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

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Finance and Administration Committee - V. Annual Report of the Treasurer, 2011 - Informationreport of UT-Battelle, please contact the Controller’s Office,The University of Tennessee, 201 Andy Holt Tower, Knoxville,Tennessee 37996-0100.UT LE BONHEUR PEDIATRIC SPECIALISTSThe university is a participant in a joint venture with MethodistHealthcare – Memphis Hospitals, Le Bonheur Children’sHospital, for the sole purpose of governance, management,and support of the UT Le Bonheur Pediatric Specialists, Inc.(ULPS), a nonprofit faculty group practice comprised ofpediatric physicians holding hospital privileges at Le Bonheurwho are employed as UT Health Science Center facultymembers. The practice group was incorporated on September 9,2010, and began operations in January 2011.Both the university and Methodist Healthcare provided anadvance to the joint venture of $900,000 in the 2011 fiscal yearso that the faculty practice group could begin its operations. Inaddition, the university and Methodist Healthcare have agreedto guarantee the losses of ULPS equally and provide cash on amonthly basis to meet the operating needs of ULPS. During the2011 fiscal year, the university remitted another $2,200,000.00for these purposes.To review the audit report of UT Le Bonheur PediatricSpecialists, Inc., please contact the Controller’s Office, TheUniversity of Tennessee, 201 Andy Holt Tower, Knoxville,Tennessee 37996-0100.Note 15: Insurance-relatedActivitiesIt is the policy of the state not to purchase commercial insurancefor the risks of losses for general liability, automobile liability,professional malpractice, and workers’ compensation. Thestate’s management believes it is more economical to managethese risks internally and set aside assets for claim settlementin its internal service fund, the Risk Management Fund.The state purchases commercial insurance for real property,flood, earthquake, and builder’s risk losses and surety bondcoverage on the state’s officials and employees. The amounts ofsettlements have not exceeded insurance coverage for each ofthe past three fiscal years. The Risk Management Fund is alsoresponsible for claims for damages to state owned property upto the amount of the property insurance aggregate deductibleamount. The insurance policy deductibles vary from $25,000per occurrence, depending on the type of coverage, to anaggregate of $5 million.The university participates in the Risk Management Fund.The fund allocates the cost of providing claims servicing andclaims payment by charging a premium to the university basedon a percentage of the university’s expected loss costs, whichinclude both experience and exposures. This charge considersrecent trends in actual claims experience of the state as awhole. An actuarial valuation is performed as of fiscal yearendto determine the fund liability and premium allocation.Information regarding the determination of the claims liabilitiesand the changes in the balances of the claims liabilities for theyears ended June 30, 2011, and June 30, 2010, are presented inthe Tennessee Comprehensive Annual Financial Report. TheCAFR is available on the state’s website at http://tennessee.gov/finance/act/cafr.html. Since the university participates in theRisk Management Fund, it is subject to the liability limitationsunder the provisions of the Tennessee Claims Commission Act,Tennessee Code Annotated, Section 9-8-101 et seq. Liabilityfor negligence of the university for bodily injury and propertydamage is limited to $300,000 per person and $1,000,000 peroccurrence. The limits of liability under workers’ compensationare set forth in Tennessee Code Annotated, Section 50-6-101 etseq. Claims are paid through the state’s Risk Management Fund.Information regarding the cash and cash equivalents designatedfor payments of claims at June 30, 2011, is presented in theTennessee Comprehensive Annual Financial Report, which isavailable at http://tennessee.gov/finance/act/cafr.html.At June 30, 2011, the scheduled coverage for the university was$4,371,025,600 for buildings and $1,139,921,000 for contents.The university also carries commercial insurance for lossesrelated to hired and non-owned automobiles, losses relatedto railroad protection, and losses related to seven universityownedaircraft. Settled claims resulting from these risks havenot exceeded commercial insurance coverage in any of the pastthree fiscal years.The state has also set aside assets in the Employee GroupInsurance Fund, an internal service fund, to provide a programof health insurance coverage for the employees of the state withthe risk retained by the state. The university participates in theEmployee Group Insurance Fund. The fund allocates the costof providing claims servicing and claims payment by charginga premium to the university based on estimates of the ultimatecost of claims, including the cost of claims that have beenreported but not settled and of claims that have been incurredbut not reported. Employees and providers have 13 months tofile medical claims.Note 16: Contingencies andCommitmentsA. CONSTRUCTION COMMITMENTThe university has contractual obligations for the constructionof new buildings and additions to and renovations of existingbuildings. The outstanding commitments under such contractsat June 30, 2011, were $144,331,680.65.B. SICK LEAVEThe university records the cost of sick leave when paid.Generally, since sick leave (earned one day per month withunlimited accumulation) is paid only when an employee diesor is absent due to illness or injury, there is no liability for sickleave at June 30, 2011. The amount of unused sick leave was$262,494,416.18 at June 30, 2011.23355
Finance and Administration Committee - V. Annual Report of the Treasurer, 2011 - InformationC. GRANTS AND CONTRACTSThe university receives grants and contracts from variousfederal and state agencies to fund research and other activities.The costs, both direct and indirect, charged to these grantsand contracts are subject to audit and disallowance by thegranting agency. The university administration believes that anydisallowance or adjustments would not have a material effect onthe university’s financial position.D. NONVESTED EQUIPMENTEquipment in the possession of the university valued at$2,909,713.19 as of June 30, 2011, is not reflected in thefinancial statements. This equipment was purchased withrestricted grant and contract funds and other funds, and title hasnot yet transferred to the university.E. LITIGATIONThe university is involved in several lawsuits, none of whichare expected to have a material effect on the financial positionof the university.Note 17: Lease and Transfer ofUT Memorial Research Centerand HospitalOn July 29, 1999, the university transferred ownership andcontrol of its hospital located in Knoxville to University HealthSystems, Inc.,(UHS), an independent, private, not-for-profitorganization operating under its own Internal Revenue Code,Section 501(c)(3) designation. The lease and transfer of thehospital from the university to UHS was accomplished throughthree main agreements: the Lease and Transfer Agreement, theEmployee Services Agreement, and the Affiliation Agreement.Each of these agreements is summarized below.Lease and Transfer Agreement: pursuant to the enablinglegislation, Tennessee Code Annotated, Section 49-9-112 andSection 49-9-1301 et. seq., UHS leased from the university thereal property of the existing hospital and the Graduate School ofMedicine. (See also Note 18.) The term of the lease is 50 years.The university also transferred to UHS all operating assets ofthe hospital. The consideration for the lease of the real propertyand transfer of the operating assets was payment by UHS of a)a sum sufficient to economically defease all of the debt issuedby the Tennessee State School Bond Authority in the amountof $149,080,353.69, b) $25,000,000.00 paid to the universityat closing, and c) a variable lease obligation of $50,000,000.00to be paid to the university over twenty years. UHS assumedall prior hospital liabilities, known or unknown. In 2019, theuniversity and UHS have agreed to negotiate an annual leasepayment for the remaining 30 years of the lease.Employee Services Agreement: UHS has leased from theuniversity all hospital employees as of the date of closing.UHS has paid to the university the amounts incurred by theuniversity to pay the direct expenses relating to the hospitalemployees, including wages, salaries, and fringe benefits. Thesepayroll expenses on behalf of UHS, totaling $66,750,026.92in 2011, are reported as operating expenses in the statement ofrevenues, expenses, and changes in net assets. An equal amountof operating revenue is reported in the non-governmental grantsand contracts category. The term of the Employee ServicesAgreement is 50 years. All persons who began service at thehospital after the date the employee service agreement wassigned are employees of UHS and not university employees.Affiliation Agreement: the university and UHS agreed thatUHS will continue to support the Graduate School of Medicineby providing appropriate facilities and resources of the hospitalto the faculty and students at the Graduate School of Medicine.UHS agreed to pay the university $1,500,000 at closing forthe benefit of the Graduate School of Medicine. In addition,UHS must pay monthly to the university, for the benefit ofthe Graduate School of Medicine, the government funding,direct and indirect medical education funds, TennCare medicaleducation funds, and other medical education funds received byUHS for the benefit of the Graduate School of Medicine. Theamount payable by UHS shall be reduced by a) the fair marketrental value of the space provided to the Graduate School ofMedicine; b) the fair market value of the information system,telecommunication, network infrastructure, and human resourceservices provided by UHS to the Graduate School of Medicine;and c) retroactive adjustments made by payers to the graduatemedical education payments.Note 18: Capital Leases of RealPropertyCAPITAL LEASE OF REAL PROPERTY TOUNIVERSITY HEALTH SYSTEMS, INC.The university has leased the real property of the UT MemorialResearch Center and Hospital to UHS for a term of 50 years.This lease is pursuant to the Lease and Transfer Agreementdescribed in Note 17. This lease is classified as a directfinancing lease. The guaranteed lease payment of $50 millionwill be paid by UHS in annual payments through 2019. Theamount of the annual payments will equal the lesser of 1) 20%of the hospital’s net operating profit for the applicable calendaryear; or 2) $3 million or the greater amount resulting fromthe application of an index, as specified in the agreement. Thepayment of $50 million is guaranteed by December 31, 2019.In 2019, the university and UHS have agreed to negotiate anannual lease payment for the remaining 30 years of the lease.An annual lease payment to the university during the year ended6/30/2011, totaled $1,791,627.00.The university recorded a lease payment receivable in theamount of $33,075,076.99 at June 30, 2011, which representsthe net present value of the guaranteed $50 million discountedat 5.75%. The minimum lease payments to be received amounthas been adjusted upward to reflect a contractually requiredadjustment to the final required lease payment (Table 18.1 onopposite page).24356
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