S TATE OF N C ORTH AROLINA APPALACHIAN STATE UNIVERSITY BOONE, NORTH CAROLINA FINANCIAL STATEMENT AUDIT REPORT FOR THE YEAR ENDED JUNE 30, 2012 OFFICE OF THE STATE AUDITOR BETH A. WOOD, CPA STATE AUDITOR A Constituent Institution of the University of North Carolina System and a Component Unit of the State of North Carolina APPALACHIAN STATE UNIVERSITY BOONE, NORTH CAROLINA FINANCIAL STATEMENT AUDIT REPORT FOR THE YEAR ENDED JUNE 30, 2012 BOARD OF GOVERNORS THE UNIVERSITY OF NORTH CAROLINA THOMAS W. ROSS, PRESIDENT BOARD OF TRUSTEES G. A. SYWASSINK, CHAIRMAN ADMINISTRATIVE OFFICERS DR. KENNETH E. PEACOCK, CHANCELLOR GREGORY M. LOVINS, INTERIM VICE CHANCELLOR FOR BUSINESS AFFAIRS STATE OF NORTH CAROLINA Office of the State Auditor 2 S. Salisbury Street 20601 Mail Service Center Raleigh, NC 27699-0601 Telephone: (919) 807-7500 Fax: (919) 807-7647 Beth A. Wood, CPA Internet State Auditor http://www.ncauditor.net AUDITOR’S TRANSMITTAL The Honorable Beverly E. Perdue, Governor The General Assembly of North Carolina Board of Trustees, Appalachian State University We have completed a financial statement audit of Appalachian State University for the year ended June 30, 2012, and our audit results are included in this report. You will note from the independent auditor’s report that we determined that the financial statements are presented fairly in all material respects. The results of our tests disclosed no deficiencies in internal control over financial reporting that we consider to be material weaknesses in relation to our audit scope or any instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. North Carolina General Statutes require the State Auditor to make audit reports available to the public. Copies of audit reports issued by the Office of the State Auditor may be obtained through one of the options listed in the back of this report. Beth A. Wood, CPA State Auditor TABLE OF CONTENTS PAGE INDEPENDENT AUDITOR’S REPORT............................................................................................1 MANAGEMENT’S DISCUSSION AND ANALYSIS...........................................................................3 BASIC FINANCIAL STATEMENTS University Exhibits A-1 Statement of Net Assets.............................................................................................11 A-2 Statement of Revenues, Expenses, and Changes in Net Assets...........................................13 A-3 Statement of Cash Flows...........................................................................................14 Component Unit Exhibits B-1 Appalachian State University Foundation, Inc., Statement of Financial Position...................16 B-2 Appalachian State University Foundation, Inc., Statement of Activities...............................17 B-3 Appalachian Student Housing Corporation, Statement of Financial Position........................18 B-4 Appalachian Student Housing Corporation, Statement of Activities....................................19 Notes to the Financial Statements...............................................................................................21 INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS..............................................................................................................51 ORDERING INFORMATION........................................................................................................53 STATE OF NORTH CAROLINA Office of the State Auditor 2 S. Salisbury Street 20601 Mail Service Center Raleigh, NC 27699-0601 Telephone: (919) 807-7500 Fax: (919) 807-7647 Beth A. Wood, CPA Internet State Auditor http://www.ncauditor.net INDEPENDENT AUDITOR’S REPORT Board of Trustees Appalachian State University Boone, North Carolina We have audited the accompanying financial statements of Appalachian State University, a constituent institution of the multi-campus University of North Carolina System, which is a component unit of the State of North Carolina, and its discretely presented component units, as of and for the year ended June 30, 2012, which collectively comprise the University’s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the University’s management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the Appalachian State University Foundation, Inc. or the Appalachian Student Housing Corporation, the University’s discretely presented component units. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinions, insofar as they relate to the amounts included for those entities, are based on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The financial statements of the Appalachian State University Foundation, Inc. and the Appalachian Student Housing Corporation were not audited in accordance with Government Auditing Standards. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinions. In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of Appalachian State University and its discretely presented component units as of June 30, 2012, and the respective changes in financial position and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. 1 INDEPENDENT AUDITOR’S REPORT (CONCLUDED) In accordance with Government Auditing Standards, we have also issued our report dated November 21, 2012 on our consideration of the University’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the Management’s Discussion and Analysis be presented to supplement the basic financial statements. Such information, although not part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during the audit of the basic financial statements. However, we do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Beth A. Wood, CPA State Auditor November 21, 2012 2 APPALACHIAN STATE UNIVERSITY MANAGEMENT’S DISCUSSION AND ANALYSIS Overview of the Financial Statement Information Appalachian State University, a constituent institution of the multi-campus University of North Carolina System (UNC System), is pleased to present its financial statements for fiscal year 2012. These statements are prepared in accordance with standards issued by the Governmental Accounting Standard’s Board (GASB). Statement of Net Assets The Statement of Net Assets (condensed, comparative table presented within this discussion and analysis) presents the assets, liabilities, and net assets of the University as of the end of the fiscal year. It provides readers with information on the assets available to continue operations, and the amounts owed to vendors, investors, and lending institutions. The change in net assets (assets minus liabilities) from year to year is an indicator of the financial condition of the institution. Restricted nonexpendable net assets consist of loan funds, research funds, and endowment gifts with specific restrictions on spending the principal. Restricted expendable net assets consist of income from endowment funds, gifts and pledges with specific restrictions, unexpended bond proceeds and grants from third party agencies with expenditure restrictions. Overall the Statement of Net Assets reflects an increase of $18,844,768.43. This represents a 4.9% increase over the prior year and will be discussed in an analysis of each component of the statement beginning with Total Assets followed by Total Liabilities and lastly, Net Assets. Prominent changes in total assets are represented by an increase in capital assets combined with a decrease in current assets and noncurrent restricted cash and cash equivalents. Capital assets net of depreciation increased by $56,917,248.99, an 11.2% change. On the other hand current assets decreased by $3,777,712.10 or 4.3% and noncurrent restricted cash and cash equivalents decreased by $38,810,973.58 or 78.3%. Overall total assets increased by 2.5% over fiscal year 2011 by $16,677,977.83. The overall increase in capital assets is primarily due to additions to construction in progress of $51,690,566.00 and the acquisition of a student housing facility, Mountaineer Hall, acquired through a capital lease. The majority of acquisitions include the addition of $16,595,625.97 for Mountaineer Hall and the following amounts being moved from construction in progress (non-depreciable) to capital assets-buildings and infrastructure (depreciable) this year: $5,874,052.17 for the College of Education Building, $1,305,276.07 for the Steam Distribution/Return System and $952,426.82 for the Boone Creek Restoration Project. These increases along with other small projects and a slight increase in machinery and equipment are offset by total depreciation of $17,108,445.86. The increase in capital assets-nondepreciable is due to the aforementioned increase in construction in progress of $51,690,566.00 reduced by the capitalization of assets moved from construction in progress $10,413,764.61. The current year additions to construction in progress included the Student Union/Center for Student Leadership and Development/Annex project, construction costs for 3 MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED) the College of Education, and the renovation of the Beasley Media Center. Beginning balances for land and general infrastructure were restated by $10,993,016.89 to properly classify these accounts from the prior period. There was no net asset impact resulting from this reclassification. Current assets decreased by $3,777,712.10 during fiscal year 2012. This decrease is a result of several factors. Most significant is the decrease in pooled cash related to University Housing operations, totaling $7,323,082.99. The decrease is primarily related to lease payments for the Mountaineer Hall capital lease offset by overall increases of cash in the Housing funds. Additionally there was a decrease in inventory of $2,592,620.87 primarily from reductions in inventory at the University Bookstore. In addition to the decommissioning of rental inventory related to the book adoption cycle, during the year the Bookstore also took measures to increase inventory turn and to better manage purchases across all departments as well as purchase textbook returns and markdowns resulting in reduced inventory. These decreases were offset by increases in pooled cash equivalents in Food Services, Student Health Services, and multiple other areas totaling $2,610,244.48. The University did have fee increases for each of the five meal plan options. The Health Services increase is due to three factors. There was an enrollment increase which generated more revenue, even though there was not a fee increase for this fee. Purchases of medications were less than anticipated and there was also a general decrease in spending. Cash carried forward also increased by $1,496,944.00. Lastly, there was an increase of $1,940,908.58 in cash and cash equivalents for New River Power and Light that offsets the decreases noted above. The reduction in noncurrent restricted cash of $38,810,973.58 represents the spending down of proceeds from bond funds. Primarily these funds were utilized for the following projects: $1,628,996.02 for the Beasley Media Center, $11,221,955.82 for additions to the Student Union, $19,513,118.28 for the Honors Residence Hall, and $4,748,672.81 for the Student Leadership Annex. Total liabilities decreased $2,166,790.60 or 0.7% from the previous year. This decrease was due to an increase in current liabilities of $2,707,392.92 offset by a decrease in long-term liabilities of $4,920,680.34. The increase in current liabilities primarily resulted from an increase in the current portion due for capital leases in the amount of $1,222,804.88, an increase in the current portion due for bonds payable for $810,000.00, an increase in notes payable for $241,206.68, and a $1,733,175.34 increase in contract retainage for capital improvement projects. This was offset by a $1,380,117.02 reduction in accounts payable also related to capital improvement projects. The decrease in long term liabilities of $4,920,680.34 can be mostly attributed to debt service payments totaling $8,953,966.33 and reductions in Accrued Vacation leave of $866,545.41. These decreases in the long-term liabilities balances were offset by the addition of capital leases on Mountaineer Hall and the Singing News Administration building, which had a remaining balance of $5,362,622.97 after capital lease payments totaling $10,518,311.31 for 2012 had been made. 4 MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED) Overall, Appalachian had an increase of $18,844,768.43 in total net assets. The change was primarily due to the increase in capital assets, net of related debt of $22,210,440.55, a decrease in unrestricted net assets of $7,016,530.38, and an increase of $3,490,463.87 in restricted nonexpendable related to additions to endowments to be discussed in the analysis of other revenues. Condensed Statement of Net Assets Fiscal Year 2012 Fiscal Year 2011 $ Change % Change Assets (as restated) Current Assets $ 84,906,096.81 $ 88,683,808.91 $ (3,777,712.10) (4.3) Noncurrent Assets Restricted Cash and Cash Equivalents 10,761,610.43 49,572,584.01 (38,810,973.58) (78.3) Capital Assets - Nondepreciable 99,474,746.09 56,340,401.27 43,134,344.82 76.6 Capital Assets - Depreciable 467,806,455.22 454,023,551.05 13,782,904.17 3.0 Other 26,580,016.05 24,230,601.53 2,349,414.52 9.7 Total Assets 689,528,924.60 672,850,946.77 16,677,977.83 2.5 Liabilities Current Liabilities 36,759,577.72 34,052,184.80 2,707,392.92 8.0 Funds Held Others 119,804.27 95,088.05 24,716.22 26.0 Long-Term Liabilities 248,783,766.38 253,704,446.72 (4,920,680.34) (1.9) Other Noncurrent Liabilities 3,972,453.15 3,950,672.55 21,780.60 0.6 Total Liabilities 289,635,601.52 291,802,392.12 (2,166,790.60) (0.7) Net Assets Invested in Capital Assets - Net of Related Debt 332,223,741.53 310,013,300.98 22,210,440.55 7.2 Restricted Nonexpendable 14,410,105.60 10,919,641.73 3,490,463.87 32.0 Expendable 9,544,079.86 9,383,685.47 160,394.39 1.7 Unrestricted 43,715,396.09 50,731,926.47 (7,016,530.38) (13.8) Total Net Assets $ 399,893,323.08 $ 381,048,554.65 $ 18,844,768.43 4.9 Statement of Revenues, Expenses, and Changes in Net Assets The Statement of Revenues, Expenses, and Changes in Net Assets (condensed, comparative table presented within this discussion and analysis) depicts operating and nonoperating revenues and expenses. Note that state appropriations are considered nonoperating revenues. Total operating revenues increased from $160,341,551.46 in 2011 to $173,066,387.93 in 2012 representing a 7.9% overall increase. This is primarily due to two factors: a 10.1% increase in tuition and fees revenue for a total of $8,620,942.47, and a 5.5% increase for a total of $4,014,432.99 in sales and services, net. The increase in tuition and fees can be mostly attributed to a slight increase in enrollment and an increase in tuition and fees of $287.00 per Undergraduate Resident full time student. Sales and services increased primarily due to increases in University Housing fees. This resulted in an increase of $2,437,992.01. Also notable was an increase in revenues for Dining operations, Athletics, and other auxiliary operations totaling $1,372,476.82. Additionally, revenue from New River Light and Power grew by $689,995.98 due to a rate increase. These increases were primarily offset by 5 MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED) reductions in revenues in Camp Programs of $578,795.26 due to the re-organizing of Camp Broadstone and a decrease in sales at the University Bookstore of $126,300.43. Operating expenses decreased by $8,947,745.83 in fiscal year 2012 representing an overall decrease of 2.6%. These operating decreases resulted primarily from reductions in salaries and benefits, payments for services, and decreases in scholarships and fellowships. Salaries and benefits decreased by 1.8% from $210,860,975.13 in 2011 to $207,066,914.53. For fiscal year 2012, the University was required to make Management Flexibility Budget Reductions. As a part of meeting this requirement salaries and benefits decreased primarily due to the elimination of vacant positions and reductions in force. Supplies and materials increased slightly by 1.5% or $682,372.55, which is primarily due to an increase in purchases of goods for resale. Services totaled $33,758,708.54 in 2012 compared to $38,883,829.58 in 2011, a decrease of 13.2% or $5,125,121.04. This decrease was primarily due to decreases in maintenance agreements, building and general repairs, and travel. Scholarships and fellowships decreased $3,338,077.64 or 13.0% mainly due to decreases in Federal Pell awards, Institutional Scholarship funding, and the elimination of the National Smart Grant and Academic Competitiveness Grant. Utilities increased by $1,543,351.80 or 12.8% due primarily to increases in the cost of electricity and cost of steam provided to academic buildings and residence halls. Finally, depreciation increased from $16,024,656.76 to $17,108,445.86 or 6.8% as additional construction in progress projects were completed and assets placed in service in addition to the acquisition of Mountaineer Hall. In nonoperating revenues, Appalachian State experienced a slight increase in state appropriations of $184,008.01 or 0.1%. This fiscal year the University did not receive funding in state aid from the Federal American Recovery Act, representing a decrease of $9,197,529.00 from the prior year. Finally, other nonoperating revenues decreased by 18.0% or 10,192,196.96. This decrease is primarily the result of decreases in investment income, other noncapital grants and student financial aid. The decrease in realized gain on investments is mostly related to the sale of investments when the University switched from the Vanguard funds to UNC management in FY 2011. The realized gain in FY11 was $2,357,203.08 compared to $4,890.82 in FY12. Also contributing was that we received less in STIF interest and had less unrealized gains in FY12 compared to FY11 due to decreases in the STIF interest rate and decreases in the market value of investments in the UNC Management Pool. Together these decreases account for an additional $478,003.27 of the difference between 2011 and 2012 balances. Other noncapital grants decreased by $2,067,102.04 primarily due to decreases in funding from private grants and state and local grants. Due to the current economic downturn private grant funding decreased overall by $1,112,692.58. In addition to the effect of the economic downturn state and local grants decreased due to the dissolution of the Appalachian Family Innovations program. This decrease along with overall decreases from state and local granting agencies accounted for a $2,258,161.49 reduction in balances. These decreases were offset by an increase in receipts of Federal AARA stimulus funds that mostly account for a $1,007,151.09 increase in several federal grants. 6