ML100810150

Submittal of Updated and Supplemental Information to the March 2005 University of Utah Application for a Renewed License in Response to Request Dated December 15, 2009. Part 2 of 2

ML100810150
Person / Time
Site:	University of Utah
Issue date:	03/10/2010
From:	Furse C Univ of Utah
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
TAC ME1599
Download: ML100810150 (115)

Text

Financial Statements

IFor Comparison Only]

2008 2007 ASSETS Current Assets Cash and cash equivalents (Notes 2 & 4) 516,750 551,160 Short-term investments (Notes 2 & 4) 419.479 386,385 Receivables, net (Note 5) 288,776 273.385 Inventory (Note I) 35J153 32,374 Other assets (Note 6) 18,891 11,645 Total current assets 1,279,049 1.254.949 Noncurrent Assets Restricted cash and cash equivalents (Notes 2 & 4) 63,995 136.019 Restricted short-term investments (Notes 2 & 4) 25,343 813 Investments (Notes 3 & 4) 268,650 220,613 Restricted investments (Notes 3 & 4) 314.276 327,538 Restricted receivables, net (Note 5) 82,689 69,522 Donated property held for sale 1,969 23165 Other assets (Note 6) 73ý266 15.241 Capital assets, net (Note 7) 1.348.040

.1,248,432 Total noncurrent assets 2.178,228 2,020,343 Total assets 3A457.277 3.275,292 LIABILITIES Current Liabilities Accounts payable 86,917 84,506 Accrued payroll 74,752 73.758 Compensated absences & early retirement benefits (Note 1) 4,966 4,509 Deferred revenue (Note 9) 31,947 26,609 Deposits & other liabilities (Notes 11 & 15) 123,175 87.299 Bonds, notes and contracts payable (Notes 14, 15, & 16) 25.497 24,847 Total current liabilities 347,254 3011,528 Noncurrent Liabilities Compensated absences & early retirement benefits (Note I) 39,101 37,123 Deposits & other liabilities (Notes II & 15) 12,617 28.074 Bonds, notes and contracts payable (Notes 14. 15, & 16) 371,264 391.082 Total noncurrent liabilities 422.982 456,*279 Total liabilities 770.236 757,80(7 NET ASSETS Invested in capital assets, net of related debt 993,443 927.224 Restricted for Nonexpendable Instruction 109,208 116,024 Research 36,132 37.334 Public service 53M8(4 56,241 Academic support 33.956 36.021 Scholarships 112.064 109,297 Other 6,455 7.038 Expendable Research 133,498 174,619 Public service 84.935 62.073 Academic support 48,127 53,837 Institutional support 49,663 50.133 Loans 34.978 35,987 Debt service 868 1,146 Capital additions 148.029 158.685 Other 28.395 15.725 Unrestricted 813,486 676.101 Total net assets

$ 2.687,041

$ 2,517.485

[For Comparison Onlyl 2008 2007 OPERATING REVENUES AND EXPENSES Revenues Tuition and fees, net (Note 1) 160,915 152.820 Patient services, net (Notes I & 13) 937,047 883,032 Federal grants and contracts 187.436 191,764 State and local grants and contracts 14,813 22,612 Nongovernmental grants and contracts 78.566 71,741 Sales and services, net (Note I) 472.607 420,813 Auxiliary enterprises, net (Note 1) 75,404 73,751 Other operat revenues 70,320 67,136 Total operatin revenues 1,997.108 1,883,669 Expenses Compensation and benefits 1,226,252 1,133,059 Component units 287,603 250,279 Supplies 252,785 242,070 Purchased services 104,529 116,729 Depreciation and amortization 110.618 104,982 Utilities 56,958 51,131 Cost of goods sold 32.857 31.427 Repairs and maintenance 32,817 24.103 Scholarships and fellowships 24.556 23,766 Other operating expenses 148,065 115,358 Total operatingexpenses 2,277,040 2.092.904 Operating loss (279,932)

(209.235)

NONOPERATING REVENUES (EXPENSES)

State appropriations 294,907 265,924 Government grants 18,481 17,307 Gifts 74,449 82,094 Investment income 22,412 128,871 Interest (20,240)

(18.229)

Other nonoperating expenses (13,525)

(13,313)

Total nonoperating -revenues 376.484 462,654 Income before capital and permanent endowment additions 96552 253.419 CAPITAL AND PERMANENT ENDOWMENT ADDITIONS Capital appropriations 12,238 58,397 Capital grants and gifts 43.274 133.617 Additions to permanent endowments 17.492 17,185 Total capital and permanent endowment additions 73,004 209,199 Increase in net assets 169.556 462.618 NET ASSETS Net assets - beginning of year as adjusted (Note 21) 2,517,485 2,054,867 Net assets - end of year

$ 2,687.041 S 2.517,485 21

I Fmo Compmrison Onlyl 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from wition and fees S 159,0(X)

$ 153,169 Receipts front patient services 938.762 865.626 Receipts from contracts and grants 273,833 289.067 Receipts from auxiliary and educational serv ice, 550.095 493.479 Collection of loans to students 4,724 6,368 Pay ments to suppliers (981,253)

(814.824)

Payments for compensation and benefits (1.222.823)

(1.1 18,223)

Payments for scholarships and fellowships (24.556)

(23,766)

Loans issued to students (4,687)

(7,812)

Other 84,038 50,603 Net cash used by operating activities (222,867)

(11)6,313)

CASH FLOWS FROM NONCAPITAI. FINANCING ACTIVITIES State appropriations 294,907 265,924 Government grants 18.481 17,307 Gifts Endowment 18.527 16.278 Nonendowment 76,879 60,318 Other (13,125)

(12,946)

Net cash provided by noncapital financing activities 395k669 346,881 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from capital debt 159,260 Capital appropriations 10.945 9.546 Gifts 17.747 20,144 Purchase of capital assets (180.069)

(142,393)

Principal paid on capital debt (40,186)

(721239)

Interest paid on capital debt (20,011)

(18.084)

Net cash used by capital and related financing activities (211.574)

(43,766)

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales and maturities of investments 549,863 8721892 Receipt of interest and dividends on investments 62.666 60.272 Purchase of investments (680,191)

( 1,026,740)

Net cash used by investing activities (67.662)

(93.576)

Net increase (decrease) in cash (106.434) 103.226 Cash - beginning of year 687.179 583.953 Cash - ending of year 5807.4

$ 687.179 Continued on next page...

22

[For Comparison Only!

2008 2007 RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES Operating loss

$ (279.932)

$ (209.235)

Adjustments Depreciation expense 110.618 104,982 Change in assets and liabilities Receivables, net (17,100)

(28.363)

Inventory (2,779)

(2,369)

Donated property held for sale Other assets (65.270)

(2,887)

Accounts payable 2,411 21,012 Accrued payroll 993 11,629 Compensated absences & early retirement benefits 2.435 3,207 Deferred revenue 5,339 2,868 Deposits and other liabilities 20.418 (7.157)

Net cash used by operating activities

$ (222.867)

$ (106,313)

NONCASH INVESTING, CAPITAL, AND FINANCING ACTIVITIES Capital leases 20.389 14,847 Donated property and equipment 8,475 8,299 Completed construction projects transferred from State of Utah (Note I) 1,292 48,851 Annuity and life income 163 163 Increase (decrease) in fair value of investments (42,130) 65,146 Total noncash investing, capital, and financing activities (11,811)

$ 137.306 23

Notes to Financial Statements

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES A.

Reporting Entity The financial statements report the financial activ-ity of the University of Utah (University), including the University of Utah Hospitals and Clinics (UUHC).

The University is a component unit of the State of Utah (State). In addition, University administrators hold a majority of seats on the boards of trustees of two other related entities representing component units of the University.

Component units are entities that are legally sepa-rate from the University, but are financially account-able to the University, or whose relationships with the University are such that exclusion would cause the University's financial statements to be mislead-ing or incomplete. The relationship of the University with its component units requires the financial ac-tivity of the component units to be blended with that of the University. The component units of the Uni-versity are the University of Utah Research Founda-tion (UURF) and Associated Regional and University Pathologists, Inc. (ARUP). Copies of the financial re-port of each component unit can be obtained from the respective entity.

- UURF is a not-for-profit corporation governed by a board of directors who, with the exception of one, are affiliated with the University. The opera-tions of UURF include the leasing and administra-tion of Research Park (a research park located on land owned by the University), the leasing of cer-tain buildings, and the commercial development of patents and products developed by University personnel. As part of its mission to advance tech-nology commercialization, UURF creates new cor-porate entities to facilitate the startup process.

In general, these entities do not have assets. Ex-penses related to the companies are expensed as incurred. The fiscal year end for UURF is June 30.

UURF is audited by other independent auditors and their report, dated September 29, 2oo8, has been issued under separate cover.

ARUP is a for-profit corporation that provides clinical and anatomic pathology reference labo-ratory services to medical centers, hospitals, clinics and other clinical laboratories through-out the United States, including UUHC. ARUP contracts with the Department of Pathology of the University of Utah School of Medicine to pro-vide pathology consulting services. The fiscal year end for ARUP is June 30. Other independent auditors audited ARUP and their report, dated September 4, 2oo8, has been issued under sepa-rate cover.

All Governmental Accounting Standards Board (GASB) pronouncements and all applicable Finan-cial Accounting Standards Board (FASB) pronounce-ments are applied by the University, UURF and ARUP in the accounting and reporting of their operations.

However, in accordance with GASB Statement No.

2o, Accounting and Financial Reporting for Propri-etary FundA and Other Governmental Entitie" That UWe Proprietary FundAccounting, the University has elected not to apply FASB pronouncements issued after November 30, 1989.

Effective with the 2oo8 fiscal year, the University implemented the following new standards issued by the GASB:

- GASB Statement No. 45, Accounting and Finan-cial Reporting by Employersfor Poatemployment BenefitA Other Than Penzion.. Dueto changes in the University's health plan for retirees, the effects of this standard were immaterial to the University and therefore had no effect on the fi-nancial statements.

- GASB Statement No. 48, SaleA and PledgeA of Receivable, and Future RevenueA and Intra-En-tity TranAferA of A-A~etA and Future Revenue,.

Implementation of this standard resulted in slight modifications to,various disclosures in the Notes to the Financial Statements.

- GASB Statement No. 49, Accounting and Finan-cial Reporting for Pollution Remediation Obliga-tionz. This statement is not effective until fiscal 25

year 2009, however, the University early adopted this standard in the current year. As of June 30, 2008, the University did not have any remedia-tion obligations subject to the accounting and financial reporting obligations of this standard.

B. Ba~is of Accounting All statements have been prepared using the eco-nomic resources measurement focus and the accrual basis of accounting. Operating activities include all revenues and expenses, derived on an exchange ba-sis, used to support the instructional, research and public service efforts, and other University priori-ties. Significant recurring sources of the University's revenues are considered nonoperating as defined by GASB Statement No. 34, Baoic Financial StatementA

- and Management's DiscuAsion and AnalyiA - for State and Local Government., and required by GASB Statement No. 35, Basic Financial StatementA - and Management'A Discuwfion and Analy.AiA -for Public CollegeA and UniversitieA. Operating revenues in-clude tuition and fees, grants and contracts, patient services, and revenue from various auxiliary and public service functions. Nonoperating revenues include state appropriations, gifts, and investment income. Operating expenses include compensa-tion and benefits, student aid, supplies, repairs and maintenance, utilities, etc. Nonoperating expenses primarily include interest on debt obligations.

Prior to the current, fiscal year revenues from Pell grants and certain governmental grants were includ-ed in operating revenue. These revenues have been reclassified as nonoperating revenue and compara-tive information reclassified accordingly.

When both restricted and unrestricted resources are available, such resources are spent and tracked at the discretion of the department subject to donor restrictions, where applicable.

In accordance with GASB Statement No. 33, Account-ing and Financial Reporting for Nonexchange Trans-actions, the University recognizes gifts, grants, ap-propriations, and the estimated net realizable value of pledges as revenue as soon as all eligibility re-quirements imposed by the provider have been met.

Patient revenue of UUHC and the School of Medicine medical practice plan is reported net of third-party adjustments.

C. Inve~tment2 Investments are recorded at fair value in accordance with GASB Statement No. 31, Accounting and Finan-cial Reporting for Certain InveAtmentA and for Ex-ternal Investment PoolA. Accordingly, the change in fair value of investments is recognized as an in-crease or decrease to investment assets and invest-ment income. The University distributes earnings from pooled investments based on the average daily investment of each participating account or for en-dowments, distributed according to the University's spending policy.

A portion of the University's endowment portfolio is invested in "alternative investments". These invest-ments, unlike more traditional investments, gener-ally do not have readily obtainable market values and typically take the form of limited partnerships. See Note 19 for more information regarding these invest-ments and the University's outstanding commitments under the terms of the partnership agreements. The University values these investments based on audited financial statements, generally as of December 31, progressed to the University's financial statement date by taking into account investment transactions subsequent to the audited statements.

D. AllowanceA In accordance with GASB Statement No. 34, certain expenses are netted against revenues as allowances.

The following schedule presents revenue allowances for the years ended June 30, 2008 and 2007:

Revenue Allowance Tuition and fees Patient services Sales and services Auxiliary enterprises 20o8

$ 21,919,239 48,537,228 23,769 804,377 2007

$ 18,101,747 40,797,926 3,530 750,806 26

E. Inventorie.s Bookstore inventories are valued using the retail in-ventory method. All other inventories are stated at the lower of cost or market using the first-in, first-out method or on a basis which approximates cost determined on the first-in, first-out method.

F Research and Development CotýA Research and development costs of ARUP are ex-pensed as incurred. These costs for the year ended June 30, 2oo8, were approximately $8,380,000.

G. Compen~atedAbAenceu & Early Retirement Benefit.

Employees' vacation leave is accrued at a rate of eight hours each month for the first five years and increases to a rate of 16.67 hours7.75463e-4 days <br />0.0186 hours <br />1.107804e-4 weeks <br />2.54935e-5 months <br /> each month after fifteen years of service. There is no requirement to use vacation leave, but a maximum of thirty days plus one-year accrual may be carried forward at the beginning of each calendar year. Employees are re-imbursed for unused vacation leave upon termina-tion and vacation leave is expended when used or reimbursed. The liability for vacation leave at June 30, 2008, was approximately $40,801,000.

Employees earn sick leave at a rate of eight hours each month, with an accumulation limit of 1,040 hours4.62963e-4 days <br />0.0111 hours <br />6.613757e-5 weeks <br />1.522e-5 months <br />. The University does not reimburse employees for unused sick leave. Each year, eligible employees may convert up to four days of unused sick leave to vacation leave based on their use of sick leave dur-ing the year. Sick leave is expended when used.

In addition, the University may provide early retire-ment benefits, if approved by the Administration and by the Board-of Trustees, for certain employees who have attained the age of 6o with at least fifteen years of service and who have been approved for the University's early retirement program. Currently, lo0 employees participate in the early retirement program. The University pays each early retiree an annual amount equal to the lesser of 20% of the re-tiree's final salary or their estimated social security benefit, as well as health care and life insurance pre-miums, which is approximately 5o% of their early retirement salary, until the employee reaches full social security retirement age. In accordance with GASB Statement No. 47, Accounting for Termination BenefitA, the amount recognized on the financial statements was calculated at the discounted present value of the projected future costs. A discount rate of 4.052% was used and is based on the average rate earned by the University on cash management in-vestments for the fiscal year. The funding for these early retirement benefits is provided on a pay-as-you-go basis. For the year ended June 30, 2008, these ex-penditures were approximately $2,039,000.

H. Construction The Utah State Division of Facilities Construction and Management (DFCM) administers most of the construction of facilities for state institutions, maintains records, and furnishes cost information for recording plant assets on the books of the Uni-versity. Interest expense incurred for construction of capital facilities is considered immaterial and is not capitalized. Construction projects administered by DFCM are not recorded on the books of the Uni-versity until the facility is available for occupancy.

L Diiclo-Aurez Financial information for fiscal year ended June 30, 2007 is included for comparison only and is not complete. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. Complete information is available in the separately issued financial state-ments for that year.

2. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS Cash and cash equivalents consists of cash and short-term investments with an original maturity of three months or less. Cash, depending on source of receipts, is pooled, except for cash and cash equiva-lents held by ARUP and when legal requirements dic-27

tate the use of separate accounts. The cash balances are invested principally in short-term investments that conform to the provisions of the Utah Code. It is the practice of the University that the investments ordinarily be held to maturity at which time the par value of the investments will be realized.

The Utah State Treasurer's Office operates the Utah Public Treasurer's Investment Fund (PTIF) which is managed in accordance with the State Money Man-agement Act. The State Money Management Council provides regulatory oversight for the PTIF. The PTIF is available for investment of funds administered by any Utah public treasurer.

Short-term investments have original maturities longer than three months and remaining maturities of one year or less.

At June 30, 2008, cash and cash equivalents and short-term investments consisted of:

Cash and Cash Equivalents Cash

$ (3,563,463)

Money market funds 1,983,738 Time certificates of deposit 50,717,860 Commercial paper 9,436,549 Obligations of the U.S.

Government and its agencies 336,799,634 Utah Public Treasurer's Investment Fund 185,370,920 Total (fair value)

$ 580,745,238 Short-term Investments Time certificates of deposit 203,895 U.S. Agencies 59,516,091 U.S. Treasuries 368,593,698 Corporate notes 16,508,376 Total (fair value)

$ 444,822,060 3-INVESTMENTS Funds available for investment are pooled to maxi-mize return and minimize administrative cost, ex-cept for funds that are authorized by the University administration to be separately invested or which are separately invested to meet legal or donor require-ments. Investments received as gifts are recorded at fair value on the date of receipt. If fair value is not available, investments received as gifts are recorded at a nominal value. Other investments are also re-corded at fair value.

UURF receives, in exchange for patent rights, com-mon stock of newly organized companies acquiring these patents. Inasmuch as the stock is ordinarily not actively traded, the fair value is generally not ascertainable and any realization from the future sale of the stock is often uncertain. Therefore, such stock is recorded by UURF at a nominal value. Those stocks that are publicly traded are recorded at their fair value on June 30, 2008.

University personnel manage certain portfolios, while other portfolios are managed by banks, invest-ment advisors or through trust agreements.

According to the Uniform Prudent Management of Institutional Funds Act (UPMIFA), Section 51-8 of the Utah Code, the institution may appropriate for expenditure or accumulate so much of an endow-ment fund as the University determines to be pru-dent for uses, benefits, purposes, and duration for which the endowment was established.

The endowment income spending policy at June 30, 2008, is 4% of the twelve quarter moving average of the market value of the endowment pool. The spend-ing policy is reviewed periodically and any neces-sary changes are made. In general, nearly all of the University's endowment is subject to spending re-strictions.

The amount of net appreciation on investments of donor-restricted endowments available for autho-rization for expenditure at June 30, 2oo8, was ap-proximately $92,257,ooo. The net appreciation is a component of restricted expendable net assets.

28

At June 30, 2008, the investment portfolio composi-tion was as follows:

Investments U.S. Treasuries Corporate notes and bonds Asset backed securities Mutual funds Common and preferred stocks Total (fair value)

$ 139,007,485 5,675,486 79,283 425,479,000 12,684,902

$ 582,926,156

4. DEPOSITS AND INVESTMENTS The State of Utah Money Management Council (Council) has the responsibility to advise the State Treasurer about investment policies, promote mea-sures and rules that will assist in strengthening the banking and credit structure of the State, and review the rules adopted under the authority of the State of Utah Money Management Act (Act) that relate to the deposit and investment of public funds.

Except for endowment funds, the University follows the requirements of the Act (Utah Code, Section 51, Chapter 7) in handling its depository and investment transactions. The Act requires the depositing of Uni-versity funds in a qualified depository. The Act de-fines a qualified depository as any financial institu-tion whose deposits are insured by an agency of the federal government and which has been certified by the State Commissioner of Financial Institutions as meeting the requirements of the Act and adhering to the rules of the Council.

For endowment funds, the University follows the re-quirements of the UPMIFA, State Board of Regents' Rule 541, Management and Reporting of Institu-tional Inve-tmenti (Rule 541), and the University's investment policy and endowment guidelines.

Deposits Custodial Credit Risk: Custodial credit risk for de-posits is the risk that, in the event of a bank failure, the University's deposits may not be returned.

At June 30,2008, the carrying amounts of the Univer-sity's deposits and bank balances were $56,624,250 and $59,468,5O0, respectively. The bank balances of the University were insured for $2oo,ooo, by the Federal Deposit Insurance Corporation. The bank balances in excess of $200,000 were uninsured and uncollateralized, leaving $59,268,501 exposed to custodial credit risk. The University's policy for re-ducing this risk of loss is to deposit all such balances in qualified depositories, as defined and required by the Act.

Investments The Act defines the types of securities authorized as appropriate investments for the University's non-endowment funds and the conditions for making investment transactions. Investment transactions may be conducted only through qualified deposito-ries, certified dealers, or directly with issuers of the investment securities.

These statutes authorize the University to invest in negotiable or nonnegotiable deposits of qualified depositories and permitted negotiable agreements; commercial paper that is classified as "first tier" by two nationally recognized statistical rating orga-nizations, one of which must be Moody's Investors Service or Standard & Poor's; bankers' acceptances; obligations of the United States Treasury including bills, notes, and bonds; bonds, notes, and other evi-dence of indebtedness of political subdivisions of the State; fixed rate corporate obligations and variable rate securities rated "A" or higher, or the equivalent of "A" or higher, by two nationally recognized statis-tical rating organizations; shares or certificates in a money market mutual fund as defined in the Act; and the Utah State Public Treasurer's Investment Fund (PTIF).

The UPMIFA, Rule 541, and the University's endow-ment guidelines allow the University to invest en-dowment funds (including gifts, devises, or bequests of property of any kind from any source) in any of the above investments or any of the following subject to satisfying certain criteria: professionally managed pooled or commingled investment funds registered 29

with the Securities and Exchange Commission or the Comptroller of the Currency (e.g., mutual funds);

professionally managed pooled or commingled in-vestment funds created under 501(f) of the Internal Revenue Code which satisfy the conditions for ex-emption from registration under Section 3(c) of the Investment Company Act of 1940; any investment made in accordance with the donor's directions in a written instrument; and any alternative investment funds that derive returns primarily from high yield and distressed debt (hedged or non-hedged), private capital (including venture capital, private equity, both domestic and international), natural resources, and private real estate assets or absolute return and long/short hedge funds.

The PTIF is not registered with the SEC as an invest-ment company. The PTIF is authorized and regu-lated by the Act, Section 51-7, Utah Code Annotated, 1953, as amended. The Act established the Council which oversees the activities of the State Treasurer and the PTIF and details the types of authorized in-vestments. Deposits in the PTIF are not insured or otherwise guaranteed by the State, and participants share proportionally in any realized gains or losses on investments.

The PTIF operates and reports to participants on an amortized cost basis. The income, including gains and losses, net of administration fees, of the PTIF are allocated based upon the participant's average daily balance. The fair value of the PTIF investment pool is approximately equal to the value of the pool shares.

The University's participation in mutual funds may indirectly expose it to risks associated with using or holding derivatives. However, specific information about any such transactions is not available to the University.

Intere.t Rate RiAk: Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The University's policy for managing its exposure to fair value loss arising from increasing interest rates is to comply with the Act or the UPMIFA and Rule 541, as applicable. For non-endowment funds, Section 51-7-11 of the Act re-quires that the remaining term to maturity of invest-ments may not exceed the period of availability of the funds to be invested. The Act further limits the remaining term to maturity on all investments in commercial paper, bankers' acceptances, fixed rate negotiable deposits and fixed rate corporate obliga-tions to 270-365 days or less. In addition, variable rate negotiable deposits and variable rate securities may not have a remaining term to final maturity ex-ceeding two years. For endowment funds, Rule 541 is more general, requiring only that investments be made as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the endowments and by exer-cising reasonable care, skill, and caution.

As of June 30, 2oo8, the University had investments with maturities as shown in Figure j.

Figure i.

Investment Type Money market mutual funds Time cerificates of deposit Commercial paper Utah Public Treasurer's Investment Fund U.S. Treasuries U.S. Agencies Corporate notes and bonds

-Asset backed securities Mutual bond funds Investment Maturities (in years)

Fair Value 1,699,834 203,895 9,436,549 185,370,920 507,601,183 396,315,725 22,183,862 79,283 Lessthan:i 1-5 1,699,834 203,895 9,436,549 6-1o More than io 185,370,920 368,593,698 396,315,725 16,508,376

$ 139,007,485 5,670,486 79,283

$5,000 Totals Totals 123,484,325 4,484,264

$ 119,000,061

$ 1,246,375,576

$ 978,128,997

$ 149,241,518

$ 119,000,061

$5,000 30

Credit Ri~k: Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The University's policy for reducing its exposure to credit risk is to comply with the Act, the UPMIFA, and Rule 541, as previously discussed.

At June 30, 2008, the University had investments with quality ratings as shown in Figure 2.

CuAtodial Credit Ri.k: Custodial credit risk for in-vestments is the risk that, in the event of a failure of the counterparty, the University will not be able to recover the value of its investments that are in the possession of an outside party. The University's policy for reducing its exposure to custodial credit risk is to comply with applicable provisions of the Act. As required by the Act, all applicable securities purchased were deliveredversus payment and held in safekeeping by a bank. Also, as required, the own-ership of book-entry-only securities, such as U.S.

Treasury or Agency securities, by the University's custodial bank was reflected in the book-entry re-cords of the issuer and the University's ownership was represented by a receipt, confirmation, or state-ment issued by the custodial bank.

At June 30, 2oo8, the University's custodial bank was both the custodian and the investment counterparty for $871,221,8o8 of U.S. Treasury and Agency securities purchased by the University and $32,695,1oo. of U.S.

Treasury securities were held by the custodial bank's trust department but not in the University's name.

Concentration of Credit Riik: Concentration of credit risk is the risk of loss attributed to the mag-nitude of a government's investment in a single is-suer. The University's policy for reducing this risk of loss is to comply with the Rules of the Council or the UPMIFA and Rule 541, as applicable. Rule 17 of the Council limits non-endowment fund investments in a single issuer of commercial paper and corporate obligations to 5-1o% depending upon the total dollar amount held in the portfolio.

For endowments, the University, under Rule 541, is permitted to establish its own investment policy which adheres to the guidelines established by UP-MIFA. Accordingly, the University's Pool Asset Allo-cation Guidelines allocates endowment funds in the following asset classes:

Asset Class Global Marketable Equities Global Marketable Fixed Income Alternatives Target Allocation Allocation Range 45%

30%

25%

20% - 60%

25% - 50%

5% - 30%

J The University diversifies assets among multiple in-vestment managers of varying investment styles to the extent that such diversification can be expected to reduce risk without sacrificing expected invest-ment return, or that such diversification may pro-duce greater investment return without incurring any greater risk.

Figure 2.

Investment Type Money market mutual funds Time cerificates of deposit Commercial paper Utah Public Treasurer's Investment Fund U.S. Treasuries U.S. Agencies Corporate notes and bonds Asset backed securities Mutual bond funds Totals Fair Value 1,699,834 203,895 9,436,549 AAA/A-i 326,162 Quality Rating A

Unrated 1,373,672 No Risk 203,895 9,436,549 185,370,920 507,601,183 396,315,725 396,315,725 22,183,862 79,283 123,484,325

$1,246,375,576

$ 406,078,436 185,370,920

$ 507,601,183 22,178,862 79,283 5,000 123,484,325

$ 22,462,040

$ 310,233,917

$ 507,601,183 31

5. RECEIVABLES Accounts, pledges, and interest receivable include hospital patient accounts, medical services plan ac-counts, trade accounts, pledges, interest income on investments, and other receivables. Loans receiv-able predominantly consist of student loans.

Allowances for doubtful accounts are established by charges to operations to cover anticipated losses from accounts receivable generated by sales and ser-vices and student loans. Such accounts are charged to the allowance when collection appears doubtful.

Any subsequent recoveries are credited to the al-lowance accounts. Allowances are not established for pledges or in those instances where receivables consist of amounts due from governmental units or where receivables are not material in amount.

The following schedule presents receivables at June 30, 2oo8, including approximately $25,759,000 and

$56,930,000 of noncurrent loans and pledges receiv-able, respectively:

7. CAPITAL ASSETS Accounts Contracts and grants Notes Loans Pledges Interest Less allowances for doubtful accounts Receivables, net

$ 368,317,794 37,944,936 99,431 32,190,854 61,929,965 6,376,721 506,859,701 (135,394,818)

$ 371,464,883 Buildings; infrastructure and improvements, which includes roads, curbs and gutters, streets and side-walks, and lighting systems; land; equipment; and library materials are valued at cost at the date of ac-quisition or at fair market value at the date of dona-tion in the case of gifts. Buildings, infrastructure and improvements, and additions to existing assets are capitalized when acquisition cost equals or ex-ceeds $5o,ooo. Equipment is capitalized when ac-quisition costs exceed $5,ooo for the University or

$l,ooo for UUHC. All costs incurred in the acquisi-tion of library materials are capitalized. All campus land acquired through grants from the U.S. Govern-ment has been valued at $3,000 per acre. Other land acquisitions have been valued at original cost or fair market value at the date of donation in the case of gifts. Buildings, improvements, land, and equip-ment of component units have been valued at cost at the date of acquisition.

Capital assets of the University and its component units are depreciated on a straight-line basis over their estimated useful lives. The estimated useful lives of University assets extends to forty years on buildings, fifteen years on infrastructure and improvements, twenty years on library books, and from five to fifteen years on equipment. The estimated useful lives of component unit assets extend to fifty years on build-ings and improvements and from three to eight years on equipment. Land, art and special collections, and construction in progress are not depreciated.

6. DEFERRED CHARGES AND OTHER ASSETS The costs associated with issuing long-term bonds payable are deferred and amortized over the life of the related bonds using the straight-line method, which approximates the effective interest method.

In addition, goodwill associated with the purchase of certain health clinics and prepaid rent for the Huntsman Cancer Hospital are amortized using the straight-line method.

32

At June 30, 2008, the University had outstanding commitments for the construction and remodeling of University buildings of approximately $33,451,000.

Capital assets at June 30, 2oo8, are shown in Figure3.

8. PENSION PLANS AND RETIREMENT BENEFITS As required by State law, eligible nonexempt employ-ees (as defined by the U.S. Fair Labor Standards Act) of the University are covered by either the Utah State and School Contributory or Noncontributory or the Public Safety Noncontributory Retirement Systems and eligible exempt employees (as defined by the U.S. Fair Labor Standards Act) are covered by the Teachers Insurance and Annuity Association-Col-lege Retirement Equities Fund (TIAA-CREF), Fidelity Investments (Fidelity), or the Vanguard Group, Inc.

(Vanguard). Eligible employees of ARUP are covered by a separate defined contribution pension plan and a profit sharing plan.

The University contributes to the Utah State and School Contributory and Noncontributory and the Public Safety Noncontributory Retirement System (Systems) that are multi-employer, cost sharing, de-fined benefit pension plans. The Systems provide refunds, retirement benefits, annual cost of living adjustments, and death benefits to plan members and beneficiaries in accordance with retirement statutes.

The Systems are established and governed by the respective sections of Chapter 49 of the Utah Code Annotated, 1953, as amended. The Utah State Retire-ment Office Act provides for the administration of the Utah Retirement Systems and Plans under the direction of the Utah State Retirement Board (Board) whose members are appointed by the Governor. The Systems issue a publicly available financial report that includes financial statements and required supplementary information for the Systems. A copy of the report may be obtained by writing to the Utah Retirement Systems.

Plan members in the State and School Contributory Retirement System are required to contribute 6.oo%

of their annual covered salaries, all of which is paid by the University, and the University is required to contribute 9.73% of their annual salaries. In the State and School Noncontributory Retirement System and the Public Safety Noncontributory Retirement Sys-tem, the University is required to contribute 14.22%

(with an additional 1.50% to a 4 01(k) salary deferral program) and 26.75%, respectively, of plan members' annual salaries. The contribution requirements of the Systems are authorized by statute and specified by the Board and the contribution rates are actuari-ally determined.

Figure 3.

Buildings Infrastructure and improvements Land Equipment Library materials Art and special collections Beginning Balance

$ 1,310.915,276 156,032,004 17,267,135 536,739,203 148,723,428 43,518,035 Additions

$ 48,938,551 6,403,651 1,611,300 59,115,327 5,027,708 4,129,126 Retirements Ending Balance

$ 1,359,853,827 162,435,655 18,878,435 563,787,945 153,604,361 47,636,161

$ 32,066,585 146,775 11,000 Construction in progress 104.385,913 119,210.524 32,944,642 190,651,795 Total cost 2,317.580,994 244,436,187 65,169,002 2,496,848,179 Less accumulated depreciation Buildings 525,209,026 45,612,105 570,821,131 Infrastructure and improvements 85,371,495 8,933,074 94,304,569 Equipment 369,728,047 49,558,249 30,205,958 389,080,338 Library materials 88,839,919 5,761,994 94,601,913 Total accumulated depreciation 1,069,148,487 109,865,422 30,205,958 1,148,807,951 Capital assets, net

$ 1,248,432,507

$ 134,570,765

$ 34,963,044

$ 1,348,040,228 33

TIAA-CREF, Fidelity, and Vanguard provide individ-ual retirement fund contracts with each participat-ing employee. Employees may allocate contributions by the University to any or all of the providers and the contributions to the employee's contract(s) be-come vested at the time the contribution is made.

Employees are eligible to participate from the date of employment and are not required to contribute to the fund. Benefits provided to retired employees are based on the value of the individual contracts and the estimated life expectancy of the employee at re-tirement. For the year ended June 30, 2008, the Uni-versity's contribution to these defined contribution pension plans was 14.20% of the employees' annual salaries. Additional contributions are made by the University based on employee contracts. The Univer-sity has no further liability once contributions are made. Certain UUHC employees hired prior to Janu-ary 1, 2001, were fully vested as of that date. Employ-ees hired subsequent to January 1, 2oo0, are eligible to participate in the plan one year after hire date and vest after six years. The University's contribution for these health clinic employees was 3.00% of the employees' annual salaries.

The ARUP defined contribution pension and profit sharing plans provide retirement benefits for all em-ployees. Effective August 4, 2007, ARUP implement-ed a change in the defined contribution pension plan which allows employees to choose whether to contin-ue to pay into the federal social security tax system or to participate in an enhanced ARUP retirement program. For those who choose to continue to pay so-cial security taxes, ARUP makes contributions each pay period amounting to 5.oo% of their compensa-tion and ARUP continues to make matching social security tax contributions. For those who discontin-ue paying social security taxes, ARUP makes contri-butions each pay period amounting to 8.io% of their compensation and do not have any social security tax contributions made by ARUP on their behalf. All minimum service and vesting requirements relating to pension contributions have been eliminated for all employees and contributions become vested at the time the contribution is made.

Contributions to the profit sharing plan are at the discretion of ARUP and are made subject to certain tenure-based and hours-worked thresholds. Employ-ees are fully vested in the profit sharing plan after five years of service.

For the years ended June 30, 2008, 2007, and 2006, the University's contributions to the Systems were equal to the required amounts, as shown in Figure 4.

9. DEFERRED REVENUE Deferred revenue consists of summer session tuition and fees, advance payments on grants and contracts, advance ticket sales for various athletic and cultural events, and results of normal operations of auxiliary enterprises and service units.

io. FUNDS HELD IN TRUST BY OTHERS Funds held in trust by others are neither in the pos-session of nor under the management of the Uni-versity. These funds, which are not recorded on the University's financial records and which arose from contributions, are held and administered by external fiscal agents, selected by the donors, who distribute net income earned by such funds to the Figure,4.

State and School Contributory Retirement System State and School Noncontributory Retirement System Public Safety Noncontributory Retirement System TIAA-CREF-Fidelity Vanguard Pension plan Profit sharin*g plan Total contributions 2008 1,555,310 25,209,056 316,579 63,247,520 7,457,205 1,808,724 7,280,524 7,036,696

$ 113,911,614 2007 1,581,565 24,259,347 328,163 70,903,307 3,498,662 6,050,982

$ 106,622,026 2oo6

$ 1,489,378 22,257,303 289,291 65,126,133 3,140,908 4,723,787

$ 97,026,800 34

University, where it is recorded when received. The fair value of funds held in trust at June 30, 2o08, was

$90,822,788.

In addition, certain funds held in trust by others are comprised of stock, which is reported at a value of

$9,622,820 as of June 30, 2oo8, based on a predeter-mined formula. The fair value of this stock as of June 30, 2008 cannot be determined because the stock is not actively traded.

ni. RISK MANAGEMENT The University maintains insurance coverage for commercial general liability, automobile, errors and omissions, and property (building and equipment) through policies administered by the Utah State Risk Management Fund. Employees of the Univer-sity and authorized volunteers are covered by work-ers' compensation and employees' liability through the Workers' Compensation Fund of Utah.

In addition, the University maintains self-insurance funds for health care, dental, and auto/physical dam-age, as well as hospital and physicians malpractice liability self-insurance funds. The malpractice li-ability self-insurance funds are held in trust with an independent financial institution in compliance with Medicare reimbursement regulations. Based on an analysis prepared by an independent actuary, the administration believes that the balance in the trust funds as of June 30, 2oo8, is adequate to cov-er any claims incurred through that date. The Uni-versity and UUHC have a "claims made" umbrella malpractice insurance policy in an amount consid-ered adequate by its respective administrations for catastrophic malpractice liabilities in excess of the trusts' fund balances.

The estimated self-insurance claims liability is based on the requirements of GASB Statement No.

lo, Accounting and Financial Reporting for RiLAk Fi-nancing and Related Insurance IA&ue., as amended by GASB Statement No. 30, RiLk Financing Omnibus, which requires that a liability for claims be reported if information prior to the issuance of the financial statements indicates that it is probable that a li-ability has been incurred at the date of the financial statements and the amount of the loss can be rea-sonably estimated.

Changes in the University's estimated self-insur-ance claims liability for the years ended June 30 are shown in Figure 5.

The University has recorded the investments of the malpractice liability trust funds at June 30, 2008, and the estimated liability for self-insurance claims at that date in the Statement of Net Assets. The in-come on fund investments, the expenses related to the administration of the self-insurance and mal-practice liability trust funds, and the estimated pro-vision for the claims liability for the year then ended are recorded in the Statement of Revenues, Expens-es, and Changes in Net Assets.

12. INCOME TAXES The University, as a political subdivision of the State, has a dual status for federal income tax purposes.

The University is both an Internal Revenue Code (IRC) Section 115 organization and an IRC Section 501(c)(3) charitable organization. This status ex-empts the University from paying federal income tax on revenue generated by activities which are directly related to the University's mission. This exemption does not apply to unrelated business activities. On these activities, the University is required to report and pay federal and state income tax.

Figure 5.

Estimated claims liability - beginning of year Current year claims and changes in estimates Claim payments, including related legal and administrative expenses Estimated claims liability - end of year 2oo8

$ 66,157,336 147,574,679 (143,202,964)

$ 70,529,051 2007

$ 54,505,514 153,046,890 (141,395,068)

$ 66,157,336 35

UURF is not subject to income taxes under Section 501(c)(3) of the Internal Revenue Code.

ARUP is also not subject to income taxes based on a private letter ruling from the Internal Revenue Ser-vice stating that certain income providing an essen-tial governmental function is exempt from federal in-come taxes under Internal Revenue Code Section 115.

13. HOSPITAL REVENUE A. Net Patient Service Revenue UUHC reports net patient service revenue at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors.

Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Charity care is excluded from net patient service revenue.

UUHC has third-party payor agreements with Medi-care and Medicaid that provide for payments to UUHC at amounts different from established rates.

Inpatient acute care services rendered to Medicare and Medicaid program beneficiaries are paid at pro-spectively determined rates per discharge. These rates vary according to a patient classification sys-tem that is based on clinical, diagnostic, and other factors. Outpatient services rendered to Medicaid program beneficiaries and certain outpatient ser-vices and defined capital costs related to Medicare beneficiaries are paid on a cost reimbursement ba-sis. Medicare reimbursements are based on a tenta-tive rate with final settlement determined after sub-mission of annual cost reports by UUHC and audits thereof by the Medicare fiscal intermediary.

The estimated final settlements for open years are based on preliminary cost findings after giving consid-eration to interim payments that have been received on behalf of patients covered under these programs.

B. Charity Care UUHC maintains records to identify and monitor the level of charity care it provides. Based on estab-lished rates, the charges foregone as a result of char-ity care during the year ended June 30, 2oo8, were approximately $27,829,000.

14. LEASES A.

Revenue UURF receives lease revenues from noncancellable sublease agreements with tenants of the Research Park and from tenants occupying six buildings owned by UURF. The lease revenue to be received from these noncancellable leases for each of the subsequent five years is $6,5oo,ooo, and for eighteen years there-after, comparable annual amounts. Most lease rev-enue is subject to escalation based on changes in the Consumer Price Index (CPI). Since such escalations are dependent upon future changes in the CPI, these escalations, if any, are not reflected in the minimum noncancellable lease revenues listed above.

At June 30, 2oo8, the historical cost of land and buildings held for lease and the related accumulated depreciation were $39,153,488 and $12,323,859, re-spectively.

B. Commitments The University leases buildings and office and com-puter equipment. Capital leases are valued at the present value of future minimum lease payments.

Assets associated with the capital leases are re-corded as buildings and equipment together with the related long-term obligations. Assets currently financed as capital leases amount to $7,420,000 and $88,o65,655 for buildings and equipment, re-spectively. Accumulated depreciation for these buildings and equipment amounts to $556,5oo and

$50,024,845, respectively. Operating leases and re-lated assets are not recorded in the Statement of Net Assets. Payments are recorded as expenses when incurred and amount to approximately $26,309,626 for the University and $5,1o8,023 for component 36

units for the year ended June 30, 2008. Total oper-ating lease commitments for the University include approximately $12,049,426 of commitments to com-ponent units.

Included in the above component unit tease expens-es are leases by ARUP for its principal laboratory and office buildings, under long-term agreements, from a real estate investment trust in which one of its directors is a shareholder. The agreements have initial terms of fifteen years with two five-year re-newal options and include rent increases of two to three percent annually in the sixth and eleventh years from the commencement of the lease. Total lease payments for the year ended June 30, 2008 were $4,811,812.

Future minimum lease commitments for operating and capital leases as of June 30, 2008 are shown in Figure 6.

15. BONDS PAYABLE AND OTHER LONG-TERM LIABILITIES The long-term debt of the University consists of bonds payable, certificates of participation, capital lease obligations, compensated absences, and other minor obligations.

The State Board of Regents issues revenue bonds to provide funds for the construction and renovation of major capital facilities and the acquisition of capital equipment for the University. In addition, revenue bonds have been issued to refund other revenue bonds and capitalized leases.

The revenue bonds are special limited obligations of the University. The obligation for repayment is solely that of the University and payable from the net revenues of auxiliary enterprises and UUHC, stu-dent building fees, land grant income, and recovered indirect costs. Neither the full faith and credit nor the taxing power of the State or any other political subdivision of the State is pledged to the payment of the bonds, the distributions or other costs associ-ated with the bonds.

In 1985, the State Board of Regents authorized the University to issue Variable Rate Demand Industrial Development Bonds (University Inn Project - 1985 Series) for the Salt Lake City Marriott - University Park Hotel, separate from the University. The bonds are payable from the revenues of the hotel and the University has no responsibility or commitment for repayment of the bonds. The outstanding balance of the bonds at June 30, 2008, is $5,6oo,ooo.

Figure 6.

Fiscal Year 2009 2010 2011 2012 2013 2014-2018 2019-2023 2024 - 2028 2029 - 2029 Operating

$ 25,259,903 22,341,808 19,829,233 16,963,371 Capital

$ 14,208,656 11,962,653 9,784,566 7,732,049 5,306,211 4,911,628 2,883,041 144,378 14,622,137 43,714,329 20,765,407 5,317,368 31,964

$ 168,845,520 Total future minimum lease payments Amount representing interest Present value of future minimum lease payments 56,933,182 (6,462,427)

$ 50,470,755 37

The Series 19 9 7 A Auxiliary and Campus Facilities Revenue Bonds currently bear interest at a weekly rate in accordance with the bond provisions. When a weekly rate is in effect, the Series 1997A Bonds are subject to purchase on the demand of the holder at a price equal to principal plus accrued interest on sev-en days notice and delivery to the University's tender agent. The University's remarketing agent is autho-rized to use its best efforts to sell the repurchased bonds at a price equal to ioo percent of the principal amount by adjusting the interest rate. If any Series 19 9 7A Bonds cannot be remarketed to new holders, the tender agent is required to draw on an irrevoca-ble standby bond purchase agreement to pay the pur-chase price of the bonds delivered to it. The standby bond purchase agreement is with JPMorgan Chase Bank and is valid through July 30, 2o0o. Through June 30, 2008, no funds have been drawn against the standby bond purchase agreement. The interest re-quirement for the Series 199 7 A Bonds is calculated using an annualized interest rate of i.6o%, which is the rate in effect at June 30, 2008.

The Hospital Revenue Bonds Series 2oo6B currently bear interest at a daily rate in accordance with the bond provisions. When a daily rate is in effect, the Series 2oo6B Bonds are subject to purchase on the demand of the holder at a price equal to principal plus accrued interest. The University's remarketing agent is authorized to use its best efforts to sell the repurchased bonds at a price equal to ioo percent of the principal amount plus accrued interest. If any Series 2oo6B bonds cannot be remarketed to new holders, the tender agent is required to draw on an irrevocable standby bond purchase agreement to pay the purchase price of the bonds delivered to it. The standby bond purchase agreement is with DEPFA Bank and is valid through October 25, 2013. Through June 30, 2008, no funds have been drawn against the standby bond purchase agreement. The interest re-quirement for the Series 2oo6B Bonds is calculated using an annualized interest rate of 7.00%, which is the rate in effect at June 30, 2008.

The University has received funding from the U. S.

Department of Health and Human Services, through the Utah State Department of Health (Department),

for medical education. The receipt of such funds was inconsistent with the timing requirements of the plan administered by the Department. The Depart-ment has requested that those funds be returned during fiscal year 2009. Accordingly, the University has recorded a current liability for the amount due the Department in the amount of $32,830,770.

38

The following schedule lists the outstanding bonds payable and certificates of participation of the University at June 30, 2008:

Date Maturity Issued Date Interest Rate Original Issue Issue Auxiliary and Campus Facilities Series 1987A-Refunding Series 1997A - Revenue Series 1998A - Revenue & Refunding Series 1999A - Revenue Series 2001 - Revenue Series 2005A - Refunding Hospital Series 1998A - Revenue Series 2005A - Revenue & Refunding Series 2006A - Revenue & Refunding Series 2006B - Revenue Research Facilities Series 2004A - Revenue Series 2005A - Revenue Series 2005B - Refunding Series 2007A - Revenue Certificates of Participation Series 2007 Current Balance Liability 6/3o/2oo8 3/1/87 7/31)/97 7/1/98 5/1/99 7/18/01 8/2/05 6/1/98 7/14/05 10/26/06 10/26/06 6/30/104 2/15/05 6/07/05 6/28/07 2014 2027 2016 2014 2021 2021 2013 2018 2032 2032 2019 2025 2020 2022 3.750% - 6.750%

Variable 4.100% - 5.250%

4.000% - 4.800%

3.500% - 5.125%

3.000% - 5.000%

5.250% - 5.375%

4.500%- 5.000%

4.000% - 5.250%

Variable 3.000% - 4.700%

3.000% - 5.000%

3.000% - 5.000%

4.600% - 4.740%

$ 11,140,000' 52,59(,000 120,240,000 5,975,000 2,755,000 42,955,000 25,020,000 30,480,000 77,145,000 20,240,000 9,685,000 5,515,000 20,130,000 10,000,000 235,000.

1,190,000 22,972 442,267 118,698 2,703,056 3,232,594 71,675 108,382 552,279 214,885 1,475,308 495,000 1,050,000 10,000,000 53,687,274 2,982,234 2,092,173 42,961,100 3,232,594 32,326,434 82,125,098 20,240,000 7,565,902 5,060,896 16,742,019 9,420.00 4/3/07 2027 4.000% - 5.500%

42,450,000 721,730 41,589.777 Total

$ 11,583,846

$ 331,075,501 UURF has purchased three buildings with two mortgages that are guaranteed by the University. The remaining amounts of the mortgages are $5,755,536 at 8.87% interest and $2,828,953 at 7.15% interest. The mortgages will be paid off on April 1, 2o20 and September i, 2o21, respectively. In addition, UURF agreed to bear 42.04% of the cost to renovate the building at 417 Wakara Way for the Health Science Center. The remaining balance of debt related to those costs is $3,167,714 at interest rates ranging from 3.00% to 4.70%.

The following schedule summarizes the changes in long-term liabilities for the year ended June 30, 2oo8:

Beginning Balance Additions Bonds payable Certificates of participation Capital leases payable Notes and contracts payable

$ 302,423,548 42,677,861 55,277,595 15.549,775 415,928,779 41,632,191 96,699,286

$ 554,260,256 Total long-term debt Compensated absences Deposits & other liabilities Total long-term liabilities

$ 20,389,309 849,271 21,238,580 31,578,884 126,438,838

$ 179,256,302 Reductions

$ 12,937,824 1,088,084 25,196,149 1,185,005 40,407,062 29,143,491 87,346,301

$ 156,896,854 Ending Balance

$ 289,485,724 41.589,777 50,470,755 15,214,041 396,760,297 44,067,584 135,791,823

$ 576,619,704 Current Portion

$ 10,862,116 721,730 12,533,154 1,379,715 25,496,715 4,966,130 123,174,904

$ 153,637.749 39

Maturities of principal and interest requirements for long-term debt payable are as follows:

Payments Fiscal Year Principal Interest 2009

$ 25,496,715

$ 18,393,270 2010 24,722,221 17,340,647 2011 25,464,800 16,309,694 2012 22,277,604 15,264,687 2013 20,600,783 14,360,831 2014-2018 82,674,286 59,966,793 2019-2023 77,765,066 40,217,701 2024 -2028 75,509,695 21,769,999 2029 -2032 42,249,127 3,901,443 Total

$ 396,760,297

$ 207,525,065 Interest related to bonds systems with pledged reve-nues amounts to $173,844,181 and is included in the interest amounts in the above schedule.

16. RETIREMENT OF DEBT In prior years, the University defeased certain reve-nue bonds by placing the proceeds of new bonds and various bond reserves in irrevocable trusts to pro-vide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the University's financial statements. The total prin-cipal amount of defeased bonds held in irrevocable trusts at June 30, 2008, is $58,540,000.

17. FUNCTIONAL CLASSIFICATION OF EXPENSES The following schedule presents operating expenses by functional classification for the year ended June 30, 2008:

Function Instruction Research Public service Academic support Student services Institutional support Operation & maintenance of plant Student aid Other Hospital Total Amount (in thousands) 282,156 212,235 416,931 78,307 20,252 63,929 56,004 38,588 442,392 666,246

$ 2,277,040

18. PLEDGED BOND REVENUE The University issues revenue bonds to provide funds for the construction and renovation of ma-jor capital facilities and the acquisition of capital equipment for the University. Investors in these bonds rely solely on the net revenue pledged by the following activities for the retirement of outstand-ing bonds payable.

Auxiliary EnterpriLe6 - is comprised of spe-cific auxiliary enterprises, namely: University Bookstore, Housing and Residential Education, University Student Apartments, Commuter Ser-vices, Jon M. Huntsman Center, Rice-Eccles Sta-dium, and the Olpin Student Union Building.

These auxiliaries provide on-campus services for the benefit of students, faculty and staff. In addition to the net revenues of these auxiliaries, student building fees, state land grant income and a subsidy from the federal department of Housing and Urban Development are pledged to the retirement of all Auxiliary Campus and Fa-cility bonds.

Univernity of Utah Ho.pitalA & Clinics - is com-prised of the University Hospitals, the Universi-ty Neuropsychiatric Institute, and other clinics that provide health and psychiatric services to the community.

40

Reimbursed Overhead - is the revenue generated by charging approved facilities and administra-tion rates to grants and contracts.

Figure 7 presents the net revenue pledged to the appli-cable bond system and the principal and interest paid for the year ended June 30, 2008.

19. COMMITMENTS AND CONTINGENCIES Under the terms of various limited partnership agreements approved by the Board of Trustees or by University officers, the University is obligated to make periodic payments for advance commitments to venture capital and private equity investments. As of June 30, 2008, the University had committed, but not paid, a total of $17,659,128 in funding for these alternative investments.

2o. SUBSEQUENT EVENTS On October 7,2008, the University issued $9,36o,ooo of Research Facilities Revenue Refunding Bonds, Series 2oo8A. Principal on the bonds is due annu-ally commencing April i, 2009 through April i, 2022.

Bond interest is due semiannually commencingApril 1, 2009 at rates ranging from 3.25% to 5.00%. Pro-ceeds from these bonds will be used to fully refund Research Facilities Revenue Bonds, Series 200 7A.

The financial markets have experienced volatility and downward pressure on asset value since June 30, 2008, which has affected the University's invest-ment portfolio.

21. PRIOR PERIOD ADJUSTMENT In fiscal year 2002, the State of Utah issued bonds to finance construction of the Huntsman Cancer Hos-pital. The University entered into an operating lease agreement with the State where the lease payments were equal to the debt service of the bonds. Lease ex-pense was recorded on a cash basis but should have been amortized over the life of the bonds.

In fiscal year 2oo8, the University determined that the lease transaction had been recorded incorrectly resulting in a prior period adjustment to beginning net assets. Because fiscal year 2007 amounts are presented, for comparison only, the adjustment was made to fiscal year 2007 beginning net assets and operating expenses. Operating expenses were in-creased in fiscal year 2007 by $517,918.

The adjustments of $18,i56,16o reduced fiscal year 2007 beginning net assets from $2,073,023,227 to $2,054,867,o67.

A corresponding liability of

$18,674,079 was also recorded for the fiscal year 2007 restatement. Ending net assets for fiscal year 2007 were previously reported as $2,536,158,678, but have likewise been reduced by $18,674,079 to reflect this adjustment and are reported as $2,517,484,599 in the Statement of Net Assets and the Statement of Revenues, Expenses, and Changes in Net Assets.;

Figure 7.

Revenue Bond Systems Auxiliary & Campus Facilities Hospital Research Facilities Operating revenue Nonoperating revenue

$ 65,294.285 5,629,038

$ 768,272,427 7,629,076

$ 59,857,357 Total revenue 70,923,323 775,901,503 59,857,357 Expenses Operating expenses 54,067,211 705,370,663 49,698,404 Nonoperating expenses 193,339 Total expenses 54,067,211 705,564,002 49,698,404 Net pledged revenue

$ 16,856,112

$ 70,337,501

$ 10,158,953 Principal paid and interest expense

$ 11,045,819

$9,175,277

$7,975,198 41

THE UNIVERSITY OF UTAH I Governing Board. and Officer.

UTAH STATE BOARD OF REGENTS led H. Pitcher Chair Bonnie Jean Beesley Vice Chair Jerry C. Atkin Janet A. Cannon Rosanita Cespedes France A. Davis Katharine B. Garff Greg W. Haws Meghan Holbrook David 1. Jordan Nolan E. Karras Robert S. Marquardt Anthony W. Morgan Basim Motiwala Marlon 0. Snow Teresa L. Theurer Joel D. Wright John H. Zenger William A. Sederburg CommisAioner of Higher Education BOARD OF TRUSTEES Randy L. Dryer Chair H. Roger Boyer Vice Chair Timothy B. Anderson C. Hope Eccles Clark D. Ivory Michele Mattsson Scott S. Parker Patrick Reimherr Lorena Riffo-Jenson James M. Wall UNIVERSITY ADMINISTRATION Michael K. Young Pre-Aident A. Lorris Betz Senior Vice President for Health ScienceA David W. Pershing Senior Vice Pre-Aidentfor Academic AffairA Jack W. Brittain Vice PreAident for Tech Venture Development Arnold B. Combe Vice PreAidentforAdministrative Service-A Fred C. Esplin Vice Pre.Aident for InAtitutional Advancement Joan E. Gines Interim Vice Pre-Aident for Human ReAourceA Stephen H. Hess Chief Information Officer John K. Morris Vice PreAident/General Coun.Ael Thomas N. Parks Vice PreAident for ReAearch Barbara H. Snyder Vice PreAident for Student AffairA Kim Wirthlin Vice PreAident for Government RelationA FINANCIAL AND BUSINESS SERVICES Jeffrey J. West A~A.ociate Vice PreAident for Financial and BuAineAA ServiceA Theresa L. Ashman Controller/Director Financial Management Stephen P. Allen AAaociate Director for Financial Accounting and Reporting Barbara K. Nielsen A-Aociate Director for Compliance Accounting and Reporting Spencer F. Eccles Treo~urer Laura Snow Secretary 42

ANNUAL FINANCIAL REPORT PREPARED BY; The University of Utah I Controller's Office 201 South Presidents Circle, Room 408 1 Salt Lake City, Utah $4112-9023 (801) 581-5077 1 Fax (801) 585-5257 UINIII I¶

©t U1J¶N

THE UNIVERSITY OF UTAH

t I

MeAAage from the PreAident As Utah's flagship institution of higher education, the University of Utah stands tall among the nation's top universities. The University's "reach" is vast-posi-tively influencing intellectual, economic, and cultural life for all Utah's citizens and communities, and indeed for countless people throughout the nation and world. Our international focus on research and teaching; our interdisciplinary infrastructure; and our centers of excellence in business, science, law, medicine, technology, and the arts are contributing to the greater good. In addition, new and evolving partnerships on campus and with communities and state govern-ment are creating world-class synergy while simultaneously enhancing student engagement. Together, this sense of academic synergy is empowering us to meet the challenges presented by an ever-shrinking globe and to take full advantage of the extraordinary opportunities this changing world offers.

The extent of the University's reach and the synergism it fosters are perhaps best epitomized in the recent announcement that Dr. Mario R. Capecchi, distinguished professor of human genetics and biology at the University of Utah's Eccles Institute of Human Genetics and a Howard Hughes Medical Institute Investigator, has won the 2007 Nobel Prize in Physiology or Medicine. The prize recognizes Dr.

Capecchi's pioneering development of a gene-targeting technique that has revolutionized the study of mam-malian biology and allowed the creation of animal models for hundreds of human diseases. His groundbreaking work will have an incalculable impact on generations to come-enabling people across the globe to live healthi-er, longer, and more productive lives. Upon receiving notification of this award, Dr. Cappechi stated that "this is a tremendous honor for our University, our Department of Human Genetics, for all the members of my laborato-ry, past and present who have contributed to this work."

We celebrate this pinnacle of scientific achievement for one of our own, and recognize that it resulted from years of dedicated work and collaboration that was, at the time, less widely known. There are many great examples of other promising, but less widely known, projects and initiatives taking place throughout the University-in class-rooms, libraries, laboratories, clinics, and offices. We are working collectively to improve the future. Of numer-ous examples that could be cited, I highlight just two:

We are in the midst of a University-wide initiative to reach out to former U students who have completed most of their coursework but-for whatever reasons-have not completed their bachelor's degrees. This ini-tiative provides academic advising, offers individualized connections with academic programs and depart-ments, and perhaps most important, makes available a team of University agencies that can identify finan-cial resources, child care options, and career opportunities to facilitate success.

We have identified more than 4,000 students who, in the last lo years, completed 90 or more credits at the University, but did not complete their degree. We are seeking them out and inviting them back. They deserve the opportunity to reach their dreams.

We are also in the midst increasing our commitment to a sustainable environment in new and exciting ways. In the academic realm, we have augmented opportunities for students and faculty to be involved in environmental issues and dialogue. In addition to an undergraduate Environmental Studies program, an Environmental Communication division within the Communication Department, and the Wallace Stegner Center, we have established a new Environmental Humanities graduate program. After completing this program, graduates are empowered with the experience and knowledge to enter a number of fields-aca-2

demic, governmental, media, legal, and business-that require expertise in environmental theory, sustain-ability, and policy.

We havealso established an Office of Sustainability to support our commitment to becoming a more sus-tainable campus. University students played a key role in instigating and writing a proposal for establish-ment of this office. The office will be a focal point for promoting practices and policies, such as the exist-ing recycling and utility conservations programs, to help the University operate more efficiently and reduce the U's impact on both the natural environment and the surrounding community. It will produce a baseline ecological footprint analysis, identify future sustainability targets, and will also promote sustain-ability-related curriculum while working toward use of the campus itself as a laboratory for sustainability in teaching and research.

I am pleased to report that the University remains in good financial condition, thanks to the efforts and generos-ity of a broad community of students, faculty, administrators, staff, alumni, and friends. I believe the accompa-nying statements detailing our assets, revenues,, endowments, investments and other financial statistics pres-ent a positive picture. Like any picture, however, it represents a limited view of its subject. As you review this report I urge you to also contemplate the extraordinary enterprise it represents. The University of Utah is dedi-cated in the fullest sense to the greater good through teaching, research, and public service. Its reach is truly astounding.

3

Austo UT STATE OF UTAH DEPUTY STATE AUDITOR:

Office of the State Auditor Joe Christensen, CPA UTAH STATE CAPITOL COMPLEX

'...EAST OFFICE BUILDING, SUITE E3 10 FINANCIAL AUDIT DIRECTORS:

P.O. BOX 142310 H. Dean Eborn, CPA SALT LAKE CITY, UTAH 84114-2310 Deborah A. Empey, CPA (801) 538-1025 Stan Godfrey, CPA Fn G. Johnson, CPA Jon T. Johnson, CPA AH STATE AUDITOR Independent State Auditor's Report To the Board of Trustees, Audit Committee, and Michael K. Young, President University of Utah We have audited the accompanying basic financial statements of the University of Utah (hereinafter referred to as the "University"), a component unit of the State of Utah, as of and for the year ended June 30, 2007, as listed in the table of contents. These financial statements are the responsibility of the University's management.

Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of the University of Utah, Hospitals and Clinics or the University's blended component units, which represent approximately 21% ($688,998,000) of total assets and 42% ($1,006,499,000) of total revenues of the University.

Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for the University of Utah Hospitals and Clinics and the component units, is based on the reports of the other auditors. The prior year partial comparative information has been derived from the University's 2006 financial statements and, in our report dated September 29, 2006, we expressed an unqualified opinion, based on our audit and the reports of other auditors, on the financial statements.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

The financial statements of the blended comfponent units were not audited in accordance with Government Auditing Standards. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the University as of June 30, 2007, and the changes in financial position and cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.

4

In accordance with Government Auditing Standards, we have also issued our report dated October 26, 2007 on our consideration of the University's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

The accompanying management's discussion and analysis, as listed in the table of contents, is not a required part of the financial statements but is supplementary information required by accounting principles generally accepted in the United States of America.

We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the inform/ation and express no opinion on it.

/

Auston G. Johnson, C Utah State Auditor October 26, 2007 5

t

INTRODUCTION The following discussion and analysis provides an overview of the financial position and activities of the University of Utah (University) for the year ended June 30, 2007, with selected comparative information for the year ended June 30, 2oo6. This discussion has been prepared by management and should be read in conjunction with the financial statements and the notes thereto, which follow this section.

The University is a comprehensive public institution of higher learning with approximately 28,600 students, 2,300 faculty members and more than 2o,ooo supporting staff.

The University offers a diverse range of degree programs from baccalaureate to post-doctoral levels, through a framework of 15 schools, colleges and divisions, and contributes to the state and nation through related research and public service programs.

The University also maintains a prestigious health care complex through its University of Utah Hospitals and Clinics (UUHC). The UUHC consists of three hospitals and numerous specialty clinics. The UUHC is an integral part of the University's health care system that also includes the University's School of Medicine and the Colleges of Health, Nursing, and Pharmacy.

The University's health care system has a tradition of excellence in teaching and advancement of medical science and patient care-consistently ranking among the best health care systems in the western United States.

The University consistently ranks as one of the nation's top universities by various measures of quality, both in general academic terms and in terms of strength of offerings in specific academic disciplines and professional subjects.

Excellence in research is another crucial element in the University's high ranking among educational institutions. Research is central to the University's mission and permeates its schools and colleges.

In addition to the academic schools, colleges, and departments, the University operates the University of Utah Research Foundation (UURF), a separately incorporated entity that specializes in applied research, the transfer of patented technol-ogy to business entities, leasing and administra-tion of Research Park (a research park located on land owned by the University), and the leasing of certain buildings. Also, a wholly-owned, separate-ly incorporated enterprise, the Associated Regional and University Pathologists, Inc. (ARUP) provides pathology services to regional and national customers.

7

FINANCIAL HIGHLIGHTS The University's financial position remained strong at June 30, 2007, with assets of $3.3 billion and total liabilities of $.7 billion. Net assets, which represent the residual interest in the University's assets after liabilities are deducted, increased by

$463.1 million to $2.5 billion at June 30, 2007.

Changes in net assets represent the total activity of the University, which results from all revenues, expenses, gains and losses, and are summarized for the years ended June 30, 2007 and 2006 in Figure i.

Fiscal year 2007 revenues before change in fair value of investments increased 17.3%, or $371.9 million, while expenses increased 8.o%, or $157.0 million. This resulted in a net gain before changes in fair value of investments of $398.0 million for fiscal year 2007, as compared to $183.1 million for fiscal year 2006.

The University invests its endowment funds to maximize total return over the long term, within an appropriate level of risk. The success of this long-term investment strategy is evidenced by returns averaging 7.7% during the past ten years.

USING THE FINANCIAL STATEMENTS The University's financial report is prepared in accordance with Governmental Accounting Standards Board (GASB) principles and includes three financial statements: the Statement of Net Assets; the Statement of Revenues, Expenses, and Changes in Net Assets; and the Statement of Cash Flows.

Revenues and expenses are categorized as operat-ing or nonoperating and other net asset additions as capital contributions or additions to permanent endowments. Significant recurring sources of the University's revenues, including state appropria-tions, gifts and investment income, are considered nonoperating, as defined by GASB Statement No.

34, Basic Financial Statement6 and Manaqement'i Discu,"ion and Analy6i, -for State and Local GovernmentA. Nonoperating revenues totaled $480.7 million and $342.5 million for the years ended June 30, 2007 and 2006, respectively.

Nonoperating expenses, which include interest expense, totaled $30.9 million and $33.6 million for the years ended June 30, 2007 and 2006, respectively.

Also, as required by GASB Statement No. 34, schol-arships and fellowships applied to student accounts are shown as a reduction of student tuition and fee revenues, while stipends and other payments made directly to students are presented as scholarship and fellowship expenses. For the years ended June 30, 2007 and 2006, scholarship and fellowship expenses totaled $23.8 million and

$21.6 million, respectively. In addition, scholar-ships and fellowships in the amount of $18.9 mil-lion and $17.5 million for the years ended June 30, 2007 and 2006, respectively, are reported as a reduction of tuition and fees and auxiliary enter-prises revenue.

Other appropriate revenue items have also been reduced by the allowance for uncollectible amounts which is estimated each fiscal year.

Figure 1.

Total revenues before change in fair value of investment Total expenses Increase in net assets before change in fair value of investments 2007 2006 (in thousands)

$2,521,256

$2,149,334 2,123,266 1,966,26 397,990 183,068 Increase in fair value of investments Increase in net assets 65,146

$ 463,136 27,250

$ 210,318 8

STATEMENT OF NET ASSETS The Statement of Net Assets presents the finan-cial position of the University at the end of the f is-cal year and includes all assets and liabilities of the University.

The difference between total assets and total liabilities is net assets and is one indicator of the current financial condition of the University, while the change in net assets is an indicator of whether the overall financial condi-tion has improved or worsened during the year.

Assets and liabilities are generally measured using current values except for capital assets, which are stated at historical cost less an allowance for depreciation. A summarized com-parison of the University's assets, liabilities and net assets at June 30, 2007 and 2oo6 is shown in Figure 2.

A review of the University's Statement of Net Assets at June 30, 2007 and 2006, shows that the University continues to build upon its strong financial foundation. This strong financial posi-tion reflects the prudent utilization of its finan-cial resources, including careful cost controls, management of its endowment funds, utilization of debt and adherence to its long range capital plan for the maintenance and replacement of the physical plant.

Current assets consist primarily of cash, operat-ing investments, trade receivables and invento-ries. Current assets represent approximately 7.6 months of total operating expenses (excluding depreciation).

Current cash and investments totaled $937.5 million at June 30, 2007 and $822.9 million at June 30, 2oo6.

Net receivables increased from $233.2 million at June 30, 2006 to

$273.4 million at June 30, 2007.

Current liabilities consist primarily of trade accounts, accrued compensation, deposits, and other liabilities, which totaled $301.5 million at June 30, 2007, as compared to $270.2 million at June 30, 2oo6.

Current liabilities also include deferred revenue, and the current portion of bonds payable. Total current liabilities increased

$31.3 million during fiscal year 2007.

Figure 2, Current assets Noncurrent assets Endowment and other investments Receivables Capital assets, net Other Total assets Current liabilities Noncurrent liabilities Total liabilities Net assets 2007 2006 (in thousands)

$1,254,949

$1,094,249 684,983 69,522 1,248,432 17,406 3,275,292 301.528 437,605 739,133

$2,536,159 474,858 51,985 1,137,791 18,620 2,777,503 270,175 434,305 704,480

$2,073,023 9

ENDOWMENT AND SIMILAR INVESTMENTS The University's endowment funds consist of true endowments, term endowments, and quasi-endow-ments. True endowments (also known as perma-nent endowments) are those funds received from donors with the stipulation that the principal remain inviolate and be invested in perpetuity to produce income that is to be expended for the pur-poses specified by the donor. Term endowment funds are similar to true endowments, except that, upon the passage of a stated period of time or the occurrence of a particular event, all or part of the principal may be expended. Quasi-endowments consist of institutional funds that have been allo-cated by the University for long-term investment purposes, although such funds are not subject to donor restrictions requiring the University to pre-serve the principal in perpetuity. Programs sup-ported by endowment funds include scholarships, fellowships, professorships, research efforts and other important programs and activities.

The University has implemented investment guidelines for the University's Endowment Pool that are designed to maximize long-term results.

The assets are strategically allocated to provide for broad diversification of the investments with a long-term goal of maximizing returns within acceptable risk levels for investment of endow-ment funds. Endowment funds that are invested in the University's endowment pool are invested on a unit basis similar to mutual funds where new dol-lars buy shares in the pool.

Fiscal year 2007 represented the end of a very good five year period with respect to investment per-formance for the University's endowment funds.

The five year average annualized return was 11.5%

through the end of the fiscal year. Prudent spend-ing and the structure of the University's portfolio should minimize the impact of any short term mar-ket swings. For the year ended June 30, 2007, the University of Utah endowment pool returned 17.0%

compared to 9.6% for the year ended June 30, 2006.

These results reflect the heavy weighting of equi-ties in the asset allocation of the pool and compare favorably to broad indexes such as the S&P 5oo and Lehman Brothers Aggregate Bond (2o.6% gain and 6.1% gain, respectively, for fiscal year 2007).

The net gain on the endowment pool for the year ended June 30, 2007 totaled $52.6 million com-pared to a gain of $24.6 million for the year ended June 30, 2oo6.

10

Payout from the endowment pool is subject to a spending policy which determines a distribution rate that will be used to allocate funds to University departments based on the total market value of the pool. The purpose of the spending pol-icy is to establish a distribution rate that over time will generate returns adequate to continue support for future expenses in perpetuity assuming moder-ate levels of inflation. During the year ended June 30, 2007, the spending policy was 4.0% of the twelve quarter moving average of unit market val-ues.

The endowment pool is managed on a total return basis where funds available for distribution are derived from dividends earned, interest and unre-alized gains. While the endowment pool earned

$11.9 million in fiscal year 2007, the University dis-tributed $13.6 million to operations. The differ-ence of $1.7 million was allocated from unrealized gains.

Since endowment funds are invested for long-term results rather than short-term annual returns, it is important to reflect on the longer investment hori-zon. Over the past ten years, the University's endowment pool has earned an average total return of 7.7%, paid out an average of 4.1%, and reinvested the balance representing an average of 3.6%. The reinvested funds enabled higher bal-ances, thus yielding greater returns to keep pace with inflation of program expenses. Endowments provide crucial support for the University's quality academic programs and accessibility to these pro-grams for all students.

Gifts to the endowment and similar funds at the University totaled $25.1 million and $19.3 million for the fiscal years 2007 and 2oo6, respectively.

CAPITAL AND DEBT ACTIVITIES One of the critical factors in continuing the quali-ty of the University's academic and research pro-grams is the development and renewal of its capi-tal assets. The University continues to implement its long-range plan to modernize its complement of older teaching and research facilities, balanced with new construction.

Capital additions totaled $426.o million in fiscal year 2007, as compared to $165.2 million in fiscal year 2oo6. Capital additions primarily comprise replacement, renovation, and new construction of academic, research, and health care facilities, as well as significant investments in equipment.

Capital asset additions are funded by capital appropriations, bond proceeds, gifts which were designated for capital purposes, and unrestricted net assets.

Construction in progress at June 30, 2007, totaled

$92.0 million that includes projects in numerous buildings across the campus. Significant projects include: a new patient services wing of the University Hospital; continued renovation of the Marriott Library; geology and geophysics office, lab, and classroom facilities; and equipment for a new cogeneration power plant.

The University takes seriously its role of financial stewardship and works hard to manage its finan-cial resources effectively, including the prudent use of debt to finance capital projects. The debt rating of the University is an important indicator of success in this area. The underlying bond rat-ings from Standard and Poor's and Moody's Investors Service for the Auxiliary and Campus Facilities Bonds are AA/Aa2, the Hospital Revenue Bonds are AA/Aa2, the Research Facilities Revenue Bonds are AA-/Aa3, and the Certificates of Participation are AA-/Aa3, respectively. These rat-ings are considered high investment grade quality and position the University, if deemed necessary, to obtain future debt financing at low interest rates and reduced issuance costs.

Bonds payable totaled $302.4 million and $210.9 million at June 30, 2007 and 2006, respectively.

Two new Hospital bond series were issued in fiscal year 2007; the Hospital Revenue and Refunding Bonds Series 20o6A and the Hospital Revenue Bonds Series 2oo6B. Proceeds from these bonds were used to finance a portion of the costs of the acquisition, construction, equipping and furnish-ing certain Hospital facilities and to refund cer-tain outstanding hospital revenue bonds. Research Facilities Revenue Bond Series 2007A was also 11

issued, the proceeds of which were used to acquire, refurbish and equip a building for research pur-poses. In addition, Certificates of Participation were issued to refinance certain energy saving projects and to construct a new power plant. The original purpose of all bond debt is to provide funds for the construction and renovation of major capital facilities and the acquisition of capital equipment for the University.

An institution's ratio of unrestricted operating rev-enues to bonds, notes and contract debt is a valu-able indicator of its ability to finance its outstand-ing debt. At June 30, 2007, the University has 3.8 times the unrestricted operating revenue neces-sary to meet its debt requirements.

NET ASSETS Net assets represent the residual interest in the University's assets after liabilities are deducted.

Inveted in capital ao&etA, net of related debt repre-sents the University's capital assets net of accumu-lated depreciation and outstanding principal bal-ances of debt attributable to the acquisition, con-struction or improvement of those assets.

Restricted nonexpendable net a&A.AetA are the University's permanent endowment funds.

Restricted expendable net a&.et6 are subject to externally imposed restrictions governing their use. This category of net assets includes $113.2 million of quasi-endowments.

Although unres6tricted net a.&4etA are not subject to externally imposed stipulations, substantially all of the University's unrestricted net assets have been designated for various academic and research programs and initiatives, as well as capi-tal projects.

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS The Statement of Revenues, Expenses, and Changes in Net Assets presents the University's results of operations. A summarized comparison of the University's revenues, expenses, and changes in net assets for the years ended June 30, 2007 and 2006 is shown in Figure 3.

One of the University's greatest strengths is the diverse streams of revenues which supplement its student tuition and fees, including voluntary pri-vate support from individuals, foundations, and corporations, along with government and other grants and contracts, state appropriations, and investment income. The University will continue to aggressively seek funding from all possible sources consistent with its mission, to supple-ment student tuition, and to manage prudently the financial resources realized from these efforts to fund its operating activities.

Significant recurring sources of the University's revenues are considered nonoperating, as defined by GASB Statement No. 34.

Graph 1 (operating revenue) and Graph 2 (nonoperating revenue) are illustrations of revenues by source, which were used to fund the University's operations for the year ended June 30, 2007 (amounts are presented in thousands of dollars).

The University continues to face significant finan-cial pressure, particularly in the areas of compen-sation and benefits, which represent 53.4% of total expenses, as well as in the areas of technolo-gy and utility costs. To manage this financial pressure, the University continues to seek diversi-fied sources of revenue and to implement cost containment measures.

Tuition and state appropriations are the primary sources of funding for the University's academic programs.

Student tuition and fees, net of allowances for scholarships and fellowships, increased $10.4 million, or 7.3% to $152.8 million in fiscal year 2007.

State appropriations increased 8.o% or $20.1 million to $269.7 million in fiscal year 2007.

While tuition and state appropriations fund a sig-nificant percentage of the University's academic and administrative costs, private support has 12

Figure 3.

2007 2006 (in thousands)

Operating revenues Tuition and fees Patient services Grants and contracts Sales and services Auxiliary enterprises Other Total operating revenues Operating expenses Operating loss Nonoperating revenues (expenses)

State appropriations Gifts Investment income Interest expense Other Net nonoperating revenues Capital appropriations Capital and endowment grants and gifts Total capital and endowment revenues Increase in net assets Net assets - beginning of year Net assets - end of year 152,820 883,032 298,986 420,813 73,751 67,136 1,896,538 2,092,386 (195,848) 269,700 82,094 128,871 (18,229)

(12,651) 449,785 58,397 150,802 209,199 463,136 2,073,023

$2,536,159 142,432 821,704 300,744 382,902 70,433 72,116 1,790,331 1,932,667 (142,336) 249,608 26,248 66,620 (14,801)

(18,798) 308,877 9,014 34,763 43,777 210,318 1,862,705

$2,073,023 Graph 1.

OPERATING REVENUES Graph 2.

NONOPERATING REVENUES Auxiliary Other Enterprises Tu tuonandF Nongovernmental '

Grants & Contracts Governmental Grants & Contracts U Tuition and Fees J

Patient Services m Governmental Grants & Contracts J Nongovernmental Grants & Contracts 8

Sales and Services

• Auxiliary Enterprises

. Other

$152,820

$883,032

$227,245

$71,741

$420,813

$73,751

$67,136 M State Appropriations

$269,700 J Gifts N Investment Income

$82,094

$128,871 13

been, and will continue to be, essential to the University's academic success. Private support in the form of gift revenues for operations increased by 212.8%, or $55.8 million, to $82.1 million in fis-cal year 2007. These positive results are indicative of the University's continued emphasis on fund raising to support critical projects and initiatives.

Revenues for grants and contracts remained sta-ble with a slight decrease of o.6%, or $1.8 million, to $299.0 million in fiscal year 2007, primarily related to research programs. Grant and contract revenues are generated by a broad base of schools, colleges, and research units across the University.

The University receives revenues for grants and contracts from government and private sources, which provide for the recovery of direct costs and facilities and administrative (indirect) costs.

Patient care revenues increased 7.5% or $61.3 mil-lion to $883.0 million in fiscal year 2007. The majority of these revenues relate to patient care services, which are generated within UUHC under contractual arrangements with governmental payers and private insurers. Revenues sustained a relatively constant rate of growth over the last few years, primarily resulting from a growth in patient volume, demand for specialty services pro-vided by outpatient clinics and moderate price increases for patient services.

Net investment income for the years ended June 30, 2007 and 2006, consisted of the following components:

Interest and dividends, net Net increase in fair value of investments Net investment income 2007 2006 (in thousands)

$ 63,725

$39,370 65,146 27,250

$128,871

$66,620 Net investment income totaled $128.9 million in fiscal year 2007, as compared to $66.6 million in fiscal year 2006, which is an increase of $62.3 mil-lion. Moreover, as discussed previously, the University's endowment investment policies are designed to maximize long-term total return while its income distribution policies are designed to preserve the value of the endowment portfolio and to generate a predictable stream of spendable income. The income distribution from the University's endowment portfolio for the sup-port of operating activities, in accordance with the University's spending policy, totaled $13.6 mil-lion in fiscal year 2007, as compared to $12.0 mil-lion in fiscal year 2006. In addition, in fiscal year 2007, $1.3 million was returned to endowment principal.

Capital appropriations received from the State in fiscal year 2007, which totaled $58.4 million, 14

funded a portion of building renovation projects.

Other revenues include capital grants and gifts and additions to permanent endowments totaling

$15o.8 million for the fiscal year ending June 30, 2007.

A comparative summary of the University's expenses for the years ended June 30, 2007 and 2oo6 follows:

2007 2006 (in thousands) retaining an outstanding faculty and staff and the compensation package is one way to successfully compete with peer institutions and nonacademic employers. The resources expended for compen-sation and benefits increased 8.5%, or $89.2 mil-lion, to $i.i billion in fiscal year 2007. Of this increase, compensation increased 8.3%, or $67.7 million, as a result of annual increases and the hiring of additional employees.

The related employee benefits increased 9.3% or $21.5 million.

In addition to their natural classification, it is also informative to review operating expenses by function.

A comparative summary of the University's operating expenses by functional classification for the years ended June 30, 2007 and 2006 follows:

Operating Compensation and benefits Component units Supplies Purchased services Depreciation and amortization Utilities Cost of goods sold Repairs and maintenance Scholarships and fellowships Other Total operating Nonoperating Interest and other Total expenses

$1,133,059 250,279 242,070

$1,043,826 227,340 228,806 116,729 103,443 104,982 51,131 31,427 24,103 23,766 114,840 2,092,386 97,475 52,238 29,165 21,004 21,624 107,746 1,932,667 Instruction Research Public service Academic support Student services Institutional support Operations and maintenance of plant Student aid Other Hospital Total operating expenses 2007 2006 (in thousands)

$ 264,901

$ 248,885 217,805 215,018 381,863 354,797 71,286 66,299 18,743 18,246 43,983 35,780 49,934 33,945 391,705 618,221 48,335 32,071 361,568 551,668 30,880 33,599

$2,123,266

$1,966,266 The University is committed to recruiting and

$2,092,386

$1,932,667 f,.

11 'h1 l ap ot o

S Repairs & Maintenance Cost of Goods Sold --

Amortization Utilities Scholarship & Fellowships Depreciation &

/ro£

-// Interest Purchased Services

/

EXPENSES 8 Compensation and Benefits I Component Units N Supplies

/i Purchased Services Depreciation and Amortization a Utilities

..J Cost of Goods Sold 8 Repairs and Maintenance 8 Scholarships and Fellowships 8 Interest 8 Other S1,133,059

$250,279

$242,070

$116,729 S104,982

$51,131

$31,427

$24,103

$23,766

$18,229

$127,491 15

Instruction, research, and public service expenses increased 5.6%, or $45.9 million, to $864.6 mil-lion in fiscal year 2007. Academic and institu-tional support expenses increased 12.9%, or $13.2 million, to $115.3 million in fiscal year 2007.

STATEMENT OF CASH FLOWS The Statement of Cash Flows provides additional information about the University's financial results, by reporting the major sources and uses of cash.

The University's cash and cash equivalents increased

$103.2 million due primarily to increased patient services revenue, state appro-priations, gifts, and the sale and maturity of investments. This positive flow of funds was off-set by funds used for personal services and the purchase of investments. The University's signif-icant sources of cash provided by noncapital financing activities, as defined by GASB Statement No. 9, include state appropriations and private gifts used to fund operating activities.

CURRENT FACTORS HAVING PROBABLE FUTURE FINANCIAL SIGNIFICANCE The University's undergraduate enrollment has declined somewhat for the second year in a row.

Graduate enrollment continues to gradually increase. Enrollment at the undergraduate level is dependent on two factors, pool and participa-tion, that are both heavily influenced by factors within the State of Utah. The available pool of potential students, age i8 through 29, is in the midst of a modest decline, but that trend is expected to reverse within the next five years as K-8 students move into and through high school in record numbers. The participation rate is like-wise lower in large part due to the State's robust economy and remarkably low unemployment rates. While both factors are currently dampen-ing enrollment numbers, both are likely to ease within the next five years. The University is, in the meantime, adjusting its recruiting strategy while at the same time evaluating the need for additional infrastructure to support modest and sustainable growth in the future. In addition to these factors, the State recently passed legisla-tion that makes it easier for non-resident stu-dents to qualify for in-state tuition. This may have a negative short-term impact on tuition rev-enue, but it is likely to have a positive long-term effect on recruiting and related tuition revenue.

The State is one of the healthiest in the nation; balancing fiscal prudence with the need to invest in its future. A large revenue surplus in fiscal year 2007 contributed to an excellent year for higher education and the coming year is likely to have the same positive impact for the University.

At the same time, the State has launched the Utah Science Technology and Research (USTAR) initia-tive. This initiative provides funding for "strate-gic investments at the University of Utah and Utah State University to recruit world-class researchers, build state-of-the-art interdiscipli-nary research and development facilities, and to form first-rate science, innovation, and commer-cialization teams across the State. This initiative focuses on leveraging the proven success of Utah's research universities in creating and com-mercializing innovative technologies which will generate more technology-based start-up firms, higher paying jobs, and additional business activ-ity leading to a state-wide expansion of Utah's tax base"'.

The University has had great success in attracting world-class researchers with a proven track record of developing intellectual property to participate in this initiative.

The UUHC and the ARUP continue to be recog-nized as leaders in their respective fields.

Financial position for each remains strong and is expected to remain so. Despite a strong outlook though, UUHC anticipates a negative impact from recent Medicare/Medicaid changes. The Centers for Medicare and Medicaid Services (CMS) (a divi-sion of the Department of Health and Human Services (DHHS)) issued a proposed rule in January 2007 to change the way Medicaid funds flow to state-owned facilities effective October i, 2007. Congress subsequently passed legislation

which imposed a moratorium on the new funds flow mechanism. This moratorium will be in effect until May 2oo8 and unless new legislation is enacted, the CMS rule will become effective. If the new rule, as currently written, becomes effec-tive, next May we estimate that UUHC will experi-ence a significant reduction in Medicaid rev-enues. UUHC is working with other medical cen-ters to educate legislators on the impact to the patient population and to medical education if these funds are no longer available.

During fiscal year 2oo6, the University's Huntsman Cancer Institute (HCI) and the Huntsman Cancer Hospital (HCH) applied for and received significant funding from CMS, in the form of a forgivable loan. Late in the 2007 fiscal year, the University received notice from DHHS that the forgiveness provisions of this loan had been met. In the 2008 fiscal year, the loan pro-ceeds will be used to retire certain debt issued to finance HCI and HCH facility construction, which will significantly reduce the University's debt service payments. However, with the need for expanded research, patient care, and student life facilities, comes the need to issue debt to support construction.

Within the next 1-3 years, the University intends to undertake various construc-tion projects, in some cases partially gift-funded, to support these critical areas.

Awards for sponsored programs, which include basic research, continue to be strong. The initia-tives resulting from the USTAR project will cer-tainly have a positive impact on those results as the number of research faculty increases. At the same time, however, efforts to restrain federal spending and increased competition for research funding are likely to constrain growth in research support. The University has completed its negoti-ation for the new facilities and administration rate study. As a result, the new rate for reim-bursed overhead on federally sponsored research projects increases to 50.5% from 49.5% effective beginning in July of 2008.

Overall, the University's outlook for the foresee-able future is positive not only as a result of its strategic leadership and prudent fiscal manage-ment, but also as a beneficiary of a strong state economy.

1 http://ustar.utah.gov/about/index.html 17

I C,>"-

1*

Fiaca Statement

THE UNIVERSITY OF UTAH I Statement of Net Assets (in thouwandA of dollarm)

As of June 30

[For Comparison Only]

2007 2006 ASSETS Current Assets Cash and cash equivalents (Notes 2 & 4)

$ 551,160

$ 558,042 Short-term investments (Notes 1, 2 & 4) 386,385 264,883 Receivables, net (Note 5) 273,385 233,208 Inventory (Note 1) 32,374 30,005 Other assets (Note 6) 11,645 8,111 Total current assets 1,254,949 1,094,249 Noncurrent Assets Restricted cash and cash equivalents (Notes 2 & 4) 136,019 25,911 Restricted short-term investments (Notes 1, 2 & 4) 813 865 Investments (Notes 3 & 4) 220,613 158,628 Restricted investments (Notes 3 & 4) 327,538 289,454 Restricted receivables, net (Note 5) 69,522 51,985 Donated property held for sale 2,165 2,732 Other assets (Note 6) 15,241 15,888 Capital assets, net (Note 7) 1,248,432 1,137,791 Total noncurrent assets 2,020,343 1,683,254 Total assets 3,275,292 2,777,503 LIABILITIES Current Liabilities Accounts payable 84,506 63,494 Accrued payroll 73,758 62,129 Compensated absences & early retirement benefits (Note 1) 4,509 4,223 Deferred revenue (Note 9) 26,609 23,742 Deposits & other liabilities (Notes II & 15) 87,299 95;355 Bonds, notes and contracts payable (Notes 14, 15, & 16) 24,847 21,232 Total current liabilities 301,528 270,175 Noncurrent Liabilities Compensated absences & early retirement benefits (Note 1) 37,123 34,202 Deposits & other liabilities (Notes 11 & 15) 9,400 9,019 Bonds, notes and contracts payable (Notes 14, 15, & 16) 391,082 391,084 Total noncurrent liabilities 437,605 434,305 Total liabilities 739,133 704,480 NET ASSETS Invested in capital assets, net of related debt 927,224 828,988 Restricted for Nonexpendable Instruction 116,024 99,041 Research 37,334 32,944 Public service 56,241 45,205 Academic support 36,021 31,550 Scholarships 109,297 91,010 Other 7,038 5,284 Expendable Research 174,619 152,083 Public service 62,073 20,869 Academic support 53,837 52,130 Institutional support 50,133 38,979 Loans 35,987 35,976 Debt service 1,146 2,504 Capital additions 158,685 52,054 Other 15,725 4,134 Unrestricted 694,775

'580,272 Total net assets

$2,536,159

$2,073,023 20 The accompanying notes are an integral part of these financial statements

THE UNIVERSITY OF UTAH I Statement of Revenues, Expenses, and Changes in Net Assets (in thouAandA of dollari,)

For the Years Ended June 30

[For Comparison Only]

2007 2006 OPERATING REVENUES AND EXPENSES Revenues Tuition and fees, Net (Note 1)

$ 152,820

$ 142,432 Patient services (Notes I & 13) 883,032 821,704 Federal grants and contracts 204,633 207,097 State and local grants and contracts 22,612 19,558 Nongovernmental grants and contracts 71,741 74,089 Sales and services, Net (Note 1) 420,813 382,902 Auxiliary enterprises (Note 1) 73,751 70,433 Other operating revenues 67,136 72,116 Total operating revenues 1,896,538 1,790,331 Expenses Compensation and benefits 1,133,059 1,043,826 Component units 250,279 227,340 Supplies 242,070 228,806 Purchased services 116,729 103,443 Depreciation and amortization 104,982 97,475 Utilities 51,131 52,238 Cost of goods sold 31,427 29,165 Repairs and maintenance 24,103 21,004 Scholarships and fellowships 23,766 21,624 Other operating expenses 114,840 107,746 Total operating expenses 2,092,386 1,932,667 Operating loss (195,848)

(142,336)

NONOPERATING REVENUES (EXPENSES)

State appropriations 269,700 249,608 Gifts -

82,094 26,248 Investment income -

128,871 66,620 Interest (18,229)

(14,801)

Other nonoperating expenses (12,651)

(18,798)

Total nonoperating revenues 449,785 308,877 Gain before capital and permanent endowment additions 253,937 166,541 Capital appropriations 58,397 9,014 Capital grants and gifts 133,617 20,788 Additions to permanent endowments 17,185 13,975 Total capital and permanent endowment additions 209,199 43,777 Increase in net assets 463,136 210,318 NET ASSETS Net assets - beginning of year 2,073,023 1,862,705 Net assets - end of year

$2,536,159

$2,073,023 21 The accompanying notes are an integral part of these financial statements

THE UNIVERSITY OF UTAH I Statement of Cash Flows (in thou.AandA of dollarA)

For the Years Ended June 30

[For Comparison Only]

2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from tuition and fees

$ 153,169

$ 142,705 Receipts from patient services 865,626 815,311 Receipts from contracts and grants 301,936 291,799 Receipts from auxiliary and educational services 493,479 452,831 Collection of loans to students 6,368 8,649 Payments to suppliers (814,824)

(769,381)

Payments for personal services (1,118,223)

(1,034,341)

Payments for scholarships and fellowships (23,766)

(21,623)

Loans issued to students (7,812)

(5,880)

Other 50,603 85,219 Net cash used by operating activities (93,444)

(34,711)

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES State appropriations 269,700 249,608 Gifts Endowment 16,278 14,407 Nonendowment 60,318 27,307 Other (12,284)

(18,732)

Net cash provided by noncapital financing activities 334,012 272,590 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from capital debt 159,260 171,048 Capital appropriations 9,546 9,014 Gifts 20,144 21,820 Purchase of capital assets (142,393)

(125,315)

Principal paid on capital debt (72,239)

(112,690)

Interest paid on capital debt (18,084)

(14,640)

Net cash used by capital and related financing activities (43,766)

(50,763)

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales and maturities of investments 872,892 113,391 Receipt of interest and dividends on investments 60,272 40,551 Purchase of investments (1,026,740)

(363,143)

Net cash used by investing activities (93,576)

(209,201)

Net increase (decrease) in cash 103.226 (22,085)

Cash - beginning of year 583,953 606,038 Cash - ending of year S 687,179

$ 583,953 22 The accompanying notes are an integral part of these financial statements

THE UNIVERSITY OF UTAH I Statement of Cash Flows (in thouiandA of dollarA)

For the Years Ended! June 30 RECONCILIATION OF NET OPERATING LOSS TO CASH USED BY OPERATING ACTIVITIES Operating loss Adjustments to reconcile operating loss to cash used by operating activities Depreciation expense Change in assets and liabilities Receivables, net Inventory Donated property held for sale Other assets Accounts payable Accrued payroll Compensated absences & early retirement benefits Deferred revenue Deposits & other liabilities Net cash used by operating activities NONCASH INVESTING, CAPITAL, AND FINANCING AC.TIVITIES Capital leases Donated property and equipment 2007

$(195,848) 104,982 (28,363)

(2,369)

(2,887) 21,012 11,629 3,207 2,868 (7,675)

$ (93,444) 14,847 8,299

[For Comparison Only]

2006

$ (142,336) 97,475 (15,290)

(2,414) 29 1,102 1,673 6,052 3,434 (75) 15,639

$ (34,711) 15,172 12,786 162 27,250 55,370 Completed construction projects transferred from State of lUtah (DFCM) 48,851 Annuity and life income 163 Increase in fair value of investments 65,146 Total noncash investing, capital, and financing activities

$ 137,306 23 The accompanying notes are an integral part of these financial statements

moa(VA ac Phsamcdog MamaompmaA

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES A.

Reporting Entity The financial statements report the financial activity of the University of Utah (University),

including the University of Utah Hospitals and Clinics (UUHC). The University is a component unit of the State of Utah (State).

In addition, University administrators hold a majority of seats on the boards of trustees of two other related entities representing component units of the University.

Component units are entities that are legally separate from the University, but are financially accountable to the University, or whose relationships with the University are such that exclusion would cause the University's financial statements to be misleading or incomplete. The relationship of the University with its component units requires the financial activity of the component units to be blended with that of the University. Copies of the financial report of each component unit can be obtained from the University. The component units of the University are the University of Utah Research Foundation (UURF) and Associated Regional and University Pathologists, Inc. (ARUP).

. UURF is a not-for-profit corporation governed by a board of directors, with the exception of one, who are affiliated with the University. The operations of UURF include the leasing and administration of Research Park (a research park located on land owned by the University),

the leasing of certain buildings, and the commercial development of patents and products developed by University personnel.

The fiscal year end for UURF is June 30. UURF is audited by other independent auditors and their report, dated September 14, 2007, has been issued under separate cover.

. ARUP is a for-profit corporation that provides clinical laboratory services to medical centers, hospitals, clinics and other clinical laboratories throughout the United States, including UUHC.

ARUP contracts with the Department of Pathology of the University of Utah School of Medicine to provide pathology consulting services. The fiscal year end for ARUP is June

30. Other independent auditors audited ARUP and their report, dated September 6, 2007, has been issued under separate cover.

All Governmental Accounting Standards Board (GASB) pronouncements and all applicable Financial Accounting Standards Board (FASB) pronouncements are applied by the University, UURF and ARUP in the accounting and reporting of their operations. However, in accordance with GASB Statement No. 2o, Accounting and Financial Reporting for Proprietary Fund-and Other Governmental Entitie6 That U6e Proprietary Fund Accounting, the University has elected not to apply FASB pronouncements issued after November 30, 1989.

B.

Ba6i, of Accounting All statements have been prepared using the economic resources measurement focus and the accrual basis of accounting. Operating activities include all revenues and expenses, derived on an exchange basis, used to support the instructional, research and public service efforts, and other University priorities.

Significant recurring sources of the University's revenues are considered nonoperating as defined by GASB Statement No. 34, Ba.ic Financial Statements -

and Management'A DizcuA.ion and AnalyAiL

- for State and Local GovernmentA, and required by GASB Statement No.

35, Ba.6ic Financial StatementA - and Management'6 DizcuAAion and AnalyAi

- for Public Collegez and UniverAitieA.

When both restricted and unrestricted resources are available, such resources are spent and tracked at the discretion of the department within the guidelines of donor restrictions.

In accordance with GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange TranAactionA, the University recognizes gifts, grants, appropriations, and the estimated net realizable value of pledges as revenue as soon as all eligibility requirements 25

imposed by the provider have been met.

E. Inventorie,6 Patient revenue of UUHC and the School of Medicine medical practice plan is reported net of third-party adjustments.

C. InveAtment.6 Investments are recorded at fair value in accordance with GASB Statement No.

31, Accounting and Financial Reporting for Certain Inve.Atment. and for External Investment PooLA.

Accordingly, the change in fair value of investments is recognized as an increase or decrease to investment assets and investment revenue.

The University distributes earnings from pooled investments based on the average daily investment of each participating account or for endowments, distributed according to the University's spending policy.

A portion of the University's endowment portfolio is invested in "alternative investments".

These investments, unlike more traditional investments, generally do not have readily obtainable market values and typically take the form of limited partnerships.

See Note 19 for more information regarding these investments and the University's outstanding commitments under the terms of the partnership agreements.

The University values these investments based on audited financial statements, generally as of December 31, progressed to the University's financial statement date by taking into account investment transactions subsequent to the audited statements.

D. Allowances In accordance with GASB Statement No. 34, certain expenses are netted against revenues as allowances.

The following schedule presents revenue allowances for the years ended June 30, 2007 and 2006:

Bookstore inventories are valued using the retail inventory method. All other inventories are stated at the lower of cost or market using the first-in, first-out method or on a basis which approximates cost determined on the first-in, first-out method.

F. Research and Development Co.ts Research and development costs of ARUP are expensed as incurred. These costs for the year ended June 30, 2007, were approximately

$7,681,ooo.

G. Compensated Ab6ence- &. Early Retirement Benefits Employees' vacation leave is accrued at a rate of eight hours each month for the first five years and increases to a rate of 16.67 hours7.75463e-4 days <br />0.0186 hours <br />1.107804e-4 weeks <br />2.54935e-5 months <br /> each month after fifteen years of service. There is no requirement to use vacation leave, but a maximum of thirty days plus one-year accrual may be carried forward at the beginning of each calendar year.

Employees are reimbursed for unused vacation leave upon termination and vacation leave is expended when used or reimbursed. The liability for vacation leave at June 30, 2007, was approximately $37,255,000.

Employees earn sick leave at a rate of eight hours each month, with an accumulation limit of 1,040 hours4.62963e-4 days <br />0.0111 hours <br />6.613757e-5 weeks <br />1.522e-5 months <br />.

The University does not reimburse employees for unused sick leave.

Each year, eligible employees may convert up to four days of unused sick leave to vacation leave based on their use of sick leave during the year. Sick leave is expended when used.

In addition, the University may provide early retirement

benefits, if approved by the Administration and by the Board of Trustees, for certain employees who have attained the age of 6o with at least fifteen years of service and who have been approved for the University's early retirement program.

Currently, 103 employees participate in the early retirement program. The University pays each early retiree an annual amount equal to the lesser of 20% of the retiree's final salary or their estimated social security Revenue Tuition and fees Patient services Sales and services Auxiliary enterprises 2007

$18,101,747 40,797,926 3,530 750,806 2006

$16,682,607 41,800,569 32,597 851,665 26

benefit, as well as health care and life insurance premiums, which is approximately 50% of their early retirement salary, until the employee reaches full social security retirement age.

In accordance with GASB Statement No.

47, Accounting for Termination Benefiti, the amount recognized on the financial statements was calculated at the discounted present value of the projected future costs. The discount rate used was based on the average rate earned by the University on cash management investments for the fiscal year. The funding for these early retirement benefits is provided on a pay-as-you-go basis. For the year ended June 30, 2007, these expenditures were approximately $1,725,000.

H. Construction The Utah State Division of Facilities Construction and Management (DFCM) administers most of the construction of facilities for state institutions, maintains

records, and furnishes cost information for recording plant assets on the books of the University. Interest expense incurred for construction of capital facilities is considered immaterial and is, not capitalized. Construction projects administered by DFCM that were started prior to fiscal year 20o2 and were not completed were recorded as Construction in Progress in prior fiscal years.

Construction projects beginning in fiscal year 2oo2 and after are recorded on the books of the University when the facility is available for occupancy.

I.

Di~clo~ureA Certain financial information for fiscal year ended June 30, 2oo6 is included for comparison only and is not complete. Complete information is available in the separately issued financial statements for that year.

2. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS Cash and cash equivalents consists of cash and short-term investments with an original maturity of three months or less.

Cash, depending on source of receipts, is pooled, except for cash and cash equivalents held by ARUP and when legal requirements dictate the use of separate accounts. The cash balances and cash float from outstanding checks are invested principally in short-term investments that conform to the provisions of the Utah Code. It is the practice of the University that the investments ordinarily be held to maturity at which time the par value of the investments will be realized.

The Utah State Treasurer's Office operates the Utah Public Treasurer's Investment Fund (PTIF) which is managed in accordance with the State Money Management Act.

The State Money Management Council provides regulatory oversight for the PTIF. The PTIF is available for investment of funds administered by any Utah public treasurer.

At June 30, 2007, cash and cash equivalents and short-term investments consisted of:

Cash and Cash Equivalents Cash

$ (4,354,439)

Money market funds 1,056,865 Time certificates of deposit 31,424,370 Commercial Paper 21,159,496 Obligations of the U.S.

Government and its agencies 269,251,887 Utah Public Treasurer's Investment Fund 368,640,701 Total (fair value)

$687,178,880 Short-term Investments Time certificates of deposit 1,724,342 Obligations of the U.S.

Government and its agencies 377,934,415 Corporate notes 7,539,316 Total (fair value)

$387,198,073

3. INVESTMENTS Funds available for investment are pooled to maximize return and minimize administrative cost, except for funds that are authorized by the University administration to be separately invested or which are separately invested to meet legal or donor requirements.

Investments received as gifts are recorded at market or 27

appraised value on the date of receipt.

If no market or appraised value is available, investments received as gifts are recorded at a nominal value. Other investments are also recorded at fair value.

UURF receives, in exchange for patent rights, common stock of newly organized companies acquiring these patents. Inasmuch as the stock is ordinarily not actively traded, the fair value is generally not ascertainable and any realization from the future sale of the stock is often uncertain. Therefore, such stock is recorded by UURF at a nominal value. Those stocks that are publicly traded are recorded at their fair value on June 30, 2007.

University personnel manage certain portfolios, while other portfolios are managed by banks, investment advisors or through trust agreements.

According to the Uniform Management of Institutional Funds Act (UMIFA), Section 13-29 of the Utah Code (applicable through April 30, 2007),

the institution may appropriate for expenditure for the purposes for which an endowment is established, as much of the net appreciation, realized and unrealized, of the fair value of the assets of an endowment over the historic dollar value as is prudent under the facts and circumstances prevailing at the time of the action or decision. According to the Uniform Prudent Management of Institutional Funds Act (UPMIFA),

Section 51-8 of the Utah Code (applicable after April 30, 2007), the institution may appropriate for expenditure or accumulate so much of an endowment fund as the University determines to be prudent for uses, benefits, purposes, and duration for which the endowment was established.

The endowment income spending policy at June 30, 2007, is 4% of the twelve quarter moving average of the market value of the endowment pool. The spending policy is reviewed periodically and any necessary changes are made.

The amount of net appreciation on investments of donor-restricted endowments available for authorization for expenditure at June 30, 2007, was approximately

$133,557,0oo.

The net appreciation is a component of restricted expendable net assets.

At June 30, 2007, the investment portfolio composition was as follows:

Obligations of the U.S.

Government and its agencies Corporate bonds Mutual funds Common and preferred stocks Total (fair value)

$100,653,300 5,000 431,345,842 16,146,707

$548,150,849

4. DEPOSITS AND INVESTMENTS The State of Utah Money Management Council (Council) has the responsibility to advise the State Treasurer about investment policies, promote measures and rules that will assist in strengthening the banking and credit structure of the State, and review the rules adopted under the authority of the State of Utah Money Management Act (Act) that relate to the deposit and investment of public funds.

Except for endowment funds, the University follows the requirements of the Act (Utah Code, Section 51, Chapter 7) in handling its depository and investment transactions. The Act requires the depositing of University funds in a qualified depository. The Act defines a qualified depository as any financial institution whose deposits are insured by an agency of the federal government and which has been certified by the State Commissioner of Financial Institutions as meeting the requirements of the Act and adhering to the rules of the Council.

For endowment funds, the University follows the requirements of the UMIFA/UPMIFA, State Board of Regents' Rule 541, Management and Reporting of In-stitutional Inve.Atment-A (Rule 541), and the University's investment policy and endowment guidelines.

Deposits Cuwtodial Credit Ri.k: Custodial credit risk for deposits is the risk that, in the event of a bank failure, the University's deposits may not be returned.

28

At June 30, 2007, the carrying amounts of the University's deposits and bank balances were

$48,26o,679 and $37,832,378, respectively. The bank balances of the University were insured for

$2oo,ooo, by the Federal Deposit Insurance Corporation. The bank balances in excess of

$200,000 were uninsured and uncollateralized, leaving $37,632,378 exposed to custodial credit risk. The University's policy for reducing this risk of loss is to deposit all such balances in qualified depositories, as defined and required by the Act.

Investments The Act defines the types of securities authorized as appropriate investments for the University's non-endowment funds and the conditions for making investment transactions. Investment transactions may be conducted only through qualified depositories, certified dealers, or directly with issuers of the investment securities.

These statutes authorize the University to invest in negotiable or nonnegotiable deposits of qualified depositories and permitted negotiable agreements; commercial paper that is classified as "first tier" by two nationally recognized statistical rating organizations, one of which must be Moody's Investors Service or Standard &

Poor's; bankers' acceptances; obligations of the United States Treasury including bills, notes, and bonds; bonds, notes, and other evidence of indebtedness of political subdivisions of the State; fixed rate corporate obligations and variable rate securities rated "A" or higher, or the equivalent of "A" or higher, by two nationally recognized statistical rating organizations; shares or certificates in a money market mutual fund as defined in the Act; and the Utah State Public Treasurer's Investment Fund (PTIF).

The UMIFA/UPMIFA, Rule

541, and the University's endowment guidelines allow the University to invest endowment funds (including gifts, devises, or bequests of property of any kind from any source) in any of the above investments or any of the following subject to satisfying certain criteria: professionally managed pooled or commingled investment funds registered with the Securities and Exchange Commission or the Comptroller of the Currency (e.g., mutual funds);

professionally managed pooled or commingled investment funds created under 501(f) of the Internal Revenue Code which satisfy the conditions for exemption from registration under Section 3(c) of the Investment Company Act of 1940; any investment made in accordance with the donor's directions in a written instrument; and any alternative investment funds that derive returns primarily from high yield and distressed debt (hedged or non-hedged), private capital (including venture capital, private equity, both domestic and international), natural resources, and private real estate assets or absolute return and long/short hedge funds.

The PTIF is not registered with the SEC as an investment company. The PTIF is authorized and regulated by the Act, Section 51-7, Utah Code Annotated, 1953, as amended. The Act established

-the Council which oversees the activities of the State Treasurer and the PTIF and details the types of authorized investments. Deposits in the PTIF are not insured or otherwise guaranteed by the State, and participants share proportionally in any realized gains or losses on investments.

The PTIF operates and reports to participants on an amortized cost basis. The income, including gains and losses, net of administration fees, of the PTIF are allocated based upon the participant's average daily balance. The fair value of the PTIF investment pool is approximately equal to the value of the pool shares.

The University's participation in mutual funds may indirectly expose it to risks associated with using or holding derivatives.

However, specific information about any such transactions is not available to the University.

Interest Rate Ri-k: Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The University's policy for managing its exposure to fair value loss arising from increasing interest rates is to comply with the Act or the UMIFA/UPMIFA and Rule 541, as applicable. For non-endowment funds, Section 51-7-11 of the Act requires that the remaining term to maturity of investments may not exceed the 29

Figure 1.

Investment Maturities (in years)

Fair Investment Type Value Money market mutual funds 747,514 Time cerificates of deposit 1,724,342 Commercial Paper 21,159,496 Utah Public Treasurer's Investment Fund 368,640,701 U.S. Treasuries 386,326,501 U.S. Agencies 361,513,101 Corporate notes and bonds 7,544,316 Mutual bond funds 124,124,370 Totals

$1,271,780,341 Less than 1 747,514 1,724,342 21,159,496 1-5 6-10 More than 10 368,640,701 285,673,201 361,513,101 7,539,316

$1,046,997,671

$100,653,300 4,703,751

$105,357,051

$119,420,619

$119,420,619

$5,000

$5,000 period of availability of the funds to be invested.

The Act further limits the remaining term to maturity on all investments in commercial paper, bankers' acceptances, fixed rate negotiable deposits and fixed rate corporate obligations to 270-365 days or less. In addition, variable rate negotiable deposits and variable rate securities may not have a remaining term to final maturity exceeding two years. For endowment funds, Rule 541 is more general, requiring only that investments be made as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the endowments and by exercising reasonable care, skill, and caution.

As of June 30, 2007, the University had investments with maturities as shown in Figure i.

Credit Risk: Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The University's policy for reducing its exposure to credit risk is to comply with the Act, the UMIFA/UPMIFA, and Rule 541, as previously discussed.

At June 30, 2007, the University had investments with quality ratings as shown in Figure 2.

Cu.modial Credit Ri~k: Custodial credit risk for investments is the risk that, in the event of a failure of the counterparty, the University will not be able to recover the value of its investments that are in the possession of an outside party. The University's policy for reducing its exposure to custodial credit risk is to comply with applicable provisions of the Act. As required by the Act, all applicable securities purchased were delivered versus payment and held in safekeeping by a bank. Also, as required, the ownership of book-Figure 2.

Quality Rating Investment Type Money market mutual funds Time certificates of deposit Commercial paper Utah Public Treasurer's Investment Fund U.S. Treasuries U.S. Agencies Corporate notes and bonds Mutal bond funds Totals Fair Value

$747,514 1,724,342 21,159,496 368,640,701 386,326,501 361,513,101 7,544,316 124,124,370

$1,271,780,341 AAA/A-l A

364,574 1,724,342 21,159,496 Unrated 382,940 368,640,701 No Risk

$386,326,501

$386,326,501 361,513,101

$384,761,513

$7,539,316 5,000 124,124,370

$7,539,316

$493,153,011 30

entry-only securities, such as U.S. Treasury or Agency securities, by the University's custodial bank was reflected in the book-entry records of the issuer and the University's ownership was represented by a receipt, confirmation, or statement issued by the custodial bank.

At June 30, 2007, the University's custodial bank was both the custodian and the investment counterparty for $707,977,202 of U.S. Treasury and Agency securities purchased by the University and $29,873,400 of U.S. Treasury securities were held by the custodial bank's trust department but not in the University's name.

Concentration of Credit RiAk:Concentration of credit risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer. The University's policy for reducing this risk of loss is to comply with the Rules of the Council or the UMIFA/UPMIFA and Rule 541, as applicable.

Rule 17 of the Council limits non-endowment fund investments in a single issuer of commercial paper and corporate obligations to 5-Lo% depending upon the total dollar amount held in the portfolio. For endowment funds, Rule 541 requires that a minimum of 25% of the equity portfolio must be invested in companies with an average market capitalization of at least $io billion; also a minimum of 25% of the overall endowment portfolio should be invested in investment grade fixed income securities as defined by Moody's Investors Service or Standard

& Poor's. The overall endowment portfolio cannot consist of more than 75% equity investments.

Rule 541 also limits investments to no more than 3% in any one sector fund that is concentrated within one sector of the U.S. market and no more than 5% in equity or fixed income funds of developing markets. It also limits investments in alternative investment funds, as allowed by Rule 541 and the University's endowment policy, to between o% and 3o% based on the size of the University's endowment fund.

5. RECEIVABLES Accounts, pledges, and interest receivable include hospital patient accounts, medical services plan accounts, trade accounts, pledges, interest income on investments, and other receivables.

Loans receivable predominantly consist of student loans.

Allowances for doubtful accounts are established by charges to operations to cover anticipated losses from accounts receivable generated by sales and services and student loans.

Such accounts are charged to the allowance when collection appears doubtful and the accounts are

• referred to collection agencies. Any subsequent recoveries are credited to the allowance accounts.

Allowances are not established for pledges or in those instances where receivables consist of amounts due from governmental units or where receivables are not material in amount.

The following schedule presents receivables at June 30,

2007, including approximately

$26,455,0oo and $43,o68,ooo of noncurrent loans and pledges receivable, respectively:

Accounts Contracts and grants Notes Loans Pledges Interest Less allowances for doubtful accounts Receivables, net

$273,042,994 33,851,669 99,962 32,355,184 46,949,939 9,409,831 395,709,579 (52,802,266)

$342,907,313

6. DEFERRED CHARGES AND OTHER ASSETS The costs associated with issuing long-term bonds payable are deferred and amortized over the life of the related bonds using the straight-line method, which approximates the effective interest method. In addition, goodwill associated with the purchase of certain health clinics is amortized using the straight-line method.

7. CAPITAL ASSETS Buildings; infrastructure and improvements, which includes roads, curbs and gutters, streets and sidewalks, and lighting systems; land; equipment; and library materials are valued at 31

cost at the date of acquisition or at fair market value at the date of donation in the case of gifts.

Buildings, infrastructure and improvements, and additions to existing assets are capitalized when acquisition cost equals or exceeds $5o,ooo.

Equipment is capitalized when acquisition costs exceed $5,ooo for the University or $5oo for UUHC. All costs incurred in the acquisition of library materials are capitalized. All campus land acquired through grants from the U.S.

Government has been valued at $3,000 per acre.

Other land acquisitions have been valued at original cost or fair market value at the date of donation in the case of gifts.

Buildings, improvements,

land, and equipment of component units have been valued at cost at the date of acquisition.

Capital assets of the University and its component units are depreciated on a straight-line basis over their estimated useful lives. The estimated useful lives of University assets extends to forty years on buildings, fifteen years on infrastructure and improvements, twenty years on library books, and from five to fifteen years on equipment. The estimated useful lives of component unit assets extend to fifty years on buildings and improvements and from three to eight years on equipment. Land, art and special collections, and construction in progress are not depreciated.

At June 30, 2007, the University had outstanding commitments for the construction and remodeling of University buildings of approximately $29,448,000.

Capital assets at June 30, 2007, are shown in Figure 3.

8. PENSION PLANS AND RETIREMENT BENEFITS As required by State law, eligible nonexempt employees (as defined by the U.S. Fair Labor Standards Act) of the University are covered by either the Utah State and School Contributory or Noncontributory or the Public Safety Noncontributory Retirement Systems and eligible exempt employees (as defined by the U.S. Fair Labor Standards Act) are covered by the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF). Eligible employees of ARUP are covered by a separate defined contribution pension plan and a profit sharing plan.

The University contributes to the Utah State and School Contributory and Noncontributory and the Public Safety Noncontributory Retirement Figure 3.

Beginning Balance Buildings

$1,136,454,473 Infrastructure & improvements 138,235,956 Land 17,267,135 Equipment 506,254,693 Library materials 146,637,831 Art and special collections 39,428,566 Construction in progress 138,977,107 Total cost 2,123,255,761 Less accumulated depreciation Buildings 478,923,560 Infrastructure & improvements 77,349,550 Equipment 345,294,335 Library materials 83,897,590 Total accumulated depreciation 985,465,035 Capital assets, net

$1,137,790,726 Additions

$175,276,953 17,796,048 67,791,827 3,174,745 4,123,122 157,796,897 425,959,592 47,207,240 8,021,945 45,582,675 4,942,329 105,754,189

$320,205,403 Retirements 816,150 24,949,378 1,089,148 33,653 204,746,030 231,634,359 Ending Balance

$1,310,915,276 156,032,004 17,267,135 549,097,142 148,723,428 43,518,035 92,027,974 2,317,580,994 921,774 525,209,026 85,371,495 21,148,963 369,728,047 88,839,919 22,070,737

$209,563,622 1,069,148,487

$1,248,432,507 32

System (Systems) that are multi-employer, cost sharing, defined benefit pension plans.

The Systems provide refunds, retirement benefits, annual cost of living adjustments, and death benefits to plan members and beneficiaries in accordance with retirement statutes.

The Systems are established and governed by the respective sections of Chapter 49 of the Utah Code Annotated, 1953, as amended.

The Utah State Retirement Office Act provides for the administration of the Utah Retirement Systems and Plans under the direction of the Utah State Retirement Board (Board) whose members are appointed by the Governor. The Systems issue a publicly available financial report that includes financial statements and required supplementary information for the Systems. A copy of the report may be obtained by writing to the Utah Retirement Systems.

Plan members in the State and School Contributory Retirement System are required to contribute 6.oo% of their annual covered salaries, all of which is paid by the University, and the University is required to contribute 9.73% of their annual salaries.

In the State and School Noncontributory Retirement System and the Public Safety Noncontributory Retirement System, the University is required to contribute 14.22% (with an additional 1.5o% to a 401(k) salary deferral program) and 26.75%, respectively, of plan members' annual salaries. The contribution requirements of the Systems are authorized by statute and specified by the Board and the contribution rates are actuarially determined.

TIAA-CREF provides individual retirement fund contracts with each participating employee.

Benefits provided to retired employees are based on the value of the individual contracts and the estimated life expectancy of the employee at retirement. Contributions by the University to the employee's contract become vested at the time the contribution is made. Employees are eligible to participate from the date of employment and are not required to contribute to the fund. For the year ended June 30, 2007, the University's contribution to this defined contribution pension plan was 14.20% of the employees' annual salaries. Additional contributions are made by the University based on employee contracts. The University has no further liability once contributions are made. Certain UUHC employees hired prior to January 1, 2001, were fully vested as of that date.

Employees hired subsequent to January 1, 2o00, are eligible to participate in the plan one year after hire date and vest after six years.

The University's contribution for these health clinic employees was 3.00% of the employees' annual salaries.

The ARUP defined contribution pension and profit sharing plans provide retirement benefits for all employees who have attained certain tenure-based and hours-worked thresholds.

Employees are fully vested in both plans after five years of service. For the year ended June 30, 2007, ARUP contributed 5.00% of the employees' annual salaries (less forfeitures) to the pension plan.

Contributions to the profit sharing plan are at the discretion of ARUP.

For the years ended June 30, 2007, 2o06, and 2005, the University's contributions to the Systems were equal to the required amounts, as shown in Figure 4.

Figure 4.

State and School Contributory Retirement System State and School Noncontributory Retirement System Public Safety Noncontributory Retirement System TIAA-CREF Pension plan Profit sharing plan Total contributions 2007 1,581,565 24,259,347 328,163 70,903,307 3,498,662 6,050,982

$106,622,026 2006

$ 1,489,378 22,257,303 289,291 65,126,133 3,140,908 4,723,787

$97,026,800 2005

$ 1,563,900 22,375,155 295,083 60,472,570 2,743,021 3,353,435

$90,803,164 33

9. DEFERRED REVENUE Deferred revenue consists of summer school tuition and student fees, advance payments on grants and contracts, and results of normal operations of auxiliary enterprises and service units.

lo.FUNDS HELD IN TRUST BY OTHERS Funds held in trust by others are neither in the possession of nor under the management of the University. These funds, which are not recorded on the University's financial records and which arose from contributions, are held and administered by external fiscal agents, selected by the donors, who distribute net income earned by such funds to the University, where it is recorded when received. The fair value of funds held in trust at June 30, 2007, was $98,596,688.

In addition, certain funds held in trust by others are comprised of stock, which is reported at a value of $7,75o,673 as of June 30, 2007, based on a predetermined formula.

The fair value of this stock as of June 30, 2007 cannot be determined because the stock is not actively traded.

11m RISK MANAGEMENT The University maintains insurance coverage for commercial general liability, automobile, errors and omissions, and property (building and equipment) through policies administered by the Utah State Risk Management Fund. Employees of the University and authorized volunteers are covered by workers' compensation and employees' liability through the Workers' Compensation Fund of Utah.

In addition, the University maintains self-insurance funds for health care, dental, and auto/physical damage, as well as hospital and physicians malpractice liability self-insurance funds. The malpractice liability self-insurance funds are held in trust with an independent financial institution in compliance with Medicare reimbursement regulations. Based on an analysis prepared by an independent actuary, the administration believes that the balance in the trust funds as of June 30, 2007, is adequate to cover any claims incurred through that date. The University and UUHC have a "claims made" umbrella malpractice insurance policy in an amount considered adequate by its respective administrations for catastrophic malpractice liabilities in excess of the trusts' fund balances.

The estimated self-insurance claims liability is based on the requirements of GASB Statement No.

io, Accounting and Financial Reporting for RiAk Financing and Related Insurance LI.Aue.,

as amended by GASB Statement No. 30, RiLk Financing Omnibus, which requires that a liability for claims be reported if information prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated.

Changes in the University's estimated self-insurance claims liability for the years ended June 3o are shown in Figure 5.

The University has recorded the investments of the malpractice liability trust funds at June 30, 2007, and the estimated liability for self-insurance claims at that date in the Statement of Net Assets. The income on fund investments, the expenses related to the administration of the self-insurance and malpractice liability trust funds, and the estimated provision for the claims liability for the year then ended are recorded in Figure 5.

Estimated claims liability - beginning of year Current year claims and changes in estimates Claim payments, including related legal and administrative expenses Estimated claims liability - end of year 2007

$ 54,505,514 153,046,890 (141,395,068)

$ 66,157,336 2006

$ 52,869,024 129,783,800 (128,147,310)

$ 54,505,514 34

the Statement of Revenues, Expenses, and Changes in Net Assets.

12. INCOME TAXES The University, as a political subdivision of the State, has a dual status for federal income tax purposes. The University is both an Internal Revenue Code (IRC) Section 115 organization and an IRC Section 501(c)(3) charitable organization.

This status exempts the University from paying federal income tax on revenue generated by activities which are directly related to the University's mission. This exemption does not apply to unrelated business activities. On these activities, the University is required to report and pay federal and state income tax.

UURF is not subject to income taxes under Section 501(c)(3) of the Internal Revenue Code.

ARUP is also not subject to income taxes based on a private letter ruling from the Internal Revenue Service stating that certain income providing an essential governmental function is exempt from federal income taxes under Internal Revenue Code Section 115.

13. HOSPITAL REVENUE A. Net Patient Service Revenue UUHC reports net patient service revenue at the estimated net realizable amounts from patients, third-party payors, and others for services

rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined.

Charity care is excluded from net patient service revenue.

UUHC has third-party payor agreements with Medicare and Medicaid that provide for payments to UUHC at amounts different from established rates. Inpatient acute care services rendered to Medicare and Medicaid program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Outpatient services rendered to Medicaid program beneficiaries and certain outpatient services and defined capital costs related to Medicare beneficiaries are paid on a

cost reimbursement basis.

Medicare reimbursements are based on a tentative rate with final settlement determined after submission of annual cost reports by UUHC and audits thereof by the Medicare fiscal intermediary.

The estimated final settlements for open years are based on preliminary cost findings after giving consideration to interim payments that have been received on behalf of patients covered under these programs.

B. Charity Care UUHC maintains records to identify and monitor the level of charity care it provides. Based on established rates, the charges foregone as a result of charity care during the year ended June 30, 2007, were approximately $21,471,000.

t4. LEASES A. Revenue UURF receives lease revenues from noncancellable sublease agreements with tenants of the Research Park and from tenants occupying six buildings owned by UURF. The lease revenue to be received from these noncancellable leases for each of the subsequent five years is

$6,500,000, and for eighteen years thereafter, comparable annual amounts. Most lease revenue is subject to escalation based on changes in the Consumer Price Index (CPI).

Since such escalations are dependent upon future changes in the CPI, these escalations, if any, are not reflected in the minimum noncancellable lease revenues listed above.

B. Commitment.A The University leases buildings and office and computer equipment. Capital leases are valued at the present value of future minimum lease payments.

Assets associated with the capital leases are recorded as buildings and equipment 35

together with the related long-term obligations.

Assets currently financed as capital leases amount to $25,795,ooo and $75,378,215 for buildings and equipment, respectively.

Accumulated depreciation for these buildings and equipment amounts to

$2,404,688 and

$37,601,181, respectively. Operating leases and related assets are not recorded in the Statement of Net Assets. Payments are recorded as expenses when incurred and amount to approximately

$25,343,000 for the University and $4,873,000 for component units for the year ended June 30, 2007.

Total operating lease commitments for the University include approximately $7,275,000 of commitments to component units.

Included in the above component unit lease expenses are leases by ARUP for its principal laboratory and office buildings, under long-term agreements, from a partnership in which one of its directors is a principal. The agreements have initial terms of fifteen years with two five-year renewal options and include rent increases of two to three percent annually in the sixth and eleventh years from the commencement of the lease. Total lease payments for the year ended June 30, 2007 were $4,732,419.

The University entered into a Huntsman Cancer Institute capital sublease agreement in the amount of $16,875,00o dated November 1996 with the State, acting through DFCM for the lease of the Huntsman Cancer Institute building, located east of the University campus and adjacent to the University Hospital. The Huntsman sublease is an annually renewable lease with a final expiration date of May 2013. Annual payments began May 1997 and range from a low of approximately

$468,478 to a high of approximately $1,648,090.

At the end of the lease, title to the Huntsman Cancer Institute building will be transferred to the University.

Future minimum lease commitements for operating and capital leases as of June 30, 2007 are shown in Figure 6.

15. BONDS PAYABLE AND OTHER LONG-TERM LIABILITIES The long-term debt of the University consists of bonds payable, certificates of participation, capital lease obligations, compensated absences, and other minor obligations.

The State Board of Regents issues revenue bonds to provide funds for the construction and renovation of major capital facilities and the acquisition of capital equipment for the University. In addition, revenue bonds have been issued to refund other revenue bonds and capitalized leases.

The revenue bonds are special limited obligations of the University. The obligation for repayment is solely that of the University and payable from the net revenues of auxiliary enterprises and UUHC, Figure 6.

Fiscal Year 2008 2009 2010 2011 2012 2013-2017 2018-2022 2023 - 2027 2028 - 2030 Total future minimum lease payments Amount representing interest Present value of future minimum lease payments Operating

$ 31,406,132 29,972,526 25,192,446 22,715,115 20,334,125 82,361,442 76,886,100 7,585,740 415,519

$296,869,145 Capital

$14,007,068 17,182,169 9,235,835 6,964,962 4,884,691 7,650,830 2,883,041 720,985 63,529,581 (8,251,986)

$55,277,595 36

student building fees, land grant income, and recovered indirect costs. Neither the full faith and credit nor the taxing power of the State or any other political subdivision of the State is pledged to the payment of the bonds, the distributions or other costs associated with the bonds.

In 1985, the State Board of Regents authorized the University to issue Variable Rate Demand Industrial Development Bonds (University Inn Project - 1985 Series) for the Salt Lake City Marriott - University Park Hotel, separate from the University. The bonds are payable from the revenues of the hotel and the University has no responsibility or commitment for repayment of the bonds. The outstanding balance of the bonds at June 30, 2007, is $6,035,000.

The Series 1997A Auxiliary and Campus Facilities Revenue Bonds currently bear interest at a weekly rate in accordance with the bond provisions.

When a weekly rate is in effect, the Series 199 7A Bonds are subject to purchase on the demand of the holder at a price equal to principal plus accrued interest on seven days notice and delivery to the University's tender agent. The University's remarketing agent is authorized to use its best efforts to sell the repurchased bonds at a price equal to loo percent of the principal amount by adjusting the interest rate. If any Series 199 7A Bonds cannot be remarketed to new holders, the tender agent is required to draw on an irrevocable standby bond purchase agreement to pay the purchase price of the bonds delivered to it. The standby bond purchase agreement is with JPMorgan Chase Bank and is valid through July 30, 2o0o. No funds have been drawn against the standby bond purchase agreement. The interest requirement for the Series 199 7A Bonds is calculated using an annualized interest rate of 3.73%, which is the rate in effect at June 30, 2007.

The Hospital Revenue Bonds Series 2oo6B currently bear interest at a daily rate in accordance with the bond provisions.

When a daily rate is in effect, the Series 2oo6B Bonds are subject to purchase on the demand of the holder at a price equal to principal plus accrued interest.

The University's remarketing agent is authorized to use its best efforts to sell the repurchased bonds at a price equal to loo percent of the principal amount plus accrued interest. If any Series 2oo6B bonds cannot be remarketed to new holders, the tender agent is required to draw on an irrevocable standby bond purchase agreement to pay the purchase price of the bonds delivered to it.

The standby bond purchase agreement is with DEPFA Bank and is valid through October 25, 2013. No funds have been drawn against the standby bond purchase agreement. The interest requirement for the Series 2oo6B Bonds is calculated using an annualized interest rate of 3.90%, which is the rate in effect at June 30, 2007.

On April 28, 2oo6, the University entered into a loan agreement with the federal government for the benefit of the Huntsman Cancer Institute (HCI) and Huntsman Cancer Hospital (HCH).

Pursuant to the Health Care Infrastructure Improvement Program, the University qualified for a loan in the amount of $ioo,ooo,ooo. The loan is administered by the Centers for Medicare and Medicaid Services (a division of the United States Department of Health and Human Services) pursuant to Section 1897, Title XVIII of the Social Security Act. The proposed rules include a Loan Forgiveness Program whereby the full amount of the loan may be forgiven based upon certain criteria. The University has received notice from the Federal Government that the criteria were met. Consequently, during fiscal year 2007, the loan was forgiven and the proceeds recorded as federal capital grant revenue in the Statement of Revenues, Expenses, and Changes in Net Assets.

37

The following schedule lists the outstanding bonds payable and certificates of participation of the University at June 30, 2007:

Issue Auxiliary and Campus Facilities Series 1987A - Refunding Series 1997A - Revenue Series 1998A

- Revenue & Refunding Series 1999A - Revenue Series 2001

- Revenue Series 2005A - Refunding Hospital Series 1998A - Revenue Series 2005A - Revenue & Refunding Series 2006A - Revenue & Refunding Series 2006B

- Revenue Research Facilities Series 2000A - Revenue & Refunding Series 2004A - Revenue Series 2005A - Revenue Series 2005B

- Refunding Series 2007A - Revenue Certificates of Participation Series 2007 Date Issued 3/1/87 7/30/97 7/1/98 5/1/99 7/18/01 8/2/05 6/1/98 7/14/05 10/26/06 10/26/06 Maturity Date 2014 2027 2016 2014 2021 2021 2013 2018 2032 2032 Interest Rate 3.750%-

6.750%

Variable 4.100%-

5.250%

4.000%-

4.800%

3.500%-

5.125%

3.000%-

5.000%

5.250%-

5.375%

4.500%-

5.000%

4.000%-

5.250%

Variable Original Issue

$ 11,140,000 52,590,000 120,240,000 5,975,000 2,755,000 42,955,000 25,020,000 30,480,000 77,145,000 20,240,000 17,585,000 9,685,000 5,515,000 2.0,130,000 10,000,000 Current Liability 440,000 1,125,000 2,546,828 422,383 113,762 (18,280) 3,224,755 (889,581) 102,594 706,701 542,181 209,689 1,417,972 580,000 Balance 6/30/2007 1,490,000 12,000,000 56,234,102 3,404,618 2,205,935 42,942,820 6,457,349 31,436,853 82,227,692 20,240,000 2,245,519 8,108,083 5,270,586 18,159,991 10,000,000 42,677,861

.345.101.409 7/13/00 2020 5.000%-

5.750%

6/30/04 2019 3.000%-

4.700%

2/15/05 2025 3.000%-

5.000%

6/07/05 2020 3.000%-

5.000%

6/28/07 2022 4.600%-

4.740%

4/3/07 2027 4.000%-

5.500%

42,450,000 1,088,084 511.612.088 Tntn 1 UURF has purchased three buildings with two mortgages that are guaranteed by the University. The remaining amounts of the mortgages are $6,019,311 at 8.87% interest and $2,952,8o0 at 7.15% interest. The mortgages will be paid off on April i, 2o2o and September 1, 2021, respectively. In addition, UURF agreed to bear 42.04% of the cost to renovate the building at 417 Wakara Way for the Health Science Center. The remaining balance of debt related to those costs is $3,394,73o at interest rates ranging from 3.00% to 4.70%.

The following schedule summarizes the changes in long-term liabilities for the year ended June 30, 2007:

Beginning Ending Current Balance Additions Reductions Balance Portion Bonds payable

$210,866,759

$116,569,818

$ 25,013,029

$302,423,548

$ 10,524,004 Certificates of participation 42,690,156 12,295 42,677,861 1,088,084 Capital leases payable 86,683,835 14,846,799 46,253,039 55,277,595 11,894,279 Notes & contracts payable 114,765,359 1,824,227 101,039,811 15,549,775 1,340,706 Total long-term debt 412,315,953 175,931,000 172,318,174 415,928,779 24,847,073 Compensated absences 38,425,406 29,125,955 25,919,170 41,632,191 4,509,589 Deposits & other liabilities 104,374,027 87,710,325 95,385,066 96,699,286 87,299,073 Total long-term liabilities

$555,115,386 $292,767,280. $293,622,410

$554,260,256

$116,655,735 38

Maturities of principal and interest requirements for long-term debt payable are as follows:

Payments

17.

FUNCTIONAL CLASSIFICATION OF EXPENSES The following schedule presents operating expenses by functional classification for the year ended June 30, 2007:

Fiscal Year 2008 2009 2010 2011 2012 2013-2017 2018-2022 2023 -2027 2028 - 2032 Total Principal

$ 24,847,073 29,141,118 22,362,518 22,150,579 18,838,617 81,418,197 74,529,819 70,882,695 71,757,427

$415,928,043 Interest

$ 19,608,618 18,591,458 17,361,028 16,373,484 15,404,676 65,087,428 45,519,347 26,537,831 9,696,025

$234,179,895 Function Instruction Research Public service Academic support Student services Institutional support Operation & maintenance of plant Student aid Other Hospital Total Amount (in thousands)

$ 264,901 217,805 381,863 71,286 18,743 43,983 49,934 33,945 391,705 618,221

$2,092,386 i6.

RETIREMENT OF DEBT In prior years, the University defeased certain revenue bonds by placing the proceeds of new bonds and various bond reserves in irrevocable trusts to provide for all future debt service payments on the old bonds.

In addition, the University issued on October 26, 2oo6, Hospital Revenue and Refunding Bonds Series 2oo6A in the amount of $77,145,000 of which $11,350,000 was used to advance refund the remaining Hospital Revenue Bonds Series 2001.

This refunding resulted in a reduction of the University's aggregate debt service payments of approximately $918,ooo over the next sixteen years and a present value economic gain of approximately $595,00o.

Accordingly, the trust account assets and the liability for the defeased bonds are not included in the University's financial statements. The total principal amount of defeased bonds held in irrevocable trusts at June 30, 2007, is $115,805,000.

18. PLEDGED BOND REVENUE The University issues revenue bonds to provide funds for the construction and renovation of major capital facilities and the acquisition of capital equipment for the University. Investors in these bonds rely solely on the net revenue pledged by the following activities for the retirement of outstanding bonds payable.

Auxiliary Enterpri.e. - is comprised of specific auxiliary enterprises, namely:

University Bookstore, Residential Living, University Student Apartments, Commuter Services, Jon M. Huntsman Center, Rice-Eccles Stadium, and Union Building. These auxiliaries provide on-campus services for the benefit of students, faculty and staff. In addition to the net revenues of these auxiliaries, student building fees, state land grant income and a subsidy from the federal department of Housing and Urban Development are pledged to the retirement of all Auxiliary Campus and Facility bonds.

University of Utah Ho-pitalA & Clinic- - is comprised of the University Hospitals, the University Neuropsychiatric Institute, and 39

other clinics that provide health and psychiatric services to the community.

Reimbursed Overhead -

is the revenue generated by charging approved facilities and administration rates to grants and contracts.

The Figure 7 presents the net revenue pledged to the applicable bond system and the principal and interest paid for the year ended June 30, 2007.

19. COMMITMENTS AND CONTINGENCIES Under the terms of various limited partnership agreements approved by the Board of Trustees or by University officers, the University is obligated to make periodic payments for advance commitments to venture capital and private equity investments. As of June 30, 2007, the University had committed, but not paid, a total of $15,497,554 in funding for these alternative investments.

During fiscal year 2007, the Utah State Auditor issued an audit finding to the Centers for Medicare and Medicaid Services (CMS) indicating that the Utah State Department of Health (the Department) had made payments for graduate medical education to teaching hospitals in excess of the maximum allowable amounts as described in the State Plan. This finding has been rebutted by the Department and an appeal has been filed with the Appeals Board of the United States Department of Health and Human Services. As UUHC has been the largest recipient of the graduate medical education funds, there is a potential that should CMS prevail in the dispute, the Department may look to UUHC to assist in funding any financial remedies imposed by the Appeals Board. As of June 30, 2007, the Department has indicated they will not look to UUHC to cover this liability and has reserved an amount adequate to cover any potential liability.

Figure 7.

Revenue Operating revenue Nonoperating revenue Total revenue Expenses Operating expenses Nonoperating expenses Total expenses Net pledged revenue Bond Systems Auxiliary &

Research Campus Facilities Hospital Facilities

$64,150,996 5,290,638 69,441,634 51,751,062 51,751,062

$17,690,572

$9,533,550

$707,728,912 7,012,340 714,741,252 654,366,342 97,381 654,463,723

$ 60,277,529

$ 60,120,135 60,120,135 45,902,397 45,902,397

$ 14,217,738

$4,553,627 Principal paid and interest expense

$8,452,352 40

THE UNIVERSITY OF UTAH I Governing BoardA and OfficerA UTAH STATE BOARD OF REGENTS Jed H. Pitcher Chair Bonnie Jean Beesley Vice Chair Jerry C. Atkin Janet A. Cannon Rosanita Cespedes Amy Engh Katharine B. Garff Patti Harrington Greg W. Haws Meghan Holbrook James S. Jardine David J. Jordan Nolan E. Karras Anthony W. Morgan Josh M. Reid Sara V. Sinclair Marion 0. Snow John H. Zenger Richard E. Kendell CommiA-Aioner of Higher Education BOARD OF TRUSTEES Randy L. Dryer Chair H. Roger Boyer Vice Chair Timothy B. Anderson C. Hope Eccles Clark Ivory

1. Spencer Kinard Scott S. Parker Spencer Pearson Lorena Riffo-Jenson James Wall UNIVERSITY ADMINISTRATION' Michael K. Young President A. Lorris Betz Senior Vice PreAident for Health ScienceA David W. Pershing Senior Vice PreAident for Academic AffairA lack W. Brittain Vice President for Tech Venture Development Arnold B. Combe Vice Pre.Aidentfor Admini trative ServiceA Fred C. Esplin Vice PreAident for InAtitutional Advancement Raymond F. Gesteland Vice Pre,6ident for ReAearch Loretta F. Harper Vice PreAidentfor Human Re,6ource.A Stephen H. Hess Chief Information Officer John K. Morris Vice President/General Counwel Barbara H. Snyder Vice PreAident for Student AffairA Kim Wirthlin Vice Preaident for Government Relationw FINANCIAL AND BUSINESS SERVICES.

Jeffrey J. West A-Aociate Vice Pre-Aident for Financial and BuAine.&- Service.6 Theresa L. Ashman Controller/Director Financial Management Barbara K. Nielsen Aj"ociate Director for Compliance Accounting and Reporting Stephen P. Allen Manager, General Accounting Spencer F. Eccles Trea.Aurer Laura Snow Secretary 41

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THE F

UNIVERSITY OF UTAH

Content.A Message from the President 3

Independent State Auditor's Report 4 - 5 Management's Discussion and Analysis 6 - 17 Financial Statements 19 - 23 Statement of Net Assets 20 Statement of Revenues, Expenses, and Changes in Net Assets 21 Statement of Cash Flows 22-23 Notes to Financial Statements 24-40 Governing Boards and Officers 41

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MeAAage from the PreAident I am pleased to present this financial report for the University's 2oo6 fiscal year. The University remains in good financial condition thanks to the vision, effort, and generosity of literally thousands of dedicated people. I keenly appreciate this extraordinary community of students, faculty, administrators, staff, alumni, and friends.

Although I could fill volumes with the accomplishments and promising initiatives of this extraordinary University, let me highlight just a few:

The University continues its strong record as an "economic engine" that powers growth in Utah. This year 2o new University-based companies were created-distinguishing the University as among the best in commercializing research from a wide number of disciplines.

The USTAR initiative is actively recruiting world-class research teams to Utah. These teams will develop products and services that can be commercialized in new businesses and industries, thereby creating high-paying jobs and increasing Utah's tax revenue.

• University Health Care continues as a major force in Utah's economic prosperity and quality of life.

Financially, this year was the best ever for University Hospitals & Clinics. And, for the 13th straight year, University Hospital has been ranked among "best in the nation" by U.S. Newi* & World Report.

The University continues to provide outstanding public service for the benefit of Utah's citizens.

For example, the Museum of Natural History reached more than 350,000 people last year through traveling exhibits, classroom, and field programs. This included visits to over 300 public schools. Through a variety of outreach programs, the Museum of Fine Arts served over 23,500 children through high school age.

University Neighborhood Partners distributed educational materials to over 1,2oo children and families and assisted 61 high school-age youth with neighborhood-based academic advising assistance in English and Spanish. Through its BookA ArtA Program, Marriott Library provided training and instruction to over 16,5oo public school K-12 teachers and students.

While there is much to be proud of, there remains much to be accomplished. We are taking steps to ensure students benefit from more international opportunity while enjoying greater research and learning possibilities on campus. We are developing strategies that facilitate recruitment and successful retention of students of color, and shaping programs that entice outstanding students in all disciplines. We are working to recruit well-qualified students from junior colleges and are delighted that enrollment for freshmen and graduate admissions remains high.

The University of Utah was established through the vision and work of pioneer settlers of Salt Lake City. Upon arriving in the Salt Lake Valley by wagon, their leader Brigham Young's first words were "This is the right place.

Drive on." Despite the toil and hardship of getting here, there was much work ahead and little time for rest. His words are as apt today as then-both for the State of Utah and its flagship University. Utah is the right place to confront the challenges facing society. There is no better time to move forward. Like our predecessors, we "drive on."

3

S 0

&STATE OF UTAH DEPUTY STATE AUDITOR:

Office of the State Auditor Joe Christensen, CPA UTAH STATE CAPITOL COMPLEX EAST OFFICE BUILDING, SUITE E3 10 FINANCIAL AUDIT DIRECTORS:

\\

P.O. BOX 142310 H. Dean Eborn, CPA SALT LAKE CITY, UTAH 84114-2310 Deborah A. Empey, CPA (801) 538-1025 Stan Godfrey, CPA FAX (801) 538-1383 Jon T. Johnson, CPA Auston G. Johnson, CPA UTAH STATE AUDITOR Independent State Auditor's Report To the Board of Trustees, Audit Committee, and Michael K. Young, President University of Utah We have audited the accompanying basic financial statements of the University of Utah (hereinafter referred to as the "University"), a component unit of the State of Utah, as of and for the year ended June 30, 2006, as listed in the table of contents. These financial statements are the responsibility of the University's management.

Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of the University of Utah Hospitals and Clinics or the University's component units, which represent approximately 22%

($604,820,000) of total assets and 43% ($926,600,000) of total revenues of the University. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for the University of Utah Hospitals and Clinics and the component units, is based on the reports of the other auditors. The prior year partial comparative information has been derived from the University's 2005 financial statements and, in our report dated September 30, 2005, we expressed an unqualified opinion, based on our audit and the reports of other auditors, on the basic financial statements.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Th Lose standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The financial statements of the component units were not audited in accordance with Government Auditing Standards. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audit and the reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the University as of June 30, 2006, and the changes in financial position and cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.

4

In accordance with Government Auditing Standards, we have also issued our report dated September 29, 2006 on our consideration of the University's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit The accompanying management discussion and analysis, as listed in the table of contents, is not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

Auston G. Johnso, CPA Utah State Auditor September 29, 2006 5

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INTRODUCTION The following discussion and analysis provides an overview of the financial position and activities of the University of Utah (University) for the year ended June 30, 2oo6, with selected comparative information for the year ended June 30,2005. This discussion has been prepared by management and should be read in conjunction with the financial statements and the notes thereto, which follow this section.

The University is a comprehensive public institution of higher learning with approximately 29,000 students, 2,300 faculty members and more than 20,000 supporting staff. The University offers a diverse range of degree programs from baccalaureate to post-doctoral levels, through a framework of 15 schools, colleges and divisions, and contributes to the state and nation through related research and public service programs. The University also maintains a prestigious health care complex through its University of Utah Hospitals and Clinics (UUHC). The UUHC consists of three hospitals and numerous specialty clinics.

The UUHC is an integral part of the University's health care system that also includes the University's School of Medicine and the Colleges of Health, Nursing, and Pharmacy. The University's health care system has a tradition of excellence in teaching, advancement of medical science and patient care, consistently ranking among the best health care systems in the western United States.

The University consistently ranks as one of the nation's top universities by various measures of quality, both in general academic terms and in terms of strength of offerings in specific academic disciplines and professional subjects.

Excellence in research is another crucial element in the University's high ranking among educational institutions. Research is central to the University's mission and permeates its schools and colleges.

In addition to the academic schools, colleges, and departments, the University operates the University of Utah Research Foundation (UURF), a separately incorporated entity that specializes in applied research, the transfer of patented technology to business entities, leasing and administration of Research Park (a research park located on land owned by the University), and the leasing of certain buildings. Also, a wholly-owned, separately incorporated enterprise, the Associated Regional and University Pathologists, Inc. (ARUP) provides pathology services to regional and national customers.

7

FINANCIAL HIGHLIGHTS The University's financial position remained strong at June 30, 2oo6, with assets of $2.8 billion and total liabilities of $.7 billion. Net assets, which represent the residual interest in the University's assets after liabilities are deducted, increased by $210.3 million to $2.1 billion at June 30, 20o6.

Changes in net assets represent the total activity of the University, which results from all revenues, expenses, gains and losses, and are summarized for the years ended June 30, 2oo6 and 2005 in Figure 1.

Fiscal year 2oo6 revenues before change in fair value of investments increased 8.7%, or $172.9 million, while expenses increased 7.6%, or

$139.6 million.

This resulted in a net gain before changes in fair value of investments of

$183.1 million for fiscal year 2oo6, as compared to $149.8 million for fiscal year 2005.

The University invests its endowment funds to maximize total return over the long term, within an appropriate level of risk. The success of this long-term investment strategy is evidenced by returns averaging 7.8% during the past ten years.

USING THE FINANCIAL STATEMENTS The University's financial report is prepared in accordance with Governmental Accounting Standards Board (GASB) principles and includes three financial statements: the Statement of Net Assets; the Statement of Revenues, Expenses, and Changes in Net Assets; and the Statement of Cash Flows.

Revenues and expenses are categorized as operating or nonoperating and other net asset additions as capital contributions or additions to permanent endowments.

Significant recurring sources of the University's revenues, including state appropriations, gifts and investment

income, are considered nonoperating, as defined by GASB Statement No. 34, BaAic Financial Statements - and Management's DiAcu.Aion and Analy.iA - for State and Local Governmentn.

Nonoperating revenues totaled $342.5 million and $319.7 million for the years ended June 30, 2oo6 and 2005, respectively.

Nonoperating expenses, which include interest expense, totaled $33.6 million and $26.2 million for the years ended June 30, 2oo6 and 2005, respectively.

Also, as required by GASB Statement No. 34, scholarships and fellowships applied to student accounts are shown as a reduction of student tuition and fee revenues, while stipends and other payments made directly to students are presented as scholarship and fellowship expenses. For the years ended June 30, 2006 and 2oo5, scholarship and fellowship expenses totaled

$21.6 million and

$21.3

million, respectively.

In addition, scholarships and fellowships in the amount of $17.4 million and

$13.6 million for the years ended June 30, 2oo6 and 2005, respectively, are reported as a reduction of tuition and fees and auxiliary enterprises revenue.

Other appropriate revenue items have also been reduced by bad debt expense incurred during each fiscal year.

Figure 1.

Total revenues before change in fair value of investment Total expenses Increase in net assets before change in fair value of investments 2006 2005 (in thousands)

$2,149,334

$1,976,472 1,966,266 1,826,662 183,068 149,810 Increase in fair value of investments Increase in net assets 27,250

$ 210,318 28,429

$ 178,239 8

STATEMENT OF NET ASSETS The Statement of Net Assets presents the financial position of the University at the end of the fiscal year and includes all assets and liabilities of the University.

The difference between total assets and total liabilities is net assets and is one indicator of the current financial condition of the University, while the change in net assets is an indicator of whether the overall financial condition has improved or worsened during the year. Assets and liabilities are generally measured using current values except for capital assets, which are stated at historical cost less an allowance for depreciation.

A summarized comparison of the University's assets, liabilities and net assets at June 30, 2oo6 and 2005 is shown in Figure 2.

A review of the University's Statement of Net Assets at June 30, 2oo6 and 2005, shows that the University continues to build upon its strong financial foundation.

This strong financial position reflects the prudent utilization of its financial resources, including careful cost controls, management of its endowment funds, utilization of debt and adherence to its long range capital plan for the maintenance and replacement of the physical plant.

Current assets consist primarily of cash, operating investments, trade receivables and inventories.

W 1-7 791M Current assets represent approximately 7.2 months of total operating expenses (excluding depreciation). Current cash and investments for capital and student loan activities totaled $ioo.6 million at June 30,2006 and $130.8 million at June 30, 2oo5.

Receivables increased from $213.9 million at June 30, 2005 to $233.2 million at June 30,2006.

Current liabilities consist primarily of trade accounts, accrued compensation, deposits, and other liabilities, which totaled $270.2 million at June 30, 2o06, as compared to $243.2 million at June 30, 2005. Current liabilities also include deferred revenue, and the current portion of bonds payable. Total current liabilities increased

$27.0 million during fiscal year 2o06.

Figure 2.

Current assets Noncurrent assets.

Endowment and other investments Receivables Capital assets, net Other Total assets Current liabilities Noncurrent liabilities Total liabilities Net assets 2006 2005 (in thousands)

$1,094,249

$ 822,181 474,858 51,985 1,137,791 18,620 2,777,503 270,175 434,305 704,480

$2,073,023 473,133 57,628 1,094,780 18,981 2,466,703 243,182 360,816 603,998

$1,862,705 9

ENDOWMENT AND SIMILAR INVESTMENTS The University's endowment funds consist of true endowments, term endowments, and quasi-endowments. True endowments (also known as permanent endowments) are those funds received from donors with the stipulation that the principal remain inviolate and be invested in perpetuity to produce income that is to be expended for the purposes specified by the donor. Term endowment funds are similar to true endowments, except that, upon the passage of a stated period of time or the occurrence of a particular event, all or part of the donation may be expended. Quasi-endowments consist of institutional funds that have been allocated by the University for long-term investment purposes, although such funds are not subject to donor restrictions requiring the University to preserve the principal in perpetuity. Programs supported by endowment funds include scholarships, fellowships, professorships, research efforts and other important programs and activities.

The University of Utah endowment pool returned 9.6% for the year ended June 30, 2006 compared to io.6% for the year ended June 30, 2005.

These results reflect the heavy weighting of equities in the asset allocation of the pool and compare favorably to broad indexes such as the S&P 5oo and Lehman Brothers Aggregate Bond (8.6% gain and o.8%

loss, respectively, for fiscal year 2o06). The net gain on the endowment pool for the year ended June 30, 20o6 totaled $24.6 million compared to a gain of $26.3 million for the year ended June 30, 2005.

Endowment funds are invested to maximize long-term results. During fiscal year 2oo6, the University implemented new investment guidelines and asset allocation for the University's Endowment Pool. The new asset allocation provides for broad diversification of assets with the long-term goal of maximizing returns within acceptable risk levels for investment of endowment funds.

Endowment funds invested in the University's endowment pool are invested on a unit basis similar to mutual funds where each new dollar buys a number of shares in the pool. The pool is subject to a spending policy, which determines a distribution rate of return that will be used to allocate funds to University departments from the growth portion of the endowment pool. The purpose of the spending policy is to establish a distribution rate that over time will generate returns adequate to continue support for future expenses in perpetuity assuming moderate levels of inflation. During the year ended June 30, 2006, the spending policy was 4.0% of the twelve quarter moving average of unit market values. Endowment pool income used in operations was $12.o million in fiscal year 2006. The amount allocated to operations exceeded dividends and interest earned on pool investments by $5.6 million.

10

CAPITAL AND DEBT ACTIVITIES One of the critical factors in continuing the quality of the University's academic and research programs is the development and renewal of its capital assets.

The University continues to implement its long-range plan to modernize its complement of older teaching and research facilities, balanced with new construction.

Capital additions totaled $165.2 million in fiscal year 2oo6, as compared to $246.8 million in fiscal year 2005.

Capital additions primarily comprise replacement, renovation, and new construction of academic, research, and health care facilities, as well as significant investments in equipment.. Capital asset additions are funded by capital appropriations, bond proceeds, gifts which were designated for capital purposes, and unrestricted net assets.

Construction in progress at June 30, 2oo6, totaled

$139.0 million that includes projects in numerous buildings across the campus. Significant projects include:

medical laboratories; additional ophthalmologic facilities; a health education facility; engineering office and classroom facilities; and renovation of the Marriott Library.

The University takes seriously its role of financial stewardship and works hard to manage its financial resources effectively, including the prudent use of debt to finance capital projects.

The debt rating of the University is an important indicator of success in this area. The underlying bond ratings from Standard and Poor's and Moody's Investors Service for the Auxiliary and Campus Facilities Bonds are AA/Aa2, the Hospital Revenue Bonds are AA/Aa2, and the Research Facilities Revenue Bonds are AA-/Aa3, respectively. These ratings are considered high investment grade quality and position the University, if deemed necessary, to obtain future debt financing at low interest rates and reduced issuance costs.

Bonds payable totaled $210.9 million and $238.1 million at June 30, 2006 and 2005, respectively.

One new Auxiliary and Campus Facility Revenue Refunding Bond series and one new Hospital Since endowment funds are invested for long-term results rather than short-term annual returns, it is important to reflect on the longer investment horizon. Over the past ten years, the University's endowment pool has earned an average total return of 7.8%, paid out an average of 4.2%, and reinvested the balance representing an average of 3.6%.

The reinvested funds enabled higher balances, thus yielding greater returns to keep pace with inflation of program expenses. Endowments provide crucial support for the University's quality academic programs and accessibility to these programs for all students.

Gifts to the endowment funds at the University totaled $19.3 million and $14.6 million for the fiscal years 2oo6 and 2oo5, respectively.

11

Revenue Refunding Bonds series were issued in fiscal year 2006, which partially advance refunded one previously issued Auxiliary and Campus Facility Revenue Bond series and two other previously issued Hospital Revenue Bond series. The original purpose of all bond debt is to provide funds for the construction and renovation of major capital facilities and the acquisition of capital equipment for the University.

An institution's ratio of unrestricted operating revenues to bonds, notes and contract debt is a valuable indicator of its ability to finance its outstanding debt. At June 30, 2oo6, the University has 3.6 times the unrestricted operating revenue necessary to meet its debt requirements.

NET ASSETS Net assets represent the residual interest in the University's assets after liabilities are deducted.

Inveted in capital auetA, net of related debt represents the University's capital assets net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction or improvement of those assets.

Restricted nonexpendable net oAAetA are the University's permanent endowment funds.

Restricted expendable net a2"etA are subject to externally imposed restrictions governing their use. This category of net assets includes $87.5 million of quasi-endowments.

Although unrestricted net aAAet.A are not subject to externally imposed stipulations, substantially all of the University's unrestricted net assets have been designated for various academic and research programs and initiatives, as well as capital projects.

12

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS The Statement of Revenues, Expenses, and Changes in Net Assets presents the University's results of operations. A summarized comparison of the University's revenues, expenses, and changes in net assets for the years ended June 30, 2006 and 2oo5 is shown in Figure3.

One of the University's greatest strengths is the diverse streams of revenues which supplement its student tuition and fees, including voluntary private support from individuals, foundations, and corporations, along with government and other grants and contracts, state appropriations, and investment income. The University has in the past and will continue to aggressively seek funding from all possible sources consistent with its mission, to supplement student tuition, and to manage prudently the financial resources realized from these efforts to fund its operating activities.

Significant recurring sources of the University's revenues are considered nonoperating, as defined by GASB Statement No. 34. Graph i (Operating Revenues) and Graph 2 (Nonoperating Revenues) are illustrations of revenues by source, which were used to fund the University's operations for the year ended June 30, 2oo6 (amounts are presented in thousands of dollars).

Figure 3.

2006 2005 (in thousands)

Operating revenues Tuition and fees Patient services Grants and contracts Sales and services Auxiliary enterprises Other Total operating revenues Operating expenses Operating loss Nonoperating revenues (expenses)

State appropriations Gifts Investment income Interest expense Other Net nonoperating revenues Capital appropriations Capital and endowment grants and gifts Total capital and endowment revenues Increase in net assets Net assets - beginning of year Net assets - end of year

$ 142,432 821,704 300,744 382,902 70,433 72,116 1,790,331 1,932,667 (142,336) 249,608 26,248 66,620 (14,801)

(18,798) 308,877 9,014 34,763 43,777 210,318 1,862,705

$2,073,023

$ 132,189 746,425 294,588 324,503 75,802 66,838 1,640,345 1,800,464 (160,119) 238,756 26,787 54,179 (16,172)

(10,026) 293,524 8,953 35,881 44,834 178,239 1,684,466

$1,862,705 13

Graph 1.

OPERATING REVENUES M Tuition and Fees

_. Patient Services M Governmental Grants & Contracts I Nongovernmental Grants & Contracts Sales and Services Auxiliary Enterprises

/ Other Graph 2.

NONOPERATING REVENUES

$142,432

$821,704

$226,655

$74,089

$382,902

$70,433

$72,116 The University continues to face significant financial pressure, particularly in the areas of compensation and benefits, which represent 53.1%

of total expenses, as well as in the areas of technology and utility costs.

To manage this financial pressure, the University continues to seek diversified sources of revenue and to implement cost containment measures.

Tuition and state appropriations are the primary sources of funding for the University's academic programs. Student tuition and fees, net of allowances for scholarships and fellowships, increased $1o.2 million, or 7.7% to $1424 million in fiscal year 2006.

State appropriations increased 4.5% or $1o.9 million to

$249.6 million in fiscal year 2006.

While tuition and state appropriations fund a significant percentage of the University's academic and administrative costs, private support has been, and will continue to be, essential to the University's academic success. Private support remained stable with gift revenues for operations slightly decreasing by 2.0%, or $o.5 million, to $26.2 million in fiscal year 2oo6.

Revenues for grants and contracts increased 2.1%,

or $6.2 million, to $300.7 million in fiscal year 2oo6, primarily related to research programs. The increase in grant and contract revenues was generated by a broad base of schools, colleges, and research units across the University.

The University receives revenues for grants and contracts from government and private sources, which provide for the recovery of direct costs and facilities and administrative (indirect) costs.

Patient care revenues increased io.i% or $75.3 million to $821.7 million in fiscal year 2oo6. The majority of these revenues relate to patient care services, which are generated within UUHC under contractual arrangements with governmental payers and private insurers. Increased revenues primarily resulted from a growth in patient volume, demand for specialty services provided by outpatient clinics and moderate price increases for patient services.

Net investment income for the years ended June 30, 2006 and 2005, consisted of the following components:

• State Appropriations

.I Gifts Investment Income

$249,608

$26,248

$66,620 14

2006 2005 (in thousands)

Interest and dividends, net $39,370

$25,750 A comparative summary of the University's expenses for the years ended June 30, 2006 and 2005 follows:

Net increase in fair value of investments 27,250 Net investment income $66,620 28,429

$54,179 2006 2005 (in thousands)

Net investment income totaled $66.6 million in fiscal year 2oo6, as compared to $54.2 million in fiscal year 2005, which is an increase of $12.4 million. Moreover, as discussed previously, the University's endowment investment policies are designed to maximize long-term total return while its income distribution policies are designed to preserve the value of the endowment portfolio and to generate a predictable stream of spendable income. The income distribution from the University's endowment portfolio for the support of operating activities, in accordance with the University's spending policy, totaled $12.0 million in fiscal year 2oo6, as compared to $11.6 million in fiscal year 2005. In addition, in fiscal year 2o06,

$1.3 million was returned to endowment principal.

Capital appropriations received from the State in fiscal year 20o6, which totaled $9.0 million, funded a portion of building renovation projects. Other revenues include capital grants and gifts and additions to permanent endowments totaling $34.8 million for the fiscal year ending June 30, 2006.

Operating Compensation and benefits Component units Supplies Purchased services Depreciation and amortization Utilities Cost of goods sold Repairs and maintenance Scholarships and fellowships Other Total operating Nonoperating Interest and other Total expenses

$1,043,826 227,340 228,806 103,443 97,475 52,238 29,165 21,004 21,624 107,746 1,932,667 33,599

$1,966,266

$ 980,676 203,419 201,988 94,419 96,142 44,905 29,411 10,809 21,338 117,357 1,800,464 26,198

$1,826,662 Graph 3 is a graphic illustration of total expenses, in thousands of dollars, by natural classification.

Graph 3.

EXPENSES A Compensation and Benefits I Component Units J Supplies I Purchased Services R Depreciation and Amortization I Utilities I_ Cost of Goods Sold 0 Repairs and Maintenance E Scholarships and Fellowships

• Interest

'M Other

$1,043,826

$227,340

$228,806

$103,443

$97,475

$52,238

$29,165

$21,004

$21,624

$14,801

$126,544 Scholarship & Fellowships Interest Repairs & Maintenance Cost of Goods Sold "

b Utilities Depreciation & Amortization Purchased Services 15 I

The University is committed to recruiting and retaining an outstanding faculty and staff and the compensation package is one way to successfully compete with peer institutions and nonacademic employers.

The resources expended for compensation and benefits increased 6.4%, or $63.2 million, to $1,043.8 million in fiscal year 2oo6. Of this increase, compensation increased 7.1%, or $53.6 million, as a result of annual increases and the hiring of additional employees.

The related employee benefits increased 4.3% or $9.6 million.

Other operating expenses decreased 8.2%, or $9.6 million, to $107.7 million in fiscal year 20o6.

In addition to their natural classification, it is also informative to review operating expenses by function.

A comparative summary of the University's operating expenses by functional classification for the years ended June 30, 2006 and 2005 follows:

Instruction Research Public service Academic support Student services Institutional support Operations and maintenance of plant Student aid Other Hospital Total operating expenses 2006 -

2005 (in thousands)

$ 248,885

$ 232,232 215,018 211,529 354,797 314,762 66,299 66,488 18,246 16,890 35,780 50,656 STATEMENT OF CASH FLOWS The Statement of Cash Flows provides additional information about the University's financial results, by reporting the major sources and uses of cash.

The University's cash and cash equivalents decreased $22.1 million due primarily to the purchase of investments, debt service and operating activities. This negative flow of funds was offset by funds provided by noncapital financing activities, predominantly state appropriations.

The University's significant sources of cash provided by noncapital financing activities, as defined by GASB Statement No. 9, include state appropriations and private gifts used to fund operating activities.

CURRENT FACTORS HAVING PROBABLE FUTURE FINANCIAL SIGNIFICANCE A primary factor contributing to the University's sound financial footing is the performance of its healthcare operations, UUHC and ARUP - with fiscal year 20o6 distinguishing itself as the best year ever for both organizations.

These operations will probably continue to comprise a growing proportion of total University revenues.

Academic colleges and related services operating on the main campus are, for the most part, financially healthy - but are reliant on state appropriations and federal research funds. The economy of the State of Utah continues to expand and this bodes well for higher education support.

Management anticipates modest increases in general State support for compensation in the 3-5% range. It is also hoped that the State may address some long-standing needs for deferred maintenance and utility cost funding - at least on a one-time basis.

Federal research awards for 2oo6, while significant, reflect little growth over the prior year.

Competition for these funds is intense, and the federal government research budget has been stagnant in recent years. This not only has an effect 48,335 32,071 361,568 551,668 43,027 32,035 314,734 518,111

$1,932,667

$1,800,464 Instruction, research, and public service expenses increased 7.9%, or $6o.2 million, to $818.7 million in fiscal year 2oo6. Academic and institutional support expenses decreased 12.9%, or $15.1 million, to $1o2.1 million in fiscal year 2oo6.

16

on direct research revenues, but on the indirect cost recovery the University receives to reimburse overhead costs associated with research activities.

On a related note, the University has submitted a new facilities and administration rate study -

based on fiscal year 2005 data, to the federal government as part of the process to renegotiate the indirect cost reimbursement rate for research.

This negotiation will likely take place in 2007, and we believe the current on-campus rate of 49.5% can be maintained or increased.

On the positive side, the University is gearing up for a major capital campaign, which is projected to add significantly to our endowment base. We are also looking forward to increased income from long-term investments as the economy continues to rebound and investment returns increase somewhat from the relatively modest gains of recent years. In addition, during fiscal year 2006 the University's Huntsman Cancer Institute (HCI) and the Huntsman Cancer Hospital (HCH) applied for and received significant funding from the Centers for Medicare and Medicaid Services (a division of the Department of Health and Human Services), in the form of a forgivable loan. Although it is not certain, HCI and HCH intend to satisfy the forgiveness provisions of this loan. If they are successful, loan proceeds will be used to retire certain debt issued to finance HCI and HCH, which will significantly reduce the University's debt service payments.

In summary, despite various challenges, the University remains on solid financial footing and maintains a strong set of financial performance indicators.

These factors contribute to the high levels of confidence and support that the University enjoys from

students, donors, legislators, taxpayers, sponsors, and creditors.

17

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THE UNIVERSITY OF UTAH I Statement o-t s

(in thou AariJdof dollurA) 7,

~~As ofJune 30,""

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2006

[For C(mpaIisonOnly]

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2005'F ASSETIS Current 'Assets Cash and cash equivalents.(Notes 2 & 4)

.Slrtterm investments (Notes 2 & 4)

'Receivables, net(Note 5)

Inventory (Note 1)

I Other asset's (Note 6)

-Total urrIent assets j NoncurirentAssets

.'Restfitedcash aiid cash equivalents (NQtes 2'& 4)

- Restricted 'shor-termtyin estvnents-(Notes?& 4)F" investments h(N e otes te (o

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Restrictedminvestments (Notes 3 & 4),

'Restricte'd. reeivables* net (Note'S)

D.oiinted proiperty heldfoir sale',

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\\: ".....

'},"Capital assets', }iet'(Nte )"ij 5":..*,[

Total noncurrent assets

-.Total a'sets" LIABILITIES

.Current Liabilities' Accounts payable..'

"Accrued payroll'.

Compensated 'absences & early retirement benefit's (Note Deferred revenue (Note 9),

° DeDeposits & other liabilities (Notes 11,& 15)

Bonds, notesand contracts payable (Notes 14,-15, & 16)

Total current liabilities

$ 558,042 264,883 23,**

,2080.

-16,1005',

28,411 21 M04.24,Y,

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F

'F865 1'

158,628 289,454'

'51,985 2.i:

-,!:.:2,732£:'

,'i5,888 1'

113,71791

'1~q683;25;4' 27 77,7503,

"6349 62,129 23 742 21,232.

~270,175

$ 491,679) 80,061 213,948' 27,591 8,902' 114,359

,710 1.75,966 182,098 F 57,628 2,782 16,199~

1,094,780F

~2,466,'703 61,820 3,990 B2 3,816 77,390 1 243,1 X82'F'7

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Noncurrent Liabilities Comperisated absences & earlyiretirement benefits (Note 1)'

Deposits & other liabilities (Notes'11 & 1,5)

Bonds, notes and con'tracts p5ayable (Notes ý 14, 15;& 16).

Total nohcurrent liabilities' '2' Total liabilities NET ASSETS

-Invested in capital assetsý, net'

,of "relat*d debt Restricted for

' F' Nonexpendable '

'F 34',202

'o <9;0'19,;

"F 391,084" 704.480 828,988

' ' 99,04'1 32,944 45,205' F

91,010.

5,284%F 31 002' 11,345 318,469 360,816 603,998 760,338 Instruction Research

-Public service.'

Academic support Scholarships;

'Other Expendable

'Instruction

'Research Public service

ýAcademic suppt,

Institutional support2 F, Scholarships.,

Loans Debt service Capital additions Other Unrestricted Total net assetL5 F '20,869 52130 38,979 35

976_

2,504,

• 2*60';0554 B4,134

'F 580,272

~$2Q,0713-'02 92,889,9 30,057 39.771 29,580 78711 4,033 5,768

'123,239 25,971 41,651 29,528 5 765 37.048 14.474'4 F 49,228 6,193.

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THE" UNIVERSITY OF UTAH I Statement of Reven6ues, Expenss'd, aid*Changes inw NetAssets (in thou.andh of dollarA)

For the Years Ended June 309ý'

[For Comparison Only]

2006 2005 OPERATING REVENUES AND EXPENSES Revenues Tuition and fees (Note 1)

$ 142,432 132,189 Patient services (Notes 1 & 13) 821,704 746,425 Federal grants and contracts 207,097 207,079 State and local grants and contracts 19,558 16,870, Nongovernmental grants and contracts 74,089 70,639 Sales and services (Note 1) 382,902 324,503 Auxiliary enterprises (Note 1) 70,433 75,802 Other operating revenues.

72,116 66,838.

Total operating revenues 1,790,331 1,640,345 Expenses Compensation and benefits 1,043,826 980,676' Component units 227,340 203,419 Supplies 228,806 201,988 Purchased services

-1103,443 94,419 Depreciation and amortization 97,475 96,14'2 Utilities 52,238 44,905 Cost of goods sold 29,165 29,411 Repairs and maintenanc&

21,004 10,809.

Scholarships and fellowships 21,624 21,338 Other operating expenses 107,746 117,357 Total operating expenses 1,932,667 1,800,464f

'Operating loss

-"(142,336)

• (160,119)

NONOPERATING REVENUES (EXPENSES)

State appropriations 249,608 238,756.

Gifts 26,248 26,787 Investment income 66,620 54,179 Interest (14,801)

(16,172)

Other nonoperating expenses (48,798)

(10,026)

Total nonoperating revenues 308,877 293,524 Gain before capital and permanent endowment additions 166,541 133,405 Capital appropriations 9,014 8,953 Capital grants and gifts 20,788 24,491 Additions to permanent endowments 13,975 11,390 Total capital and permanent endowment additions 43,777 44,834 Increase in net assets 210,318 178,239 NET ASSETS,,-

Net assets - beginning of year 1,862,705 1,684,466 Net assets - end of year

$2,073,023

$1,862,705 21 The accompanying notes are an integral part of these financiýal.statements

THE UNIVERSITY OF"'UTAH I Statement of Cash Flows (in thouwandA of dollarA)

For the Years Ended June 30 1

CASH FLOWS FROM OPERATING ACTIVITIES Receipts from tuition and fees Receipts from patient services Receipts from contracts and grants Receipts from auxiliary and educational services Collection of loans to students Payments to suppliers Payments for personal services Payments for scholarships/fellowships Loans issued to students Other Net cash used by operating activities

ý CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES State appropriations Gifts Endowment, Nonendowment Other Net cash provided by noncapital financing activities 2006

$ 142,705 815,311 291,799 452,831 8,649 (769,381)

(1,034,341)

(21,623)

(5,880) 85,219 (34,711) 249,608 14,407 27,307 (18,732) 272,590

[For Comparison Only) 2005

$ 132,850 719,817 295,380 401,263 7,868 (721,667).

(974,425)

(21,338)

(9,692) 73,638 (96,306) 238,756 11,506 29,401 (9,870)

.269,793 I

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from capital debt 171,048 Capital appropriations 9,014 Gifts 21,820 Purchase of capital assets (125,315)

Principal paid on capital debt (112,690)

Interest paid on capital debt (14,640)

Net cash used by capital and related financing activities (50,763)

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales and maturities of investments Receipt of interest on investments Purchase of investments Net cash provided (used) by investing activities Net increase (decrease) in cash Cash - beginning of year Cash - ending of year 26,888

• .. 8,952 19,787 (131,079)

(53,490)

(16,165),

(145,107)

180,594 24,646 (82,091) 123,149 151,529 454,509

$ 606,038 113,391 40,551 (363,143)

(209,201)

(22,085) 606,038

$ 583,953 22 The accompanying notesa-e 'an interal part of these financial statements

THE UNIVERSITY OF UTAH I Statement of Cash Flows (in thou~AandA of dollarA),

For the Years Ended June 30

[For Comparison Only]

.2006" 2005 RECONCILIATION OF NET OPERATING LOSS TO CASH USED BY OPERATING ACTIVITIES Operating loss

.(142,336)

$(160,119)

Adjustments to reconcile operating loss to cash used by operating activities Depreciation expense 97,475 96,142 Change in assets and liabilities Receivables, net (15,290),

r

,(24,072).

Inventory (2,414),

(2,156)

Donated property held for sale 29 Other assets 1,102 434 Accounts payable 1,673 (17,636)

Accrued payroll 6,052 3,618 Compensated absences & early retirement benefits 3,434 2,632 Deferred revenue (75)

(5,575)

N Deposits & other liabilities 15,639 10,426, Net cash used by operating ac tivities

$ (34,711)'

$ (96,306)

NONCASH INVESTING, CAPITAL, AND FINANCING ACTIVITIES Capital leases 15,172

$ 30,370 Donated property and equipment 12,786, 8,582 Annuity and life income 162 163 Increase in fair value of investments 27,250 28,429 Total noncash investing, capital, and financing activities

$ 55,370, S, 67,544ý 23 The accompanying notes are an integral part of these financial statements

Hafts

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1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES A.

Reporting Entity The financial statements report the financial activity of the University of Utah (University),

including the University of Utah Hospitals and Clinics (UUHC). The University is a component unit of the State of Utah. In addition, University administrators hold a majority of seats on the boards of trustees of two other related entities representing component units of the University.

Component units are entities that are legally separate from the University, but are financially accountable to the University, or whose relationships with the University are such that exclusion would cause the University's financial statements to be misleading or incomplete. The relationship of the University with its component units requires the financial activity of the component units to be blended with that of the University. Copies of the financial report of each component unit can be obtained from the University.

The component units of the University are the University of Utah Research Foundation (UURF) and Associated Regional and University Pathologists, Inc. (ARUP).

- UURF is a not-for-profit corporation governed by a board of directors who are affiliated with the University with the exception of two. The operations of UURF include the leasing and the administration of Research Park (a research park located on land owned by the University),

the leasing of certain buildings, and the commercial development of patents and products developed by University personnel.

The fiscal year end for UURF is June 30. UURF is audited by other independent auditors and their report, dated September 6, 2oo6, has been issued under separate cover.

- ARUP is a for-profit corporation that provides clinical laboratory services to medical centers, hospitals, clinics and other clinical laboratories throughout the United States, including UUHC.

ARUP contracts with the Department of Pathology of the University of Utah School of Medicine to provide pathology consulting services. The fiscal year end for ARUP is June 30. Other independent auditors audited ARUP and their report, dated September i, 2oo6, has been issued under separate cover.

All Governmental Accounting Standards Board (GASB) pronouncements and all applicable Financial Accounting Standards Board (FASB) pronouncements are applied by the University, UURF and ARUP in the accounting and reporting of their operations. However, in accordance with GASB Statement No. 2o, Accounting and Financial Reporting for Proprietary FundA and Other Governmental EntitieA That Uze Proprietary Fund Accounting, the University has elected not to apply FASB pronouncements issued after November 30, 1989.

B.

BaAiA of Accounting All statements have been prepared using the economic resources measurement focus and the accrual basis of accounting. Operating activities include all revenues and expenses, derived on an exchange basis, used to support the instructional, research and public service efforts, and other University priorities.

Significant recurring sources of the University's revenues are considered nonoperating as defined by GASB Statement No. 34, Bazic Financial StatementA -

and Management': Dizcuwion and AnalyAiA -for State and Local GovernmentA, and required by GASB Statement No.

35, Bazic Financial Statementm - and Management'6 Di.ctizion and AnalyziA - for Public CollegeA and Univer.itieA.

When both restricted and unrestricted resources are available, such resources are spent and tracked at the discretion of the department within the guidelines of donor restrictions.

Investments are recorded at fair value in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain InveutmentA and for External Investment PoolA.

Accordingly, the change in fair value of investments is recognized as an increase or decrease to investment assets and investment revenue.

The University distributes earnings 25

from pooled investments based on the average daily investment of each participating account or for endowments, distributed according to the University's spending policy.

In accordance with GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Tran.actionA, the University recognizes gifts, grants, appropriations, and the estimated net realizable value of pledges as revenue as soon as all eligibility requirements imposed by the provider have been met.

Patient revenue of UUHC and the School of Medicine medical practice plan are reported net of third-party adjustments.

In accordance with GASB Statement No. 34, certain expenses are netted against revenues as allowances.

The following schedule presents revenue allowances for the years ended June 30, 2006 and 2oo5:

Revenue Tuition and fees Patient services Sales and services Auxiliary enterprises 2006

$16,682,607 41,800,569 32,597 851,665 2005

$13,025,482 34,695,589 14,667 911,203 after fifteen years of service.

There is no requirement to use vacation leaye, but a maximum of thirty days plus one-year accrual may be carried forward at the beginning of each calendar year.

Employees are reimbursed for unused vacation leave upon termination and vacation leave is expended when used or reimbursed. The liability for vacation leave at June 30, 2oo6, was approximately $34,203,000.

Employees earn sick leave at a rate of eight hours each month, with an accumulation limit of 1,04o hours. The University does not reimburse employees for unused sick leave.

Each year, eligible employees may convert up to four days of unused sick leave to vacation leave based on their use of sick leave during the year. Sick leave is expended when used.

In addition, the University may provide early retirement benefits, if approved by the Administration and by the Board of Trustees, for certain employees who have attained the age of 6o with at least fifteen years of service and who have been approved for the University's early retirement program.

Currently, 99 employees participate in the early retirement program. The University pays each early retiree an annual amount equal to the lesser of 20% of the retiree's final salary or their estimated social security benefit, as well as health care and life insurance premiums, which is approximately 5o% of their early retirement salary, until the employee reaches full social security retirement age. The amount recognized on the financial statements was calculated at the discounted present value of the projected future costs. The discount rate used was based on the average rate earned by the University on cash management investments for the fiscal year. The funding for these early retirement benefits is provided on a pay-as-you-go basis. For the year ended June 30, 2006, these expenditures were approximately $1,567,000.

F. Construction The Utah State Division of Facilities Construction and Management (DFCM) administers most of the construction of

-facilities for state institutions, maintains C. InventorieA Bookstore inventories are valued using the retail inventory method. All other inventories are stated at the lower of cost or market using the first-in, first-out method or on a basis which approximates cost determined on the first-in, first-out method.

D. ReAearch and Development Co.t.

Research and development costs of ARUP are expensed as incurred. These costs for the year ended June 30, 2006, were approximately

$6,920,000.

E. Compen~ated AbAenceA & Early Retirement BenefitA Employees' vacation leave is accrued at a rate of eight hours each month for the first five years and increases to a rate of 16.67 hours7.75463e-4 days <br />0.0186 hours <br />1.107804e-4 weeks <br />2.54935e-5 months <br /> each month 26

records, and furnishes cost information for recording plant assets on the books of the University.

Interest expense incurred for construction of capital facilities is considered immaterial and is not capitalized. Construction projects administered by DFCM that were started prior to fiscal year 2002 and are not completed are recorded as Construction in Progress. Construction projects beginning in fiscal year 2002 and after will not be recorded on the books of the University until the facility is available for occupancy.

G. Di.clo-sure-A Certain financial information for fiscal year ended June 30, 2005 is included for comparison only and is not complete. Complete information is available in the separately issued financial statements for that year.

2. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS Cash and cash equivalents consists of cash and short-term investments with an original maturity of three months or less.

Cash, depending on source of receipts, is pooled, except for cash and cash equivalents held by ARUP and when legal requirements dictate the use of separate accounts. The cash balances and cash float from outstanding checks are invested principally in short-term investments that conform to the provisions of the Utah Code. It is the practice of the University that the investments ordinarily be held to maturity at which time the par value of the investments will be realized.

The Utah State Treasurer's Office operates the Utah Public Treasurer's Investment Fund (PTIF) which is invested in accordance with the State Money Management Act. The State Money Management Council provides regulatory oversight for the PTIF.

The PTIF is available for investment of funds administered by any Utah public treasurer.

At June 30, 2006, cash and cash equivalents and short-term investments consisted of:

Cash and Cash Equivalents Cash

$ (14,351,099)

Money market funds 5,880,227 Time certificates of deposit 64,410,699 Obligations of the U.S.

Government and its agencies 120,358,005 Utah Public Treasurer's Investment Fund 407,655,480 Total (fair value)

$583,953,312 Short-term Investments Time certificates of deposit

$ 6,000,000 Obligations of the U.S.

Government and its agencies 259,747,974 Total (fair value)

$265,747,974

3. INVESTMENTS Funds available for investment are pooled to maximize return and minimize administrative cost, except for funds that are authorized by the University administration to be separately invested or which are separately invested to meet legal or donor requirements. Investments received as gifts are recorded at market or appraised value on the date of receipt. If no market or. appraised value is available, investments received as gifts are recorded at a nominal value. Other investments are also recorded at fair value.

UURF receives, in exchange for patent rights, common stock of newly organized companies acquiring these patents. Inasmuch as the stock is ordinarily not actively traded, the fair value is ordinarily not ascertainable and any realization from the sale of the stock is often uncertain.

Therefore, such stock is recorded by UURF at a nominal value. Those stocks that are publicly traded are recorded at their fair value on June 30, 2006.

University personnel manage certain portfolios, while other portfolios are managed by banks, investment advisors or through trust agreements.

27

According to the Uniform Management of Institutional Funds Act, Section 13-29 of the Utah

Code, the governing board may appropriate for expenditure for the purposes for which an endowment is established, as much of the net appreciation, realized and unrealized, of the fair value of the assets of an endowment over the historic dollar value as is prudent under the facts and circumstances prevailing at the time of the action or decision.

The endowment income spending policy at June 30, 20o6, is 4% of the twelve quarter moving average of the market value of the endowment pool. The spending policy is reviewed periodically and any necessary changes are made.

The amount of net appreciation on investments of donor-restricted endowments available for authorization for expenditure at June 30, 2oo6, was approximately $81,437,0oo.

The net appreciation is a component of restricted expendable net assets.

At June 30, 2oo6, the investment portfolio composition was'as follows:

investment transactions. The Act requires the depositing of University funds in a qualified depository. The Act defines a qualified depository as any financial institution whose deposits are insured by an agency of the federal government and which has been certified by the State Commissioner of Financial Institutions as meeting the requirements of the Act and adhering to the rules of the Utah Money Management Council.

As of July 1, 2005 for endowment funds, the University follows the requirements of the Uniform Management of Institutional Funds Act (UMIFA) and State Board of Regents Rule 541, Management and Reporting of Institutional Investments (Rule 541).

Deposits Cu.todial Credit RiLk: Custodial credit risk for deposits is the risk that, in the event of a bank failure, the University's deposits may not be returned to it.

At June 30, 2006, the carrying amounts of the University's deposits and bank balances were

$59,936,316 and $82,253,232, respectively. The bank balances of the University were insured for

$200,000, by the Federal Deposit Insurance Corporation. The bank balances in excess of

$200,000 were uninsured and uncollateralized, leaving $82,053,232 exposed to custodial credit risk. The University's policy for reducing this risk of loss is to deposit all such balances in qualified depositories, as defined and required by the Act.

Investments The State of Utah Money Management Act defines the types of securities authorized as appropriate investments for the University's non-endowment funds and the conditions for making investment transactions. Investment transactions may be conducted only through qualified depositories, certified dealers, or directly with issuers of the investment securities.

These statutes authorize the University to invest in negotiable or nonnegotiable deposits of qualified depositories and permitted Obligations of the U.S.

Government and its agencies Mutual funds Common and preferred stocks Total (fair value)

$ 58,999,170 375,217,260 13,865,487

$ 448,081,917

4. DEPOSITS AND INVESTMENTS The State of Utah Money Management Council has the responsibility to advise the State Treasurer about investment policies, promote measures and rules that will assist in strengthening the banking and credit structure of the state, and review the rules adopted under the authority of the State of Utah Money Management Act that relate to the deposit and investment of public funds.

Except for endowment funds, the University follows the requirements of the Utah Money Management Act (Utah Code, Section 51, Chapter 7) in handling its depository and 28

negotiable agreements; commercial paper that is classified as "first tier" by two nationally recognized statistical rating organizations, one of which must be Moody's Investors Service or Standard & Poor's; bankers' acceptances; obligations of the United States Treasury including bills, notes, and bonds; bonds, notes, and other evidence of indebtedness of political subdivisions of the State; fixed rate corporate obligations and variable rate securities rated "A" or higher, or the equivalent of "A" or higher, by two nationally recognized statistical rating organizations; shares or certificates in a money market mutual fund as defined in the State Money Management Act; and the Utah State Public Treasurer's Investment Fund.

The UMIFA and Rule 541 allow the University to invest endowment funds (including gifts, devises, or bequests of property of any kind from any source) in any of the above investments or any of the following subject to satisfying certain criteria: professionally managed pooled or commingled investment funds registered with the Securities and Exchange Commission or the Comptroller of the Currency (e.g.,

mutual funds);

professionally managed pooled or commingled investment funds created under 5o1(f) of the Internal Revenue Code which satisfy the conditions for exemption from registration under Section 3(c) of the Investment Company Act of 1940; any investment made in accordance with the donor's directions in a written instrument; and any alternative investment funds that derive returns primarily from high yield and distressed debt (hedged or non-hedged), private capital (including venture capital, private equity, both domestic and international), natural resources, and private real estate assets or absolute return and long/short hedge funds.

The PTIF is not registered with the SEC as an investment company. The PTIF is authorized and regulated by the State Money Management Act, Section 51-7, Utah Code Annotated, 1953, as amended. The Act established the State Money Management Council which oversees the activities of the State Treasurer and the PTIF and details the types of authorized investments. Deposits in the PTIF are not insured or otherwise guaranteed by the State of Utah, and participants share proportionally in any realized gains or losses on investments.

The PTIF operates and reports to participants on an amortized cost basis. The income, gains, and losses - net of administration fees, of the PTIF are allocated based upon the participant's average daily balance.

The fair value of the PTIF investment pool is approximately equal to the value of the pool shares.

The University's participation in mutual funds may indirectly expose it to risks associated with using, holding, or writing derivatives. However, specific information about any such transactions is not available to the University.

Interet Rate Riik: Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment.

The University's policy for managing its exposure to fair value loss arising from increasing interest rates is to comply with the State Money Management Act or the UMIFA and Rule 541, as applicable. For non-endowment funds, Section 51-7-n of the Act requires that the remaining term to maturity of investments may not exceed the period of availability of the funds to be invested. The Act further limits the remaining term to maturity on all investments in commercial paper, bankers' acceptances, fixed rate negotiable deposits and fixed rate corporate obligations to 270-365 days or less. In addition, variable rate negotiable deposits and variable rate securities may not have a remaining term to final maturity exceeding 2 years. For endowment funds, Rule 541 is more general, requiring only that investments be made as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the endowments and by exercising reasonable care, skill, and caution.

As of June 30, 2006, the University had debt securities and maturities as shown in Figure i.

29

Figure 1.

Investment Maturities (in years)

Investment Type Money market mutual funds Utah Public Treasurer's Investment Fund U.S. Treasuries U.S. Agencies Mutual bond funds Totals Fair Value 1,736,610 407,655,480 273,930,144 165,175,005 97,871,591

$946,368,830 Less than 1 1,736,610 407,655,480 210,010,974 165,175,005

$784,578,069 1-5

$63,919,170 4,690,248

$68,609,418 6-10

$93,181,343

$93,181,343 Credit RiLk: Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The University's policy for reducing its exposure to credit risk is to comply with the State Money Management Act, the UMIFA, and Rule 541, as previously discussed.

At June 30, 2oo6, the University had debt securities and quality ratings as shown in Figure 2.

Cu.Atodial Credit RiAk: Custodial credit risk for investments is the risk that, in the event of a failure of the counterparty, the University will not be able to recover the value of its investments that are in the possession of an outside party. The University's policy for reducing its exposure to custodial credit risk is to comply with applicable provisions of the State Money Management Act.

As required by the Act, all applicable securities purchased were delivered versus payment and held in safekeeping by a bank. Also, as required, the ownership of book-entry-only securities, such as U.S. Treasury or Agency securities, by the University's custodial bank was reflected in the book-entry records of the issuer and the University's ownership was represented by a receipt, confirmation, or statement issued by the custodial bank.

At June 30, 2006, the University's custodial bank was both the custodian and the investment counterparty for $409,392,900 of U.S. Treasury and Agency securities purchased by the University and $4,967,749 of U.S. Treasury securities were held by the custodial bank's trust department but not in the University's name.

Concentration of Credit RiAk: Concentration of credit risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer.

The University's policy for reducing this risk of loss is to comply with the Rules of the State Money Management Council or the UMIFA and Rule 541, as applicable. Rule 17 of the State Money Management Council limits non-endowment fund investments in a single issuer of commercial paper and corporate Figure 2.

Investment Type Money market mutual funds Utah Public Treasurer's Investment Fund U.S. Treasuries U.S. Agencies Mutual bond funds Totals Fair Value 1,736,610 407,655,480 273,930,144 165,175,005 97,871,591

$946,368,830 AAA 309,418 165,175,005

$165,484,423 Quality Rating Unrated

$ 1,427,192 407,655,480 97,871,591

$506,954,263 No Risk

$273,930,144

$273,930,144 30

obligations to 5-1o% depending upon the total dollar amount held in the portfolio. For endowment funds, Rule 541 requires that a minimum of 25% of the equity portfolio must be invested in companies with an average market capitalization of at least $1o billion; also a minimum of 25% of the overall endowment portfolio should be invested in investment grade fixed income securities as defined by Moody's Investors Service or Standard & Poor's. The overall endowment portfolio cannot consist of more than 75% equity investments. Rule 541 also limits investments to no more than 3% in any one sector fund that is concentrated within one sector of the U.S. market and no more than 5% in equity or fixed income funds of developing markets.

It also limits investments in alternative investment funds, as allowed by Rule 541, to between o% and 3o% based on the size of the University's endowment fund.

5. RECEIVABLES Accounts, pledges, and interest receivable include hospital patient accounts, medical services plan accounts, trade accounts, pledges, interest income on investments, and other receivables.

Loans receivable predominantly consist of student loans.

Allowances for doubtful accounts are established by charges to operations to cover anticipated losses from accounts receivable generated by sales and services and student loans.

Such accounts are charged to the allowance when collection appears doubtful and the accounts are referred to collection agencies.

Any subsequent recoveries are credited to the allowance accounts. Allowances are not established for pledges or in those instances where receivables consist of amounts due from governmental units or where receivables are not material in amount.

The following schedule presents receivables at June 30, 20o6, including approximately $1,595,ooo,

$25,289,o0o and $25,102,000 of noncurrent notes, loans and pledges receivable, respectively:

Accounts Contracts and grants Notes Loans Pledges Interest Less allowances for bad debt Receivables, net

$234,400,831 35,681,493 1,755,611 30,914,052 27,381,230 2,780,277 332,913,494 (47,720,500)

$285,192,994

6. DEFERRED CHARGES AND OTHER ASSETS The costs associated with issuing long-term bonds payable are deferred and amortized over the life of the related bonds using the straight-line method, which approximates the effective interest method. In addition, goodwill associated with the purchase of certain health clinics is amortized using the straight-line method.

7-CAPITAL ASSETS Buildings, infrastructure and improvements, which includes roads, curbs and gutters, streets and sidewalks, and lighting systems; land; equipment; and library materials are valued at cost at the date of acquisition or at fair market value at the date of donation in the case of gifts.

Buildings, infrastructure and improvements, and additions to existing assets are capitalized when acquisition cost equals or exceeds

$5o,ooo. Equipment is capitalized when acquisition costs exceed $5,ooo for the University or $5oo for UUHC. All costs incurred in the acquisition of library materials are capitalized. The University acquires some of its equipment from inventories of government excess property for which the University pays a minimal processing charge. Such property is valued at the original cost paid by the governmental entity. All campus land acquired through grants from the U.S. Government has been valued at $3,000 per acre.

Other land acquisitions have been valued at original cost or fair market value at the date of donation in the case of gifts.

Buildings, improvements, 31

land, and equipment of component units have been valued at cost at the date of acquisition.

Capital assets of the University and its component units are depreciated on a straight-line basis over their estimated useful lives. The estimated useful lives of University assets extends to forty years on buildings, fifteen years on infrastructure and improvements, twenty years on library books, and from five to fifteen years on equipment. The estimated useful lives of component unit assets extend to fifty years on buildings and improvements and from three to eight years on equipment. Land, art and special collections, and construction in progress are not depreciated.

At June 30, 2oo6, the University had outstanding commitments for the construction and remodeling of University buildings of approximately $28,o81,ooo.

Capital assets at June 30, 2oo6, are shown in Figure 3.

8. PENSION PLANS AND RETIREMENT BENEFITS As required by state law, eligible nonexempt employees (as defined by the U.S. Fair Labor Standards Act) of the University are covered by either the Utah State and School Contributory or Noncontributory or the Public Safety Noncontributory Retirement Systems and eligible exempt employees (as defined by the U.S. Fair Labor Standards Act) are covered by the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF). Eligible employees of ARUP are covered by a separate defined contribution pension plan and a profit sharing plan.

The University contributes to the Utah State and School Contributory and Noncontributory and the Public Safety Noncontributory Retirement System (Systems) that are multi-employer, cost sharing, defined benefit pension plans.

The Systems provide refunds, retirement benefits, annual cost of living adjustments, and death benefits to plan members and beneficiaries in accordance with retirement statutes.

Figure 3.

Beginning Balance Buildings

$1,121,663,881 Infrastructure & improvements 131,765,144 Land 17,267,135 Equipment 485,517,133 Library materials 144,049,652 Art and special collections 36,019,567 Construction in progress 86,659,444 Total cost 2,022,941,956 Less accumulated depreciation Buildings 443,155,863 Infrastructure & improvements 70,043,152 Equipment 334,486,585 Library materials 80,476,617 Total accumulated depreciation 928,162,217 Capital assets, net

$1,094,779,739 Additions

$ 23,893,590 6,470,812 53,452,669 5,152,037 4,569,527 71,666,908 165,205,543 42,088,642 7,306,398 44,230,528 3,420,973 97,046,541

$ 68,159,002 Retirements

$ 9,102,998 32,715,109 2,563,858 1,160,528 19,349,245 64,891,738 Ending Balance

$1,136,454,473 138,235,956 17,267,135 506,254,693 146,637,831 39,428,566 138,977,107 2,123,255,761 6,320,945 478,923,560 77,349,550 33,422,778 345,294,335 83,897,590 39,743,723

$25,148,015 985,465,035

$1,137,790,726 32

The Systems are established and governed by the respective sections of Chapter 49 of the Utah Code Annotated, 1953, as amended. The Utah State Retirement Office Act provides for the administration of the Utah Retirement Systems and Plans under the direction of the Utah State Retirement Board (Board) whose members are appointed by the Governor. The Systems issue a publicly available financial report that includes financial statements and required supplementary information for the Systems. A copy of the report may be obtained by writing to the Utah Retirement Systems.

Plan members in the State and School Contributory Retirement System are required to contribute 6.oo% of their annual covered salaries, all of which is paid by the University, and the University is required to contribute 8.89% of their annual salaries. In the State and School Noncontributory Retirement System and the Public Safety Noncontributory Retirement System, the University is required to contribute 14.88% (including 1.5o% to a 4 01(k) salary deferral program) and 23.46%, respectively, of plan members' annual salaries. The contribution requirements of the Systems are authorized by statute and specified by the Board and the contribution rates are actuarially determined.

TIAA-CREF provides individual retirement fund contracts with each participating employee.

Benefits provided to retired employees are based on the value of the individual contracts and the estimated life expectancy of the employee at retirement. Contributions by the University to the employee's contract become vested at the time the contribution is made. Employees are eligible to participate from the date of employment and are not required to contribute to the fund. For the year ended June 30, 2006, the University's contribution to this defined contribution pension plan was 14.20% of the employees' annual salaries.

Additional contributions are made by the University based on employee contracts. The University has no further liability once contributions are made.

Certain UUHC employees hired prior to January i, 2001, were fully vested as of that date. Employees hired subsequent to January 1, 2OO0, are eligible to participate in the plan one year after hire date and vest after six years.

The University's contribution for these health clinic employees was 3.00% of the employees' annual salaries.

The ARUP defined contribution pension and profit sharing plans provide retirement benefits for all employees who have attained certain tenure-based and hours-worked thresholds.

Employees are fully vested in both plans after five years of service. For the year ended June 30,

2006, ARUP contributed 5.00%

of the employees' annual salaries (less forfeitures) to the pension plan. Contributions to the profit sharing plan are at the discretion of ARUP.

For the years ended June 30, 2006, 2005, and 2004, the University's contributions to the Systems were equal to the required amounts, as shown in Figure 4.

9. DEFERRED REVENUE Deferred revenue consists of summer school tuition and student fees, advance payments on grants and contracts, and results of normal operations of auxiliary enterprises and service units.

Figure 4.

State and School Contributory Retirement System State and School Noncontributory Retirement System Public Safety Noncontributory Retirement System TIAA-CREF Pension plan Profit sharing plan Total contributions 2006

$ 1,489,378 22,257,303 289,291 65,126,133 3,140,908 4,723,787

$97,026,800 2005

$ 1,563,900 22,375,155 295,083 60,472,570 2,743,021 3,353,435

$90,803,164 2004

$ 1,419,412 20,178,128 279,877 56,352,292 2,646,171 3,173,865

$84,049,745 33

1O. FUNDS HELD IN TRUST BY OTHERS Funds held in trust by others are neither in the possession of nor under the management of the University. These funds, which are not recorded on the University's financial records and which arose from contributions, are held and administered by external fiscal agents, selected by the donors, who distribute net income earned by such funds to the University, where it is recorded when received. The fair value of funds held in trust at June 30, 2oo6, was $85,413,161.

In addition, certain funds held in trust by others are comprised of stock, which is reported at a value of $7,488,576 as of June 30, 2oo6, based on a predetermined formula. The fair value of this stock as of June 30, 2oo6 cannot be determined because the stock is not actively traded.

ii.

RISK MANAGEMENT The University maintains insurance coverage for commercial general liability, automobile, errors and omissions, and property (building and equipment) through policies administered by the Utah State Risk Management Fund.

Employees of the University and authorized volunteers are covered by workers' compensation and employees' liability through the Workers' Compensation Fund of Utah.

In addition, the University maintains self-insurance funds for health care, dental, and auto/physical damage, as well as hospital and physicians malpractice liability self-insurance funds. The malpractice liability self-insurance funds are held in trust with an independent financial institution in compliance with Medicare reimbursement regulations. Based on an analysis prepared by an independent actuary, the administration believes that the balance in the trust funds as of June 30, 2oo6, is adequate to cover any claims incurred through that date.

The University and UUHC have a "claims made" umbrella malpractice insurance policy in an amount considered adequate by its respective administrations for catastrophic malpractice liabilities in excess of the trusts' fund balances.

The estimated self-insurance claims liability is based on the requirements of GASB Statement No. io, Accounting and Financial Reporting for Ri~k Financing and Related InAurance IAAueA, which requires that a liability for claims be reported if information prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated.

Changes in the University's estimated self-insurance claims liability for the years ended June 3o are shown in Figure 5.

The University has recorded the investments of the malpractice liability trust funds at June 30, 2oo6, and the estimated liability for self-insurance claims at that date in the Statement of Net Assets. The income on fund investments, the expenses related to the administration of the self-insurance and malpractice liability trust funds, and the estimated provision for the claims liability for the year then ended are recorded in the Statement of Revenues, Expenses, and Changes in Net Assets.

Figure 5.

Estimated claims liability - beginning of year Current year claims and changes in estimates Claim payments, including related legal and administrative expenses Estimated claims liability - end of year 2006

$ 52,869,024 129,783,800 (128,147,310)

$ 54,505,514 2005

$ 44,198,248 124,615,602 (115,944,826)

$ 52,869,024 34

12. INCOME TAXES The University, as a political subdivision of the state of Utah, has a dual status for federal income tax purposes. The University is both an Internal Revenue Code (IRC) Section in5 organization and an IRC Section 501(c)(3) charitable organization.

This status exempts the University from paying federal income tax on revenue generated by activities which are directly related to the University's mission. This exemption does not apply to unrelated business activities. On these activities, the University is required to report and pay federal and state income tax.

UURF is not subject to income taxes under Section 501(c)(3) of the Internal Revenue Code.

ARUP is also not subject to income taxes based on a private letter ruling from the Internal Revenue Service stating that certain income providing an essential governmental function is exempt from federal income taxes under Internal Revenue Code Section 115.

13. HOSPITAL REVENUE A. Net Patient Service Revenue UUHC reports net patient service revenue at the estimated net realizable amounts from patients, third-party payors, and others for services

rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Charity care is excluded from net patient service revenue.

UUHC has third-party payor agreements with Medicare and Medicaid that provide for payments to UUHC at amounts different from established rates. Inpatient acute care services rendered to Medicare and Medicaid program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Outpatient services rendered to Medicaid program beneficiaries and certain outpatient services and defined capital costs related to Medicare beneficiaries are paid based on a cost reimbursement basis. Medicare reimbursements are based on a tentative rate with final settlement determined after submission of annual cost reports by UUHC and audits thereof by the Medicare fiscal intermediary.

The estimated final settlements for open years are based on preliminary cost findings after giving consideration to interim payments that have been received on behalf of patients covered under these programs.

B. Charity Care UUHC maintains records to identify and monitor the level of charity care it provides.

Based on established rates, the charges foregone as a result of charity during the year ended June 30, 2oo6, were approximately

$23,805,000.

14. LEASES A. Revenue UURF receives lease revenues from noncancellable sublease agreements with tenants of the Research Park and from tenants occupying six buildings owned by UURF. The lease revenue to be received from these noncancellable leases for each of the subsequent five years is $6,5oo,ooo, and for nineteen years thereafter, comparable annual amounts. Most lease revenue is subject to escalation based on changes in the Consumer Price Index (CPI).

Since such escalations are dependent upon future changes in the CPI, these escalations, if any, are not reflected in the minimum noncancellable lease revenues listed above.

B. Commitmenti The University leases buildings and office and computer equipment. Capital leases are valued at the present value of future minimum lease 35

payments.

Assets associated with the capital leases are recorded as buildings and equipment together with the related long-term obligations.

Assets currently financed as capital leases amount to $16,875,ooo and $125,401,263 for buildings and equipment, respectively.

Accumulated depreciation for these buildings and equipment amounts to $2,003,9o6 and

$74,026,597, respectively. Capital leases of ARUP are guaranteed by the University.

Operating leases and related assets are not recorded in the Statement of Net Assets. Payments are recorded as expenses when incurred and amount to approximately $23,201,000 for the University and $5,o63,000 for component units for the year ended June 30, 2006.

Total operating lease commitments for the University include approximately $25,628,850 of commitments to component units.

Included in the above component unit lease expenses are leases by ARUP for its principal laboratory and office buildings, under long-term agreements, from a partnership in which one of its directors is a principal. The agreements have initial terms of fifteen years with two five-year renewal options and include rent increases of two to three percent annually in the sixth and eleventh years from the commencement of the lease. Total lease payments for the year ended June 30, 20o6 were $4,732,419.

The University entered into a Huntsman Cancer Institute capital sublease agreement in the amount of $16,875,ooo dated November 1996 with the State of Utah, acting through DFCM for the lease of the Huntsman Cancer Institute building, located east of the University campus and adjacent to the University Hospital.

The Huntsman sublease is an annually renewable lease with a final expiration date of May 2013.

Annual payments began May 1997 and range from a low of approximately $468,478 to a high of approximately $1,648,09o. At the end of the lease, title to the Huntsman Cancer Institute building will be transferred to the University.

Future minimum lease commitments for operating and capital leases as of June 30, 2006 are shown in Figure 6.

15. BONDS PAYABLE AND OTHER LONG-TERM LIABILITIES The long-term debt of the University consists of bonds payable, capital lease obligations, compensated absences, and other minor obligations.

The State Board of Regents of the State of Utah issues revenue bonds to provide funds for the construction and renovation of major capital facilities and the acquisition of capital equipment for the University.

In addition, revenue bonds have been issued to refund other revenue bonds and capitalized leases.

Figure 6.

Fiscal Year 2007 2008 2009 2010 2011 2012-2016 2017-2021 2022 -2026 2027-2029 Total future minimum lease payments Amount representing interest Present value of future minimum lease payments Operating

$ 30,466,415 28,899,357 27,062,531 23,029,836 21,669,670 90,444,679 53,553,542 39,013,947 831,038

$314,971,015 Capital

$ 14,990,527 13,728,799 26,116,097 8,591,556 24,032,559 11,974,941 2,883,042 1,297,593 103,615,114 (16,931,279)

$ 86,683,835 36

The revenue bonds are special limited obligations of the University. The obligation for repayment is solely that of the University and payable from the net revenues of auxiliary enterprises and UUHC, student building fees, land grant income, and recovered indirect costs.

Neither the full faith and credit nor the taxing power of the State of Utah or any other political subdivision of the State is pledged to the payment of the bonds, the distributions or other costs appertaining thereto.

In 1985, the State Board of Regents authorized the University to issue Variable Rate Demand Industrial Development Bonds (University Inn Project - 1985 Series) for the Salt Lake City Marriott - University Park Hotel, separate from the University. The bonds are payable from the revenues of the hotel and the University has no responsibility or commitment for repayment of the bonds.

The outstanding balance of the bonds at June 30, 2006, is $6,425,000.

The Series 19 9 7A Auxiliary and Campus Facilities Revenue Bonds currently bear interest at a weekly rate in accordance with the bond provisions. When a weekly rate is in effect, the Series 19 9 7A Bonds are subject to purchase on the demand of the holder at a price equal to principal plus accrued interest on seven days notice and delivery to the University's tender agent. The University's remarketing agent is authorized to use its best efforts to sell the repurchased bonds at a price equal to loo percent of the principal amount by adjusting the interest rate. If any Series 19 9 7A Bonds cannot be remarketed to new holders, the tender agent is required to draw on an irrevocable standby bond purchase agreement to pay the purchase price of the bonds delivered to it. The standby bond purchase agreement is with J.P. Morgan Chase Bank and is valid through July 30, 2010.

The University pays a quarterly fee for the services provided by J.P. Morgan Chase Bank.

No funds have been drawn against the standby bond purchase agreement.

The interest requirement for the Series 19 9 7A Bonds is calculated using an interest rate of 4.01%, which is the rate in effect at June 30, 2oo6.

On April 28, 2006, the University entered into a loan agreement with the federal government for the benefit of the Huntsman Cancer Institute (HCI) and Huntsman Cancer Hospital (HCH). Pursuant to the Health Care Infrastructure Improvement Program, the University has qualified for a loan in the amount of $ioo,ooo,ooo. The loan is administered by the Centers for Medicare and Medicaid Services (a division of the Department of Health and Human Services) pursuant to Section 1897, Title XVIII, of the Social Security Act. The University intends to use the loan proceeds to retire certain debt issued to finance HCI and HCH. The loan bears an interest rate of 11.875% and is not secured by net revenues of the University. The proposed rules relating to the loan include a Loan Forgiveness Program whereby the full amount of the loan may be forgiven based upon criteria that the University, HCI, and HCH expect to meet. The proposed rules relating to loan forgiveness were published in the Federal Register. Commensurate with these rules, HCI and HCH were required to notify the Centers for Medicare and Medicaid Services of their intention to apply for loan forgiveness, which they did and submitted their plan and qualifications for achieving complete forgiveness of this loan. It is uncertain whether this loan will be forgiven in the next year or during the five year term of payment deferral. In the event that the loan is not forgiven, all loan proceeds will be returned to the federal government.

37

The following schedule lists the outstanding bonds payable of the University at June 30, 2oo6:

Issue Auxiliary and Campus Facilities Auxiliary and Campus Facilities Hospital Revenue Refunding Hospital Revenue Auxiliary and Campus Facilities Revenue and Refunding Auxiliary and Campus Facilities Research Facilities Revenue Auxiliary and Campus Facilities Hospital Revenue Research Facilities Revenue Research Facilities Revenue Research Facilities Revenue Hospital Revenue Refunding Auxiliary and Campus Facilities Revenue Refunding Date Issued 3/1/87 7/30/97 12/1/97 6/1/98 7/1/98 5/1/99 7/13/00 7/18/01 8/7/01 6/30/04 2/15/05 6/07/05 7/14/05 Maturity Date 2014 2027 2006 2013 2016 2014 2020 2021 2022 2019 2025 2020 2018 Interest Rate 3.750% -

6.750%

Variable 4.750% -

5.500%

5.250% -

5.375%

4.100% -

5.250%

4.000% -

4.800%

5.000% -

5.750%

3.500%-

5.125%

5.000%-

5.500%

3.000%-

4.700%

3.000%-

5.000%

3.000%-

5.000%

4.500%-

5.000%

3.000%-

5.000%

Original Issue

$ 11,140,000 52,590,000 24,615,000 25,020,000 120,240,000 5,975,000 17,585,000 2,755,000 26,670,000 9,685,000 5,515,000 20,130,000 30,480,000 42,955,000 Current Liability

$ 215,000 1,060,000 3,414,825 180,160 2,265,741 407,495 667,945 113,822 15,165 527,088 204,502 1,360,722 (895,319)

(24,382)

$9,512,764 Balance 6/30/2006 1,490,000 13,000,000 3,414,825 6,637,509 58,499,843 3,812,112 2,913,465 2,319,757 11,688,305 8,635,171 5,475,088 19,520,712 30,541,534 42,918,438

$210,866,759 8/2/05 2021 Total UURF has purchased three buildings with two mortgages that are guaranteed by the University. The remaining amounts of the mortgages are $6,260,776 at 8.87% interest and $3,o68,127 at 7.15% interest. The mortgages will be paid off on April 1, 202o and September 1, 2021, respectively. In addition, UURF agreed to bear 42.04% of the cost to renovate the building at 417 Wakara Way for the Health Science Center. The remaining balance of debt related to those costs is $3,615,44o at interest rates ranging from 3.00% to 4.70%.

The following schedule summarizes the changes in long-term liabilities for the year ended June 30, 2oo6:

Beginning Ending Current Balance Additions Reductions Balance Portion Bonds payable

$238,100,262

$ 71,047,533

$ 98,281,036

$210,866,759 9,512,764 Capital leases payable 85,291,905 15,171,471 13,779,541 86,683,835 10,864,701 Notes & contracts payable 15,165,986 100,304,142 704,769 114,765,359 854,047 Total long-term debt 338,558,153 186,523,146 112,765,346 412,315,953 21,231,512 Compensated absences 34,991,809 26,304,517 22,870,920 38,425,406 4,223,173 Deposits & other liabilities 88,734,692 93,029,469 77,390,134 104,374,027 95,354,730 Total long-term liabilities

$462,284,654

$305,857,132

$213,026,400

$555,115,386

$120,809,415 38

Maturities of principal and interest requirements for bonds, notes and contracts payable are shown in the following schedule. Payments for the years 2011 through 2o31 include payments on the Health Care Infrastructure Improvement Program loan, as described above, in the amount of $ioo,ooo,ooo for principal and $251,112,097 for interest. These amounts are expected to be forgiven.

Fiscal Year 2007 2008 2009 2010 2011 2012-2016 2017 -. 2021 2022 -2026 2027 -2031 Total Payments Principal

$ 21,231,512

$ 1 20,567,990 1:

35,076,450 1:

18,950,405 1

36,218,693 1:

69,976,770 12 55,748,611 10 66,681,027 6:

87,864,495 2.

$412,315,953

$38 Interest 4,843,532 3,899,314 2,670,010 1,324,112 2,873,389 4,040,083 9,501,472 2,402,402 3,138,907 4,693,221

16. RETIREMENT OF DEBT In prior years, the University defeased certain revenue bonds by placing the proceeds of new bonds and various bond reserves in irrevocable trusts to provide for all future debt service payments on the old bonds.

In addition, the University issued on July 14, 2oo5, Hospital Revenue Refunding Bonds Series 2oo5A in the amount of $30,480,000 to partially advance refund $18,785,000 of Hospital Revenue Bonds Series 1998 and

$15,320,000 of Hospital Revenue Bonds Series 2ool. Also, on August 2, 2005, the University issued Auxiliary and Campus Facilities Revenue Refunding Bonds Series 2oo5A in the amount of $42,955,000 to partially advance refund $56,670,000 of Auxiliary and Campus Facilities Revenue and Refunding Bonds Series 1998. These refundings resulted in a reduction of the University's aggregate debt service payments of approximately $23,455,000 over the next twenty-three years and a present value economic gain of approximately $11,645,000.

Accordingly, the trust account assets and the liability for the defeased bonds are not included in the University's financial statements. The total principal amount of defeased bonds held in irrevocable trusts at June 30, 2oo6, is

$105,O10,OOO.

17.

FUNCTIONAL CLASSIFICATION OF EXPENSES The following schedule presents operating expenses by functional classification for the year ended June 30, 2oo6:

Amount Function (in thousands)

Instruction

$ 248,885 Research 215,018 Public service 354,797 Academic support 66,299 Student services 18,246 Institutional support 35,780 Operation & maintenance of plant 48,335 Student aid 32,071 Other 361,568 Hospital 551,668 Total

$1,932,667

18. PLEDGED BOND REVENUE The University issues revenue bonds to provide funds for the construction and renovation of major capital facilities and the acquisition of capital equipment for the University. Investors in these bonds rely solely on the net revenue pledged by the following activities for the retirement of outstanding bonds payable.

Auxiliary EnterpriAe..A - is comprised of specific auxiliary enterprises, namely: University Bookstore, Residential Living, University Student Apartments, Commuter Services, Jon M.

Huntsman Center, Rice-Eccles Stadium, and Union Building. These auxiliaries provide on-campus services for the benefit of students, faculty and staff. In addition to the net revenues of these auxiliaries, student building fees, state land grant income and a subsidy from the federal department of Housing and Urban Development are pledged to the retirement of all Auxiliary Campus and Facility bonds.

39

Univerzity of Utah HoipitaLA & ClinicA - is comprised of the University Hospitals, the University Neuropsychiatric Institute, and other clinics that provide health and psychiatric services to the community.

Reimbur.Aed Overhead -

is the revenue generated by charging approved facilities and administration rates to grants and contracts.

The following schedule presents the net revenue pledged to the applicable bond system and the principal and interest paid for the year ended June 30, 2006.

Bond Systems Auxiliary &

Campus Facilities Research Facilities Hospital Revenue Operating revenue Nonoperating revenue Total revenue Expenses Operating expenses Nonoperating expenses Total expenses Net pledged revenue

$60,993,763 5,730,213 66,723,976 49,451,886 49,451,886

$17,272,090

$9,308,427

$662,408,664 5,026,272 667,434,936 583,209,847 146,515 583,356,362

$ 84,078,574

$ 60,778,430 60,778,430 48,121,009 48,121,009

$ 12,657,421

$4,365,712 Principal paid and interest expense

$4,987,667 40

THE UNIVERSITY OF UTAH 'I G

UTAH STATE BOARD OF RiGENTS JedH. Pitcher Chair' Bonnie Jean Beesley Vice Chair Jerry C. Atkin Daryl C. Barrett Janet A. Cannon Rosanita Cespedes Katharine B. Garff David J.,Grant Ali Hasnain Greg W. Haws Meghan Holbrook James S. Jardine Michael R. Jensen David J. Jordan Nolan E. Karras Josh Reid Sara V. Sinclair Marlon 0. Snow Richard E. Kendell Commi.~ioner of Higher Education BOARD OF TRUSTEES James L. Macfarlane Chair Randy L. Dryer Vice Chair Timothy B. Anderson H. Roger Boyer C. Hope Eccles E. J. Garn Jacob Kirkham J. Spencer Kinard Scott S. Parker Lorena Riffo-Jenson ovOernin~qý`6oard&A' adii OfficersA UNIVERSITY ADMINISTRATION MichalK., Young President A. Lorris Betz Senior Vice PreAident for Health ScienceA Dayid W. Pershing Senibr Vice PreAidehtfor Academic Affdir %A Jack W. Brittain Vice Pre.ident for Tech Venture Development Arnold B. Combe Vice IPre.AidentforAdminie.trative Service.

Fred C. Esplin,.

Vice PreAident for Univerzity Advancement Raymond F. Gesteland Vice President for Research Loretta F.'Harper VicePre*ident for Human Re.ourceA".

John K. Morris Vice President/General Counael Barbara H. Snyder Vice PreAident for Student AffairA Kim Wirthlin Vice PreAldent for Goverment RelationA-'.

FINANCIAL AND BUSINESS SERVICES Jeffrey J. West A,.,ociate Vice Prezident for Financial and Bu.ineA Service" Barbara K. Nielsen Director of Governmental Accounting and Support Service.

Stephen P. Allen Manager, General Accounting Spencer F. Eccles Treasurer Laura Snow Secretary 41

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