DRAFT The State University of New York www.suny.edu Board of Trustees Thomas F. Egan, Chairman Randy A. Daniels, Vice Chairman Alyssa Amyotte Aminy I. Audi Robert J. Bellafiore Christopher P. Conners Edward F. Cox John J. Cremins Candace de Russy Gordon R. Gross Stephen J. Hunt Michael E. Russell Teresa A. Santiago Kay Stafford Harvey F. Wachsman Gerri Warren-Merrick Senior Management John R. Ryan Chancellor Michael A. Abbott University Auditor Dr. Kimberly R. Cline Vice Chancellor and Chief Financial Officer John J. O’Connor Vice Chancellor and Secretary of the University Dr. Risa I. Palm Provost and Vice Chancellor for Academic Affairs Nicholas Rostow University Counsel and Vice Chancellor for Legal Affairs Michael C. Trunzo Senior Associate Vice Chancellor for University Relations Patrick J. Wiater University Controller Page 1 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 State University’s finances and operating results for the year ended June 30, 2006. The State University continues to be in sound financial condition, and we continue to make progress on enhancing quality, affordability and accessibility throughout the State University. Enrollment, student retention, sponsored research and philanthropy are all at record levels. Total student enrollment has grown every year since 1997 and has been on a record-setting pace since the fall 2003. Enrollment, including community colleges, has increased by more than 15 percent since fall 1996, from 368,459 to a level projected to reach 424,000 this fall. Enrollment has increased by more than 55,600 students since 1996, a population larger than the size of the University at Buffalo. In addition, system-wide retention rates, which are indicators of overall graduation rates, are steadily increasing. Retention of first-year, full-time students, who entered the State University System in the fall 2004 to pursue a baccalaureate degree tied the highest rate (fall 1990) in the history of the State University, at 82 percent. The State University rates continue to outpace the rates at most public colleges nationally, and are as high as or approaching the rates at many of the best private colleges and universities in the United States. Reflecting the State University’s commitment to improved student performance across all cultural backgrounds, recent data shows that the State University’s minority student graduation rates exceed the national rates for minority students attending public institutions. The 2005-06 State Budget was the best that the State University has received from the Governor and Legislature in decades. The overwhelming majority of the State University’s financial plan has enabled the State University to meet its salary obligations, and heat, light, and to maintain the 90 million square feet of facilities. In addition, the State University was able to hold the line on tuition and add approximately 380 full-time faculty across its 29 state- operated campuses. Full-time faculty provides the outstanding teaching, service, and research that inspires our students, trains our workers, and strengthens our economy. In fiscal years 2006 and 2005, the State University received new multi-year capital funding authorizations intended to cover the five-year period through fiscal year 2008-09. Cumulatively, the multi-year capital plan now totals $2.7 billion for State-operated campus educational facilities and $419 million for the State University hospitals. 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. Sponsored programs and research funding decreased slightly in the 2006 fiscal year to $871 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 the 2006 fiscal year, The Research Foundation of State University of New York recorded 284 invention disclosures, 196 patent applications, 33 issued patents, 45 licenses executed, and more than $10.7 million from royalties. These achievements were the products of more than 7,300 research projects that supported 17,000 employees 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 nearly $1.5 billion in philanthropic donations and giving remains strong. The State University of New York is an excellent investment for students who seek a higher education and for taxpayers as well. We take very seriously our responsibility to be good stewards of public dollars and will continue to strive to be as efficient as possible in managing our resources. John R. Ryan Chancellor 1 THESTATEUNIVERSITYOFNEWYORK Management’s Discussion and Analysis Page 2 Management’s discussion and analysis (MD&A) provides a broad overview of the State University of New York’s (State University) financial condition as of June 30, 2006 and 2005, the results of its operations for the years then ended, and significant changes from the previous years. Management has prepared the financial statements and related footnote disclosures along with this MD&A. The MD&A should be read in conjunction with the audited financial statements and related footnotes of the State University which directly follows the MD&A. For financial reporting purposes, the State University’s reporting entity consists of all sectors of the State University including the university centers, health science centers (including hospitals), colleges of arts and sciences, colleges of technology and agriculture, specialized colleges, statutory colleges (located at the campuses of Cornell and Alfred Universities), and central services, but excluding community colleges. The financial statements also include the financial activity of The Research Foundation of the State University of New York (Research Foundation), which administers the sponsored program activity of the State University, the State University Construction Fund, (Construction Fund), which administers the capital program of the State University, the auxiliary services corporations and foundations located on its campuses. The foundations meet the criteria under the Governmental Accounting Standards Board (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 (FASB) for not-for-profit organizations. The focus of the MD&A is on the State University financial information contained in the balance sheet, the statement of revenues, expenses, and changes in net assets, and the statement of cash flows, which exclude the foundations. Foundation financial statement information is presented separately on pages 16 and 17 of the State University’s financial statements. Financial Highlights At June 30, 2006 and 2005, total assets reported by the State University were $9.45 billion and $8.66 billion and total liabilities were $7.73 billion and $7.2 billion, respectively. Net assets, which total $1.72 billion and $1.46 billion at June 30, 2006 and 2005, experienced an increase of $255 million in 2006 and an increase of $29.4 million in 2005. The net assets at June 30, 2006, 2005, and 2004 are summarized in the following categories (in thousands), shown with a table: Net Assets: Invested in capital assets, net of related debt $ 312,538 207,234 and 185,807 Restricted -nonexpendable 229,583 206,488 and 181,913 Restricted -expendable 769,568 647,669 and 560,814 Unrestricted 405,173 400,907 and 504,357 Total net assets $ 1,716,862 1,462,298 and 1,432,891 End of table. The change in net assets during 2006 and 2005 was driven by operating and other supporting revenues over expenses and losses. Revenues, expenses, and the change in net assets for the 2006, 2005, and 2004 fiscal years are summarized as follows (in thousands), shown with a table: Operating revenues $4,381,490 4,146,877 and 4,138,126 Nonoperating revenues 2,782,245 2,281,707 and 2,277,368 Other revenues 93,985 130,603 and 104,478 Total revenues 7,257,720 6,559,187 and 6,519,972 Operating expenses 6,734,484 6,249,985 and 5,959,903 Nonoperating expenses 268,672 279,795 and 281,161 Total expenses 7,003,156 6,529,780 and 6,241,064 Increase in net assets $254,564 29,407 and 278,908 End of table. Total revenues reported in 2006, 2005, and 2004 were $7.26 billion, $6.56 billion, and $6.52 billion, respectively. Total revenue in 2006 and 2005 grew $699 million and $39 million, respectively, compared to the previous year. Revenue growth in 2006 compared to 2005 was driven by increases in state appropriation revenue of $383 million, hospital and clinic revenue of $142 million, investment income and net realized and unrealized gains of $49 million, sales and service activities of auxiliary Page 3 enterprises of $49 million, other nonoperating revenues of $31 million, private gifts of $36 million, grants and contracts of $27 million, and net tuition and fees of $19 million. These increases were offset by decreases in capital appropriations of $22 million, capital gifts and grants of $8 million, and additions to permanent endowments of $7 million. Total expenses for 2006, 2005, and 2004 were $7.0 billion, $6.53 billion, and $6.24 billion, respectively. State University expense growth in 2006 and 2005 was $473 million and $289 million, respectively. Expense growth in 2006 compared to 2005 was primarily the result of increases in support services of $166 million, instruction activity of $125 million, hospital and clinic activity of $89 million, auxiliary enterprises of $42 million, depreciation and amortization expense of $24 million, research of $24 million, and public service of $14 million. These increases were offset by a decrease in other nonoperating expenses of $11 million. Overview of the Financial Statements The financial statements of the State University have been prepared in accordance with U.S. generally accepted accounting principles 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, 2006 fiscal year, with comparative totals for the fiscal year ended June 30, 2005. 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 statement portrays net cash provided or used from operating, investing, capital, and noncapital financing activities. Balance Sheet The balance sheet presents the financial position of the State University at the end of its fiscal year. During the 2006 and 2005 fiscal years, the State University’s total assets increased over the prior years by $794 million and $8 million, while total liabilities increased $539 million in 2006 and decreased $22 million in 2005. The following table reflects the financial position at June 30, 2006, 2005, and 2004 (in thousands), shown with a table: Current assets $ 2,253,725 2,146,039 and 2,142,559 Capital assets, net 4,832,248 4,464,604 and 4,132,780 Other noncurrent assets 2,365,089 2,046,812 and 2,374,610 Total assets 9,451,062 8,657,455 and 8,649,949 Current liabilities 1,516,129 1,424,980 and 1,441,113 Noncurrent liabilities 6,218,071 5,770,177 and 5,775,945 Total liabilities 7,734,200 7,195,157 and 7,217,058 Net assets $ 1,716,862 1,462,298 and 1,432,891 End of table. Current Assets Current assets at June 30, 2006 increased $108 million and current liabilities increased $93 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, 2006 and 2005 consist primarily of cash and cash equivalents of $853 million and $772 million, short-term investments of $225 million and $213 million, and receivables (accounts, interest, appropriations, and grants) of $1.13 billion and $1.12 billion, respectively. During Page 4 2006, cash and cash equivalents increased $82 million and short-term investments increased $12 million. Current Liabilities Current liabilities at June 30, 2006 and 2005 consist principally of accounts payable and accrued expenses of $515 million and $438 million, interest on debt of $255 million and $267 million, deferred revenue of $213 million and $198 million, and the current portion of long-term liabilities of $442 million and $431 million, respectively. The increase in current liabilities at June 30, 2006 was driven principally by an increase in accounts payable and accrued expenses of $77 million and an increase in deferred revenue of $14 million. Capital Assets, net In the 2006 and 2005 fiscal years, the State University received new multi-year capital funding authorizations intended to cover the five-year period through fiscal year 2008-09. Cumulatively, the multi-year capital plan now totals $2.7 billion for State-operated campus educational facilities and $419 million for the State University hospitals. 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 2006 and 2005 fiscal years, capital assets (net of depreciation) increased $368 million and $332 million, respectively, compared to the previous year. The majority of the increase occurred at the State University campuses due to new building construction, renovations, and rehabilitation totaling $504 million and $416 million for the 2006 and 2005 fiscal years, respectively. Equipment additions during 2006 and 2005 of $172 million and $217 million, respectively, also contributed to the increase. Significant projects completed and capitalized during the 2006 fiscal year included new student residential facilities at the College of Technology at Farmingdale and the College at Cortland, the renovation of a residential facility at the College at Plattsburgh, and the renovation and modernization of a humanities educational facility and Heart Center at the University at Stony Brook. A summary of capital assets, by major classification, and related accumulated depreciation for the 2006, 2005, and 2004 fiscal years is as follows (in thousands): Land $ 262,774 249,435 223,881 Infrastructure and land improvements 483,155 467,607 447,683 Buildings 5,572,529 5,271,212 4,834,908 Equipment, library books, and artwork 1,998,206 1,867,266 1,728,078 Construction in progress 712,773 586,293 700,957 Total capital assets 9,029,437 8,441,813 7,935,507 Less accumulated depreciation: Infrastructure and land improvements 313,381 301,695 289,295 Buildings 2,551,025 2,447,466 2,340,003 Equipment and library books 1,332,783 1,228,048 1,173,429 Total accumulated depreciation 4,197,189 3,977,209 3,802,727 Capital assets, net $ 4,832,248 4,464,604 4,132,780 Other Noncurrent Assets Other noncurrent assets exclusive of capital assets were $2.37 billion and $2.05 billion at June 30, 2006 and 2005, respectively. Noncurrent assets at June 30, 2006 and 2005 include long-term investments of $1.15 billion and $998 million, deposits with trustees of $843 million and $681 million, restricted cash of $57 million and $73 million, and the noncurrent portion of receivables and deferred financing costs of $311 million and $295 million, respectively. Long-term investments at June 30, 2006 and 2005 of $1.15 billion and $998 million represent endowment and similar funds held in separate and distinct investment pools of the State University campuses of $360 million and $338 million, and the Cornell statutory colleges of $564 million and $471 million, respectively, and separately invested funds of $28 million for both years. Long-term investments of the Research Foundation totaled $163 million and $132 million, which includes $56 million and $47 million in investments designated for its post- retirement benefit plan at June 30, 2006 and 2005, respectively. Other long-term investments include investments of the statutory College of Ceramics at Page 5 Alfred University of $21 million and $13 million, and the auxiliary services corporations of $17 million and $16 million at June 30, 2006 and 2005, respectively. During 2006, long-term investments increased by a total of $155 million, or 16 percent, due primarily to net realized and unrealized investment gains of $109 million and investment income of $79 million. Investment gains and reinvested investment income, donations, and other additions were offset by amounts used to meet spending needs. During fiscal year 2006, deposits with trustees increased $162 million, which generally represent funds available from the issuance of bonds by the Dormitory Authority of the State of New York (DASNY) used to finance capital projects and maintain debt service reserves for the State University’s facilities. Restricted cash and cash equivalents at June 30, 2006 decreased $16 million compared to 2005. During the normal course of operations, the State University has entered into various capital financing arrangements. The unspent cash on those arrangements at June 30, 2006 and 2005 were $45 million and $60 million, respectively. The noncurrent portion of receivables reported at June 30, 2006 and 2005 consisted of accounts, notes, and loan receivables of $103 million and $107 million, appropriation receivables of $116 million and $121 million, and contribution receivables of $28 million and $5 million, respectively. Noncurrent Liabilities Noncurrent liabilities at June 30, 2006 and 2005 of $6.22 billion and $5.77 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, 2006, 2005, and 2004 is as follows (in thousands): With a table, the following figures for years 2006 2005 and 2004, respectively: Educational facilities $ 4,302,253 3,989,173 4,133,882 Residence hall facilities 664,770 612,805 570,425 Compensated absences and post-retirement obligations 629,566 543,491 487,539 Loan -State STIP pool 131,608 132,056 148,437 Other obligations 319,284 321,760 272,233 Total long-term liabilities $ 6,047,481 5,599,285 5,612,516 End of table. During fiscal year 2006, 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 $480 million. The State University entered into agreements with DASNY during fiscal year 2006 to issue residence hall facility obligations totaling $182 million; $5.9 million for remarketing bonds; $72.1 million for the purpose of financing capital construction and major rehabilitation for residential facilities; and $104 million in order to refinance $101.3 million of the State University’s existing obligations. The State University reduced its future aggregate debt service payments by $3.4 million through lower interest costs, resulting in an economic gain of $3.1 million. During fiscal year 2006, Moody’s upgraded the credit ratings for PIT (from A1 to Aa3), educational (from A2 to A1) and residence hall (from A1 to Aa3) bonds compared to the previous year. Standard & Poor’s also upgraded the credit ratings for PIT bonds (from AA to AAA). In 2005, the State University’s credit ratings for residence hall bonds were unchanged from 2004. In 2005, Moody’s upgraded the credit ratings for PIT bonds (from A2 to A1) and educational bonds (from A3 to A2). Also in 2005, the credit rating for educational bonds was downgraded by Fitch IBCA (from AA-to A+) compared to the previous year. The credit ratings at June 30, 2006 are as follows: Page 6 PIT Educational Residence Bonds Facilities Halls rated and shown in table. Moody’s Investors Service Aa3 A1 Aa3 Standard & Poor’s AAA AA-AA- Fitch IBCA AA-A+ A+ End of table. Principal payments on educational and residence hall facilities obligations made during 2006 totaled $161.7 million and $21 million, in 2005 totaled $153.7 million and $19.3 million, and in 2004 totaled $125.5 million and $20.5 million, respectively. During fiscal years 2006 and 2005, the long-term portion of compensated absence liabilities (vacation and sick leave) and post-retirement benefit obligations increased $86 million and $56 million, respectively. The increase for fiscal years 2006 and 2005 was driven by an increase of $51 million and $31 million, respectively, 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, and an increase of $25 million and $17 million, respectively, in the post-retirement benefit obligation of the Research Foundation. In prior years, the State University experienced operating cash-flow deficits precipitated by cash- flow 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, including accrued interest, at June 30, 2006 and 2005 was $148.2 million and $148.6 million, respectively. During fiscal years 2006 and 2005, the total amount paid on these loans was $6.5 million and $17.9 million, respectively. Refundable government loan funds at June 30, 2006 and 2005 totaled $138.9 million and $137.2 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 statement of revenues, expenses, and changes in net assets presents the State University’s results of operations. Total operating revenues of the State University for 2006, 2005, and 2004 were $4.38 billion, $4.15 billion, and $4.14 billion, respectively. Nonoperating and other revenues, which includes State appropriations, totaled $2.88 billion, $2.41 billion, and $2.38 billion for fiscal years 2006, 2005, and 2004, respectively. Total expenses for 2006, 2005, and 2004 were $7.0 billion, $6.53 billion, and $6.24 billion, respectively. Revenue Overview Table Revenues (in thousands): 2006 2005 2004 Tuition and fees, net $ 879,549 860,803 819,256 Hospitals and clinics 1,430,623 1,288,686 1,373,510 Federal grants and contracts 798,086 794,131 805,448 State, local, private grants and contracts, and other sources 636,291 615,025 606,954 Auxiliary enterprises 636,941 588,232 532,958 Operating revenues 4,381,490 4,146,877 4,138,126 State appropriations 2,458,827 2,075,575 2,061,188 Other nonoperating 417,403 336,735 320,658 Nonoperating and other revenues 2,876,230 2,412,310 2,381,846 Total revenues $ 7,257,720 6,559,187 6,519,972 End of table. In a Pie-graph, 2006 Revenues (in thousands) to illustrate the afore mentioned figures: Auxiliary Other Enterprises Nonoperating $636,941 State, Local, Private $636,291 State Appropriations $2,458,827 Federal Grants and Contracts $798,086 Tuition and Fees $879,549 HospitalsandClinics$1,430,623 Grants,Contracts and Other Sources $417,403 End of of graph. Page 7 Tuition and Fees, Net Tuition and fee revenue for the 2006, 2005, and 2004 fiscal years, net of scholarship allowances, were $880 million, $861 million and $819 million, an increase of $19 million and $42 million, in 2006 and 2005 respectively, compared to the previous years. The increase in 2006 was driven by an increase in enrollment and slight increase in fee revenue. The growth in 2005 was largely due to an increase in tuition rates for out-of-state students and other professional degrees. Annual average full-time equivalent students, including undergraduate and graduate, were approximately 176,800, 174,800, and 173,500 for the fiscal years ended June 30, 2006, 2005, and 2004, respectively. Hospitals and Clinics The State University has three hospitals (each with academic medical centers) under its jurisdiction -the State University hospitals at Brooklyn, Stony Brook, and Syracuse. Hospital and clinic revenue for the 2006, 2005, and 2004 fiscal years were $1.43 billion, $1.29 billion and $1.37 billion, respectively. During the 2006 fiscal year, hospital and clinic revenues increased $142 million compared to the previous year principally due to an increase in outpatient and inpatient revenue along with an increase in Medicaid Disproportionate Share (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 $205 million under the DSH Program, compared to $188 million in 2005 and $379 million in 2004, respectively. Sponsored Research, Grant and Contract Revenue During fiscal year 2006, the volume of sponsored program activity exhibited a decline. Total revenue from federal, state, local, private and capital grants and contracts administered by the Research Foundation was $717 million, $743 million, and $728 million, for the fiscal years ended June 30, 2006, 2005, and 2004, respectively. Facilities and administrative recoveries earned on grants and contracts administered by the Research Foundation were $123 million, $126 million, and $123 million for the fiscal periods ending June 30, 2006, 2005, and 2004, respectively. The volume of research and other sponsored programs reported for 2006 and 2005 by the statutory colleges at Cornell University was $149.7 million and $151.6 million, respectively, and Alfred University was $4.1 million and $3.8 million, respectively. Revenue from projects sponsored by the federal government and administered by the Research Foundation totaled $349 million and $365 million during 2006 and 2005, respectively. Of these federally-sponsored projects, 56 percent of the funding was received from the Public Health Service in both years. Other major federal sponsors include the National Science Foundation, and the Departments of Education, Defense and Energy, and the Agency for International Development. Revenue from nonfederal sponsors (including federal flow-through funds) administered by the Research Foundation totaled $368 million, $378 million and $367 million for the 2006, 2005, and 2004 fiscal years, respectively. In fiscal years 2006 and 2005, the largest nonfederal support of sponsored research programs was received from the Empire State Development Corporation. Amounts received under the State’s Tuition Assistance Program in 2006 increased $4 million over the previous fiscal year. Federal grants under the Pell and other federal student aid programs decreased $7 million from the previous year. Auxiliary Enterprises The State University’s auxiliary enterprise activity is comprised of sales and services for residence halls, food services, 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, food services, campus store operations and other services are operated and managed by separately incorporated not-for-profit organizations, commonly referred to as auxiliary services corporations. Page 8 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 maintenance of the residence halls. Occupancy at the residence halls has risen steadily to 68,632 for the fall of 2005, an increase of over 8,200 students since the fall of 2001 and an increase of nearly 1,000 students compared to the previous year. The overall utilization rate for the fall of 2005 was reported at 96.7 percent. Auxiliary enterprise sales and services revenue totaled $637 million, $588 million, and $533 million in the 2006, 2005, and 2004 fiscal years, respectively. Of these amounts, residence halls operating revenue totaled $280 million, $255 million, and $232 million for 2006, 2005, and 2004, respectively. Increases in revenue were largely due to increases in occupancy levels and modest increases in room rates. Food service operations generated $179 million, $165 million, and $147 million in revenue for fiscal years 2006, 2005, and 2004, respectively. In addition to residence halls and food service activities, other auxiliary revenues totaled $178 million, $168 million, and $154 million for fiscal years 2006, 2005, and 2004, respectively. State Appropriations The State University’s single largest source of revenues are State appropriations, which for financial reporting purposes is classified as nonoperating revenues. State appropriations totaled $2.46 billion, $2.08 billion, and $2.06 billion and representeda pproximately 34 percent of total revenues for fiscal year 2006 and 32 percent for fiscal years 2005 and 2004. 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 $383 million in 2006 and $14 million in 2005. In 2006, State support for operating expenses increased $327 million, while indirect State support for debt service, fringe benefits, and litigation accruals increased $56 million compared to 2005. Nonoperating and Other Revenue Nonoperating and other revenue excluding State appropriations were $417 million and $337 million for the 2006 and 2005 fiscal years, respectively. This increase was primarily due to an increase of $49 million in investment income and gains, $36 million in gifts, and $25 million in other nonoperating revenues offset by a decline in capital appropriations of $22 million and capital gifts and grants of $8 million. Expense Overview Table Expenses(in thousands): 2006 2005 2004 Instruction $1,641,524 1,516,929 1,422,449 Research 540,220 516,129 523,821 Public service 249,461 234,232 237,383 Support services 1,746,660 1,580,244 1,54,298 Scholarships and fellowships 98,784 99,775 99,446 Hospitals and clinics 1,509,180 1,420,504 1,321,968 Auxiliary enterprises 628,201 586,165 45,992 Depreciation and amortization 320,454 296,003 268,546 Other nonoperating 268,672 279,795 281,161 Total expenses $7,003,156 6,529,780 6,241,064 Expenses(in thousands) Public Service $249,461 Hospitals and Clinics $1,509,180 Instruction $1,641,524 Auxiliary Enterprises $628,201 Depreciation $320,454 Other Nonoperating $268,672 Support Services $1,746,660 Research $540,220 Scholarships and Fellowships $98,784 End of table. Page 9 The increase in instruction expense during 2006 and 2005 of $125 million and $94 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 41.99 percent in 2005 to 45.24 percent in 2006. Research expenses increased $24 million during 2006 and decreased $8 million from 2004 to 2005. The growth in 2006 was predominantly from increased sponsored research expenditure activity at the Research Foundation and Cornell statutory colleges. Support services, which includes expenses for academic support, student services, institutional support, and operation and maintenance of plant, increased $166 million and $40 million during 2006 and 2005, respectively. Institutional support increased $59 million and $36 million and academic support $27 million and $13 million in the 2006 and 2005 fiscal years, respectively, driven by an increase in personal service and fringe benefit costs. Operation and maintenance of plant costs increased $74 million during 2006 and decreased $5 million in 2005. The increase in 2006 was attributable to an increase in utility and construction 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 $506 million and $495 million for the fiscal years ended June 30, 2006 and 2005, respectively. Of this amount, $407 million and $395 million were classified as scholarship allowances and $99 million and $100 million was reported as scholarship expense for fiscal years 2006 and 2005, respectively. Major scholarships and grants received include the State Tuition Assistance Program of $179.0 million and $175.2 million, and $136.5 million and $143.2 million from the federal Pell Program during fiscal years 2006 and 2005, respectively. Expenses at the State University’s hospitals and clinics increased $89 million and $99 million during 2006 and 2005, respectively, largely due to an increase in core operating and personal service costs. Also contributing to the growth in expenses in 2006 and 2005 was an increase in fringe benefit costs of $23 million and $35 million, respectively. During fiscal years 2006 and 2005, auxiliary enterprise expenses increased $42 million and $40 million, respectively. For the 2006 and 2005 fiscal years, residence halls expenses increased $16 million and $12 million and food service expenses increased $13 million and $18 million, respectively, primarily due to an increase in occupancy and rates. Other auxiliary enterprise expenses for the years ended June 30, 2006 and 2005, increased $13 million and $10 million, respectively. Depreciation and amortization expense recognized in fiscal years 2006 and 2005 totaled $320 million and $296 million, respectively. Other nonoperating expenses were $269 million and $280 million for the years ended June 30, 2006 and 2005, respectively. 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 205,800 in the fall 2005, on twenty-nine State-operated campuses and five contract/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, 2006, is approximately 176,800, an increase compared to June 30, 2005 of approximately 174,800. New York State appropriations remain the largest single source of revenues. State appropriation revenues are expected to increase in fiscal year 2006- 07 to support the rising costs of personnel services, utilities, health care, and other fringe benefits. The State University’s continued operational viability is substantially dependent upon this level of ongoing State support. For the most recent fiscal year, State Page 10 appropriations represented 34 percent of the total revenues of the State University. Continued emphasis will be placed on University-wide efforts to control operating costs and enhance other revenue streams, including philanthropy, sponsored programs, and auxiliary revenues. Debt service on educational facilities is paid by the State in an amount sufficient to cover annual debt service requirements. In fiscal years 2006 and 2005, the State University received new multi-year capital funding authorizations intended to cover the five- year period through fiscal year 2008-09. Cumulatively, the multi-year capital plan now totals $2.7 billion for State-operated campus educational facilities and $419 million for State University hospitals. Taken together, the sizeable new multi- year funding authorizations provide the State University with both the basic resources needed to make steady progress in addressing core critical maintenance needs of its existing infrastructure, and the means 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. Page 11 Independent Auditors’ Report of October20,2006 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 (“theUniversity”)as of and for the year ended June 30, 2006, 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, the State University Construction Fund, nor certain auxiliary service corporations, which statements reflect assets constituting 7% and revenues constituting 19% of the related totals of the University. Additionally, we did not audit the financial statements of certain entities presented as discretely pre- sented componentunits, which statements reflect assets constituting 47% and revenues constituting 47% 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, the State University Construction Fund, certain auxiliary service corporations, 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 is statement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circum- stances, 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial state- ment 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 U.S. generally accepted accounting principles. 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, 2006, and the related changes in financial position and, where applicable, cash flows thereof for the year then ended, in conformity with U.S. generally accepted accounting principles. The Management’s Discussion and Analysis (MD&A) on pages 2 through 10 is not a required part of the financial statements but is supplementary information required by U.S. generally accepted accounting princi- ples. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary informtion. However, we did not audit the information and express no opinion on it. KPMG LLP,a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. Page 12 Balance Sheet June 30, 2006 (with comparative totals at June 30, 2005) In thousands Table comparing Assets 2006 and 2005 Current Assets: Cash and cash equivalents $ 853,377 and 771,622 Short-term investments 225,121 212,778 Accounts, notes, and loans receivable, net 558,630 and 503,066 Interest receivable 5,622 and 3,901 Appropriations receivable 424,529 and 433,205 Grants receivable 139,377 and 179,081 Inventories 35,051 and 31,449 Other assets 12,018 and 10,937 Total current assets for respective years $2,253,725 and 2,146,039 Noncurrent Assets: Restricted cash and cash equivalents 57,012 and 73,213 Deposits with trustees 842,895 and 680,505 Accounts, notes, and loans receivable, net 102,783 and 106,604 Contributions receivable 27,681 and 4,987 Appropriations receivable 116,155 and 120,554 Deferred financing costs 64,772 and 62,503 Long-term investments 1,153,791 and 998,446 Capital assets, net 4,832,248 and 4,464,604 Total noncurrent assets for respecive years $7,197,337 and 6,511,416 Total assets for respective years $9,451,062 and 8,657,455 Liabilities and Net Assets Current Liabilities: Accounts payable and accrued liabilities $515,393 and 438,302 Interest payable 255,009 and 266,948 Student deposits 12,105 and 12,324 Deposits held in custody for others 29,921 and 26,409 Deferred revenue 212,525 and 198,042 Long-term liabilities -current portion 441,890 and 430,627 Other liabilities 49,286 and 52,328 Total current liabilities for respective years $1,516,129 and 1,424,980 Noncurrent Liabilities: Long-term liabilities 6,047,481 and 5,599,285 Refundable government loan funds 138,922 and 137,169 Other noncurrent liabilities 31,668 and 33,723 Total noncurrent liabilities 6,218,071 and 5,770,177 Total liabilities for respective yeas $7,734,200 and 7,195,157 Net Assets: Invested in capital assets, net of related debt 312,538 and 207,234 Restricted -nonexpendable: Instruction and departmental research 89,608 and 79,668 Scholarships and fellowships 68,079 and 60,298 General operations and other 71,896 and 66,522 Restricted -expendable: Instruction and departmental research 371,433 and 329,972 Scholarships and fellowships 85,883 and 72,840 Capital projects 78,077 and 41,453 Loans 21,988 and 21,470 General operations and other 212,187 and 181,934 Unrestricted 405,173 and 400,907 Total net assets $1,716,862 and 1,462,298 Total liabilities and net assets for respective years $9,451,062 and 8,657,455 End of table. See accompanying notes to financial statements. Page 13 Statement of Revenues, Expenses, and Changes in Net Assets For the Year Ended June 30, 2006 (with comparative totals for the year ended June 30, 2005) Table, in thousands, for years, respectively: 2006 and 2005 Operating revenues: Tuition and fees $ 1,200,791 and 1,174,057 Less scholarship allowances (321,242) and (313,254) Net tuition and fees 879,549 and 860,803 Federal grants and contracts 798,086 and 794,131 State grants and contracts 287,295 and 300,139 Local grants and contracts 17,205 and 16,942 Private grants and contracts 239,006 and 203,235 Sales and services: University hospitals and clinics 1,430,623 and 1,288,686 Educational activities 45,804 and 44,627 Sales and services of auxiliary enterprises: Residence halls, net 279,720 and 254,667 Food service, net 179,097 and 165,148 Other, net 178,124 and 168,417 Other sources 46,981 and 50,082 Total operating revenues 4,381,490 and 4,146,877 Operating expenses: Instruction 1,641,524 and 1,516,929 Research 540,220 and 516,129 Public service 249,461 and 234,232 Academic support 342,261 and 314,910 Student services 206,171 and 197,305 Institutional support 676,725 and 617,739 Operation and maintenance of plant 517,131 and 443,526 Scholarships and fellowships 98,784 99,775 Hospitals and clinics 1,509,180 and 1,420,504 Auxiliary enterprises: Residence halls 245,531 and 229,378 Food service 178,900 and 166,258 Other 203,770 and 190,533 Depreciation and amortization expense 320,454 and 296,003 Other operating expenses 4,372 and 6,764 Total operating expenses 6,734,484 and 6,249,985 Operating loss (2,352,994) and (2,103,108) Nonoperating revenues (expenses): State appropriations: University operations 2,306,074 and 1,915,621 Hospitals and clinics 152,753 and 159,954 Federal appropriations 16,755 and 16,300 Investment income, net of investment fees 78,569 and 55,011 Net realized and unrealized gains 108,841 and 83,487 Gifts 86,985 51,334 Interest expense on capital related debt (262,373) and (257,547) Loss on disposal of plant assets (6,299) and (15,079) Other nonoperating revenues (expenses), net 32,268 and (7,169) Net nonoperating revenues 2,513,573 2,001,912 Income (loss) before other revenues and gains 160,579 and (101,196) Capital appropriations 9,417 and 31,353 Capital gifts and grants 72,820 and 80,488 Additions to permanent endowments 11,748 and 18,762 Increase in net assets 254,564 and 29,407 Net assets at the beginning of year 1,462,298 and 1,432,891 Net assets at the end of year for 2006 and 2005, respectively $ 1,716,862 and 1,462,298 End of table. See accompanying notes to financial statements. Page 14 Statement of Cash Flows For the Year Ended June 30, 2006 (with comparative totals for the year ended June 30, 2005) Table follows, in thousands, for years 2006 and 2005 Cash flows from operating activities: Tuition and fees $ 898,940 and 866,247 Grants and contracts: Federal 803,562 and 812,829 State and local 342,473 and 321,014 Private 235,243 and 254,205 Hospital and clinics 1,317,168 and 1,305,475 Personal service payments (2,999,291) and (2,909,869) Other than personal service payments (1,908,717) and (1,792,759) Payments for fringe benefits (343,879) and (310,601) Payments for scholarships and fellowships (50,134) and (53,656) Loans issued to students (35,145) and (35,613) Collection of loans to students 33,725 and 30,468 Auxiliary enterprise charges: Residence halls 279,839 and 256,386 Food service 183,536 and 164,183 Other (intercollegiate athletics, bookstore, fees, and vending) 163,734 and 152,960 Sales and service of educational activities 52,293 and 3,667 Other receipts (payments) 28,253 and (28,544) Net cash used by operating activities (998,400) and (963,608) Cash flows from noncapital financing activities: State appropriations: Operations 1,186,693 and 877,939 Debt service 393,612 and 374,204 Federal appropriations 15,161 and 14,842 Private gifts and grants 61,041 and 51,766 Proceeds from short-term loans 84,956 and 278,787 Repayment of short-term loans (90,712) and (285,907) Direct loan receipts 286,392 and 294,008 Direct loan disbursements (286,392) and (294,008) Other receipts 14,427 and 21,734 Net cash provided by noncapital financing activities 1,665,178 and 1,333,365 Cash flows from capital and related financing activities: Proceeds from capital debt 624,460 and 151,471 Capital appropriations 10,731 and 46,280 Capital grants and gifts received 64,455 and 83,289 Proceeds from sale of capital assets 373 and 493 Purchases of capital assets (231,808) and (272,637) Payments to contractors (414,727) and (373,041) Principal paid on capital debt and leases (236,218) and (220,623) Interest paid on capital debt and leases (282,774) and (278,260) Other receipts (payments) (3,229) and 7,449 Deposits with trustees (155,947) and 317,094 Net cash used by capital and related financing activities (624,684) and (538,485) Cash flows from investing activities: Proceeds from sales and maturities of investments 5,263,909 and 4,814,335 Interest, dividends, and realized gains on investments 136,696 and 123,255 Purchases of investments (5,377,145) and (4,854,540) Net cash provided by investing activities 23,460 and 83,050 Net change in cash 65,554 and (85,678) Cash -beginning of year 844,835 and 930,513 Cash -end of year $ 910,389 and 844,835 (table continued to next page) Page 15 Statement of Cash Flows (continued) For the Year Ended June 30, 2006 (with comparative totals for the year ended June 30, 2005) In thousands, table comparing years 2006 and 2005 Reconciliation of net operating loss to net cash used by operating activities: Operating loss $ (2,352,994) and (2,103,108) Adjustments to reconcile operating loss to net cash used by operating activities: Depreciation and amortization expense 320,454 and 296,003 Fringe benefits provided by State 857,084 and 770,515 Litigation costs provided by State 9,710 and 41,949 Change in assets and liabilities: Receivables, net (23,379) and 12,332 Inventories (3,602) and (1,825) Other assets (3,353) and (4,181) Accounts payable and other accrued liabilities 214,442 and 62,815 Deferred revenue (13,866) and (37,332) Student deposits 219 and 737 Deposits held in custody for others (3,115) and (1,513) Net cash used by operating activities $ (998,400) and (963,608) Supplemental disclosures for noncash transactions: New capital leases / debt agreements $ 75,181 and 42,110 Fringe benefits provided by the State $ 857,084 and 770,515 Litigation costs provided by the State $ 9,710 and 41,949 Noncash gifts $ 23,355 and 8,723 End of table. See accompanying notes to financial statements. Page 16 State University of New York Foundations Balance Sheet Table for June 30, 2006 (with comparative totals for June 30, 2005) In thousands for years 2006 and restated for 2005 Assets Cash and cash equivalents $ 59,050 and 50,167 Accounts and notes receivable, net 13,734 and 13,752 Pledges receivable, net 51,748 and 30,283 Investments 771,937 and 693,298 Other assets 45,252 and 45,013 Capital assets, net 311,221 and 297,540 Total assets $ 1,252,942 and 1,130,053 Liabilities and Net Assets Liabilities: Accounts payable and accrued expenses 20,016 and 18,964 Current portion of long-term debt 5,897 and 6,343 Deferred revenue 1,426 and 1,578 Deposits held for others 43,085 and 42,352 Other liabilities 27,265 and 34,027 Long-term debt 258,105 and 257,066 Total liabilities 355,794 and 360,330 Net Assets: Unrestricted: Board designated for: Fixed assets 70,954 and 59,479 Campus programs 104,500 and 84,430 Investments 60,385 and 57,640 Other 23,924 and 24,380 Undesignated 29,218 and 22,356 Temporarily restricted: Scholarships and fellowships 66,450 and 55,536 Campus programs 108,187 and 76,649 Research 38,444 and 39,868 General operations and other 66,987 and 52,111 Permanently restricted: Scholarships and fellowships 159,344 and 148,893 Campus programs 82,949 and 65,821 Research 43,284 and 40,555 General operations and other 42,522 and 42,005 Total net assets 897,148 and 769,723 Total liabilities and net assets $ 1,252,942 and 1,130,053 See accompanying notes to financial statements. End of table. Page 17 State University of New York Foundations Statement of Activities For the Year Ended June 30, 2006, with comparative information for June 30, 2005. In thousands for years 2006 and 2005 Table with Columns for: Temporarily Unrestricted, Permanently Restricted, 2006 Total and 2005 Total (restated) Revenues: Contributions, gifts, and grants $35,961 104,306 25,209 165,476 and 123,767 Investment income, net 5,900 11,244 2,003 19,147 and 15,851 Net realized and unrealized gains 25,046 21,479 3,305 49,830 and 39,700 Rental income 37,291 318 0 37,609 and 32,151 Sales and services 14,850 0 14 14,864 and 16,602 Program income and special events 36,071 5,291 58 41,420 and 42,474 Other sources 9,717 336 1,954 12,007 and 2,572 Endowment earnings transferred 0 1,718 (1,718) 0 and 0 Net assets released from restrictions 88,788 (88,788) 0 0 and 0 Total revenues 253,624 55,904 30,825 340,353 and 273,117 Expenses: Program expenses 106,126 0 0 106,126 and 93,014 Payments to State University: Scholarships and fellowships 18,674 0 0 18,674 and 20,412 Other 17,850 0 0 17,850 and 11,677 Real estate expenses 19,606 0 0 19,606 and 13,253 Depreciation and amortization expense 9,451 0 0 9,451 and 9,416 Interest expense on capital-related debt 10,329 0 0 10,329 and 9,882 Management and general 16,303 0 0 16,303 and 16,361 Fundraising 12,694 0 0 12,694 and 10,684 Other expenses 1,895 0 0 1,895 and 6,032 Total expenses 212,928 0 0 212,928 and 190,731 Increase in net assets 40,696 55,904 30,825 127,425 and 82,386 Net assets, beginning of year (restated) 248,285 224,164 297,274 769,723 and 687,337 Net assets, end of year $288,981 280,068 328,099 897,148 and 769,723 End of table. See accompanying notes to financial statements. Page 18 Notes to Financial Statements June 30, 2006, with comparitive information for June 30, 2005. 1. Summary of Significant Accounting Policies and Basis of Presentation Reporting Entity For financial reporting purposes, the State University of New York (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 (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 as an aggregate component unit 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 (FASB). The Research Foundation of State University of New York (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, 2006 and 2005. Almost all of the State University’s campuses maintain auxiliary services corporations. These corporations are campus-based, not-for-profit corporations which, as independent contractors, operate, manage, and promote educationally related services for the benefit of the campus community. Although separate and independent legal entities, these corporations carry out operations which are integrally related to the State University and, therefore, are included in the financial statements of the State University. All of the financial data for these corporations was derived from each entity’s individual financial statements, the majority of which have a May 31 or June 30 fiscal year end. The State University Construction Fund (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 is included in the State University’s financial statements as of the Construction Fund’s fiscal years end of March 31, 2006 and 2005. The State statutory colleges at Cornell University and Alfred University are an integral part of, and are Page 19 1. Summary of Significant Accounting Policies and Basis of Presentation (continued) 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 2006 and 2005, have been included in the accompanying financial statements. The operations of certain related but independent organizations, i.e., 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 U.S. generally accepted accounting principles as prescribed by the GASB. 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 state- ments 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 a classified balance sheet; statement of revenues, expenses, and changes in net assets, that distinguish between operating and nonoperating revenues and expenses; and statement 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, i.e., the payments received for services and payments made for the purchase of goods and services. Certain other transactions are reported as nonoperating activities and include the State University’s operating and capital appropriations from the State, federal appropriations, nonexchange receipts, net investment income, gifts, and interest expense. Resources are classified for accounting and financial reporting purposes into the following four net asset categories: Invested in capital assets, net of related debt, follows. 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, follows. Net assets subject to externally imposed conditions that the State University must maintain them in perpetuity. Restricted – expendable, follows. 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, follows. 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. Page 20 1. Summary of Significant Accounting Policies and Basis of Presentation (continued) Revenues are recognized in the accounting period when earned. State appropriations are recognized when they are made legally available for expenditure. Revenues and expenditures arising from nonexchange transactions are recognized when all eligibility requirements, including time requirements, are met. Promises of private donations are recognized at fair value. Tuition and fees and auxiliary sales and service revenues are reported net of scholarship discounts and allowances. Auxiliary sales and service revenue classifications for 2006 and 2005 were reported net of the following scholarship discount and allowance amounts (in thousands): Table comparing years 2006 and 2005: Residence halls $44,998 and 42,419 Food service 20,562 and 19,699 Other auxiliary 20,451 and 20,073 End of table. 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 sheet. 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, 2006 and 2005, the State University had $591 million and $518 million available for authorization for expenditure, respectively, $375 million and $329 million from restricted funds, and $216 million and $189 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 guide- lines. 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 invest- ment 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. The estimated fair value of these investments is based on the most recent valuations provided by the external investment managers. Because of the inherent uncertainty of valuation for these investments, the investment manager’s estimate may differ from the values that would have been used had a ready market existed. Capital assets are stated at cost, or in the case of gifts, fair value at the date of receipt. Building Page 21 1. Summary of Significant Accounting Policies and Basis of Presentation (continued) renovations and additions costing over $100,000 and equipment items with a unit cost of more than $5,000 are capitalized. Equipment under capital leases are stated at the present value of minimum lease payments at the inception of the lease. Generally, the net interest cost on debt during the construction period related to capital projects, is capitalized and totaled $5.6 million and $8.2 million, in the 2006 and 2005 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, using historical and industry experience, ranging from 3 to 50 years. Deferred financing costs represent costs incurred for the issuance of bonds that are capitalized and amortized over the life of the related debt. 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 held by the State University are primarily stated at the lower of cost or market value on a first-in, first-out basis. 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. The State University and the Construction Fund are political subdivisions of the State and are, therefore, generally exempt from federal and state income taxes under applicable federal and state statutes and regulations. The Research Foundation and campus auxiliary services corporations are not-for-profit corporations as described in Section 501(c)(3) of the Internal Revenue Service Code and are tax-exempt on related income, pursuant to Section 501(a) of the code. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts displayed in the 2005 financial statements have been reclassified to conform to the 2006 presentation. 2. Cash and Cash Equivalents Cash and cash equivalents represent State University funds held in the State treasury, in the short-term investment pool (STIP), 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 are guaranteed by, the United States, obligations of the State and its political subdivisions, and repurchase agreements. These investments are reported at cost Page 21 2. Cash and Cash Equivalents (continued) (which approximates fair value) and are held by the State’s agent in its name on behalf of the State University. 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 and 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, 2006 and 2005, is as follows: Columns: Category a Category b and Category c For fiscal year 2006 $63,491 2,979 and 2,202 For fiscal year 2005 50,528 2,143 and 2,457 3. Deposits with Trustees Deposits with trustees primarily represent Dormitory Authority of the State of New York (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 and money market accounts were approximately $56.6 million and $27.3 million at June 30, 2006 and 2005, respectively. The market value of investments held, maturity and rating, if applicable, are displayed in the table below (in thousands). Table Comparison of Fiscal Years 2006 and 2005 for the following columns. In 2006 the Types of investments, Fair Value, Less than 1 year, 1 to 5 years For US Treasury notes or bonds $329,533 322,357 and 7,176 For US Treasury bills 205,722 205,722 and 0 For Us Treasury strips 251,057 248,577 and 2,480 For Federal National Mortgage Association 0 0 and 0 For Federal Home Loan Bank 0 0 and 0 For Federal Farm Credit Bank 0 0 and 0 Totals for 2006 $786,312 776,656 and 9,656 Comparing these figures to Fiscal Year 2005, in columns labeled Type of Investments, Fair Value, Less than 1 year, 1 to 5 years and Rating. For US Treasury notes or bonds 158,793 125,756 33,037 and no rating. For US Treasury bills 131,103 131,103 0 and no rating. For US Treasruy strips 287,873 284,072 3,801 and no rating For Federal National Mortgage Association 6,885 6,885 0 and triple A rating. For Federal Home Loan Bank 28,203 28,203 0 and triple A rating. For Federal Farm Credit Bank 40,370 40,370 0 and triple A rating. Totals for 2005 $653,227 616,389 36,838 End of table. 4. Investments Investments of the State University are recorded at fair value. Investment income is reported net of investment fees of $4 million and $3.1 million for 2006 and 2005, respectively. Investments are comprised of investments of the State University’s endowment and similar funds, the statutory colleges at Cornell University and Alfred University (Alfred Ceramics), the Research Foundation, the Construction Fund, and the auxiliary services corporations. Pooled investments are held in two separate and distinct investment pools -the State University’s investment pool and Cornell’s long-term investment pool. The investments of the State University’s investment pool are held by the State University’s agent in the State University’s name. The Research Foundation maintains a diverse investment portfolio and with respect to debt instruments, has a policy of investing in primarily high quality securities. Investments are held with the investment custodian in the Research Foundation’s name. Investments include $60.8 million and $50.9 million of investments designated for their post- retirement benefit plan for 2006 and 2005, 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. Page 23 4. Investments (continued) The investments of the Construction Fund consisted of United States government obligations of approximately $24.4 million and $23.3 million, at March 31, 2006 and 2005, 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). Table comparing fiscal years 2006 to 2005: For State University Campuses the Pooled funds: In Non-equities $61,927 to 66,119 In Equities - domestic 269,963 to 246,478 In Equities - international 45,679 to 45,710 Total pooled funds for the years 377,569 to 358,307 In Separately invested funds the non-equities 103 to 102 Total invested funds for the years 377,672 to 358,409 For Cornell Statutory Colleges the Pooled funds In Non-equities 390,487 to 303,497 In Equities - domestic 75,773 to 77,288 In Equities - international 98,040 to 90,483 Total pooled funds for the years 564,300 to 471,268 In Short-term and separately invested funds the Non-equities 21,457 to 21,420 the Equities 15,330 to 17,124 Total short-term and separately invested funds for the years 36,787 to 38,544 Total invested funds for the years 601,087 to 509,812 For Alfred Ceramics campus In Non-equities 13,069 to 3,104 In Equities 8,301 to 9,724 Total invested funds for the years 21,370 to 12,828 For Research Foundation In Non-equities 142,522 to 147,665 In Equities 155,947 to 114,097 Total invested funds for the years 298,469 to 261,762 For Auxiliary Services Corporations In Non-equities 42,124 to 28,186 In Equities 13,789 to 16,915 Total invested funds for the years 55,913 to 45,101 For State University Construction Fund Total invested funds in non-equities 24,401 to 23,312 Total investments for the years $1,378,912 to 1,211,224 In Classified as short-term $225,121 to 212,778 End of table. 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): Columns for the following changes are Fair Value, Cost, Gains or losses and Unit Value. End of year $377,569 335,156 42,413 and 10.75 Beginning of year 358,307 319,416 38,891 and 10.04 Unrealized net gain 3,522 Realized net gain 21,101 Total net gain $24,623 End of table. Investments of the endowment and similar funds of the Cornell statutory colleges, except for separately invested funds with a fair value of $28 million for both years, 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): Columns for the following changes are Fair Value, Cost, Gains or losses and Unit Value. End of year $564,300 462,484 101,127 and 55.42 Beginning of year 471,268 411,141 60,127 and 50.11 Unrealized net gain 41,689 Realized net gain 29,915 Total net gain $71,604 End of table. Generally, individual investment securities must be of investment grade. The State University Page 24 4. Investments (continued) 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; 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, 2006 and 2005, the State University had the following investments and maturities as summarized in Table A. Table A (in thousands) Fiscal Year 2006 and Fiscal Year 2005 First for the Fiscal year 2006: Less than More than Columns are: Investment Type, Fair Value, Less than 1 yr., 1-5 yrs., 6-10 yrs., and More than 10 yrs. US treasury bills $11,659 11,659 0 0 and 0 US treasury notes or bonds 27,288 4,363 14,494 1,467 and 6,964 US treasury strips 1,378 1,091 287 0 and 0 Asset-backed securities 56,470 4,874 3,185 437 and 47,974 Municipals 8,862 13 624 5,107 and 3,118 Repurchase agreements 19,689 19,689 0 0 and 0 Government bonds 0 0 0 0 and 0 Corporate bonds 29,746 2,197 7,735 6,798 and 13,016 Commercial paper 7,519 7,288 0 69 and 162 Mutual funds – non-equities 98,203 64,005 16,152 14,612 and 3,434 International – non-equities 12,103 3,065 6,314 1,943 and 781 US government – TIPS 9,722 15 5,541 3,224 and 942 US government agencies 32,061 1,971 6,249 2,043 and 21,798 Totals $314,700 120,230 60,581 35,700 and 98,189 Now for the Fiscal Year 2005: Less than More than Columns are: Investment Type, Fair Value, Less than 1 yr., 1-5 yrs., 6-10 yrs., and More than 10 yrs. US treasury bills $5079 2718 520 312 and 1,529 US treasury notes or bonds 239,042 4,809 15,444 9,931 and 8,8584 US treasury strips 20,800 20,800 0 0 and 0 Asset-backed securities63,473 1,774 5,402 2,137 and 54,160 Municipals 3,456 0 261 1,660 and 1,535 Repurchase agreements 2,531 810 380 228 and 1,113 Government bonds 5,021 1,555 729 437 and 2,300 Corporate bonds 39,458 7,376 6,781 11,155 and 14,146 Commercial paper 10,648 3,407 1,597 958 and 4,686 Mutual funds non-equities 132,941 68,534 29,954 16,511 and 17,986 International non-equities 13,242 3,778 2,400 1,687 and 5,377 US government TIPS 15,344 3,975 2,786 1,812 and 6,771 US government agencies 14,384 4,120 2,753 1,159 and 6,352 Totals $365,419 123,656 69,007 47,987 and 124,769 End of table A. Table B (in thousands) Columns are Credit Rating, Triple A, Double A, A, Triple B, Double B, B and Not Rated First, Investment Type 2006: Asset-backed securities $49,275 0 138 204 17 0 and 6,836 Municipal bonds 6,076 119 60 754 0 0 and 1,853 Repurchase agreements 0 0 0 0 0 0 and 19,689 Corporate bonds 2,702 846 12,168 10,879 1,740 367 and 1,044 Commercial paper 231 0 0 0 0 0 and 7,288 Mutual funds non-equities* 72,471 0 0 0 0 0 and25,732 International non-equities 5,826 1,241 805 1,641 414 113 and 2,063 US government agencies 11,505 1,632 216 0 0 0 and 18,708 Totals for columns $148,086 3,838 13,387 13,478 2,171 480 and 83,213 Secondly, Investment Type 2005: Asset-backed securities 18,754 710 2,395 354 0 0 and 41,260 Municipal bonds 2,471 702 283 0 0 0 and 0 Repurchase agreements 0 0 0 0 0 0 and 2,531 Corporate bonds 4,089 467 12,981 7,772 4,364 115 and 9,670 Commercial paper 0 0 3,972 0 2,897 0 and 3,779 Mutual funds non-equities* 90,890 0 0 0 0 13,437 and 28,614 International non-equities 7,522 1,097 360 2,285 1,604 0 and 374 US government agencies 13,314 822 0 0 0 0 and 248 Totals for columns $137,040 3,798 19,991 10,411 8,865 13,552 86,476 *based on average credit quality of holdings End of table B. Page 25 4. Investments (continued) Credit quality ratings of the State University’s investments in debt securities, as described by Moody’s, S&P, and Fitch IBCA as of June 30, 2006 and 2005 are summarized in Table B. The State University’s exposure to foreign currency risk for investments, held at June 30, 2006 and 2005, was as follows (fair value in thousands): Table on currency denomination values for years 2006 and 2005: Euro $30,064 and 23,814 Japanese yen 22,051 and 19,019 British pound 19,280 and 19,544 Hong Kong dollar 7,296 and 2,363 South Korean won 6,235 and 3,052 Taiwan dollar 5,676 and 3,965 Australian dollar 4,907 and 4,711 Brazil real 3,433 and 524 South African rand 2,823 and 1,031 Swiss franc 2,666 and 1,717 Malaysian ringgit 2,084 and 768 Singapore dollar 1,827 and 1,797 Turkish lira 1,159 and 7,691 Swedish krona 927 and 1,022 New Zealand dollar 384 and 927 Other 4,950 and 2,026 Totals $115,762 and 93,971 End of table. 5. Accounts, Notes and Loans Receivable At June 30, accounts, notes and loans receivable were summarized as follows (in thousands) in a Table comparing 2006 and 2005: Tuition and fees $29,545 and 50,772 Allowance for uncollectible (7,055) and (7,364) Net tuition and fees 22,490 and 43,408 Room and Rent 7,041 and 7,834 Allowance for uncollectible (1,684) and (1,763) Net room rent 5,357 and 6,071 Patient fees, net of contractual allowances 532,788 and 403,184 Allowance for uncollectible (139,925) and (88,920) Net patient fees 392,863 and 314,264 Other, net 109,261 and 113,406 Total accounts and notes receivable 529,971 and 477,149 Student loans 152,546 and 154,431 Allowance for uncollectible (21,104) and (21,910) Total student loans receivable 131,442 and 132,521 Total, net $661,413 and 609,670 End of table. 6. Capital Assets Capital assets, net of accumulated depreciation, totaled $4.83 billion and $4.46 billion at fiscal year end 2006 and 2005, respectively. Capital asset activity for fiscal years 2006 and 2005 is reflected in Table C. 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. Table C (in thousands) Columns are July 1, 2004, Additions, Closed Projects & Retirements, June 30,2005, Additions, Closed Projects & Retirements and June 30, 2006 Land $223,881 30,261 4,707 249,435 13,410 71 and 262,774 Infrastructure and land improvements 447,683 20,486 562 467,607 17,470 1,922 and 483,155 Buildings 4,834,908 479,520 43,216 5,271,212 347,106 45,789 and 5,572,529 Equipment, library books, and artwork 1,728,078 242,061 102,873 1,867,266 197,894 66,954 and 1,998,206 Construction in progress 700,957 393,200 507,864 586,293 510,142 383,662 and 712,773 Total capital assets 7,935,507 1,165,528 659,222 8,441,813 1,086,022 498,398 and 9,029,437 Less accumulated depreciation: Infrastructure and land improvements 289,295 12,947 547 301,695 13,608 1,922 and 313,381 Buildings 2,340,003 134,665 27,202 2,447,466 130,285 26,726 and 2,551,025 Equipment and library books 1,173,429 140,597 85,978 1,228,048 165,734 60,999 and 1,332,783 Total accumulated depreciation 3,802,727 288,209 113,727 3,977,209 309,627 89,647 and 4,197,189 Capital assets, net $ 4,132,780 877,319 545,495 4,464,604 776,395 408,751 and 4,832,248 End of table. Page 26 7. Longterm Liabilities The State University has entered into capital leases and other financing agreements with the DASNY to finance most of its capital facilities. The State University has also entered into financing arrangements with the New York Power Authority under the statewide energy services program. Equipment purchases are also made through DASNY’s Tax-exempt Equipment Leasing Program (TELP), various state sponsored equipment leasing programs, or private financing arrangements. At June 30, 2006 and 2005, other than facilities obligations, which are included as of March 31, 2006 and 2005, total obligations are summarized in Table D. Educational Facilities The State University, through DASNY, has entered into financing agreements to finance various educational facilities 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. During the year, 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 $480 million. 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. During the year, the State University entered into agreements with DASNY to issue residential hall facility obligations totaling $182 million; $5.9 million for remarketing bonds; $72.1 million for the purpose of financing capital construction and major rehabilitation for residential hall facilities; and $104 million in order to refinance $101.3 million of the State University’s existing residential hall facility obligations. The State University reduced its future aggregate debt service payments by $3.4 million Table D (in thousands) for the fiscal year 2006: The columns for these amounts fall under July 1, 2005, Additions, Reductions, June 30, 2006 and Current Portion. Long-term debt: Educational facilities $4,147,612 479,975 161,704 4,465,883 and 163,630 Residence hall facilities 633,780 181,965 128,085 687,660 and 22,890 Capital lease arrangements 171,453 75,025 49,484 196,994 and 55,730 Other long-term debt 8,797 0 2,807 5,990 and 0 Total long-term debt 4,961,642 736,965 342,080 5,356,527 and 242,250 Other long-term liabilities: Compensated absences and post-retirement obligations 676,498 261,859 165,338 773,019 and 143,453 Loan, State STIP pool 148,636 6,052 6,500 148,188 and 16,580 Litigation 167,576 25,033 47,168 145,441 and 29,286 Other long-term liabilities 75,560 17,743 27,107 66,196 and 10,321 Total other long-term liabilities 1,068,270 310,687 246,113 1,132,844 and 199,640 Total long-term liabilities $ 6,029,912 1,047,652 588,193 6,489,371 and 441,890 Page 27 Table D is continued with the same columns, but for fiscal year 2005 (in thousands): Long-term debt: Educational facilities $4,287,613 387,170 527,171 4,147,612 and 158,439 Residence hall facilities 589,770 63,355 19,345 633,780 and 20,975 Capital lease arrangements 169,711 42,149 40,407 171,453 and 45,299 Other long-term debt 11,528 0 2,731 8,797 and 2,672 Total long-term debt 5,058,622 492,674 589,654 4,961,642 and 227,385 Other long-term liabilities: Compensated absences and post-retirement obligations 611,615 218,797 153,914 676,498 and 133,007 Loan -State STIP pool 163,373 3,198 17,935 148,636 and 16,580 Litigation 162,271 91,456 86,151 167,576 and 47,022 Other long-term liabilities 17,715 59,865 2,020 75,560 and 6,633 Total other long-term liabilities 954,974 373,316 260,020 1,068,270 and 203,242 Total long-term liabilities $ 6,013,596 865,990 849,674 6,029,912 and 430,627 7. Longterm Liabilities (continued for Residence Hall Facilities) through lower interest costs, resulting in an economic gain of $3.1 million. During this year and 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, 2006, $1.21 billion and $346.9 million of outstanding educational and residence hall facility obligations, respectively, were considered defeased. Capital Lease Arrangements The State University leases equipment under DASNY TELP, New York State Personal Income Tax Revenue Bonds, certificates of participation (COPs), vendor financing, or through statewide lease purchase agreements. The State University is responsible for lease debt service payments sufficient to cover the interest and principal amounts due under these arrangements. administered by a nine-member board. TIAA/CREF is a multiple-employer, defined contribution plan administered by separate boards of trustees. Loan State, STIP Pool In prior years, the State University experienced the plans. operating cash-flow deficits precipitated by cash-flow difficultings experiences 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 of the State. The amount outstanding under this borrowing from the State at June 30, 2006 was $148.2 million. During the year, $6.5 million was paid on these loans. The State University incurred an interest cost of $6.1 million at an average interest rate of 4.1 percent. 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, multiple-employer, defined benefit public plan administered by the State Comptroller. TRS is a cost-sharing, multiple- employer, defined benefit public plan separately administered by a nine-member board. TIAA/CREF is a multiple-employer, defined contribution plan administered by separate boards of trustees. Substantially all full-time employees participate in the plans. Page 28 Table for Debt Service of the long-term debt obligations as of June 30, 2006 are as follows in thousands: Columns are Fiscal years, then Principal and Interest expressed in brackets for each of the following columns: Educational Facilities, Reidential Facilities, other and TOTALS For 2007 under Educational Facilities the Principal of $163,630 and interest of [249,427], Residential Facilities - 22,890 [33,118] 55,730 [6,709] 242,250 [289,254] FOr 2008 $164,949 [252,597] 23,195 [32,043] 40,053 [4,4778] 228,197 [289,418] For 2009 $172,500 [246,256] 23,960 [30,951] 33,043 [3,583] 229,503 [280,790] For 2010 $160,150 [234,839] 24,480 [29,808] 21,624 [2,655] 206,254 [267,302] For 2011 $185,086 [226,437] 24,135 [28,646] 8,703 [2002] 217,924 [257,085] For 2012-16 $1,315,958 [778,340] 127,395 [125,277] 17,943 [7,506] 1,461,296 [911,123] FOr 2017-21 $1,041,218 [463,462] 123,765 [94,177] 20,503 [3,404] 1,185,486 [561,043] FOr 2022-26 $683,075 [251,171] 123,740 [63,821] 3,245 [648] 810,060 [315,640] For 2027-31 $441,107 [93,093] 136,060 [30,452] 1,475 [249] 578,642 [123,794] FOr 2032-36 $138,210 [16,078] 58,040 [4,538] 665 [14] 196,915 [20,630] Totals are $4,465,883 [2,811,700] 687,660 [472,831] 202,984 [31,548] 5,356,527 [3,316,079] For the Educational Facilities the Interest rates range from 2.0% to 7.5% For the Residential Facilities the Interest rates range from 2.0% to 6.0% For Other the Interest rates range from 2.4% to 5.4% End of table. 8. Retirement Plans (continued) 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 in the ORP. Benefits are determined by the amount of individual accumulations and the retirement income option selected. All benefits generally vest after the completion of one year of service if the employee is retained thereafter. TIAA/CREF is contributory for employees who joined after July 27, 1976, who contribute 3 percent of their salary. Employer contributions range from 8 percent to 15 percent depending upon when the employee was hired. Employee contributions are deducted from their salaries and remitted on a current basis to TIAA/CREF. The State University's total retirement-related payroll was $2.3 billion and $2.19 billion for the June 30, 2006 and 2005 fiscal years, respectively. The payroll for 2006 and 2005 for State University employees covered by TIAA/CREF was $1.43 billion and $1.38 billion, ERS was $784 million and $725 million, and TRS was $84 million and $86 million, respectively. In a tble for demonstating the Employer and employee contributions under each of the plans were as follows in millions for years 2006, 2005 and 2004: Employer contributions: for TIAA-CREF $149.4 147.3 and 140.2 for ERS 52.5 54.7 and 20.5 for TRS 6.4 5.5 and 4.6 Employee contributions: for TIAA-CREF $ 40.9 39.1 and 36.5 for ERS 9.5 8.1 and 7.2 for TRS 0.9 0.9 and 0.8 End of table. The employer contributions are equal to 100 percent of the required contributions under each of the respective plans. Page 29 8. Retirement Plans (continued) The Research Foundation maintains a separate non-contributory plan through TIAA/CREF for substantially all of its employees. Employees become fully vested in contributions made by the Research Foundation after five years of service which are allocated to individual employee accounts. Employer contributions are based on a percentage of regular salary and range from 8 percent to 15 percent. The payroll for Research Foundation employees covered by TIAA/CREF for its fiscal year ended June 30, 2006 and 2005 was $310.5 million and $296.0 million, respectively. The Research Foundation pension contributions for fiscal years 2006, 2005, and 2004 were $23.6 million, $21.6 million, and $22.2 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, 15,987 retirees and 1,883 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 year ended June 30, 2006 and 2005, the State, on behalf of the State University, paid health insurance premiums of $145.4 million and $131.8 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 5,877 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 $4.6 million and $4.5 million during the years ended June 30, 2006 and 2005, respectively. Amounts recognized in the June 30, 2006 and 2005 financial statements include an accrued benefit cost of $117.0 million and $91.6 million, respectively, and investments designated for the plan of $60.8 million and $50.9 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, 2006, these outstanding contract commitments totaled approximately $491.6 million. The State University is also committed under numerous operating leases covering real property and equipment. Rental expenditures reported for the year ended June 30, 2006 and 2005 under such operating leases were approximately $24.2 million and $22.3 million, respectively. The following is table demonstating a summary of the future minimum Page 30 9. Commitments (continued) rental commitments under noncancelable real property and equipment leases with terms exceeding one year with figures in thousands: Year ending June 30, 2007 $23,473 2008 18,146 2009 15,385 2010 11,484 2011 8,802 2012-16 20,129 2017-21 2,304 2022-26 2,607 TOTAL for the years $102,330 End of table. 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 $145.4 million at June 30, 2006 ($143.1 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 34 and 32 percent of total revenues for the 2006 and 2005 fiscal years, respectively. 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 August 2006, the State University entered into agreements with the DASNY to issue obligations totaling $87.4 million for the construction and rehabilitation of residential facilities and to refinance the State University’s existing residential hall obligations. In October 2006, the State University completed the $35 million purchase of the Long Island University campus and facilities. The purchase includes land, infrastructure, academic, residential, administrative and other major facilities located on the site. Page 31 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 of revenues and support received for the promotion, development and advancement of the welfare of its campus, the State University, its students, faculty, staff and alumni. The foundations receive the majority of their support and revenues through contributions, gifts and grants and provide benefits to their campus, students, faculty, staff and alumni. In addition, the reported amounts include foundation student housing corporations, not-for- profit organizations that operate and administer certain housing and related services for students. All the foundations are exempt from federal income taxes on related income pursuant to Section 501(a) of the Internal Revenue Code. All of the financial data for these organizations was derived from each entity's individual financial 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, 2006 and 2005, the foundations distributed $36.5 million and $32.1 million, respectively, to the State University principally for scholarships and support of campus program activities. Separately issued financial statements of the foundations and other related entities may be obtained in writing to: Office of the University Controller State University Plaza, Room S-421 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 $771.9 million and $693.3 million at June 30, 2006 and 2005, respectively. The composition of investments is as follows with a table in thousands for the years 2006 and 2005: Equities, domestic $309,639 and 265,583 Equities, international 120,650 and 89,719 Non-equities 254,912 and 265,459 Other investments 86,736 and 72,537 Total investments $ 771,937 and 693,298 End of table. 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 $311.2 million and $297.5 million at fiscal year end 2006 and 2005, respectively. Capital asset classifications are summarized as follows expressed in thousands for years 2006 and 2005: for Land and land improvements $11,803 and 10,457 for Buildings 303,804 and 219,914 for Equipment 31,547 and 28,699 for Artwork and library books 15,603 and 14,864 for Construction in progress 15,757 and 78,692 Total capital assets 378,514 and 352,626 Less accumulated depreciation 67,293 and 55,086 Capital assets, net $311,221 and 297,540 End of table. Page 32 14. Foundations (continued) Longterm 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, expressed in thousands: Year ending June 30: for 2007 $5,897 for 2008 6,871 for 2009 7,303 for 2010 7,730 for 2011 7,548 Thereafter 228,653 Total for all years $264,002 End of table. Restatement The financial statement amounts previously reported for the 2005 fiscal year have been restated to properly reflect the net asset classification for accumulated endowment gains and to properly reflect capital assets, other liabilities, and expense activity. The effect of these adjustments was a reduction of the beginning net assets by $1.02 million for the 2005 fiscal year, and an increase in capital assets of $390 thousand, a decrease in other liabilities of $869 thousand, and a decrease in total expenses resulting in a corresponding increase in net assets of $1.26 million at the end of 2005. Additional copies of this report are available from The State University of New York Office of the University Controller State University Plaza - Room S421 Albany, NY 12246 518-443-5463 The State Universityof NewYork ANNUAL FINANCIAL REPORT 2006 The State University of New York State University Plaza Albany, NY 12246 www.suny.edu