University of Puget Sound
2012 Financial Report
Mission Statement
University of Puget Sound is an independent, predominantly residential, undergraduate liberal
arts college with selected graduate programs building effectively on a liberal arts foundation. The
university, as a community of learning, maintains a strong commitment to teaching excellence,
scholarly engagement, and fruitful student-faculty interaction.
The mission of the university is to develop in its students capacities for critical analysis, aesthetic
appreciation, sound judgment, and apt expression that will sustain a lifetime of intellectual
curiosity, active inquiry, and reasoned independence. A Puget Sound education, both academic and
cocurricular, encourages a rich knowledge of self and others; an appreciation of commonality and
difference; the full, open, and civil discussion of ideas; thoughtful moral discourse; and the
integration of learning, preparing the university’s graduates to meet the highest tests of
democratic citizenship. Such an education seeks to liberate each person’s fullest intellectual and
human potential to assist in the unfolding of creative and useful lives.
office of Finance and Administration
1500 N. Warner St. #1083
Tacoma, WA 98416-1083
Telephone: 253.879.3204
Fax: 253.879.3398
University of Puget Sound
Contents
2012 Financial Report
Report of the President.......................................................... 2
June 30, 2012
Report of the Vice President for Finance
and Administration.................................................................. 6
Independent Auditors’ Report................................................11
Financial Statements
Consolidated Statement of Financial Position.......................12
Consolidated Statement of Activities....................................13
Consolidated Statement of Cash Flows................................14
Consolidated Supplemental Schedule of
Changes in Endowment Investments...................................15
Notes to Consolidated Financial Statements........................16
Report of
the President
“Disruptive innovation” is a term we have heard a good deal about of late. The term
Ronald R. Thomas
growing new markets—for “customers” who previously had been considered unable or
was popularized by Harvard Business School professor Clayton Christensen, who argues
for higher education’s need to develop a new business model that will be scalable for
unequipped to be served.
Commentators have taken a cue from Christensen’s analysis to consider a future where
bricks and mortar are no longer part of the picture, where education is “delivered”
electronically through “technology enablers,” freed from requirements like the traditional
college campus or the professorial mentor. Evidence cited to support this vision of the
future includes the instant popularity of massive open online courses (MOOCs) now
offered free from Stanford and MIT, among others; the “flipped classroom,” where
instruction is received at home online and homework is done in the classroom; and the
growing market share earned by for-profit universities.
“Disruptive” may well be an appropriate adjective for aspects of this vision, as the
shifting marketplace for higher education does call for new models and new approaches
to meet new needs for creating a skilled work force and an educated citizenry. But
“innovation” may be a premature claim for the direction that some of these futurists
advocate for higher education. While technology will become (and already has been for
some time) an increasingly important element in the educational experience we provide
for leaders of the future, there are few if any of those leaders who will live in a world
without bricks and mortar or outside of the company of other people. The best education
is not merely a transfer of information to provide skills in preparation for a future
profession; it is an active engagement in living and learning where information is gained,
analyzed, and critiqued in the company of peers and experts. If we believe this to be
true—and many of us do—then some of these innovations will be disruptive at best and
counterproductive at worst. The University of Phoenix’s 2009 $67.5 million settlement
with the federal government for unethical recruitment practices, its closing of 115 sites
due to a sharp decline in enrollments this fall, and the 60% decline in fourth quarter 2012
net revenues for its ownership group are warnings to this effect.
If we conceive of a college education as a process of personal development where
talents are discovered and nurtured, an enduring act of self-discovery and human
development, a laboratory where ideas are formed and tested, then we should think
hard about where the most important innovations to reach these objectives will likely
emerge and where they should lead us. While these phrases may not describe the entire
spectrum of American higher education, they will continue to represent a distinctive
segment of it that our society will continue to need and demand. We should (and
must) investigate how new technologies will advance and expedite this more enduring
process, even as we discover what technology’s limits are in serving its ends. This is why
Professor Christensen has made it clear that his “disruptive innovation” is a prescription
designed for large state systems to dramatically reinvent and scale up their delivery of
services for massive new markets, and is not designed for private universities.
Most private colleges and universities are not seeking to increase their scale of
operations and their customer base, or change their mission and business model.
For those who adopt disruptive innovation as an extension of their mission, however,
it would have to be as a separate initiative, as MIT and Harvard are pursuing in
2
university of puget sound 2012 financial report
Figure 1 Puget Sound Fund History—Fiscal Years 1992–2012
(In Millions)
$2.4
$2.2
$2.0
$1.8
$1.6
$1.4
$1.2
$1.0
$0.8
$0.6
$0.4
$0.2
$0.0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
their edX plan. Further, as Christensen reminds us: in
developing the right business plan, it is not so important
to understand the customer but, rather, to “understand
2002
2003
private colleges and universities can learn from disruptive
$18
$14
business model to achieve it.
$12
Such a focus has been the force of our efforts at Puget
$10
directions we put forward a year ago: focusing our mission
$6
and need. We have assimilated a great deal of research
$4
our own productive innovation and by identifying and
building upon:
2008
2009
2010
2011
2012
$8
and understanding the outcomes our students most value
from our constituents and the market in order to advance
2007
$16
in developing a focused strategy and applying the correct
Sound over the past year as we have acted on the strategic
2006
(In Millions)
$20
serve its “customers” (our students): it is, as he argues,
2005
Figure 2 Puget Sound Comprehensive Cash-In History—Fiscal Years 2002–12
the job the customer wants to accomplish.” What existing
innovation goes beyond understanding how technology can
2004
$2
$0
Science Center Campaign
One [of a Kind] Campaign
2002 2003 2004 2005 2006 2007 2008 2009
2010
2011
2012
• what is most highly valued about the education we provide;
• how we are performing on those objectives;
• what our distinguishing strengths are; and
• where we can improve on delivering on our value
proposition.
University of Puget Sound 2012 Financial Report
3
FIGURE 3 West elevation of new residence hall for upper-class students, opening fall 2013
At the same time, we recognize that business as usual is
of what our “customers” want to accomplish, and the work
not an option in the world in which are now living. We have
associated with our branding initiative. These have resulted in
therefore engaged in a rigorous exercise of developing
our identification of three essential brand pillars that will guide
strategies to enhance our revenues and reduce our costs.
our work as well as our communication to the marketplace:
To increase revenue, we have made strategic investments
in student recruitment and retention, communications and
marketing, alumni and parent engagement, and fundraising.
We have set (and met) ambitious fundraising goals in the One
[of a Kind] comprehensive capital campaign and in annual
giving (figures 1 and 2). And we have laid out a five-point, fiveyear agenda to contain our tuition discount rate, strengthen
• distinguished teaching and innovative learning;
• an inspiring physical, cultural, and campus location; and
• superior and demonstrable outcomes in the professions,
graduate school preparation, personal relationships, and
lifelong leadership skills.
retention, and maximize net tuition revenues by repositioning
Our research, benchmarking, and internal assessments have
our place in the market and better leveraging our financial aid
helped clarify these three pillars and led us to a significant
awarding program.
capital investment now underway. We are expanding our
Correspondingly, we have over the last three years, and
with the same strategic discipline, made reductions in the
operating budget in excess of $2.5 million through the
restructuring of offices and new approaches to our work,
resulting in the reduction of 27 FTE. Identification and
implementation of additional efficiencies are expected in the
coming years.
campus housing capacity with the design and construction
of an impressive new 55,000-square-foot student residence,
which broke ground last summer (figure 3). There is no
immediate outcome more important to our students and
families than success to graduation in four years, while taking
full advantage of the distinctive academic experience we
provide. We have seen a strong correlation between that
outcome and four years of living on campus, with 94% of
Guiding these investments and cost-saving initiatives, we have
sophomores living on campus continuing into their junior year
advanced a “strategy of focus” at Puget Sound informed by our
compared to only 87% for those living off campus.
historic mission, our market research, the careful assessment
4
university of puget sound 2012 financial report
This new facility will become the home to 135 upper-division
experience in which students are heard and respected, have
students in five programmatic areas: the interdisciplinary
their confidence built, skills sharpened, and assumptions
humanities, environmental studies and outdoor programs,
challenged. This assessment is one in which we take
global education, entrepreneurship, and spirituality and social
considerable pride because, unlike most college “rankings,”
justice. In a building designed by AIA Gold Medal-winning
this one emphasizes results rather than inputs, reputation,
architect Peter Bohlin, students will live in single rooms
or expenditures. And it describes accurately the “job” our
organized into a series of intimate “houses” of nine to 14
research shows that our “customers” want to accomplish.
residents. The building will include shared seminar rooms, a
screening room for videos, study areas, a flexible activities
room, and a great assembly hall where all occupants can
gather for lectures, dining, and events. The project will be
self-funded by room and board revenues, and serves our three
strategic pillars: outstanding teaching, a distinctive location for
living and learning, and fostering of successful outcomes.
We understand well the challenges before us in this new
disruptive economy. They are great. We appreciate that the
education we aspire to provide must be offered at a price
the market can afford. We know we will have to do more at
a lower cost. And we recognize that this will require fresh
thinking, tough choices, and a strategy of focus. We are
prepared, and we are determined to succeed.
Puget Sound has developed a long tradition of informed
disruption and collaborative innovation around these pillars
in many ways. Our faculty invented the first undergraduate
program in international political economy and wrote the
standard textbook for the field now adopted by more than
200 colleges and universities. We have integrated into an
award-winning building our graduate on-site clinical programs
in the health sciences with our undergraduate teaching and
research programs in psychology, exercise science, and
neuroscience. We are a liberal arts college that developed
a liberal arts-inspired business and leadership program with
an emphasis on entrepreneurship reflective of (and with
connections to) the ethos of the great companies of the
Pacific Northwest. And we have taken our location at the
gateway to the Pacific Rim to create an innovative Asian
Studies Program and a unique study abroad experience
that immerses students from across the disciplines in eight
different cultures over the course of nine months.
We will continue to adapt and innovate through the
opportunities that “disruptive innovations” and other
technologies present to us. Change is in our DNA at Puget
Sound, and resourcefulness is a well-learned habit of our minds.
We were gratified, therefore, to begin this academic year with
the news that Puget Sound was named one of the nation’s
40 “Colleges that Change Lives.” Colleges That Change
Lives: 40 Schools That Will Change the Way You Think About
Colleges is a highly influential college guide based on detailed
research data to assess the selected colleges’ academics,
cocurricular opportunities, and outcomes. The book praises
Puget Sound for our transformative character: our dynamic
curriculum, collaborative community, innovative faculty, and
the comprehensive educational experience we provide—an
University of Puget Sound 2012 Financial Report
5
Report of the
Vice President
for Finance and
Administration
At Puget Sound we value the transformational power of a residential liberal arts
Sherry B. Mondou
graduate with the capacities and relationships that prepare them not only for what
education, where students come first, and learning and holistic development are
absolute priorities. Students come to Puget Sound for the accessible professors who
are dedicated to teaching and for the inspiring campus and regional activities and
opportunities that support their development. Students treasure their time here and
comes next—whether that is a job, graduate school, or a prestigious fellowship—but
also for what comes later in life. What students gain at Puget Sound endures a lifetime:
intellectual curiosity, active inquiry, critical analysis, sound judgment, teamwork, problemsolving, apt expression, rich knowledge of self and others, engaged citizenship, the bonds
of friendship, and a network of Puget Sound support. Such a life-changing experience
is possible because of a total immersion in campus life, the learning process, and the
mentorship offered by the teacher-scholar model. This kind of life preparation is capital
intensive in terms of human capital, physical capital, and financial capital. It requires
thoughtful and careful management of Puget Sound’s resources.
The enclosed 2011–12 consolidated financial statements reflect the health of Puget
Sound’s resources and operations. I am pleased to supplement the consolidated financial
statements with the following commentary.
Consolidated Statement of Financial Position
Assets
Puget Sound has a strong asset base of $506.4 million at June 30, 2012, down .7% from
the prior year’s $509.8 million. Puget Sound’s asset strength comes primarily from its
cash and short-term investments, its endowment, and its campus facilities.
• Cash and short-term investments provide essential liquidity to cover operating
costs, maintain campus facilities, and make debt service payments. The university
maintains a short-term investment portfolio that seeks to preserve capital, provide
needed liquidity, and maximize investment return within appropriate risk constraints.
Aggregate cash and short-term investment balances totaled $41.1 million as of June
30, 2012, down $2.5 million or 5.7% from the prior June as the final construction
payments were made upon completion of Weyerhaeuser Hall.
• Puget Sound’s endowment totaled $250.5 million as of June 30, 2012, comprising
about half of the university’s total asset value. The endowment’s purpose is to
provide ongoing financial support for university operations, including student
financial aid. $86.4 million or 34.5% of the endowment is quasi-endowment
unrestricted as to use, providing valuable flexibility to the university. The vast
majority of this unrestricted quasi-endowment is currently designated by the board
to support student financial aid.
The endowment grew from $68.6 million in 1992 to $156.4 million in 2002 to $250.5
million as of June 30, 2012, and the portfolio has become increasingly diverse
over this time period (figure 4). The endowment’s annualized 10-year return was
6.3% as of June 30, 2012, and its one-year return was -1.2%, following a return of
18.1% in 2010–11. The 2011–12 total return was hurt by declines in the global equity
market and the relative infancy of Puget Sound’s private equity program, which is
experiencing the typical “J-curve” effect that occurs in the early years of these longterm investments.
6
university of puget sound 2012 financial report
Figure 4 Endowment Value and Diversification
Figure 5 Sources of Endowment Growth
(In Millions)
(In Millions)
$260
$400
$240
11.6%
$220
$200
$250
$140
22.7%
30.4%
$120
$100
15.9%
42.1%
40.0%
$40
29.5%
1.6%
8.9%
2002
2012
U.S. Equity–Large Cap
Fixed Income and Cash Equivalents
U.S. Equity–Small Cap
Real Estate, Natural Resources,
Private Equity, Hedge Funds, and
Private Debt
International Equity
$43.7
$156.4
$100
$50
58.4%
1992
$250.5
$14.2
$200
$150
15.3%
$80
$0
($97.7)
$300
$160
$20
$133.9
13.5%
$180
$60
$350
10.1%
$0
Endowment
Value 2002
Gifts
University Investment
Amount
Endowment
Designated
Return
Distributed Value 2012
Transfers and
for Operating
Other Additions
Activities
Gifts to the endowment are key to an endowment’s growth
million investment in the past decade that has included
over time, especially in low return environments, and in
seven building renovations and four newly constructed
2011–12 totaled $12.2 million, with another $6.2 million
buildings, as well as the addition of Commencement Walk
promised in the form of campaign commitments. Growing
and other landscape improvements. A combination of
the endowment is an important strategy for strengthening
gifts, university budgets and reserves, and debt financing
Puget Sound’s financial position and is a key component
have made these improvements possible (figure 6). To
of the One [of a Kind] campaign currently in progress and
protect its investment in campus facilities and to come
scheduled to conclude June 30, 2015. As of June 30, 2012,
closer to fully funding depreciation expense in the annual
we have successfully secured commitments for 67% of the
operating budget, the university has increased its annual
$63 million endowment campaign goal.
planned major maintenance budget by $3 million over the
Figure 5 shows additions to and distributions from the
endowment over the last decade.
• Puget Sound’s 97-acre campus provides an inspiring
past decade. Puget Sound currently funds approximately
64% of depreciation in the annual operating budget and
has supplemented that budget with gift, debt, and reserve
funding for major projects. The strength of investment in
environment that fosters students’ intellectual pursuits,
campus facilities is reflected in Puget Sound’s average age
cocurricular engagement, and sense of community.
of plant (accumulated depreciation/annual depreciation
Tudor-Gothic buildings that are as functional as they are
expense) of 7.1 years as compared to an average of 12.9
beautiful, climbing ivy, and inviting green spaces are
years for other A-rated colleges.
signature components of Puget Sound’s campus facilities
and are key to its residential liberal arts mission. The
campus is a pillar of strength for Puget Sound’s brand in
the marketplace and is a significant draw for prospective
students. Carried in the Consolidated Statement of
Financial Position at a net cost of $173.2 million, Puget
Sound’s campus facilities have benefited from a $130.1
Intangibles, net, of $3.9 million as of June 30, 2012, grew $3
million in 2011–12 reflecting Puget Sound’s investment to
date in a multiyear Optimize Puget Sound project designed to
improve the efficiency and effectiveness of university operations
via business processes reengineering and the implementation
of PeopleSoft’s Enterprise Resource Planning (ERP) system.
University of Puget Sound 2012 Financial Report
7
2006A) and issuing in its place $18.1 million in fixed-rate revenue
Figure 6 Funding Sources of Campus Facilities Additions
bonds with an all-in rate of 3.98%, exclusive of payments
(In Millions)
under the swap agreement, which will remain in place until the
$240
termination value is much nearer to zero. The university also
$41.8
refunded its Series 2006B variable-rate debt, issuing in its place
($49.9)
$29.2 million via a seven-year direct purchase arrangement
$200
with a bank with a variable-rate of 70% of LIBOR plus a credit
$44.6
$173.2
$160
spread. The direct purchase transaction reduced liquidity risk,
letter of credit pricing and renewal risk, basis risk relative to the
$120
$80
swap agreement, and remarketing risk. The end result is a debt
$43.7
portfolio that is 47% traditional fixed and 53% synthetically fixed
through interest rate swap agreements.
$93.0
Puget Sound enjoys long-term ratings of A1 and A+ from
Moody’s and S&P, respectively, with a stable outlook. Puget
$40
Sound has utilized debt responsibly in support of mission$0
critical projects. Its expendable resources-to-debt ratio was
Campus
Facilities,
Net 2002
Gifts
University
Reserves
Long-Term
Less
Debt
Depreciation
Campus
Facilities,
Net 2012
Funding Sources of Additions
2.69:1 at June 30, 2012, and following the October debt
issuance and restructuring, this ratio is anticipated to move
closer to 2:1, as compared to the 2011 median for Moody’s
A-rated institutions of 1.80:1 (figure 7).
Net Assets
It is a major undertaking that will help position Puget Sound to
Net Assets totaled $394.3 million at June 30, 2012, down
optimize its resources and achieve its strategic goals.
$6.2 million or 1.5% for the year primarily due to the decline in
Liabilities
endowment market value as discussed above.
Puget Sound’s liabilities totaled $112 million at June 30, 2012,
Consolidated Statement of Activities
an increase of 2.5% over the prior year.
Operations
Puget Sound’s long-term debt declined $1.6 million in 2011–12
to $60.8 million as of June 30, 2012, due to scheduled
principal payments. Long-term debt was largely in the form of
variable-rate bonds synthetically fixed via long-term interest
rate swap agreements as discussed more fully in Note 6 to
the consolidated financial statements. During this low interest
rate environment, as reflected in the Consolidated Statement
of Financial Position, the swap agreements show a negative
mark-to-market valuation of $16.1 million, which will rise and
fall as interest rates fall and rise, and which will amortize
Puget Sound has a long history of balanced operating budgets
and has continued this discipline under the shadow of the
Great Recession that officially ran from December 2007 to
June 2009, and that continues its drag on economic growth.
Puget Sound is approaching the resulting challenges of college
affordability, market competition, and cost scrutiny by staying
focused on long-term strategic objectives while making
midcourse adjustments to build reputation, recruit best-fit
students, increase graduation rates, reduce tuition discount
rate, and find cost efficiencies.
to zero at the swap maturity date. The university’s swap
The increase in net assets from operating activities was
counterparties, The Bank of New York Mellon and Societe
$283,000 in 2011–12, representing a modest operating
General, are currently rated Aa1/AA- and A2/A, respectively.
margin of .26%. Excluding depreciation and other noncash
Subsequent to June 30, 2012, the university issued $16.7 million
in fixed-rate revenue bonds with an all-in rate of 4.40% on
October 1, 2012, to finance a 135-bed self-supporting residence
items, the university generated $6.6 million from operating
activities in 2011–12 as reflected in the Consolidated
Statement of Cash Flows.
hall programmed for juniors and seniors. In conjunction with this
Operating Revenues
financing, the university restructured its existing debt portfolio
Operating revenues and gains were up 2.6% in 2011–12,
by refunding a portion of its variable-rate debt (WHEFA Series
including a 4.1% increase in net tuition and fees, Puget
8
university of puget sound 2012 financial report
Sound’s primary revenue source. Tuition rates increased 4%,
Figure 7 Expendable Resources-to-Debt Ratio
student enrollment increased by 53 students and exceeded
budget by 125 students, and the discount rate increased to
38.6%, as compared to 37.6% the prior year. Student room
and board revenues increased 5.5%. Together net tuition and
fees and student room and board accounted for 78.9% of all
operating revenues (figure 8).
3.5
3.0
3.00
2.69
2.5
Investment and gift support and other sources provide revenue
diversification and subsidize a portion of the cost of a Puget
2.0
Sound education for all students, and also provide individual
financial aid awards for students, keeping net tuition more
1.80
1.5
affordable for families than it otherwise would be (figure 9).
1.0
In accordance with the university’s endowment spending
policy of distributing 5% of a lagging 36-month average market
0.5
value, the endowment distributed $10.8 million in 2011–12,
comprising 10.1% of total operating revenues and providing
critical funding for student financial aid, faculty compensation,
0.0
Puget Sound 2012
Puget Sound 2011
Moody's A Rated 2011
2011 is most current comparative data available
and other operating costs. The endowment distribution
decreased 3.2% in 2011–12 because the calculation is based
on the average endowment value for the 36 months of July
2007 through June 2010, which includes lower valuations
during the recession.
figure 8 Operating Revenues
Short-term interest rates declined rapidly between 2007 and
2009, and have remained at historic lows. Interest income on
Puget Sound’s cash and short-term investments totaled just
$501,000 or .46% of total operating revenues in 2011–12.
Revenue from governmental grants and contracts of $2.2
million was flat for the year, following reductions in state
support for students in the prior two years.
17%
62%
Student Room
and Board
Net Tuition
and Fees
3%
Donor contributions in support of operations totaled $4.1
million, or 3.8% of total operating revenues, and were 10.4%
Other Auxiliary
Enterprises
greater than the prior year. The Puget Sound Fund reached
2%
an all-time high for the second consecutive year. Strategic
Governmental Grants
and Contracts
initiatives encompassing development of robust parent and
4%
alumni relations programs and Puget Sound’s One [of a
Contributions
10%
Kind] $125 million comprehensive campaign, have spurred
engagement and fundraising success.
Other sources of operating sources decreased $973,000 to
1%
1%
Other
Sources
Interest
Income
Endowment
Income
and Gains
Distributed
$1.3 million in 2011–12 following a one-time conservation grant
received to support the decommisioning of the university’s central
steam plant to create greater energy efficiencies on campus.
Operating Expenses
Total operating expenses increased 4% in 2011–12, with
educational and general expenses increasing 3.3% and auxiliary
University of Puget Sound 2012 Financial Report
9
enterprises increasing 6.9%. Contributing to the 4% increase in
Figure 9 Keeping Tuition Affordable
total operating expense was a $1.4 million or 13% increase in
depreciation and amortization in 2011–12. Excluding this increase,
total operating expenses increased a more modest 2.5%.
$4,248
$19,124
General
Subsidy*
Total Average
Subsidy
Figure 10 shows how Puget Sound allocated its resources
among instruction, academic support, student services, and
auxiliary enterprises.
$23,634
Instruction expense of $46.8 million comprised 53.6% of
Net Tuition
$14,876
educational and general expenses and increased 3.9%
Student
Financial Aid
in 2011–12. The increase in instruction includes a few
atypical expenses in 2011–12: expenses associated with
the PacRim study abroad program that runs every third
year, new depreciation associated with the completion and
*Includes endowment,gifts,
and other supplemental
sources
opening of Weyerhaeuser Hall, and Optimize Puget Sound
ERP conversion costs that are not eligible for capitalization.
Excluding these items, instruction would have increased 1.1%,
primarily in compensation. Academic support of $8.9 million
$38,510
comprised 10.2% of educational and general expenses (and
“Sticker Price”
was virtually unchanged in 2011–12). Together instruction and
academic support comprised 63.8% of educational and general
expenses (51.9% of total operating expenses) and increased
3.3%. Student services increased 1.3%.
Figure 10 Allocating Resources
Institutional support of $14.2 million increased 6.2% in 2011–
12 and comprised 13.3% of total operating expenses versus
100%
14.0%
13.3%
14.5%
80%
13.9%
16.2%
14.5%
60%
20.7%
18.6%
16.3%
the 14.5% median for national peers, suggesting greater
efficiency and lower overhead at Puget Sound. Contributing to
the 6.2% increase was a strategic investment in fundraising
infrastructure and One [of a Kind] campaign activities.
Auxiliary enterprises incurred expenses of $19.9 million and
40%
increased 6.9% in 2011–12, largely in relation to the 5.5%
51.4%
51.9%
54.7%
20%
0%
increase in auxiliary revenues.
Nonoperating Activities
Net assets decreased a total of $6.4 million from nonoperating
1992
2012
National Peers 2011
2011 is most current comparative data available
activities. Contributions restricted to facilities and endowments
totaled $17.2 million, an $11.1 million increase over the prior
year, while endowment investment losses, net of distributions,
Institutional Support
Auxiliary Enterprises
reduced net assets by $13.1 million. Further reducing
Student Services
Instructional and
Academic Support
net assets in 2011–12 was a $7.0 million mark-to-market
adjustment on the interest rate swap agreements as discussed
above and in Note 6 to the consolidated financial statements.
Closing Remarks
High aspirations are commonplace at Puget Sound. We set
our sights high, we develop plans, and we stay focused on the
most important things. Puget Sound’s strength in resources—
our people, this place, and financial assets—has enabled Puget
Sound to be among the great colleges that change lives.
10
university of puget sound 2012 financial report
University of Puget Sound 2012 Financial Report
11
University of Puget Sound
Consolidated Statement of Financial Position
As of June 30, 2012 (With Comparative Financial Information as of June 30, 2011)
(Dollars in Thousands)
2012
2011
$ 23,496
$ 24,513
17,584
19,099
ASSETS:
Cash and cash equivalents (Note 1)
Short-term investments
Investment income receivable (Note 1)
47
56
Receivables, net
1,385
2,301
Contributions receivable, net (Note 2)
9,247
9,323
Inventories (Note 1)
Prepaid expenses and other assets
Student loans receivable, net (Note 1)
731
712
3,104
4,364
14,579
15,398
Beneficial interest in outside trusts (Note 1)
1,708
2,035
Assets held under split-interest agreements (Note 1)
6,042
6,390
250,468
251,291
3,889
891
Endowment investments (Notes 1, 3 and 4)
Intangibles, net (Notes 1 and 5)
Assets restricted for investment in campus facilities
Campus facilities, net (Notes 1 and 5)
Total assets
882
132
173,222
173,315
$506,384
$509,820
$
LIABILITIES AND NET ASSETS:
Liabilities:
Accounts payable
2,361
$ 6,990
13,120
10,712
Advance deposits from students (Note 1)
2,912
2,916
Liabilities under split-interest agreements (Note 1)
2,391
2,576
12,827
13,122
Accrued payroll and other liabilities (Note 8)
Government advances for student loans (Note 1)
Asset retirement obligation (Notes 1 and 5)
1,611
1,563
Unrealized loss on interest rate swap agreements (Note 6)
16,052
9,091
Long-term debt (Note 6)
60,766
62,345
$112,040
$109,315
Total liabilities
Net Assets:
Unrestricted:
Available for operations
984
979
114,819
99,622
Endowment (Note 4)
86,394
91,364
Designated for other specific purposes
10,355
16,410
212,552
208,375
Invested in or designated for campus facilities
Total unrestricted
Temporarily restricted (Note 7)
Permanently restricted (Note 7)
Total net assets
Total liabilities and net assets
67,271
90,565
114,521
101,565
394,344
400,505
$506,384
$509,820
The accompanying notes are an integral part of the consolidated financial statements
12
university of puget sound 2012 financial report
University of Puget Sound
Consolidated Statement of Activites
For the Year Ended June 30, 2012 (With Summarized Financial Information for the Year Ended June 30, 2011)
Unrestricted
(Dollars in Thousands)
Temporarily
Restricted
Permanently
Restricted
Totals
2012
2011
Operating:
Revenues and gains:
$108,072
$108,072
$ 102,174
Less student financial aid
Student tuition and fees
(41,277)
(41,277)
(38,021)
Net tuition and fees
66,795
66,795
64,153
Student room and board
17,962
17,962
17,032
Other auxiliary enterprises
3,783
3,783
3,584
2,229
Governmental grants and contracts
897
$ 1,331
2,228
Contributions (Note 1)
2,408
1,694
4,102
3,714
Endowment income and gains distributed (Note 4)
3,794
7,025
10,819
11,182
Interest income
Other sources Total operating revenues and gains
478
23
501
561
1,276
-
1,276
2,249
97,393
10,073
107,466
104,704
44,988
Expenses:
Educational and general:
Instruction
46,760
46,760
Academic support
8,882
8,882
8,875
Student services
17,400
17,400
17,181
Institutional support
14,225
14,225
13,397
87,267
87,267
84,441
Total educational and general expenses
Auxiliary enterprises
Total operating expenses
Net assets released from restrictions
Increase in net assets from operating activities 19,916
19,916
18,632
107,183
107,183
103,073
10,064
(10,064)
-
-
274
9
283
1,631
Nonoperating:
Contributions (Note 1)
-
4,043
$ 13,166
17,209
6,156
Change in allowance for uncollectible promises (Note 2)
-
(2,015)
(56)
(2,071)
(2,139)
Net (losses) gains and income on endowment investments,
net of distributions (Note 4)
(4,973)
(8,062)
(70)
(13,105)
28,473
Actuarial adjustments and other changes
(8,075)
(318)
(84)
(8,477)
3,404
Net assets released from restrictions
Increase (decrease) in net assets from nonoperating
activities
16,951
(16,951)
-
-
-
3,903
(23,303)
12,956
(6,444)
35,894
Increase (decrease) in net assets Net assets at beginning of the year
Net assets at end of the year 4,177
(23,294)
12,956
(6,161)
37,525
208,375
90,565
101,565
400,505
362,980
$212,552
$67,271
$114,521
$394,344
$400,505
The accompanying notes are an integral part of the consolidated financial statements
University of Puget Sound 2012 Financial Report
13
University of Puget Sound
Consolidated Statement of Cash Flows
For the Year Ended June 30, 2012 (With Summarized Financial Information for the Year Ended June 30, 2011)
Cash flows from operating activities:
Change in net assets
(Dollars in Thousands)
2012
2011
$ (6,161)
$37,525
Adjustments to reconcile change in net assets to net cash provided by operating activities:
Depreciation and amortization
12,299
10,883
Contributions restricted for long-term investment
(15,481)
(9,462)
Gifts of investments, property, and outside trusts
(12)
(34)
4,998
(36,929)
240
(664)
-
59
Amortization of tax-exempt bond premium, discount, and issuance costs
38
39
Accretion, settlement, and adjustments to asset retirement obligations
48
(8)
916
(848)
Losses (gains) on endowment investments and split-interest agreements
Actuarial adjustments of liabilities under split-interest agreements
Loss on disposition of fixed assets
Changes in:
Accounts receivable
Investment income receivable
Contributions receivable, net
Inventories, prepaid expenses, and other assets
Accounts payable
Accrued payroll and other liabilities
Advance deposits from students
Unrealized loss (gain) on interest rate swap agreements
Net cash provided by operating activities
9
40
76
5,231
1,204
(795)
(936)
(344)
2,408
861
(4)
373
6,961
(1,870)
6,603
4,057
Cash flows from investing activities:
Proceeds from sales and maturities of investments
Purchases of investments
Net sales of short-term investments
91,526
62,821
(95,291)
1,515
(58,580)
14,774
Net (receipt) use of assets restricted for investment in campus facilities
Purchases of campus facilities and intangibles
(750)
7,337
(18,885)
(31,717)
(1,484)
(1,427)
1,881
(21,488)
1,681
(5,111)
15,481
9,462
208
295
Disbursements of loans to students
Repayments of loans from students
Net cash used for investing activities
Cash flows from financing activities:
Contributions restricted for long-term investment
Investment income subject to split-interest agreements
New liabilities under split-interest agreements
Payments to split-interest agreement beneficiaries
Repayments of long-term debt
Changes in government advances for student loans
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
61
(384)
(440)
(1,580)
127
13,868
(1,539)
111
7,950
(1,017)
6,896
24,513
17,617
$23,496
$24,513
$ 2,447
$ 2,441
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
16
Supplemental cash flow information:
Interest paid (net of capitalized interest of $131 and $241 in 2012 and 2011, respectively)
Noncash investing and financing activities:
Purchases of equipment and building construction on account
$ 1,434
$ 5,127
Gifts of investments, property, and outside trusts
$
12
$
34
Student loan cancellations
$
422
$
504
The accompanying notes are an integral part of the consolidated financial statements
14
university of puget sound 2012 financial report
University of Puget Sound
Consolidated Supplemental Schedule of Changes in Endowment Investments
For the Year Ended June 30, 2012 (With Comparative Financial Information for the Year Ended June 30, 2011)
Endowment investments, beginning of the year
Gifts
Transfers and other additions
(Dollars in Thousands)
2012
2011
$251,291
$ 217,691
12,178
4,660
104
467
4,479
5,567
(1,867)
(2,313)
Return on endowment investments:
Ordinary income
Investment expenses
Realized gains
686
3,544
Change in cumulative unrealized (losses) gains
(5,584)
32,857
Total return on endowment investments
(2,286)
39,655
(10,819)
(11,182)
(823)
33,600
$250,468
$251,291
(1.20%)
18.10%
Amount distributed for operating activities
Net change in endowment investments
Endowment investments, end of the year
Total return on pooled endowment
Pooled investments and the allocation of income and gains are accounted for under the unit method.
Pooled endowment investment unit values are summarized as follows:
Market value, end of year
Market value, beginning of period
2012
2011
$55.9148
$56.5772
56.5772
48.4929
(Loss) gain
$ (0.6624)
$ 8.0843
Ordinary income
$ 0.5296
$ 0.7056
Distributed for operations
$ 2.5004
$ 2.5814
See accompanying Independent Auditor’s Report
University of Puget Sound 2012 Financial Report
15
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The University of Puget Sound (the university, Puget Sound), established in 1888, is a nonprofit corporation organized under the laws of the state
of Washington. The university is an independent predominantly residential undergraduate liberal arts college with selected graduate programs
building effectively on a liberal arts foundation. The university, as a community of learning, maintains a strong commitment to teaching excellence,
scholarly engagement, and fruitful student-faculty interaction.
The mission of the university is to develop in its students capacities for critical analysis, aesthetic appreciation, sound judgment, and apt expression
that will sustain a lifetime of intellectual curiosity, active inquiry, and reasoned independence. A Puget Sound education, both academic and cocurricular, encourages a rich knowledge of self and others; an appreciation of commonality and difference; the full, open, and civil discussion of
ideas; thoughtful moral discourse; and the integration of learning, preparing the university’s graduates to meet the highest tests of democratic
citizenship. Such an education seeks to liberate each person’s fullest intellectual and human potential to assist in the unfolding of creative and
useful lives.
Basis of Accounting and Presentation
The accompanying financial statements are the consolidated statements of the university and its wholly owned subsidiaries CVI GVF Holdings 13
Ltd. and Rainier Heights Holdings, LLC. All material transactions between the university and its consolidated subsidiaries have been eliminated.
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting and in accordance with the AICPA
Audit and Accounting Guide for Not-For-Profit Organizations. While the underlying accounts of the university are maintained in accordance with the
principles of fund accounting to facilitate observance of specific restrictions placed on the resources available to the university, the consolidated
financial statements focus on the university as a whole.
The university’s activities and net assets are classified in the consolidated financial statements as unrestricted, temporarily restricted, or
permanently restricted based on the existence or absence of donor-imposed restrictions. These classifications are described below:
Unrestricted net assets - resources not subject to donor-imposed restrictions.
Temporarily restricted net assets - resources that can be expended subject to donor-imposed restrictions as to use or passage of time.
Permanently restricted net assets - resources that a donor requires the university to retain in perpetuity. Generally, the donor permits the
university to use all or a part of the income and gains earned on the contributed assets.
The Consolidated Statement of Activities presents expenses by functional classification in accordance with the overall educational mission of
the university. Depreciation and amortization expense is allocated directly to functional classifications based on the nature of the underlying
assets. Interest expense on long-term debt is allocated to the functional areas that have benefited from the proceeds. The cost of operating
and maintaining campus facilities is allocated to the functional areas based on occupancy square footage. The cost of supporting information
technology systems is allocated to the functional areas based on estimated utilization of system resources and support. The university has defined
nonoperating activities to include contributions added to endowment, contributions supporting major capital purchases, contributions and other
activity related to split-interest agreements, changes in the allowance for uncollectible promises to give, retirement plan actuarial adjustments,
interest rate swap agreement changes in fair value, and endowment income and gains or losses, net of amounts distributed to support operations
in accordance with the applicable spending policies. Certain other gains and losses that do not occur in the normal course of operations are also
included in nonoperating activity.
The Consolidated Statement of Activities includes comparative summarized information for the year ended June 30, 2011. Such information does
not include sufficient detail by net asset class to constitute a presentation in conformity with generally accepted accounting principles in the United
States of America (U.S. GAAP). Accordingly such information should be read in conjunction with the university’s consolidated financial statements
for the year ended June 30, 2011, from which the summarized information was derived. In addition, the notes to the consolidated financial
statements exclude comparative information for certain disclosures.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less when purchased, except for those held for long-term
investment. Cash equivalents totaled $530 and $11,307, respectively, at June 30, 2012 and 2011.
16
university of puget sound 2012 financial report
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Receivables
Investment income receivable includes earnings on cash and cash equivalents, short-term investments, investment property, and endowment
investments.
A reasonable estimate of the fair value of student loans receivable, which are federally-sponsored student loans with U.S. government-mandated interest
rates and repayment terms, could not be made because the notes are not saleable and can only be assigned to the U.S. government or its designees.
The university participates in the Federal Perkins revolving loan program. The availability of funds for loans under the program is dependent on
reimbursements to the pool from repayments on outstanding loans. The outstanding loan balance was $15,812 and $16,043 at June 30, 2012
and 2011, respectively. Funds contributed to the program by the Federal government must ultimately be returned to the government so they are
classified as liabilities under “Government advances for student loans” in the Consolidated Statement of Financial Position. Outstanding loans
cancelled under the program result in a reduction of the funds available for loan and a decrease in the liability to the government.
Contributions
Contributions received, including unconditional promises to give, are recognized as revenues when the donor’s commitment is received.
Unconditional promises are recognized at the estimated present value of expected future cash flows. An allowance for uncollectible promises is
provided based on management’s judgment including but not limited to factors such as prior giving history, type of contribution, collection risk,
and nature of fundraising activity. Conditional promises are recorded when donor stipulations are substantially met. Total contributions of $21,311
and $9,870 are recognized in the Consolidated Statement of Activities for the years ended June 30, 2012 and 2011, respectively, and include both
operating and nonoperating contributions.
Fundraising expenses of $4,025 and $3,376 are included in “Institutional support” in the Consolidated Statement of Activities for the years ended
June 30, 2012 and 2011, respectively, and include direct expenses associated with fundraising activities and allocations for depreciation expense,
interest on long-term debt, operation and maintenance of campus facilities, and information technology support.
Inventories
Inventories are carried at cost using average cost, first-in first-out, and retail valuation methods. The cost of inventories is not in excess of net
realizable value.
Investments
Investments are stated at fair value according to U.S. GAAP (see Note 3), which requires that the valuation of investments reported at fair value
be made in the context of market conditions as of the valuation date. Whenever available, quotations from organized securities exchanges are
used as the basis for fair value. For investments not traded on organized exchanges, fair value estimates are provided by investment managers.
For applicable investments, manager-reported net asset value (NAV) is used as a practical expedient to estimate fair value. Valuations provided
by fund managers consider variables such as the financial performance and sales of underlying investments and other pertinent information. In
addition, actual market exchanges at year-end provide additional observable market inputs of the exit price. The university reviews valuations and
assumptions provided by fund managers for reasonableness and believes that the carrying amounts of these financial instruments are reasonable
estimates of the fair value.
The university employs procedures to ensure appropriate oversight of its investments including ongoing monitoring of investment managers and
review of periodic fair value and other information received from them.
For real estate or hard-to-value assets held for investment directly or in trust by the university or its subsidiaries, reported fair value is based on
a representative appraisal performed at intervals appropriate to establish current market values, with consideration given to the cost/benefit of
the appraisal. Investment transactions are recorded on a trade-date basis and the cost of securities sold is based on their weighted average cost.
Interest is accrued as earned, and dividends are recorded on the ex-dividend date.
Risk and Investment Performance
Cash, cash equivalents, and investments are exposed to various risks, such as interest rate, market, and credit. To minimize such risks, the
university has a diversified portfolio with a number of investment managers in a variety of asset classes. The university regularly evaluates its
investments including performance thereof. Due to inherent risks and potential volatility in investment valuations, the amounts reported in the
Consolidated Statement of Financial Position and Consolidated Statement of Activities can vary substantially from year to year.
Beneficial Interest in Outside Trusts
Funds held in trust by others represent resources neither in the possession nor under the control of the university. These trusts are administered
by outside trustees, with the university deriving income and/or a residual interest from the assets. When an irrevocable trust is established or the
university is notified of its existence, the university recognizes its beneficial interest in the outside trust as a contribution at fair value, which is
measured as the present value of the estimated expected future benefits to be received when the trust assets are distributed. The contribution
revenue recognized is classified as an increase in either temporarily or permanently restricted net assets based on the time or use restrictions
placed by the donor upon the university’s beneficial interest in the assets. Periodic adjustments to the beneficial interest to reflect changes in the
fair value, life expectancy, and discount rate are recognized as actuarial gains or losses. The discount rate used at June 30, 2012, was 1.20%.
University of Puget Sound 2012 Financial Report
17
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Amounts held as Trustee or Agent Under Split-Interest Agreements
The university has legal title, either in the university’s name or as trustee, to charitable remainder and lead trusts. No significant financial benefit
can be realized until the contractual obligations are released. The university also receives contributions in exchange for charitable gift annuity
contracts. Actuarial methods are used to record these annuities and trusts using discount rates ranging from 1.60% to 9.40%. For charitable gift
annuities and charitable remainder trusts, when a gift is received, the present value of future expected payments to the beneficiaries is recorded
as a liability based upon life expectancy tables and current discount rate assumptions and the remainder is recorded as a contribution. For
charitable lead trusts, when a gift is received, the present value of future expected payments to the university, as lead beneficiary, is recorded
as a contribution and the remainder is recorded as a liability to the remainder beneficiaries. Contribution revenue recognized from charitable gift
annuities and charitable remainder and lead trusts is classified as an increase in unrestricted, temporarily restricted, or permanently restricted net
assets based on the existence or absence of time or use restrictions placed by the donor upon the university’s interest in the assets. Annuity and
trust assets are reported at fair value. Investment income and gains are credited, and beneficiary payments, direct costs of funds management,
and investment losses are charged to the liability accounts, with periodic adjustments made between the liability and the net assets to record
actuarial gains or losses resulting from changes in fair value and life expectancy.
The university maintains separate reserve funds adequate to meet future payments under its charitable gift annuity contracts as required by
governing states’ laws. The total amount held in separate reserve funds was $825 as of June 30, 2012, and $946 as of June 30, 2011. The amount
included in the liability under split-interest agreements to meet future payments under gift annuity contracts was $435 as of June 30, 2012, and
$473 as of June 30, 2011.
Intangible Assets and Campus Facilities
Intangible assets include software, website development costs, and electronic information resources, and are recorded at cost. These assets have
finite useful lives and are amortized on a straight-line basis over their estimated useful lives, ranging from three to seven years.
Campus facilities, including land, buildings, equipment, and library resources, are recorded at cost or, if received as a gift, at fair value on the date of
donation. In the absence of donor-imposed restrictions on the use of assets, gifts of long-lived assets are reported as unrestricted contributions. The
university’s natural history and other collections are capitalized but not depreciated. Maintenance and repairs are charged to operations when they
occur. Expenditures that significantly increase the value, performance, capacity, or service potential or extend the useful lives of campus facilities are
capitalized and depreciated. Depreciation is computed on a straight-line basis over estimated useful lives of 15 years for land improvements, 25 to 40
years for buildings, 20 years for building improvements, four to seven years for equipment, and three years for library resources.
The costs and accumulated depreciation and amortization of assets sold or retired are removed from the accounts, and the related gains and
losses are included in the Consolidated Statement of Activities.
Asset retirement obligations include legal obligations associated with the retirement of long-lived assets. These liabilities are recorded at fair value
when incurred and are capitalized by increasing the carrying amount of the associated long-lived asset. The fair value of the obligation is measured
based on the present value of estimated future retirement costs. Asset retirement costs are depreciated on a straight-line basis over the useful
life of the associated asset. Subsequent to the initial recognition, period-to-period changes in the carrying amount of the liability are recorded due
to the passage of time and revisions to either the timing or amount of the original estimated cash flows. The liability is removed when the related
obligation is settled.
Advance Deposits from Students
Payments from students received by the end of the current fiscal year that are for a term in the subsequent fiscal year have been deferred for
inclusion in unrestricted operating revenues in that subsequent year.
Federal Income Taxes
The university has been recognized by the Internal Revenue Service as exempt from federal income taxes pursuant to section 501(c)(3) of the
Internal Revenue Code except to the extent of unrelated business taxable income. Donations to the university are generally tax deductible. The
university’s wholly-owned subsidiaries CVI GVF Holdings 13 Ltd. and Rainier Heights Holdings, LLC are subject to federal income tax as applicable.
The university had no unrecognized tax benefits that would have required an adjustment to its net assets, and no unrecognized tax benefits at
June 30, 2012. In general the university is no longer subject to U.S. federal and state income tax examinations by tax authorities before its fiscal
year ended June 30, 2006.
18
university of puget sound 2012 financial report
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 2 – CONTRIBUTIONS RECEIVABLE
June 30, 2012
June 30, 2011
$ 4,241
$ 6,556
7,901
5,991
Unconditional promises expected to be collected in:
Less than one year
One to five years
More than five years
Allowance for uncollectable promises
Discount to present value (discount rates of 0.51% to 5.21%) Contributions receivable, net
-
293
12,142
12,840
(2,390)
(2,599)
(505)
(918)
$ 9,247
$ 9,323
$6,191
$5,016
5,267
4,543
58
2,107
Contributions receivable are intended for the following uses:
Endowment
Construction and improvement of campus facilities
Student financial aid
Other programs and activities, including unrestricted promises for future periods
Allowance for uncollectable promises
121
256
$11,637
$11,922
(2,390)
(2,599)
$ 9,247
$ 9,323
At June 30, 2012 the university had received conditional promises to give in the amount of $1,030. Receipt is conditioned upon the university
meeting certain fundraising goals. The promises will be recognized when the conditions are substantially met.
NOTE 3 – FAIR VALUE MEASUREMENTS
The university discloses the fair value of assets and liabilities’ providing it is practicable to do so. Fair value measurements are determined based
on the assumptions that market participants, in the context of an orderly market, would use in pricing an asset or liability. U.S. GAAP established
a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in an active market for identical assets or liabilities and the
lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 -- inputs are unadjusted quoted prices in active markets for identical assets or liabilities. For the university, this level generally includes
mutual funds, listed equities, and other securities where quoted prices may be easily obtained.
Level 2 -- inputs other than quoted prices included within Level 1 that are observable market-based inputs or unobservable inputs that are
corroborated by observable market data. Assets and liabilities the university generally classifies as Level 2 include units held in commingled
pools and common trust funds and investments that may be priced using model-based valuation, including the university’s interest rate swap
agreements.
Level 3 -- inputs are unobservable because there is little or no market activity, and reflect an entity’s own determination about the assumptions
that market participants would use in pricing the assets or liabilities. For the university, assets and liabilities in Level 3 include units in hedge
funds, beneficial interests in outside trusts, interests in perpetual trusts, limited partnership interests, other private investments, and the
university’s asset retirement obligations.
An asset or liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
University of Puget Sound 2012 Financial Report
19
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 3 – FAIR VALUE MEASUREMENTS, continued
For assets and liabilities reported at fair value, the following table presents the fair value measurements used as of June 30, 2012:
Total
Level 1
Level 2
Level 3
$ 54,129
$ 16,795
$37,334
$
International
33,848
10,633
Directional hedged equity
21,430
Pooled endowment investments:
Global equity:
US
Directional hedged equity-in liquidation
Private equity
Global fixed income/credit:
Interest rate sensitive strategies
Private debt
Real assets:
Private energy
Timber
Real estate
Commodities
Absolute return hedge funds:
In liquidation
Cash and short-term investments
Daily, 1-5 days’ notice
23,215
-
Daily and monthly,
1-44 days’ notice
-
11,621
9,809
Monthly, quarterly,
and
annual, 6-100
days’ notice
99
20,256
-
-
99
20,256
Illiquid
$10,865
54,627
10,376
54,627
-
-
10,376
Illiquid
$ 3,429
11,957
7,303
13,724
-
-
-
11,957
7,303
13,724
1,128
17,220
Illiquid
$18,384
$ 1,072
$ 5,073
1,668
1,668
-
-
308
445
134
21
8
1,787
250,468
308
445
8
84,484
72,170
134
21
1,787
93,814
-
-
251
251
20,743
10,576
10,167
-
Illiquid
Illiquid
In liquidation
Quarterly/Semi-annual
60-100 days’ notice
Nonpooled endowment investments
Equity mutual funds
Fixed income mutual funds
Real estate
Private equity
Cash and short-term investments
Perpetual trusts
Total endowment investments
Other assets
Cash and cash equivalents held in split-interest
agreements
Marketable securities
Illiquid
Illiquid
Mutual funds
3,514
3,514
-
Beneficial interest in outside trusts
1,708
-
-
1,708
Illiquid
380
-
-
380
Illiquid
Real estate
Total other assets
Total
Liabilities
Asset retirement obligation
Unrealized loss on interest rate swap agreements
Total
20
26,596
14,341
10,167
2,088
$277,064
$98,825
$82,337
$95,902
$
$ 1,611
$
1,611
16,052
$ 17,663
university of puget sound 2012 financial report
Unfunded
Commitments
-
1,128
17,220
Other
Redemption
Restrictions
Level 2 & 3
$
$
-
16,052
$16,052
$ 1,611
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 3 – FAIR VALUE MEASUREMENTS, continued
For assets and liabilities reported at fair value, the following table presents the fair value measurements used as of June 30, 2011:
Total
Level 1
Level 2
Level 3
$ 57,225
$ 18,169
$39,056
$
International
36,736
11,663
Directional hedged equity
25,988
Private equity
Global fixed income/credit:
Interest rate sensitive strategies
Pooled endowment investments:
Global equity:
US
Private debt
Real assets:
Private energy
Timber
Real estate
Commodities
Absolute return hedge funds:
In liquidation
Cash and short-term investments
Unfunded
Commitments
-
Daily, 1-5 days’ notice
25,073
-
Daily and monthly,
1-44 days’ notice
-
11,152
14,836
Monthly, quarterly,
and annual, 6-100
days’ notice
19,935
-
-
19,935
Illiquid
$11,195
43,689
43,689
-
-
10,068
-
-
10,068
Illiquid
$ 1,766
9,279
6,438
11,776
6,632
6,632
-
-
9,279
6,438
11,776
1,767
17,298
Illiquid
$ 6,706
$ 1,924
$ 7,267
1,767
17,298
Other
Redemption
Restrictions
Level 2 & 3
1,612
1,612
-
-
339
422
134
30
37
1,886
251,291
339
422
37
82,563
75,281
134
30
1,886
93,447
189
189
-
-
Illiquid
Illiquid
In liquidation
Quarterly/Semi-annual
60-100 days’ notice
Nonpooled endowment investments
Equity mutual funds
Fixed income mutual funds
Real estate
Private equity
Cash and short-term investments
Perpetual trusts
Total endowment investments
Other assets
Cash and cash equivalents held in split-interest
agreements
Illiquid
Illiquid
21,670
11,548
10,122
-
Mutual funds
3,762
3,762
-
-
Beneficial interest in outside trusts
2,035
-
-
2,035
Illiquid
Illiquid
Marketable securities
Real estate
1,481
-
-
1,481
29,137
15,499
10,122
3,516
$280,428
$98,062
$85,403
$96,963
$
$ 1,563
Total other assets
Total
Liabilities
Asset retirement obligation
Unrealized loss on interest rate swap agreements
Total
$
1,563
9,091
$ 10,654
$
$
-
9,091
$ 9,091
$ 1,563
University of Puget Sound 2012 Financial Report
21
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 3 – FAIR VALUE MEASUREMENTS, continued
Although the university uses its best judgment in determining the fair value of assets and liabilities, there are inherent limitations in any methodology.
Therefore, the values presented herein are not necessarily indicative of the amount the university could realize in a current transaction. Future
confirming events could affect the estimates of fair value and could be material to the consolidated financial statements. These events could also
affect the amount realized upon liquidation of the investments. Carrying amounts for cash and cash equivalents approximate fair value because of the
short maturity of these instruments. Perpetual trusts are managed by outside trustees and are not subject to the university’s investment policies.
Redemption terms and restrictions and unfunded commitments are presented for investments when manager-reported net asset value (NAV) is
used as a practical expedient to estimate fair value. Valuations of underlying assets which comprise the NAV are provided by fund managers and
consider variables such as comparable sales, income streams discounted for risk levels, and other pertinent information. In addition, actual market
exchanges of units of the investment fund at or near fiscal year-end provide observable market inputs of the exit price. Based on its review of
assumptions and valuations provided by fund managers, the university believes the carrying amount of these financial instruments are reasonable
estimates of fair value. The fair value of endowment investments with liquidity of 90 days or greater was $93,637 at June 30, 2012, and $92,760 at
June 30, 2011.
Global equities include marketable securities held in mutual funds and commingled pools, enhanced indexing, and directional hedge funds that are
benchmarked against equity indices. The fair value of assets held through commingled pools and common trusts, units of which are not publicly
traded, was $53,247 at June 30, 2012, and $57,224 at June 30, 2011. The university utilizes enhanced indexing strategies to gain exposure to the
S&P 500 through the use of futures contracts, allowing a portion of the large-cap domestic and international equity allocations to be invested in
fixed-income securities to enhance the index returns. The fair value of investments that employed enhanced indexing strategies was $7,301 at
June 30, 2012, and $6,904 at June 30, 2011. Directional hedged equities generally utilize both long and short positions in corporate securities and
derivatives to provide favorable risk-adjusted returns.
Private capital funds are not generally available for liquidation by the university and depend on fund managers’ decisions about exit timing to
provide distributions. In addition, the university has minimal ability to influence the operating decisions affecting these investments. The fair values
of private capital funds have been estimated using the most current information available and where appropriate, adjusting for cash flows since the
valuation date. Unfunded commitments to private capital may be called at any time during the fund investment periods, which generally range from
three to seven years.
Absolute return hedge funds utilize strategies designed to generate long-term capital appreciation with low volatility and little correlation with
equity and bond markets. Some absolute return funds may invest a small portion of assets in private capital funds or other illiquid vehicles.
The following table presents changes for assets and liabilities measured at fair value using significant unobservable inputs (Level 3):
June 30, 2012
Assets
Balance, beginning of the year
Total realized and unrealized gains
Purchases
Settlements
Sales
Balance, end of the year
Liabilities
$96,963
22
university of puget sound 2012 financial report
$1,563
Assets
Liabilities
$89,317
$1,571
-
2,284
-
10,269
16,302
-
14,597
-
-
48
-
(8)
(19,647)
-
(17,220)
-
$95,902
$1,611
$96,963
$1,563
June 30, 2012
Unrealized gains related to Level 3 assets held at the end of the
year included in “Net (losses) gains and income on endowment
investments, net of distributions” in the Consolidated Statement of
Activities June 30, 2011
$3,501
June 30, 2011
$9,009
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 4 – ENDOWMENT INVESTMENTS AND NET ASSETS
At June 30, 2012, the university’s endowment consisted of approximately 540 individual funds established for a variety of purposes. The
endowment includes both donor-restricted endowments and funds designated by the board of trustees to function as endowments (quasiendowments). Quasi-endowment funds may be expended at the discretion of the university’s board of trustees. As required by U.S. GAAP, net
assets associated with endowment funds, including quasi-endowment funds, are classified and reported based on the existence or absence of
donor-imposed restrictions.
Endowment Investment and Spending Policies
To enable broad diversification and economies of scale, the university’s policy is to pool endowment assets for investment purposes to the fullest
extent possible as permitted by gift agreements and applicable government regulations. In the rare cases when a donor has prohibited a gift from
being pooled for investments purposes, such endowments (referred to as non-pooled endowments) are separately invested and managed.
The purpose of the university’s pooled endowment is to provide ongoing financial support for operations that will remain stable (or grow) in real or
inflation-adjusted terms, as adjusted for new additions to the pooled endowment. The primary investment objective of the pooled endowment is to
provide a sustainable maximum level of return consistent with prudent risk levels. The overall, long-term investment goal of the pooled endowment
is to achieve an annualized total return (net of fees and expenses), through appreciation and income, of at least 5% plus the rate of inflation (as
measured by the broad, domestic Consumer Price Index), thus protecting the assets against inflation. Investments are diversified across a wide
range of asset classes, including those providing return premiums for illiquidity, so as to provide a balance that will enhance total return under a
range of economic scenarios, while avoiding undue risk concentrations in any single asset class or investment category. Maintaining adequate
liquidity to meet operating and debt service requirements, to support desired credit ratings, and to provide a source of funds for rebalancing is also
considered when making investment decisions regarding asset allocation or changes in managers.
In accordance with the Washington State Uniform Prudent Management of Institutional Funds Act (UPMIFA), the university considers the
following factors, among others, in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) the duration and
preservation of the fund; (2) the purposes of the university and the donor-restricted endowment fund; (3) general economic conditions; (4) the
possible effect of inflation or deflation; (5) the expected total return from income and the appreciation of investments; (6) other resources of the
university; and (7) the investment policies of the university.
Pooled endowment spending is determined using the total return concept. The board of trustees approved a spending rate of 5% of a trailing
36-month average market value for the years ended June 30, 2012 and 2011. For a few donor-restricted endowment funds, the university honors
and adheres to donor-stipulated spending limitations.
At June 30, 2012, nearly 99% of the university’s endowment investments were pooled. Endowment investment activity is summarized as follows:
Balance, beginning of the year
Gifts
Transfers and other additions
June 30, 2012
June 30, 2011
$251,291
$217,691
12,178
4,660
104
467
4,479
5,567
(1,867)
(2,313)
Return on investments:
Ordinary income
Investment expenses
Realized gains
Change in cumulative unrealized (losses) gains
Total return on investments
Amount distributed for operating activities
Total return, net of distributions
Balance, end of year 686
3,544
(5,584)
32,857
(2,286)
39,655
(10,819)
(11,182)
(13,105)
28,473
$250,468
$251,291
University of Puget Sound 2012 Financial Report
23
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 4 – ENDOWMENT INVESTMENTS AND NET ASSETS, continued
Interpretation of Relevant Law
Consistent with its understanding of donor intent, the board of trustees of the university has interpreted UPMIFA as requiring the preservation of
the fair value of the original gift as of the gift date of the donor-restricted endowment funds, absent explicit donor stipulations to the contrary. The
university classifies as permanently restricted net assets: (a) the original value of gifts to donor-restricted endowments and (b) any other amounts
added to donor-restricted endowments that donors have stipulated are not expendable. The remaining portion of the donor-restricted endowment
fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are
appropriated for expenditure by the university in a manner consistent with the standard of prudence prescribed by UPMIFA. Temporarily restricted
board-designated quasi-endowment funds were established with expendable restricted bequests and gifts.
Underwater Endowment Funds
As of June 30, 2012, seven individual, donor-restricted endowment funds had estimated fair values that were $20 less than their permanently
restricted value. Such endowments are often referred to as “underwater” endowments. The gifts that funded these underwater endowments
were largely received since 2006 as a result of successful fundraising efforts. These endowment funds did not have sufficient time to accumulate
sufficient investment earnings, as did older funds, when declines in financial markets occurred during the fiscal year ended June 30, 2012. Though
the university is not required by donor-imposed restriction or law to use its unrestricted resources to restore the endowments to their historic
dollar value, U.S. GAAP requires that such losses and subsequent gains be reflected as changes to unrestricted net assets until the fair values
again reach the permanently restricted values. In accordance with its spending policy, the university has limited distributions from underwater
endowments to the current year’s income, such as interest and dividends and any net accumulated capital appreciation that is available. If such
endowments support financial aid, the spending shortfall may be covered by quasi-endowment for financial aid in order to achieve the approved
and committed total tuition discount rate.
As of June 30, 2012, endowment net assets consisted of the following:
Unrestricted
Temporarily
Restricted
Permanently
Restricted
Total
$55,511
$106,811
$162,302
437
-
437
Donor-restricted endowment funds:
True endowments $
Term endowments
-
Total donor-restricted endowment funds
Board-designated quasi-endowment funds Total endowment investments
55,948
106,811
162,739
86,414
(20)
1,315
-
87,729
86,394
57,263
106,811
250,468
-
-
3,990
3,990
$86,394
$57,263
$110,801
$254,458
Temporarily
Restricted
Permanently
Restricted
Total
$63,333
$94,788
$158,112
473
-
473
63,806
94,788
158,585
Unconditional promises to endowment
Total endowment net assets (20)
As of June 30, 2011, endowment net assets consisted of the following:
Unrestricted
Donor-restricted endowment funds:
True endowments Term endowments
Total donor-restricted endowment funds
Board-designated quasi-endowment funds Total endowment investments
Unconditional promises to endowment
Total endowment net assets 24
university of puget sound 2012 financial report
$
(9)
(9)
91,373
1,333
-
92,706
91,364
65,139
94,788
251,291
-
162
2,871
3,033
$91,364
$65,301
$97,659
$254,324
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 4 – ENDOWMENT INVESTMENTS AND NET ASSETS, continued
Changes to endowment net assets for the year ended June 30, 2012 are as follows:
Temporarily
Restricted
Permanently
Restricted
$91,364
$65,139
$94,788
-
162
2,871
3,033
91,364
65,301
97,659
254,324
12,178
Unrestricted
Total
Endowment net assets, June 30, 2011:
Endowment investments
Unconditional promises to endowment
Total endowment net assets
$251,291
Contributions:
Gifts added to endowment investments -
197
11,981
Change in unconditional promises, net
-
(162)
1,119
957
Total contributions
-
35
13,100
13,135
Transfers and other additions
2
(12)
114
104
Ordinary income, net of investment expenses
816
1,668
128
2,612
Realized gains
223
444
19
686
(2,217)
(3,148)
(219)
(5,584)
Return on investments:
Change in cumulative unrealized losses
(1,178)
(1,036)
(72)
(2,286)
Amount distributed for operating activities Total return on investments
(3,794)
(7,025)
-
(10,819)
Total return, net of operating distribution
(4,972)
(8,061)
(72)
(13,105)
86,394
57,263
106,811
250,468
-
-
3,990
3,990
$86,394
$57,263
$110,801
$254,458
Temporarily
Restricted
Permanently
Restricted
Total
$80,374
$48,619
$88,698
$217,691
-
24
6,297
6,321
80,374
48,643
94,995
224,012
Endowment net assets, June 30, 2012:
Endowment investments
Unconditional promises to endowment
Total endowment net assets
Changes to endowment net assets for the year ended June 30, 2011 are as follows:
Unrestricted
Endowment net assets, June 30, 2010:
Endowment investments
Unconditional promises to endowment
Total endowment net assets
Contributions:
Gifts added to endowment investments -
75
4,585
4,660
Change in unconditional promises, net
-
138
(3,426)
(3,288)
-
213
1,159
1,372
Total contributions
Transfers and other additions
Net assets released from restrictions
2
(12)
477
467
898
(898)
-
-
Return on investments:
Ordinary income, net of investment expenses
Realized gains (losses)
Change in cumulative unrealized gains
656
2,551
47
3,254
1,653
1,818
73
3,544
32,857
11,355
20,594
908
13,664
24,963
1,028
39,655
Amount distributed for operating activities (3,574)
(7,608)
-
(11,182)
Total return, net of operating distribution
10,090
17,355
1,028
28,473
91,364
65,139
94,788
251,291
-
162
2,871
3,033
$91,364
$65,301
$97,659
$254,324
Total return on investments
Endowment net assets, June 30, 2011:
Endowment investments
Unconditional promises to endowment
Total endowment net assets
University of Puget Sound 2012 Financial Report
25
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 5 – INTANGIBLE ASSETS AND CAMPUS FACILITIES
Intangible Assets
Intangible assets include software, electronic information resources, and website development costs. The weighted average amortization period for
intangible assets is four years.
June 30, 2012
June 30, 2011
Amortized intangible assets:
Gross carrying amount
Accumulated amortization
Net carrying amount
$6,508
$3,172
(2,619)
(2,281)
$3,889
$ 891
The gross carrying amount includes $2,687 of software placed in service subsequent to year-end and considered in progress at June 30, 2012.
Aggregate amortization expense:
2012
$ 446
Estimated amortization expense for each of the next five years and thereafter is as follows:
2013
$ 519
2014
397
2015
180
2016
50
2017
30
Thereafter
26
Total
$1,202
Campus Facilities
Campus facilities consisted of the following:
Land and improvements
Building and improvements
June 30, 2012
June 30, 2011
$ 28,488
$ 21,432
210,332
189,072
Equipment
17,412
15,608
Library resources
1,433
1,876
Collections
Construction in progress
Accumulated depreciation
Campus facilities, net
544
540
2,602
23,210
260,811
251,738
(87,589)
(78,423)
$173,222
$173,315
Asset Retirement Obligation
Under U.S. GAAP, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the liability can be
reasonably estimated. For the university, these obligations are primarily for the disposal of asbestos and certain other regulated materials generally
found in pre-1980 campus facilities. Though these materials do not currently pose a health hazard in any of these facilities, appropriate remediation
procedures are required to remove these materials upon renovation or demolition.
The following schedule summarizes the university’s asset retirement obligation activity:
June 30, 2012
Asset retirement obligation, beginning of the year
$1,563
$1,571
(43)
(89)
8
-
Accretion expense
67
67
Revisions in estimated cash flows
16
14
$1,611
$1,563
Obligations settled
Obligations Incurred
Asset retirement obligation, end of the year
26
June 30, 2011
university of puget sound 2012 financial report
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 6 – LONG-TERM DEBT
Long-term debt consisted of the following:
2012 Average
Interest Rate
Final
Maturity Date
June 30, 2012
June 30, 2011
WHEFA Revenue Bonds, 2006A
4.25%
2030
$19,615
$20,280
WHEFA Revenue Bonds, 2006B
4.23%
2036
29,505
30,000
WHEFA Revenue Bonds, 2001
3.72%
2031
10,460
10,490
WHEFA Revenue Bonds, 1998
5.18%
2014
1,127
1,466
Capital lease obligations
8.47%
2013-2014
59
109
$60,766
$62,345
Total
Principal due within the next five years and thereafter is as follows:
2013
1,653
2014
1,676
2015
1,740
2016
1,820
2017
Thereafter
1,895
51,985
60,769
Unamortized net discount
Total
(3)
$60,766
The Washington Higher Education Facilities Authority (WHEFA) is a financing conduit provided by the State of Washington for private higher
education facility acquisition and construction in the state. The tax-exempt bonds are obligations solely of the university and are not guaranteed by
the state. The WHEFA bond agreements contain covenants relating to maintenance of facilities, insurance, and other general items. In addition,
the WHEFA 2001 bond agreement contains a covenant that the university will comply with certain liquidity requirements. The WHEFA 2006A and
2006B bonds are supported by irrevocable letters of credit issued by a bank. The reimbursement agreements in the letters of credit require the
university to maintain certain financial ratios and other measures as defined in the contracts. The university’s unrestricted revenues are pledged as
collateral on the WHEFA tax-exempt bond obligations. The university’s underlying long-term rating is “A1” by Moody’s Investors Service, Inc., and
“A+” by Standard & Poor’s Rating Services.
During 2006 the university entered into a loan agreement with WHEFA whereby WHEFA issued tax-exempt Variable Rate Demand Refunding
Bonds in the amount of $21,930 (Series 2006A) and Variable Rate Demand Revenue Bonds in the amount of $30,000 (Series 2006B). The proceeds
from the Series 2006B Revenue Bonds were used to fund the renovation and improvement of campus facilities and the proceeds from the Series
2006A Refunding Bonds were used to advance refund outstanding WHEFA 1998 bonds. Pursuant to the loan agreements, both the WHEFA
2006A and 2006B variable rate bonds bear interest at a rate that is determined weekly, with the maximum annual rate capped initially at 10%.
The university maintains irrevocable letters of credit equal to the principal amount plus 40 days accrued interest on the outstanding Series 2006A
and 2006B bonds. The Series 2006A and Series 2006B bonds may be tendered with seven days’ notice and to the extent the tendered bonds
do not remarket, a liquidity draw against the letter of credit may occur. Any draws under the letter of credit must be reimbursed to the bank 730
days after the bank pays such drawing. Interest on such amount is the greatest of prime plus 1%, the Federal Funds Rate plus 2%, or 7% (the
greatest is also known as the Base Rate) for the first six months, and the Base Rate plus 1% thereafter. Additionally, pursuant to the terms of the
Reimbursement Agreement, if certain material adverse changes occur, such changes could result in all obligations becoming immediately due.
During 2001 the university entered into a loan agreement with WHEFA whereby WHEFA issued $10,620 of tax-exempt Variable Rate Demand
Revenue Bonds, Series 2001. The proceeds were used to finance the construction of a new student residence hall. Pursuant to the loan agreement,
the bonds bear interest at a rate that is determined weekly, with the maximum annual rate capped at 12%.
During 1998 the university entered into a loan agreement with WHEFA whereby WHEFA issued $34,870 of tax-exempt Revenue and Refunding
Revenue Bonds, Series 1998, with various fixed rates, at a net discount of $54. The proceeds were used in part to advance refund outstanding
WHEFA revenue bonds, and the balance was used to finance the construction and renovation of campus facilities. As of June 30, 2012, the WHEFA
1998 bonds that remain outstanding are those that were used to advance refund other WHEFA revenue bonds and therefore were not eligible for
advance refunding with proceeds from the WHEFA 2006A bonds.
University of Puget Sound 2012 Financial Report
27
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 6 – LONG-TERM DEBT, continued
Subsequent to year-end, on October 1, 2012, the university entered into loan agreements whereby WHEFA issued tax-exempt Revenue and
Refunding Revenue Bonds in the amount of $34,805 at a net premium of $3,577 (Series 2012A) and Refunding Revenue Bonds in the amount of
$29,195 (Series 2012B). The bonds are general obligations of the university. The proceeds from the Series 2012A bonds will be used to finance the
construction of a 135-bed residence hall, and to refund outstanding WHEFA 2006A bonds. The proceeds from Series 2012B will be used to refund
outstanding WHEFA 2006B bonds. The 2012A bonds will bear interest at fixed rates ranging from 3% to 5% with an all in cost of 4.20%. The
2012B bonds were sold through a direct purchase transaction with a bank, who will hold the bonds for an initial seven year term, after which the
university will remarket the bonds. The bonds bear interest at 70% of the one-month London Interbank Offer Rate (LIBOR) plus a credit spread.
The university is subject to certain financial covenants. The letters of credit associated with the refunded 2006 bonds were terminated.
For the year ended June 30, 2012, the university incurred total interest costs related to long-term debt of $2,589, of which $131 was capitalized.
The fair value of long-term debt was estimated to be $60,774 and $62,352 at June 30, 2012 and 2011, respectively, based on quoted market prices
for publicly traded debt with similar characteristics.
The university has a $5,000 unsecured line of credit in the form of a demand note with a bank. The agreement provides for interest at the bank’s
prime rate with no additional fees. As of June 30, 2012, the bank’s prime rate was 3.25%. This line of credit has not been drawn on but is available
for operating expenses or to provide liquidity for the Series 2001 bonds should the need arise.
Interest Rate Swap Agreements
During 2006, in an effort to manage the fluctuations in cash flows resulting from variable interest rates and to lower its overall borrowing costs,
the university entered into three separate interest rate swap agreements to convert its variable rate bonds to a substantially fixed rate through
maturity. Over the remaining life of the bonds, the university expects the average interest rate to be the fixed swap rate plus related fees. Under
the terms of the swap agreements, the university pays the swap counterparties fixed amounts of interest over the term of the contracts and
receives variable interest payments based on 67% of the one-month LIBOR. Additional key terms of the agreements are as follows:
Swap
Counterparty
Trade
Date
Effective
Date
Swap
Fixed Rate
Final
Maturity Date
10/1/2030
WHEFA 2006A Swap
The Bank of New York Mellon
5/25/06
4/1/08
3.875%
WHEFA 2006B Swap
The Bank of New York Mellon
5/25/06
6/30/06
3.855%
10/1/2036
WHEFA 2001 Swap
Societe Generale, New York Branch
8/9/05
9/1/05
3.426%
10/1/2031
The university accounts for its interest rate swap agreements in accordance with U.S. GAAP. The fair value of the interest rate swap agreements
is the estimated amount that the university would receive or pay to transfer the agreements as of the reporting date and is recognized as either
as an unrealized gain or loss, as appropriate. Amounts reported in the Consolidated Statement of Financial Position as of June 30, 2012 and 2011,
included an “Unrealized loss on interest rate swap agreements” of $16,052 and $9,091, respectively also known as the mark-to-market value.
The net changes in the fair value of the interest rate swap agreements for the years ended June 30, 2012 and 2011, was a net unrealized loss of
$6,961 and gain of $1,870, respectively, recognized within “Actuarial adjustments and other changes” in the Consolidated Statement of Activities.
Providing the university holds the swaps to maturity, the fair value of the derivatives will be zero. The university retains the option to terminate,
cancel, and cash settle the interest rate swap agreements.
The university utilizes its interest rate swap agreements solely as a cash flow hedge and does not use derivative instruments for trading
or speculative purposes. The university seeks to diversify counterparty risk and executes credit-sensitive derivative transactions only with
counterparties with strong credit ratings. The university is not required to post collateral for its swaps unless its credit rating drops below Baa2 by
Moody’s Investors Service, Inc or BBB by Standard & Poor’s Rating Services on the WHEFA 2001 Swap and Baa3 by Moody’s Investors Service,
Inc or BBB- by Standard & Poor’s Rating Services on the WHEFA 2006A and 2006B swaps. The amount of the collateral would be the mark-tomarket loss exposure at the time the credit rating dropped below the required level.
28
university of puget sound 2012 financial report
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 7 – RESTRICTIONS ON NET ASSETS
Restrictions on net assets consisted of the following:
June 30, 2012
June 30, 2011
Temporarily restricted:
Time restrictions:
Unappropriated earnings from donor-restricted endowments
$ 55,511
$ 63,333
437
473
55,948
63,806
Unconditional promises to give
5,257
6,452
Split-interest agreements
1,580
1,885
Term endowment
Total donor-restricted endowments
466
445
63,251
72,588
Construction of campus facilities
2,585
16,231
Educational programs and activities
1,435
1,746
Cash surrender value of life insurance policies
Total time restrictions
Purpose restrictions:
Total purpose restrictions
Total temporarily restricted
4,020
17,977
$ 67,271
$ 90,565
$110,801
$97,659
3,715
3,901
Permanently restricted:
Endowment funds
Split-interest agreements
Loan funds
Total permanently restricted
5
5
$114,521
$101,565
NOTE 8 – RETIREMENT PLANS
Defined Contribution Plan
The university contributes to a defined contribution retirement plan for the benefit of eligible faculty and staff (participants), with funding vehicles
available through Teachers Insurance Annuity Association of America (TIAA) and College Retirement Equities Fund (CREF), (together TIAACREF). University contributions for participants begin after one year of service to the university or one year of service at an eligible employer
during the twelve months immediately prior to their employment at the university. Contributions are 10% or 12% of salaries, depending upon
position classifications and are fully vested. The university’s contributions totaled $4,402 and $4,373 for the years ended June 30, 2012 and 2011,
respectively.
Defined Benefit Plans
The university has in place an unfunded early retirement and career change plan for eligible members of the faculty. The university also accrues
post-retirement medical benefits available to certain active faculty under the faculty early retirement and career change policy (pre-65 benefits) and
certain retired faculty and staff under a discontinued medical benefits plan for retirees (post-65 benefits). Plan expenses and liabilities are valued
based on actuarial methods and are reflected in the consolidated financial statements. U.S. GAAP requires employers to recognize the overfunded
or underfunded status of a defined benefit post-retirement plan as an asset or liability in their statement of financial position and to recognize
changes in that funded status in the year in which the changes occur. As a not-for-profit organization, the university recognizes such changes
through changes in unrestricted net assets.
University of Puget Sound 2012 Financial Report
29
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 8 – RETIREMENT PLANS, continued
Defined Benefit Plans, Continued
Amounts recognized in the Consolidated Statement of Financial Position as of June 30, 2012 and 2011, and in the Consolidated Statement of
Activities for the years then ended are as follows:
Faculty Early Retirement
and Career Change Plan
2012
2011
$ 4,945
Post-Retirement
Medical Plan
2012
2011
$ 4,808
$ 1,608
$ 1,614
(210)
(311)
(139)
(124)
Service cost
269
258
55
51
Interest cost
240
229
76
75
-
-
40
41
226
226
27
26
Projected and accumulated post-retirement benefit obligations:
Beginning of the year
Benefits paid
Amounts recognized in the Consolidated Statement of Activities:
Components of net benefit expense recognized as operating
expense:
Amortization of transition obligation
Amortization of actuarial loss
Total net benefit expense
735
713
198
193
Loss (gain) recognized within actuarial and other changes
148
(265)
1,028
(75)
$ 5,618
$ 4,945
$ 2,695
$ 1,608
$
$
$
$
End of the year
Post-retirement benefit liability recognized within accrued payroll
and other liabilities in the Consolidated Statement of Financial Position:
Current portion
Noncurrent portion
Total
Plan funded status
333
301
158
139
5,285
4,644
2,537
1,469
$ 5,618
$ 4,945
$ 2,695
$ 1,608
$(5,618)
$(4,945)
$(2,695)
$(1,608)
The weighted-average assumptions used to determine plan benefit obligations as of June 30, 2012 and 2011, and the net benefit expense for the
years then ended, included:
Faculty Early Retirement
and Career Change Plan
2012
2011
Post-Retirement
Medical Plan
2012
2011
Benefit obligation (post-retirement benefit liability):
Discount rate
4.08%
5.01%
4.08%
Rate of compensation increase
5.00%
5.04%
N/A
N/A
N/A
N/A
*
7.00%
Discount rate
5.01%
4.91%
4.92%
4.85%
Rate of compensation increase
5.00%
5.04%
N/A
N/A
N/A
N/A
7.00%
7.00%
Health care trend rates
4.92%
Net benefit expense:
Health care trend rates
* Post-65 Medical Premium is 7.00%, Pre-65 Medical Premium is 10.00%
Health care trend rates are expected to decline by 1.00% per year to an ultimate trend rate of 5.00%.
30
university of puget sound 2012 financial report
University of Puget Sound
Notes to Consolidated Financial Statements
June 30, 2012
(Dollars in Thousands)
NOTE 8 – RETIREMENT PLANS, continued
Defined Benefit Plans, Continued
The benefits expected to be paid in each of the next five years, and in the aggregate for the five years thereafter, were estimated based on the
same assumptions used to measure the benefit obligations and are as follows:
Faculty Early Retirement
and Career Change Plan
Post-Retirement
Medical Plan
2013
$ 333
$ 158
2014
$ 347
$ 166
2015
$ 372
$ 185
2016
$ 351
$ 205
2017
$ 399
$ 225
2018–2022
$2,275
$1,051
Estimated university contributions to the plans that are expected to be paid during the next fiscal year include $333 for the faculty early retirement
and career change plan and $158 for the post-retirement medical plan.
Amounts recognized as changes in unrestricted net assets that are expected to be recognized as amortization components of net benefit expense
in the next fiscal year include a net loss of $226 for the faculty early retirement and career change plan and a net loss of $99 for the post-retirement
medical plan.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
The university allocates a portion of its pooled endowment to investments in natural resources, private equity and real estate asset classes. At
June 30, 2012, an outstanding commitment of $38,823 remains to be invested in these asset classes.
As of June 30, 2012, the university had outstanding commitments in the amount of $1,036 related to the renovation and improvement of campus
facilities.
In the normal course of activities, the university from time to time is the subject of various claims and also has claims against others. In the opinion
of management, the results of these matters will not have a significant impact on the consolidated financial statements.
Federally funded programs, including financial aid, research and development, and other programs, are routinely subject to special audit. The
reports on examinations, which are conducted pursuant to specific regulatory requirements by the auditors for the university, are required to be
submitted to both the university and the Federal Audit Clearinghouse. Federal oversight agencies have the authority to determine liabilities as well
as to limit, suspend, or terminate federally funded programs. In the university’s opinion, no material instances of noncompliance have occurred
during the year ended June 30, 2012, related to the university’s federally funded student financial aid, research and development, and other
programs.
NOTE 10 – SUBSEQUENT EVENTS
The university evaluated subsequent events through December 17, 2012, the date these consolidated financial statements were issued, and
concluded there were no events requiring recording or disclosure other than what was disclosed in Note 6 related to a new financing transaction.
University of Puget Sound 2012 Financial Report
31
University of Puget Sound
Board of Trustees and Officers
As of December 2012
Trustee Officers
Richard M. Brooks ‘82, Chair
Robert C. Pohlad P’07, Vice Chair
Ronald R. Thomas, President
George E. Matelich ‘78, Treasurer
Trustees
Richard M. Brooks ‘82 CEO/Director, Zumiez, Inc., Lynnwood, Washington
William M. Canfield ‘76, P’08 Chairman, Cytovance Biologics, Oklahoma City, Oklahoma
Mitzi W. Carletti ‘78 Investment Advisor and Research Analyst, Badgley Phelps, Seattle, Washington
Michael J. Corliss ‘82, P’13 CEO, Investco Financial Corporation, Sumner, Washington
Hollis S. Dillon ‘84, J.D.’88 Owner and Co‐President, HeidiSays.com, Mercer Island, Washington
Kathleen A. Duncan ‘82 Trustee, Thomas and Dorothy Leavey Foundation, Los Angeles, California
Randolph C. Foster ‘74 Partner, Stoel Rives, Portland, Oregon
Frederick W. Grimm ‘78 CEO, Triad Development, Seattle, Washington
Bruce W. Hart P’09 Principal, Jacobs, San Francisco, California
Matthew M. Kelleher ‘79 Senior Vice President, Morgan Stanley Smith Barney LLC, Seattle, Washington
Thomas E. Leavitt ‘71, J.D.‘75, P’10 President, Leavitt Capital Companies, Seattle, Washington
Gwendolyn H. Lillis P’05 Trustee, The Lillis Foundation, Castle Rock, Colorado
Eric Lindgren Professor Emeritus of Biology, University of Puget Sound, Tacoma, Washington
George E. Matelich ‘78 Managing Director, Kelso & Company, New York, New York
Janeen Solie McAninch ‘77, P’06 CEO, Becker Capital Management, Portland, Oregon
Kenneth C. McGill ‘61 CEO (retired), Northwest Kinetics, Tacoma, Washington
William C. Nelson ‘69 Vice Chairman (retired), Bank of Hawaii, Portland, Oregon
Jill T. Nishi ‘89 Deputy Director of Strategy & Management and Special Initiative, Post-Secondary Success,
US Programs, Bill & Melinda Gates Foundation, Seattle, Washington
Deanna W. Oppenheimer ‘80, P’11, P’14 CEO, CameoWorks, Seattle, Washington
Wade H. Perrow ‘73, P’02 CEO, Wade Perrow Construction, Gig Harbor, Washington
John C. Pierce ‘65, P’94, P’97 Executive Director (retired), Oregon Historical Society, Lawrence, Kansas
Robert C. Pohlad P’07 Principal, Pohlad Family Companies, Minneapolis, Minnesota
Lyle Quasim ‘70, H’05 Public Service Executive (Retired), Tacoma, Washington
Allan D. Sapp ‘78, P’10 Private Investor, Gardnerville, Nevada
Robert T. Shishido ‘72, P’09 Senior Software Engineer, Boeing North America, Wailuku, Hawai’i
Ronald R. Thomas President, University of Puget Sound, Tacoma, Washington
Gillian Neukom Toledo ‘94 Teacher, Seattle, Washington
Barbara S. Walker P’05, P’07 Bookkeeper, Meridian Dental Clinic; Manager, JR & JA LLC, Kent, Washington
Guy N. Watanabe ‘75, M.B.A.‘76 President/Founder, GW Capital, Inc., Bellevue, Washington
William T. Weyerhaeuser Chairman of the Board, Columbia Banking System, Inc., Tacoma, Washington
Kenneth W. Willman ‘82 Chief Legal Officer, Russell Investments, Seattle, Washington
Non-Trustee Officers
Kristine M. Bartanen Academic Vice President and Dean of the University
David R. Beers P’11
Vice President for University Relations
Mary Elizabeth Collins ’81, P’02
Secretary of the Corporation and Director of the Office of the President
Janet S. Hallman ‘84
Associate Vice President for Accounting and Budget Services and Controller
George H. Mills Jr. ’68, M.S.’72
Vice President for Enrollment
Sherry B. Mondou Vice President for Finance and Administration
J. Michael Segawa Vice President for Student Affairs and Dean of Students
32
university of puget sound 2012 financial report
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