activity of The Research Foundation of State University of New York (the “Research Foundation”), which administers the sponsored program activity of the State University, the State University Construction Fund, (the “Construction Fund”), which administers the capital program of the State University, and the auxiliary service corporations located on its campuses. During 2004, the State University adopted Governmental Accounting Standards Board (the “GASB”) Statement No. 39, Determining Whether Certain Organizations Are Component Units, which amends GASB Statement No. 14, The Financial Reporting Entity. As a result, campus-related foundations and student housing corporations (all referred to as the “foundations”) are included in the State University reporting entity. The focus of the MD&A is on the State University financial information contained in the balance sheets, the statements of revenues, expenses, and changes in net assets, and the statements of cash flows, which exclude the foundations. Foundation financial statement information is presented separately on pages 16 and 17 of the State University’s financial statements. Financial Highlights At June 30, 2004 and 2003, total assets reported by the State University were $8.65 billion and T H E S TAT E U N I V E R S I T Y O F N E W YO R K $8.141 billion and total liabilities were $7.217 billion and $6.987 billion, respectively. Net assets, which total $1.433 billion and $1.154 billion at June 30, 2004 and 2003, experienced an increase of $278.9 million and $66.6 million, respectively, over the previous year. The net assets at June 30, 2004, 2003, and 2002 are summarized in the following categories (in thousands): 2004 $ 185,807 181,913 560,814 504,357 Net Assets (in thousands): Invested in capital assets, net of related debt Restricted - nonexpendable Restricted - expendable Unrestricted Total net assets 90,730 166,394 557,616 272,678 $ 1,432,891 1,153,983 1,087,418 The change in net assets during 2004 and 2003 was driven by operating and other supporting revenues over expenses and losses. Revenues, expenses, and the change in net assets for the 2004, 2003, and 2002 fiscal years are summarized as follows (in thousands): 2004 58,765 280,850 $ 4,179,134 3,443,110 3,447,958 2,277,183 2,214,401 2,243,774 33,395 6,515,082 5,799,663 5,725,127 5,955,324 5,504,430 5,127,515 306,023 6,236,174 5,733,098 5,433,538 291,589 Operating revenues Nonoperating revenues Other revenues Total revenues Operating expenses Nonoperating expenses Total expenses Increase in net assets $ 278,908 Total revenues reported in 2004, 2003, and 2002 were $6.515 billion, $5.8 billion, and $5.725 billion, respectively. Total revenue in 2004 and 2003 grew $715 million and $75 million, respectively, compared to the prior year. Revenue growth in 2004 compared to 2003 was driven by increases in hospital and clinics revenue of $370 million, grants and contracts of $160 million (including $87 million for sponsored research activities), net tuition and fees of $166 million, investment income and net realized and unrealized gains of $82 million, and an increase in sales and services activity of auxiliary enterprises of $38 million. 2 2002 2003 239,581 172,970 546,110 195,322 2002 2003 142,152 228,668 66,565 Management’s Discussion and Analysis These increases were offset by decreases in capital gifts and grants of $101 million and state appropriation revenue of $18 million. Total expenses for 2004, 2003, and 2002 were $6.236 billion, $5.733 billion, and $5.433 billion, respectively. State University expense growth in 2004 and 2003 was $503 million and $300 million, respectively. Expense growth in 2004 and 2003 was primarily the result of increases in hospital and clinic activity of $122 million and $116 million, and expenses for operation and maintenance of plant of $59 million and $42 million, research of $46 million and $50 million, and instruction of $41 million and $48 million, respectively. Increases in expenses were also experienced by auxiliary enterprises of $55 million and $29 million, and for institutional support of $56 million and $34 million for the fiscal years ended June 30, 2004 and 2003, respectively. Overview of the Financial Statements The financial statements of the State University have been prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the GASB. The financial statement presentation consists of balance sheets, statements of revenues, expenses, and changes in net assets, statements of cash flows, and accompanying notes for the June 30, 2004 and 2003 fiscal years. These statements provide information on the financial position of the State University and the financial activity and results of its operations during the years presented. A description of these statements follows: The Balance Sheets present information on all of the State University’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the State University is improving or deteriorating. The Statements of Revenues, Expenses, and Changes in Net Assets present information showing the change in the State University’s net assets during each fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses reported in this statement include items that will result in cash received or disbursed in future fiscal periods (e.g., 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT the receipt of amounts due from students and others for services rendered, or the payment accrued for compensated absences). The Statements of Cash Flows provide information on the major sources and uses of cash during the year. The cash flow statements portray net cash provided or used from operating, investing, capital, and noncapital financing activities. Foundations The foundations meet the criteria under GASB accounting and financial reporting requirements for inclusion in the State University reporting entity using discrete presentation. For financial statement presentation purposes, the combined totals of the foundations are not included in the reported amounts of the State University but are discretely presented on separate pages in the State University’s financial statements in accordance with display requirements prescribed by the Financial Accounting Standards Board (the “FASB”) for not-for-profit organizations. Information on the foundations is contained in the footnotes to the financial statements under the Summary of Significant Accounting Policies and Basis of Presentation and Foundations, footnote nos. 1 and 14, respectively. Balance Sheets The balance sheets present the financial position of the State University at the end of its 2004 and 2003 fiscal years. During the 2004 and 2003 fiscal years, the State University’s total assets increased over the prior years by $509 million and $518 million, while total liabilities increased $230 million and $451 million, respectively. The table below reflects the financial position at June 30, 2004, 2003, and 2002 (in thousands): 2004 Current assets Capital assets, net Other noncurrent assets Total assets $ 2,142,559 1,866,646 1,809,329 4,132,780 3,892,744 3,551,118 2,374,610 2,381,484 2,262,908 8,649,949 8,140,874 7,623,355 1,441,113 1,294,136 1,208,762 5,775,945 5,692,755 5,327,175 Current liabilities Noncurrent liabilities 7,217,058 6,986,891 6,535,937 Total liabilities Net assets $ 1,432,891 1,153,983 1,087,418 2003 2002 3 Current Assets Management’s Discussion and Analysis Current assets at June 30, 2004 grew $276 million and current liabilities increased $147 million compared to the previous year. In general, current assets are those assets that are available to satisfy current liabilities (i.e., those that will be paid within one year). Current assets at June 30, 2004 and 2003 consist primarily of cash and cash equivalents of $746 million and $682 million, short-term investments of $240 million and $180 million, and receivables (accounts, interest, appropriations, and grants) of $1.119 billion and $965 million, respectively. During 2004, cash and cash equivalents increased $64 million, primarily due to an increase in cash at the State University’s Health Science Centers (the “HSCs”). Short-term investments increased $61 million, mainly due to an increase of $35 million in unexpended sponsored awards for nanotechnology, as well as a $14.4 million transfer from long-term investments. The current portion of net accounts, notes, and loans receivable at June 30, 2004 compared to 2003 increased $161 million, driven primarily by an increase in patient accounts receivable of $138 million for amounts earned and recognized under the Medicaid disproportionate share (the “DSH Program”). Payments under the DSH Program are contingent upon federal approval of the State Medicaid plan. Federal approval of the State Medicaid plan covering the last six months of the State University’s 2003 fiscal year was not received until December 2003. As a result, in the 2003 fiscal year a receivable for the DSH Program was not recorded. These increases were offset by decreases in appropriations receivable of $31 million, primarily due to a decrease in the accrual for payroll and related fringe benefits funded by State appropriations. Current Liabilities Current liabilities at June 30, 2004 and 2003 consist principally of accounts payable and accrued expenses of $429 million and $423 million, interest on debt of $279 million and $281 million, deferred revenue of $235 million and $174 million, and the current portion of long-term liabilities of $431 T H E S TAT E U N I V E R S I T Y O F N E W YO R K million and $358 million, respectively. Increases in current liabilities at June 30, 2004 were the result of an increase of $61 million in deferred revenue pertaining primarily to research grants and tuition and fee amounts received and not yet earned, and increases in the current portion of long-term liabilities of $73 million. Capital Assets, net The 2004 fiscal year represents the sixth year under the State’s 1998-99 multi-year capital plan. Funding levels and bonding authority supporting the State University capital plan were provided to facilitate a multi-year planning and construction effort to modernize and rehabilitate facilities of the State University. Under this capital plan, $1.7 billion was earmarked for educational facilities and $250 million for residence halls. During the 2004 and 2003 fiscal years, capital assets, net of depreciation, increased $240 million and $342 million, respectively, compared to the previous year. The majority of the increase occurred at the State University campuses due to new building construction and improvements and rehabilitation totaling $441 million and $276 million for the 2004 and 2003 fiscal years, respectively, primarily the result of building costs capitalized during each year. Equipment additions during 2004 and 2003 of $162 million and $169 million, respectively, also contributed to the increase. Significant projects completed and capitalized during the 2004 fiscal year included student living facilities - the Mountainview Complex - at Binghamton University, a residential facility and student union at the College at Old Westbury, rehabilitation of a human ecology building at the College at Oneonta, construction of a library and community center at Utica-Rome Institute of Technology, and a renovation of Johnson Hall residential facility at the College at Oswego. A summary of capital assets, by major classification, and related accumulated depreciation for the 2004, 2003, and 2002 fiscal years is as follows (in thousands): 4 and artwork Construction in progress Total capital assets Capital assets, net Management’s Discussion and Analysis 2002 2003 2004 194,490 208,417 $ 223,881 420,842 434,321 447,683 Land Infrastructure and land improvements Buildings 4,834,908 4,459,624 4,229,006 Equipment, library books, 814,531 700,957 1,728,078 1,679,925 1,545,601 710,739 7,935,507 7,596,818 7,100,678 269,654 278,830 289,295 Less accumulated depreciation: Infrastructure and land improvements Buildings 2,340,003 2,257,454 2,167,863 Equipment and library books 1,173,429 1,167,790 1,112,043 Total accumulated depreciation 3,802,727 3,704,074 3,549,560 $ 4,132,780 3,892,744 3,551,118 Other Noncurrent Assets Other noncurrent assets exclusive of capital assets were $2.37 billion, $2.38 billion, and $2.26 billion at June 30, 2004, 2003, and 2002 respectively. Noncurrent assets at June 30, 2004 and 2003 include deposits with trustees of $980 million and $1.288 billion, long-term investments of $912 million and $816 million, restricted cash of $184 million and $14 million, and the noncurrent portion of receivables and deferred financing costs of $298 million and $264 million, respectively. During fiscal year 2004, deposits with trustees decreased $308 million, which generally represent funds available from the issuance of bonds by the Dormitory Authority of the State of New York (the “DASNY”) used to finance capital projects and establish debt service reserves for educational and residence hall facilities of the State University. Long-term investments at June 30, 2004 and 2003 of $912 million and $816 million represent endowment and similar funds held in separate and distinct investment pools of the State University campuses of $327 million and $285 million, and the Cornell statutory colleges of $400 million and $351 million, respectively, and separately invested funds of $27 million in both years. Long-term investments of the Research Foundation totaled $135 million and $133 million, which includes $43.4 million and $38 million in investments designated for its post-retirement benefit plan at 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT June 30, 2004 and 2003, respectively. Other longterm investments include investments of the statutory College of Ceramics at Alfred University of $13 million and $11 million, and the auxiliary service corporations of $10 million and $9 million at June 30, 2004 and 2003, respectively. During 2004, long-term investments increased by a total of $96 million, or 12 percent, due primarily to net realized and unrealized investment gains of $97 million. Investment gains and reinvested investment income, donations, and other additions were offset by amounts used to meet spending needs. Restricted cash and cash equivalents at June 30, 2004 increased $170 million compared to 2003. Of this amount, $89.5 million represents amounts received from bond proceeds for certain equipment purchases originally financed by the State University from operating funds. In October 2004, pursuant to requirements of the 2005 fiscal year budget of the State of New York, these funds were transferred to the State where, combined with other state appropriations, preserves the State’s support of the State University for the 2005 fiscal year. In addition, during the year the State University entered into various capital financing arrangements. The unspent cash on those arrangements at June 30, 2004 of $80 million was also classified as restricted cash. The noncurrent portion of receivables at June 30, 2004 and 2003 consisted of accounts, notes, and loan receivables of $106 million and $107 million, appropriations receivable of $122 million and $81 million, and contributions receivable of $7 million and $10 million, respectively. The increase in state appropriations receivable of $41 million in the 2004 fiscal year is due largely to expected unfavorable medical malpractice judgments against the State University hospitals funded by state appropriations, when settled. Noncurrent Liabilities Noncurrent liabilities at June 30, 2004 and 2003 of $5.776 billion and $5.693 billion, respectively, is largely comprised of debt on State University facilities, other long-term liabilities accrued for compensated absences and post-retirement benefits, and litigation, as well as an outstanding loan from the State’s short-term investment pool (STIP). The State University capital funding levels and bonding authority are subject to operating and capital 5 Educational facilities Residence hall facilities Compensated absences Loan - State STIP pool Other obligations Management’s Discussion and Analysis appropriations of the State. Funding for capital construction and rehabilitation of educational and residence hall facilities of the State University is provided principally through the issuance of bonds by DASNY. The debt service for the educational facilities is paid by, or provided through a direct appropriation of, the State. The debt service on residence hall bonds is funded primarily from room rents. A summary of the long-term liabilities at June 30, 2004, 2003, and 2002 is as follows (in thousands): 2002 2003 2004 $ 4,133,882 4,243,453 4,083,806 570,425 539,675 405,660 438,870 401,559 487,539 148,437 272,233 171,983 139,703 183,796 105,682 Total long-term liabilities $ 5,612,516 5,533,684 5,180,503 In March 2004, DASNY Personal Income Tax Revenue Bonds (“PIT”) were issued for the purpose of financing capital construction and major rehabilitation for educational facilities in the amount of $29.1 million. Also in March, PIT bonds were issued for the purpose of funding capital projects, including the acquisition of equipment, principally for scientific research and economic development projects for use by the State University totaling $15.1 million. Debt service payments for these bonds are supported directly by the State, and the State University and the Construction Fund receive no appropriation authority for debt service on these bonds. In December 2003, the State University entered into agreements with DASNY to issue obligations totaling $264.8 million in order to refinance $274.6 million of the State University’s existing residence hall obligations. Although the refinancing resulted in an accounting loss of $17.9 million, the State University reduced its future aggregate debt service payments by $67.7 million through lower interest costs, resulting in an economic gain of $16.1 million. The State University also entered into agreements with DASNY in December 2003 to issue obligations totaling $59.9 million for the construction and rehabilitation of residential facilities. Funding for capital construction and rehabilitation of residence halls is provided from the issuance of bonds T H E S TAT E U N I V E R S I T Y O F N E W YO R K by DASNY and from reserve funds accumulated by campuses from residence halls operating revenues. Capital disbursements made during the 2004 and 2003 fiscal years for equipment and educational and residence hall facilities using the available funds on deposit with trustees were $407 million and $311 million, respectively. Interest earnings on these funds during the 2004 and 2003 fiscal years were approximately $14.9 million and $28.8 million, respectively. The State University has entered into contracts for the construction and improvement of various projects. At March 31, 2004 and 2003, these outstanding contract commitments totaled approximately $284 million and $293 million, respectively. During fiscal year 2004, the State University’s credit ratings for educational bonds were upgraded by Moody’s (from A3 to A1) and Standard & Poor’s (from AA- to AA) compared to the previous year. The State University’s credit ratings for residence hall bonds during 2004 and 2003 were unchanged from the previous year, and the credit ratings for educational bonds were unchanged in 2003 from 2002. The credit ratings at June 30, 2004 are as follows: Educational Residence Facilities Moody’s Investors Service A1 Standard & Poor’s AA Fitch IBCA AADebt service principal payments on educational and residence hall facilities obligations made during 2004 and 2003 totaled $125.5 million and $20.5 million, and $126.4 million and $20.9 million, respectively. During fiscal years 2004 and 2003, the long-term portion of compensated absence liabilities (vacation and sick) and post-retirement benefit obligations increased $48.7 million and $37.3 million, respectively. The majority of the compensated absence liability balance at June 30, 2004 and 2003 of $355 million and $327 million relates to accrued sick leave that is available and estimated to be converted into post-retirement health benefits for eligible employees who retire from the State University. The percentage of sick leave credits that is estimated to be used to cover these costs upon retirement increased during both the 2004 and 2003 fiscal years, contributing to the overall increase in the recorded liability. 6 Halls A1 AAA+ Revenues (in thousands): Nonoperating and other revenues Total revenues Management’s Discussion and Analysis In prior years, the State University experienced operating cash-flow deficits precipitated by cashflow difficulties experienced by its three hospitals. As a result, the State University borrowed funds with interest from the short-term investment pool of the State. The amount outstanding under this borrowing at June 30, 2004 and 2003 was $163.4 million and $186.7 million, respectively. During the 2004 fiscal year the State provided $10.5 million in funds, and the hospitals repaid $14.7 million on these loans in both 2004 and 2003. Refundable government loan funds at June 30, 2004, 2003, and 2002 totaled $133.8 million, $132.1 million, and $129 million, respectively. These revolving loan funds are principally those of the federal Perkins and Nursing loan programs established with an initial and continued federal capital contribution. Repayments of principal and interest and new contributions are deposited into a revolving loan fund for continual disbursement to students. Statements of Revenues, Expenses, and Changes in Net Assets The statements of revenues, expenses, and changes in net assets presents the State University’s results of operations. Total operating revenues of the State University for 2004, 2003, and 2002 were $4.179 billion, $3.443 billion, and $3.448 billion, respectively. Nonoperating and other revenues including State appropriations totaled $2.336 billion, $2.357 billion, and $2.277 billion for fiscal years 2004, 2003, and 2002, respectively. Total expenses for 2004, 2003, and 2002 were $6.236 billion, $5.733 billion, and $5.433 billion, respectively. Revenue Overview 2002 2003 2004 652,824 615,446 $ 819,256 1,373,510 1,003,838 1,156,335 820,225 755,549 699,336 Tuition and fees, net Hospitals and clinics Federal grants and contracts State, local, and private grants and contracts, and other sources Auxiliary enterprises Operating revenues State appropriations Other nonoperating 633,185 536,115 511,382 532,958 494,784 465,459 4,179,134 3,443,110 3,447,958 2,061,188 2,079,164 2,096,748 274,760 277,389 180,421 2,335,948 2,356,553 2,277,169 $ 6,515,082 5,799,663 5,725,127 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT Tuition and Fees Tuition and fee revenue for the 2004 and 2003 fiscal years, net of scholarship allowances, was $819 million and $653 million, an increase of $166 million and $37 million, respectively, compared to the previous year. The growth in 2004 was largely due to an increase in tuition rates. The annual undergraduate tuition for State residents was raised to $4,350 from $3,400 beginning in the fall of 2003. Tuition rates for out-of-state students and other professional degrees were also increased. 2004 Revenues (in thousands) Other Nonoperating $274,760 Auxiliary Enterprises $532,958 State, Local, Private Grants, Contracts and Other Sources $633,185 Federal Grants and Contracts $820,225 For the year ended June 30, 2004, enrollment increased for the seventh consecutive year. Total undergraduate and graduate headcount for the fall 2003, 2002, and 2001 were 205,396, 204,420, and 199,270, respectively. Annual average full-time equivalent students, including undergraduate and graduate, were 173,501, 171,730, and 167,840 in the fiscal years ended June 30, 2004, 2003, and 2002, respectively. Hospitals The State University has three hospitals (each with academic medical centers) under its jurisdiction - the State University hospitals at Brooklyn, Stony Brook, and Syracuse. During the 2004 fiscal year, hospital and clinic revenue increased $370 million compared to the previous year. A supplement to the patient service revenue stream of the hospitals comes from the Medicaid DSH Program. The DSH Program is designed to help support “safety net” hospitals that serve large numbers of Medicaid and uninsured State Appropriations $2,061,188 Tuition and Fees $819,256 Hospitals and Clinics $1,373,510 7 Management’s Discussion and Analysis patients. As noted above, federal approval of the State Medicaid plan covering the last six months of the State University’s 2003 fiscal year had not been received. Subsequently, the plan was approved and revenue under the DSH program was recognized in 2004. In the current year, the State University recorded revenue of $379 million under the DSH Program compared to $64 million in 2003, and $278 million in 2002. Sponsored Research, Grant and Contract Revenue During the 2004 and 2003 fiscal years, the State University continued to increase its volume of sponsored program activity. Total revenue from federal, state, local and private grants and contracts administered by the Research Foundation was $723 million, $634 million, and $570 million, respectively for the fiscal years ended June 30, 2004, 2003, and 2002. Facilities and administrative recoveries earned on grants and contracts administered by the Research Foundation were $123 million, $109 million, and $97 million for the fiscal periods ending June 30, 2004, 2003, and 2002, respectively. The volume of research and other sponsored programs reported for 2004 and 2003 by the statutory colleges at Cornell University was $130.9 million and $131.3 million, and Alfred University was $3.8 million and $5.6 million, respectively. Revenue from projects sponsored by the federal government and administered by the Research Foundation totaled $361 million and $334 million during 2004 and 2003, respectively. Of these federally-sponsored projects, 55 percent of the funding was received from the Public Health Service in both years. Other major federal sponsors include the National Science Foundation, and the Departments of Education, Defense and Energy, and the Agency for International Development. Revenue from non-federal sponsors (including federal flow-through funds) administered by the Research Foundation totaled $362 million, $300 million, and $269 million for the 2004, 2003, and 2002 fiscal years, respectively. In fiscal years 2004 and 2003, the largest non-federal support of sponsored research programs was received from the State’s Office of Children and Family Services. T H E S TAT E U N I V E R S I T Y O F N E W YO R K Amounts received under the State’s Tuition Assistance Program in 2004 increased $41 million over the previous fiscal year due primarily to the State University tuition rate increase that took affect in the fall of 2003. Federal grants under the Pell and other federal student aid programs remained consistent with the previous year. Auxiliary Enterprises The State University’s auxiliary enterprise activity is comprised of sales and services for residence halls, food service, campus store operations, intercollegiate athletics, student health services, parking, and other activities. The residence halls are owned, operated, and managed by the State University and its campuses. Generally, dining services, bookstore operations, and other services are operated and managed by separately incorporated not-for-profit organizations, commonly referred to as auxiliary services corporations. The residence hall operations and capital programs are financially self-sufficient. Each campus is responsible for the operation of its residence halls program including setting room rates and covering operating, maintenance, capital and debt service costs. Any excess funds generated by residence halls operating activities are separately maintained for improvements and necessary maintenance of the residence halls. Occupancy at the residence halls has risen steadily to 64,842, an increase of over 8,400 students since the fall of 1998, and an increase of over 3,700 students compared to the previous year. Utilization rates for the fall of 2003 were reported at 95.5 percent. Auxiliary enterprise sales and services revenue totaled $533 million, $495 million, and $465 million in the 2004, 2003, and 2002 fiscal years, respectively. Of these amounts, residence halls operating revenue totaled $232 million, $210 million, and $200 million for 2004, 2003, and 2002, respectively. Increases in revenue were largely due to increases in occupancy levels and modest increases in room rates. Food service operations generated $147 million, $135 million, and $128 million in revenue in fiscal years 2004, 2003, and 2002, respectively. In addition to residence halls and food service activities, 8 Scholarships and Fellowships $99,441 Depreciation $268,546 Auxiliary Enterprises $552,947 Research $569,276 Hospitals and Clinics $1,306,232 Management’s Discussion and Analysis other auxiliary revenues totaled $154 million, $151 million, and $137 million for fiscal years 2004, 2003, and 2002, respectively. State Appropriations The State University’s single largest source of revenue is State appropriations, which for financial reporting purposes is classified as nonoperating revenue. State appropriations totaled $2.061 billion and $2.079 billion, and represented approximately 32 percent and 36 percent of total revenues in the 2004 and 2003 fiscal years. During both 2004 and 2003, State support (both direct support for operations and indirect support for debt service and fringe benefits) for State University campus operations, statutory colleges, and hospitals and clinics decreased by $18 million. In 2004, State support for operating expenses decreased $140 million, while indirect State support for debt service, fringe benefits, and litigation accruals increased $122 million compared to 2003. Nonoperating and Other Revenue Nonoperating and other revenue excluding State appropriations were $275 million and $277 million for the 2004 and 2003 fiscal years, respectively. Capital gifts in the 2004 fiscal year declined $101 million mainly from two large one-time gifts received in the prior year totaling $106 million. This decrease was offset principally by an increase in net realized and unrealized investment gains and income of $82 million, and capital appropriations of $16 million. Expense Overview 2004 Expenses (in thousands) Other Nonoperating $280,850 Instruction $1,415,189 Support Services $1,506,576 Public Service $237,117 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT Expenses (in thousands): 2004 280,850 Total expenses Instruction $ 1,415,189 1,374,314 1,326,065 Research 569,276 523,261 473,279 Public service 237,117 239,740 231,044 Support services 1,506,576 1,356,380 1,260,458 Scholarships and fellowships 99,441 100,023 87,461 Hospitals and clinics 1,306,232 1,184,617 1,068,866 Auxiliary enterprises 552,947 497,478 468,312 Depreciation and amortization 268,546 228,617 212,030 Other nonoperating 228,668 306,023 $ 6,236,174 5,733,098 5,433,538 The increase in instruction expense during 2004 and 2003 of $41 million and $48 million, respectively, is attributable to growth in personal service and related fringe benefit expenses. Research expense increased by $46 million and $50 million during 2004 and 2003, respectively. This growth was predominately from increased sponsored research activity at the Research Foundation. Cornell statutory colleges also reported increases in research expense activity in both years. Support services, which include expenses for academic support, student services, institutional support, and maintenance and operation of plant, increased $150 million and $96 million during 2004 and 2003, respectively. Institutional support increased $56 million and $34 million in the 2004 and 2003 fiscal years, respectively, due to an increase in general administrative and fringe benefit costs. Operation and maintenance of plant increased $59 million and $42 million in the 2004 and 2003 fiscal years, respectively, primarily due to increases in capital expenses and utility costs. In the State University’s financial statements, scholarships used to satisfy student tuition and fees (residence hall, food service, etc.) are reported as an allowance (offset) to the respective revenue classification up to the amount of the student charges. The amount reported as expense represents amounts provided to the student in excess of State University charges. 2002 2003 9 Management’s Discussion and Analysis Total scholarships and fellowships, including federal and state grant programs were $482 million and $421 million for the fiscal years ended June 30, 2004 and 2003, respectively. Of this amount, $382 million and $321 million were classified as scholarship allowances for fiscal years 2004 and 2003, respectively, and $100 million was reported as expense in both years. Major scholarships and grants received include the State Tuition Assistance Program of $169.9 million and $123.5 million, and $143 million and $142 million from the federal Pell program during fiscal years 2004 and 2003, respectively. Expenses at the State University’s hospitals and clinics increased $122 million and $116 million during 2004 and 2003, respectively, largely due to an increase in core operating and personal service costs. Also contributing to the growth in expenses in 2004 and 2003 was an increase in fringe benefit costs of $29 million and $27 million, respectively. During fiscal years 2004 and 2003, auxiliary enterprise expenses increased $55 million and $29 million, respectively, principally due to increased enrollment and occupancy. For the 2004 and 2003 fiscal years, residence halls expenses increased $36 million and $16 million, and food service expenses increased $11 million and $4 million, respectively. Other auxiliary enterprise expenses for the years ended June 30, 2004 and 2003 were $179 million and $171 million, respectively. Depreciation and amortization expense recognized in fiscal years 2004 and 2003 totaled $269 million and $229 million, respectively. Other nonoperating expenses were $281 million and $229 million for the years ended June 30, 2004 and 2003, respectively. The increase in 2004 is primarily driven by interest expense on capital debt of $268 million which grew $50 million compared to 2003. Economic Factors That Will Affect the Future The demand for a quality education at an affordable price at the State University is expected to remain strong in the upcoming years. Full-time equivalent enrollment, excluding community colleges, for the fiscal year ended June 30, 2004 is T H E S TAT E U N I V E R S I T Y O F N E W YO R K approximately 173,500. The State University’s student population is directly influenced by State demographics as the majority of students attending the State University are New York residents. The enrollment outlook remains strong for the State University based on its continued ability to attract quality students coupled with a larger expected number of high school graduates in New York State over the next several years. The State University’s continued operational viability is substantially dependent upon the level of ongoing State support. For the most recent fiscal year, State appropriations represented 32 percent of the total revenues of the State University. Although the State’s economy finally began to grow after more than two years of decline, the State is expected to continue to face financial pressure that may affect the level of State support available to the State University. Continued emphasis will be placed on University-wide efforts to control operating costs and enhance other revenue streams, including philanthropy, sponsored programs, and auxiliary revenues. Debt service on educational facilities is paid by the State in an amount sufficient to cover annual debt service requirements. Under the 2004-05 State budget, the State University is expected to receive new multi-year capital funding authorizations totaling nearly $1.8 billion, including $1.63 billion in new State funding, with $150 million supported by campus-generated funds. This program is intended to cover the five-year period through fiscal year 2008-09, with a majority of the funding designed to support critical maintenance projects to repair, renovate, or rehabilitate existing State University facilities. The State University hospitals at Brooklyn, Stony Brook, and Syracuse serve large numbers of Medicaid and uninsured patients and, as a result, their dependency on the Medicaid DSH Program revenue stream is critical to their continued viability. Their financial and operational capabilities will also continue to be challenged by industry deregulation and managed care. 10 October 15, 2004 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. Independent Auditors’ Report KPMG LLP 515 Broadway Albany, NY 12207 The Board of Trustees State University of New York We have audited the accompanying financial statements of The State University of New York (“the University”) and its aggregate discretely presented component units as of and for the year ended June 30, 2004, and the accompanying financial statements of the University as of and for the year ended June 30, 2003. These financial statements are the responsibility of the University's management. Our responsibility is to express opinions on these financial statements based on our audits. We did not audit the financial statements of The Research Foundation of State University of New York, nor the State University Construction Fund, which statements reflect assets constituting 6% and 5% in 2004 and 2003, respectively, and revenues constituting 17% in 2004 and 2003 of the related totals of the University. Additionally, we did not audit the financial statements of certain entities presented as discretely presented component units, which statements reflect assets constituting 50% and revenues constituting 52% of the related aggregate discretely presented component unit totals in 2004. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinions, insofar as they relate to the amounts included for The Research Foundation of State University of New York and the State University Construction Fund, and certain entities presented as aggregate discretely presented component units, are based solely on the reports of the other auditors. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinions. As discussed in Note 1, the University is included in the primary government reporting entity of the State of New York as an enterprise fund. The accompanying financial statements represent only the financial statements of the University and do not purport to, and do not, present fairly the financial statements of the State of New York in conformity with accounting principles generally accepted in the United States of America. In our opinion, based on our audits and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the University and its aggregate discretely presented component units as of June 30, 2004, and the related changes in financial position and cash flows thereof, where applicable, for the year then ended, and the financial position of the University as of June 30, 2003, and the related changes in its financial position and cash flows thereof for the year then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, the University adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 39, Determining Whether Certain Organizations are Component Units – an amendment of GASB Statement No. 14, as of July 1, 2003. The Management’s Discussion and Analysis (MD&A) on pages 2 through 10 is not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT 11 Total noncurrent assets Total assets Total liabilities Total net assets Balance Sheets June 30, 2004 and 2003 In thousands Assets Current Assets: Cash and cash equivalents $ 746,460 682,558 Short-term investments 240,322 179,738 Accounts, notes, and loans receivable, net 509,523 348,739 Interest receivable 4,162 9,241 Appropriations receivable 422,300 453,393 Grants receivable 183,412 153,561 Inventories 29,624 30,874 Other assets 8,542 Total current assets 1,866,646 Noncurrent Assets: Restricted cash and cash equivalents Deposits with trustees Accounts, notes, and loans receivable, net Contributions receivable Appropriations receivable Deferred financing costs Long-term investments Capital assets, net Liabilities and Net Assets Current Liabilities: Accounts payable and accrued liabilities Interest payable Student deposits Deposits held in custody for others Deferred revenue Long-term liabilities-current portion Other liabilities Total current liabilities Noncurrent Liabilities: Long-term liabilities Refundable government loan funds Other liabilities Total noncurrent liabilities Net Assets: Invested in capital assets, net of related debt Restricted - nonexpendable: Scholarships and fellowships Instruction and departmental research General operations and other Restricted - expendable: Instruction and departmental research 293,067 259,284 Scholarships and fellowships 62,762 61,110 Capital projects 42,016 85,656 Loans 20,728 19,854 General operations and other 120,206 Unrestricted 504,357 195,322 Total liabilities and net assets See accompanying notes to financial statements. T H E S TAT E U N I V E R S I T Y O F N E W YO R K 12 2003 2004 6,756 2,142,559 13,511 1,288,128 106,554 9,844 81,458 65,791 816,198 3,892,744 6,274,228 8,140,874 184,053 980,441 106,080 7,055 122,353 62,884 911,744 4,132,780 6,507,390 $ 8,649,949 423,188 280,926 11,954 21,070 173,997 357,528 25,473 1,294,136 428,975 279,004 11,587 27,922 235,374 431,080 27,171 1,441,113 5,533,684 132,060 27,011 5,692,755 6,986,891 5,612,516 133,839 29,590 5,775,945 7,217,058 239,581 185,807 40,389 68,890 63,691 48,877 76,421 56,615 142,241 1,153,983 1,432,891 8,140,874 $ 8,649,949 Statements of Revenues, Expenses, and Changes in Net Assets 2003 897,479 (244,655) 652,824 755,549 223,725 18,460 207,937 1,003,838 41,259 209,643 134,603 150,538 44,734 3,443,110 239,740 268,043 178,444 502,287 388,694 100,023 1,184,617 228,617 18,912 5,504,430 (2,061,320) 1,933,518 145,646 18,769 64,772 (217,998) (7,456) 2,215 1,985,733 (75,587) 21,598 116,049 4,505 66,565 1,087,418 1,153,983 For the Years Ended June 30, 2004 and 2003 In thousands 2004 Operating revenues: Tuition and fees Less scholarship allowances Net tuition and fees Federal grants and contracts $ 1,122,946 (303,690) 819,256 820,225 318,437 19,144 207,784 State grants and contracts Local grants and contracts Private grants and contracts Sales and services: University hospitals and clinics 1,373,510 41,224 Educational activities Sales and services of auxiliary enterprises: Residence halls, net Food service, net Other, net Other sources Total operating revenues 231,641 147,206 154,111 46,596 4,179,134 Operating expenses: Instruction 1,415,189 1,374,314 Research 569,276 523,261 Public service Academic support Student services Institutional support Operation and maintenance of plant Scholarships and fellowships Hospitals and clinics 237,117 297,578 187,353 557,965 447,592 99,441 1,306,232 Auxiliary enterprises: Residence halls 225,346 188,904 Food service 148,173 137,191 Other 179,428 171,383 Depreciation and amortization expense Other operating expenses Total operating expenses 268,546 16,088 5,955,324 (1,776,190) Operating loss Nonoperating revenues (expenses): State appropriations: University operations Hospitals and clinics Federal appropriations 1,895,720 165,468 17,048 46,939 97,081 Investment income, net of investment fees Net realized and unrealized gains (losses) (3,214) Gifts 52,831 49,481 Interest expense on capital related debt Loss on disposal of plant assets Other nonoperating revenues, net Net nonoperating revenues (268,432) (12,418) 2,096 1,996,333 220,143 Income (loss) before other revenues and gains Capital appropriations Capital gifts and grants Additions to permanent endowments 37,301 15,145 6,319 Increase in net assets 278,908 Net assets at the beginning of year Net assets at the end of year 1,153,983 $ 1,432,891 See accompanying notes to financial statements. 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT 13 Statements of Cash Flows For the Years Ended June 30, 2004 and 2003 In thousands Cash flows from operating activities: Tuition and fees Grants and contracts: Federal 847,932 767,588 State and local 315,980 355,930 Private 220,503 209,289 Hospital and clinics 1,178,999 Personal service payments Other than personal service payments Payments for fringe benefits Payments for scholarships and fellowships Loans issued to students Collection of loans to students Auxiliary enterprise charges: Residence halls Food service Other (intercollegiate athletics, bookstore, fees, and vending) Sales and service of educational activities Other receipts Net cash used by operating activities Cash flows from noncapital financing activities: State appropriations: Operations 1,033,148 1,154,200 Debt service 358,404 12,157 53,399 235,300 Federal appropriations Private gifts and grants Proceeds from short-term loans Repayment of short-term loans Direct loan receipts Direct loan disbursements Other receipts Net cash provided by noncapital financing activities Cash flows from capital and related financing activities: Proceeds from capital debt Capital appropriations Capital grants and gifts received Proceeds from sale of capital assets Purchases of capital assets Payments to contractors Principal paid on capital debt and leases Interest paid on capital debt and leases Other payments Deposits with trustees Net cash used by capital and related financing activities Cash flows from investing activities: Proceeds from sales and maturities of investments Interest, dividends, and realized gains on investments Purchases of investments Net cash provided (used) by investing activities Net change in cash Cash and cash equivalents - beginning of year Cash and cash equivalents - end of year T H E S TAT E U N I V E R S I T Y O F N E W YO R K 2004 $ 821,198 1,223,762 (2,729,487) (1,956,818) (259,558) (50,858) (34,190) 29,637 234,851 153,229 139,249 37,269 13,783 (953,568) (214,942) 279,739 (279,739) 7,625 1,485,091 250,099 31,288 18,446 - (81,991) (367,089) (187,589) (282,869) (5,093) 328,476 (296,322) 4,014,448 78,193 (4,093,398) (757) 234,444 696,069 $ 930,513 14 2003 662,366 (2,638,271) (1,704,052) (217,033) (60,654) (31,277) 28,935 211,447 132,209 148,379 43,725 19,761 (932,609) 278,062 29,452 51,228 88,726 (82,478) 248,240 (248,240) 8,640 1,527,830 477,133 34,199 13,367 125 (88,303) (353,144) (182,517) (230,510) (24,520) (110,570) (464,740) 4,162,989 42,349 (4,191,430) 13,908 144,389 551,680 696,069 (continued) Statements of Cash Flows (continued) For the Years Ended June 30, 2004 and 2003 In thousands Reconciliation of net operating loss to net cash used by operating activities: Operating loss Adjustments to reconcile operating loss to net cash used by operating activities: Depreciation and amortization expense Bad debt expense (recovery) Fringe benefits provided by State Litigation costs provided by State Change in assets and liabilities: Receivables, net (182,171) 142,135 Inventories 1,251 3,013 Other assets (2,652) Accounts payable, accrued expenses, and other liabilities Deferred revenue Student deposits Deposits held for others Net cash used by operating activities Supplemental disclosures for noncash transactions: New capital leases / debt agreements Fringe benefits provided by the State Litigation costs provided by the State Noncash gifts See accompanying notes to financial statements. 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT 2004 $ (1,776,190) 268,546 (1,000) 665,651 57,592 4,695 (62,879) 62,641 981 7,315 $ (953,568) 15,145 $ 157,537 $ 665,651 $ 57,592 $ 2003 (2,061,320) 228,617 2,000 583,708 59,097 65,037 45,652 975 1,129 (932,609) 32,941 583,708 59,097 111,950 15 State University Foundations Balance Sheet June 30, 2004 (with comparative amounts at June 30, 2003) In thousands Assets Cash and cash equivalents $ 41,586 40,324 Accounts and notes receivable, net 16,431 10,080 Pledges receivable, net 31,143 35,543 Investments 635,757 524,144 Other assets 27,770 19,896 Capital assets, net 231,127 Total assets Liabilities and Net Assets Liabilities: Accounts payable and accrued expenses Current portion of long-term debt Deferred revenue Deposits held for others Other liabilities Long-term debt Total liabilities Net Assets: Unrestricted: Board designated for: Fixed assets Campus programs 44,342 35,069 63,584 47,065 Investments 50,385 47,174 Other 8,111 8,006 Undesignated 40,241 17,382 Temporarily restricted: Scholarships and fellowships 45,227 37,852 Campus programs 84,919 74,849 Research 37,120 34,171 General operations and other 17,976 Permanently restricted: Scholarships and fellowships 140,594 125,382 Campus programs 64,345 59,468 Research 44,176 41,392 General operations and other 34,617 Total net assets Total liabilities and net assets See accompanying notes to financial statements. T H E S TAT E U N I V E R S I T Y O F N E W YO R K 2004 983,814 14,916 5,152 1,438 45,382 25,723 203,564 296,175 30,746 33,849 687,639 $ 983,814 16 2003 (unaudited) 214,456 844,443 14,383 3,787 1,743 28,574 22,155 193,398 264,040 580,403 844,443 State University Foundations Statement of Activities For the Year Ended June 30, 2004 (with comparative totals for the year ended June 30, 2003) In thousands Revenues: Contributions, gifts, and grants Investment income, net Net realized and unrealized gains Rental income Sales and services Program income and special events Other sources Endowment earnings transferred Net assets released from restrictions Total revenues Expenses: Program expenses Payments to State University: Total expenses - Scholarships and fellowships - 14,959 14,959 13,392 Other 12,653 - - 12,653 6,559 - Real estate expenses - 20,332 20,332 19,343 - Depreciation and amortization expense - 3,054 3,054 3,233 - Interest expense on capital-related debt - 4,211 4,211 3,458 - Management and general - 12,713 12,713 13,113 Fundraising 9,914 - - 9,914 6,165 - Other expenses - 1,023 1,023 8,048 - 171,336 - 171,336 173,969 Increase in net assets Net assets at the beginning of year Net assets at the end of year See accompanying notes to financial statements. 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT 2004 Total Permanently Restricted Temporarily Restricted Unrestricted 2003 Total (unaudited) 17,221 2,622 4,521 -- 101,700 14,524 1,102 24,635 12,864 38,257 100,528 16,532 58,170 28,257 14,023 42,840 57,068 12,540 22,084 316 2,472 8,803 $ 26,239 1,370 31,565 27,941 11,551 33,969 68 1,252 1,891 18,222 264 3,579 16,706 - 73,962 (3,579) - - - - - (73,962) 194,973 278,572 22,105 33,164 223,303 - - 100,658 92,477 92,477 21,004 107,236 22,105 33,164 51,967 559,399 580,403 260,859 164,848 154,696 580,403 687,639 282,964 198,012 $ 206,663 17 Notes to Financial Statements June 30, 2004 and 2003 1. Summary of Significant Accounting Policies and Basis of Presentation Reporting Entity - For financial reporting purposes, the State University of New York (the “State University”) consists of all sectors of the State University including the university centers, health science centers (including hospitals), colleges of arts and sciences, colleges of technology and agriculture, specialized colleges, and statutory colleges (located at the campuses of Cornell and Alfred Universities), central services and other affiliated entities determined to be includable in the State University’s financial reporting entity. During 2004, the State University adopted Governmental Accounting Standards Board (the “GASB”) Statement No. 39, Determining Whether Certain Organizations Are Component Units. This statement amends GASB Statement No. 14, The Financial Reporting Entity, and provides additional guidance to determine whether an affiliated organization is considered a component unit of a financial reporting entity. Inclusion in the entity is based primarily on the notion of financial accountability. GASB Statement No. 14 as amended by GASB Statement No. 39, defines financial accountability in terms of a primary government (State University) that is financially accountable for the organizations that make up its legal entity. It is also financially accountable for legally-separate organizations if its officers appoint a voting majority of an organization’s governing body and either it is able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or to impose specific financial burdens on, the primary government. A primary government may also be financially accountable for governmental organizations that are fiscally dependent on it. The State University is included in the financial statements of the State of New York (the “State”) as an enterprise fund as the State is the primary government of the State University. Inclusion in the reporting entity under GASB Statement No. 39 is required for legally-separate, tax-exempt, affiliated organizations that (a) receive or hold economic resources that are significant to, and entirely or almost entirely for the direct benefit of, the primary government, its component units, T H E S TAT E U N I V E R S I T Y O F N E W YO R K or its constituents and (b) the primary government, or its component units, is entitled to, or can otherwise access, a majority of the economic resources received or held by the separate organization. As a result, certain affiliates organized for the benefit of the State University where the economic resources held by these affiliates can only be used by, or for the benefit of, the State University and its component units are included in the State University reporting entity. The affiliates meeting GASB No. 39 criteria include the campus-related foundations and student housing corporations (all referred to as “foundations”). The combined totals of the foundations are presented on financial statement pages 16 and 17 in the State University’s financial statements in accordance with display requirements prescribed by the Financial Accounting Standards Board (the “FASB”). Financial statement footnote disclosure information of the foundations is contained in footnote no. 14. The Research Foundation of State University of New York (the “Research Foundation”) is a separate not-for-profit educational corporation that operates as the fiscal administrator for the majority of the State University’s sponsored programs. The programs include research, training, and public service activities of the State-operated campuses supported by sponsored funds other than state appropriations. The activity of the Research Foundation has been included in these financial statements. All of the financial activity was derived from audited financial statements of the Research Foundation for the years ended June 30, 2004 and 2003. Almost all of the State University’s campuses maintain auxiliary services corporations. These corporations are campus-based, not-for-profit corporations which, as independent contractors, operate, manage, and promote educationally related services for the benefit of the campus community. Although separate and independent legal entities, these corporations carry out operations which are integrally related to the State University and, therefore, are included in the financial statements of the State University. All of the financial data for these corporations was derived from each entity’s individual financial statements, the majority of which have a June 30 fiscal year end. 18 Notes to Financial Statements June 30, 2004 and 2003 1. Summary of Significant Accounting Policies and Basis of Presentation, continued The State University Construction Fund (the “Construction Fund”) is a public benefit corporation that designs, constructs, reconstructs and rehabilitates facilities of the State University pursuant to an approved master plan. Although the Construction Fund is a separate legal entity, it carries out operations which are integrally related to the State University and, therefore, the financial activity related to the Construction Fund, which administers the capital program of the State University, is included in the State University’s financial statements as of the Construction Fund’s fiscal years end of March 31, 2004 and 2003. The State statutory colleges at Cornell University and Alfred University are an integral part of, and are administered by, those universities. The statutory colleges are fiscally dependent on State appropriations through the State University. The statutory colleges financial statements of Cornell University and Alfred University for the years ended June 30, 2004 and 2003 have been included in the accompanying financial statements. The operations of certain related but independent organizations such as clinical practice management plans, alumni associations, and student associations, are not included in the accompanying financial statements as such organizations do not meet the definition for inclusion under GASB Statement Nos. 14 or 39. The State University administers State financial assistance to the community colleges in connection with its general supervision responsibilities pursuant to State Education Law. However, since these community colleges are sponsored by local governmental entities and are included in their financial statements, the community colleges are not considered part of the State University’s financial reporting entity and, therefore, are not included in the accompanying financial statements. The accompanying financial statements of the State University have been prepared using the economic resources measurement focus and the accrual basis of accounting in accordance with the accounting principles generally accepted in the United States of America as prescribed by the GASB. 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT The State University applies all applicable pronouncements of the FASB issued on or before November 30, 1989 that do not conflict or contradict GASB pronouncements. The State University has elected not to apply FASB pronouncements issued after November 30, 1989. The State University reports its financial statements as a special purpose government engaged in business-type activities, as defined by GASB. Business-type activities are those that are financed in whole or in part by fees charged to external parties for goods or services. The financial statements of the State University consist of classified balance sheets; statements of revenues, expenses, and changes in net assets, that distinguishes between operating and nonoperating revenues and expenses; and statements of cash flows, using the direct method of presenting cash flows from operations and other sources. The State University’s policy for defining operating activities in the statement of revenues, expenses, and changes in net assets are those that generally result from exchange transactions such as the payments received for services and payments made for the purchase of goods and services. Certain other transactions are reported as nonoperating activities and include the State University’s operating and capital appropriations from the State, federal appropriations, nonexchange receipts, net investment income, gifts, and interest expense. Resources are classified for accounting and financial reporting purposes into the following four net asset categories: Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation and amortization and outstanding principal balances of debt attributable to the acquisition, construction, repair or improvement of those assets. Restricted - nonexpendable: Net assets subject to externally imposed conditions that the State University must maintain them in perpetuity. Restricted - expendable: Net assets whose use is subject to externally imposed conditions that can be fulfilled by the actions of the State University or by the passage of time. 19 Notes to Financial Statements June 30, 2004 and 2003 1. Summary of Significant Accounting Policies and Basis of Presentation, continued Unrestricted: All other categories of net assets. Included in unrestricted net assets are amounts provided for specific use by the State University’s colleges and universities, hospitals and clinics, and separate legal entities included in the State University’s reporting entity that are designated for those entities and, therefore, not available for other purposes. The State University has adopted a policy of generally utilizing restricted - expendable funds, when available, prior to unrestricted funds. Revenues Revenues are recognized in the accounting period when earned. State appropriations are recognized when they are made legally available for expenditure. Revenues and expenditures arising from nonexchange transactions are recognized when all eligibility requirements, including time requirements, are met. Promises of private donations are recognized at fair value. Tuition and fees and auxiliary sales and service revenue are reported net of scholarship discounts and allowances. Auxiliary sales and service revenue classifications for 2004 and 2003 were reported net of the following scholarship discount and allowance amounts (in thousands): 2003 2004 38,091 18,025 20,154 $ 40,101 18,343 19,819 Residence halls Food service Other auxiliary Cash and cash equivalents Cash and cash equivalents are defined as current operating assets that include investments with original maturities of less than 90 days, except for cash and cash equivalents held in investment pools which are included in short-term and long-term investments in the accompanying balance sheets. Investments Investments in marketable securities are stated at fair value based upon quoted market prices. T H E S TAT E U N I V E R S I T Y O F N E W YO R K Investment income is recorded on the accrual basis, and purchases and sales of investment securities are reflected on a trade date basis. Any net earnings not expended are included as increases in restricted - nonexpendable net assets if the terms of the gift require that such earnings be added to the principal of a permanent endowment fund, or as increases in restricted - expendable net assets as provided for under the terms of the gift, or as unrestricted. At June 30, 2004 and 2003, the State University had $457 million and $387.5 million available for authorization for expenditure, respectively, $293.5 million and $249.8 million from restricted funds and $163.5 million and $137.7 million from unrestricted funds, respectively. The State University’s Board of Trustees has the responsibility of oversight for the State University’s endowment and similar funds, including the establishment of investment objectives and guidelines. The primary investment objective is to preserve the purchasing power of fund assets while providing a relatively predictable, stable, and constant stream of earnings in line with spending needs. The expenditure of available endowment and similar funds income is subject to State appropriation and may be spent at an annual rate of 5 percent increase per unit value per year, subject to certain minimum and maximum spending parameters. The State University is currently authorized by its Board of Trustees to invest in domestic and international equity and fixed income securities, a limited use of an alternative investment strategy under a fund-offunds approach. The State University’s investment strategies are subject to asset allocation parameters established in the State University’s investment objectives and guidelines. The Investment Committee of the Cornell Board of Trustees establishes the investment policy of the Cornell statutory colleges. Distributions from the pool are approved by the Cornell Board of Trustees and are provided for program support independent of the cash yield and appreciation of investments in that year. Investments in the pool are stated at fair value and include limited use of derivative instruments, including leverage futures, options and other similar vehicles to manage market exposure and to enhance the total return. 20 Notes to Financial Statements June 30, 2004 and 2003 1. Summary of Significant Accounting Policies and Basis of Presentation, continued Capital Assets Capital assets are stated at cost, or in the case of gifts, fair value at the date of receipt. Building renovations and additions costing over $100,000 and equipment items with a unit cost of more than $5,000 are capitalized. Plant and equipment under capital leases are stated at the present value of minimum lease payments at the inception of the lease. Generally, the net interest cost on debt during the construction period related to capital projects is capitalized and totaled $11.5 million and $19.1 million during the 2004 and 2003 fiscal years, respectively. Library materials are capitalized and amortized over a ten-year period. Works of art or historical treasures that are held for public exhibition, education, or research in furtherance of public service are capitalized. Capital assets, with the exception of land, construction in progress, and inexhaustible works of art, are depreciated on a straight-line basis over their estimated useful lives, which range from 5 to 50 years. Deferred Financing Costs Deferred financing costs represent costs incurred for the issuance of bonds that are capitalized and amortized over the life of the related debt. Compensated Absences Employees accrue annual leave based primarily on the number of years employed up to a maximum rate of 21 days per year up to a maximum of 40 days. Employees also earn sick leave credits, which are considered termination payments and may be used to pay the employee’s share of post-employment health insurance. Inventories Inventories held by the State University are primarily stated at the lower of cost or market value on a first-in, first-out basis. Fringe Benefits Employee fringe benefit costs (e.g., health insurance, worker’s compensation, retirement and post-retirement benefits) are paid by the State on behalf of the State University (except for the State University hospitals which pay their own fringe 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT 2. Cash and Cash Equivalents Cash and cash equivalents represent State University funds held in the State treasury or local depositories, and cash held by affiliated organizations. Cash held in the State treasury beyond immediate need is pooled with other State funds for short-term investment purposes. The pooled balances are limited to legally-stipulated investments which include obligations of, or guaranteed by, the United States, obligations of the State and its political subdivisions, and repurchase agreements. These investments are reported at cost (which approximates fair benefit costs) at a fringe benefit rate determined by the State. The State University records an expense and a corresponding state appropriation revenue for fringe benefit costs based on the fringe benefit rate applied to total eligible personal service costs incurred. Tax Status The State University and the Construction Fund are political subdivisions of the State and are, therefore, generally exempt from federal and state income taxes under applicable federal and state statutes and regulations. The Research Foundation and campus auxiliary services corporations are not-for-profit corporations as described in Section 501(c)(3) of the Internal Revenue Service Code and are tax-exempt on related income pursuant to Section 501 (a) of the code. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts displayed in the 2003 financial statements have been reclassified to conform to the 2004 presentation. 21 3. Investments Investments of the State University are recorded at fair value, net of investment fees of $3 million and $2.6 million for 2004 and 2003, respectively. Investments are comprised of investments of the State University’s endowment and similar funds, the statutory colleges at Cornell University and Alfred University (“Alfred Ceramics”), the Research Foundation, the Construction Fund, and the auxiliary services corporations. Pooled investments are held in two separate and distinct investment pools - the State University’s investment pool and Cornell’s long-term investment pool. The investments of the State University’s investment pool are held by the State University’s agent in the State University’s name. The Research Foundation maintains a diverse investment portfolio and with respect to debt instruments, has a policy of investing in primarily high quality securities. Investments are held with the investment custodian in the Research Foundation’s name. Investments include $43.4 million and $40.6 million of investments designated for their post-retirement benefit plan for 2004 and 2003, respectively. Investments of the Construction Fund have been made in accordance with the applicable provi- Notes to Financial Statements June 30, 2004 and 2003 sions of the laws of the State and the Construction Fund’s investment policy. Investments are limited to obligations of, or guaranteed by, the United States and obligations of the State and its political subdivisions. The investments of the Construction Fund are as of March 31, 2004 and consisted of United States government obligations of approximately $22.3 million and $21.5 million, at March 31, 2004 and 2003, respectively. These investments are held by the State’s agent in the State University’s name. Investments of the auxiliary services corporations and Alfred Ceramics were derived from each entity’s individual financial statements. The composition of investments is as follows (in thousands): State University Campuses Pooled funds: Non-equities Equities - domestic Equities - international Total pooled funds Separately invested fundsnon- equities 102 92 Total invested funds Cornell Statutory Colleges Pooled funds: Non-equities 230,168 191,066 108,291 131,007 Equities - domestic Equities - international Total pooled funds Short-term and separately invested funds: Non-equities 49,433 41,520 Equities 30,690 30,777 Total short-term and separately invested funds 80,123 Total invested funds Alfred Ceramics Non-equities 10,313 9,435 Equities 2,515 1,207 Total invested funds Research Foundation Non-equities 189,228 138,636 Equities 72,987 68,616 Total invested funds 2. Cash and Cash Equivalents, continued value) and are held by the State’s agent in its name on behalf of the State University. Restricted cash and cash equivalents at June 30, 2004 includes $89.5 million of bond proceeds for certain equipment purchases originally financed by the State University from operating funds during its 2003 and 2004 fiscal years. In October 2004, pursuant to requirements of the 2005 fiscal year budget of the State of New York, these funds were transferred to the State where, combined with other state appropriations, preserves the State’s support of the State University for the 2005 fiscal year. T H E S TAT E U N I V E R S I T Y O F N E W YO R K 22 2003 2004 $ 54,251 62,305 239,144 204,229 38,815 30,097 332,210 296,631 332,312 296,723 61,138 29,152 399,597 351,225 72,297 479,720 423,522 10,642 12,828 262,215 207,252 Notes to Financial Statements July 1, 2002 June 30, 2004 and 2003 36,271 $1,152,066 995,936 Additions 13,927 15,820 246,132 197,391 307,008 780,278 11,518 100,106 111,966 223,590 269,654 2,167,863 1,112,043 3,549,560 556,688 ments of the State University’s endowment and similar funds and fair value per unit (in thousands): End of year $ 332,210 303,794 28,416 9.14 Beginning of year 296,631 301,539 (4,908) 8.01 Unrealized net gain Investments of the endowment and similar funds of the Cornell statutory colleges, except for separately invested funds with a fair value of $27 million at both June 30, 2004 and 2003, are pooled on a fair value basis in Cornell’s long-term investment pool and living trust fund. Individual funds enter or withdraw from the pool based on each fund’s share of the fair value of the pool’s investments. The following summarizes changes in the relationship between cost and fair value of the portion of Cornell’s statutory colleges long term investment pool and fair value per unit (in thousands): End of year $ 399,597 341,476 58,121 46.51 Beginning of year 351,225 323,093 28,132 42.65 Unrealized net gain 29,989 Realized net gain 16,711 Total net gain Closed Projects & Retirements - 2,341 15,514 63,067 203,216 284,138 2,342 10,515 56,219 69,076 215,062 Gains Unit Fair Value Cost (Losses) Value Fair Value Cost June 30, 2003 Closed Projects Additions & Retirements 208,417 434,321 4,459,624 1,679,925 814,531 7,596,818 278,830 2,257,454 1,167,790 3,704,074 3,892,744 3. Investments, continued Auxiliary Service Corporations Non-equities 29,805 26,760 Total invested funds Equities 12,902 9,511 42,707 State University Construction Fund Total invested funds - non-equities 22,284 21,526 Realized net gain Total net gain Total investments Classified as shortterm $ 240,322 179,738 Pooled investments of the State University and Cornell statutory colleges are described in the following paragraphs. The fair values per unit for the respective pools are not comparable, as initial unit values were determined at the inception of each pool based on the number of units. Substantially all of the investments of the State University’s endowment and similar funds are pooled on a fair value basis. Individual funds subscribe to or dispose of units on the basis of the market value per unit at the beginning of the month within which the transaction takes place. The following summarizes changes in the relationship between cost and fair value of the pooled invest- Table A (in thousands) Infrastructure and land improvements Buildings Land $ 194,490 420,842 4,229,006 Equipment, library books, and artwork 1,545,601 710,739 7,100,678 Construction in progress Total capital assets Less accumulated depreciation: Infrastructure and land improvements Buildings Equipment and library books Total accumulated depreciation Capital assets, net $ 3,551,118 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT 33,324 10,286 $ 43,610 Unit Gains Value $ 46,700 June 30, 2004 999 1,703 16,463 15,065 409,768 427,760 314,186 223,881 447,683 34,484 4,834,908 191,366 143,213 1,728,078 700,957 946,848 608,159 7,935,507 1,612 12,077 105,733 289,295 23,184 2,340,003 136,151 130,512 1,173,429 253,961 155,308 3,802,727 692,887 452,851 4,132,780 23 Notes to Financial Statements 4. Accounts, Notes, and Loans Receivable At June 30, accounts, notes, and loans receivable were summarized as follows (in thousands): 2004 $ 42,002 (5,696) 36,306 6,146 (1,364) 4,782 431,371 (72,749) 358,622 2003 39,425 (6,883) 32,542 6,024 (1,797) 4,227 Tuition and fees Allowance for uncollectibles Net tuition and fees Room Rent Allowance for uncollectibles Net room rent Patient fees, net of contractual allowances Allowance for uncollectibles Net patient fees Other, net Total accounts and notes receivable 86,234 283,344 (62,555) 220,789 69,859 485,944 327,417 152,535 (22,876) Total student loans receivable 129,659 Total, net Student loans Allowance for uncollectibles 151,361 (23,485) 127,876 455,293 $ 615,603 Other accounts receivable consist primarily of funds due to the State University from federal and state government agencies and private sources. Table B (in thousands) For the 2004 Fiscal Year Long-term debt: $ 4,368,931 560,180 40,962 4,700 6,380 11,156 Educational facilities Residential facilities Equipment capital leases Certificates of participation IDA agreement - building IDA agreement - information system 4,992,309 Total long-term debt Other long-term liabilities: 559,854 186,682 123,983 28,384 Compensated absences and post-retirement obligations Loan - State STIP pool Litigation Other long-term liabilities 898,903 Total other long-term liabilities $ 5,891,212 Total long-term liabilities 6. Long-term Liabilities The State University has entered into capital leases and other financing agreements with the Dormitory Authority of the State of New York (the “DASNY”) to finance most of its capital facilities and equipment, and has also entered into various arrangements for the purchase of equipment through the issuance of certificates of participation. The Research Foundation has entered into financing arrangements through the City of Albany Industrial Development Agency (IDA). At June 30, 2004 and 2003, other than facilities obligations, which are included as of March 31, 2004 and 2003, total obligations are summarized in Table B. June 30, Current 2003 Additions Reductions 2004 Portion July1, 125,478 295,060 33,159 2,004 120 3,153 44,160 324,650 155,789 688 - - 458,974 525,287 138,111 25,233 63,091 2,302 189,872 1,924 101,379 21,633 228,737 314,808 687,711 840,095 T H E S TAT E U N I V E R S I T Y O F N E W YO R K June 30, 2004 and 2003 5. Capital Assets Capital assets, net of accumulated depreciation, totaled $4.13 billion and $3.89 billion at fiscal year end 2004 and 2003, respectively. Capital asset activity for fiscal years 2004 and 2003 is reflected in Table A. In the table, closed projects and retirements represent capital assets retired and assets transferred from construction in progress for projects completed and the related capital assets placed in service. 4,287,613 589,770 163,592 3,384 6,260 8,003 5,058,622 6,043,596 24 153,731 19,345 37,956 1,872 - 3,286 216,190 124,076 14,936 39,917 35,961 611,615 163,373 162,271 47,715 214,890 984,974 431,080 Long-term debt: Notes to Financial Statements Table B, continued (in thousands) For the 2003 Fiscal Year Educational facilities Residence hall facilities Equipment capital leases Certificates of participation IDA agreement - information system Total long-term debt Other long-term liabilities: Compensated absences and post-retirement obligations Loan - State STIP pool Litigation Other long-term liabilities Total other long-term liabilities Total long-term liabilities $ 4,210,212 426,525 26,651 7,901 IDA agreement - building 6,500 9,895 June 30, 2004 and 2003 July 1, June 30, Current 2002 Additions Reductions 2003 Portion 4,687,684 519,028 198,495 90,508 25,984 834,015 $ 5,521,699 1,339,125 154,520 32,941 - - 11,173 1,537,759 172,857 2,886 67,658 13,097 256,498 1,794,257 included in the State University’s financial statements. As of March 31, 2004, $1.464 billion of such obligations outstanding were considered defeased. Residence Hall Facilities - the State University has entered into capital lease agreements for residence hall facilities. DASNY bonds for residence hall facilities, which have a maximum 30-year life, are repaid from room rentals and other residence hall revenues. Upon repayment of the bonds, including interest thereon, and the satisfaction of all other obligations under the lease agreements, DASNY shall convey to the State University all rights, title, and interest in the assets financed by the capital lease agreements. Residence hall facilities revenue realized during the year from facilities from which there are bonds outstanding is pledged as a security for debt service and is assigned to DASNY to the extent required for debt service purposes. Any excess funds pledged to DASNY are available for residence hall capital and operating purposes. In December 2003, the State University entered into agreements with DASNY to issue obligations totaling $264.8 million in order to refinance $274.6 million of the State University’s existing 1,180,406 20,865 18,630 3,201 120 9,912 1,233,134 1,424,744 6. Long-term Liabilities, continued Educational Facilities - the State University, through DASNY, has entered into financing agreements to finance various educational facilities and an athletic facility, which have a maximum 30-year life. Athletic facility debt is aggregated with educational facility debt. Debt service is paid by, or from specific appropriations of, the State. In March 2004, DASNY Personal Income Tax Revenue Bonds (“PIT”) were issued for the purpose of financing capital construction and major rehabilitation for educational facilities in the amount of $29.1 million. Also in March, PIT bonds were issued for the purpose of funding capital projects, including the acquisition of equipment, principally for scientific research and economic development projects for use by the State University totaling $15.1 million. In prior years, the State University defeased various obligations whereby proceeds of new obligations were placed in an irrevocable trust to provide for all future debt service payments on the defeased obligations. Accordingly, the trust account assets and liabilities for the defeased obligations are not 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT 4,368,931 560,180 40,962 4,700 6,380 11,156 4,992,309 132,031 14,699 34,183 10,697 191,610 5,891,212 125,478 20,505 12,668 1,975 - 3,204 163,830 120,984 14,699 43,497 14,518 559,854 186,682 123,983 28,384 193,698 898,903 357,528 25 Fiscal year(s) 2005 2006 2007 2008 2009 2015-19 2020-24 2025-29 2030-34 Total Notes to Financial Statements Educational Facilities Interest Principal $ 153,731 246,000 158,439 243,268 $ 4,287,613 2,746,074 June 30, 2004 and 2003 Table C Debt service requirements of the long-term debt obligations as of June 30, 2004 are as follows (in thousands): Residential Facilities Principal Interest 19,345 23,619 20,975 28,233 155,979 240,380 20,340 26,316 166,914 233,601 20,360 25,338 216,190 275,454 219,487 275,800 154,912 237,594 20,490 27,301 34,922 3,162 210,324 268,057 195,695 268,836 199,780 260,549 2010-14 1,077,659 863,928 102,355 111,640 11,334 5,485 1,191,348 981,053 12,134 2,857 1,311,999 485,552 769,514 249,102 82 563,234 99,419 9 181,051 15,454 1,198,225 408,092 101,640 74,603 667,229 195,968 97,175 52,777 446,054 68,929 115,795 30,408 108,471 8,314 71,295 7,131 1,285 589,770 407,366 Interest rates range Interest rates range Interest rates range from 1.75% to 7.5% from 2.0% to 6.0% from 1.16% to 5.75% Principal 43,114 40,073 19,376 2,140 12,506 1,610 5,110 1,385 181,239 25,836 accounted for in the same manner as equipment capital leases. The certificates are issued through a trustee and the State University is responsible for payments to the trustee sufficient to cover the interest and principal payments made by the trustee to the certificate holders. Industrial Development Agency Agreements - In fiscal 2002, the Research Foundation entered into an arrangement with the City of Albany IDA, where the IDA issued both taxable and tax-exempt series of bonds for the purpose of providing funds to acquire a parcel of real estate, together with the existing building thereon. In fiscal 1999, the Research Foundation also entered into a financing arrangement through the IDA to finance the development of a new information system. Loan - State STIP Pool - In prior years, the State University experienced operating cash-flow deficits precipitated by cash-flow difficulties experienced by its hospitals. In connection with these cash-flow deficits, as authorized by State Finance Law, the State University borrowed funds with interest from the short-term investment pool (STIP) of the State. The amount outstanding under this borrowing from the State at June 30, 2004 was $163.4 million. During the year, the State paid $10.5 million and the hospitals paid $14.7 million on these loans. The State University incurred an interest cost of $1.9 million at an average interest rate of 1.1 percent. 6. Long-term Liabilities, continued residence hall obligations. The refinancing resulted in an accounting loss of $17.9 million after giving effect to the write-off of remaining deferred financing costs and the use of available reserves. The State University reduced its future aggregate debt service payments by $67.7 million through lower interest costs, resulting in an economic gain of $16.1 million. The State University also entered into agreements with DASNY in December 2003 to issue obligations totaling $59.9 million for the construction and rehabilitation of residential facilities. During the year and in prior years, the State University defeased various obligations whereby proceeds of new obligations were placed in an irrevocable trust to provide for all future debt service payments on the defeased obligations. Accordingly, the trust account assets and liabilities for the defeased obligations are not included in the State University’s financial statements. As of March 31, 2004, $286.6 million of such obligations outstanding were considered defeased. Equipment Capital Leases and Certificates of Participation - the State University leases equipment under various capital lease arrangements and has entered into various arrangements for the refinancing and purchase of equipment through the issuance of certificates of participation, which are T H E S TAT E U N I V E R S I T Y O F N E W YO R K Other Total Interest 5,835 4,299 357 26 Interest Principal 5,058,622 3,179,276 Notes to Financial Statements June 30, 2004 and 2003 Category 2 (“NYSRSSL”) and Education Law. These plans offer a wide range of programs and benefits. ERS and TRS benefits are related to years of credited service and final average salary, vesting of retirement benefits, death and disability benefits, and optional methods of benefit payments. TIAA/CREF is a State University Optional Retirement Program (“ORP”) and offers benefits through annuity contracts. ERS and TRS provide retirement benefits as well as death and disability benefits. Benefits generally vest after 5 years of credited service. The NYSRSSL provides that all participants in ERS and TRS are jointly and severally liable for any actuarial unfunded amounts. Such amounts are collected through annual billings to all participating employers. Employees who joined ERS and TRS after July 27, 1976, and have less than 10 years of service or membership are required to contribute 3 percent of their salary. Employee contributions are deducted from their salaries and remitted on a current basis to ERS and TRS. TIAA/CREF provides benefits through annuity contracts and provides retirement and death benefits to those employees who elected to participate in the ORP. Benefits are determined by the amount of individual accumulations and the retirement income option selected. All benefits generally vest after the completion of one year of service if the employee is retained thereafter. TIAA/CREF is contributory for employees who joined after July 27, 1976, who contribute 3 percent of their salary. Employer contributions range from 8 percent to 15 percent depending upon when the employee was hired. Employee contributions are deducted from their salaries and remitted on a current basis to TIAA/CREF. The State University’s total retirement-related payroll was $2.07 billion and $1.96 billion for the June 30, 2004 and 2003 fiscal years, respectively. The payroll for 2004 and 2003 for State University employees covered by TIAA/CREF was $1.32 billion and $1.25 billion, ERS was $667 million and $636 million, and TRS was $82 million and $74 million, respectively. Employer and employee contributions under each of the plans were as follows (in millions): 8. Retirement Plans Retirement Benefits There are three major retirement plans for State University employees. The New York State and Local Employees’ Retirement System (“ERS”), the New York State Teachers’ Retirement System (“TRS”), and the Teachers Insurance and Annuity Association - College Retirement Equities Fund (“TIAA/CREF”). ERS is a cost-sharing, multipleemployer, defined benefit public plan administered by the State Comptroller. TRS is a cost-sharing, multiple-employer, defined benefit public plan separately administered by a nine-member board. TIAA/CREF is a multiple-employer, defined contribution plan administered by separate boards of trustees. Substantially all full-time employees participate in the plans. Obligations of employers and employees to contribute and related benefits are governed by the New York State Retirement and Social Security Law 7. Deposits with Trustees Deposits with trustees primarily represent DASNY bond proceeds needed to finance capital projects and to establish required building and equipment replacement and debt service reserves. Pursuant to financing agreements with DASNY, bond proceeds, including interest income, are restricted for capital projects or debt service. Also included are non-bond proceeds which have been designated for capital projects and equipment. In accordance with GASB Statement No. 3, the State University has categorized its investments, which comprise deposits with trustees, into two groups. Category 1 includes investments that are insured or registered in the State University’s name, or held by an agent in the State University’s name. Category 2 includes investments that are uninsured but which were purchased through trustees acting as purchasing agents and are held in trust accounts in the State University’s name. They are as follows (in thousands): Category 1 U.S. government obligations $ 722,452 257,989 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT 27 Notes to Financial Statements June 30, 2004 and 2003 2003 2002 Post-retirement Benefits The State, on behalf of the State University, provides health insurance coverage and survivor benefits for retired State University employees and their cost of providing post-retirement health insurance and death benefits on a pay-as-you-go basis. For the fiscal years ended June 30, 2004 and 2003, the State, on behalf of the State University, paid health insurance premiums of $117.9 million and $102.7 million, respectively, and survivor benefits of $1 million in both years. The Research Foundation sponsors a separate plan that provides health insurance and medical benefits for retired employees and their spouses. Substantially all of the Research Foundation employees who meet age and service requirements become eligible for these benefits. There are approximately 6,040 participants in the plan. Employees hired after 1985, upon retirement, contribute to cover the cost of plan benefits provided. The cost of the benefits provided under this plan is recognized on an actuarially-determined basis using the projected unit cost method. Under this method, actuarial assumptions are made based on employee demographics and medical trend rates to calculate the accrued benefit cost. Contributions by the Research Foundation are made pursuant to a funding policy established by its Board of Directors and were $3.5 million and $3 million during the years ended June 30, 2004 and 2003, respectively. Amounts recognized in the June 30, 2004 and 2003 financial statements include an accrued benefit cost of $73.9 million and $55.7 million, respectively, and investments designated for the plan of $43.4 million and $40.6 million, respectively. The investments are held in an unrestricted account, designated by the Research Foundation Board of Directors, consisting primarily of equity securities. 8. Retirement Plans, continued 2004 Employer contributions: Employee contributions: TIAA- CREF $140.2 135.1 122.5 ERS 5.4 5.1 3.5 survivors. Substantially all of the State University’s TRS 4.6 4.0 3.8 employees become eligible for these benefits if they reach normal retirement age while working for the State University. Currently, 15,482 retirees and TIAA- CREF $ 36.5 34.8 30.6 ERS 7.2 6.7 5.2 1,802 dependent survivors meet the eligibility TRS 0.8 0.8 0.8 requirements. The State University recognizes the The employer contributions are equal to 100 percent of the required contributions under each of the respective plans. The Research Foundation maintains a separate non-contributory plan through TIAA/CREF for substantially all of its employees. Employees become fully vested in contributions made by the Research Foundation after five years of service which are allocated to individual employee accounts. Employer contributions are based on a percentage of regular salary and range from 8 percent to 15 percent. The payroll for Research Foundation employees covered by TIAA/CREF for its fiscal year ended June 30, 2004 and 2003 was $282.7 million and $271.8 million, respectively. The Research Foundation pension contributions for fiscal years 2004, 2003, and 2002 were $22.2 million, $20.5 million, and $18.6 million, respectively. These contributions are equal to 100 percent of the required contributions for each year. Each retirement system issues a publicly available financial report that includes financial statements and supplementary information. The reports may be obtained by writing to: New York State and Local Employees’ Retirement System 110 State Street Albany, New York 12244 New York State Teachers’ Retirement System 10 Corporate Woods Drive Albany, New York 12211 Teachers Insurance and Annuity Association/ College Retirement Equities Fund 730 Third Avenue New York, New York 10017 T H E S TAT E U N I V E R S I T Y O F N E W YO R K 28 Notes to Financial Statements June 30, 2004 and 2003 $ 88,854 12. Federal Grants and Contracts and Third-Party Reimbursement Substantially all federal grants and contracts are subject to financial and compliance audits by the grantor agencies of the federal government. Disallowances, if any, as a result of these audits may become liabilities of the State University. State University management believes that no material disallowances will result from audits by the grantor agencies. The State University hospitals have agreements with third-party payors, which provide for reimbursement to the hospitals at amounts different from their established charges. Contractual service allowances and discounts (reflected through State University hospitals and clinics sales and services) represent the difference between the hospitals established rates and amounts reimbursed by third-party payors. The State University has made provision in the accompanying financial statements for estimated retroactive adjustments relating to third-party payors cost reimbursement items. 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT The State University is exposed to various risks of loss related to damage and destruction of assets, injuries to employees, damage to the environment or noncompliance with environmental requirements, and natural and other unforeseen disasters. The State University has insurance coverage for its residence hall facilities. However, in general, the State University does not insure its educational buildings, contents or related risks and does not insure its vehicles and equipment for claims and assessments arising from bodily injury, property damages, and other perils. Unfavorable judgments, claims, or losses incurred by the State University are covered by the State on a self-insured basis. The State does have fidelity insurance on State employees. 11. Related Parties The State University’s single largest source of revenue is State appropriations which represents approximately 32 percent and 36 percent of total revenues for the 2004 and 2003 fiscal years, respectively. The State University is dependent on this appropriation to carry on its operations. 9. Commitments The State University has entered into contracts for the construction and improvement of various projects. At March 31, 2004, these outstanding contract commitments totaled approximately $284 million. The State University is also committed under numerous operating leases covering real property and equipment. Rental expenditures reported for the years ended June 30, 2004 and 2003 under such operating leases were approximately $20.4 million and $19.3 million, respectively. The following is a summary of the future minimum rental commitments under non-cancelable real property and equipment leases with terms exceeding one year (in thousands): Year ending June 30, 2005 $ 25,759 2006 17,951 2007 15,113 2008 10,064 2009 11,942 2010-14 7,287 2015-19 702 2020-24 36 10. Contingencies The State is contingently liable in connection with claims and other legal actions involving the State University, including those currently in litigation arising in the normal course of State University activities. The State University does not carry malpractice insurance and, instead, administers these types of cases in the same manner as all other claims against the State involving State University activities in that any settlements of judgments and claims are paid by the State from an account established for this purpose. With respect to pending and threatened litigation, the State University has recorded a liability and a corresponding appropriation receivable of approximately $162 million at June 30, 2004 ($158.3 million related to hospitals and clinics) for unfavorable judgments, both anticipated and awarded but not yet paid. 29 13. Subsequent Events In October 2004, the State University entered into agreements with the DASNY to issue obligations totaling $63.355 million for the construction and rehabilitation of residential facilities. Notes to Financial Statements June 30, 2004 and 2003 Net Asset Classifications Unrestricted net assets represent resources whose uses are not restricted by donor-imposed stipulations and are generally available for the support of the State University campus and foundation programs and activities. Temporarily restricted net assets represent resources whose use is limited by donor-imposed stipulations that either expire by the passage of time or are removed by specific actions. Permanently restricted net assets represent resources that donors have stipulated must be maintained permanently. The income derived from the permanently restricted net assets is permitted to be spent in part or in whole, restricted only by the donors’ wishes. Investments All investments with readily determinable fair values have been reported in the financial statements at fair value. Realized and unrealized gains and losses are recognized in the statement of activities. Gains or losses on investments are recognized as increases or decreases in unrestricted net assets unless their use is temporarily or permanently restricted by explicit donor stipulations or by law. Investments of the State University foundations were $636 million and $524 million for 2004 and 2003, respectively. The composition of investments is as follows (in thousands): Equities - domestic $ 324,143 267,392 Equities - international 73,749 48,795 Non-equities 218,342 191,502 Other investments 16,455 19,523 Total investments $ 635,757 524,144 Capital Assets Capital assets are stated at cost, if purchased, or fair value at date of receipt, if acquired by gift. Land improvements, buildings, and equipment are depreciated over their estimated useful lives using the straight-line method. Capital assets, net of accumulated depreciation, totaled $231.1 million and $214.5 million at fiscal year end 2004 and 2003, respectively. Capital asset classifications are summarized as follows (in thousands): 14. Foundations (2003 comparative information is unaudited) Discretely presented component unit information is comprised principally of the campus-related foundations. These foundations are not-for-profit organizations responsible for the fiscal administration of revenues and support received for the promotion, development and advancement of the welfare of its campus, the State University, its students, faculty, staff and alumni. The foundations receive the majority of their support and revenues through contributions, gifts and grants, and provide benefits to their campus, students, faculty, staff and alumni. In addition, the reported amounts include foundation student housing corporations, not-for-profit organizations that operate and administer certain housing and related services for students. All the foundations are exempt from federal income taxes on related income pursuant to Section 501(a) of the Internal Revenue Code. All of the financial data for these organizations was derived from each entity’s individual financial statement, reported in accordance with generally accepted accounting principles promulgated by FASB, the majority of which have a June 30 fiscal year end. During the year ended June 30, 2004 and 2003, the foundations distributed $27.6 million and $20 million, respectively, to the State University, principally for scholarships and support of campus program activities. Separately issued financial statements of the foundations may be obtained by writing to: Office of the University Controller State University Plaza - Room S421 Albany, New York 12246 T H E S TAT E U N I V E R S I T Y O F N E W YO R K 30 2003 2004 Notes to Financial Statements June 30, 2004 and 2003 Long-term Debt The Foundations have entered into various financing arrangements, principally through the issuance of Industrial Development Agency bonds and Housing Authority bonds for the construction of student residence hall facilities. The following is a summary of the future minimum annual debt service requirements for the next five years and thereafter (in thousands): For the year ending: 14. Foundations (2003 comparative information is unaudited), continued 2003 2004 13,619 11,018 13,126 430 276,426 252,033 Land and land improvements $ 23,373 7,303 Buildings 202,486 207,545 Equipment 25,930 23,629 Artwork and library books Construction in progress Total capital assets Less accumulated depreciation 45,299 37,577 $ 231,127 214,456 Capital assets, net 2 0 0 4 A N N U A L F I N A N C I A L R E P O RT 2005 $ 5,152 2006 5,668 2007 5,936 2008 6,129 2009 6,396 Thereafter 179,435 $ 208,716 31 Report of Management on Internal Control To the Residents of the State of New York: The State University of New York is responsible for the preparation, integrity and fair presentation of its published financial statements. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on judgments and estimates made by management. The State University of New York also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the financial statements. The accompanying financial statements of the State University of New York have been audited by the independent accounting firm of KPMG LLP. The independent auditors’ report, which appears prior to the financial statements, expresses an independent opinion on the fairness of presentation of these financial statements. The State University of New York has established and maintains a system of internal control over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition which is designed to provide reasonable assurance to management and the Board of Trustees regarding the preparation of reliable, published financial statements and such asset safeguarding. The system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. In addition, the State University of New York’s internal audit staff monitor the operation of the internal control system and report findings and recommendations to management and the Board of Trustees; corrective actions are taken to address control deficiencies and other opportunities for improving the system are pursued as they are identified. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Furthermore, the effectiveness of an internal control system can change with circumstances. The State University of New York assessed its internal control system as of June 30, 2004 in relation to the requirements of the New York State Governmental Accountability, Audit and Internal Control Act and criteria for effective internal control over financial reporting described in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, the State University of New York believes that, as of June 30, 2004, its system of financial reporting met those criteria. Brian T. Stenson Vice Chancellor for Finance and Business Robert L. King Chancellor 32 Additional copies of this report are available from The State University of New York Office of the University Controller State University Plaza - Room S421 Albany, NY 12246 518-443-5463 The StateUniversity of NewYork ANNUAL FINANCIAL REPORT 2004 The StateUniversity of New York State University Plaza Albany | NY 12246 www.suny.edu