The State University of New York 2005 Annual Financial Report www.suny.edu Board of Trustees Thomas F. Egan, Chairman Randy A. Daniels, Vice Chairman Aminy I. Audi Robert J. Bellafiore Christopher P. Conners Edward F. Cox John J. Cremins Candace de Russy Gordon R. Gross Josh Hyman Celine R. Paquette Teresa A. Santiago Patricia Elliott Stevens Harvey F. Wachsman Senior Management John R. Ryan Chancellor (Acting) Robert T. Brown Acting Vice Chancellor for Community Colleges Elizabeth D. Capaldi Vice Chancellor and Chief of Staff Dr. John B. Clark Acting Vice Chancellor for Enrollment and University Life Kimberly R. Cline Acting Vice Chancellor and Chief Financial Officer D. Andrew Edwards, Jr. University Counsel John J. O’Connor Vice Chancellor and Secretary of the University Kevin O’Donoghue University Auditor Peter D. Salins Provost and Vice Chancellor for Academic Affairs Michael C. Trunzo Senior Associate Vice Chancellor for University Relations Patrick J. Wiater University Controller Message from the Chancellor I am pleased to present this year’s Annual Financial Report of the State University of New York. The report provides an overview of the University’s finances and operating results for the year ended June 30, 2005. The State University continues to be in sound financial condition. We continue to make progress on enhancing quality throughout the State University. New, full- time and minority student enrollments are at record levels. Average SAT scores continue to rise, demonstrating that the public recognizes the high quality of education offered at the State University campuses. More importantly, the system-wide graduation rate is steadily increasing and the first-year retention rate indicates it will continue to climb. Sponsored programs and research funding increased nearly five percent in fiscal year 2005 to $898 million. Research continues to be a major component of the State University’s activity, with faculty constantly breaking new ground in science, technology, and commercial development. In fiscal year 2005, the State University recorded 245 invention disclosures, 193 patent applications, 34 patents, 78 licenses executed, and more than $13.5 million from royalties. These achievements were the products of more than 10,000 research projects that supported 18,000 jobs statewide. Private support is critical to maintaining excellence at the State University. It allows our campuses to invest in academic quality and support innovative research on a level comparable to private institutions. In March 2004, we launched an ambitious fundraising campaign, The State University of New York $3 Billion Challenge. To date, the Challenge has raised over $1.28 billion in philanthropic donations and giving remains strong. Under the 2004-05 State Budget, the State University received new multi-year capital funding authorization totaling nearly $1.8 billion. The authorization was augmented in the 2005-06 state budget by nearly $700 million, bringing total funding in support of University facilities to $2.5 billion. Under these programs, a majority of the funding supports critical maintenance needs to renovate and modernize existing State University educational and hospital facilities as well as selected program initiatives. The State University of New York is an excellent investment for all New Yorkers, from students to taxpayers. We take very seriously our responsibility to be good stewards of public dollars and strive continuously to be as efficient as possible in managing our resources. Together, the State University and the State of New York have the opportunity to invest in public higher education and establish the State as the nation’s center of scientific and technological innovation, economic growth, and opportunity for educated young workers. John R. Ryan Chancellor (Acting) 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, 2005 and 2004, 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 follow 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 community 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, the auxiliary service corporations and foundations located on its campuses. The foundations meet the criteria under GASB accounting and financial reporting requirements for inclusion in the State University reporting entity. 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. 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 and footnote numbers 1 and 14. Financial Highlights At June 30, 2005 and 2004, total assets reported by the State University were $8.66 billion and $8.65 billion and total liabilities were $7.2 billion and $7.22 billion, respectively. Net assets, which totaled $1.46 billion and $1.43 billion at June 30, 2005 and 2004, experienced an increase of $29.4 million in 2005 and an increase of $278.9 million in 2004. The net assets at June 30, 2005, 2004, and 2003 are summarized in the following categories (in thousands): 2005 2004 2003 Net Assets (in thousands): Invested in capital assets, net of related debt $ 207,234 185,807 239,581 Restricted – nonexpendable 206,488 181,913 172,970 Restricted – expendable 647,669 560,814 546,110 Unrestricted 400,907 504,357 195,322 Total net assets 1,462,298 1,432,891 1,153,983 The change in net assets during 2005 and 2004 was driven by operating and other supporting revenues over expenses and losses. Revenues, expenses, and the change in net assets for the 2005, 2004, and 2003 fiscal years are summarized as follows (in thousands): 2005 2004 2003 Operating revenues $ 4,108,938 4,138,126 3,443,110 Nonoperating revenues 2,296,987 2,277,368 2,214,401 Other revenues 130,603 104,478 142,152 Total revenues 6,536,528 6,519,972 5,799,663 Operating expenses 6,207,398 5,959,903 5,504,430 Nonoperating expenses 299,723 281,161 228,668 Total expenses 6,507,121 6,241,064 5,733,098 Increase in net as $ 29,407 278,908 66,565 Total revenues reported in 2005, 2004, and 2003 were $6.54 billion, $6.52 billion, and $5.8 billion, respectively. Total revenues in 2005 and 2004 grew $17 million and $720 million, respectively, compared to the previous year. Revenue growth in 2005 compared to 2004 was driven by increases in sales and services activity of auxiliary enterprises of $55 million, net tuition and fees of $42 million, capital gifts and grants of $20 million, state appropriations revenues of $14 million, additions to permanent endowments of $12 million and other non-operating revenues of $14 million. These increases were offset by decreases in hospital and clinics revenue of $123 million, investment income and net realized and unrealized gains of $6 million, capital appropriations of $6 million, and grants and contracts revenue of $5 million. Total expenses for 2005, 2004, and 2003 were $6.51 billion, $6.24 billion, and $5.73 billion, respectively. State University expense growth in 2005 and 2004 was $266 million and $508 million, respectively. Expense growth in 2005 compared to 2004 was primarily the result of increases in instruction activity of $94 million, hospital and clinic activity of $61 million, support services of $35 million, loss on refinancing of $27 million, auxiliary enterprises of $26 million, depreciation expense of $23 million and research of $11million. These increases were offset by a decrease in interest expense of $11 million. 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 a balance sheet, statement of revenues, expenses, and changes in net assets, statement of cash flows, and accompanying notes for the June 30, 2005 fiscal year. Comparative financial statement totals and information is presented for the June 30, 2004 fiscal year. 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 Sheet presents 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 Statement of Revenues, Expenses, and Changes in Net Assets presents 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., the receipt of amounts due from students and others for services rendered, or the payment accrued for compensated absences). The Statement of Cash Flows provides 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 non-capital financing activities. Balance Sheet The balance sheet presents the financial position of the State University at the end of its 2005 and 2004 fiscal years. During the 2005 and 2004 fiscal years, the State University’s total assets increased over the prior years by $8 million and $509 million, while total liabilities decreased $22 million and increased $230 million, respectively. The following table reflects the financial position at June 30, 2005, 2004, and 2003 (in thousands): 2005 2004 2003 Current assets $ 2,070,228 2,142,559 1,866,646 Capital assets, net 4,464,604 4,132,780 3,892,744 Other noncurrent assets 2,122,623 2,374,610 2,381,484 Total assets 8,657,455 8,649,949 8,140,874 Current liabilities 1,424,980 1,441,113 1,294,136 Noncurrent liabilities 5,770,177 5,775,945 5,692,755 Total liabilities 7,195,157 7,217,058 6,986,891 Net assets $ 1,462,298 1,432,891 1,153,983 Current Assets Current assets at June 30, 2005 decreased $72 million and current liabilities decreased $16 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, 2005 and 2004 consist primarily of cash and cash equivalents of $772 million and $746 million, short-term investments of $137 million and $240 million, and receivables (accounts, interest, appropriations, and grants) of $1.119 billion for both years. During 2005, short-term investments decreased $103 million, mainly due to new investment strategies that allocated a greater percentage of investments to long-term investment pools. This decrease was offset by an increase of $25 million in cash and cash equivalents and other current assets which increased $6 million. Current Liabilities Current liabilities at June 30, 2005 and 2004 consist principally of accounts payable and accrued expenses of $438 million and $429 million, interest on debt of $267 million and $279 million, deferred revenue of $198 million and $235 million, and the current portion of long-term liabilities of $453 million and $431 million, respectively. The decrease in current liabilities at June 30, 2005 was driven principally by a decrease in deferred revenue of $37 million offset by an increase in the current portion of long-term liabilities of $22 million. Capital Assets, net In the 2005 fiscal year, the State approved the State University’s multi-year capital plan totaling nearly $1.8 billion, including $1.63 billion in new State funding with $150 million supported by campus generated funds, intended to cover the five year period through fiscal year 2008-09. Under this program, a majority of the funding is designed to support critical maintenance projects to repair, renovate or rehabilitate existing State University facilities. During the 2005 and 2004 fiscal years, capital assets, net of depreciation, increased $332 million and $240 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 $530 million and $441 million for the 2005 and 2004 fiscal years, respectively, primarily the result of building costs capitalized during each year. Equipment, library books and artwork additions during 2005 and 2004 of $242 million and $191 million, respectively, also contributed to the increase. Significant projects completed and capitalized during the 2005 fiscal year included a life sciences building at the University at Albany, student living facilities at Stony Brook University, a residential facility at Maritime College, a field house at Binghamton University, and a residential facility at the College at New Paltz. A summary of capital assets, by major classification, and related accumulated depreciation for the 2005, 2004, and 2003 fiscal years is as follows (in thousands): 2005 2004 2003 Land $ 249,435 223,881 208,417 Infrastructure and land improvements 467,607 447,683 434,321 Buildings 5,271,212 4,834,908 4,459,624 Equipment, library books, and artwork 1,867,266 1,728,078 1,679,925 Construction in progress 586,293 700,957 814,531 Total capital assets 8,441,813 7,935,507 7,596,818 Less accumulated depreciation: Infrastructure and land improvements 301,695 289,295 278,830 Buildings 2,447,466 2,340,003 2,257,454 Equipment and library books 1,228,048 1,173,429 1,167,790 Total accumulated depreciation 3,977,209 3,802,727 3,704,074 Capital assets, net $ 4,464,604 4,132,780 3,892,744 Other Noncurrent Assets Other noncurrent assets exclusive of capital assets were $2.12 billion, $2.37 billion, and $2.38 billion at June 30, 2005, 2004, and 2003, respectively. Noncurrent assets at June 30, 2005 and 2004 include long-term investments of $1.074 billion and $912 million, deposits with trustees of $681 million and $980 million, restricted cash of $73 million and $184 million, and the noncurrent portion of receivables and deferred financing costs of $295 million and $298 million, respectively. Long-term investments at June 30, 2005 and 2004 totaling $1.074 billion and $912 million, respectively, represent endowment and similar funds held in separate and distinct investment pools of the State University campuses of $338 million and $327 million, and the Cornell statutory colleges of $471 million and $400 million, respectively, and separately invested funds of $28 million and $27 million, respectively. Long-term investments of the Research Foundation totaled $208 million and $135 million, which includes $47 million and $39.5 million in investments designated for its post-retirement benefit plan at June 30, 2005 and 2004, respectively. Other long-term investments include investments of the statutory College of Ceramics at Alfred University of $13 million for both years, and the auxiliary services corporations of $16 million and $10 million at June 30, 2005 and 2004, respectively. During 2005, long-term investments increased by a total of $163 million, or 18 percent, due primarily to net realized and unrealized investment gains of $83 million, investment income of $55 million and the allocation of previously held shortterm investments to long-term investment pools. Investment gains and reinvested investment income, donations, and other additions were offset by amounts used to meet spending needs. During fiscal year 2005, deposits with trustees decreased $300 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 maintain debt service reserves for the State University’s facilities. This decrease was principally due to a change in the financing of educational facility capital projects from an “advance funding” to a “disbursement funding” structure. Restricted cash and cash equivalents at June 30, 2005 decreased $111 million compared to 2004. In October 2004, pursuant to requirements of the 2005 fiscal year budget of the State of New York, $89.5 million in funds from bond proceeds for certain equipment purchases, originally financed by the State University from operating funds, were transferred to the State and combined with other state appropriations to support the State University. Restricted cash and cash equivalents includes unspent cash on various capital financing arrangements for equipment purchases at June 30, 2005 and 2004 of $60 million and $80 million, respectively. The noncurrent portion of receivables reported at June 30, 2005 and 2004 remained relatively flat and consisted of accounts, notes, and loan receivables of $107 million and $106 million, appropriations receivable of $121 million and $122 million, and contributions receivable of $5 million and $7 million, respectively. Noncurrent Liabilities Noncurrent liabilities at June 30, 2005 and 2004 of $5.77 billion and $5.78 billion, respectively, are 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 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, 2005, 2004, and 2003 is as follows (in thousands): 2005 2004 2003 Educational facilities $ 3,989,173 4,133,882 4,243,453 Residence hall facilities 612,805 570,425 539,675 Compensated absences and post-retirement obligations 543,491 487,539 438,870 Loan - State STIP pool 132,056 148,437 171,983 Other obligations 321,760 272,233 139,703 Total long-term liabilities$ 5,599,285 5,612,516 5,533,684 In March 2005, 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 $39.3 million. Also in March, PIT bonds were issued totaling $175.8 million in order to refinance $184.8 million of the State University’s existing educational facility obligations. Although the refinancing resulted in an accounting loss of $14.5 million, the State University reduced its future aggregate debt service payments by $19.3 million through lower interest costs, resulting in an economic gain of $13.7 million. Debt service payments for PIT bonds are supported directly by the State, and the State University and the Construction Fund receives no appropriation authority for debt service on these bonds. In March 2005, the State University entered into agreements with DASNY to issue obligations totaling $172 million in order to refinance $188.6 million of the State University’s existing educational facility obligations. Although the refinancing resulted in an accounting loss of $12.6 million, the State University reduced its future aggregate debt service payments by $19 million through lower interest costs, resulting in an economic gain of $13.3 million. The State University also entered into agreements with DASNY in October 2004 to issue obligations totaling $63.4 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 by DASNY and from reserve funds accumulated by campuses from residence halls operating revenues. During fiscal year 2005, the State University’s credit ratings for educational bonds were upgraded by Moody’s (from A3 to A2) and downgraded by Fitch IBCA (from AA- to A+) compared to the previous year. The State University’s credit ratings for residence hall bonds during 2005 and 2004 were unchanged from the previous year, and the credit ratings for educational bonds were unchanged in 2004 from 2003. In 2005, the credit ratings for DASNY PIT bonds were upgraded by Moody’s (from A2 to A1). The credit ratings at June 30, 2005 are as follows: PIT Bonds Educational Residence Facilities Halls Moody’s Investors Service A1 A2 A1 Standard & Poor’s AA AA- AA- Fitch IBC AA- A+ A+ Principal payments on educational and residence hall facilities obligations made during 2005 totaled $153.7 million and $19.3 million, and in 2004 totaled $125.5 million and $20.5 million, respectively. During fiscal years 2005 and 2004, the longterm portion of compensated absence liabilities (vacation and sick) and post-retirement benefit obligations increased $56 million and $48.7 million, respectively. The increase was driven by an increase of $31 million due 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. A $17 million increase in the post- retirement benefit obligation of the Research Foundation also contributed to the increase. 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, 2005 and 2004 was $148.6 million and $163.4 million, respectively. During fiscal years 2005 and 2004, the total amount paid on these loans was $17.9 million and $25.2 million, respectively. Refundable government loan funds at June 30, 2005 and 2004 totaled $137.2 million and $133.8 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. Statement of Revenues, Expenses, and Changes in Net Assets The statements of revenues, expenses, and changes in net assets present the State University’s results of operations. Total operating revenues of the State University for 2005, 2004, and 2003 were $4.11 billion, $4.14 billion, and $3.44 billion, respectively. Nonoperating and other revenues including State appropriations totaled $2.43 billion, $2.38 billion, and $2.36 billion for fiscal years 2005, 2004, and 2003, respectively. Total expenses for 2005, 2004, and 2003 were $6.51 billion, $6.24 billion, and $5.73 billion, respectively. Revenue Overview Revenues (in thousands): 2005 2004 2003 Tuition and fees, net $ 860,803 819,256 652,824 Hospitals and clinics 1,250,747 1,373,510 1,003,838 Federal grants and contracts 794,131 805,448 755,549 State, local, private grants and contracts, and other sources 615,025 606,954 536,115 Auxiliary enterprises 588,232 532,958 494,784 Operating revenues 4,108,938 4,138,126 3,443,110 State appropriations 2,075,575 2,061,188 2,079,164 Other nonoperating 352,015 320,658 277,389 Nonoperating and other revenues 2,427,590 2,381,846 2,356,553 Total revenues $ 6,536,528 6,519,972 5,799,663 Tuition and Fees Tuition and fee revenue for the 2005 and 2004 fiscal years, net of scholarship allowances, was $861 million and $819 million, an increase of $42 million and $166 million, respectively, compared to the previous year. The growth in 2005 was largely due to an increase in tuition rates for out-of- state students and other professional degrees, as well as an increase in enrollment. The increase in 2004 was principally driven by an increase in undergraduate tuition for State residents to $4,350 from $3,400 beginning in the fall of 2003. 2005 Revenues (in thousands) Auxiliary Enterprises $588,232 State, Local, Private Grants, Contracts and Other Sources $615,025 Federal Grants and Contracts $794,131 Tuition and Fees $860,803 Hospitals and Clinics $1,250,747 State Appropriations $2,075,575 Other Nonoperating $352,015 Annual average full-time equivalent students, including undergraduate and graduate, were 174,817, 73,501, and 171,730 for the fiscal years ended June 30, 2005, 2004, and 2003, 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 2005 fiscal year, hospital and clinic revenue decreased $123 million compared to the previous year principally due to a reduction in DSH Program revenue from the prior 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 hospitals that serve large numbers of Medicaid and uninsured patients. In the current year, the State University recorded revenue of $188 million under the DSH Program compared to $379 million in 2004, and $64 million in 2003, respectively. The State’s Medicaid plan covering the last six months of the 2003 fiscal year was not approved and recognized until 2004 causing the significant increase in DSH Program revenue in 2004. Sponsored Research, Grant and Contract Revenue During the 2005 and 2004 fiscal years, the State University continued to increase its volume of sponsored program activity. Total revenue from federal, state, local, private and capital grants and contracts administered by the Research Foundation was $743 million, $728 million, and $638 million, respectively for the fiscal years ended June 30, 2005, 2004, and 2003, respectively. Facilities and administrative recoveries earned on grants and contracts administered by the Research Foundation were $126 million, $123 million, and $109 million for the fiscal periods ending June 30, 2005, 2004, and 2003, respectively. The volume of research and other sponsored programs reported for 2005 and 2004 by the statutory colleges at Cornell University was $151.6 million and $130.9 million, respectively, and Alfred University was $3.8 million for both years. Revenue from projects sponsored by the federal government and administered by the Research Foundation totaled $365 million and $361 million during 2005 and 2004, respectively. Of these federally sponsored projects, 56 and 55 percent of the funding was received from the Public Health Service in 2005 and 2004, respectively. 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 $378 million, $367 million, and $304 million for the 2005, 2004, and 2003 fiscal years, respectively. In fiscal years 2005 and 2004, the largest non-federal support of sponsored research programs was received from the Empire State Development Corporation and from the State’s Office of Children and Family Services. Amounts received under the State’s Tuition Assistance Program in 2005 increased $5 million over the previous fiscal year. 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 service 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 67,921, an increase of nearly 9,500 students since the fall of 2000 and an increase of over 3,000 students compared to the previous year. Utilization rates for the fall of 2004 were reported at 97.8 percent. Auxiliary enterprise sales and services revenue totaled $588 million, $533 million, and $495 million in the 2005, 2004, and 2003 fiscal years, respectively. Of these amounts, residence halls operating revenue totaled $255 million, $232 million, and $210 million for 2005, 2004, and 2003, respectively. Increases in revenue were largely due to increases in occupancy levels and modest increases in room rates. Food service operations generated $165 million, $147 million, and $135 million in revenue in fiscal years 2005, 2004, and 2003, respectively. In addition to residence halls and food service activities, other auxiliary revenues totaled $168 million, $154 million, and $151 million for fiscal years 2005, 2004, and 2003, 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 $2.076 billion and $2.061 billion, and represented approximately 32 percent of total revenues for both fiscal years. 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 increased $14 million in 2005 and decreased by $18 million in 2004. In 2005, State support for operating expenses decreased $132 million, while indirect State support for debt service, fringe benefits, and litigation accruals increased $146 million compared to 2004. Nonoperating and Other Revenue Nonoperating and other revenue excluding State appropriations were $352 million and $321 million for the 2005 and 2004 fiscal years, respectively. This increase was primarily due to an increase of $20 million in capital gifts and grants and $12 million in additions to permanent endowments. Expense Overview 2005 Expenses (in thousands) Scholarships and Fellowships $99,775 Depreciation $291,355 Auxiliary Enterprises $572,264 Research $563,842 Hospitals and Clinics $1,382,565 Public Service $234,232 Support Services $1,546,436 Instruction $1,516,929 Other Nonoperating $299,723 Expenses (in thousands): 2005 2004 2003 Instruction $ 1,516,929 1,422,449 1,374,314 Research 563,842 552,651 523,261 Public service 234,232 237,383 239,740 Support services 1,546,436 1,511,468 1,356,380 Scholarships and fellowships 99,775 99,446 100,023 Hospitals and clinics 1,382,565 1,321,968 1,184,617 Auxiliary enterprises 572,264 545,992 497,478 Depreciation and amortization 291,355 268,546 228,617 Other nonoperating 299,723 281,161 228,668 Total expenses $ 6,507,121 6,241,064 5,733,098 The increase in instruction expense during 2005 and 2004 of $94 million and $48 million, respectively, is attributable to growth in personal service and related fringe benefit expenses. The fringe benefit rate applied to personal service costs increased from 36.24 percent in 2004 to 41.99 percent in 2005. Research expenses increased $11 million and $29million during 2005 and 2004, respectively. This growth was predominantly from increased sponsored research activity at the Research Foundation and Cornell statutory colleges in both years. Support services, which include expenses for academic support, student services, institutional support, maintenance and operation of plant, and other operating expenses increased $35 million and $155 million during 2005 and 2004, respectively. Institutional support increased $17 million and $51 million and academic support $13 million and $34 million in the 2005 and 2004 fiscal years, respectively, driven by an increase in personal service and fringe benefit 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. Total scholarships and fellowships, including federal and state grant programs were $495 million and $482 million for the fiscal years ended June 30, 2005 and 2004, respectively. Of this amount, $395 million and $382 million were classified as scholarship allowances for fiscal years 2005 and 2004, respectively, and $100 million was reported as expense in both years. Major scholarships and grants received include the State Tuition Assistance Program of $175.2 million and $169.9 million, and $143.2 million and $143 million from the federal Pell program during fiscal years 2005 and 2004, respectively. Expenses at the State University’s hospitals and clinics increased $61 million and $137 million during 2005 and 2004, respectively, largely due to an increase in core operating and personal service costs. Also contributing to the growth in expenses in 2005 and 2004 was an increase in fringe benefit costs of $35 million and $29 million, respectively. During fiscal years 2005 and 2004, auxiliary enterprise expenses increased $26 million and $49 million, respectively. For the 2005 and 2004 fiscal years, residence halls expenses remained relatively flat and food service expenses increased $18 million and $11 million, respectively. Other auxiliary enterprise expenses for the years ended June 30, 2005 and 2004 were $191 million and $181 million, respectively. Depreciation and amortization expense recognized in fiscal years 2005 and 2004 totaled $291million and $269 million, respectively. Other nonoperating expenses were $300 million and $281 million for the years ended June 30, 2005 and 2004, respectively. The increase in 2005 is primarily driven by a loss on refinancing expense of $27 million offset by a decrease in interest expense. Economic Factors That Will Affect the Future The State University is one of the largest public universities in the nation, with headcount enrollment of nearly 204,000 in the fall 2004, on twenty nine State-operated campuses and five statutory colleges. 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 for its academic programs coupled with a larger expected number of high school graduates in New York State over the next few years. Full-time equivalent enrollment, excluding community colleges, for the fiscal year ended June 30, 2005 is approximately 174,800, a slight increase compared to June 30, 2004 of approximately 173,500. New York State appropriations remain the largest single source of revenue. State appropriation revenue is expected to increase slightly in fiscal year 2005-06, to support the rising personal service, utility, health care and other fringe benefit costs. The State University’s continued operational viability is substantially dependent upon this level of ongoing State support. For the most recent fiscal year, State appropriations represented 32 percent of the total revenues of the State University. Continued emphasis will be placed on Universitywide 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. In fiscal 2005, the State University received new multi-year capital funding authorizations totaling nearly $1.8 billion, intended to cover the five-year period through fiscal year 2008-09. The recently enacted 2005-06 State Budget included a total of nearly $700 million in new State appropriations for special capital project initiatives for University hospitals and the academic facilities of state-operated campuses. These new appropriations provide the University both the resources needed to make steady progress in addressing the core critical maintenance needs of its existing infrastructure, and the flexibility to make additional capital investments in a wide range of areas, including research and technology development. The State University hospitals, each with academic medical centers, 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. 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 business-type activities and aggregate discretely presented component units of The State University of New York ("the University") as of and for the year ended June 30, 2005, which collectively comprise the University’s financial statements. These financial statements are the responsibility of the University's management. Our responsibility is to express opinions on these financial statements based on our audit. 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 revenues constituting 18% 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 49% and revenues constituting 50% of the related aggregate discretely presented component unit totals. 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 audit 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University’s internal control over financial reporting. Accordingly, we express no such opinion. 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 audit 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 audit and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities and aggregate discretely presented component units of the University as of June 30, 2005, and the related changes in financial position and, where applicable, 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. 40, Deposit and Investment Risk Disclosures – an amendment of GASB Statement No. 3, as of July 1, 2004. 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. October 21, 2005 KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. Balance Sheet June 30, 2005 (with comparative totals at June 30, 2004) In thousands 2005 2004 Assets Current Assets: Cash and cash equivalents $ 771,622 746,460 Short-term investments 136,967 240,322 Accounts, notes, and loans receivable, net 503,066 509,523 Interest receivable 3,901 4,162 Appropriations receivable 433,205 422,300 Grants receivable 179,081 183,412 Inventories 31,449 29,624 Other assets 10,937 6,756 Total current assets 2,070,228 2,142,559 Noncurrent Assets: Restricted cash and cash equivalents 73,213 184,053 Deposits with trustees 680,505 980,441 Accounts, notes, and loans receivable, net 106,604 106,080 Contributions receivable 4,987 7,055 Appropriations receivable 120,554 122,353 Deferred financing costs 62,503 62,884 Long-term investments 1,074,257 911,744 Capital assets, net 4,464,604 4,132,780 Total noncurrent assets 6,587,227 6,507,390 Total assets $ 8,657,455 8,649,949 Liabilities and Net Assets Current Liabilities: Accounts payable and accrued liabilities 438,302 428,975 Interest payable 266,948 279,004 Student deposits 12,324 11,587 Deposits held in custody for others 26,409 27,922 Deferred revenue 198,042 235,374 Long-term liabilities-current portion 452,619 431,080 Other liabilities 30,336 27,171 Total current liabilities 1,424,980 1,441,113 Noncurrent Liabilities: Long-term liabilities 5,599,285 5,612,516 Refundable government loan funds 137,169 133,839 Other liabilities 33,723 29,590 Total noncurrent liabilities 5,770,177 5,775,945 Total liabilities 7,195,157 7,217,058 Net Assets: Invested in capital assets, net of related debt 207,234 185,807 Restricted - nonexpendable: Scholarships and fellowships 60,298 48,877 Instruction and departmental research 79,668 76,421 General operations and other 66,522 56,615 Restricted - expendable: Instruction and departmental research 329,972 293,067 Scholarships and fellowships 72,840 62,762 Capital projects 41,453 42,016 Loans 21,470 20,728 General operations and other 181,934 142,241 Unrestricted 400,907 504,357 Total net assets 1,462,298 1,432,891 Total liabilities and net assets $ 8,657,455 8,649,949 Statement of Revenues, Expenses, and Changes in Net Assets For the Year Ended June 30, 2005 (with comparative totals for the year ended June 30, 2004) In thousands 2005 2004 Operating revenues: Tuition and fees $ 1,174,057 1,122,946 Less scholarship allowances (313,254) (303,690) Net tuition and fees 860,803 819,256 Federal grants and contracts 794,131 805,448 State grants and contracts 300,139 291,369 Local grants and contracts 16,942 19,603 Private grants and contracts 203,235 203,456 Sales and services: University hospitals and clinics 1,250,747 1,373,510 Educational activities 44,627 41,224 Sales and services of auxiliary enterprises: Residence halls, net 254,667 231,641 Food service, net 165,148 147,206 Other, net 168,417 154,111 Other sources 50,082 51,302 Total operating revenues 4,108,938 4,138,126 Operating expenses: Instruction 1,516,929 1,422,449 Research 563,842 552,651 Public service 234,232 237,383 Academic support 314,910 301,749 Student services 197,305 192,108 Institutional support 570,026 552,920 Operation and maintenance of plant 443,526 448,603 Scholarships and fellowships 99,775 99,446 Hospitals and clinics 1,382,565 1,321,968 Auxiliary enterprises: Residence halls 215,473 217,091 Food service 166,258 148,184 Other 190,533 180,717 Depreciation and amortization expense 291,355 268,546 Other operating expenses 20,669 16,088 Total operating expenses 6,207,398 5,959,903 Operating loss (2,098,460) (1,821,777) Nonoperating revenues (expenses): State appropriations: University operations 1,915,621 1,895,720 Hospitals and clinics 159,954 165,468 Federal appropriations 16,300 17,048 Investment income, net of investment fees 55,011 46,042 Net realized and unrealized gains 83,487 97,978 Gifts 51,334 53,016 Interest expense on capital related debt (257,547) (268,743) Loss on disposal of plant assets (15,079) (12,418) Loss on refinancing (27,097) - Other nonoperating revenues, net 15,280 2,096 Net nonoperating revenues 1,997,264 1,996,207 Income (loss) before other revenues and gains (101,196) 174,430 Capital appropriations 31,353 37,301 Capital gifts and grants 80,488 60,858 Additions to permanent endowments 18,762 6,319 Increase in net assets 29,407 278,908 Net assets at the beginning of year 1,432,891 1,153,983 Net assets at the end of year $ 1,462,298 1,432,891 Statement of Cash Flows For the Year Ended June 30, 2005 (with comparative totals for the year ended June 30, 2004) In thousands 2005 2004 Cash flows from operating activities: Tuition and fees $ 866,247 821,198 Grants and contracts: Federal 812,829 839,726 State and local 321,014 325,618 Private 254,205 213,308 Hospital and clinics 1,305,475 1,223,762 Personal service payments (2,909,869) (2,729,487) Other than personal service payments (1,792,759) (1,911,105) Payments for fringe benefits (310,601) (259,558) Payments for scholarships and fellowships (53,656) (50,858) Loans issued to students (35,613) (34,190) Collection of loans to students 30,468 29,637 Auxiliary enterprise charges: Residence halls 256,386 234,851 Food service 164,183 153,229 Other (intercollegiate athletics, bookstore, fees, and vending) 152,960 139,249 Sales and service of educational activities 3,667 37,269 Other receipts (payments) (28,544) 13,657 Net cash used by operating activities (963,608) (953,694) Cash flows from noncapital financing activities: State appropriations: Operations 877,939 1,033,148 Debt service 374,204 358,404 Federal appropriations 14,842 12,157 Private gifts and grants 51,766 53,399 Proceeds from short-term loans 278,787 235,300 Repayment of short-term loans (285,907) (214,942) Direct loan receipts 294,008 279,739 Direct loan disbursements (294,008) (279,739) Other receipts 21,734 7,751 Net cash provided by noncapital financing activities 1,333,365 1,485,217 Cash flows from capital and related financing activities: Proceeds from capital debt 151,471 250,099 Capital appropriations 46,280 31,288 Capital grants and gifts received 83,289 64,159 Proceeds from sale of capital assets 493 - Purchases of capital assets (272,637) (127,704) Payments to contractors (373,041) (367,089) Principal paid on capital debt and leases (220,623) (187,589) Interest paid on capital debt and leases (278,260) (282,869) Other receipts (payments) 7,449 (5,093) Deposits with trustees 317,094 328,476 Net cash used by capital and related financing activities (538,485) (296,322) Cash flows from investing activities: Proceeds from sales and maturities of investments 4,814,335 4,014,448 Interest, dividends, and realized gains on investments 123,255 78,193 Purchases of investments (4,854,540) (4,093,398) Net cash provided (used) by investing activities 83,050 (757) Net change in cash (85,678) 234,444 Cash - beginning of year 930,513 696,069 Cash - end of year $ 844,835 930,513 Reconciliation of net operating loss to net cash used by operating activities: Operating loss $ (2,098,460) (1,821,777) Adjustments to reconcile operating loss to net cash used by operating activities: Depreciation and amortization expense 291,355 268,546 Bad debt expense - (1,000) Fringe benefits provided by State 770,515 665,651 Litigation costs provided by State 41,949 57,592 Change in assets and liabilities: Receivables, net 12,332 (182,171) Inventories (1,825) 1,251 Other assets (4,181) 4,695 Accounts payable, accrued expenses, and other liabilities 62,815 (17,418) Deferred revenue (37,332) 62,641 Student deposits 737 981 Deposits held for others (1,513) 7,315 Net cash used by operating activities $ (963,608) (953,694) Supplemental disclosures for noncash transactions: New capital leases/debt agreements $ 4,444 21,016 Fringe benefits provided by the State $ 770,515 665,651 Litigation costs provided by the State $ 41,949 57,592 Noncash gifts $ 8,723 15,145 State University of New York Foundations Balance Sheet June 30, 2005 In thousands Assets Cash and cash equivalents $ 50,167 Accounts and notes receivable, net 13,752 Pledges receivable, net 30,283 Investments 693,298 Other assets 45,013 Capital assets, net 297,150 Total assets 1,129,663 Liabilities and Net Assets Liabilities: Accounts payable and accrued expenses 18,964 Current portion of long-term debt 6,343 Deferred revenue 1,578 Deposits held for others 42,352 Other liabilities 34,896 Long-term debt 257,066 Total liabilities 361,199 Net Assets: Unrestricted: Board designated for: Fixed assets 45,306 Campus programs 84,430 Investments 57,640 Other 24,380 Undesignated 34,654 Temporarily restricted: Scholarships and fellowships 55,536 Campus programs 76,770 Research 39,868 General operations and other 52,111 Permanently restricted: Scholarships and fellowships 148,893 Campus programs 56,762 Research 50,109 General operations and other 42,005 Total net assets 768,464 Total liabilities and net assets $ 1,129,663 State University of New York Foundations Statement of Activities For the Year Ended June 30, 2005 In thousands Temporarily Permanently Unrestricted Restricted Restricted Total Revenues: Contributions, gifts, and grants $ 32,901 65,454 25,412 123,767 Investment income, net 3,354 10,493 2,004 15,851 Net realized and unrealized gains 23,483 15,435 782 39,700 Rental income 31,839 312 - 32,151 Sales and services 16,602 - - 16,602 Program income and special events 34,955 7,477 42 42,474 Other sources 1,291 422 859 2,572 Endowment earnings transferred - 2,318 (2,318) - Net assets released from restrictions 84,878 (84,878) - - Total revenues 229,303 Expenses: Program expenses 93,014 93,014 Payments to State University: Scholarships and fellowships 20,412 20,412 Other 11,677 11,677 Real estate expenses 14,144 14,144 Depreciation and amortization expense 9,416 9,416 Interest expense on capital-related debt 9,882 9,882 Management and general 16,877 16,877 Fundraising 10,684 10,684 Other expenses 6,901 6,901 Total expenses 193,007 193,007 Increase in net assets 36,296 17,033 26,781 80,110 Net assets at the beginning of year (restated) 210,114 207,252 270,988 688,354 Net assets at the end of year $ 246,410 224,285 297,769 768,464 Notes to Financial Statements June 30, 2005 (with comparative information for June 30, 2004) 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. Inclusion in the entity is based primarily on the notion of financial accountability. Governmental Accounting Standards Board (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 is also 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, 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, the campus- related foundations and student housing corporations (all referred to as foundations) are included in the State University reporting entity. 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). 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, 2005 and 2004. 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 audited financial statements, the majority of which have a May 31 or June 30 fiscal year end. 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, 2005 and 2004. 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 financial statements information of the statutory colleges of Cornell University and Alfred University, for 2005 and 2004, 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. During 2005, the State University adopted GASB Statement No. 40, Deposit and Investment Risk Disclosures. This Statement amends GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements, and establishes and modifies disclosure requirements related to investment and deposit risks. 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 distinguish between operating and non-operating 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, non-exchange 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. 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 non-exchange 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 revenues are reported net of scholarship discounts and allowances. Auxiliary sales and service revenue classifications for 2005 and 2004 were reported net of the following scholarship discount and allowance amounts (in thousands): 2005 2004 Residence halls $ 42,419 40,101 Food service 19,699 18,343 Other auxiliary 20,073 19,819 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. 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, 2005 and 2004, the State University had $515 million and $457 million available for authorization for expenditure, respectively, $328 million and $293.5 million from restricted funds and $187 million and $163.5 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 and a limited use of an alternative investment strategy under a fund-of-funds 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. Alternative investments are valued using current estimates of fair value obtained from the investment manager in the absence of readily determinable public market values. Such valuations generally reflect discounts for liquidity and consider variables such as financial performance of investments, including comparison of comparable companies’ earning multiples, cash flow analysis, recent sales prices of investments, and other pertinent information. Because of the inherent uncertainty of the valuation for these investments, the estimated values may differ from the values that would have been used had a ready market existed. 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. Generally, the net interest cost on debt during the construction period related to capital projects is capitalized, and totaled $8.2 million and $11.5 million, in the 2005 and 2004 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 benefit costs) at a fringe benefit rate determined by the State. The State University records an expense and 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 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 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 2004 financial statements have been reclassified to conform to the 2005 presentation. 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 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, 2005 and 2004 includes unspent cash under capital financing arrangements and deposits held for others. At June 30, 2004, restricted cash included $89.5 million of bond proceeds for certain equipment purchases originally financed by the State University from operating funds pursuant to requirements of the 2005 fiscal year budget of the State of New York. Accordingly, during the 2005 fiscal year this cash was transferred to the State and combined with other state appropriations, to augment the State’s support of the State University. The State University does not have a formal policy for collateral requirements for cash deposits. The New York State Comprehensive Annual Financial Report contains the GASB No. 40 risk disclosures for deposits held in the State treasury. Deposits not held in the state treasury that are not covered by depository insurance are a. uncollateralized; b. collateralized with securities held by a pledging financial institution; or c. collateralized with securities held by a pledging financial institution’s trust department or agency, but not in the State University or affiliates name. At June 30, 2005, these deposits are catagorized as follows: Category a Category b Category c Deposits: $ 50,528 2,143 2,457 3. Investments Investments of the State University are recorded at fair value. Investment income is reported net of investment fees of $3.1 million and $3 million for 2005 and 2004, 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 longterm 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 $50.9 million and $43.4 million of investments designated for their post-retirement benefit plan for 2005 and 2004, respectively. Investments of the Construction Fund have been made in accordance with the applicable provisions 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 consisted of United States government obligations of approximately $23.3 million and $22.3 million, at March 31, 2005 and 2004, 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): 2005 2004 State University Campuses Pooled funds: Non-equities $ 66,119 54,251 Equities - domestic 246,478 239,144 Equities - international 45,710 38,815 Total pooled funds 358,307 332,210 Separately invested funds non-equities 102 102 Total invested funds 358,409 332,312 Cornell Statutory Colleges Pooled funds: Non-equities 303,497 230,168 Equities - domestic 77,288 108,291 Equities - international 90,483 61,138 Total pooled funds 471,268 399,597 Short-term and separately invested funds: Non-equities 21,420 49,433 Equities 17,124 30,690 Total short-term and separately invested funds 38,544 80,123 Total invested funds 509,812 479,720 Alfred Ceramics Non-equities 3,104 3,104 Equities 9,724 9,724 Total invested funds 12,828 12,828 Research Foundation Non-equities 147,665 189,228 Equities 114,097 72,987 Total invested funds 261,762 262,215 Auxiliary Services Corporations Non-equities 28,186 29,805 Equities 16,915 12,902 Total invested funds 45,101 42,707 State University Construction Fund Total invested funds - non-equities 23,312 22,284 Total investments $1,211,224 1,152,066 Classified as shortterm $ 136,967 240,322 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 investments of the State University’s endowment and similar funds and fair value per unit (in thousands): Gains Unit Fair Value Cost (Losses) Value End of year $ 358,307 319,416 38,891 10.04 Beginning of year 332,210 303,794 28,416 9.14 Unrealized net gain 10,475 Realized net gain 21,304 Total net gain $ 31,779 Investments of the endowment and similar funds of the Cornell statutory colleges, except for separately invested funds with a fair value of $28 million and $27 million for 2005 and 2004, respectively; 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): Gains Unit Fair Value Cost (Losses) Value End of year $ 471,268 411,141 60,127 50.11 Beginning of year 399,597 341,476 58,121 46.51 Unrealized net gain 2,006 Realized net gain 43,688 Total net gain $ 45,694 Generally, individual fixed income investment securities must be of investment grade. The State University maintains a portfolio which possesses an overall weighted average rating by Moody’s and Standard and Poor’s (S&P) of at least A. Private placement securities must be rated A3 or higher by Moody’s or A- or higher by S&P. Parameters exist that allow some limited investments in non-investment grade securities, however, investments rated below B3 by Moody’s or B- by S&P are prohibited. Policies are in place that limit fixed income investment duration within certain benchmarks and a highly diversified portfolio is maintained which limits interest rate risk exposure. At June 30, 2005, the State University had the following fixed income investments and related maturities, assuming no calls (in thousands): More Fair Less than 1-5 6-10 than 10 Investment Type Value 1 year years years years US treasury bills $ 5,079 2,718 520 312 1,529 US treasury notes/bonds 39,042 4,809 15,444 9,931 8,858 US treasury strips 20,800 20,800 - - - Asset-backed securities 63,473 1,774 5,402 2,137 54,160 Municipals 3,456 - 261 1,660 1,535 Repurchase agreements 2,531 810 380 228 1,113 Government bonds 5,021 1,555 729 437 2,300 Coporate bonds 39,458 7,376 6,781 11,155 14,146 Commercial paper 10,648 3,407 1,597 958 4,686 Mutual funds - non-equities 132,941 68,534 29,954 16,511 17,942 International - non-equities 13,242 3,778 2,400 1,687 5,377 US government TIPS 15,344 3,975 2,786 1,812 6,771 US government agencies 14,384 4,120 2,753 1,159 6,352 Total $ 365,419 123,656 69,007 47,987 124,769 Credit quality ratings of the State University’s investments in debt securities excluding obligations of, or guarenteed by, the U.S. Government, as described by Moody’s Investors Service, S&P, and Fitch IBCA as of June 30, 2005 are summarized in Table A. The State University’s exposure to foreign currency risk for investments held at June 30, 2005, by currency denomination, was as follows (in thousands): Currency Fair Value Euro $ 23,814 British pound 19,544 Japanese yen 19,019 Turkish lira 7,691 Australian dollar 4,711 Taiwan dollar 3,965 South Korean won 3,052 Hong Kong dollar 2,363 Singapore dollar 1,797 Swiss franc 1,717 So. African rand 1,031 Swedish krona 1,022 New Zealand dollar 927 Malaysian ringgit 768 Brazil Real cruzeiro 524 Other 2,026 Total $ 93,971 Table A (in thousands) Credit Ratings for the 2005 Fiscal Year Investment Type AAA AA A BBB BB B Not Rated Asset-backed securities $ 18,754 710 2,395 354 41,260 Municipal bonds 2,471 702 283 Repurchase agreements 2,531 Corporate bonds 4,089 467 12,981 7,772 4,364 115 9,670 Commercial paper 3,972 2,897 3,779 Mutual funds - non-equities* 90,890 13,437 28,614 International - non-equities 7,522 1,097 360 2,285 1,604 374 US government agencies 13,314 822 248 Total $ 137,040 3,798 19,991 10,411 8,865 13,552 86,476 4. Accounts, Notes, and Loans Receivable At June 30, accounts, notes, and loans receivable were summarized as follows (in thousands): 2005 2004 Tuition and fees $ 50,772 42,002 Allowance for uncollectible (7,364) (5,696) Net tuition and fees 43,408 36,306 Room Rent 7,834 6,146 Allowance for uncollectible (1,763) (1,364) Net room rent 6,071 4,782 Patient fees, net of contractual allowances 403,184 431,371 Allowance for uncollectible (88,920) (72,749) Net patient fees 314,264 358,622 Other, net 113,406 86,234 Total accounts and notes receivable 477,149 485,944 Student loans 154,431 152,535 Allowance for uncollectible (21,910) (22,876) Total student loans receivable 132,521 129,659 Total, net $ 609,670 615,603 Other accounts receivable consist primarily of funds due to the State University from federal and state government agencies and private sources. 5. Capital Assets Capital assets, net of accumulated depreciation, totaled $4.46 billion and $4.13 billion at fiscal year end 2005 and 2004, respectively. Capital asset activity for fiscal years 2005 and 2004 is reflected in Table B. 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. 6. Long-term Liabilities The State University has entered into capital leases and other financing agreements with the (“DASNY”) to finance most of its capital facilities. Equipment purchases are also made through DASNY’s Tax-exempt Equipment Leasing Program (TELP) and 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, 2005 and 2004, other than facilities obligations, which are included as of March 31, 2005 and 2004, total obligations are summarized in Table C. 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 2005, 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 $39.3 million. Also in March, PIT bonds were issued totaling $175.8 million in order to refinance $184.8 million of existing PIT obligations. The refinancing resulted in an accounting loss of $14.5 million. The State University reduced its future aggregate debt service payments by $19.3 million through lower interest costs, resulting in an economic In March 2005, the State University entered into agreements with DASNY to issue obligations totaling $172 million in order to refinance $188.6 million of the State University’s existing educational facility obligations. The refinancing resulted in an accounting loss of $12.6 million. The State University reduced its future aggregate debt service gain of $13.7 million. In March 2005, the State University entered into agreements with DASNY to issue obligations totaling $172 million in order to refinance $188.6 million of the State University’s existing educational facility obligations. The refinancing resulted in an accounting loss of $12.6 million. The State University reduced its future aggregate debt service payments by $19 million through lower interest costs, resulting in an economic gain of $13.3 million. 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, 2005, $1.36 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. The State University entered into agreements with DASNY in October 2004 to issue obligations totaling $63.4 million for the construction and rehabilitation of residential facilities. 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, 2005, $274.6 million of such obligations outstanding were considered defeased. Equipment Capital Leases - The State University leases equipment under DASNY’s Tax-exempt Equipment Leasing Program (TELP) and various other capital lease arrangements and through the issuance of certificates of participation, which are 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, 2005 was $148.6 million. During the year, $17.9 million was paid on these loans. The State University incurred an interest cost of $3.2 million at an average interest rate of 2.1 percent. 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. The State University’s cash and investments, which comprise deposits with trustees, are registered in the State University’s name held by an agent or in trust accounts in the State University's name. Cash and short-term investments held in the State treasury were approximately $27.3 million. The market value of investments held, maturity and rating, if applicable, are as follows (in thousands): Fair Less than 1-5 Type of Investments Value 1 year years Rating US treasury notes/bonds $ 158,793 125,756 33,037 US treasury bills 131,103 131,103 US treasury strips 287,873 284,072 3,801 Federal National Mortgage Association 6,885 6,885 AAA Federal Home Loan Bank 28,203 28,203 AAA Federal Farm Credit Bank 40,370 40,370 AAA Total $ 653,227 616,389 36,838 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 administeredby 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 (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 five 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 ten 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 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 $2.19 billion and $2.07 billion for the June 30, 2005 and 2004 fiscal years, respectively. The payroll for 2005 and 2004 for State University employees covered by TIAA/CREF was $1.38 billion and $1.32 billion, ERS was $725 million and $667 million, and TRS was $86 million and $82 million, respectively. Employer and employee contributions under each of the plans were as follows (in millions): 2005 2004 2003 Employer contributions: TIAA- CREF $147.3 140.2 135.1 ERS 5.7 5.4 5.1 TRS 5.5 4.6 4.0 Employee contributions: TIAA- CREF $ 39.1 36.5 34.8 ERS 8.1 7.2 6.7 TRS 0.9 0.8 0.8 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 years ended June 30, 2005 and 2004 was $296.0 million and $282.7 million, respectively. The Research Foundation pension contributions for fiscal years 2005, 2004, and 2003 were $21.6 million, $22.2 million, and $20.5 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 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 survivors. Substantially all of the State University's employees become eligible for these benefits if they reach normal retirement age while working for the State University. Currently, 15,694 retirees and 1,839 dependent survivors meet the eligibility requirements. The State University recognizes the cost of providing post-retirement health insurance and death benefits on a pay-as-you-go basis. For the fiscal years ended June 30, 2005 and 2004, the State, on behalf of the State University, paid health insurance premiums of $131.8 million and $117.9 million, respectively, and survivor benefits of $1.1 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 5,635 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 $4.5 million and $3.5 million during the years ended June 30, 2005 and 2004, respectively. Amounts recognized in the June 30, 2005 and 2004 financial statements include an accrued benefit cost of $91.6 million and $73.9 million, respectively, and investments designated for the plan of $50.9 million and $43.4 million, respectively. The investments are held in an unrestricted account, designated by the Research Foundation Board of Directors, consisting primarily of equity securities. 9. Commitments The State University has entered into contracts for the construction and improvement of various projects. At March 31, 2005, these outstanding contract commitments totaled approximately $285.3 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, 2005 and 2004 under such operating leases were approximately $22.3 million and $20.4 million, respectively. The following is a summary of the future minimum rental commitments under noncancelable real property and equipment leases with terms exceeding one year (in thousands): Year ending June 30, 2006 $ 23,800 2007 16,916 2008 11,529 2009 8,757 2010 5,148 2011-15 10,973 2016-20 60 2021-25 25 $ 77,208 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 $167.6 million at June 30, 2005 ($165.5 million related to hospitals and clinics) for unfavorable judgments, both anticipated and awarded but not yet paid. 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 of total revenues for both the 2005 and 2004 fiscal years. The State University is dependent on this appropriation to carry on its operations. 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. 13. Subsequent Events In April 2005, the State University entered into agreements with DASNY to issue obligations totaling $70.1 million in order to refinance $67.7 million of the State University‘s existing residential hall obligations for the purpose of reducing the University’s future aggregate debt service payments. In October 2005, the State University entered into agreements with DASNY to issue obligations totaling $111.9 million for the construction and rehabilitation of residential facilities and to refinance the State University’s existing residential hall obligations. 14. Foundations 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 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 statements, 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, 2005, the foundations distributed $32.1 million 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 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 $693.3 million at June 30, 2005. The composition of investments at June 30, 2005 is as follows (in thousands): Equities - domestic $ 265,583 Equities - international 89,719 Non-equities 265,459 Other investments 72,537 Total investments $ 693,298 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 $297.2 million at fiscal year end 2005. Capital asset classifications at June 30, 2005 are summarized as follows (in thousands): Land and land improvements $ 10,457 Buildings 219,524 Equipment 28,699 Artwork and library books 14,864 Construction in progress 78,692 Total capital assets 352,236 Less accumulated depreciation 55,086 Capital assets, net $ 297,150 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: 2006 $ 6,343 2007 6,400 2008 7,209 2009 8,328 2010 8,015 Thereafter 227,114 $ 263,409 Restatement The unrestricted, temporarily restricted, and permanently restricted net assets as previously reported at June 30, 2004 have been restated to properly reflect the net asset class for accumulated endowment gains, and adjusted to properly reflect assets and liabilities not previously recorded. The effect of these adjustments was an increase in net assets of $715 thousand, an increase in assets of $7.124 million and an increase in liabilities of $6.409 million. Accordingly, the beginning net assets at July 1, 2004 in the accompanying statement of activities, for the State University foundations, have been restated as follows (in thousands): Net Asset As Previously Classification Reported Restatement As Restated Unrestricted $ 206,663 3,451 210,114 Temporarily restricted 198,012 9,240 207,252 Permanently restricted 282,964 (11,976) 270,988 Totals $ 687,639 715 688,354 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 ANNUAL FINANCIAL REPORT 2005 The StateUniversity of New York State University Plaza Albany | NY 12246 www.suny.edu The StateUniversity of NewYork