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
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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
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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
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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.
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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.
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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
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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