Minnesota State Colleges and Universities Board of Trustees Meeting December 14, 2004

Table of Contents Audit Results, Reports Issued and New Standards Implemented, Including Component Units Management Recommendations Required Communication Financial Statement Highlights Questions and Open Discussion

Audit Results – Reports Issued Independent Auditors’ Report on Financial Statements (System Wide) – Unqualified Opinion. Report References Other Campus Auditors and 2003 System Wide Auditors. Independent Auditors’ report on Financial Statements (Revenue Bond) – Unqualified Opinion. Independent Auditors’ Report on Compliance and on Internal Control Over Financial Reporting Based Upon the Audit Performed in Accordance With Government Auditing Standards – no findings or material weaknesses, except for certain colleges and universities that did not maintain depository insurance/collateral securities at required minimum levels during the year.

New Standards SAS 99 – New Fraud Standards. Requires additional communication of fraud risks, increased documentation of fraud risks and unpredictable audit tests for risk areas. No fraud identified as a result of our testing. GASB 39 – Component Units. Requires reassessment of significant component units. The seven University Foundations were deemed significant and included in the annual audit report. Separate pages for identification of component units.

Component Units New for Fiscal year 2004 audit, as required by GASB Statement 39. Includes University Foundations that are “Significant”. Includes Southwest, Winona, Metropolitan State, Mankato, Bemidji, Moorhead and St. Cloud. Total Assets at June 30, 2004 totaled $114,279,000 Total Revenues recognized for the year ended June 30, 2004 totaled $25,314,000. Shown as separate statement in the consolidated MnSCU report to allow the financial statement readers to distinguish between MnSCU and the Foundations.

Management Recommendations System Access and Security – Continue to review applicable system access rights at campus level to reduce incompatibilities. Financial Reporting Process and Structure – Continue to train and pass down responsibilities to campus level. Accounting Disciplines – Explore interim financial reporting to assist in year end work load. Computer Processing Environment/Information Protection Plan – continue to implement OLA recommendations for security concerns (consistency of security, system privileges, password management, data warehouse security.)

Management Recommendations New Accounting Pronouncements – –GASB 45 – Post Employment Benefits – effective June 30, –GASB 39 – Component Units – implemented June 30, –GASB 40 – Deposit and Investment Risk Disclosures – effective June 30, –GASB 42 – Impairment of Capital Assets and for Insurance recoveries – effective June 30, 2006.

Required Communication OUR RESPONSIBILITY UNDER GENERALLY ACCEPTED AUDITING STANDARDS AND GOVERNMENT AUDITING STANDARDS – reasonable but not absolute assurance that financial statements are free of material misstatement. Sampling used in testing. No opinion on internal controls. SIGNIFICANT ACCOUNTING POLICIES – Note 1 to the Financial Statements ACCOUNTING ESTIMATES - the most sensitive estimates were: Depreciation, Allowance for uncollectible A/R, Scholarship Allowances (Alternate Method), Workers Compensation Claims, Compensated Absences - reasonable and consistent AUDIT ADJUSTMENTS - reallocation of capital appropriations between campuses and the adjustments for prior year compensated absences and capital assets. DISAGREEMENTS WITH MANAGEMENT - none CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS – campus auditors ISSUES DISCUSSED PRIOR TO RETENTION OF INDEPENDENT AUDITORS - normal DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT - none

Financial Statement Highlights - Revenues Operating Revenue up 7.7% to $802,131,000. Tuition up 12.9%, Fees up 9.7%, sales flat, room and board up 9.6%. Grant Revenue: Federal up 2.9% State up 4.5%, private grants down 31% from $19,880,000 to $13,704,000.

Financial Statement Overview – Expenses Operating Expenses decreased.49% to $1,366,116,000. Salaries up 2.9% to $922,014,000. Expenses increasing in 2004 include: Supplies (+13.8%), Depreciation (+1.8%). Expenses decreasing in 2004 include: Purchased Services (-2.4%), Repairs and Maintenance (-24.6%), Financial Aid (-12.4%) and Other Expense (-27.5%).

Financial Statement Overview - Statement of Revenues, Expenses & Changes in Net Assets State Operating Appropriation down 5.6 % or $33,171,000 to $559,631,000. Capital Appropriation $64,793,000, compared to $86,364,000 in Other non-operating trends: Insurance proceeds declined from $11,181,000 in 2003 to $2,848,000 in 204 due to Southwest Minnesota State Fire. Grants to Other Organizations increased from $7,484,000 in 2003 to $9,272,000 in 2004.

Financial Statement Overview - Statement of Revenues, Expenses & Changes in Net Assets Net Assets Increased $63,224,000 in 2004, compared to increase of $73,286,000 in Net Assets Decreased $5,324,000 prior to Capital Appropriations in 2004 compared to 2003 decrease of $25,535,000.

Financial Statement Overview - Statement of Net Assets Net Assets Restrictions decreased from $99,382,000 in 2003 to $71,312,000 in 2004 – due to drop in Capital Project Restrictions. Invested in Capital Assets increased from $794,297,000 in 2003 to $854,354,000 in 2004 – capital assets added $148,150,000, depreciation deducted $67,753,000. Unrestricted Net Assets increased $31,237,000 in 2004, to $160,650,000 at June 30, Represents 1.4 months of 2004 operating expenses, compared to 1.1 months in Typical goal of governments is 3-6 months, depending on philosophy, cash flow and board policy. General Fund required reserves at June 30, 2004 is $51,568,000 and is included above.

Financial Statement Overview - Statement of Net Assets Total Assets increased to $1,620,375,000 at June 30, 2004, up from $1,496,513,000 at June 30, Capital Assets Net of Depreciation increased from $936,797,000 at June 30, 2003 to $1,025,934,000 at June 30, Depreciation expense of $67,753,000 recognized for FY Current Assets increased from $460,269,000 at June 30, 2003 to $526,563,000 at June 30, 2004, a result of increases in cash and investments (+$49,624,000) and securities lending assets (+$13,983,000). Restricted assets declined from $67,952,000 at June 30, 2003 to $29,510,000 at June 30, 2004, due to spend down of capital project funds.

Financial Statement Overview - Statement of Net Assets Total Liabilities increased from $473,421,000 at June 30, 2003 to $534,059,000 at June 30, Current Liabilities increased from $186,786,000 at June 30, 2003 to $220,640,000 at June 30, 2004, primarily related to increases in salaries payable, deferred revenue, and securities lending liabilities. Long-term liabilities increased from $286,635,000 at June 30, 2003 to $313,419,000 at June 30, 2004 due to increases in compensated absences and long term bonds payable. Bonds payable totaled $177,489,000 at June 30, 2004, an increase of $16,462,000 from 2003.

Expendable Net Assets/Annual Operating Expenses

Equity/Total Assets

Expendable Net Assets/Outstanding Debt

Revenue Fund - Performance Net assets increased $6.8 million in 2004 compared to $13.4 million in Operating Revenue up $6.1 million over 2003 or 10%, a result of Room & Board increases across the campuses and added capacity at Winona campus. Operating Expenses up $6.5 million over 2003 or 12% with much of the increases in Purchased Services and Supplies.

Questions and Open Discussion