Comprehensive annual financial report of the University of North Carolina at Chapel Hill |
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fiscal year ended June 30, 2006 • Chapel Hill, North Carolina A Constituent Institution of the University of North Carolina System and a Component Unit of the State of North Carolina 2006 Comprehensive Annual Financial Report T h e U n i v e r s i t y o f N o r t h C a r o l i n a a t C h a p e l H i l l Comprehensive Annual Financial Report June 30, 2006 Chapel Hill, North Carolina A Constituent Institution of the University of North Carolina System and a Component Unit of the State of North Carolina P r e par ed b y th e Con t rol l e r ’ s Offic e 2006 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 5 I n t ro duc to r y S e c t i on 6 Message from the Chancellor 9 Letter of Transmittal 15 Progress and Major Initiatives 23 Board of Trustees 23 Chancellor’s Cabinet 24 Organization Chart 25 F inancia l S e c t i on 26 Report of the Independent Auditor 28 Management’s Discussion and Analysis B A S I C F I N A N C I A L S TAT EME N T S 40 Statement of Net Assets 42 Statement of Revenues, Expenses, and Changes in Net Assets 43 Statement of Cash Flows 45 Statement of Financial Position — Component Units 46 Statement of Activities and Changes in Net Assets — Component Units 47 Notes to the Financial Statements 75 S t a t is t ica l S e c t i on 76 Net Assets by Component 77 Changes in Net Assets 80 Changes in Net Assets Adjusted for Inflation 82 Operating Expenses by Function 83 Revenue Base 84 Long-term Debt 85 Capital Asset Statistics 86 Summary of Ratios 92 Schedule of Specific Revenue and General Revenue Bond Coverage 94 Annual Undergraduate Educational Costs per Student 96 Admissions, Enrollment, and Degrees Earned 98 Faculty and Staff Statistics Table of Contents T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t I n t roduc t i on i n t r o d u c t o r y S e c t i o n T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l I n t r o d uc t i o n Carolina is a university in the midst of great change for the better. We are a dynamic insti-tution with bold aspirations. We are focused intently on success and making a great university even better to benefit the people of North Carolina and beyond. This fall, we enrolled our third class of Carolina Covenant Scholars and one of the most academically prepared freshman classes in the University’s history. We also implemented a new undergraduate curriculum, a once-in-a-generation event, to enhance connections between classes, between disciplines, and between teach-ing and research. Our students, faculty, and staff continue to pursue excellence in classrooms, research labs, patient clinics, schools, community agencies, and other settings that demonstrate Carolina’s commitment to engagement and serving the public. The faculty attracted $593 million in contract and grant funding in fiscal 2006, up slightly from the previous year and at a time when the federal research budget has tightened considerably. The physical campus is being rapidly transformed and is bringing a nationally recognized Campus Master Plan to life. Some 94 percent of the $515 million in construc-tion and renovation projects resulting from the state’s Higher Education Bond Referendum have been completed, are under contract, or in design. We are rapidly nearing complete build-out of the main campus and are pushing hard to realize the possibilities for amazing discovery and innovation at Carolina North, a new mixed-use campus planned on our property two miles north in Chapel Hill. Generous alumni, parents, and friends are contribut-ing at even higher levels to the Carolina First Campaign, which, at this writing, is approaching the $1.9 billion mark in private gifts and pledges toward our $2 billion goal. The campaign is well on its way toward surpassing its goal far ahead of the December 2007 conclusion. Carolina is a university on the move and poised for even greater leadership and accomplishments. We have purposefully set our expectations very high for Carolina’s future. Following are a few details about some recent developments important to the University’s future. State Budget Results We are enormously grateful for the work of the North Carolina General Assembly during a 2006 legislative session that resulted in the best budget this University has received in years. The 5.5 percent pay increase for our employees subject to the State Personnel Act (SPA) was the largest in many years and a huge step forward. We were overjoyed with the average 6 percent increase for faculty, and we targeted those funds strategically to reward merit and achievement. Governor Easley and our legislative leaders again made education a major priority for North Carolina. Much of this success resulted from the passionate and effec-tive leadership of UNC President Erskine Bowles. We all worked together as a team to best represent the entire UNC system. UNC-Chapel Hill is proud to be a partner with our sister UNC campuses. Faculty Tops Priority List Our top priority remains unchanged — to continue to strengthen support for faculty — so we can recruit and “We are a dynamic institution with bold aspirations. We are focused intently on success and making a great university even better to benefit the people of North Carolina and beyond.” —C h a n c e l l o r J ame s Mo e s e r Message from the Chancellor 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t retain the very best, and provide the tools faculty need to excel. This is the key to everything. It all starts with the faculty, and it quickly expands to staff and students. We have an extraordinary academic culture — a true culture of excellence — the magnet that attracts and keeps great faculty as well as staff. I constantly hear our faculty say that their greatest joy is their colleagues — the pride of being associated with distinguished professionals in a collegial environment. Last year we created 29 new endowed professorships with gifts to the Carolina First Campaign, which had another record year in fiscal 2006. That brought us to 181 new professorships toward our goal of 200. That total had risen to 188 by this writing. Salaries and benefits are the most obvious and tan-gible elements in attracting and retaining great faculty. Thanks to the new state budget, supplemented with our own campus- and school-based tuition revenues, we made great progress on faculty salaries this past year. However, we know that achieving our goals long term will require a sustained effort. Our Five-Year Financial Plan calls for reaching the 67th percentile for faculty salaries among our public and private campus peers by 2011. That will require average annual 6 percent legislative salary increases over the next five years, supplemented by modest campus-based tuition increas-es. Until this most recent year, campus-based tuition revenue has been our salvation in maintaining a competitive position for faculty. Engaging With North Carolina Last fall, I appointed our Engagement Task Force to recommend how we could intensify our service to North Carolina, especially in the areas of K-12 education, health, and economic development. The Institute of Gov-ernment, the Area Health Education Centers Program, Current UNC students enjoy the beauty of the Carolina campus. The Class of 2010 — 3,816 students — represents 99 North Carolina counties, 40 states, and 23 countries. Seventy-six percent were in the top 10 percent of their high school class; nearly 40 percent were among the top 10 students. More than 85 percent graduated with a grade-point average of 4.0 or higher. The average SAT score was 1293, with 22 percent scoring 1400 or better. T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l of engagement that I know we are capable of achieving by serving as an advocate and a facilitator. In his new role, Mike is encouraging greater coordination inside the University and promoting collabora-tions that respond to the challenges facing our state. We need to be determined in bringing all of the knowledge that the University can contribute to the success of each North Carolina community and the entire state. In the 21st Century, with China and India in the fast track and with the whole world now moving into an economy based on information and knowledge, we must be at the top of our game to help North Carolina compete internationally. It is vital that we be fully engaged and invested in the ongoing success of our public service mission. The people of North Carolina should expect nothing less. Conclusion 2005-2006 was one of the most successful years we have had in Chapel Hill for some time. We made excellent progress toward strategic University priorities. We are focused on remaining true to core Carolina values such as affordability and accessibility while making sure we are positioned well to meet long-term goals for excellence. At the same time, we have an important responsibility to be accountable to the General Assembly and the taxpay-ers of North Carolina in all that we do. We strive to be excellent stewards of their generous support. Sincerely, J am e s Mo e s e r and the Carolina Center for Public Service are wonderful examples of our engagement with North Carolina. But we knew that we could do more to match the University’s resources with the state’s needs. The task force’s report provides great opportunities to chart an even bolder course for engagement. That bold course requires senior leadership — some-one who gets up every day thinking about how Carolina can do an even better job of serving this state. That is why I appointed Mike Smith as Vice Chancellor for Engagement, in addition to his current duties as dean of the School of Government. Mike has been among the great champions on this campus for doing more with engagement. He will help us define the even deeper level At the heart of the campus stands the Old Well, the visual symbol of the University. Each spring, azaleas provide a stunning backdrop for this landmark. University lore holds that students can bring good luck with a drink from the Old Well on the first day of classes. The Carolina academic community benefits from a library with more than 5.7 million volumes and a perennial ranking among the best research libraries in North America as judged by the Association of Research Libraries. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t I n t r o d uc t i o n Introduction This Comprehensive Annual Financial Report includes the financial statements for the year ended June 30, 2006, as well as other useful information that helps ensure the University’s accountability to the public. Responsibility for the accuracy of the information and for the completeness and fairness of its presentation, including all disclosures, rests with the University’s management. We believe the information is accurate in all material respects and fairly presents the University’s financial position, revenues, expenses, and other changes in net assets. We believe our system of internal controls is sound and sufficient to disclose material deficiencies in controls to the auditors and the audit committee. The Comprehensive Annual Financial Report includes all disclosures necessary for the reader to gain a broad understanding of the University’s financial position and results of operations for the fiscal year ended June 30, 2006. The report is organized into three sections. The Introductory Section includes a message from the chancellor, the transmittal letter, a listing of the University’s Board of Trustees, Chancellor’s Cabinet, and an organization chart. This section also features the University’s major recent initiatives, priorities, and progress. Overall, this section provides background about the organization and structure of the University, the scope of its operations, significant factors contributing to the current fiscal environment, and expected factors influencing the future. The Financial Section presents management’s discus-sion and analysis, basic financial statements, and a report of the Office of the State Auditor. Management’s discussion and analysis provides an objective review of the University’s financial activities. The basic financial statements are prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board. The Statistical Section contains selected financial, sta-tistical, and demographic information. This information provides a broad overview of trends in the University’s financial affairs. Also included is information on the Cost of College Project of the National Association of College and University Business Officers. The accompanying financial statements present all funds belonging to the University and its component units. While the 16-campus University of North Carolina System’s Board of Governors has ultimate responsibility, the chancellor, the University’s Board of Trustees, and the Board of Trustees of the Endowment Fund have both delegated and statutory responsibilities for financial ac-countability of the University’s funds. For the fiscal year ended June 30, 2006, the University implemented GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recover-ies, GASB Statement No. 44, Economic Condition Report-ing: The Statistical Section, and GASB No. 47, Accounting for Termination Benefits. Statement No. 42 establishes standards for reporting the impairment of capital assets, which occurs when an asset’s service utility has declined significantly and unexpectedly. The Statement also clari-fies and establishes accounting requirements for insur-ance recoveries. Statement No. 44 amends prior guidance on the preparation of the statistical section of the CAFR to enhance the understandability and usefulness of the reported information and also by adding information to the statistical section based on the current financial reporting model. Statement No. 47 establishes accounting standards for termination benefits. The Financial Reporting Entity for the financial statements is comprised of the University and 11 com-ponent units. Eight of these, although legally separate, are reported as if they were part of the University. These include The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc. (Investment Fund), UNC Investment Fund, LC (System Fund), UNC Management Company, Inc. (Management Company), The University of North Carolina at Chapel Hill Foundation, Inc., The Kenan-Flagler Business School Foundation, The School of Social Work Foundation, Inc., The School of Education Foundation, Inc., and U.N.C. Law Foundation, Inc. The Investment Fund supports the University by operating an investment fund for charitable, non-profit nov emb e r 2 2 , 2 0 0 6 To Chancellor Moeser, Members of the Board of Trustees, and Friends of The University of North Carolina at Chapel Hill: Letter of Transmittal 1 0 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l foundations, associations, trusts, endowments, and funds that are organized and operated primarily to support the University. The System Fund was organized to allow the University, the University of North Carolina and its constituent institutions (UNC System), affiliated foundations, associations, trust, and endowments that support the University and the UNC System to pool their resources and invest collectively in investment opportunities identified, structured and arranged by the Management Company. The Investment Fund contributed and assigned all of its assets to the System Fund in exchange for membership interest in the System Fund. At year end, the Investment Fund membership interest was approximately 92.5 percent of the System Fund total membership interest. The Management Company is organized and operated exclusively to support the educational mission of the University. The Management Company also provides investment management services to the University, UNC System, and affiliated tax-exempt organizations. The purpose of UNC-CH Foundation, Business School Foundation, Social Work Foundation, School of Education Foundation, and Law Foundation is to aid, support, and promote teaching, research, and service in the various educational, scientific, scholarly, professional, artistic, and creative endeavors of the University. The financial statements of the Investment Fund, Sys-tem Fund, Management Company, UNC-CH Foundation, Business School Foundation, Social Work Foundation, School of Education Foundation, and U.N.C. Law Foun-dation have been blended with those of the University. Separate financial statements for three other compo-nent units are reported based on GASB Statement No. 39. The Medical Foundation of North Carolina, Inc., The Edu-cational Foundation Scholarship Endowment Trust, and The University of North Carolina at Chapel Hill Arts and Sciences Foundation, Inc. are legally separate, non-profit, tax-exempt organizations and are reported as discretely presented component units based on the nature and significance of their relationship to the University. Other related foundations and similar non-profit corporations for which the University is not financially accountable are not part of the accompanying financial statements. The University of North Carolina at Chapel Hill is a constituent institution of the 16-campus Univer-sity of North Carolina System, which is a component unit of the State of North Carolina and an integral part of the State’s Comprehensive Annual Financial Report. Economic Condition and Outlook During the year ended June 30, 2006, growth of total non-farm payroll employment in North Carolina was so strong that we finally exceeded the former January 2001 peak of 3,967,500 such jobs. The Bureau of Labor Statistics reported in June 2006, that North Carolina had 3,986,200 non-farm payroll jobs, a very strong increase of 82,400 payroll jobs from June 2005. The total employment picture, which includes agri-cultural workers as well as the self-employed, was even brighter. There were 4,215,500 people employed in North Carolina in June 2006. This was in increase of 119,700 from a year earlier. All these people employed earned record levels of personal income. The Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce reported that total personal income in North Carolina in the second quarter of 2006 was running at a seasonally adjusted annual rate of $284.4 billion. This was in increase of $17.1 billion or 6.4 percent. For the 12 months ended June 30, 2006, total person-al income in North Carolina was a record $277.4 billion. For 2005 total personal income was $269.4 billion. This was an upward revision of 1.6 percent from the March 2006 estimates previously reported by BEA. These large increases in personal income were reflect-ed in increased sales tax revenues across the state and in a sharp rise in income tax receipts at the state level. This allowed the Legislature to restore funding in many areas for the current fiscal year that had been hit repeatedly by budget cuts during the preceding five years of severe fiscal stringency in the state. In June 2006, BEA reported that the gross state product for North Carolina in 2005 was $344.6 billion or 2.8 percent of the U.S. total. This ranked 12th in the nation, just below the $352.7 billion of Virginia and just above the $328.5 billion of Massachusetts. North Carolina seems to be experiencing accelerating economic growth. Most forecasters expect the state to end 2006 with more than 100,000 net new non-farm payroll jobs than we had at the end of 2005. The demand for the University’s graduates to fill many of these new positions is likely to turn out to be the strongest in years when all the data have been collected and reported. Total economic growth in North Carolina should exceed that of the U.S. average in both 2006 and 2007. That has not happened since 1999, although it used to occur frequently in the 1955-2000 period. Progress and Major Initiatives Carolina’s progress, priorities, and major initiatives during fiscal year 2005-2006 reflected the University’s vision of becoming the nation’s leading public university. Following this letter are highlights from fiscal year 2005-2006. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 1 1 Financial Information Internal Control Structure The University’s Finance and Administration Division establishes and maintains an effective system of internal control. One objective of an internal control structure is to provide management with reasonable, although not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition. Another objective is to ensure that transactions are executed in accordance with appropriate authorization and recorded properly in the financial records to permit the prepara-tion of financial statements in accordance with generally accepted accounting principles. Organizational structure, policies, and procedures have been established to safe-guard assets, ensure the reliability of accounting data, promote efficient operations, and ensure compliance with established governmental laws, regulations and policies, University policies, and other requirements of sponsors to whom the University is accountable. As a recipient of federal financial awards, the Uni-versity is responsible for ensuring compliance with all applicable laws and regulations. A combination of state and University policies and procedures, integrated with the University’s system of internal controls, provides for this compliance. As an integral part of the State of North Carolina’s Single Audit, the University is subject to an an-nual examination by the Office of the State Auditor of its federal financial assistance programs and federal cost-re-imbursement contracts in accordance with U.S. Office of Management and Budget Circular A-133, Audits of State and Local Governments, and Non-Profit Organizations. The University determined a course of action as part of higher education’s response to the Sarbanes-Oxley Act, and has implemented practices to enhance the internal control structure. The University’s focused effort on financial controls provides a more proactive and broader approach in identifying and resolving potential limitations on sound internal control through a self-assessment process, development of a professional code of ethics, targeted campus training sessions, special reviews, improved documentation of internal controls, and timely and useful responses to questions from campus units. A financial controls manager leads efforts to strengthen and maintain sound internal controls. The Audit and Finance Committee of the Board of Trustees maintains an Audit Committee charter consistent with higher education standards. Budgetary Controls The University is responsible for controlling its budget and using the funds to fulfill its educational, research, and public service missions. It is also responsible for planning, developing, and controlling budgets and expen-ditures within authorized allocations in accordance with University, state, and federal policies and procedures. The University maintains budgetary controls to ensure compliance with provisions embodied in the annual appropriated budget approved by the North Carolina General Assembly, and as further directed by the Board of Governors. Project-length financial plans are adopted for capital projects. After the budget has been approved by the chancellor and the Board of Governors, the University follows an established system of budgetary controls. Finance and Administration issues periodic interim budget statements to department heads to guide them in managing their budget allocations. Monthly financial reports are provided on each fund to individual managers responsible for the fund. Financial reports are also provided to the state. When actual conditions require changes to the budget, revisions are prepared, and these revisions are appro-priately approved and communicated to those affected. Changes to the budget are approved at the University level and/or the state level as required. Based on the state’s management flexibility legislation, the University has received delegated authority for designated budget changes. The University maintains an encumbrance accounting system as another method to ensure that imposed expenditure constraints are observed. Debt Administration To ensure the appropriate mix of funding sources is utilized, the University established a debt policy, which is continuously used by management as a tool to evalu-ate the University’s organizational and capital funding structure, the appropriate use of leverage, and internal lending mechanisms. To fulfill its mission, the University will need to make capital investments, driving capital decisions that affect the University’s credit. Appropriate financial leverage serves a useful role and should be considered a long-term component of the University’s balance sheet. Just as investments represent an integral component of the University’s assets, debt is viewed to be a continuing component of the University’s liabilities. Debt, especially tax-exempt debt, provides a low-cost source of capital for the University to fund capital investments and achieve its mission and strategic objectives. The debt strategies, combined with management judgment, provide the framework by which decisions will be made regarding the use and management of debt. The objectives of the debt policy are: l Identify projects eligible for debt financing. Us-ing debt to fund mission-critical projects will ensure that debt capacity is optimally used to fulfill Carolina’s mission. Projects that relate to the core mission will be 1 2 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l given priority for debt financing; projects with associated revenues will receive priority consideration as well. l Maintain Carolina’s favorable access to capital. Management’s determination of the timing of capital proj-ects will not be compromised by the University’s access to capital sources, including debt. Management will use and issue debt to ensure timely access to capital. l Limit risk of University debt portfolio. The University will manage debt on a portfolio basis. The University’s continuing objective to achieve the lowest cost of capital will be balanced with the goal of limiting exposure to market shifts. l Manage the University’s credit rating to maintain the highest acceptable credit. This practice will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meeting strategic objectives. The University will limit its overall debt to a level that will maintain an acceptable credit rating with the bond rating agencies. In meeting these objectives, the University has ad-opted strategies and procedures for the management of its debt. These strategies include the following: l Mission-Based Capital Planning. Provide framework with a link to mission to evaluate and prioritize debt-eli-gible projects. l Core Ratios. Adopt a set of core ratios to guide capital planning and ensure central oversight of Univer-sity- wide leverage levels. l Financial Instruments. Provide management with appropriate debt vehicles based on borrowing needs. l Asset/Liability Management. Manage outstanding debt and future debt-financing needs within the frame-work of sound portfolio management practices. The University has $803.8 million of outstanding long-term bonds and $117.4 million of commercial paper at June 30, 2006. The bonds were issued to finance the construction and/or renovation of many campus facilities including essential new research buildings, major new cultural facilities that will benefit the local community and state, undergraduate residence halls, student family housing, parking facilities, and utilities infrastructure. Principal and interest for the bonds are payable from the general revenues of the University — excluding state appropriations, tuition, restricted gifts and restricted income from endowment investments — and net revenues generated by the operations of the debt-financed facilities. The UNC-CH Foundation, which is part of the University’s financial reporting entity, also adheres to a debt policy that maximizes the utility of the foundation’s financial resources to continue to provide current and future support to the University. Cash Management The cash management plan of the University provides guidance to ensure control and deposit of receipts, appropriate management of disbursements, and invest-ment of funds to maximize earnings on the investment of cash and minimize non-productive cash balances. State law requires that state-appropriated funds be deposited and invested with the State Treasurer with investment earnings accruing to the state. Other resources, such as gifts, contract and grant awards, auxiliary revenues, and student activity fees are not appropriated by the state. These funds, except for fees from services of health care clinics, must be deposited and invested with the State Treasurer with investment earnings accruing to the University. Endowment, debt service, fees from services of health care clinics, and other designated funds are invested by the University in accordance with its invest-ment policies. The University administers a short-term investment pool for funds not required to be on deposit with the State Treasurer. The investment pool is administered in conjunction with cash receipts and disbursing require-ments to minimize idle cash and to generate current income without loss of capital at a rate of return no less than the State Treasurer. Earnings are distributed to participating funds. The objective in managing disbursements is to main-tain funds in interest-bearing accounts for the longest appropriate period of time while ensuring that payments for goods and services are made timely. Disbursement cycles are established to coincide with this objective. The University uses the state’s cash management control system to improve cash flow by electronically recording cash receipts and disbursements for funds deposited with the State Treasurer. Other electronic processes have been developed for the receipt and disbursement functions to provide efficient and effective processes. Risk Management Risk has traditionally been viewed as something to be avoided or eliminated with only a negative outcome. Increasingly in today’s environment, there is greater awareness that responsible risk taking leads to a com-petitive advantage and can maximize stakeholder value. To optimize the benefits of risk and minimize their costs, the University has taken a more enterprise-wide approach to its risk management programs by holistically addressing its operational, financial, compliance, stra-tegic and reputation risks. This enterprise risk manage-ment ensures that decisions that trade value and risk are made on an informed basis and are aligned with our risk tolerance and strategy. The risks we face constantly change so our strategies must remain fluid. This ongoing 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 1 3 the 11th consecutive year that the University has been honored with this prestigious award. To receive a Certifi-cate of Achievement, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for one year. We believe our current comprehensive annual financial report continues to meet the Certificate of Achievement Program’s requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. Acknowledgments Preparation of this Comprehensive Annual Financial Report in a timely manner would not have been possible without the coordinated efforts of the University commu-nity, with special assistance from the Chancellor’s Office, the Office of the Executive Vice Chancellor and Provost, Research and Economic Development, Student Affairs, Information Technology Services, University Advance-ment, University Relations, Institutional Research, the Office of Scholarships and Student Aid, the Department of Athletics, and Dr. James F. Smith, Adjunct Professor of Business Administration in the Kenan-Flagler Busi-ness School. In addition, the Office of the State Auditor provided invaluable assistance. Davi d R . P e rr y Interim, Vice Chancellor for Finance and Administration process allows us to prioritize and efficiently use our risk management resources. Included within this enterprise risk management framework is our responsibility to mitigate any busi-ness interruption that adversely affects our education, research, and public service missions. An effective campus-wide Business Continuity Plan is central to this responsibility. The University has created a full-time Business Continuity Officer position who will lead this campus-wide planning process. Insurable risks are addressed in several ways, includ-ing participation in various state-administered risk pools, purchase of commercial insurance and self retention of certain risks. Refer to Note 15 of the Notes to the Finan-cial Statements for more detailed information concerning the University’s insurance programs. Other Information Audits State law, federal guidelines, and certain bond covenants require that the University’s accounting and financial records be audited by the Office of the State Auditor each year. The University’s Internal Auditors also perform fiscal, compliance, and performance audits. The reports resulting from these audits are shared with University management. Internal and external audit reports are provided to the Audit and Finance Committee of the Board of Trustees. The audit of the University’s federal financial as-sistance programs is performed by the Office of the State Auditor in conjunction with the statewide Single Audit. The accounting and financial records of The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc., The University of North Carolina at Chapel Hill Foundation, Inc., UNC Investment Fund, LC, UNC Management Company, Inc., The Kenan-Flagler Business School Foundation, The School of Social Work Founda-tion, Inc., The School of Education Foundation, Inc., The U.N.C. Law Foundation, Inc., the University of North Carolina at Chapel Hill Arts and Sciences Foundation, Inc., The Medical Foundation of North Carolina, Inc., the Educational Foundation Scholarship Endowment Trust, WUNC Radio, and the Athletic Department are each audited by a public accounting firm in addition to the State Auditor review. All audit reports are available for public inspection. Certificate Of Achievement The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the University for its comprehensive annual financial report for the fiscal year ended June 30, 2005. This was The University of North Carolina at Chapel Hill has received the award for reporting excellence for the past eleven years. 1 4 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 1 5 I n t r o d uc t i o n Progress and Major Initiatives t h e n a t i o n ’ s f i r s t p u b l i c u n i v e r s i t y is still leading the way. The University is making great strides. The Carolina Covenant is firmly estab-lished as a national model for student accessibility. Students, faculty, and staff shine in their pursuits of excellence in classrooms, research laboratories, and communities. The physical campus is undergoing an unprecedented transfor-mation. Alumni and friends are making record-setting gifts to the Carolina First Campaign. And the University is poised for even greater leadership in American higher education and outstanding public service to North Carolina. Following is a sampling of recent highlights demonstrating significant progress across many different areas of the University during fiscal 2005 – 2006. Carolina A U n i v e r s it y on t h e Mov e LE F T Reflection of the Old Well appears in a window of South Building. 1 6 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l l e f t Shirley Ort, associate provost and director of the Office of Scholarships and Financial Aid, makes a point during “The Politics of Inclusion: Higher Education at a Crossroads” confer-ence in Chapel Hill. Ort conceived the Carolina Covenant, which provided the impetus for national higher education leaders to converge in Chapel Hill to discuss issues such as affordability and accessibility. Carolina Covenant: Leading by Example The Carolina Covenant is a ground-breaking program in American higher education that permits qualified low-income students to graduate debt-free. Covenant students can graduate without debt. Instead, they agree to work on campus 10 to 12 hours weekly in a federal work-study job, and Carolina meets the rest of their needs through a combination of federal, state, University, and other privately funded grants and scholarships. Launched in fall 2004 by Chancellor James Moeser, the Carolina Covenant initially covered 223 freshmen. In fall 2006, the University enrolled its third class of Carolina Covenant Scholars. To date, UNC has awarded more than 900 scholarships through the Carolina Covenant. In addition, the University has launched a mentoring component of the program. This effort matches students with volunteer faculty to support them in their daily lives and help them further engage with the Caroli-na community. Goals include supporting student success and successful graduation. In fall 2006, the mentoring expanded to include peers offering support to the incom-ing Covenant Scholars. Beginning in fall 2005, students and their families had to be at or below 200 percent of the federal poverty level — up from 150 percent. That raised the threshold to cover a family of four with an annual income of about $37,000 or a single parent with a child who makes about $24,000. Carolina was the first major public U.S. university to announce plans for such a program in 2003. Since then, more than two dozen financial aid initiatives for low- to moderate-income students have been launched and were modeled after the Carolina Covenant. They include Brown, Harvard, MIT, and Stanford, as well as Michigan and Virginia. Many of these programs, like Carolina’s, respond to rapidly changing demographics and social needs, such as rising high school dropout and poverty rates — both major concerns here in North Carolina. Carolina advanced the national conversation about accessibility and affordability in September 2006 by hosting a conference, “The Politics of Inclusion: Higher Education at a Crossroads,” sponsored by leading private foundations. The goal was to stimulate action among 160 “The Carolina Covenant is for students who have the motivation and skills to do well academically, but who don’t have the financial resources to come to college. It helps them achieve their goals for college, and hopefully then they can give back to the community.” Tasrif A hme d Carolina Covenant Student Durham, NC “The Carolina Covenant is an excellent incentive for low-income students who might be thinking they can’t attend college because they don’t have a way to pay for it. If you come to Carolina with outside scholarships, the Carolina Covenant finishes your package with additional grants and work-study. They want to make sure that you graduate debt-free.” C r y s t a l b rown Carolina Covenant Student Ahoskie, NC A c l o s e r l o o k at t h e c o v e n a n t For more information about the Carolina Covenant, go to www.unc.edu/carolinacovenant. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 1 7 Marc Pollefeys, associate professor of computer science, is internationally recog-nized for techniques he has helped develop for computer vision, a field that creates three-dimensional models of scenes from video footage shot from cameras moving through the scene. He has received a $625,000 Packard Fellowship in Science and Engineer-ing as part of an effort to strengthen university science and engineering programs by sup-porting innovative researchers early in their careers. federal and state policymakers, economists, research-ers, foundation and business leaders, and educators. They exchanged ideas to help shape national policy and practice. In 2006, the Jack Kent Cooke Foundation selected Carolina to partner in a $27 million program that will help more deserving community college students from families with low to moderate income levels earn bachelor’s degrees. Carolina will receive nearly $900,000, and participation on campus will benefit students from Alamance Community College, Durham Technical Com-munity College, and Wake Technical Community College. The program includes the Carolina Student Transfer Excellence Program, which aims to encourage community college students of great talent and potential. Carolina First: Racing Toward $2 Billion The Carolina First Campaign is a comprehensive, multi-year private fund-raising campaign — the largest in the University’s history — to support the vision of Carolina becoming the nation’s leading public university. Each year, private funding and investment income provide about 20 percent of the University’s budget — creating Carolina’s margin of excellence. In October 2005, the campaign steering committee increased the goal from $1.8 billion to $2 billion. By Oc-tober 2006, Carolina First had brought in nearly $1.897 billion, 95 percent of the goal for the campaign that ends in December 2007. The campaign has created 188 endowed professorships for faculty toward a goal of 200 and 603 scholarships and fellowships for students out of the goal of 1,000. Carolina First has received gifts and pledges that will increase the University’s endowment and fund faculty research, academic programs and initiatives, as well as new buildings and renovations. In setting the Carolina First Campaign goal $200 million higher to $2 billion, the University is focusing on faculty support, merit-based scholarships, and capital projects. These are the three most pressing priorities that affect Carolina’s ability to compete with peer campuses. The campaign continues to exceed projections, raising a record $241.2 million in private gifts during fiscal 2006, which ended June 30. This is the first time that UNC has raised more than $200 million in a single year. The University has now set three consecutive years of record-setting support, topping $192.5 million in 2005 and $192 million in 2004. Gifts in fiscal 2005-2006 helped the University create 29 endowed professorships, as well as 98 undergraduate scholarships and graduate fellowships. In student support, an $11 million bequest from the estate of Col. John Harvey Robinson jump-started a $60 1 8 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l A student studies on the “green” roof at the addition to Car-rington Hall. Sedum, blueberries, and purple cornflower surround a small patio while capturing 70 percent of the stormwater that falls on the building. Crepe myrtle trees planted in brick wells will eventually shade the patio. million campaign to raise funds for merit-based scholar-ships that will help the University attract more top high school scholars. Building projects also received a boost with a $5 mil-lion gift from FedEx Inc. to support a Global Education Center that will house all international and area studies programs for the College of Arts and Sciences, including study abroad. In a move supporting the arts, the William R. Kenan Jr. Charitable Trust made a $5 million challenge grant to establish a new endowment for the University’s Carolina Performing Arts Series. The trust awarded Carolina $2.5 million, with the remaining $2.5 million to come after the University raises $5 million for the series by the end of Carolina First. Master Plan: Guiding Unprecedented Growth Today, the campus is undergoing an unprecedented physical transformation made possible in part by North Carolinians’ overwhelming approval of the $3.1 billion bond referendum for higher education in 2000. By mid- 2006, 94 percent of the $515 million in construction and renovation projects resulting from the bond referendum had been completed, were under contract, or were in design. The University projects completion of the final bond program building, the Arts Common Phase I (Music Instructional Facility), in July 2008. The University is also investing funds from non-state sources, including private gifts, overhead receipts from faculty research grants, and other sources. The result- 53 projects completed 26 percent of total program within budget and on schedule Value: $459 million 41 projects under construction 48 percent of program Value: $867 million 60 projects in design 26 percent of program Value: $474 million C ampus mas t e r p l an accompl ishme n t s ing $1.8 billion capital construction program — up from $1.5 billion just two years ago as critical new projects emerged — is among the most ambitious at any major U.S. university. Guiding the University’s capital construction program is the nationally recognized Campus Master Plan, which shows where and how to place future buildings, suggests ways to protect open space, and meets key environmental standards covering topics such as stormwater runoff. The University completed an update of the Campus Master Plan. Approved by the trustees, this updated plan includes key revisions to the Arts Common Plan. Completed projects included Bondurant Hall, Burnett- Womack Building, first phases of the Carolina Physical Science Complex, and the Information Technology Services Building (West Franklin Street). Other projects under way include the FedEx Global Education Center, Genetic Medicine Building (Schools of Medicine and Pharmacy), the N.C. Cancer Hospital, Campus Y, Infor-mation Technology Services Building (Manning Drive), and infrastructure improvements (chilled water, utilities, steam plant). Carolina continued award-winning transportation demand management strategies. Milestones included the expansion of park-and-ride lots for employees with 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 1 9 This exterior view shows the newly completed Max Chapman Hall, one of the early phases of the Carolina Physical Science Complex, the largest construction project in the University’s history. The $205 million complex is replacing outdated, deteriorating buildings with state-of-the-art facilities. The complex will provide an innovative learning atmosphere for students and open the door for integrated collaboration among Carolina’s world-renowned scientists. the opening of a Chatham County lot. The University was recognized with a “Best Workplaces for Commuters” designation by the U.S. Environmental Protection Agency and the U.S. Department of Transportation in May 2006. Faculty Research: Finding Solutions Carolina ranks among the top U.S. public universities in research support and creating jobs through new products and spin-off companies. The faculty attracted $593 million in total contract and grant funding in fiscal 2006 — up 2.4 percent at a time when federal research funding is leveling off. The National Institutes of Health (NIH) is Carolina’s central funding source, and the faculty ranked 15th overall in fiscal 2005 with nearly $300 million in total NIH funding. UNC is the top public university in the South for NIH funding. The School of Medicine received most of the University’s NIH funds ($217 million) in 2005, ranking 17th nationally. All five health affairs schools — dentistry, medicine, nursing, pharmacy, and public health — ranked within the NIH’s top 20 of public and private institutions. Since 2000, the University has maintained a strategy of targeted investment in “big idea” research themes, knitting together existing strengths in various areas to create broad, interdisciplinary new thrusts. Recent examples include: l The “Roadmap for Medical Research” initiative, intended to focus future NIH funding in 21 broad areas of concentration. This NIH initiative encourages researchers 2 0 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l to attack difficult problems using interdisciplin-ary collaboration and sophisticated computa-tional techniques to create quick translations to patient care. Carolina was the only university to receive eight of 21 grants in the 2005 Roadmap competition. In 2004, the University received three of the 21 initial Roadmap grants — more than any other university. l The Renaissance Computing Institute (RENCI) addresses problems spanning the sciences and engineering, the arts, the humani-ties, and commerce through a partnership with Duke, N.C. State, and the private sector. It is deploying high-performance computing re-sources and expertise to help the state plan for and respond to disasters, including hurricanes and their aftermath. l The Carolina Entrepreneurial Initiative, supported by the Marion Kauffman Foundation, resulted from a national competition. Goals include creating a surge of entrepreneurship, and the College of Arts and Sciences has a new minor in entrepreneurship. The initiative is managed by the Frank Hawkins Kenan Institute of Private Enterprise. Faculty discoveries and innovations have resulted in the creation of 35 UNC spin-off companies and jobs for North Carolinians. For example, an experimental anti-HIV drug being developed by Panacos Pharmaceuticals has successfully completed Phase II clinical trials. The drug was developed by UNC researcher Kuo-Hsiung Lee, a professor of natural products in the School of Pharmacy. Carolina North: realizing potential The University’s future contributions to the North Carolina economy one day will include Carolina North, to be built on about 900 acres of UNC-owned land less than two miles from main campus. Carolina North will redefine the University’s engagement with the state, nation, and world. University leaders intend to create a vibrant, innovative setting for outreach and service, research collaborations with private industry and public agencies, and economic development for North Carolina. Kenan Professor Hans Paerl scoops algae samples from the Trent River near New Bern. Paerl is part of the University’s Institute of Marine Sciences in Morehead City, which has served North Carolina since the 1940s. Chemist Mike Ramsey displays his “lab-on-a-chip.” He received a $3.8 million National Institutes of Health grant to develop technology that could reduce the cost of human genome sequencing for wider medical applications. E X UM 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 2 1 An economic impact study has projected that comple-tion of the first two phases of Carolina North by 2020 would create over 7,500 permanent high-wage jobs for North Carolinians. The study also confirmed that Caro-lina North has the potential to position the University as a leading national center for public-private partner-ships and to be a catalyst for the state’s economic transformation. The University advanced its planning process for Caro-lina North in the past year by engaging local community members. Chancellor Moeser appointed a Carolina North Leadership Advisory Committee (LAC) in February 2006 to seek broad community input. The charge is to develop guiding principles for the physical development of Caro-lina North. The committee’s final report is due by March 2007. The Board of Trustees has directed the University to submit zoning and land development applications for Carolina North to local governments no later than October 1, 2007. Academic Reputation: measuring quality Several national publications regularly publish rankings that listed Carolina prominently in categories ranging from academic quality to affordability to international presence. Recent highlights include: l 5th best public university in U.S. News & World Report’s 2007 “Best Colleges” guidebook for the sixth con-secutive year. 1st among public campuses for the second consecutive year and 9th overall in “Great Schools, Great Prices,” based on academic quality and the net cost of attendance for a student who received the average level of need-based financial aid. Kenan-Flagler Business School tied for 5th among undergraduate programs. l 1st among the 100 best U.S. public colleges and universities that offer the best combination of top-flight A b ov e l e f t Associate Professor John Stephens makes a point with his students while teaching a class in the School of Government. The school houses the Institute of Government, the largest university-based local govern-ment training and consulting organization in the nation. A B O V E A class takes advantage of a nice day to learn in the historic McCorkle Place quadrangle. b e l ow Old East is the nation’s first state university building, with the cornerstone for it laid on Oct. 12, 1793. Now a residence hall, Old East occupies a prominent spot next to the landmark Old Well on north campus. 2 2 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l academics and affordable costs as ranked by Kiplinger’s Personal Finance Magazine. Carolina has been first for six consecutive times since the magazine began its periodic surveys in 1998. l Among 25 “New Ivy” campuses in the 2007 Ka-plan/ Newsweek “How to Get into College Guide.” Includes schools with first-rate academic programs fueling their rise in national stature. Based on admissions statistics and interviews with administrators, students, faculty and alumni. l A “best value” among 81 schools chosen for “Amer-ica’s Best Value Colleges, 2006 Edition” by The Princeton Review/Random House for outstanding academics, relatively low costs, and generous financial aid packages. Carolina has appeared in this publication two years in a row. l 1st among public research universities, for the third consecutive year, recording the highest rate of undergradu-ates studying abroad in 2003-2004; 6th among all public and private research universities for the total number of undergraduates going abroad, according to an annual report published by the Institute of International Education. Degree programs or specialty areas from the schools of business, education, information and library science, law, medicine, public health as well as the College of Arts and Sciences, appeared prominently in the Spring 2007 edition of U.S. News & World Report’s “American’s Best Graduate Schools” issue. The School of Information and Library Science, tied for 1st overall, among the top 10 in five librarianship specialties; the School of Medicine, 2nd overall for primary care, tied for 20th in research, and three specialties among the top 10; Kenan-Flagler Business School’s master of business administration degree program, 20th; School of Law, tied for 27th, School of Education, tied for 29th, School of Public Health’s environmental and environmental health program, tied for 7th (in a category for engineering schools, which UNC does not have); and doctoral science programs in the Col-lege of Arts and Sciences, biological sciences (tied for 24th overall), chemistry (1st for analytical and tied for 14th overall); computer science (tied for 22nd) and mathemat-ics (tied for 29th). Newly graduated Carolina students share their sentiments about the magic of Chapel Hill during the traditional Commencement ceremony in Kenan Stadium. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 2 3 I n t r o d uc t i o n Nelson Schwab III Chair, Charlotte, NC Jean Almand Kitchin Vice Chair, Scotland Neck, NC Russell M. Carter Secretary, Wilmington, NC Timothy B. Burnett Greensboro, NC James C. Moeser Chancellor Richard A. Baddour Director of Athletics Nancy K. Davis Associate Vice Chancellor for University Relations Douglas S. Dibbert President, General Alumni Association Archie W. Ervin Associate Provost for Diversity and Multicultural Affairs Kevin M. FitzGerald Special Assistant to the Chancellor for State Government Relations Bernadette Gray-Little Dean, College of Arts and Sciences Board of Trustees John G. B. Ellison, Jr. Greensboro, NC Paul Fulton, Jr. Winston-Salem, NC Barbara R. Hyde Memphis, TN Karol V. Mason Atlanta, GA Roger L. Perry, Sr. Chapel Hill, NC A. Donald Stallings Rocky Mount, NC Richard T. Williams Charlotte, NC Robert W. Winston III Raleigh, NC James S. Allred Ex-Officio, Chapel Hill, NC Margaret A. Jablonski Vice Chancellor for Student Affairs Brenda W. Kirby Secretary of the University Matthew G. Kupec Vice Chancellor for University Advancement Jerome A. Lucido Vice Provost for Enrollment Policy and Management Ann E. Penn Equal Opportunity/ADA Officer Daniel A. Reed Vice Chancellor for Information Technology and Chief Information Officer William L. Roper Vice Chancellor for Medical Affairs and Dean, School of Medicine Chancellor’s Cabinet Robert N. Shelton* Executive Vice Chancellor and Provost Leslie C. Strohm Vice Chancellor and General Counsel Nancy D. Suttenfield** Vice Chancellor for Finance and Administration Tony G. Waldrop Vice Chancellor for Research and Economic Development * Bernadette Gray-Little was appointed Executive Vice Chancellor and Provost effective July 1, 2006. ** David R. Perry was appointed Interim Vice Chancellor for Finance and Administration effective July 1, 2006. 2 4 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l I n t r o d uc t i o n T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l Organization Chart Board of Trustees Chair Nelson Schwab III Chancellor James C. Moeser Executive Vice Chancellor and Provost Robert N. Shelton* Vice Chancellor for Student Affairs Margaret A. Jablonski Vice Chancellor for Medical Affairs William L. Roper Vice Chancellor for Finance and Administration Nancy D. Suttenfield** Vica Chancellor and General Counsel Leslie Chambers Strohm Vice Chancellor for Information Technology Daniel A. Reed Vice Chancellor for University Advancement Matthew G. Kupec Director of Athletics Richard A. Baddour Equal Opportunity/ ADA Officer Ann E. Penn Internal Auditor Phyllis C. Petree Vice Chancellor for Research and Economic Development Tony G. Waldrop * Bernadette Gray-Little was appointed Executive Vice Chancellor and Provost effective July 1, 2006. ** David R. Perry was appointed Interim Vice Chancellor for Finance and Administration effective July 1, 2006. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 2 5 I n t roduc t i on f i nanc i a l S e c t i o n 2 6 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 2 7 2 8 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l financia l s STATEMENT OF NET ASSETS $ Thousands 4,500,000 0 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 5,000,000 500,000 2,000,000 2,500,000 1,500,000 1,000,000 500,000 0 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS $ Thousands Total Assets Net Assets Total Liabilities 4,476,028 2,928,002 3,760,963 2,607,879 1,153,084 2006 2005 2006 2005 Capital Gifts, Grants, and Endowments Non-Operating Revenues, net Operating Revenues Increase in Net Assets Op erating Expenses 137,490 743,554 1,241,511 320,123 1,802,432 207,219 684,361 1,157,001 1,681,901 366,680 1,548,026 Introduction Management’s discussion and analysis provides an over-view of the financial position and activities of The Univer-sity of North Carolina at Chapel Hill (the “University”) for the fiscal year ended June 30, 2006, with comparative information for the fiscal year ended June 30, 2005. Management has prepared the discussion and analysis to be read in conjunction with the financial statements and accompanying note disclosures. The University is a constituent institution of the 16-campus University of North Carolina System (UNC System), a component unit of the State of North Carolina and an integral part of the State’s Comprehensive Annual Financial Report (CAFR). The Financial Reporting Entity for the financial statements is comprised of the University and 11 component units. Eight component units are reported as if they were part of the University, and three are reported as discretely presented component units based on the nature and significance of their relationship to the University. The reader may refer to note 1A for detail information on the financial reporting entity. Management’s discussion and analysis includes a separate section regarding the three component units that are discretely reported in the financial statements. The remainder of the management’s discussion and analysis pertains to the University and the eight compo-nent units reported as part of the University. Financial Highlights The University’s financial position at June 30, 2006, remained sound with total assets of $4.5 billion. Net assets, which represent the residual interest in the University’s assets after deducting liabilities, were $2.9 billion at June 30, 2006. The University’s net assets increased by $320 million in fiscal year 2005-2006, when operating, non-operating, and other changes are included. A comparison of the total assets, liabilities, and net assets at June 30, 2006, and 2005 and a comparison of the major components of the changes in net assets for the two fiscal years is presented below: Management’s Discussion and Analysis 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 2 9 Net assets increased 12.3 percent at June 30, 2006 over the prior year. Total assets increased 19 percent and total liabilities increased 34.3 percent for the same period. Operating revenues increased at a slightly greater rate than operating expenses in 2005-2006 over the prior year, 7.3 percent and 7.2 percent respectively. Net non-operating revenues and expenses increased 8.6 percent in 2005-2006 over the prior year. The state appropriations growth of 8.2 percent was significant. Investment income growth remained substantial with a 33.9 percent increase in 2005-2006 over the prior year. Research funding, fund raising for operational and capital needs and construction funding through the North Carolina Higher Education Bond Referendum of 2000 continued to be positive factors in the sustained financial well-being of the University. Using the Financial Statements The financial statements have been prepared in ac-cordance with generally accepted accounting principles prescribed by the Governmental Accounting Standards Board (GASB), which establishes standards for external financial reporting for public colleges and universities. The financial statements are presented on a consolidated basis to focus on the University as a whole. The full scope of the University’s activities is considered to be a single business-type activity and accordingly, is reported within a single column in the basic financial statements. Effective for the fiscal year ended June 30, 2006, the University implemented GASB Statement No. 42, Ac-counting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, GASB Statement No. 44, Economic Condition Reporting: The Statistical Section, and GASB No. 47, Accounting for Termination Benefits. Statement No. 42 establishes standards for reporting the impairment of capital assets, which occurs when an asset’s service utility has declined significantly and unexpectedly. The Statement also clarifies and estab-lishes accounting requirements for insurance recoveries. Statement No. 44 amends prior guidance on the prepara-tion of the statistical section of the CAFR to enhance the understandability and usefulness of the reported infor-mation and also by adding information to the statistical section based on the current financial reporting model. Statement No. 47 establishes accounting standards for termination benefits. The University’s Comprehensive Annual Financial Report includes the following three financial statements. l Statement of Net Assets l Statement of Revenues, Expenses, and Changes in Net Assets l Statement of Cash Flows Management’s discussion and analysis provides information regarding each of these financial statements. Condensed Statement of Net Assets The Statement of Net Assets presents the financial position of the University at the end of the fiscal year, includes all assets and liabilities of the University, and segregates the assets and liabilities into current and non-current components. Net assets represent the differ-ence between total assets and total liabilities and are one indicator of the University’s current financial condition. The following table summarizes the University’s assets, liabilities, and net assets at June 30, 2006, and 2005. percent 2006 2005 Change Assets, Liabilities , and Net Assets (dollars in thousands) Assets Current assets $912,751 $856,015 6.6 Non-current assets: Endowment investments 1,145,669 972,461 17.8 Other long-term investments 458,860 283,641 61.8 Capital assets, net 1,874,486 1,550,201 20.9 Other non-current assets 84,262 98,645 (14.6) Total Assets 4,476,028 3,760,963 19.0 Liabilities Current liabilities 391,685 420,350 (6.8) Non-current liabilities: Funds held in trust for pool participants 326,419 260,960 25.1 Long-term liabilities 797,852 440,423 81.2 Other non-current liabilities 32,070 31,351 2.3 Total Liabilities 1,548,026 1,153,084 34.3 Net Assets Invested in capital assets, net of related debt 1,119,040 1,017,383 10.0 Restricted: Non-expendable 430,316 378,234 13.8 Expendable 853,133 736,631 15.8 Unrestricted 525,513 475,631 10.5 Total Net Assets $2,928,002 $2,607,879 12.3 Current Assets and Liabilities The Statement of Net Assets shows the University had total assets of $4.5 billion at June 30, 2006, an increase of 19 percent over the prior year. Working capital, which is current assets less current liabilities, was $521.1 million at June 30, 2006, an increase of 19.6 percent, or $85.4 million, over the previous year. The significant factors which resulted in the working capital improve-ment were an increase in cash and cash equivalents of $39.7 million and a decrease in short-term debt and the current portion of long-term liabilities of $33.4 million. The cash and cash equivalents increase was due in part to a participating, University-affiliated foundation elect-ing to invest endowment assets in the Investment Fund effective June 30, 2006, of which $32.1 million were in 3 0 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l CURRENT LIABILITIES — COMPARATIVE 2005-2006 Total Current Liabilities: $391,685 2004-2005 Total Current Liabilities: $420,350 Percent Change from 2005 to 2006 $ Thousands Accounts Payable and Accrued Liabilities 160,000 0 Unearned Revenue Current Portion-Long Term Liabilities Other Current Liabilities 93,089 90,617 36,618 33,352 135,779 145,474 126,199 150,907 140,000 120,000 100,000 80,000 60,000 40,000 20,000 2.7% 9.8% (6.7%) (16.4%) 180,000 cash assets. A portion of short-term debt was replaced by long-term debt during 2005-2006 as part of the University’s financing strategy for the capital construction program. Current assets are represented graphically below: CURRENT ASSETS — COMPARATIVE 2005-2006 Total Current Assets: $912,751 2004-2005 Total Current Assets: $856,015 Percent Change from 2005 to 2006 $ Thousands Cash and Cash Equivalents 600,000 500,000 400,000 300,000 200,000 100,000 0 Short-term Investments Receivables Inventories Other Current Assets 495,190 455,492 268,766 262,744 125,142 113,924 17,428 17,401 6,225 6,454 8.7% 2.3% 9.8% 0.2% (3.5%) Current liabilities are represented graphically below: 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 3 1 Endowment and Other Long-term Investments Endowment investments increased 17.8 percent during 2005-2006 and were $1.146 billion at June 30, 2006, and $972.5 million at June 30, 2005, and include permanent endowments, funds internally designated as endowments and similar funds such as gift annuities and charitable trusts. Net assets of endowment and similar funds were $1.12 billion at June 30, 2006, and $930.6 million for the prior year. The endowment assets are invested with The Universi-ty of North Carolina at Chapel Hill Foundation Investment Fund, Inc. (“Investment Fund”), which is reported as a governmental external investment pool in the financial statements. The Investment Fund is a 501(c)(3) non-profit corporation established to support the University by operating an investment pool for charitable, non-profit foundations, associations, trusts, endowments, and funds that are organized and operated primarily to sup-port the University. The investment objective is to earn an average real total return of at least 5.5 percent per year, net of all fees, over rolling five- and ten-year periods. The earnings distribution policy is to provide a stable source of spend-ing support that is sustainable over the long term while preserving the purchasing power of the endowment. The earnings distribution rate was established at 5 percent of the previous year’s market value, with annual increases based on inflationary factors. Each year’s distribution is subject to a 4 percent floor and a 7 percent cap based on estimated fiscal year-end market value. Other long-term investments of $458.9 million at June 30, 2006, include funds of $317.4 million of affiliated entities that are neither part of the University’s financial reporting entity nor reported discretely but do invest through the System Fund. The remaining component is bond reserves and related funds of $141.5 million. Most of the University’s endowment assets are currently managed within the System Fund, a pooled investment fund vehicle. The System Fund is designed to provide long-term, stable rates of return on the invested assets through the use of a highly diversified portfolio strategy. As reported by UNC Management Company, Inc., the nominal return on the endowment assets invested in the System Fund for fiscal year 2005-2006 was 19.2 percent, with a real return of 15 percent after inflation. The respective returns for fiscal year 2004-2005 were 15.5 percent and 13 percent. The System Fund return of 19.2 percent for 2005-2006 far outdistanced the Strategic Investment Policy Portfolio (“SIPP”) return of 14.1 percent by 5.1 percent. The System Fund’s return also exceeded the 70 percent S&P 500 / 30 percent Lehman Brothers Bond Index (“70/30”) return of 5.8 percent for the year. The continuing strong investment performance has increased the three-year annualized return to 16.9 percent at June 30, 2006. This three-year return mea-sure compares well with the corresponding measure of 14.5 percent for the SIPP and 8.5 percent for the 70/30. For the five years ended June 30, 2006, the System Fund earned a 10.6 percent annualized return compared to 7.3 percent for the SIPP and 3.5 percent for the 70/30. The System Fund has also outperformed its long term objective of real return, after inflation, of 5.5 percent for each of the time periods noted above as well as for longer time periods. For the 10-, 15-, and 20-year time periods ended June 30, 2006, the System Fund returned 11.6 percent, 12.2 percent, and 11.7 percent, respectively. Comparatively, the CPI plus 5.5 percent has been 8.2 percent, 8.3 percent, and 8.8 percent, respectively, for the corresponding time periods. The System Fund is very well positioned in the current environment and remains invested according to the approved investment policy that provides excellent diversification in both bull and bear markets. Capital Assets and Debt Management An essential aspect for enhancing and maintaining the University’s academic, research, and service programs and its residential life is the development and renewal of its capital assets. The University Board of Trustees ap-proved the Campus Master Plan to guide the University’s physical development in the 21st Century. The master plan meshes the critical pieces needed for smart growth in the 21st Century — transportation, parking, hous-ing, utilities, and environmental sustainability — with the program needs of a growing campus. The master plan combines the practical requirements of a research university with the beauty that inspired its founders. 3 2 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l EXPENDABLE RESOURCES TO DEBT Percent 2006 5.0 4.5 4.0 0 1.8 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2.4 2.6 1.5 2.4 2005 2004 University Debt Policy (Minimum) Moody’s Public Universities Aaa & Aa1, 2005 The University will continue to grow dramatically in the coming years. A summary of changes in capital assets is disclosed in Note 5. Capital assets, net of accumulated depreciation, at June 30, 2006 and June 30, 2005 were as follows: 2006 and $141.1 million at June 30, 2005. The University maintains a combination of variable and fixed-rate debt, consistent with its debt manage-ment policy. The effective, combined interest rate for variable and fixed rate debt was 4.65 percent for fiscal year 2005-2006 and 4.5 percent for 2004-2005. The interest rate on the commercial paper program for fiscal year 2005-2006 was 3 percent and for 2004-2005 was 1.82 percent. Interest rates on the University’s variable rate, long-term bonds were 2.93 percent for fiscal year 2005-2006 and 1.82 percent for 2004-2005. Interest rates on fixed rate, long-term bonds are disclosed in Note 8B of the financial statements. The University’s financial strength allowed it to achieve ratings of AA+/Aa1 by the national rating agencies. The University’s debt policy uses two key ratios to measure debt capacity, financial health, and credit quality. The expendable resources to debt ratio measures the availability of expendable assets to cover long-term obligations should the University be required to repay all its obligations immediately. The debt service to operations ratio measures the University’s ability to repay annual principal and interest associated with all outstanding debt and its impact on the overall budget. Each ratio is compared to the University’s debt policy standard and the appropriate peer group comparison for fiscal year 2004- 2005 (the latest available numbers). The debt policy floor for expendable resources to debt is 1.5 times, and the metrics indicate the University has sufficient expendable resources to pay its long-term debt obligations. The debt policy ceiling for debt service to operations is 4 percent, and the metrics indicate the University’s annual debt service requirements are a reasonable proportion of the operating budget. percent 2006 2005 Change Capital Assets (dollars in thousands) Capital Assets Construction in progress $585,216 $377,522 55.0 Land and other non-depreciable assets 93,980 86,347 8.8 Buildings 910,763 798,181 14.1 General infrastructure 190,898 202,594 (5.8) Machinery and equipment 93,629 85,557 9.4 Total $1,874,486 $1,550,201 20.9 The University is engaged in a $1.8 billion capital construction program that began in 2000 and will continue through the next several years. This program includes major capital renewal of existing buildings and infrastructure to address both deferred maintenance and programmatic needs. The 53 completed projects total $459 million, or 26 percent of the $1.8 billion capital construction program. The 41 projects under construc-tion total $867 million or 48 percent, and the 60 projects under design represent $474 million or 26 percent. Capital funds resulting from North Carolina Higher Education Bonds continue to provide essential resources for construction. The University is directly investing in its capital construction program using a variety of other funding sources including general revenue bonds, cost reimbursements from research grants, internal reserves, and private gifts. In August 2005, the University issued $405 million in fixed-rate bonds, of which approximately $245 mil-lion was used to fund project costs for the University’s capital improvement program and approximately $121 million to refund outstanding commercial paper which had already been issued to provide construction financ-ing for the capital improvement program. The University continues to use its commercial paper program to provide low-cost bridge financing for capital projects until gifts are received or in anticipation of an external bond issue. Commercial paper debt was $117.4 million at June 30, 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 3 3 2006 NET ASSETS: $2,928,002 38% 29% 15% 18% Investment in Capital Assets, net of related debt $1,119,040 Restricted Expendable $853,133 Restricted Non-expendable $430,316 Unrestricted $525,513 $ Thousands Other Non-current Assets Other non-current assets were $84.3 million at June 30, 2006 and $98.6 million at June 30, 2005, a 14.6 percent decrease. Included in this category at June 30, 2006 are restricted cash and cash equivalents of $19 mil-lion, receivables for pledged gifts of $23.2 million, notes receivable for student loans of $30.5 million, restricted resources due from the primary government of $3.2 mil-lion, and an investment in a joint venture of $8.3 million. The decrease in other non-current assets from the prior year resulted primarily from a $23.9 million decline in restricted resources due from the primary government. Restricted resources due from the primary government represent receivables for designated capital construction projects funded from proceeds from statewide higher education bonds and other state resources. The decline resulted from a $22.7 million decrease in statewide higher education bonds due as funding for capital construction projects shifts to other resources. The investment in a joint venture represents the construction of the Southern Astrophysical Research Telescope (SOAR), situated in Cerro Pachon, Chile, in South America, as part of an international consortium including the University. Non-current Liabilities Non-current liabilities were $1.2 billion at June 30, 2006 and $732.7 million at June 30, 2005 and include funds held in trust for the University’s affiliated foundations and other campuses in the UNC System and their af-filiates of $326.4 million and $261 million, respectively. These entities are not part of the University’s financial reporting entity nor are they discretely presented, but the entities do invest through the System Fund. The increase in funds held in trust of 25.1 percent over the prior year resulted from strong investment performance, participant contributions, and new participants in the System Fund. Long-term liabilities of $797.9 million at June 30, 2006 and $440.4 million at June 30, 2005, are the non-current portion of bonds payable, notes payable, capital leases payable, compensated absences, and annuities payable. The 81.2 percent increase from the prior year resulted from the University’s issuance of $405 million in fixed-rate bonds to fund project costs for the University’s capital improvement program. The reader may refer to Note 8 for summary of changes in long-term liabilities. Other non-current liabilities of $32.1 million at June 30, 2006 and $31.4 million at June 30, 2005 are refund-able U.S. government grants that provide resources for student loan programs. Net Assets Net assets represent the value of the University’s assets after liabilities are deducted. The University’s net assets were $2.9 billion at June 30, 2006, an increase of $320.1 million over the prior year. DEBT SERVICES TO OPERATIONS Percent 2006 5.0 4.5 4.0 0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 3.7 4.0 2.2 2.1 3.2 2005 2004 University Debt Policy (Maximum) Moody’s Public Universities Aaa & Aa1, 2005 3 4 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l percent 2006 2005 Change University Operations (dollars in thousands) Operating Revenues Student tuition and fees, net $195,882 $164,457 19.1 Grants and contracts 554,047 524,476 5.6 Sales and services, net 485,627 462,460 5.0 Other 5,955 5,608 6.2 Total Operating Revenues 1,241,511 1,157,001 7.3 Operating Expenses Salaries and benefits 1,042,452 966,629 7.8 Supplies and materials 152,911 148,440 3.0 Services 432,212 407,690 6.0 Scholarships and fellowships 54,105 51,170 5.7 Utilities 56,277 47,870 17.6 Depreciation 64,475 60,102 7.3 Total Operating Expenses 1,802,432 1,681,901 7.2 Operating Loss (560,921) (524,900) 6.9 Non-operating Revenues (Expenses) State appropriations 440,070 406,673 8.2 Non-capital grants 67,388 62,544 7.7 Non-capital gifts, net 68,824 73,693 (6.6) Investment income, net 207,423 154,900 33.9 Interest and fees on capital asset-related debt (39,921) (21,823) 82.9 Other non-operating (230) 8,374 102.7 Income Before Other Changes 182,633 159,461 14.5 Capital grants 52,277 152,844 (65.8) Capital appropriations 15,776 5,166 205.4 Capital gifts 13,368 11,521 16.0 Additions to permanent endowments 56,069 37,688 48.8 Increase in Net Assets 320,123 366,680 (12.7) Net Assets – July 1 2,607,879 2,241,199 16.4 Net Assets – June 30 $2,928,002 $2,607,879 12.3 Fiscal year 2005-2006 revenues and other changes total $2,162,706, and expenses total $1,842,583. Fiscal year 2004-2005 revenues and other changes total $2,070,404, and expenses total $1,703,724. Condensed Statement of Revenues, Expenses, and Changes in Net Assets The Statements of Revenues, Expenses, and Changes in Net Assets present the University’s results of operations. The statements for the fiscal year ended June 30, 2006 and the prior year are summarized as follows: Operating Revenues The operating revenues represent resources generated by the University in fulfilling its instruction, research, and public service missions. Student tuition and fees are reported net of the scholarship discount, which was $45.3 million for fiscal year 2005-2006 and $37.9 million for the prior year. Total revenues from student tuition and fees increased 19.1 percent over the prior year. While 2005-2006 tuition rates for undergraduate residents did not change, tuition rates increased 4.3 percent for undergraduate non-residents, 5.9 percent for graduate residents, and 5.7 percent for graduate non-residents. There were also limited tuition increases for the profes-sional schools. Beginning in 2005-2006, mandatory student charges used to support designated auxiliary operations are reported as student fees. Previously, these charges were reported as sales and services revenues. Revenues from grants and contracts increased 5.6 percent over the prior year as reflected in the financial statements. Discussion of grants and contracts in terms of awards provides another useful perspective. The University is among the nation’s leading public research universities, with a diversified portfolio of research that attracted more than $593 million in sponsored program funding during fiscal year 2005-2006, a 2.4 percent increase over the previous year. During the federal fiscal year 2004-2005 (the latest available numbers), University faculty attracted $296.6 million in National Institutes of Health (NIH) funding (up from $289 million in 2003-2004), ranking 15th overall among U.S. private and public universities. The growth comes at a time when the NIH, which historically has ac-counted for slightly more than half of all research funding at the University, experienced a cut in appropriations in 2005-2006 with no increase expected for 2006-2007. Health-related research continues to receive the bulk of research dollars, with the medical school bringing in $288 million in 2005-2006. The School of Public Health received $61 million, and the College of Arts and Sciences received $60 million. Interdisciplinary research centers, institutes and other units that do not fall under one particular school accounted for $132 million. Funding sources include state and federal agencies, industry and foundations and non-profit organizations. Sales and services and patient services revenues of $485.6 million for fiscal year 2005-2006 represent an increase of 5 percent over the prior year and include the 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 3 5 2006 OPERATING EXPENSES BY NATURE: 1,802,432 Salaries and Benefits $1,042,452 Services $432,212 24% 58% 3% 9% 3% 3% Supplies and Materials $152,911 Depreciation $64,475 Scholarships and Fel lowships $54,105 Utilities $56,277 $ Thousands 2006 OPERATING EXPENSES BY FUNCTION: 1,802,432 Instruction $595,319 Auxiliary Enterprises $424,042 Academic Support $86,229 Research $285,646 33% 24% 6% 16% 5% 5% 4% 3% 3%1% Operations and Maintenance of Plant $111,720 Public Service $85,330 Institutional Support $71,609 Student Financial Aid $54,105 Depreciation $64,475 Student Services $23,957 $ Thousands revenues of campus auxiliary operations such as student housing, student stores, student health services, the utilities system, and parking and transportation, as well as revenues from patient services provided by the profes-sional health-care clinics. Net revenues generated by the health-care clinics increased 7.1 percent in 2005-2006, while revenues from auxiliary operations increased 3.8 percent. Other revenues of $6 million for fiscal year 2005-2006 represent operating resources not separately identified and include, as examples, an assessment to the Investment Fund to support administrative services, library fines, and interest income from student loans. Operating Expenses The University’s operating expenses were $1.8 billion for the fiscal year ended June 30, 2006, an increase of 7.2 percent over the prior year. The operating expenses are reported by natural classification in the financial statements and by functional classification in the note disclosures (Note 12). The following table illustrates the University’s operating expenses by the functional classification: The following graph illustrates the University’s operat-ing expenses by function. percent 2006 2005 Change Operating Expenses by Function (DOLARS in thousands) Instruction $595,319 $575,951 3.4 Research 285,646 271,208 5.3 Public Service 85,330 83,005 2.8 Academic Support 86,229 75,384 14.4 Student Services 23,957 21,653 10.6 Institutional Support 71,609 67,426 6.2 Operations and Maintenance of Plant 111,720 92,860 20.3 Student Financial Aid 54,105 51,170 5.7 Auxiliary Enterprises 424,042 383,142 10.7 Depreciation 64,475 60,102 7.3 Total Operating Expenses $1,802,432 $1,681,901 7.2 The following graph illustrates the University’s operat-ing expenses by the natural classification. 3 6 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l 2006 TOTAL REVENUES BY SOURCE: $2,025,216 Non-Operating Revenues $783,705 Sales and Services, net $301,303 21% 10% 15% 9% 4% Federal Grants and Contracts $422,229 Student Tuition & Fees, net $195,882 39% 2% Nongovernmental Grants and Contracts $89,976 State & Local Grants and Contracts $41,842 Patient Services, net $184,324 Interest Earnings on Loans $672 (0%) Other Operating Revenues $5,283 (0%) State Appropriations $440,070 Non-capital Grants $67,388 Non-capital Gifts, net $68,824 Investment Income (Net of Investment Expense of $4,314) $207,423 3% 3% 11% 22% Non-Operating Revenues: Breakdown $ Thousands Operating expense categories reported by natural classification increased at a comparable rate to total operating expenses with one exception. The 17.6 percent increase in utilities expenses in 2005-2006 over the prior year was caused by higher costs for purchased electricity, natural gas and propane, and coal and related additives; consumption increases based on campus growth; and higher rates to fund increased debt service to finance cap-ital construction program for campus utilities operations. Salaries and benefits increased 7.8 percent, supplies and materials increased 3 percent, expenses for services in-creased 6 percent, scholarships and fellowships increased 5.7 percent, and depreciation increased 7.3 percent. Non-operating Revenues and Expenses State appropriations of $440.1 million, non-capital grants of $67.4 million, non-capital gifts of $68.8 million, investment income of $207.4 million, interest and fees on capital asset-related debt of ($39.9) million, and other revenues and expenses of ($0.2) million comprise net non-operating revenues and expenses. These revenues are considered non-operating because they were not generated by the University’s principal, ongoing opera-tions. For example, state appropriations were not generated by the University but were provided to help fund operating expenses. The University’s initial budget for state appropriations was $415.9 million for fiscal year 2005-2006. The Uni-versity received budget increases totaling $30.5 million to fund employee salary and benefit increases, enrollment increases, expansion items, and other program enhance-ments. In response to legislative action, the University, excluding AHEC operations, was required to take a permanent budget reduction of 1.72 percent. The reduc-tion totaled $6.3 million, resulting in an appropriated budget of $440.1 million for 2005-2006, an increase of 8.2 percent over fiscal year 2004-2005. Non-capital grants increased by 7.7 percent to $67.4 million in fiscal year 2005-2006 and represent federal awards that are not considered to be operating revenues. Net non-capital gifts decreased by 6.6 percent to $68.8 million and represent expendable gifts received and pledges made and are net of an allowance for uncollect-ible pledges. Net investment income of $207.4 million, an increase of 33.9 percent over 2005-2006, includes income and realized and unrealized gains and is net of realized and unrealized losses and investment manage-ment fees. For detail discussion, the reader may refer to Endowment and Other Long-term Investments section of Management’s Discussion and Analysis. Interest and fees on capital asset-related debt were ($39.9) million, an increase of 82.9 percent over the prior year. Other non-operating revenues and expenses were ($0.2) million, a decrease of $8.6 million from the prior year. Other non-operating revenues and expenses for 2004-2005 included a $6.6 million increase in the net as-sets of annuities and charitable remainder trusts. These annuities and charitable remainder trusts include split-interest agreements that have a liability component for the present value of projected future distributions to the annuitant or donor and liabilities to other organizations where the University reporting entity serves as trustee but not the beneficiary of the split-interest agreements. Changes in the actuarial calculations of the liabilities will increase or decrease the net assets of the annuities and charitable remainder trusts. Total Operating and Non-operating Revenues Operating and non-operating revenues such as state appropriations, non-capital grants, non-capital gifts, and investment income are used to fund University opera-tions. The following chart illustrates the University’s operating and non-operating revenues which total $2 billion for fiscal year 2005-2006. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 3 7 percent 2006 2005 Change Cash Flows (dollars in thousands) Cash Flows Provided (Used) Operating activities ($492,016) ($460,046) 6.9 Non-capital financing activities 704,641 589,302 19.6 Capital and related financing activities (16,732) (67,227) (75.1) Investing activities (141,021) (147,354) (4.3) Net Increase (Decrease) in Cash 54,872 (85,325) (164.3) Cash – July 1 459,363 544,688 (15.7) Cash – June 30 $514,235 $459,363 11.9 Other Changes in Net Assets Capital grants of $52.3 million for 2005-2006 and $152.8 million for 2004-2005 are from statewide higher educa-tion bond proceeds for capital construction projects. Capital appropriations of $15.8 million for 2005-2006 and $5.2 million for the prior year were received from the state for repairs and replacements. Net capital gifts of $13.4 million for 2005-2006 and $11.5 million for the prior year resulted from fund-raising efforts and also provided funding for construction projects. Non-expend-able gifts and funds from the state’s program to match gifts for distinguished professorship endowments resulted in additions to permanent endowments of $56.1 million during fiscal year 2005-2006 and $37.7 million during fiscal year 2004-2005. Condensed Statement of Cash Flows The Statement of Cash Flows provides additional informa-tion about the University’s financial results by reporting the major sources and uses of cash. Cash increased by $54.9 million during the fiscal year 2005-2006, com-pared with a decrease of $85.3 million during fiscal year 2004-2005. Factors which caused the increase in the cash position at June 30, 2006, include $32.1 million in cash assets of University-affiliated foundation that was transferring endowment assets to the Investment Fund for investment. Also, funds invested in the State Treasurer’s short-term investment fund (STIF), which is classified as a cash equivalent, increased by $8 million. The primary factor which caused the decrease in the cash position at June 30, 2005 was the decreased use of STIF for the University’s temporary investment pool. The temporary investment pool’s investment in STIF was $120 million at June 30, 2004 and zero at June 30, 2005. The statements for the fiscal year ended June 30, 2006 and the prior year are summarized as follows: Component Units Reported using Discrete Presentation Three affiliated foundations were categorized as compo-nent units using discrete presentation. Discrete presenta-tion provides readers with complete information regarding the financial activities of the components units. The reader may refer to Note 1A for additional information regarding the three affiliated foundations. Summary information regarding the financial activities of the three affiliated foundations follows: percent 2006 2005 Change Total Net Assets (dollars in thousands) Assets and Liabilities Total assets $501,142 $431,587 16.1 Total liabilities 3,954 2,166 82.5 Total net assets $497,188 $429,421 15.8 Net Assets Composition Unrestricted $23,708 $20,653 14.8 Temporarily restricted 284,351 238,745 19.1 Permanently restricted 189,129 170,023 11.2 Total Net Assets $497,188 $429,421 15.8 The growth in total assets and net assets resulted from increased levels of contributions and investment returns. Liabilities increased as the UNC-Chapel Hill Arts and Sciences Foundation entered into a loan agree-ment during 2005-2006 with principal of $3,000,000 outstanding at June 30, 2006 to finance a building lease in London, England, benefiting the Foundation and the University. The University plans to refinance the loan with fund raising and program revenues. 3 8 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l The net assets of the three affiliated foundations increased $67.8 million during fiscal year 2005-2006. The main factors attributing to the increase were $43 million in contributions and $35.8 million in investment income which is comprised of net gains on investments and inter-est and dividend income. Economic Outlook Fiscal year 2005-2006 demonstrated an improvement on a solid financial foundation. The University’s compara-tively low tuition levels enhance its appeal to prospective students and provide a possible source of additional resources, should campus-based tuition increases be enacted. The University’s support from the state con-tinues to improve, sponsored awards are a proven and reliable source in support of the University’s research mission, philanthropic efforts should have ongoing suc-cess, and investment returns are expected to remain at high levels. The University’s strong debt credit ratings of Aa1 and AA+ allow it to obtain competitive financing for capital construction. Campus-based tuition rates increased for fiscal year 2006-2007 by 7.8 percent for undergraduate residents, 6.5 percent for undergraduate non-residents, 13.8 per-cent for graduate residents, and 2.8 percent for graduate non-residents. There were limited tuition increases for the professional schools. The University’s academic stand-ing allows it to continuously attract top students. The University’s ratio of accepted applications as a percentage of total applications was 36.6 percent for 2005-2006. The ratio of enrolled students as a percentage of accepted applications was 55.7 percent for 2005-2006. The CAFR Statistical Section includes historical data for these two and other metrics. The Carolina Covenant provides qualified students from low income families with a Carolina education debt-free. Carolina Covenant Scholars agree to work on campus 10 to 12 hours weekly in a federal work-study job, and the University meets the rest of their needs through a combination of federal, state, university, and other privately funded grants and scholarships. Effective with the fall semester of 2005, the Carolina Covenant expanded the program to include families with incomes up to 200 percent of the federal poverty level. This move covered a family of four with an annual income of about $37,000 or a single parent with a child who makes about $24,000. To attract additional high-achieving students, the University expanded merit-based scholarships. Fund raising efforts have provided resources for more than 600 scholarships and fellowships in support of both need and merit, a 60 percent increase since the campaign began. The University now directs all of its trademark licensing revenue to scholarships, allowing the establishment of 68 new merit scholarships in 2005-2006 and 2006-2007. The Governor and the North Carolina General As-sembly have continued to demonstrate strong financial support for higher education. The budgeted funding level for state appropriations for 2006-2007 totals $490.2 million, which represents an increase of 11.4 percent over fiscal year 2005-2006 actual state appropriations. This level of state appropriation funding includes faculty and staff pay and benefit increases of $26 million. The fiscal year 2006-2007 pay increase of 5.5 percent for staff and average 6 percent for faculty is the third consecutive year of base salary increases for all employees. Other budget increases included $3.7 million for student enrollment increases, $8.5 million for planned operating expenses for new construction, and $5.9 million for the Renaissance Computing Institute based in Chapel Hill and created in partnership with Duke and North Carolina State universities. The 2006-2007 appropriations budget also included a base budget reduction of $1.4 million, and a base budget increase of $7.4 million for new programs. While additional budget reductions or reversions are not anticipated for fiscal year 2006-2007, it is not certain. percent 2006 2005 Change Changes in Net Assets (dollars in thousands) Total revenues $103,510 $75,806 36.5 Total expenses 35,743 33,574 6.5 Increase in net assets 67,767 42,232 60.5 Net assets – July 1 429,421 387,189 10.9 Net assets – June 30 $497,188 $429,421 15.8 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 3 9 A critical priority is to strengthen faculty support through recruitment and retention efforts and providing them with the necessary resources for teaching, research-ing, and serving the public. Significant progress has been made in this area, and the University’s Five-Year Finan-cial Plan calls for attaining the 67th percentile for faculty salaries among our public and private peers by 2011. This goal will require average annual 6 percent legislative salary increases over the next five years, supplemented by modest campus-based tuition increases. External funding from contracts and grants increased to $593 million in 2005-2006. While this funding level is notable, attracting more private funding is one area that is essential to continued growth. The University’s com-mitment to improving private funding is demonstrated by the planning for Carolina North, the University’s 21st Century living-and-learning community. The goal is for the Carolina North campus to be a national model for sustainability, addressing the long-term needs for accelerated transfer of new knowledge into the economy, housing for faculty and staff, and new collaborations with the private sector. A Leadership Advisory Committee of community, state, and university representatives is developing guiding principles for building Carolina North. As announced by Chancellor Moeser in his 2006 “State of the University” address, the University’s goal is to secure $1 billion in external research funding by 2015. The growth of research funding also translates into economic growth for the state. Data that reflect the economic impact of technological development include the number of patents, spin-off companies, jobs, and licensed technology. In 2005-2006, the University was awarded 21 patents; started five new companies, bringing the total to 35; licensed 43 inventions; and received a total of $2.2 million in licensed technology. Management believes the investment performance of its endowment fund will continue to earn attractive returns and provide important resources for University operations. The University’s investment management operation is separately organized as the UNC Manage-ment Company, Inc., a non-profit corporation organized and operated as a 501(c)(3) entity, to provide investment management services and administrative services to the University and to the other campuses of the UNC System and their affiliated non-profit foundations as appropri-ate. Management believes this structure will continue to enhance the ability to attract and retain investment professionals and increase the pool of funds and resulting investment returns. The University’s fund-raising efforts continued to achieve a high level of success. Private gifts and grants, along with state matching funds, totaled a record $241.2 million in fiscal year 2005-2006, marking the first time that the University, in a single year, has raised more than $200 million in cash and other assets. The University’s Carolina First Campaign has raised $1.81 billion and has passed its initial goal of $1.8 billion. The campaign’s goal was increased to $2 billion in October 2005. The campaign, which began in July 1999, also was extended by six months and will end December 31, 2007. The campaign finished 2005-2006 ahead of pace to reach $2 billion, with 90 percent of the goal attained and just 82 percent of the campaign completed. Increased support from the state, the ability to attract top prospective students, vibrant research funding, continued strength in investment performance, a dy-namic capital construction program, and an exceptional fund-raising campaign all contribute to a positive outlook for the University. The University’s commitment to sound financial and budgetary planning, protection and enhancement of its endowed and physical assets, and observance of compliance and control standards support a solid financial future for the University. 4 0 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l financia l s A ss e t s Current Assets: Cash and cash equivalents $158,591,038 Restricted cash and cash equivalents 336,599,057 Short-term investments 175,089,510 Restricted short-term investments 93,676,248 Receivables, net (Note 4) 125,141,916 Due from State of North Carolina component units 3,022,098 Inventories 17,427,497 Notes receivable, net (Note 4) 3,203,171 Total current assets 912,750,535 Non-current Assets: Restricted cash and cash equivalents 19,045,146 Receivables, net (Note 4) 23,181,244 Restricted due from primary government 3,211,019 Endowment investments 1,145,668,496 Other long-term investments 458,860,725 Notes receivable, net (Note 4) 30,505,262 Investment in joint venture 8,318,917 Capital assets, non-depreciable (Note 5) 679,195,885 Capital assets, depreciable, net (Note 5) 1,195,290,353 Total non-current assets 3,563,277,047 Total assets $4,476,027,582 The accompanying notes to the financial statements are an integral part of this statement. Statement of Net Assets June 30, 2006 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 4 1 Total assets (continued) $4,476,027,582 Lia b i l i t i e s Current Liabilities: Accounts payable and accrued liabilities (Note 6) 93,089,196 Due to primary government 190,708 Due to State of North Carolina component units 3,006,265 Deposits payable 1,902,918 Unearned revenue 36,617,440 Interest payable 3,685,390 Short-term debt (Note 7) 117,414,000 Long-term liabilities - current portion (Note 8) 135,778,820 Total current liabilities 391,684,737 Non-current Liabilities: U. S. government grants refundable 32,069,778 Funds held in trust for pool participants 326,419,316 Long-term liabilities (Note 8) 797,851,618 Total non-current liabilities 1,156,340,712 Total liabilities 1,548,025,449 Total asets les liabilities $2,928,002,133 N e t A ss e t s Invested in capital assets, net of related debt $1,119,039,950 Restricted for: Non-expendable (Note 10) 430,315,566 Expendable (Note 10) 853,133,381 Unrestricted 525,513,236 Total net asets $2,928,002,133 The accompanying notes to the financial statements are an integral part of this statement. 4 2 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l financia l s R e v e nu e s Operating Revenues Student tuition and fees, net (Note 11) $195,882,460 Patient services, net (Note 11) 184,324,052 Federal grants and contracts 422,228,732 State and local grants and contracts 41,841,926 Non-governmental grants and contracts 89,975,881 Sales and services, net (Note 11) 301,302,925 Interest earnings on loans 672,155 Other operating revenues 5,282,547 Total operating revenues 1,241,510,678 E x p e ns e s Operating Expenses Salaries and benefits 1,042,451,851 Supplies and materials 152,911,484 Services 432,211,908 Scholarships and fellowships 54,105,093 Utilities 56,276,744 Depreciation 64,475,131 Total operating expenses 1,802,432,211 Operating loss (560,921,533) N on - o p e ra t ing R e v e nu e s ( E x p e ns e s ) State appropriations 440,070,173 Non-capital grants 67,387,887 Non-capital gifts, net (Note 11) 68,823,820 Investment income (net of investment expense of $4,313,989) 207,423,036 Interest and fees on capital asset related debt (39,921,063) Other non-operating expenses (230,054) Net non-operating revenues 743,553,799 Income before other revenues 182,632,266 Capital appropriations 15,775,900 Capital grants 52,277,305 Capital gifts 13,368,446 Additions to endowments 56,068,953 Increase in net assets 320,122,870 N e t A ss e t s Net assets - July 1, 2005 2,607,879,263 Net assets - June 30, 2006 $2,928,002,133 The accompanying notes to the financial statements are an integral part of this statement. Statement of Revenues, Expenses, and Changes in Net Assets For the fiscal year ended June 30, 2006 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 4 3 financia l s C A SH F LOWS F R OM O P E R A T I NG A C T I V I T I E S Received from customers $1,240,267,585 Payments to employees and fringe benefits (1,026,926,673) Payments to vendors and suppliers (642,243,427) Payments for scholarships and fellowships (54,105,093) Loans issued to students (9,753,347) Collection of loans to students 9,755,263 Other payments (9,010,507) Net cash used by operating activities (492,016,199) C A SH F LOWS F R OM NON - C A P I T A L F I N A N C I NG A C T I V I T I E S State appropriations 440,070,173 Non-capital grants received 68,580,247 Non-capital gifts received 78,174,625 Additions to permanent endowments 56,068,953 Related activity agency receipts 61,747,872 Net cash provided by non-capital financing activities 704,641,870 C A SH F LOWS F R OM C A P I T A L A N D R EL A TED F I N A N C I NG A C T I V I T I E S Proceeds from capital debt 535,861,847 Capital grants 76,155,362 Capital appropriations 15,775,900 Capital gifts 13,368,446 Acquisition and construction of capital assets (389,465,953) Principal paid on capital debt and leases (228,037,306) Interest and fees paid on capital debt and leases (40,390,066) Net cash used by capital and related financing activities (16,731,770) C A SH F LOWS F R OM I N V E S T I NG A C T I V I T I E S Proceeds from sales and maturities of investments 1,099,071,632 Investment Income 55,893,747 Purchase of investments and related fees (1,295,986,840) Net cash used by investing activities (141,021,461) Net increase in cash and cash equivalents 54,872,440 Cash and cash equivalents, July 1, 2005 459,362,801 Cash and cash equivalents, June 30, 2006 $514,235,241 The accompanying notes to the financial statements are an integral part of this statement. Statement of Cash Flows (continued) Statement of Cash Flows For the fiscal year ended June 30, 2006 44 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l Statement of Cash Flows continued For the Fiscal Year Ended June 30, 2006 Reconciliation of net operating revenues (expenses) to net cash used by operating activities: Operating loss ($560,921,533) Adjustments to reconcile operating loss to net cash used by operating activities: Depreciation expense 64,475,131 Provision for uncollectible loans and writeoffs (296,049) Changes in assets and liabilities: Receivables, net (11,768,770) Inventories (26,971) Notes receivable, net (680,917) Accounts payable and accrued liabilities 1,509,876 Due to primary government (22,094) U.S. government grants refundable 718,851 Deferred revenue 1,479,152 Compensated absences 13,517,125 Net cash used by operating activities ($492,016,199) Non-cash investing, capital, and financing activities: Assets acquired through assumption of a liability $393,128 Assets acquired through a gift $810,695 Change in fair value of investments $123,601,604 Reconciliation of cash and cash equivalent: Current Assets: Cash and cash equivalents $158,591,038 Restricted cash and cash equivalents 336,599,057 Non-current assets: Restricted cash and cash equivalents 19,045,146 Total cash and cash equivalent - June 30, 2006 $514,235,241 The accompanying notes to the financial statements are an integral part of this statement. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 45 financia l s ARTS AND SCIENCES EDUCATIONAL FOUNDATION THE MEDICAL FOUNDATION FOUNDATION, INC. SCHOLARSHIP ENDOWMENT TRUST OF NORTH CAROLINA, INC. A ss e t s Current assets Cash and cash equivalents $8,198,054 $9,929,344 $34,039,129 Investments 139,180,017 103,723,020 Unconditional promises to give 7,375,017 7,380,012 2,719,831 Contributions receivable from remainder trusts 3,567,710 Accounts receivable 63,187 Funds held in trust 125,387 Accrued income receivable 23,698 189,431 Prepaid expenses 24,971 Miscellaneous receivables 250,452 Total current assets 15,785,343 160,057,083 140,946,834 Property and equipment Building 436,340 Furniture and equipment 88,464 420,692 Leasehold interest - building 3,750,483 Vehicle 8,930 Total property and equipment 3,847,877 857,032 Less: allowance for depreciation (162,301) (447,615) Total property and equipment (net) 3,685,576 409,417 Other assets Investments 97,259,535 46,722,237 Unconditional promises to give,net 17,406,059 12,383,080 Restricted cash 2,994,510 86,459 Split-interest agreements 422,070 Restricted investments 441,073 Real estate interests held for investment 49,500 Student loans receivable 39,095 Cash surrender value of life insurance 2,061,825 392,632 Total other assets 118,131,674 2,061,825 60,064,576 Total assets $137,602,593 $162,118,908 $201,420,827 Lia b i l i t i e s and N e t A ss e t s Current liabilites Accounts payable $15,568 $365,229 Annuities payable $187,868 Accrued expenses 144,423 240,913 Total current liabilities 159,991 187,868 606,142 Long-term debt 3,000,000 Total liabilities 3,159,991 187,868 606,142 Net assets Unrestricted 11,844,297 11,864,250 Temporarily restricted 61,705,510 80,417,301 142,228,198 Permanently restricted 60,892,795 81,513,739 46,722,237 Total net assets 134,442,602 161,931,040 200,814,685 Total liabilities and net assets $137,602,593 $162,118,908 $201,420,827 The accompanying notes to the financial statements are an integral part of this statement. Component Units Statement of Financial Position June 30, 2006 4 6 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l financia l s ARTS AND SCIENCES EDUCATIONAL FOUNDATION THE MEDICAL FOUNDATION FOUNDATION, INC. SCHOLARSHIP ENDOWMENT TRUST OF NORTH CAROLINA, INC. S upp or t and R e v e nu e Support Contributions $20,314,671 $6,707,515 $15,953,101 Development assessment fee 1,313,333 Change in value of split-interest agreements 35,141 Donated facilites 40,000 Actuarial adjustment of annuities payable 14,868 Endowment investment return designated for current operations 5,801,413 Total support 21,703,145 12,523,796 15,953,101 Revenue Interest and dividend income 4,517,132 Net unrealized and realized gains (losses) on investments 13,580,443 14,959,590 Investment income 2,755,490 Loss on sale of real estate investments (22,213) Gain on sale of property and equipment 3,500 Other income 42,945 988,469 Total revenue 16,378,878 20,446,478 Total support and revenue 38,082,023 12,523,796 36,399,579 E x p e ns e s Program services Grants 9,324,790 14,859,381 Scholarship expense distribution 5,790,442 Annuity payments 10,971 Adminstrative expenses 40,983 Other expenses 1,064,112 Total program services 9,324,790 6,906,508 14,859,381 Supporting services Fundraising expenses 1,753,190 1,118,782 Management and general 801,358 979,122 Total supporting services 2,554,548 2,097,904 Total expenses 11,879,338 6,906,508 16,957,285 Change in net assets from operations 26,202,685 5,617,288 19,442,294 Other changes: Investment return in excess of amounts designated for current operations 16,504,962 Changes in net assets 26,202,685 22,122,250 19,442,294 Net assets - beginning of year 108,239,917 139,808,790 181,372,391 Net assets - end of year $134,442,602 $161,931,040 $200,814,685 The accompanying notes to the financial statements are an integral part of this statement. Component Units Statement of Activities and Changes in Net Assets For the fiscal year ended June 30, 2006 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 47 financia l s Notes to the Financial Statements June 30, 2006 48 NOTE 1: Significant Accounting Policies A. Financial Reporting Entity B. Basis of Presentation C. Basis of Accounting D. Cash and Cash Equivalents E. Investments F. Receivables G. Inventories H. Capital Assets I. Restricted Assets J. Funds Held in Trust for Pool Participants K. Funds Held in Trust by Others L. Non-current Long-term Liabilities M. Compensated Absences N. Net Assets O. Scholarship Discounts P. Revenue and Expense Recognition Q. Internal Sales Activities R. Related Parties 53 NOTE 2: Deposits and Investments A. Deposits B. Investments 59 NOTE 3: Endowment Investment Return 60 NOTE 4: Receivables 61 NOTE 5: Capital Assets 61 NOTE 6: Accounts Payable and Accrued Liabilities 61 NOTE 7: Short-term Debt Index 62 NOTE 8: Long-term Liabilities A. Changes in Long-term Liabilities B. Bonds Payable C. Demand Bonds D. Capital Appreciation Bonds E. Annual Requirements F. Bonds Defeasance G. Notes Payable H. Annuities Payable 67 NOTE 9: Lease Obligations A. Capital Lease Obligations B. Operating Lease Obligations C. Other Lease Obligations 68 NOTE 10: Restricted Net Assets 69 NOTE 11: Revenues 69 NOTE 12: Operating Expenses by Function 70 NOTE 13: Pension Plans A. Retirement Plans B. Deferred Compensation and Supplemental Retirement Income Plans 71 NOTE 14: Other Post-Employment Benefits A. Heath Care for Long-term Disability Beneficiaries and Retirees B. Long-term Disability 71 NOTE 15: Risk Management 73 NOTE 16: Commitments and Contingencies A. Commitments B. Pending Litigations and Claims C. Other Contingent Receivables 74 NOTE 17: Related Parties 74 NOTE 18: Subsequent Events 48 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l Note 1 Significant Accounting Policies A Financial Reporting Entity The concept under-lying the definition of the financial reporting entity is that elected officials are accountable to their constituents for their actions. As required by accounting principles generally accepted in the United States of America, the financial reporting entity includes both the primary government and all of its component units. An organiza-tion other than a primary government serves as a nucleus for a reporting entity when it issues separate financial statements. The University of North Carolina at Chapel Hill (University) is a constituent institution of the 16-campus University of North Carolina System, which is a component unit of the State of North Carolina and an integral part of the State’s Comprehensive Annual Financial Report. The accompanying financial statements present all funds belonging to the University and its component units. While the Board of Governors of the University of North Carolina System has ultimate responsibility, the chancellor, the Board of Trustees, and the Board of Trustees of the Endowment Fund have delegated respon-sibilities for financial accountability of the University’s funds. The University’s component units are either blended or discretely presented in the University’s finan-cial statements. The blended component units, although legally separate, are, in substance, part of the University’s operations and therefore, are reported as if they were part of the University. Discretely presented component units’ financial data are reported in separate financial state-ments because of their use of different GAAP reporting models and to emphasize their legal separateness. Blended Component Units Although legally separate, The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc. (Investment Fund), UNC Investment Fund, LLC (System Fund), UNC Management Company, Inc. (Management Company), The University of North Carolina at Chapel Hill Foundation, Inc. (UNC-Chapel Hill Foundation), The Kenan-Flagler Business School Foundation (Business School Foundation), The School of Social Work Foundation, Inc. (Social Work Foundation), U.N.C. Law Foundation, Inc. (Law Foundation), and The University of North Carolina at Chapel Hill School of Education Foundation, Inc. (School of Education Foundation), are reported as if they were part of the University. The Investment Fund is governed by a board consist-ing of 11 ex-officio directors and one or two elected directors. Ex-officio directors include all of the members of the Board of Trustees of the Endowment Fund of the University, the vice chancellor for finance and administra-tion, and the vice chancellor for university advancement. The UNC-Chapel Hill Foundation Board may, in its discretion, elect one or two of its at-large members to the Investment Fund Board. The Investment Fund supports the University by operating an investment fund for charitable, non-profit foundations, associations, trusts, endowments, and funds that are organized and operated primarily to support the University. Because members of the Board of Directors of the Investment Fund are officials or appointed by officials of the University and the Investment Fund’s primary purpose is to benefit the University and other organizations operated primarily to support the University, its financial statements have been blended with those of the University. In December 2002, the System Fund was organized by the Investment Fund to allow the University, the Universi-ty of North Carolina and its other constituent institutions (UNC System), affiliated foundations, associations, trusts, and endowments that support the University and the UNC System to pool their resources and invest collectively in investment opportunities identified, structured, and arranged by the Management Company. The membership interests are offered only to government entities or tax-ex-empt organizations that are controlled by or support the University or UNC System. The Investment Fund contrib-uted and assigned all of its assets to the System Fund effective January 1, 2003, in exchange for its membership interest in the System Fund. Upon such contribution and assignment, and in consideration thereof, the System Fund has assumed all liabilities and obligations of the Investment Fund in respect of such contributed assets. At June 30, 2006, the Investment Fund membership interest was approximately 92.5 percent of the System Fund total membership interests. Because the Investment Fund is the organizer and a predominant member of the System Fund, the financial statements of the System Fund have been blended with those of the University. The Management Company is a North Carolina non-profit corporation organized and operated exclusively to support the educational mission of the University. The Management Company will also provide investment management services to the University, UNC System, and institutions and affiliated tax-exempt organizations and perform other functions for and generally carry out the purposes of the University. The Management Company is governed by five ex-officio directors and one or two additional directors as fixed or changed from time to time by the board, elected by the ex-officio directors. The ex-officio directors consist of the chancellor of the University, the vice chancellor for finance and adminis-tration of the University, the chairman of the University’s Board of Trustees, the chairman of the Board of Direc-tors of the Investment Fund, and the president of the Management Company. Because members of the Board of Directors of the Management Company are officials or ap-pointed by officials of the University and the Management 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 49 Company’s primary purpose is to benefit the University and other organizations operated primarily to support the University, its financial statements have been blended with those of the University. The UNC-Chapel Hill Foundation is governed by a 17-member board consisting of nine ex-officio directors and eight elected directors. Ex-officio directors include the chairman of the University Board of Trustees, the chancellor, the vice chancellor for finance and adminis-tration, and the vice chancellor for university advance-ment (non-voting). In addition, the Board of Trustees elects two ex-officio directors from among its own mem-bers as well as three ex-officio directors from the Board of Trustees of the Endowment Fund who have not otherwise been selected. The eight remaining directors are elected as members of the UNC-Chapel Hill Foundation Board of Directors by action of the ex-officio directors. The UNC-Chapel Hill Foundation aids, supports, and promotes teaching, research, and service in the various education-al, scientific, scholarly, professional, artistic, and creative endeavors of the University. Because members of the Board of Directors of the UNC-Chapel Hill Foundation are officials or appointed by officials of the University and the UNC-Chapel Hill Foundation’s sole purpose is to benefit the University, its financial statements have been blended with those of the University The Business School Foundation is governed by a board consisting of
Object Description
Description
Title | Comprehensive annual financial report of the University of North Carolina at Chapel Hill |
Other Title | Annual financial report of the University of North Carolina at Chapel Hill |
Date | 2006-06-30 |
Description | 2006 |
Digital Characteristics-A | 2694 KB; 102 p. |
Digital Format | application/pdf |
Full Text | fiscal year ended June 30, 2006 • Chapel Hill, North Carolina A Constituent Institution of the University of North Carolina System and a Component Unit of the State of North Carolina 2006 Comprehensive Annual Financial Report T h e U n i v e r s i t y o f N o r t h C a r o l i n a a t C h a p e l H i l l Comprehensive Annual Financial Report June 30, 2006 Chapel Hill, North Carolina A Constituent Institution of the University of North Carolina System and a Component Unit of the State of North Carolina P r e par ed b y th e Con t rol l e r ’ s Offic e 2006 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 5 I n t ro duc to r y S e c t i on 6 Message from the Chancellor 9 Letter of Transmittal 15 Progress and Major Initiatives 23 Board of Trustees 23 Chancellor’s Cabinet 24 Organization Chart 25 F inancia l S e c t i on 26 Report of the Independent Auditor 28 Management’s Discussion and Analysis B A S I C F I N A N C I A L S TAT EME N T S 40 Statement of Net Assets 42 Statement of Revenues, Expenses, and Changes in Net Assets 43 Statement of Cash Flows 45 Statement of Financial Position — Component Units 46 Statement of Activities and Changes in Net Assets — Component Units 47 Notes to the Financial Statements 75 S t a t is t ica l S e c t i on 76 Net Assets by Component 77 Changes in Net Assets 80 Changes in Net Assets Adjusted for Inflation 82 Operating Expenses by Function 83 Revenue Base 84 Long-term Debt 85 Capital Asset Statistics 86 Summary of Ratios 92 Schedule of Specific Revenue and General Revenue Bond Coverage 94 Annual Undergraduate Educational Costs per Student 96 Admissions, Enrollment, and Degrees Earned 98 Faculty and Staff Statistics Table of Contents T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t I n t roduc t i on i n t r o d u c t o r y S e c t i o n T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l I n t r o d uc t i o n Carolina is a university in the midst of great change for the better. We are a dynamic insti-tution with bold aspirations. We are focused intently on success and making a great university even better to benefit the people of North Carolina and beyond. This fall, we enrolled our third class of Carolina Covenant Scholars and one of the most academically prepared freshman classes in the University’s history. We also implemented a new undergraduate curriculum, a once-in-a-generation event, to enhance connections between classes, between disciplines, and between teach-ing and research. Our students, faculty, and staff continue to pursue excellence in classrooms, research labs, patient clinics, schools, community agencies, and other settings that demonstrate Carolina’s commitment to engagement and serving the public. The faculty attracted $593 million in contract and grant funding in fiscal 2006, up slightly from the previous year and at a time when the federal research budget has tightened considerably. The physical campus is being rapidly transformed and is bringing a nationally recognized Campus Master Plan to life. Some 94 percent of the $515 million in construc-tion and renovation projects resulting from the state’s Higher Education Bond Referendum have been completed, are under contract, or in design. We are rapidly nearing complete build-out of the main campus and are pushing hard to realize the possibilities for amazing discovery and innovation at Carolina North, a new mixed-use campus planned on our property two miles north in Chapel Hill. Generous alumni, parents, and friends are contribut-ing at even higher levels to the Carolina First Campaign, which, at this writing, is approaching the $1.9 billion mark in private gifts and pledges toward our $2 billion goal. The campaign is well on its way toward surpassing its goal far ahead of the December 2007 conclusion. Carolina is a university on the move and poised for even greater leadership and accomplishments. We have purposefully set our expectations very high for Carolina’s future. Following are a few details about some recent developments important to the University’s future. State Budget Results We are enormously grateful for the work of the North Carolina General Assembly during a 2006 legislative session that resulted in the best budget this University has received in years. The 5.5 percent pay increase for our employees subject to the State Personnel Act (SPA) was the largest in many years and a huge step forward. We were overjoyed with the average 6 percent increase for faculty, and we targeted those funds strategically to reward merit and achievement. Governor Easley and our legislative leaders again made education a major priority for North Carolina. Much of this success resulted from the passionate and effec-tive leadership of UNC President Erskine Bowles. We all worked together as a team to best represent the entire UNC system. UNC-Chapel Hill is proud to be a partner with our sister UNC campuses. Faculty Tops Priority List Our top priority remains unchanged — to continue to strengthen support for faculty — so we can recruit and “We are a dynamic institution with bold aspirations. We are focused intently on success and making a great university even better to benefit the people of North Carolina and beyond.” —C h a n c e l l o r J ame s Mo e s e r Message from the Chancellor 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t retain the very best, and provide the tools faculty need to excel. This is the key to everything. It all starts with the faculty, and it quickly expands to staff and students. We have an extraordinary academic culture — a true culture of excellence — the magnet that attracts and keeps great faculty as well as staff. I constantly hear our faculty say that their greatest joy is their colleagues — the pride of being associated with distinguished professionals in a collegial environment. Last year we created 29 new endowed professorships with gifts to the Carolina First Campaign, which had another record year in fiscal 2006. That brought us to 181 new professorships toward our goal of 200. That total had risen to 188 by this writing. Salaries and benefits are the most obvious and tan-gible elements in attracting and retaining great faculty. Thanks to the new state budget, supplemented with our own campus- and school-based tuition revenues, we made great progress on faculty salaries this past year. However, we know that achieving our goals long term will require a sustained effort. Our Five-Year Financial Plan calls for reaching the 67th percentile for faculty salaries among our public and private campus peers by 2011. That will require average annual 6 percent legislative salary increases over the next five years, supplemented by modest campus-based tuition increas-es. Until this most recent year, campus-based tuition revenue has been our salvation in maintaining a competitive position for faculty. Engaging With North Carolina Last fall, I appointed our Engagement Task Force to recommend how we could intensify our service to North Carolina, especially in the areas of K-12 education, health, and economic development. The Institute of Gov-ernment, the Area Health Education Centers Program, Current UNC students enjoy the beauty of the Carolina campus. The Class of 2010 — 3,816 students — represents 99 North Carolina counties, 40 states, and 23 countries. Seventy-six percent were in the top 10 percent of their high school class; nearly 40 percent were among the top 10 students. More than 85 percent graduated with a grade-point average of 4.0 or higher. The average SAT score was 1293, with 22 percent scoring 1400 or better. T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l of engagement that I know we are capable of achieving by serving as an advocate and a facilitator. In his new role, Mike is encouraging greater coordination inside the University and promoting collabora-tions that respond to the challenges facing our state. We need to be determined in bringing all of the knowledge that the University can contribute to the success of each North Carolina community and the entire state. In the 21st Century, with China and India in the fast track and with the whole world now moving into an economy based on information and knowledge, we must be at the top of our game to help North Carolina compete internationally. It is vital that we be fully engaged and invested in the ongoing success of our public service mission. The people of North Carolina should expect nothing less. Conclusion 2005-2006 was one of the most successful years we have had in Chapel Hill for some time. We made excellent progress toward strategic University priorities. We are focused on remaining true to core Carolina values such as affordability and accessibility while making sure we are positioned well to meet long-term goals for excellence. At the same time, we have an important responsibility to be accountable to the General Assembly and the taxpay-ers of North Carolina in all that we do. We strive to be excellent stewards of their generous support. Sincerely, J am e s Mo e s e r and the Carolina Center for Public Service are wonderful examples of our engagement with North Carolina. But we knew that we could do more to match the University’s resources with the state’s needs. The task force’s report provides great opportunities to chart an even bolder course for engagement. That bold course requires senior leadership — some-one who gets up every day thinking about how Carolina can do an even better job of serving this state. That is why I appointed Mike Smith as Vice Chancellor for Engagement, in addition to his current duties as dean of the School of Government. Mike has been among the great champions on this campus for doing more with engagement. He will help us define the even deeper level At the heart of the campus stands the Old Well, the visual symbol of the University. Each spring, azaleas provide a stunning backdrop for this landmark. University lore holds that students can bring good luck with a drink from the Old Well on the first day of classes. The Carolina academic community benefits from a library with more than 5.7 million volumes and a perennial ranking among the best research libraries in North America as judged by the Association of Research Libraries. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t I n t r o d uc t i o n Introduction This Comprehensive Annual Financial Report includes the financial statements for the year ended June 30, 2006, as well as other useful information that helps ensure the University’s accountability to the public. Responsibility for the accuracy of the information and for the completeness and fairness of its presentation, including all disclosures, rests with the University’s management. We believe the information is accurate in all material respects and fairly presents the University’s financial position, revenues, expenses, and other changes in net assets. We believe our system of internal controls is sound and sufficient to disclose material deficiencies in controls to the auditors and the audit committee. The Comprehensive Annual Financial Report includes all disclosures necessary for the reader to gain a broad understanding of the University’s financial position and results of operations for the fiscal year ended June 30, 2006. The report is organized into three sections. The Introductory Section includes a message from the chancellor, the transmittal letter, a listing of the University’s Board of Trustees, Chancellor’s Cabinet, and an organization chart. This section also features the University’s major recent initiatives, priorities, and progress. Overall, this section provides background about the organization and structure of the University, the scope of its operations, significant factors contributing to the current fiscal environment, and expected factors influencing the future. The Financial Section presents management’s discus-sion and analysis, basic financial statements, and a report of the Office of the State Auditor. Management’s discussion and analysis provides an objective review of the University’s financial activities. The basic financial statements are prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board. The Statistical Section contains selected financial, sta-tistical, and demographic information. This information provides a broad overview of trends in the University’s financial affairs. Also included is information on the Cost of College Project of the National Association of College and University Business Officers. The accompanying financial statements present all funds belonging to the University and its component units. While the 16-campus University of North Carolina System’s Board of Governors has ultimate responsibility, the chancellor, the University’s Board of Trustees, and the Board of Trustees of the Endowment Fund have both delegated and statutory responsibilities for financial ac-countability of the University’s funds. For the fiscal year ended June 30, 2006, the University implemented GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recover-ies, GASB Statement No. 44, Economic Condition Report-ing: The Statistical Section, and GASB No. 47, Accounting for Termination Benefits. Statement No. 42 establishes standards for reporting the impairment of capital assets, which occurs when an asset’s service utility has declined significantly and unexpectedly. The Statement also clari-fies and establishes accounting requirements for insur-ance recoveries. Statement No. 44 amends prior guidance on the preparation of the statistical section of the CAFR to enhance the understandability and usefulness of the reported information and also by adding information to the statistical section based on the current financial reporting model. Statement No. 47 establishes accounting standards for termination benefits. The Financial Reporting Entity for the financial statements is comprised of the University and 11 com-ponent units. Eight of these, although legally separate, are reported as if they were part of the University. These include The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc. (Investment Fund), UNC Investment Fund, LC (System Fund), UNC Management Company, Inc. (Management Company), The University of North Carolina at Chapel Hill Foundation, Inc., The Kenan-Flagler Business School Foundation, The School of Social Work Foundation, Inc., The School of Education Foundation, Inc., and U.N.C. Law Foundation, Inc. The Investment Fund supports the University by operating an investment fund for charitable, non-profit nov emb e r 2 2 , 2 0 0 6 To Chancellor Moeser, Members of the Board of Trustees, and Friends of The University of North Carolina at Chapel Hill: Letter of Transmittal 1 0 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l foundations, associations, trusts, endowments, and funds that are organized and operated primarily to support the University. The System Fund was organized to allow the University, the University of North Carolina and its constituent institutions (UNC System), affiliated foundations, associations, trust, and endowments that support the University and the UNC System to pool their resources and invest collectively in investment opportunities identified, structured and arranged by the Management Company. The Investment Fund contributed and assigned all of its assets to the System Fund in exchange for membership interest in the System Fund. At year end, the Investment Fund membership interest was approximately 92.5 percent of the System Fund total membership interest. The Management Company is organized and operated exclusively to support the educational mission of the University. The Management Company also provides investment management services to the University, UNC System, and affiliated tax-exempt organizations. The purpose of UNC-CH Foundation, Business School Foundation, Social Work Foundation, School of Education Foundation, and Law Foundation is to aid, support, and promote teaching, research, and service in the various educational, scientific, scholarly, professional, artistic, and creative endeavors of the University. The financial statements of the Investment Fund, Sys-tem Fund, Management Company, UNC-CH Foundation, Business School Foundation, Social Work Foundation, School of Education Foundation, and U.N.C. Law Foun-dation have been blended with those of the University. Separate financial statements for three other compo-nent units are reported based on GASB Statement No. 39. The Medical Foundation of North Carolina, Inc., The Edu-cational Foundation Scholarship Endowment Trust, and The University of North Carolina at Chapel Hill Arts and Sciences Foundation, Inc. are legally separate, non-profit, tax-exempt organizations and are reported as discretely presented component units based on the nature and significance of their relationship to the University. Other related foundations and similar non-profit corporations for which the University is not financially accountable are not part of the accompanying financial statements. The University of North Carolina at Chapel Hill is a constituent institution of the 16-campus Univer-sity of North Carolina System, which is a component unit of the State of North Carolina and an integral part of the State’s Comprehensive Annual Financial Report. Economic Condition and Outlook During the year ended June 30, 2006, growth of total non-farm payroll employment in North Carolina was so strong that we finally exceeded the former January 2001 peak of 3,967,500 such jobs. The Bureau of Labor Statistics reported in June 2006, that North Carolina had 3,986,200 non-farm payroll jobs, a very strong increase of 82,400 payroll jobs from June 2005. The total employment picture, which includes agri-cultural workers as well as the self-employed, was even brighter. There were 4,215,500 people employed in North Carolina in June 2006. This was in increase of 119,700 from a year earlier. All these people employed earned record levels of personal income. The Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce reported that total personal income in North Carolina in the second quarter of 2006 was running at a seasonally adjusted annual rate of $284.4 billion. This was in increase of $17.1 billion or 6.4 percent. For the 12 months ended June 30, 2006, total person-al income in North Carolina was a record $277.4 billion. For 2005 total personal income was $269.4 billion. This was an upward revision of 1.6 percent from the March 2006 estimates previously reported by BEA. These large increases in personal income were reflect-ed in increased sales tax revenues across the state and in a sharp rise in income tax receipts at the state level. This allowed the Legislature to restore funding in many areas for the current fiscal year that had been hit repeatedly by budget cuts during the preceding five years of severe fiscal stringency in the state. In June 2006, BEA reported that the gross state product for North Carolina in 2005 was $344.6 billion or 2.8 percent of the U.S. total. This ranked 12th in the nation, just below the $352.7 billion of Virginia and just above the $328.5 billion of Massachusetts. North Carolina seems to be experiencing accelerating economic growth. Most forecasters expect the state to end 2006 with more than 100,000 net new non-farm payroll jobs than we had at the end of 2005. The demand for the University’s graduates to fill many of these new positions is likely to turn out to be the strongest in years when all the data have been collected and reported. Total economic growth in North Carolina should exceed that of the U.S. average in both 2006 and 2007. That has not happened since 1999, although it used to occur frequently in the 1955-2000 period. Progress and Major Initiatives Carolina’s progress, priorities, and major initiatives during fiscal year 2005-2006 reflected the University’s vision of becoming the nation’s leading public university. Following this letter are highlights from fiscal year 2005-2006. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 1 1 Financial Information Internal Control Structure The University’s Finance and Administration Division establishes and maintains an effective system of internal control. One objective of an internal control structure is to provide management with reasonable, although not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition. Another objective is to ensure that transactions are executed in accordance with appropriate authorization and recorded properly in the financial records to permit the prepara-tion of financial statements in accordance with generally accepted accounting principles. Organizational structure, policies, and procedures have been established to safe-guard assets, ensure the reliability of accounting data, promote efficient operations, and ensure compliance with established governmental laws, regulations and policies, University policies, and other requirements of sponsors to whom the University is accountable. As a recipient of federal financial awards, the Uni-versity is responsible for ensuring compliance with all applicable laws and regulations. A combination of state and University policies and procedures, integrated with the University’s system of internal controls, provides for this compliance. As an integral part of the State of North Carolina’s Single Audit, the University is subject to an an-nual examination by the Office of the State Auditor of its federal financial assistance programs and federal cost-re-imbursement contracts in accordance with U.S. Office of Management and Budget Circular A-133, Audits of State and Local Governments, and Non-Profit Organizations. The University determined a course of action as part of higher education’s response to the Sarbanes-Oxley Act, and has implemented practices to enhance the internal control structure. The University’s focused effort on financial controls provides a more proactive and broader approach in identifying and resolving potential limitations on sound internal control through a self-assessment process, development of a professional code of ethics, targeted campus training sessions, special reviews, improved documentation of internal controls, and timely and useful responses to questions from campus units. A financial controls manager leads efforts to strengthen and maintain sound internal controls. The Audit and Finance Committee of the Board of Trustees maintains an Audit Committee charter consistent with higher education standards. Budgetary Controls The University is responsible for controlling its budget and using the funds to fulfill its educational, research, and public service missions. It is also responsible for planning, developing, and controlling budgets and expen-ditures within authorized allocations in accordance with University, state, and federal policies and procedures. The University maintains budgetary controls to ensure compliance with provisions embodied in the annual appropriated budget approved by the North Carolina General Assembly, and as further directed by the Board of Governors. Project-length financial plans are adopted for capital projects. After the budget has been approved by the chancellor and the Board of Governors, the University follows an established system of budgetary controls. Finance and Administration issues periodic interim budget statements to department heads to guide them in managing their budget allocations. Monthly financial reports are provided on each fund to individual managers responsible for the fund. Financial reports are also provided to the state. When actual conditions require changes to the budget, revisions are prepared, and these revisions are appro-priately approved and communicated to those affected. Changes to the budget are approved at the University level and/or the state level as required. Based on the state’s management flexibility legislation, the University has received delegated authority for designated budget changes. The University maintains an encumbrance accounting system as another method to ensure that imposed expenditure constraints are observed. Debt Administration To ensure the appropriate mix of funding sources is utilized, the University established a debt policy, which is continuously used by management as a tool to evalu-ate the University’s organizational and capital funding structure, the appropriate use of leverage, and internal lending mechanisms. To fulfill its mission, the University will need to make capital investments, driving capital decisions that affect the University’s credit. Appropriate financial leverage serves a useful role and should be considered a long-term component of the University’s balance sheet. Just as investments represent an integral component of the University’s assets, debt is viewed to be a continuing component of the University’s liabilities. Debt, especially tax-exempt debt, provides a low-cost source of capital for the University to fund capital investments and achieve its mission and strategic objectives. The debt strategies, combined with management judgment, provide the framework by which decisions will be made regarding the use and management of debt. The objectives of the debt policy are: l Identify projects eligible for debt financing. Us-ing debt to fund mission-critical projects will ensure that debt capacity is optimally used to fulfill Carolina’s mission. Projects that relate to the core mission will be 1 2 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l given priority for debt financing; projects with associated revenues will receive priority consideration as well. l Maintain Carolina’s favorable access to capital. Management’s determination of the timing of capital proj-ects will not be compromised by the University’s access to capital sources, including debt. Management will use and issue debt to ensure timely access to capital. l Limit risk of University debt portfolio. The University will manage debt on a portfolio basis. The University’s continuing objective to achieve the lowest cost of capital will be balanced with the goal of limiting exposure to market shifts. l Manage the University’s credit rating to maintain the highest acceptable credit. This practice will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meeting strategic objectives. The University will limit its overall debt to a level that will maintain an acceptable credit rating with the bond rating agencies. In meeting these objectives, the University has ad-opted strategies and procedures for the management of its debt. These strategies include the following: l Mission-Based Capital Planning. Provide framework with a link to mission to evaluate and prioritize debt-eli-gible projects. l Core Ratios. Adopt a set of core ratios to guide capital planning and ensure central oversight of Univer-sity- wide leverage levels. l Financial Instruments. Provide management with appropriate debt vehicles based on borrowing needs. l Asset/Liability Management. Manage outstanding debt and future debt-financing needs within the frame-work of sound portfolio management practices. The University has $803.8 million of outstanding long-term bonds and $117.4 million of commercial paper at June 30, 2006. The bonds were issued to finance the construction and/or renovation of many campus facilities including essential new research buildings, major new cultural facilities that will benefit the local community and state, undergraduate residence halls, student family housing, parking facilities, and utilities infrastructure. Principal and interest for the bonds are payable from the general revenues of the University — excluding state appropriations, tuition, restricted gifts and restricted income from endowment investments — and net revenues generated by the operations of the debt-financed facilities. The UNC-CH Foundation, which is part of the University’s financial reporting entity, also adheres to a debt policy that maximizes the utility of the foundation’s financial resources to continue to provide current and future support to the University. Cash Management The cash management plan of the University provides guidance to ensure control and deposit of receipts, appropriate management of disbursements, and invest-ment of funds to maximize earnings on the investment of cash and minimize non-productive cash balances. State law requires that state-appropriated funds be deposited and invested with the State Treasurer with investment earnings accruing to the state. Other resources, such as gifts, contract and grant awards, auxiliary revenues, and student activity fees are not appropriated by the state. These funds, except for fees from services of health care clinics, must be deposited and invested with the State Treasurer with investment earnings accruing to the University. Endowment, debt service, fees from services of health care clinics, and other designated funds are invested by the University in accordance with its invest-ment policies. The University administers a short-term investment pool for funds not required to be on deposit with the State Treasurer. The investment pool is administered in conjunction with cash receipts and disbursing require-ments to minimize idle cash and to generate current income without loss of capital at a rate of return no less than the State Treasurer. Earnings are distributed to participating funds. The objective in managing disbursements is to main-tain funds in interest-bearing accounts for the longest appropriate period of time while ensuring that payments for goods and services are made timely. Disbursement cycles are established to coincide with this objective. The University uses the state’s cash management control system to improve cash flow by electronically recording cash receipts and disbursements for funds deposited with the State Treasurer. Other electronic processes have been developed for the receipt and disbursement functions to provide efficient and effective processes. Risk Management Risk has traditionally been viewed as something to be avoided or eliminated with only a negative outcome. Increasingly in today’s environment, there is greater awareness that responsible risk taking leads to a com-petitive advantage and can maximize stakeholder value. To optimize the benefits of risk and minimize their costs, the University has taken a more enterprise-wide approach to its risk management programs by holistically addressing its operational, financial, compliance, stra-tegic and reputation risks. This enterprise risk manage-ment ensures that decisions that trade value and risk are made on an informed basis and are aligned with our risk tolerance and strategy. The risks we face constantly change so our strategies must remain fluid. This ongoing 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 1 3 the 11th consecutive year that the University has been honored with this prestigious award. To receive a Certifi-cate of Achievement, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for one year. We believe our current comprehensive annual financial report continues to meet the Certificate of Achievement Program’s requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. Acknowledgments Preparation of this Comprehensive Annual Financial Report in a timely manner would not have been possible without the coordinated efforts of the University commu-nity, with special assistance from the Chancellor’s Office, the Office of the Executive Vice Chancellor and Provost, Research and Economic Development, Student Affairs, Information Technology Services, University Advance-ment, University Relations, Institutional Research, the Office of Scholarships and Student Aid, the Department of Athletics, and Dr. James F. Smith, Adjunct Professor of Business Administration in the Kenan-Flagler Busi-ness School. In addition, the Office of the State Auditor provided invaluable assistance. Davi d R . P e rr y Interim, Vice Chancellor for Finance and Administration process allows us to prioritize and efficiently use our risk management resources. Included within this enterprise risk management framework is our responsibility to mitigate any busi-ness interruption that adversely affects our education, research, and public service missions. An effective campus-wide Business Continuity Plan is central to this responsibility. The University has created a full-time Business Continuity Officer position who will lead this campus-wide planning process. Insurable risks are addressed in several ways, includ-ing participation in various state-administered risk pools, purchase of commercial insurance and self retention of certain risks. Refer to Note 15 of the Notes to the Finan-cial Statements for more detailed information concerning the University’s insurance programs. Other Information Audits State law, federal guidelines, and certain bond covenants require that the University’s accounting and financial records be audited by the Office of the State Auditor each year. The University’s Internal Auditors also perform fiscal, compliance, and performance audits. The reports resulting from these audits are shared with University management. Internal and external audit reports are provided to the Audit and Finance Committee of the Board of Trustees. The audit of the University’s federal financial as-sistance programs is performed by the Office of the State Auditor in conjunction with the statewide Single Audit. The accounting and financial records of The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc., The University of North Carolina at Chapel Hill Foundation, Inc., UNC Investment Fund, LC, UNC Management Company, Inc., The Kenan-Flagler Business School Foundation, The School of Social Work Founda-tion, Inc., The School of Education Foundation, Inc., The U.N.C. Law Foundation, Inc., the University of North Carolina at Chapel Hill Arts and Sciences Foundation, Inc., The Medical Foundation of North Carolina, Inc., the Educational Foundation Scholarship Endowment Trust, WUNC Radio, and the Athletic Department are each audited by a public accounting firm in addition to the State Auditor review. All audit reports are available for public inspection. Certificate Of Achievement The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the University for its comprehensive annual financial report for the fiscal year ended June 30, 2005. This was The University of North Carolina at Chapel Hill has received the award for reporting excellence for the past eleven years. 1 4 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 1 5 I n t r o d uc t i o n Progress and Major Initiatives t h e n a t i o n ’ s f i r s t p u b l i c u n i v e r s i t y is still leading the way. The University is making great strides. The Carolina Covenant is firmly estab-lished as a national model for student accessibility. Students, faculty, and staff shine in their pursuits of excellence in classrooms, research laboratories, and communities. The physical campus is undergoing an unprecedented transfor-mation. Alumni and friends are making record-setting gifts to the Carolina First Campaign. And the University is poised for even greater leadership in American higher education and outstanding public service to North Carolina. Following is a sampling of recent highlights demonstrating significant progress across many different areas of the University during fiscal 2005 – 2006. Carolina A U n i v e r s it y on t h e Mov e LE F T Reflection of the Old Well appears in a window of South Building. 1 6 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l l e f t Shirley Ort, associate provost and director of the Office of Scholarships and Financial Aid, makes a point during “The Politics of Inclusion: Higher Education at a Crossroads” confer-ence in Chapel Hill. Ort conceived the Carolina Covenant, which provided the impetus for national higher education leaders to converge in Chapel Hill to discuss issues such as affordability and accessibility. Carolina Covenant: Leading by Example The Carolina Covenant is a ground-breaking program in American higher education that permits qualified low-income students to graduate debt-free. Covenant students can graduate without debt. Instead, they agree to work on campus 10 to 12 hours weekly in a federal work-study job, and Carolina meets the rest of their needs through a combination of federal, state, University, and other privately funded grants and scholarships. Launched in fall 2004 by Chancellor James Moeser, the Carolina Covenant initially covered 223 freshmen. In fall 2006, the University enrolled its third class of Carolina Covenant Scholars. To date, UNC has awarded more than 900 scholarships through the Carolina Covenant. In addition, the University has launched a mentoring component of the program. This effort matches students with volunteer faculty to support them in their daily lives and help them further engage with the Caroli-na community. Goals include supporting student success and successful graduation. In fall 2006, the mentoring expanded to include peers offering support to the incom-ing Covenant Scholars. Beginning in fall 2005, students and their families had to be at or below 200 percent of the federal poverty level — up from 150 percent. That raised the threshold to cover a family of four with an annual income of about $37,000 or a single parent with a child who makes about $24,000. Carolina was the first major public U.S. university to announce plans for such a program in 2003. Since then, more than two dozen financial aid initiatives for low- to moderate-income students have been launched and were modeled after the Carolina Covenant. They include Brown, Harvard, MIT, and Stanford, as well as Michigan and Virginia. Many of these programs, like Carolina’s, respond to rapidly changing demographics and social needs, such as rising high school dropout and poverty rates — both major concerns here in North Carolina. Carolina advanced the national conversation about accessibility and affordability in September 2006 by hosting a conference, “The Politics of Inclusion: Higher Education at a Crossroads,” sponsored by leading private foundations. The goal was to stimulate action among 160 “The Carolina Covenant is for students who have the motivation and skills to do well academically, but who don’t have the financial resources to come to college. It helps them achieve their goals for college, and hopefully then they can give back to the community.” Tasrif A hme d Carolina Covenant Student Durham, NC “The Carolina Covenant is an excellent incentive for low-income students who might be thinking they can’t attend college because they don’t have a way to pay for it. If you come to Carolina with outside scholarships, the Carolina Covenant finishes your package with additional grants and work-study. They want to make sure that you graduate debt-free.” C r y s t a l b rown Carolina Covenant Student Ahoskie, NC A c l o s e r l o o k at t h e c o v e n a n t For more information about the Carolina Covenant, go to www.unc.edu/carolinacovenant. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 1 7 Marc Pollefeys, associate professor of computer science, is internationally recog-nized for techniques he has helped develop for computer vision, a field that creates three-dimensional models of scenes from video footage shot from cameras moving through the scene. He has received a $625,000 Packard Fellowship in Science and Engineer-ing as part of an effort to strengthen university science and engineering programs by sup-porting innovative researchers early in their careers. federal and state policymakers, economists, research-ers, foundation and business leaders, and educators. They exchanged ideas to help shape national policy and practice. In 2006, the Jack Kent Cooke Foundation selected Carolina to partner in a $27 million program that will help more deserving community college students from families with low to moderate income levels earn bachelor’s degrees. Carolina will receive nearly $900,000, and participation on campus will benefit students from Alamance Community College, Durham Technical Com-munity College, and Wake Technical Community College. The program includes the Carolina Student Transfer Excellence Program, which aims to encourage community college students of great talent and potential. Carolina First: Racing Toward $2 Billion The Carolina First Campaign is a comprehensive, multi-year private fund-raising campaign — the largest in the University’s history — to support the vision of Carolina becoming the nation’s leading public university. Each year, private funding and investment income provide about 20 percent of the University’s budget — creating Carolina’s margin of excellence. In October 2005, the campaign steering committee increased the goal from $1.8 billion to $2 billion. By Oc-tober 2006, Carolina First had brought in nearly $1.897 billion, 95 percent of the goal for the campaign that ends in December 2007. The campaign has created 188 endowed professorships for faculty toward a goal of 200 and 603 scholarships and fellowships for students out of the goal of 1,000. Carolina First has received gifts and pledges that will increase the University’s endowment and fund faculty research, academic programs and initiatives, as well as new buildings and renovations. In setting the Carolina First Campaign goal $200 million higher to $2 billion, the University is focusing on faculty support, merit-based scholarships, and capital projects. These are the three most pressing priorities that affect Carolina’s ability to compete with peer campuses. The campaign continues to exceed projections, raising a record $241.2 million in private gifts during fiscal 2006, which ended June 30. This is the first time that UNC has raised more than $200 million in a single year. The University has now set three consecutive years of record-setting support, topping $192.5 million in 2005 and $192 million in 2004. Gifts in fiscal 2005-2006 helped the University create 29 endowed professorships, as well as 98 undergraduate scholarships and graduate fellowships. In student support, an $11 million bequest from the estate of Col. John Harvey Robinson jump-started a $60 1 8 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l A student studies on the “green” roof at the addition to Car-rington Hall. Sedum, blueberries, and purple cornflower surround a small patio while capturing 70 percent of the stormwater that falls on the building. Crepe myrtle trees planted in brick wells will eventually shade the patio. million campaign to raise funds for merit-based scholar-ships that will help the University attract more top high school scholars. Building projects also received a boost with a $5 mil-lion gift from FedEx Inc. to support a Global Education Center that will house all international and area studies programs for the College of Arts and Sciences, including study abroad. In a move supporting the arts, the William R. Kenan Jr. Charitable Trust made a $5 million challenge grant to establish a new endowment for the University’s Carolina Performing Arts Series. The trust awarded Carolina $2.5 million, with the remaining $2.5 million to come after the University raises $5 million for the series by the end of Carolina First. Master Plan: Guiding Unprecedented Growth Today, the campus is undergoing an unprecedented physical transformation made possible in part by North Carolinians’ overwhelming approval of the $3.1 billion bond referendum for higher education in 2000. By mid- 2006, 94 percent of the $515 million in construction and renovation projects resulting from the bond referendum had been completed, were under contract, or were in design. The University projects completion of the final bond program building, the Arts Common Phase I (Music Instructional Facility), in July 2008. The University is also investing funds from non-state sources, including private gifts, overhead receipts from faculty research grants, and other sources. The result- 53 projects completed 26 percent of total program within budget and on schedule Value: $459 million 41 projects under construction 48 percent of program Value: $867 million 60 projects in design 26 percent of program Value: $474 million C ampus mas t e r p l an accompl ishme n t s ing $1.8 billion capital construction program — up from $1.5 billion just two years ago as critical new projects emerged — is among the most ambitious at any major U.S. university. Guiding the University’s capital construction program is the nationally recognized Campus Master Plan, which shows where and how to place future buildings, suggests ways to protect open space, and meets key environmental standards covering topics such as stormwater runoff. The University completed an update of the Campus Master Plan. Approved by the trustees, this updated plan includes key revisions to the Arts Common Plan. Completed projects included Bondurant Hall, Burnett- Womack Building, first phases of the Carolina Physical Science Complex, and the Information Technology Services Building (West Franklin Street). Other projects under way include the FedEx Global Education Center, Genetic Medicine Building (Schools of Medicine and Pharmacy), the N.C. Cancer Hospital, Campus Y, Infor-mation Technology Services Building (Manning Drive), and infrastructure improvements (chilled water, utilities, steam plant). Carolina continued award-winning transportation demand management strategies. Milestones included the expansion of park-and-ride lots for employees with 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 1 9 This exterior view shows the newly completed Max Chapman Hall, one of the early phases of the Carolina Physical Science Complex, the largest construction project in the University’s history. The $205 million complex is replacing outdated, deteriorating buildings with state-of-the-art facilities. The complex will provide an innovative learning atmosphere for students and open the door for integrated collaboration among Carolina’s world-renowned scientists. the opening of a Chatham County lot. The University was recognized with a “Best Workplaces for Commuters” designation by the U.S. Environmental Protection Agency and the U.S. Department of Transportation in May 2006. Faculty Research: Finding Solutions Carolina ranks among the top U.S. public universities in research support and creating jobs through new products and spin-off companies. The faculty attracted $593 million in total contract and grant funding in fiscal 2006 — up 2.4 percent at a time when federal research funding is leveling off. The National Institutes of Health (NIH) is Carolina’s central funding source, and the faculty ranked 15th overall in fiscal 2005 with nearly $300 million in total NIH funding. UNC is the top public university in the South for NIH funding. The School of Medicine received most of the University’s NIH funds ($217 million) in 2005, ranking 17th nationally. All five health affairs schools — dentistry, medicine, nursing, pharmacy, and public health — ranked within the NIH’s top 20 of public and private institutions. Since 2000, the University has maintained a strategy of targeted investment in “big idea” research themes, knitting together existing strengths in various areas to create broad, interdisciplinary new thrusts. Recent examples include: l The “Roadmap for Medical Research” initiative, intended to focus future NIH funding in 21 broad areas of concentration. This NIH initiative encourages researchers 2 0 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l to attack difficult problems using interdisciplin-ary collaboration and sophisticated computa-tional techniques to create quick translations to patient care. Carolina was the only university to receive eight of 21 grants in the 2005 Roadmap competition. In 2004, the University received three of the 21 initial Roadmap grants — more than any other university. l The Renaissance Computing Institute (RENCI) addresses problems spanning the sciences and engineering, the arts, the humani-ties, and commerce through a partnership with Duke, N.C. State, and the private sector. It is deploying high-performance computing re-sources and expertise to help the state plan for and respond to disasters, including hurricanes and their aftermath. l The Carolina Entrepreneurial Initiative, supported by the Marion Kauffman Foundation, resulted from a national competition. Goals include creating a surge of entrepreneurship, and the College of Arts and Sciences has a new minor in entrepreneurship. The initiative is managed by the Frank Hawkins Kenan Institute of Private Enterprise. Faculty discoveries and innovations have resulted in the creation of 35 UNC spin-off companies and jobs for North Carolinians. For example, an experimental anti-HIV drug being developed by Panacos Pharmaceuticals has successfully completed Phase II clinical trials. The drug was developed by UNC researcher Kuo-Hsiung Lee, a professor of natural products in the School of Pharmacy. Carolina North: realizing potential The University’s future contributions to the North Carolina economy one day will include Carolina North, to be built on about 900 acres of UNC-owned land less than two miles from main campus. Carolina North will redefine the University’s engagement with the state, nation, and world. University leaders intend to create a vibrant, innovative setting for outreach and service, research collaborations with private industry and public agencies, and economic development for North Carolina. Kenan Professor Hans Paerl scoops algae samples from the Trent River near New Bern. Paerl is part of the University’s Institute of Marine Sciences in Morehead City, which has served North Carolina since the 1940s. Chemist Mike Ramsey displays his “lab-on-a-chip.” He received a $3.8 million National Institutes of Health grant to develop technology that could reduce the cost of human genome sequencing for wider medical applications. E X UM 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 2 1 An economic impact study has projected that comple-tion of the first two phases of Carolina North by 2020 would create over 7,500 permanent high-wage jobs for North Carolinians. The study also confirmed that Caro-lina North has the potential to position the University as a leading national center for public-private partner-ships and to be a catalyst for the state’s economic transformation. The University advanced its planning process for Caro-lina North in the past year by engaging local community members. Chancellor Moeser appointed a Carolina North Leadership Advisory Committee (LAC) in February 2006 to seek broad community input. The charge is to develop guiding principles for the physical development of Caro-lina North. The committee’s final report is due by March 2007. The Board of Trustees has directed the University to submit zoning and land development applications for Carolina North to local governments no later than October 1, 2007. Academic Reputation: measuring quality Several national publications regularly publish rankings that listed Carolina prominently in categories ranging from academic quality to affordability to international presence. Recent highlights include: l 5th best public university in U.S. News & World Report’s 2007 “Best Colleges” guidebook for the sixth con-secutive year. 1st among public campuses for the second consecutive year and 9th overall in “Great Schools, Great Prices,” based on academic quality and the net cost of attendance for a student who received the average level of need-based financial aid. Kenan-Flagler Business School tied for 5th among undergraduate programs. l 1st among the 100 best U.S. public colleges and universities that offer the best combination of top-flight A b ov e l e f t Associate Professor John Stephens makes a point with his students while teaching a class in the School of Government. The school houses the Institute of Government, the largest university-based local govern-ment training and consulting organization in the nation. A B O V E A class takes advantage of a nice day to learn in the historic McCorkle Place quadrangle. b e l ow Old East is the nation’s first state university building, with the cornerstone for it laid on Oct. 12, 1793. Now a residence hall, Old East occupies a prominent spot next to the landmark Old Well on north campus. 2 2 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l academics and affordable costs as ranked by Kiplinger’s Personal Finance Magazine. Carolina has been first for six consecutive times since the magazine began its periodic surveys in 1998. l Among 25 “New Ivy” campuses in the 2007 Ka-plan/ Newsweek “How to Get into College Guide.” Includes schools with first-rate academic programs fueling their rise in national stature. Based on admissions statistics and interviews with administrators, students, faculty and alumni. l A “best value” among 81 schools chosen for “Amer-ica’s Best Value Colleges, 2006 Edition” by The Princeton Review/Random House for outstanding academics, relatively low costs, and generous financial aid packages. Carolina has appeared in this publication two years in a row. l 1st among public research universities, for the third consecutive year, recording the highest rate of undergradu-ates studying abroad in 2003-2004; 6th among all public and private research universities for the total number of undergraduates going abroad, according to an annual report published by the Institute of International Education. Degree programs or specialty areas from the schools of business, education, information and library science, law, medicine, public health as well as the College of Arts and Sciences, appeared prominently in the Spring 2007 edition of U.S. News & World Report’s “American’s Best Graduate Schools” issue. The School of Information and Library Science, tied for 1st overall, among the top 10 in five librarianship specialties; the School of Medicine, 2nd overall for primary care, tied for 20th in research, and three specialties among the top 10; Kenan-Flagler Business School’s master of business administration degree program, 20th; School of Law, tied for 27th, School of Education, tied for 29th, School of Public Health’s environmental and environmental health program, tied for 7th (in a category for engineering schools, which UNC does not have); and doctoral science programs in the Col-lege of Arts and Sciences, biological sciences (tied for 24th overall), chemistry (1st for analytical and tied for 14th overall); computer science (tied for 22nd) and mathemat-ics (tied for 29th). Newly graduated Carolina students share their sentiments about the magic of Chapel Hill during the traditional Commencement ceremony in Kenan Stadium. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 2 3 I n t r o d uc t i o n Nelson Schwab III Chair, Charlotte, NC Jean Almand Kitchin Vice Chair, Scotland Neck, NC Russell M. Carter Secretary, Wilmington, NC Timothy B. Burnett Greensboro, NC James C. Moeser Chancellor Richard A. Baddour Director of Athletics Nancy K. Davis Associate Vice Chancellor for University Relations Douglas S. Dibbert President, General Alumni Association Archie W. Ervin Associate Provost for Diversity and Multicultural Affairs Kevin M. FitzGerald Special Assistant to the Chancellor for State Government Relations Bernadette Gray-Little Dean, College of Arts and Sciences Board of Trustees John G. B. Ellison, Jr. Greensboro, NC Paul Fulton, Jr. Winston-Salem, NC Barbara R. Hyde Memphis, TN Karol V. Mason Atlanta, GA Roger L. Perry, Sr. Chapel Hill, NC A. Donald Stallings Rocky Mount, NC Richard T. Williams Charlotte, NC Robert W. Winston III Raleigh, NC James S. Allred Ex-Officio, Chapel Hill, NC Margaret A. Jablonski Vice Chancellor for Student Affairs Brenda W. Kirby Secretary of the University Matthew G. Kupec Vice Chancellor for University Advancement Jerome A. Lucido Vice Provost for Enrollment Policy and Management Ann E. Penn Equal Opportunity/ADA Officer Daniel A. Reed Vice Chancellor for Information Technology and Chief Information Officer William L. Roper Vice Chancellor for Medical Affairs and Dean, School of Medicine Chancellor’s Cabinet Robert N. Shelton* Executive Vice Chancellor and Provost Leslie C. Strohm Vice Chancellor and General Counsel Nancy D. Suttenfield** Vice Chancellor for Finance and Administration Tony G. Waldrop Vice Chancellor for Research and Economic Development * Bernadette Gray-Little was appointed Executive Vice Chancellor and Provost effective July 1, 2006. ** David R. Perry was appointed Interim Vice Chancellor for Finance and Administration effective July 1, 2006. 2 4 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l I n t r o d uc t i o n T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l Organization Chart Board of Trustees Chair Nelson Schwab III Chancellor James C. Moeser Executive Vice Chancellor and Provost Robert N. Shelton* Vice Chancellor for Student Affairs Margaret A. Jablonski Vice Chancellor for Medical Affairs William L. Roper Vice Chancellor for Finance and Administration Nancy D. Suttenfield** Vica Chancellor and General Counsel Leslie Chambers Strohm Vice Chancellor for Information Technology Daniel A. Reed Vice Chancellor for University Advancement Matthew G. Kupec Director of Athletics Richard A. Baddour Equal Opportunity/ ADA Officer Ann E. Penn Internal Auditor Phyllis C. Petree Vice Chancellor for Research and Economic Development Tony G. Waldrop * Bernadette Gray-Little was appointed Executive Vice Chancellor and Provost effective July 1, 2006. ** David R. Perry was appointed Interim Vice Chancellor for Finance and Administration effective July 1, 2006. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 2 5 I n t roduc t i on f i nanc i a l S e c t i o n 2 6 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 2 7 2 8 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l financia l s STATEMENT OF NET ASSETS $ Thousands 4,500,000 0 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 5,000,000 500,000 2,000,000 2,500,000 1,500,000 1,000,000 500,000 0 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS $ Thousands Total Assets Net Assets Total Liabilities 4,476,028 2,928,002 3,760,963 2,607,879 1,153,084 2006 2005 2006 2005 Capital Gifts, Grants, and Endowments Non-Operating Revenues, net Operating Revenues Increase in Net Assets Op erating Expenses 137,490 743,554 1,241,511 320,123 1,802,432 207,219 684,361 1,157,001 1,681,901 366,680 1,548,026 Introduction Management’s discussion and analysis provides an over-view of the financial position and activities of The Univer-sity of North Carolina at Chapel Hill (the “University”) for the fiscal year ended June 30, 2006, with comparative information for the fiscal year ended June 30, 2005. Management has prepared the discussion and analysis to be read in conjunction with the financial statements and accompanying note disclosures. The University is a constituent institution of the 16-campus University of North Carolina System (UNC System), a component unit of the State of North Carolina and an integral part of the State’s Comprehensive Annual Financial Report (CAFR). The Financial Reporting Entity for the financial statements is comprised of the University and 11 component units. Eight component units are reported as if they were part of the University, and three are reported as discretely presented component units based on the nature and significance of their relationship to the University. The reader may refer to note 1A for detail information on the financial reporting entity. Management’s discussion and analysis includes a separate section regarding the three component units that are discretely reported in the financial statements. The remainder of the management’s discussion and analysis pertains to the University and the eight compo-nent units reported as part of the University. Financial Highlights The University’s financial position at June 30, 2006, remained sound with total assets of $4.5 billion. Net assets, which represent the residual interest in the University’s assets after deducting liabilities, were $2.9 billion at June 30, 2006. The University’s net assets increased by $320 million in fiscal year 2005-2006, when operating, non-operating, and other changes are included. A comparison of the total assets, liabilities, and net assets at June 30, 2006, and 2005 and a comparison of the major components of the changes in net assets for the two fiscal years is presented below: Management’s Discussion and Analysis 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 2 9 Net assets increased 12.3 percent at June 30, 2006 over the prior year. Total assets increased 19 percent and total liabilities increased 34.3 percent for the same period. Operating revenues increased at a slightly greater rate than operating expenses in 2005-2006 over the prior year, 7.3 percent and 7.2 percent respectively. Net non-operating revenues and expenses increased 8.6 percent in 2005-2006 over the prior year. The state appropriations growth of 8.2 percent was significant. Investment income growth remained substantial with a 33.9 percent increase in 2005-2006 over the prior year. Research funding, fund raising for operational and capital needs and construction funding through the North Carolina Higher Education Bond Referendum of 2000 continued to be positive factors in the sustained financial well-being of the University. Using the Financial Statements The financial statements have been prepared in ac-cordance with generally accepted accounting principles prescribed by the Governmental Accounting Standards Board (GASB), which establishes standards for external financial reporting for public colleges and universities. The financial statements are presented on a consolidated basis to focus on the University as a whole. The full scope of the University’s activities is considered to be a single business-type activity and accordingly, is reported within a single column in the basic financial statements. Effective for the fiscal year ended June 30, 2006, the University implemented GASB Statement No. 42, Ac-counting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, GASB Statement No. 44, Economic Condition Reporting: The Statistical Section, and GASB No. 47, Accounting for Termination Benefits. Statement No. 42 establishes standards for reporting the impairment of capital assets, which occurs when an asset’s service utility has declined significantly and unexpectedly. The Statement also clarifies and estab-lishes accounting requirements for insurance recoveries. Statement No. 44 amends prior guidance on the prepara-tion of the statistical section of the CAFR to enhance the understandability and usefulness of the reported infor-mation and also by adding information to the statistical section based on the current financial reporting model. Statement No. 47 establishes accounting standards for termination benefits. The University’s Comprehensive Annual Financial Report includes the following three financial statements. l Statement of Net Assets l Statement of Revenues, Expenses, and Changes in Net Assets l Statement of Cash Flows Management’s discussion and analysis provides information regarding each of these financial statements. Condensed Statement of Net Assets The Statement of Net Assets presents the financial position of the University at the end of the fiscal year, includes all assets and liabilities of the University, and segregates the assets and liabilities into current and non-current components. Net assets represent the differ-ence between total assets and total liabilities and are one indicator of the University’s current financial condition. The following table summarizes the University’s assets, liabilities, and net assets at June 30, 2006, and 2005. percent 2006 2005 Change Assets, Liabilities , and Net Assets (dollars in thousands) Assets Current assets $912,751 $856,015 6.6 Non-current assets: Endowment investments 1,145,669 972,461 17.8 Other long-term investments 458,860 283,641 61.8 Capital assets, net 1,874,486 1,550,201 20.9 Other non-current assets 84,262 98,645 (14.6) Total Assets 4,476,028 3,760,963 19.0 Liabilities Current liabilities 391,685 420,350 (6.8) Non-current liabilities: Funds held in trust for pool participants 326,419 260,960 25.1 Long-term liabilities 797,852 440,423 81.2 Other non-current liabilities 32,070 31,351 2.3 Total Liabilities 1,548,026 1,153,084 34.3 Net Assets Invested in capital assets, net of related debt 1,119,040 1,017,383 10.0 Restricted: Non-expendable 430,316 378,234 13.8 Expendable 853,133 736,631 15.8 Unrestricted 525,513 475,631 10.5 Total Net Assets $2,928,002 $2,607,879 12.3 Current Assets and Liabilities The Statement of Net Assets shows the University had total assets of $4.5 billion at June 30, 2006, an increase of 19 percent over the prior year. Working capital, which is current assets less current liabilities, was $521.1 million at June 30, 2006, an increase of 19.6 percent, or $85.4 million, over the previous year. The significant factors which resulted in the working capital improve-ment were an increase in cash and cash equivalents of $39.7 million and a decrease in short-term debt and the current portion of long-term liabilities of $33.4 million. The cash and cash equivalents increase was due in part to a participating, University-affiliated foundation elect-ing to invest endowment assets in the Investment Fund effective June 30, 2006, of which $32.1 million were in 3 0 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l CURRENT LIABILITIES — COMPARATIVE 2005-2006 Total Current Liabilities: $391,685 2004-2005 Total Current Liabilities: $420,350 Percent Change from 2005 to 2006 $ Thousands Accounts Payable and Accrued Liabilities 160,000 0 Unearned Revenue Current Portion-Long Term Liabilities Other Current Liabilities 93,089 90,617 36,618 33,352 135,779 145,474 126,199 150,907 140,000 120,000 100,000 80,000 60,000 40,000 20,000 2.7% 9.8% (6.7%) (16.4%) 180,000 cash assets. A portion of short-term debt was replaced by long-term debt during 2005-2006 as part of the University’s financing strategy for the capital construction program. Current assets are represented graphically below: CURRENT ASSETS — COMPARATIVE 2005-2006 Total Current Assets: $912,751 2004-2005 Total Current Assets: $856,015 Percent Change from 2005 to 2006 $ Thousands Cash and Cash Equivalents 600,000 500,000 400,000 300,000 200,000 100,000 0 Short-term Investments Receivables Inventories Other Current Assets 495,190 455,492 268,766 262,744 125,142 113,924 17,428 17,401 6,225 6,454 8.7% 2.3% 9.8% 0.2% (3.5%) Current liabilities are represented graphically below: 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 3 1 Endowment and Other Long-term Investments Endowment investments increased 17.8 percent during 2005-2006 and were $1.146 billion at June 30, 2006, and $972.5 million at June 30, 2005, and include permanent endowments, funds internally designated as endowments and similar funds such as gift annuities and charitable trusts. Net assets of endowment and similar funds were $1.12 billion at June 30, 2006, and $930.6 million for the prior year. The endowment assets are invested with The Universi-ty of North Carolina at Chapel Hill Foundation Investment Fund, Inc. (“Investment Fund”), which is reported as a governmental external investment pool in the financial statements. The Investment Fund is a 501(c)(3) non-profit corporation established to support the University by operating an investment pool for charitable, non-profit foundations, associations, trusts, endowments, and funds that are organized and operated primarily to sup-port the University. The investment objective is to earn an average real total return of at least 5.5 percent per year, net of all fees, over rolling five- and ten-year periods. The earnings distribution policy is to provide a stable source of spend-ing support that is sustainable over the long term while preserving the purchasing power of the endowment. The earnings distribution rate was established at 5 percent of the previous year’s market value, with annual increases based on inflationary factors. Each year’s distribution is subject to a 4 percent floor and a 7 percent cap based on estimated fiscal year-end market value. Other long-term investments of $458.9 million at June 30, 2006, include funds of $317.4 million of affiliated entities that are neither part of the University’s financial reporting entity nor reported discretely but do invest through the System Fund. The remaining component is bond reserves and related funds of $141.5 million. Most of the University’s endowment assets are currently managed within the System Fund, a pooled investment fund vehicle. The System Fund is designed to provide long-term, stable rates of return on the invested assets through the use of a highly diversified portfolio strategy. As reported by UNC Management Company, Inc., the nominal return on the endowment assets invested in the System Fund for fiscal year 2005-2006 was 19.2 percent, with a real return of 15 percent after inflation. The respective returns for fiscal year 2004-2005 were 15.5 percent and 13 percent. The System Fund return of 19.2 percent for 2005-2006 far outdistanced the Strategic Investment Policy Portfolio (“SIPP”) return of 14.1 percent by 5.1 percent. The System Fund’s return also exceeded the 70 percent S&P 500 / 30 percent Lehman Brothers Bond Index (“70/30”) return of 5.8 percent for the year. The continuing strong investment performance has increased the three-year annualized return to 16.9 percent at June 30, 2006. This three-year return mea-sure compares well with the corresponding measure of 14.5 percent for the SIPP and 8.5 percent for the 70/30. For the five years ended June 30, 2006, the System Fund earned a 10.6 percent annualized return compared to 7.3 percent for the SIPP and 3.5 percent for the 70/30. The System Fund has also outperformed its long term objective of real return, after inflation, of 5.5 percent for each of the time periods noted above as well as for longer time periods. For the 10-, 15-, and 20-year time periods ended June 30, 2006, the System Fund returned 11.6 percent, 12.2 percent, and 11.7 percent, respectively. Comparatively, the CPI plus 5.5 percent has been 8.2 percent, 8.3 percent, and 8.8 percent, respectively, for the corresponding time periods. The System Fund is very well positioned in the current environment and remains invested according to the approved investment policy that provides excellent diversification in both bull and bear markets. Capital Assets and Debt Management An essential aspect for enhancing and maintaining the University’s academic, research, and service programs and its residential life is the development and renewal of its capital assets. The University Board of Trustees ap-proved the Campus Master Plan to guide the University’s physical development in the 21st Century. The master plan meshes the critical pieces needed for smart growth in the 21st Century — transportation, parking, hous-ing, utilities, and environmental sustainability — with the program needs of a growing campus. The master plan combines the practical requirements of a research university with the beauty that inspired its founders. 3 2 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l EXPENDABLE RESOURCES TO DEBT Percent 2006 5.0 4.5 4.0 0 1.8 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2.4 2.6 1.5 2.4 2005 2004 University Debt Policy (Minimum) Moody’s Public Universities Aaa & Aa1, 2005 The University will continue to grow dramatically in the coming years. A summary of changes in capital assets is disclosed in Note 5. Capital assets, net of accumulated depreciation, at June 30, 2006 and June 30, 2005 were as follows: 2006 and $141.1 million at June 30, 2005. The University maintains a combination of variable and fixed-rate debt, consistent with its debt manage-ment policy. The effective, combined interest rate for variable and fixed rate debt was 4.65 percent for fiscal year 2005-2006 and 4.5 percent for 2004-2005. The interest rate on the commercial paper program for fiscal year 2005-2006 was 3 percent and for 2004-2005 was 1.82 percent. Interest rates on the University’s variable rate, long-term bonds were 2.93 percent for fiscal year 2005-2006 and 1.82 percent for 2004-2005. Interest rates on fixed rate, long-term bonds are disclosed in Note 8B of the financial statements. The University’s financial strength allowed it to achieve ratings of AA+/Aa1 by the national rating agencies. The University’s debt policy uses two key ratios to measure debt capacity, financial health, and credit quality. The expendable resources to debt ratio measures the availability of expendable assets to cover long-term obligations should the University be required to repay all its obligations immediately. The debt service to operations ratio measures the University’s ability to repay annual principal and interest associated with all outstanding debt and its impact on the overall budget. Each ratio is compared to the University’s debt policy standard and the appropriate peer group comparison for fiscal year 2004- 2005 (the latest available numbers). The debt policy floor for expendable resources to debt is 1.5 times, and the metrics indicate the University has sufficient expendable resources to pay its long-term debt obligations. The debt policy ceiling for debt service to operations is 4 percent, and the metrics indicate the University’s annual debt service requirements are a reasonable proportion of the operating budget. percent 2006 2005 Change Capital Assets (dollars in thousands) Capital Assets Construction in progress $585,216 $377,522 55.0 Land and other non-depreciable assets 93,980 86,347 8.8 Buildings 910,763 798,181 14.1 General infrastructure 190,898 202,594 (5.8) Machinery and equipment 93,629 85,557 9.4 Total $1,874,486 $1,550,201 20.9 The University is engaged in a $1.8 billion capital construction program that began in 2000 and will continue through the next several years. This program includes major capital renewal of existing buildings and infrastructure to address both deferred maintenance and programmatic needs. The 53 completed projects total $459 million, or 26 percent of the $1.8 billion capital construction program. The 41 projects under construc-tion total $867 million or 48 percent, and the 60 projects under design represent $474 million or 26 percent. Capital funds resulting from North Carolina Higher Education Bonds continue to provide essential resources for construction. The University is directly investing in its capital construction program using a variety of other funding sources including general revenue bonds, cost reimbursements from research grants, internal reserves, and private gifts. In August 2005, the University issued $405 million in fixed-rate bonds, of which approximately $245 mil-lion was used to fund project costs for the University’s capital improvement program and approximately $121 million to refund outstanding commercial paper which had already been issued to provide construction financ-ing for the capital improvement program. The University continues to use its commercial paper program to provide low-cost bridge financing for capital projects until gifts are received or in anticipation of an external bond issue. Commercial paper debt was $117.4 million at June 30, 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 3 3 2006 NET ASSETS: $2,928,002 38% 29% 15% 18% Investment in Capital Assets, net of related debt $1,119,040 Restricted Expendable $853,133 Restricted Non-expendable $430,316 Unrestricted $525,513 $ Thousands Other Non-current Assets Other non-current assets were $84.3 million at June 30, 2006 and $98.6 million at June 30, 2005, a 14.6 percent decrease. Included in this category at June 30, 2006 are restricted cash and cash equivalents of $19 mil-lion, receivables for pledged gifts of $23.2 million, notes receivable for student loans of $30.5 million, restricted resources due from the primary government of $3.2 mil-lion, and an investment in a joint venture of $8.3 million. The decrease in other non-current assets from the prior year resulted primarily from a $23.9 million decline in restricted resources due from the primary government. Restricted resources due from the primary government represent receivables for designated capital construction projects funded from proceeds from statewide higher education bonds and other state resources. The decline resulted from a $22.7 million decrease in statewide higher education bonds due as funding for capital construction projects shifts to other resources. The investment in a joint venture represents the construction of the Southern Astrophysical Research Telescope (SOAR), situated in Cerro Pachon, Chile, in South America, as part of an international consortium including the University. Non-current Liabilities Non-current liabilities were $1.2 billion at June 30, 2006 and $732.7 million at June 30, 2005 and include funds held in trust for the University’s affiliated foundations and other campuses in the UNC System and their af-filiates of $326.4 million and $261 million, respectively. These entities are not part of the University’s financial reporting entity nor are they discretely presented, but the entities do invest through the System Fund. The increase in funds held in trust of 25.1 percent over the prior year resulted from strong investment performance, participant contributions, and new participants in the System Fund. Long-term liabilities of $797.9 million at June 30, 2006 and $440.4 million at June 30, 2005, are the non-current portion of bonds payable, notes payable, capital leases payable, compensated absences, and annuities payable. The 81.2 percent increase from the prior year resulted from the University’s issuance of $405 million in fixed-rate bonds to fund project costs for the University’s capital improvement program. The reader may refer to Note 8 for summary of changes in long-term liabilities. Other non-current liabilities of $32.1 million at June 30, 2006 and $31.4 million at June 30, 2005 are refund-able U.S. government grants that provide resources for student loan programs. Net Assets Net assets represent the value of the University’s assets after liabilities are deducted. The University’s net assets were $2.9 billion at June 30, 2006, an increase of $320.1 million over the prior year. DEBT SERVICES TO OPERATIONS Percent 2006 5.0 4.5 4.0 0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 3.7 4.0 2.2 2.1 3.2 2005 2004 University Debt Policy (Maximum) Moody’s Public Universities Aaa & Aa1, 2005 3 4 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l percent 2006 2005 Change University Operations (dollars in thousands) Operating Revenues Student tuition and fees, net $195,882 $164,457 19.1 Grants and contracts 554,047 524,476 5.6 Sales and services, net 485,627 462,460 5.0 Other 5,955 5,608 6.2 Total Operating Revenues 1,241,511 1,157,001 7.3 Operating Expenses Salaries and benefits 1,042,452 966,629 7.8 Supplies and materials 152,911 148,440 3.0 Services 432,212 407,690 6.0 Scholarships and fellowships 54,105 51,170 5.7 Utilities 56,277 47,870 17.6 Depreciation 64,475 60,102 7.3 Total Operating Expenses 1,802,432 1,681,901 7.2 Operating Loss (560,921) (524,900) 6.9 Non-operating Revenues (Expenses) State appropriations 440,070 406,673 8.2 Non-capital grants 67,388 62,544 7.7 Non-capital gifts, net 68,824 73,693 (6.6) Investment income, net 207,423 154,900 33.9 Interest and fees on capital asset-related debt (39,921) (21,823) 82.9 Other non-operating (230) 8,374 102.7 Income Before Other Changes 182,633 159,461 14.5 Capital grants 52,277 152,844 (65.8) Capital appropriations 15,776 5,166 205.4 Capital gifts 13,368 11,521 16.0 Additions to permanent endowments 56,069 37,688 48.8 Increase in Net Assets 320,123 366,680 (12.7) Net Assets – July 1 2,607,879 2,241,199 16.4 Net Assets – June 30 $2,928,002 $2,607,879 12.3 Fiscal year 2005-2006 revenues and other changes total $2,162,706, and expenses total $1,842,583. Fiscal year 2004-2005 revenues and other changes total $2,070,404, and expenses total $1,703,724. Condensed Statement of Revenues, Expenses, and Changes in Net Assets The Statements of Revenues, Expenses, and Changes in Net Assets present the University’s results of operations. The statements for the fiscal year ended June 30, 2006 and the prior year are summarized as follows: Operating Revenues The operating revenues represent resources generated by the University in fulfilling its instruction, research, and public service missions. Student tuition and fees are reported net of the scholarship discount, which was $45.3 million for fiscal year 2005-2006 and $37.9 million for the prior year. Total revenues from student tuition and fees increased 19.1 percent over the prior year. While 2005-2006 tuition rates for undergraduate residents did not change, tuition rates increased 4.3 percent for undergraduate non-residents, 5.9 percent for graduate residents, and 5.7 percent for graduate non-residents. There were also limited tuition increases for the profes-sional schools. Beginning in 2005-2006, mandatory student charges used to support designated auxiliary operations are reported as student fees. Previously, these charges were reported as sales and services revenues. Revenues from grants and contracts increased 5.6 percent over the prior year as reflected in the financial statements. Discussion of grants and contracts in terms of awards provides another useful perspective. The University is among the nation’s leading public research universities, with a diversified portfolio of research that attracted more than $593 million in sponsored program funding during fiscal year 2005-2006, a 2.4 percent increase over the previous year. During the federal fiscal year 2004-2005 (the latest available numbers), University faculty attracted $296.6 million in National Institutes of Health (NIH) funding (up from $289 million in 2003-2004), ranking 15th overall among U.S. private and public universities. The growth comes at a time when the NIH, which historically has ac-counted for slightly more than half of all research funding at the University, experienced a cut in appropriations in 2005-2006 with no increase expected for 2006-2007. Health-related research continues to receive the bulk of research dollars, with the medical school bringing in $288 million in 2005-2006. The School of Public Health received $61 million, and the College of Arts and Sciences received $60 million. Interdisciplinary research centers, institutes and other units that do not fall under one particular school accounted for $132 million. Funding sources include state and federal agencies, industry and foundations and non-profit organizations. Sales and services and patient services revenues of $485.6 million for fiscal year 2005-2006 represent an increase of 5 percent over the prior year and include the 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 3 5 2006 OPERATING EXPENSES BY NATURE: 1,802,432 Salaries and Benefits $1,042,452 Services $432,212 24% 58% 3% 9% 3% 3% Supplies and Materials $152,911 Depreciation $64,475 Scholarships and Fel lowships $54,105 Utilities $56,277 $ Thousands 2006 OPERATING EXPENSES BY FUNCTION: 1,802,432 Instruction $595,319 Auxiliary Enterprises $424,042 Academic Support $86,229 Research $285,646 33% 24% 6% 16% 5% 5% 4% 3% 3%1% Operations and Maintenance of Plant $111,720 Public Service $85,330 Institutional Support $71,609 Student Financial Aid $54,105 Depreciation $64,475 Student Services $23,957 $ Thousands revenues of campus auxiliary operations such as student housing, student stores, student health services, the utilities system, and parking and transportation, as well as revenues from patient services provided by the profes-sional health-care clinics. Net revenues generated by the health-care clinics increased 7.1 percent in 2005-2006, while revenues from auxiliary operations increased 3.8 percent. Other revenues of $6 million for fiscal year 2005-2006 represent operating resources not separately identified and include, as examples, an assessment to the Investment Fund to support administrative services, library fines, and interest income from student loans. Operating Expenses The University’s operating expenses were $1.8 billion for the fiscal year ended June 30, 2006, an increase of 7.2 percent over the prior year. The operating expenses are reported by natural classification in the financial statements and by functional classification in the note disclosures (Note 12). The following table illustrates the University’s operating expenses by the functional classification: The following graph illustrates the University’s operat-ing expenses by function. percent 2006 2005 Change Operating Expenses by Function (DOLARS in thousands) Instruction $595,319 $575,951 3.4 Research 285,646 271,208 5.3 Public Service 85,330 83,005 2.8 Academic Support 86,229 75,384 14.4 Student Services 23,957 21,653 10.6 Institutional Support 71,609 67,426 6.2 Operations and Maintenance of Plant 111,720 92,860 20.3 Student Financial Aid 54,105 51,170 5.7 Auxiliary Enterprises 424,042 383,142 10.7 Depreciation 64,475 60,102 7.3 Total Operating Expenses $1,802,432 $1,681,901 7.2 The following graph illustrates the University’s operat-ing expenses by the natural classification. 3 6 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l 2006 TOTAL REVENUES BY SOURCE: $2,025,216 Non-Operating Revenues $783,705 Sales and Services, net $301,303 21% 10% 15% 9% 4% Federal Grants and Contracts $422,229 Student Tuition & Fees, net $195,882 39% 2% Nongovernmental Grants and Contracts $89,976 State & Local Grants and Contracts $41,842 Patient Services, net $184,324 Interest Earnings on Loans $672 (0%) Other Operating Revenues $5,283 (0%) State Appropriations $440,070 Non-capital Grants $67,388 Non-capital Gifts, net $68,824 Investment Income (Net of Investment Expense of $4,314) $207,423 3% 3% 11% 22% Non-Operating Revenues: Breakdown $ Thousands Operating expense categories reported by natural classification increased at a comparable rate to total operating expenses with one exception. The 17.6 percent increase in utilities expenses in 2005-2006 over the prior year was caused by higher costs for purchased electricity, natural gas and propane, and coal and related additives; consumption increases based on campus growth; and higher rates to fund increased debt service to finance cap-ital construction program for campus utilities operations. Salaries and benefits increased 7.8 percent, supplies and materials increased 3 percent, expenses for services in-creased 6 percent, scholarships and fellowships increased 5.7 percent, and depreciation increased 7.3 percent. Non-operating Revenues and Expenses State appropriations of $440.1 million, non-capital grants of $67.4 million, non-capital gifts of $68.8 million, investment income of $207.4 million, interest and fees on capital asset-related debt of ($39.9) million, and other revenues and expenses of ($0.2) million comprise net non-operating revenues and expenses. These revenues are considered non-operating because they were not generated by the University’s principal, ongoing opera-tions. For example, state appropriations were not generated by the University but were provided to help fund operating expenses. The University’s initial budget for state appropriations was $415.9 million for fiscal year 2005-2006. The Uni-versity received budget increases totaling $30.5 million to fund employee salary and benefit increases, enrollment increases, expansion items, and other program enhance-ments. In response to legislative action, the University, excluding AHEC operations, was required to take a permanent budget reduction of 1.72 percent. The reduc-tion totaled $6.3 million, resulting in an appropriated budget of $440.1 million for 2005-2006, an increase of 8.2 percent over fiscal year 2004-2005. Non-capital grants increased by 7.7 percent to $67.4 million in fiscal year 2005-2006 and represent federal awards that are not considered to be operating revenues. Net non-capital gifts decreased by 6.6 percent to $68.8 million and represent expendable gifts received and pledges made and are net of an allowance for uncollect-ible pledges. Net investment income of $207.4 million, an increase of 33.9 percent over 2005-2006, includes income and realized and unrealized gains and is net of realized and unrealized losses and investment manage-ment fees. For detail discussion, the reader may refer to Endowment and Other Long-term Investments section of Management’s Discussion and Analysis. Interest and fees on capital asset-related debt were ($39.9) million, an increase of 82.9 percent over the prior year. Other non-operating revenues and expenses were ($0.2) million, a decrease of $8.6 million from the prior year. Other non-operating revenues and expenses for 2004-2005 included a $6.6 million increase in the net as-sets of annuities and charitable remainder trusts. These annuities and charitable remainder trusts include split-interest agreements that have a liability component for the present value of projected future distributions to the annuitant or donor and liabilities to other organizations where the University reporting entity serves as trustee but not the beneficiary of the split-interest agreements. Changes in the actuarial calculations of the liabilities will increase or decrease the net assets of the annuities and charitable remainder trusts. Total Operating and Non-operating Revenues Operating and non-operating revenues such as state appropriations, non-capital grants, non-capital gifts, and investment income are used to fund University opera-tions. The following chart illustrates the University’s operating and non-operating revenues which total $2 billion for fiscal year 2005-2006. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 3 7 percent 2006 2005 Change Cash Flows (dollars in thousands) Cash Flows Provided (Used) Operating activities ($492,016) ($460,046) 6.9 Non-capital financing activities 704,641 589,302 19.6 Capital and related financing activities (16,732) (67,227) (75.1) Investing activities (141,021) (147,354) (4.3) Net Increase (Decrease) in Cash 54,872 (85,325) (164.3) Cash – July 1 459,363 544,688 (15.7) Cash – June 30 $514,235 $459,363 11.9 Other Changes in Net Assets Capital grants of $52.3 million for 2005-2006 and $152.8 million for 2004-2005 are from statewide higher educa-tion bond proceeds for capital construction projects. Capital appropriations of $15.8 million for 2005-2006 and $5.2 million for the prior year were received from the state for repairs and replacements. Net capital gifts of $13.4 million for 2005-2006 and $11.5 million for the prior year resulted from fund-raising efforts and also provided funding for construction projects. Non-expend-able gifts and funds from the state’s program to match gifts for distinguished professorship endowments resulted in additions to permanent endowments of $56.1 million during fiscal year 2005-2006 and $37.7 million during fiscal year 2004-2005. Condensed Statement of Cash Flows The Statement of Cash Flows provides additional informa-tion about the University’s financial results by reporting the major sources and uses of cash. Cash increased by $54.9 million during the fiscal year 2005-2006, com-pared with a decrease of $85.3 million during fiscal year 2004-2005. Factors which caused the increase in the cash position at June 30, 2006, include $32.1 million in cash assets of University-affiliated foundation that was transferring endowment assets to the Investment Fund for investment. Also, funds invested in the State Treasurer’s short-term investment fund (STIF), which is classified as a cash equivalent, increased by $8 million. The primary factor which caused the decrease in the cash position at June 30, 2005 was the decreased use of STIF for the University’s temporary investment pool. The temporary investment pool’s investment in STIF was $120 million at June 30, 2004 and zero at June 30, 2005. The statements for the fiscal year ended June 30, 2006 and the prior year are summarized as follows: Component Units Reported using Discrete Presentation Three affiliated foundations were categorized as compo-nent units using discrete presentation. Discrete presenta-tion provides readers with complete information regarding the financial activities of the components units. The reader may refer to Note 1A for additional information regarding the three affiliated foundations. Summary information regarding the financial activities of the three affiliated foundations follows: percent 2006 2005 Change Total Net Assets (dollars in thousands) Assets and Liabilities Total assets $501,142 $431,587 16.1 Total liabilities 3,954 2,166 82.5 Total net assets $497,188 $429,421 15.8 Net Assets Composition Unrestricted $23,708 $20,653 14.8 Temporarily restricted 284,351 238,745 19.1 Permanently restricted 189,129 170,023 11.2 Total Net Assets $497,188 $429,421 15.8 The growth in total assets and net assets resulted from increased levels of contributions and investment returns. Liabilities increased as the UNC-Chapel Hill Arts and Sciences Foundation entered into a loan agree-ment during 2005-2006 with principal of $3,000,000 outstanding at June 30, 2006 to finance a building lease in London, England, benefiting the Foundation and the University. The University plans to refinance the loan with fund raising and program revenues. 3 8 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l The net assets of the three affiliated foundations increased $67.8 million during fiscal year 2005-2006. The main factors attributing to the increase were $43 million in contributions and $35.8 million in investment income which is comprised of net gains on investments and inter-est and dividend income. Economic Outlook Fiscal year 2005-2006 demonstrated an improvement on a solid financial foundation. The University’s compara-tively low tuition levels enhance its appeal to prospective students and provide a possible source of additional resources, should campus-based tuition increases be enacted. The University’s support from the state con-tinues to improve, sponsored awards are a proven and reliable source in support of the University’s research mission, philanthropic efforts should have ongoing suc-cess, and investment returns are expected to remain at high levels. The University’s strong debt credit ratings of Aa1 and AA+ allow it to obtain competitive financing for capital construction. Campus-based tuition rates increased for fiscal year 2006-2007 by 7.8 percent for undergraduate residents, 6.5 percent for undergraduate non-residents, 13.8 per-cent for graduate residents, and 2.8 percent for graduate non-residents. There were limited tuition increases for the professional schools. The University’s academic stand-ing allows it to continuously attract top students. The University’s ratio of accepted applications as a percentage of total applications was 36.6 percent for 2005-2006. The ratio of enrolled students as a percentage of accepted applications was 55.7 percent for 2005-2006. The CAFR Statistical Section includes historical data for these two and other metrics. The Carolina Covenant provides qualified students from low income families with a Carolina education debt-free. Carolina Covenant Scholars agree to work on campus 10 to 12 hours weekly in a federal work-study job, and the University meets the rest of their needs through a combination of federal, state, university, and other privately funded grants and scholarships. Effective with the fall semester of 2005, the Carolina Covenant expanded the program to include families with incomes up to 200 percent of the federal poverty level. This move covered a family of four with an annual income of about $37,000 or a single parent with a child who makes about $24,000. To attract additional high-achieving students, the University expanded merit-based scholarships. Fund raising efforts have provided resources for more than 600 scholarships and fellowships in support of both need and merit, a 60 percent increase since the campaign began. The University now directs all of its trademark licensing revenue to scholarships, allowing the establishment of 68 new merit scholarships in 2005-2006 and 2006-2007. The Governor and the North Carolina General As-sembly have continued to demonstrate strong financial support for higher education. The budgeted funding level for state appropriations for 2006-2007 totals $490.2 million, which represents an increase of 11.4 percent over fiscal year 2005-2006 actual state appropriations. This level of state appropriation funding includes faculty and staff pay and benefit increases of $26 million. The fiscal year 2006-2007 pay increase of 5.5 percent for staff and average 6 percent for faculty is the third consecutive year of base salary increases for all employees. Other budget increases included $3.7 million for student enrollment increases, $8.5 million for planned operating expenses for new construction, and $5.9 million for the Renaissance Computing Institute based in Chapel Hill and created in partnership with Duke and North Carolina State universities. The 2006-2007 appropriations budget also included a base budget reduction of $1.4 million, and a base budget increase of $7.4 million for new programs. While additional budget reductions or reversions are not anticipated for fiscal year 2006-2007, it is not certain. percent 2006 2005 Change Changes in Net Assets (dollars in thousands) Total revenues $103,510 $75,806 36.5 Total expenses 35,743 33,574 6.5 Increase in net assets 67,767 42,232 60.5 Net assets – July 1 429,421 387,189 10.9 Net assets – June 30 $497,188 $429,421 15.8 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 3 9 A critical priority is to strengthen faculty support through recruitment and retention efforts and providing them with the necessary resources for teaching, research-ing, and serving the public. Significant progress has been made in this area, and the University’s Five-Year Finan-cial Plan calls for attaining the 67th percentile for faculty salaries among our public and private peers by 2011. This goal will require average annual 6 percent legislative salary increases over the next five years, supplemented by modest campus-based tuition increases. External funding from contracts and grants increased to $593 million in 2005-2006. While this funding level is notable, attracting more private funding is one area that is essential to continued growth. The University’s com-mitment to improving private funding is demonstrated by the planning for Carolina North, the University’s 21st Century living-and-learning community. The goal is for the Carolina North campus to be a national model for sustainability, addressing the long-term needs for accelerated transfer of new knowledge into the economy, housing for faculty and staff, and new collaborations with the private sector. A Leadership Advisory Committee of community, state, and university representatives is developing guiding principles for building Carolina North. As announced by Chancellor Moeser in his 2006 “State of the University” address, the University’s goal is to secure $1 billion in external research funding by 2015. The growth of research funding also translates into economic growth for the state. Data that reflect the economic impact of technological development include the number of patents, spin-off companies, jobs, and licensed technology. In 2005-2006, the University was awarded 21 patents; started five new companies, bringing the total to 35; licensed 43 inventions; and received a total of $2.2 million in licensed technology. Management believes the investment performance of its endowment fund will continue to earn attractive returns and provide important resources for University operations. The University’s investment management operation is separately organized as the UNC Manage-ment Company, Inc., a non-profit corporation organized and operated as a 501(c)(3) entity, to provide investment management services and administrative services to the University and to the other campuses of the UNC System and their affiliated non-profit foundations as appropri-ate. Management believes this structure will continue to enhance the ability to attract and retain investment professionals and increase the pool of funds and resulting investment returns. The University’s fund-raising efforts continued to achieve a high level of success. Private gifts and grants, along with state matching funds, totaled a record $241.2 million in fiscal year 2005-2006, marking the first time that the University, in a single year, has raised more than $200 million in cash and other assets. The University’s Carolina First Campaign has raised $1.81 billion and has passed its initial goal of $1.8 billion. The campaign’s goal was increased to $2 billion in October 2005. The campaign, which began in July 1999, also was extended by six months and will end December 31, 2007. The campaign finished 2005-2006 ahead of pace to reach $2 billion, with 90 percent of the goal attained and just 82 percent of the campaign completed. Increased support from the state, the ability to attract top prospective students, vibrant research funding, continued strength in investment performance, a dy-namic capital construction program, and an exceptional fund-raising campaign all contribute to a positive outlook for the University. The University’s commitment to sound financial and budgetary planning, protection and enhancement of its endowed and physical assets, and observance of compliance and control standards support a solid financial future for the University. 4 0 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l financia l s A ss e t s Current Assets: Cash and cash equivalents $158,591,038 Restricted cash and cash equivalents 336,599,057 Short-term investments 175,089,510 Restricted short-term investments 93,676,248 Receivables, net (Note 4) 125,141,916 Due from State of North Carolina component units 3,022,098 Inventories 17,427,497 Notes receivable, net (Note 4) 3,203,171 Total current assets 912,750,535 Non-current Assets: Restricted cash and cash equivalents 19,045,146 Receivables, net (Note 4) 23,181,244 Restricted due from primary government 3,211,019 Endowment investments 1,145,668,496 Other long-term investments 458,860,725 Notes receivable, net (Note 4) 30,505,262 Investment in joint venture 8,318,917 Capital assets, non-depreciable (Note 5) 679,195,885 Capital assets, depreciable, net (Note 5) 1,195,290,353 Total non-current assets 3,563,277,047 Total assets $4,476,027,582 The accompanying notes to the financial statements are an integral part of this statement. Statement of Net Assets June 30, 2006 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 4 1 Total assets (continued) $4,476,027,582 Lia b i l i t i e s Current Liabilities: Accounts payable and accrued liabilities (Note 6) 93,089,196 Due to primary government 190,708 Due to State of North Carolina component units 3,006,265 Deposits payable 1,902,918 Unearned revenue 36,617,440 Interest payable 3,685,390 Short-term debt (Note 7) 117,414,000 Long-term liabilities - current portion (Note 8) 135,778,820 Total current liabilities 391,684,737 Non-current Liabilities: U. S. government grants refundable 32,069,778 Funds held in trust for pool participants 326,419,316 Long-term liabilities (Note 8) 797,851,618 Total non-current liabilities 1,156,340,712 Total liabilities 1,548,025,449 Total asets les liabilities $2,928,002,133 N e t A ss e t s Invested in capital assets, net of related debt $1,119,039,950 Restricted for: Non-expendable (Note 10) 430,315,566 Expendable (Note 10) 853,133,381 Unrestricted 525,513,236 Total net asets $2,928,002,133 The accompanying notes to the financial statements are an integral part of this statement. 4 2 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l financia l s R e v e nu e s Operating Revenues Student tuition and fees, net (Note 11) $195,882,460 Patient services, net (Note 11) 184,324,052 Federal grants and contracts 422,228,732 State and local grants and contracts 41,841,926 Non-governmental grants and contracts 89,975,881 Sales and services, net (Note 11) 301,302,925 Interest earnings on loans 672,155 Other operating revenues 5,282,547 Total operating revenues 1,241,510,678 E x p e ns e s Operating Expenses Salaries and benefits 1,042,451,851 Supplies and materials 152,911,484 Services 432,211,908 Scholarships and fellowships 54,105,093 Utilities 56,276,744 Depreciation 64,475,131 Total operating expenses 1,802,432,211 Operating loss (560,921,533) N on - o p e ra t ing R e v e nu e s ( E x p e ns e s ) State appropriations 440,070,173 Non-capital grants 67,387,887 Non-capital gifts, net (Note 11) 68,823,820 Investment income (net of investment expense of $4,313,989) 207,423,036 Interest and fees on capital asset related debt (39,921,063) Other non-operating expenses (230,054) Net non-operating revenues 743,553,799 Income before other revenues 182,632,266 Capital appropriations 15,775,900 Capital grants 52,277,305 Capital gifts 13,368,446 Additions to endowments 56,068,953 Increase in net assets 320,122,870 N e t A ss e t s Net assets - July 1, 2005 2,607,879,263 Net assets - June 30, 2006 $2,928,002,133 The accompanying notes to the financial statements are an integral part of this statement. Statement of Revenues, Expenses, and Changes in Net Assets For the fiscal year ended June 30, 2006 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 4 3 financia l s C A SH F LOWS F R OM O P E R A T I NG A C T I V I T I E S Received from customers $1,240,267,585 Payments to employees and fringe benefits (1,026,926,673) Payments to vendors and suppliers (642,243,427) Payments for scholarships and fellowships (54,105,093) Loans issued to students (9,753,347) Collection of loans to students 9,755,263 Other payments (9,010,507) Net cash used by operating activities (492,016,199) C A SH F LOWS F R OM NON - C A P I T A L F I N A N C I NG A C T I V I T I E S State appropriations 440,070,173 Non-capital grants received 68,580,247 Non-capital gifts received 78,174,625 Additions to permanent endowments 56,068,953 Related activity agency receipts 61,747,872 Net cash provided by non-capital financing activities 704,641,870 C A SH F LOWS F R OM C A P I T A L A N D R EL A TED F I N A N C I NG A C T I V I T I E S Proceeds from capital debt 535,861,847 Capital grants 76,155,362 Capital appropriations 15,775,900 Capital gifts 13,368,446 Acquisition and construction of capital assets (389,465,953) Principal paid on capital debt and leases (228,037,306) Interest and fees paid on capital debt and leases (40,390,066) Net cash used by capital and related financing activities (16,731,770) C A SH F LOWS F R OM I N V E S T I NG A C T I V I T I E S Proceeds from sales and maturities of investments 1,099,071,632 Investment Income 55,893,747 Purchase of investments and related fees (1,295,986,840) Net cash used by investing activities (141,021,461) Net increase in cash and cash equivalents 54,872,440 Cash and cash equivalents, July 1, 2005 459,362,801 Cash and cash equivalents, June 30, 2006 $514,235,241 The accompanying notes to the financial statements are an integral part of this statement. Statement of Cash Flows (continued) Statement of Cash Flows For the fiscal year ended June 30, 2006 44 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l Statement of Cash Flows continued For the Fiscal Year Ended June 30, 2006 Reconciliation of net operating revenues (expenses) to net cash used by operating activities: Operating loss ($560,921,533) Adjustments to reconcile operating loss to net cash used by operating activities: Depreciation expense 64,475,131 Provision for uncollectible loans and writeoffs (296,049) Changes in assets and liabilities: Receivables, net (11,768,770) Inventories (26,971) Notes receivable, net (680,917) Accounts payable and accrued liabilities 1,509,876 Due to primary government (22,094) U.S. government grants refundable 718,851 Deferred revenue 1,479,152 Compensated absences 13,517,125 Net cash used by operating activities ($492,016,199) Non-cash investing, capital, and financing activities: Assets acquired through assumption of a liability $393,128 Assets acquired through a gift $810,695 Change in fair value of investments $123,601,604 Reconciliation of cash and cash equivalent: Current Assets: Cash and cash equivalents $158,591,038 Restricted cash and cash equivalents 336,599,057 Non-current assets: Restricted cash and cash equivalents 19,045,146 Total cash and cash equivalent - June 30, 2006 $514,235,241 The accompanying notes to the financial statements are an integral part of this statement. 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 45 financia l s ARTS AND SCIENCES EDUCATIONAL FOUNDATION THE MEDICAL FOUNDATION FOUNDATION, INC. SCHOLARSHIP ENDOWMENT TRUST OF NORTH CAROLINA, INC. A ss e t s Current assets Cash and cash equivalents $8,198,054 $9,929,344 $34,039,129 Investments 139,180,017 103,723,020 Unconditional promises to give 7,375,017 7,380,012 2,719,831 Contributions receivable from remainder trusts 3,567,710 Accounts receivable 63,187 Funds held in trust 125,387 Accrued income receivable 23,698 189,431 Prepaid expenses 24,971 Miscellaneous receivables 250,452 Total current assets 15,785,343 160,057,083 140,946,834 Property and equipment Building 436,340 Furniture and equipment 88,464 420,692 Leasehold interest - building 3,750,483 Vehicle 8,930 Total property and equipment 3,847,877 857,032 Less: allowance for depreciation (162,301) (447,615) Total property and equipment (net) 3,685,576 409,417 Other assets Investments 97,259,535 46,722,237 Unconditional promises to give,net 17,406,059 12,383,080 Restricted cash 2,994,510 86,459 Split-interest agreements 422,070 Restricted investments 441,073 Real estate interests held for investment 49,500 Student loans receivable 39,095 Cash surrender value of life insurance 2,061,825 392,632 Total other assets 118,131,674 2,061,825 60,064,576 Total assets $137,602,593 $162,118,908 $201,420,827 Lia b i l i t i e s and N e t A ss e t s Current liabilites Accounts payable $15,568 $365,229 Annuities payable $187,868 Accrued expenses 144,423 240,913 Total current liabilities 159,991 187,868 606,142 Long-term debt 3,000,000 Total liabilities 3,159,991 187,868 606,142 Net assets Unrestricted 11,844,297 11,864,250 Temporarily restricted 61,705,510 80,417,301 142,228,198 Permanently restricted 60,892,795 81,513,739 46,722,237 Total net assets 134,442,602 161,931,040 200,814,685 Total liabilities and net assets $137,602,593 $162,118,908 $201,420,827 The accompanying notes to the financial statements are an integral part of this statement. Component Units Statement of Financial Position June 30, 2006 4 6 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l financia l s ARTS AND SCIENCES EDUCATIONAL FOUNDATION THE MEDICAL FOUNDATION FOUNDATION, INC. SCHOLARSHIP ENDOWMENT TRUST OF NORTH CAROLINA, INC. S upp or t and R e v e nu e Support Contributions $20,314,671 $6,707,515 $15,953,101 Development assessment fee 1,313,333 Change in value of split-interest agreements 35,141 Donated facilites 40,000 Actuarial adjustment of annuities payable 14,868 Endowment investment return designated for current operations 5,801,413 Total support 21,703,145 12,523,796 15,953,101 Revenue Interest and dividend income 4,517,132 Net unrealized and realized gains (losses) on investments 13,580,443 14,959,590 Investment income 2,755,490 Loss on sale of real estate investments (22,213) Gain on sale of property and equipment 3,500 Other income 42,945 988,469 Total revenue 16,378,878 20,446,478 Total support and revenue 38,082,023 12,523,796 36,399,579 E x p e ns e s Program services Grants 9,324,790 14,859,381 Scholarship expense distribution 5,790,442 Annuity payments 10,971 Adminstrative expenses 40,983 Other expenses 1,064,112 Total program services 9,324,790 6,906,508 14,859,381 Supporting services Fundraising expenses 1,753,190 1,118,782 Management and general 801,358 979,122 Total supporting services 2,554,548 2,097,904 Total expenses 11,879,338 6,906,508 16,957,285 Change in net assets from operations 26,202,685 5,617,288 19,442,294 Other changes: Investment return in excess of amounts designated for current operations 16,504,962 Changes in net assets 26,202,685 22,122,250 19,442,294 Net assets - beginning of year 108,239,917 139,808,790 181,372,391 Net assets - end of year $134,442,602 $161,931,040 $200,814,685 The accompanying notes to the financial statements are an integral part of this statement. Component Units Statement of Activities and Changes in Net Assets For the fiscal year ended June 30, 2006 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 47 financia l s Notes to the Financial Statements June 30, 2006 48 NOTE 1: Significant Accounting Policies A. Financial Reporting Entity B. Basis of Presentation C. Basis of Accounting D. Cash and Cash Equivalents E. Investments F. Receivables G. Inventories H. Capital Assets I. Restricted Assets J. Funds Held in Trust for Pool Participants K. Funds Held in Trust by Others L. Non-current Long-term Liabilities M. Compensated Absences N. Net Assets O. Scholarship Discounts P. Revenue and Expense Recognition Q. Internal Sales Activities R. Related Parties 53 NOTE 2: Deposits and Investments A. Deposits B. Investments 59 NOTE 3: Endowment Investment Return 60 NOTE 4: Receivables 61 NOTE 5: Capital Assets 61 NOTE 6: Accounts Payable and Accrued Liabilities 61 NOTE 7: Short-term Debt Index 62 NOTE 8: Long-term Liabilities A. Changes in Long-term Liabilities B. Bonds Payable C. Demand Bonds D. Capital Appreciation Bonds E. Annual Requirements F. Bonds Defeasance G. Notes Payable H. Annuities Payable 67 NOTE 9: Lease Obligations A. Capital Lease Obligations B. Operating Lease Obligations C. Other Lease Obligations 68 NOTE 10: Restricted Net Assets 69 NOTE 11: Revenues 69 NOTE 12: Operating Expenses by Function 70 NOTE 13: Pension Plans A. Retirement Plans B. Deferred Compensation and Supplemental Retirement Income Plans 71 NOTE 14: Other Post-Employment Benefits A. Heath Care for Long-term Disability Beneficiaries and Retirees B. Long-term Disability 71 NOTE 15: Risk Management 73 NOTE 16: Commitments and Contingencies A. Commitments B. Pending Litigations and Claims C. Other Contingent Receivables 74 NOTE 17: Related Parties 74 NOTE 18: Subsequent Events 48 T h e U n i v e r s i t y o f N o r t h C a r o l i n a at C h a p e l H i l l Note 1 Significant Accounting Policies A Financial Reporting Entity The concept under-lying the definition of the financial reporting entity is that elected officials are accountable to their constituents for their actions. As required by accounting principles generally accepted in the United States of America, the financial reporting entity includes both the primary government and all of its component units. An organiza-tion other than a primary government serves as a nucleus for a reporting entity when it issues separate financial statements. The University of North Carolina at Chapel Hill (University) is a constituent institution of the 16-campus University of North Carolina System, which is a component unit of the State of North Carolina and an integral part of the State’s Comprehensive Annual Financial Report. The accompanying financial statements present all funds belonging to the University and its component units. While the Board of Governors of the University of North Carolina System has ultimate responsibility, the chancellor, the Board of Trustees, and the Board of Trustees of the Endowment Fund have delegated respon-sibilities for financial accountability of the University’s funds. The University’s component units are either blended or discretely presented in the University’s finan-cial statements. The blended component units, although legally separate, are, in substance, part of the University’s operations and therefore, are reported as if they were part of the University. Discretely presented component units’ financial data are reported in separate financial state-ments because of their use of different GAAP reporting models and to emphasize their legal separateness. Blended Component Units Although legally separate, The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc. (Investment Fund), UNC Investment Fund, LLC (System Fund), UNC Management Company, Inc. (Management Company), The University of North Carolina at Chapel Hill Foundation, Inc. (UNC-Chapel Hill Foundation), The Kenan-Flagler Business School Foundation (Business School Foundation), The School of Social Work Foundation, Inc. (Social Work Foundation), U.N.C. Law Foundation, Inc. (Law Foundation), and The University of North Carolina at Chapel Hill School of Education Foundation, Inc. (School of Education Foundation), are reported as if they were part of the University. The Investment Fund is governed by a board consist-ing of 11 ex-officio directors and one or two elected directors. Ex-officio directors include all of the members of the Board of Trustees of the Endowment Fund of the University, the vice chancellor for finance and administra-tion, and the vice chancellor for university advancement. The UNC-Chapel Hill Foundation Board may, in its discretion, elect one or two of its at-large members to the Investment Fund Board. The Investment Fund supports the University by operating an investment fund for charitable, non-profit foundations, associations, trusts, endowments, and funds that are organized and operated primarily to support the University. Because members of the Board of Directors of the Investment Fund are officials or appointed by officials of the University and the Investment Fund’s primary purpose is to benefit the University and other organizations operated primarily to support the University, its financial statements have been blended with those of the University. In December 2002, the System Fund was organized by the Investment Fund to allow the University, the Universi-ty of North Carolina and its other constituent institutions (UNC System), affiliated foundations, associations, trusts, and endowments that support the University and the UNC System to pool their resources and invest collectively in investment opportunities identified, structured, and arranged by the Management Company. The membership interests are offered only to government entities or tax-ex-empt organizations that are controlled by or support the University or UNC System. The Investment Fund contrib-uted and assigned all of its assets to the System Fund effective January 1, 2003, in exchange for its membership interest in the System Fund. Upon such contribution and assignment, and in consideration thereof, the System Fund has assumed all liabilities and obligations of the Investment Fund in respect of such contributed assets. At June 30, 2006, the Investment Fund membership interest was approximately 92.5 percent of the System Fund total membership interests. Because the Investment Fund is the organizer and a predominant member of the System Fund, the financial statements of the System Fund have been blended with those of the University. The Management Company is a North Carolina non-profit corporation organized and operated exclusively to support the educational mission of the University. The Management Company will also provide investment management services to the University, UNC System, and institutions and affiliated tax-exempt organizations and perform other functions for and generally carry out the purposes of the University. The Management Company is governed by five ex-officio directors and one or two additional directors as fixed or changed from time to time by the board, elected by the ex-officio directors. The ex-officio directors consist of the chancellor of the University, the vice chancellor for finance and adminis-tration of the University, the chairman of the University’s Board of Trustees, the chairman of the Board of Direc-tors of the Investment Fund, and the president of the Management Company. Because members of the Board of Directors of the Management Company are officials or ap-pointed by officials of the University and the Management 2 0 0 6 C omp r e h e n s i v e a n n u a l f i n a n c i a l r e p o r t 49 Company’s primary purpose is to benefit the University and other organizations operated primarily to support the University, its financial statements have been blended with those of the University. The UNC-Chapel Hill Foundation is governed by a 17-member board consisting of nine ex-officio directors and eight elected directors. Ex-officio directors include the chairman of the University Board of Trustees, the chancellor, the vice chancellor for finance and adminis-tration, and the vice chancellor for university advance-ment (non-voting). In addition, the Board of Trustees elects two ex-officio directors from among its own mem-bers as well as three ex-officio directors from the Board of Trustees of the Endowment Fund who have not otherwise been selected. The eight remaining directors are elected as members of the UNC-Chapel Hill Foundation Board of Directors by action of the ex-officio directors. The UNC-Chapel Hill Foundation aids, supports, and promotes teaching, research, and service in the various education-al, scientific, scholarly, professional, artistic, and creative endeavors of the University. Because members of the Board of Directors of the UNC-Chapel Hill Foundation are officials or appointed by officials of the University and the UNC-Chapel Hill Foundation’s sole purpose is to benefit the University, its financial statements have been blended with those of the University The Business School Foundation is governed by a board consisting of |
OCLC number | 34297063 |