Finance and Administration - Board of Trustees - The University of ...

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Finance and Administration Committee - V. Annual Report of the Treasurer, 2011 - Informationcommercial paper at June 30, 2011. All other investments arereported at fair value or estimated fair value.The university holds investments in limited partnerships, limitedcompanies, corporations, and limited liability corporationswhich are carried at estimated fair value provided by themanagement of these funds. The purpose of this alternativeinvestment class is to increase portfolio diversification andreduce risk due to the low correlation with other asset classes.Methods for determining estimated fair values includediscounted cash flows and estimates provided by generalpartners and fund managers. Because these investments arenot readily marketable, the estimated fair value is subject touncertainty and, therefore, may differ from the value that wouldhave been used had a ready market for the investments existed,and such differences could be material. The estimated fairvalues are reviewed and evaluated by the university.G. CAPITAL ASSETSCapital assets, which include property, plant, equipment,software, and library holdings, are reported in the statement ofnet assets at historical cost or at fair value at date of donation,less accumulated depreciation. The costs of normal maintenanceand repairs that do not add to the value of the assets ormaterially extend the assets’ useful lives are not capitalized.A capitalization threshold of $100,000 is used for buildings,land improvements, and infrastructure. Equipment and softwareare capitalized when the unit acquisition cost is $5,000 orgreater and the estimated useful life is one year or more.The capitalization threshold for additions and improvementsto buildings, infrastructure, and land improvements is also$100,000. The capitalization threshold for additions andimprovements to buildings is $100,000 provided that amountexceeds 20% of the book value of the building.These assets, with the exception of land, are depreciated/amortized using the straight-line method over the estimateduseful lives of the assets, which range from 5 to 40 years.H. ACCOUNTS PAYABLEIncluded in accounts payable are checks payable in the amountof $683,487.86 as of June 30, 2011. These amounts representthe sum of checks written in excess of the university’s checkingaccount balance because of the use of a controlled disbursementaccount. In this way, the university maximizes interest incomeby transferring from an investment account only fundsnecessary to cover the checks that clear the bank daily.I. COMPENSATED ABSENCESThe university’s employees accrue annual leave at varying rates,depending on length of service or classification. Some employeesalso earn compensatory time. Generally, all permanent full-timeemployees and certain part-time employees are entitled to accrueand carry forward calendar year maximums of 42 days annualvacation leave, except nine-month faculty members who do notaccrue annual leave. The amount of these liabilities and theirrelated benefits are reported in the statement of net assets.J. NET ASSETSThe institution’s net assets are classified as follows:Invested in Capital Assets, Net of Related Debt: Thisrepresents the institution’s total investment in capital assets, netof outstanding debt obligations related to those capital assets.To the extent debt has been incurred but not yet expended forcapital assets, such amounts are not included as a component ofinvested in capital assets, net of related debt.Nonexpendable Restricted Net Assets: Nonexpendablerestricted net assets consist of endowment and similar typefunds in which donors or other outside sources have stipulated,as a condition of the gift instrument, that the principal is to bemaintained inviolate and in perpetuity, and invested for thepurpose of producing present and future income, which may beexpendable or added to principal.Expendable Restricted Net Assets: Expendable restricted netassets include resources in which the university is legally orcontractually obligated to spend resources in accordance withrestrictions imposed by external third parties.Unrestricted Net Assets: Unrestricted net assets representresources derived from student tuition and fees, stateappropriations, and the sales and services of educationaldepartments, and auxiliary enterprises. These resources areused for transactions relating to the educational and generaloperations of the institution, and may be used at the discretionof the institution to meet current expenses for any purpose.K. SCHOLARSHIP DISCOUNTS ANDALLOWANCESStudent tuition and fee revenues, and certain other revenuesfrom students, are reported net of scholarship discounts andallowances in the statement of revenues, expenses, and changesin net assets. Scholarship discounts and allowances are thedifference between the stated charge for goods and servicesprovided by the university and the amount that is paid by thestudent and/or third parties making payments on the student’sbehalf.Certain governmental grants, such as Pell grants, and otherfederal, state, or nongovernmental programs, are recorded aseither operating or nonoperating revenues in the institution’sfinancial statements. To the extent that revenues from suchprograms are used to satisfy tuition and fees and other studentcharges, the institution has recorded a scholarship discount andallowance.L. INCOME TAXESThe university, as a public corporation and an instrumentalityof the State of Tennessee, is exempt from federal income taxesunder Section 115 of the Internal Revenue Code. Contributionsto the university are deductible by donors as provided underSection 170 of the Internal Revenue Code.31345
Finance and Administration Committee - V. Annual Report of the Treasurer, 2011 - InformationNote 2: Deposits and InvestmentsINVESTMENT POLICYCash Management Investment Pool: The University ofTennessee maintains a cash management investment poolthat is available for use by all fund groups. State statutes anduniversity investment policies authorize the university’s cashmanagement pool to invest in collateralized Tennessee bankor savings and loan association certificates of deposit, U.S.Treasury obligations, U.S. government agency obligations,repurchase agreements of those securities, highest qualitycommercial paper, prime bankers’ acceptances, and moneymarket mutual funds meeting certain criteria.University policy also requires that commercial paper notexceed 35% of the portfolio in total and that no more than 10%of the portfolio’s value be in the commercial paper of a singleissuer. In addition, banker’s acceptances cannot exceed 20% ofthe portfolio’s value and no one bank’s acceptances may exceed10%. Money market funds cannot exceed 10% of the portfolio’stotal value. At June 30, 2011, the university’s cash managementinvestment pool consisted of $718,250,000.00 of certificatesof deposit and $159,400,000.00 of demand deposits yieldingmoney market rates.Investments: The university’s assets subject to long-terminvestment (endowments and annuity and life income assets)use various external managers and funds consistent withinvestment objectives for those invested assets. A significantpart of these assets is the university’s Consolidated InvestmentPool which is a carefully crafted portfolio of broadly diversifiedasset classes.Deposits: University policy and state statute require thatuniversity funds be deposited into authorized commercial banksand savings and loan associations. State statutes also requirethat these financial institutions pledge securities as collateralto secure university time and demand deposits. To facilitatethe pledge requirement, financial institutions can elect toeither participate in the State of Tennessee Collateral Pool forPublic Deposits administered by the State Treasurer or pledgesecurities with a third party.CASH AND CASH EQUIVALENTSIn addition to petty cash and demand deposits, this classificationincludes instruments which are readily convertible to knownamounts of cash.At June 30, 2011, cash and cash equivalents consisted of$191,101,822.84 in bank accounts, $1,504,429.36 of petty cashon hand, and $718,250,000.00 of certificates of deposit.The carrying amount of the university’s deposits was$909,351,822.84 and the bank balance was $936,870,504.26.Additionally, the university maintains custodial accounts atFirst Tennessee Bank and Hilliard Lyons for funds contractuallymanaged by independent investment counsel. In accordancewith the custody agreements, First Tennessee Bank and HilliardLyons placed cash equivalents totaling $1,761,074.30 at June30, 2011, in money market mutual funds.CUSTODIAL CREDIT RISK—DEPOSITSThe custodial credit risk for deposits is the risk that in theevent of a bank failure, the university’s deposits may notbe recovered. As stated earlier, state statutes require that alluniversity deposits be in a qualified depository and securedthrough direct collateralization or participation in the StateCollateral Pool. As of June 30, 2011, all university depositswere adequately secured as required by state statute.INVESTMENTSInvestments in commercial paper are reported at amortizedcost. All other investments are reported at fair value, includingthose securities with a maturity date of one year or less. As ofJune 30, 2011, the university had investments and maturities asshown on Table 2.1.INTEREST RATE RISKInterest rate risk is the risk that changes in interest rates willadversely affect the fair value of a debt investment. Theuniversity does not have a formal investment policy that limitsinvestment maturities as a means of managing its exposure tofair value losses arising from increasing interest rates.CREDIT RISKCredit risk is the risk that an issuer or other counterparty to aninvestment will not fulfill its obligations. The university’s debtinvestments as of June 30, 2011, were rated by Moody’s.The university is authorized by statute to invest funds inaccordance with University of Tennessee investment policies.Funds, other than endowment and annuity and life income fundsmay be invested in collateralized Tennessee bank or savingsand loan association certificates of deposit, U. S. Treasuryobligations, U.S. government agency obligations, repurchaseagreements of those securities, highest quality commercialpaper, prime bankers’ acceptances, and money market mutualfunds meeting certain criteria. Endowment and life incomefunds can be invested in equity securities and various othersecurities given prudent diversification. The university hasno investment policy limiting its investment choice basedon ratings issued by nationally recognized statistical ratingagencies. As of June 30, 2011, the institution’s investments wererated as shown in Table 2.2CUSTODIAL CREDIT RISK – INVESTMENTSCustodial credit risk is the risk that, in the event of a failureof the counterparty, the university will not be able to recoverthe value of the investment or collateral securities that are inpossession of an outside party. At June 30, 2011, the universityhad $6,454,456.05 of uninsured and unregistered investmentsheld by a counterparty but not in the school’s name.CONCENTRATION OF CREDIT RISKConcentration of credit risk is the risk of loss attributed to themagnitude of the university’s investment in a single issuer.Other than the restrictions placed on the cash management31446
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