Minnesota State Colleges and Universities Board of Trustees

Minnesota State Colleges and Universities Board of Trustees Meeting November 18, 2009

Agenda • • • Audit Process Audit Results – Reports Issued New Standards (GASB 45 update and GASB 49) Accomplishments and Challenges Significant Deficiencies System Management Recommendations Required Communication Financial Statement Highlights Questions and Open Discussion

Audit Process • Detailed planning required prior to start of audit, including increased communication before the audit is planned. • Internal controls are analyzed in more detail than prior years. • Risk is assessed, interviews are conducted and audit plan is finalized. • Audit plan executed, including sampling of transactions. • Sample sizes range from 15 to 250 depending on risk, some increasing and some decreasing based on internal controls and related risk. • Weekly conference calls are used to effectively and efficiently complete the audit. • Exit conference is scheduled to review results and management letter comments. • Process is finalized and sent to audit committee for acceptance.

Audit Results – Reports Issued • Independent Auditors’ Report on Financial Statements (System Wide and Revenue Fund) – Unqualified Opinion. • Reasonable assurances on statements, which are responsibility of management. • Report References Other Campus Auditors for 2009 and 2008 for campus work and foundations. KDV’s percentage under audit decreased slightly in 2009 due to rotation of some campuses. • Report on Internal Control Over Financial Reporting and on Compliance Based Upon the Audit Performed in Accordance With Government Auditing Standards – no material weaknesses, two significant deficiencies at system level. This compares to no material weaknesses or significant deficiencies at system level in 2008.

New Standards - GASB Statement 45 Actuarial Report for Other Postemployment Liabilities (OPEB) was updated for 2009 audit year. New report decreased the required contribution from $10. 1 Million to $8. 4 Million. Total liability accrued at June 30, 2009 totaled $10. 5 Million.

New Standards - GASB Statement 49 This statement accounts for and reports other pollution remediation obligations. An analysis was performed and no material liabilities were accrued at June 30, 2009.

Accomplishments/Challenges Accomplishments – Continue to Receive Unqualified Opinion – Improved Financial Reporting Process – Financial results Challenges – Information Technology – Campus Local Bank Account Reconciliations – Financial Results and Economy

Definitions – Reporting Deficiencies – SAS 112 establishes standards and provides guidance on communicating matters related to an entity’s internal control over financial reporting identified in an audit of financial statements. It defines the terms "significant deficiency" and "material weakness“ and requires the auditor to communicate, in writing, to management and those charged with governance, significant deficiencies and material weaknesses identified in an audit. – A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the course of performing their assigned functions, to prevent or detect misstatements on a timely basis. – A “significant deficiency” is a control deficiency or combination of control deficiencies, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected. – A “material weakness” is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

Significant Deficiencies Systemwide Information Technology – Mn. SCU has not fully developed a process to adequately address prior year Information Technology comments that are essential to data security and business continuity in a timely manner. – Mn. SCU has not implemented adequate user level security over current web application environments. Management Response – Improved process being implemented.

Significant Deficiencies Reconciliation of Campus Local Bank Accounts – 4 campus local bank accounts were not reconciled or not timely reconciled at June 30, 2009. Failure to accurately reconcile all local bank accounts increases the risk of misstatements of financial statement amounts. Managements Response – Increased monitoring and training/assistance is being implemented if required.

System Level Board Comments Security Access – Incompatibilities remain at campus and system level and remains an important long term issue to resolve. Although complete resolution to incompatibilities may not be achievable, continue to work with Information Technology to design new systems with reduced incompatibilities. Documentation of mitigating controls is an important step that Mn. SCU should continue to implement. Leave Benefit Accounting – Continue to refine the leave balance reporting and accounting function to improve accuracy of the estimated liability, currently at $132 Million.

System Level Board Comments Information Technology – Implementation of New Systems in 2009. – Conversion of accounting data from the old system to the new systems was generally successful. – Implement process to resolve outstanding audit issues. – Continue to analyze and test disaster recovery plans and test as deemed appropriate.

Component Units • As required by GASB Statement 39. • Includes University Foundations that are “Significant”. Includes Southwest, Winona, Metropolitan State, Mankato, Bemidji, Moorhead, Century, Fergus Area and St. Cloud. • Total Assets at June 30, 2009 totaled $148, 936, 000 compared to 2008 amount of $169, 414, 000. • Total Revenues recognized for the year ended June 30, 2009 totaled $8, 849, 000, a decrease from 2008 amount of $35, 515, 000. Realized and Unrealized investment loss 2009 was ($19, 643, 000) vs loss 2008 of $(7, 298, 000). • Shown as separate statement in the consolidated Mn. SCU report to allow the financial statement readers to distinguish between Mn. SCU and the Foundations.

Upcoming Standards Summary of GASB Statement 51 - Accounting and Financial Reporting for Intangible Assets – In June 2007, the GASB issued Statement No. 51, Accounting and Financial Reporting for Intangible Assets. The objective of this Statement is to establish accounting and financial reporting requirements for intangible assets to reduce reporting inconsistencies, thereby enhancing the comparability of the accounting and financial reporting of such assets among state and local governments. The effect GASB Statement No. 51 will have on the fiscal year 2010 basic financial statements has not yet been determined. Summary of GASB Statement 53 - Accounting and Financial Reporting for Derivative Instruments – In June 2008, the GASB issued Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. This Statement addresses the recognition, measurement, and disclosure of information regarding derivative instruments entered into by state and local governments. GASB Statement No. 53 is effective for Minnesota Colleges and Universities for fiscal year 2010. The effect this statement will have on fiscal year 2010 basic financial statements has not been determined.

Upcoming Standards Summary of Statement on Auditing Standards 115 Communicating Internal Control Relate matters Identified in an Audit – In October 2008, the AICPA issued SAS No. 115, SAS 115 supersedes SAS No. 112 and was issued to eliminate differences within AICPA standards. The SAS revised the definitions of the terms Material Weakness and Significant Deficiency, and revises the list of deficiencies that are indicators of material weaknesses. The standard is effective for Minnesota Colleges and Universities for fiscal year 2010. The effect this statement will have on fiscal year 2010 basic financial statements reporting has not been determined.

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. GASB 49 considered for 2009, no liability accrued. ACCOUNTING ESTIMATES - the most sensitive estimates were depreciation, Allowance for uncollectible A/R, Scholarship Allowances, Workers Compensation Claims, Other Post Employment Benefits, Compensated Absences - reasonable and consistent. POSTED OR PASSED AUDIT ADJUSTMENTS – None significant DISAGREEMENTS WITH MANAGEMENT - none CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS – campus auditors via weekly conference calls. ISSUES DISCUSSED PRIOR TO RETENTION OF INDEPENDENT AUDITORS - normal DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT – none

Summary of Key Indicators

Summary of Key Indicators – Revenue Fund

Questions and Open Discussion

Minnesota State Colleges and Universities Financial Report Summary For the years ended June 30, 2009 and 2008 Audit Committee Meeting November 18, 2009 The Minnesota State Colleges and Universities system is an Equal Opportunity employer and educator.

Presentation Overview • Consolidated System-wide & Revenue Fund results • Summarized College and University Audit and Financial results • Resolution and Other Related Matters Slide 21

System-wide Changes in Financial Position-- FY 2009 vs. FY 2008 Significant Changes in Assets, Liabilities and Net Assets ($ millions) Capital Asset Activity Remains Strong FY 2009 FY 2008 Capital assets, net of related debt, including all construction in progress 132. 8 154. 3 New construction in progress (included in line above) 192. 4 201. 8 71. 0 84. 7 (10. 2) 44. 0 3. 1 21. 6 New capital asset related debt (gross) First Signs of a Weakening Financial Position? Change in unrestricted cash and cash equivalents* Unrestricted net assets *There was a $20 million operating appropriation receivable from the state at 6/30/09 Slide 22

Changes in Net Operating Revenue *-FY 2009 vs. FY 2008 ($ millions) Revenue/(Expense) FY 2009 “Net operating revenue” FY 2009 change FY 2008 $ (9. 3) $ (17. 7) $ 8. 4 $ 730. 0 $ 35. 3 $ 694. 7 Operating appropriation revenue 662. 4 (3. 5) 665. 9 Federal and state grant revenue 297. 3 26. 1 271. 2 Components and changes Revenue from students, net of financial aid Salaries expense (1, 224. 8) All other revenues/(expenses), net Net operating revenue per million dollars of revenue (65. 3) (1, 159. 5)) (474. 2) (10. 3) (463. 9) $ (5, 000) $ (10, 000) $5, 000 *”Income (Loss) Before Other Revenues, Expenses, Gains or Losses Slide 23 Negative impact on “net operating revenue” and “return on net assets” ratios.

System-wide Changes in Net Assets-FY 2009 vs. FY 2008 ($ millions) Revenue/(Expense) FY 2009 change FY 2008 Total operating revenues $ 1, 734. 3 $ 49. 6 $ 1, 684. 7 Total operating expenses (1, 743. 6) (67. 3) (1, 676. 3) Net operating revenue (9. 3) (17. 7) 8. 4 106. 7 4. 6 102. 1 9. 4 - 9. 4 106. 8 (13. 1) 119. 9 Capital appropriation revenue Other revenue, net Change in Net Assets Positive impact on “return on net assets ratio” but not on “expendable net assets” (liquid net assets—cash or easily converted to cash) Slide 24

Composite Financial Index • A set of four financial ratios (performance measures) and a standardization formula to develop a composite financial health value • Two ratios measure financial position (balance sheet); two measure financial performance (P/L) • Mn. SCU has used internally for five years • As of FY 2007 the Higher Learning Commission requires CFI reporting for all member institutions —one indicator of a mismatch between financial health and ability to sustain educational mission. Slide 25

Financial Ratios in CFI • Measures of financial position (point-in-time): – Primary reserve ratio—measures financial strength and flexibility (expendable net assets ÷ total operating and non-operating expense) – Viability ratio—measures the institution’s ability settle debt (expendable net assets ÷ debt) • Measures of financial operations (for the period): – Net operating revenue ratio—measures operating surplus or deficit and indicates if operations are strengthening or weakening net assets (net operating revenue ÷ revenue) – Return on net assets ratio—measures the total increase or decrease in financial resources (change in net assets ÷ beginning total net assets) Slide 26

CFI Comparisons Slide 27

CFI Showing Fund Impact Slide 28

Revenue Fund FY 2009 Changes Statements of Net Assets • $35. 8 million new CIP (construction in progress) • Total capital assets, net, increased $25. 9 million • Debt increased $41. 8 million • Primary reserve is at 10. 2 months, up from 9. 7 months *Income before other revenues, expenses, gains, or losses Slide 29 Statements of Revenues, Expenses and Changes in Net Assets • Operating revenues increased $ 10. 2 million to $93. 8 million • Operating expenses increased $ 5. 9 million to $ 79. 9 million • Net operating revenue* decreased $ 0. 2 million to $ 9. 2 million • Changes in net assets by segment ranged from -$2. 0 million to +$3. 4 million

Financial Program Outline • Financial monitoring through exception reporting which will be modified to include CFI and realtime/predictive measures and remedial requirements • External financial audits coupled with strategic OLA and OIA program and compliance audits • Presidential evaluation component • Higher Learning Commission assessments and remedial requirements Slide 30

Summarized Audit and Financial Results—Kern De. Wenter Viere Hennepin Technical Winona State University MSU Moorhead MSU, Mankato Audit Results & Communications Audit opinion Unqualified Internal control/compliance - - Other communications - - Potential high risk items - X X X $1. 1 $(0. 8) $0. 7 $0. 9 2. 2 2. 7 Financial Indicators Operating Margin ($million) Primary Reserve (months) Slide 31

Kern De. Wenter Viere Audits -Commentary Hennepin Technical MSU, Mankato. • • none Winona State University • • Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes MSU Moorhead. • • Slide 32 Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes • Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes

Summarized Audit and Financial Results—Larson. Allen Metropolitan State U. Minneapolis CTC SMSU Rochester CTC Unqualified Internal control/ compliance X - - X Other communications - - Potential high risk items X X $(0. 2) mil $2. 9 mil $(3. 1) mil $(2. 5)mil 2. 6 3. 5 1. 4 1. 9 Audit Results & Communications Audit Opinion Financial Indicators Operating Margin ($ millions) Primary Reserve (in months) Slide 33

Larson. Allen Audits -- Commentary Metropolitan State University Southwest Minnesota State • A significant deficiency was reported related to leave accrual computation and recording. • Foundation related-party transactions -disclosed in Footnotes along with the colocation at Minneapolis CTC. • Foundation (component unit) disclosure in Footnotes • Foundation related-party transactions -disclosed in Footnotes • Foundation (component unit) disclosure in Footnotes Rochester CTC • A material weakness was cited related to an accounts payable cut-off and accrual process error. Minneapolis CTC • Metropolitan State University’s Minneapolis • A significant deficiency was cited regarding inadequate supervision and approval of the campus is co-located with Minneapolis CTC. journal entry process. • RCTC has a joint use agreement with the City of Rochester for a regional sports complex plus some joint facilities used and cost sharing with Winona State University and the University of Minnesota Slide 34

Summarized Audit and Financial results—Baker Tilly St. Cloud State University. Bemidji State University. Century College Minnesota State CTC Audit Results & Communications Audit opinion Unqualified Internal control/ compliance - - X - Other communications - - Potential high risk items X X $(1. 7)mil $0. 4 mil $1. 7 mil $0. 9 mil 1. 8 2. 2 2. 0 1. 3 Financial Indicators Operating Margin (millions) Primary Reserve (months) Slide 35

Baker Tilly Audits -- Commentary St. Cloud State University Century • One contingent litigation liability with a potential settlement in excess of $100 k was disclosed in the footnotes. • Foundation related-party transactions -disclosed in Footnotes • Foundation (component unit) disclosure in Footnotes • A significant deficiency was reported for inadequate controls over year-end financial reporting processes such as adjustments, journal entries, etc. • Foundation related-party transactions -disclosed in Footnotes • Foundation (component unit) disclosure in Footnotes Bemidji State University Minnesota State CTC • Foundation related-party transactions -disclosed in Footnotes • Foundation (component unit) disclosure in Footnotes Slide 36 • Foundation related-party transactions -disclosed in Footnotes • Foundation (component unit) disclosure in Footnotes

Wrap Up • Questions? • Resolution covering release of audited statements • There will be a January 2010 Report to Finance Committee on FY 2009 Audited Financial Statements Slide 37

Completed 2009 CFI Matrix--System CFI Calculation Matrix Calculation step Primary Reserve Return on Net Assets Viability Net Operating Revenue 1 CFI (1) FY 2009 System Ratio values 0. 208 0. 074 0. 788 (0. 005) n/a (2) Base Strength factor (set)2 0. 133 0. 02 0. 417 0. 007 n/a (3) = [(1) ÷ (2)] Computed Strength factor 3 1. 56 3. 70 1. 89 (0. 77) n/a (4) Weighting factor (set) 0. 35 0. 20 0. 35 0. 10 1. 00 Weighted value --System with 9 Foundations 0. 55 0. 74 0. 55 0. 66 0. 62 (0. 08) (0. 10) 1. 87 1. 62 Also called Operating Margin ratio A standard, fixed base value denoting a border-line or minimal level of financial health (“going concern”). 3 Following HLC protocol, these values are capped at -1. 0 for and + 10. 0 for computed strength factor values below 1. 0 or above +10. 0. 1 2 Slide 38

CFI College/University Variability Slide 39