DFA Cornell, Summaries of Nursing

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Cornell University

Reports on Federal Awards in

Accordance with Uniform Guidance

June 30, 2016

EIN: 15-

Cornell University

Index

June 30, 2016

Page(s)

Report of Independent Auditors ...............................................................................................................1–

Consolidated Financial Statements .........................................................................................................3–

Notes to Consolidated Financial Statements .........................................................................................7–

Schedule of Expenditures of Federal Awards Part A, Award Expenditure Detail................................33–

Schedule of Expenditures of Federal Awards Part B, Summary of Program Clusters ........................67–

Schedule of Expenditures of Federal Awards Part C, Federal Loan Program Year End Balances ..........

Notes to Schedule of Expenditures of Federal Awards ...........................................................................

Report of Independent Auditors 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 ......................................................................................................101–

Report of Independent Auditors on Compliance with Requirements

That Could Have a Direct and Material Effect On Each Major Program

and on Internal Control Over Compliance in Accordance with Uniform Guidance ..........................103–

Schedule of Findings and Questioned Costs...................................................................................105–

Schedule of Status of Prior Audit Findings ......................................................................................112–

Management’s Corrective Action Plan.............................................................................................114–

Other Matters

We have previously audited the consolidated balance sheet as of June 30, 2015, and the related

consolidated statements of activities and cash flows for the year then ended (not presented herein), and in

our report dated October 22, 2015, we expressed an unmodified opinion on those consolidated financial

statements. In our opinion, the information set forth in the accompanying summarized financial

information as of June 30, 2015 and for the year then ended is consistent, in all material respects, with the

audited consolidated financial statements from which it has been derived.

Other Information

Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements

as a whole. The accompanying schedule of expenditures of federal awards Part A, Award Expenditure

Detail, Part B, Summary of Program Clusters, and Part C, Federal Loan Program Year End Balances for

the year ended June 30, 2016 is presented for purposes of additional analysis as required by Title 2 U.S.

Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit

Requirements for Federal Awards (Uniform Guidance) and is not a required part of the consolidated

financial statements. Such information is the responsibility of management and was derived from and

relates directly to the underlying accounting and other records used to prepare the consolidated financial

statements. The information has been subjected to the auditing procedures applied in the audit of the

consolidated financial statements and certain additional procedures, including comparing and reconciling

such information directly to the underlying accounting and other records used to prepare the consolidated

financial statements or to the consolidated financial statements themselves, and other additional

procedures in accordance with auditing standards generally accepted in the United States of America. In

our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, in

relation to the consolidated financial statements as a whole.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards , we have also issued our report dated October 27,

2016 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 and grant agreements and other

matters for the year ended June 30, 2016. 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 internal control over financial reporting or on compliance. That report is an

integral part of an audit performed in accordance with Government Auditing Standards in considering

the University's internal control over financial reporting and compliance.

October 27, 2016

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF JUNE 30, 2016 AND JUNE 30, 2015 (in thousands)

Restricted Total Total

• 1 Cash and cash equivalents $ 182,096 $ 149, Assets
• 2 Accounts receivable, net (note 2-A) 404,061 414,
• 3 Contributions receivable, net (note 2-B) 986,322 1,093,
• 4 Prepaid expenses and other assets 151,031 142,
• 5 Student loans receivable, net (note 2-C) 80,956 76,
• 6 Investments (note 3) 6,587,175 6,986,
• 7 Land, buildings, and equipment, net (note 4) 4,009,285 3,788,
• 8 Funds held in trust by others (note 5) 124,960 118,
• 9 Total assets $ 12,525,886 $ 12,771,
• 10 Accounts payable and accrued expenses $ 713,414 $ 593, Liabilities
• 11 Deferred revenue and other liabilities 262,694 237,
• 12 Obligations under split interest agreements (note 5) 135,444 139,
• 13 Deferred benefits (note 6) 656,410 527,
• 14 Funds held for others (note 7) 153,065 195,
• 15 Bonds and notes payable (note 8) 1,515,135 1,542,
• 16 Government advances for student loans 50,730 52,
• 17 Total liabilities 3,486,892 3,289,
• 18 Unrestricted 2,698,090 2,970, Net assets (note 11)
• 19 Temporarily restricted 3,204,004 3,577,
• 20 Permanently restricted 3,136,900 2,933,
• 21 Total net assets 9,038,994 9,481,
• 22 Total liabilities and net assets $ 12,525,886 $ 12,771,
  • Permanently
• $ - $ 998,942 $ 963,722 - - (352,179) (352,668) - - 646,763 611,054 - - 149,138 148,712 - - 444,656 461,329 - - 142,010 133,439 - - 266,626 320,956 - - 327,906 314,342 - - 1,050,886 927,579 - - 160,853 157,523 - - 620,376 561,697 - - - - - - 3,809,214 3,636,631 - - 2,450,545 2,297,837 - - 274,626 255,159 - - 704,638 625,337 - - 122,266 134,069 - - 82,870 89,447 - - 258,698 259,776 - - 3,893,643 3,661,625 - - (84,429) (24,994) - - 41,604 28,279 - - 39,592 11,391 - 140,980 245,669 316,610 - 29,044 (467,085) (66,983) - (227) (4,236) (12,050) - - (123,342) (47,423) - - (89,965) (16,419) - (160) (225) 49,620 - 33,925 - - - 203,562 (357,988) 263,025 - 203,562 (442,417) 238,031 - 2,933,338 9,481,411 9,243,380
• $ 3,136,900 $ 9,038,994 $ 9,481,411

CONSOLIDATED STATEMENTS OF CASH FLOWS

2 Proceeds from contributions for capital acquisitions, trusts and endowments (293,552) (343,906) 3 Depreciation 258,698 259, 4 Net realized and unrealized (gain)/loss on investments 202,286 (146,283) 5 Pension and postretirement changes other than net periodic costs 123,342 47, 6 Change in value of interest rate swaps 89,965 16, 7 Loss on disposals of land, building, and equipment 4,181 2, 8 Other adjustments (22,102) (2,348) Change in assets and liabilities 9 Accounts receivable, net 10,546 22, 10 Contributions receivable, net 107,521 (274) 11 Prepaid expenses and other assets (2,618) (45,475) 12 Accounts payable and accrued expenses 39,547 16, 13 Deferred revenue and other liabilities 25,405 (47,577) 14 Obligations under split interest agreements (10,992) 9, 15 Deferred benefits 5,494 3, 16 Net cash provided/(used) by operating activities 95,304 29,

17 Proceeds from the sale and maturities of investments 9,900,735 6,643, 18 Purchase of investments (9,723,130) (6,630,290) 19 Acquisition of land, buildings, and equipment (net) (471,367) (335,823) 20 Student loans granted (17,273) (16,109) 21 Student loans repaid 13,090 11, 22 Change in funds held for others, net of unrealized (gain)/loss on investments (28,102) (22,427) 23 Net cash used by investing activities (326,047) (350,017)

Proceeds from contributions for capital acquisitions, trusts and endowments 24 Investment in endowments 207,687 251, 25 Investment in physical plant 81,219 87, 26 Investment subject to living trust agreements 4,646 5, 27 Principal payments of bonds and notes payable (181,767) (42,951) 28 Proceeds from issuance of bonds and notes payable 154,068 15, 29 Bond issuance costs incurred (505) - 30 Government advances for student loans (2,262) 717 31 Net cash provided by financing activities 263,086 317, 32 Net change in cash and cash equivalents 32,343 (3,120) 33 Cash and cash equivalents, beginning of year 149,753 152, 34 Cash and cash equivalents, end of year $ 182,096 $ 149,

35 Cash paid for interest $ 93,900 $ 93, 36 Increase/(decrease) in construction payables, non-cash activity $ 9,895 $ (1,951) 37 Gifts-in-kind $ 16,562 $ 2,

Cash flows from financing activities

Supplemental disclosure of cash flow information

The accompanying notes are an integral part of the consolidated financial statements.

FOR THE YEARS-ENDED JUNE 30, 2016 AND JUNE 30, 2015 (in thousands)

Cash flows from operating activities Change in net assets Adjustments to reconcile change in net assets to net cash provided/(used) by operating activities

Cash flows from investing activities

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

C. Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in bank accounts, money market funds, and other temporary in- vestments held for working capital purposes with an original maturity term of ninety days or less. The carrying amount of cash equivalents approximates fair value because of their short terms of maturity. Cash that is part of the University’s investment portfolio is reported as investments and included in Note 3.

D. Contributions

Contributions, including unconditional promises to give (pledges), are recognized as revenues in the appropriate categories of net assets in the periods received. A pledge is recorded at the present value of estimated future cash flows, based on an appropriate discount rate determined by management at the time of the contribution. Amortization of this discount in subsequent years is included in contribution revenue. A contribution of assets other than cash is recorded at its estimated fair value on the date of the contribution. Contributions for capital projects, endowments, and similar funds are reported as non-operating revenues. Conditional promises to donate to the University are not recognized until the conditions are substantially met.

Temporarily restricted net assets include contributions to the University and to the Cornell University Foundation (“the Foundation”), an affiliated entity that is included in the consolidated financial statements. The Foundation maintains a donor-advised fund for which the donors can make recommendations to the fund’s trustees regarding distributions to the University or other charitable organizations. Distributions from the Foundation to external charitable organizations are recorded as non-operating expenses.

E. Investments

The University’s investments are recorded in the consolidated financial statements at fair value. The values of publicly traded securities are based on quoted market prices and exchange rates, if applicable. The fair value of non-marketable securities is based on valuations provided by external investment managers. These investments are generally less liquid than other investments, and the values reported by the general partner or investment manager may differ from the values that would have been reported, had a ready market for these securities existed. The University exercises due diligence in assessing the policies, procedures, and controls implemented by its external investment managers, and believes the carrying amount of these assets is a reasonable estimate of fair value.

Investment income is recorded on an accrual basis, and purchases and sales of investment securities are reflected on a trade-date basis. Realized gains and losses are calculated using average cost for securities sold.

Investment return included in operating revenues consists of amounts appropriated by the Board of Trustees from the pooled endowment, as well as income and realized gains and losses on investments from working capital and non-pooled endowments and similar funds. Unrealized gains and losses on investments, any difference between total return and amounts appropriated from the pooled endowment, and income and realized gains reinvested per donor restrictions are reported as non-operating activities.

F. Fair-Value Hierarchy

The University values certain financial and non-financial assets and liabilities, on a recurring basis, in accordance with a hierarchy that categorizes and prioritizes the sources used to measure and disclose fair value. Fair value is defined as the price associated with an orderly transaction between market participants at the measurement date. This fair-value hier- archy is broken down into three levels based on inputs that market participants would use in valuing the financial instru- ments, which is based on market data obtained from sources independent of the University. The hierarchy of inputs used to measure fair value, and the primary valuation methodologies used by the University for assets and liabilities measured at fair value, are disclosed below.

The fair value of Level 1 securities is based upon quoted prices in accessible active markets for identical assets. Market price data is generally obtained from exchange or dealer markets. The University does not adjust the quoted price for such assets.

Fair value for Level 2 is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data. Inputs are obtained from various sources, including market participants, dealers, and brokers. In determining fair value of financial instruments, the University considers factors such as interest-rate yield curves, duration of the instrument, and counterparty credit risk.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

The fair value of Level 2 instruments is determined using multiple valuation techniques including the market approach, income approach, or cost approach.

The fair value of Level 3 securities is based upon valuation techniques that use significant unobservable inputs.

Inputs used in applying the various valuation techniques refer to the assumptions that are used to make valuation deci- sions. Inputs may include price information, credit data, liquidity statistics, and other factors. A financial instrument’s level within the fair-value hierarchy is based on the lowest level of any input that is significant to the fair-value measurement. The University considers observable data to be market data that is readily available and reliable and provided by independent sources. The categorization of a financial instrument within the fair-value hierarchy is, therefore, based upon the pricing transparency of the instrument, and does not correspond to the University’s perceived risk of that instrument.

G. Derivative Instruments

The University has approved the use of derivatives by outside investment managers, based on investment guidelines ne- gotiated at the time of a manager’s appointment. The derivatives are used to adjust fixed income durations and rates, to create “synthetic exposures” to certain types of investments, and to hedge foreign currency fluctuations. The University records the fair value of a derivative instrument within the applicable portfolio. The change in the fair value of a derivative instrument held for investment is included in non-operating investment return in the consolidated statement of activities.

In addition, the University holds other derivatives to manage its current and/or future long-term debt. These instruments are recorded at fair value as either prepaid or accrued expenses in the consolidated statement of financial position, and the change in fair value is recorded as other non-operating activity in the consolidated statement of activities.

Derivatives involve counterparty credit exposure. To minimize this exposure, the University manages counterparty risk by limiting swap exposure for each counterparty and monitoring the financial health of swap counterparties, and has structured swap documents to limit maximum loss in the event of counterparty default.

H. Land, Buildings, and Equipment

Land, buildings, and equipment are stated in the consolidated statement of financial position at cost on the date of ac- quisition or at fair value on the date of donation, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the asset, and is reflected as an operating expense. Expenditures as- sociated with the construction of new facilities are recorded as construction in progress until the projects are completed.

The University’s collections of art, rare books, and other property have been acquired through purchases and contributions since the University’s inception. They are recognized as capital assets and are reflected, net of accumulated depreciation, in the consolidated statement of financial position. A collection received as a gift is recorded at fair value as an increase in net assets in the year in which it is received.

I. Split Interest Agreements

The University’s split interest agreements with donors consist primarily of charitable gift annuities, pooled income funds, and charitable trusts for which the University serves as trustee. Assets held in trust are either separately invested or included in the University’s investment pools in accordance with the agreements. Contributions of split interest agreements, net of related liabilities, increase temporarily restricted net assets or permanently restricted net assets. Liabilities associated with charitable gift annuities and charitable remainder trusts represent the present value of the expected payments to the beneficiaries based on the terms of the agreements. Pooled income funds are recognized at the net present value of the net assets expected at a future date. Gains or losses resulting from changes in fair value, changes in assumptions, and amortiza- tion of the discount are recorded as changes in value of split interest agreements in the appropriate restriction categories in the non-operating section of the consolidated statement of activities.

J. Funds Held in Trust by Others

Funds held in trust by others represent resources that are not in the possession or under the control of the University. These funds are administered by outside trustees, with the University receiving income or residual interest. Funds held in trust by others are recognized at the estimated fair value of the assets or the present value of the future cash flows due to the University when the irrevocable trust is established or the University is notified of its existence. Gains or losses resulting from changes in fair value are recorded as non-operating activities in the consolidated statement of activities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

O. Comparative Financial Information

The consolidated statement of activities includes prior-year information in summary form, rather than by restriction class. Such information does not include sufficient detail to constitute a presentation of prior-year data in conformity with U.S. GAAP. Accordingly, such information should be read in conjunction with the University’s consolidated financial statements for the prior fiscal year, from which the summarized information was derived.

P. Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09–Revenue from Contracts with Cus- tomers (Topic 606) at the conclusion of a joint effort with the International Accounting Standards Board to create common revenue recognition guidance for U.S. GAAP and international accounting standards. This framework ensures that entities appropriately reflect the consideration to which they expect to be entitled in exchange for goods and services, by allocat- ing transaction price to identified performance obligations, and recognizing that revenue as performance obligations are satisfied. Qualitative and quantitative disclosures will be required to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August of 2015, FASB issued ASU 2015-14–Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which makes ASU 2014-09 effective for the fiscal year ending June 30, 2019. The University continues to evaluate the impact this will have on the consolidated financial statements, and is closely monitoring changes deliberated by the FASB related to its implementation.

In April 2015, the FASB issued ASU 2015-03–Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires all costs incurred to issue debt to be presented in the balance sheet as a direct deduc- tion from the carrying value of the associated debt liability. The University is evaluating the impact this will have on the consolidated financial statements for the fiscal year ending June 30, 2017, the first year in which the standard is effective.

In April 2015, the FASB also issued ASU 2015-05–Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350- 40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement which provides guidance to help entities evaluate whether a cloud computing arrangement includes a software license. The University is evaluating the impact of the new guidance which is effective in the fiscal year ending June 30, 2017.

In February 2016, the FASB issued ASU 2016-02–Leases (Topic 842) which provides accounting guidance for leases from both the lessor’s and lessee’s perspective. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases; however, the University will evaluate other impacts of the new guidance. The new standard will be effective in the fiscal year ending June 30, 2020.

In August 2016, the FASB issued ASU 2016-14–Not-for-Profit Entities (Topic 958): Presentation of Financial Statements for Not-for-Profit Entities to improve the information presented in financial statements and notes about a not-for-profit entity’s liquidity, financial performance, and cash flows. The significant changes under the new guidance include the reduction of net asset classifications to two categories based on the existence or absence of donor restrictions, and additional disclosure requirements related to board designation of net assets, and on the liquidity and availability of the entity’s financial assets. ASU 2016-14 is effective for the fiscal year ending June 30, 2019; the University is currently evaluating both the impact on the consolidated financial statements and the timing of its adoption.

Q. Reclassifications

The University reclassified certain lines in the consolidated statement of cash flows to conform to the current year presen- tation. These changes impacted the net realized and unrealized gain/loss on investments, change in funds held for others, and cash paid for interest.

R. Income Taxes

The University is a not-for-profit organization as described in Section 501(c)(3) of the Internal Revenue Code and is gen- erally exempt from income taxes on related income pursuant to the appropriate sections of the Internal Revenue Code. In accordance with the accounting standards, the University evaluates its income tax position each fiscal year to determine whether it is more likely than not to be sustained if examined by the applicable taxing authority. This review had no mate- rial impact on the University’s consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

2. RECEIVABLES

A. Accounts Receivable

The University’s receivables from the sources identified in the table below are reviewed and monitored for aging and other factors that affect collectability.

Accounts receivable from the following sources were outstanding as of June 30:

The patient accounts receivable for medical services was comprised of the following at June 30, 2016 and 2015, respec- tively: commercial third parties 64.4 percent and 59.5 percent; federal/state government 15.3 percent and 19.1 percent; and patients 20.2 percent and 21.5 percent. Note 12 provides additional information related to the reinsurance receivable.

Other accounts receivable include receivables from other government agencies, matured bequests, and receivables from other operating activities.

B. Contributions Receivable

Unconditional promises to give, or pledges, are recorded in the consolidated financial statements at present value using discount rates ranging from 1.5 percent to 7.0 percent. The methodology for estimating uncollectible amounts is based on an analysis of the historical collectability of contributions receivable. Contributions are expected to be realized as follows:

Contributions receivable as of June 30 are intended for the following purposes:

At June 30, 2016, conditional promises not reflected in the consolidated financial statements, which consist primarily of bequest intentions and conditional promises with significant requirements, were $507,794.

Grants and contracts $ 85,386 $118, New York Presbyterian Hospital and other affiliates 44,603 41, Patients (net of contractual allowances) 131,669 119, Reinsurance receivable 102,891 95, Student accounts 7,200 11, Other 68,224 54, Gross accounts receivable $ 439,973 $440, Less: allowance for doubtful accounts (35,912) (26,127) Net accounts receivable $ 404,061 $414,

SUMMARY OF ACCOUNTS RECEIVABLE

Less than one year $ 366,885 $ 356, Between one and five years 561,661 703, More than five years 155,652 164, Gross contributions receivable $ 1,084,198 $ 1,224, Less: unamortized discount (67,371) (84,658) Less: allowance for uncollectible amounts (30,505) (45,570) Net contributions receivable $ 986,322 $ 1,093,

SUMMARY OF CONTRIBUTIONS RECEIVABLE

Program support $ 521,273 $ 563, Capital purposes 289,949 351, Long-term support 175,100 178, Net contributions receivable $ 986,322 $ 1,093,

EXPECTED PURPOSE OF CONTRIBUTIONS RECEIVABLE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

The University maintains a number of investment pools or categories for specific purposes as follows:

Total earnings on the University’s investment portfolio for the fiscal years ended June 30 is presented in the following table:

B. Fair Value

The University’s investment holdings as of June 30, categorized in accordance with the fair-value hierarchy, are summarized in the following table:

Interest and dividends, net of investment fees $ 77,473 $ 95, Net realized gain/(loss) 210,733 301, Net unrealized gain/(loss) (427,385) (150,091) Total investment return $ (139,179) $ 247,

SUMMARY OF INVESTMENT RETURN

Long-term investments (LTI) Long-term investment pool (LTIP) $ 5,629,008 $ 5,973, Other LTI 343,333 315, Total LTI $ 5,972,341 $ 6,289,

Intermediate-term 277,263 346, Separately invested and other assets 337,571 350, Total investments $ 6,587,175 $ 6,986,

INVESTMENT POOLS/CATEGORIES AT FAIR VALUE

Cash and cash equivalents $ 84,714 $ - $ - $ - $ 84,714 $ 56,

Securities not included in investment portfolio

Level 1 fair value

Level 2 fair value

Level 3 fair value

Net asset value

Total

Total Cash and cash equivalents $ 291,504 $ 32,262 $ - $ - $ 323,766 $ 602, Derivatives - (3,527) - - (3,527) (3,242) Equity Domestic equity 415,478 58,729 3,416 168,990 646,613 698, Foreign equity 599,478 22,957 17,857 245,845 886,137 947, Hedged equity - - 1,949 627,506 629,455 724, Private equity - - 42,058 1,131,930 1,173,988 1,209, Fixed income Asset backed fixed income - 28,598 1,006 - 29,604 22, Corporate bonds - 446,358 127 - 446,485 408, Equity partnership - 77 - 478,440 478,517 423, International 23,404 86,951 - - 110,355 154, Municipals - 12,998 - - 12,998 30, Mutual funds (non-equity) 99 22,504 - - 22,603 49, Preferred/convertible - 23,970 4,959 - 28,929 26, Other fixed income - 5,737 - - 5,737 6, US government 65,622 90,533 - - 156,155 125, Marketable alternatives - 25 - 722,054 722,079 654, Real assets - - 27,383 909,113 936,496 900, Receivable for investments sold 39,336 - - - 39,336 21, Payable for investments purchased (83,011) - - - (83,011) (38,573) Other - - 24,460 - 24,460 23, Total investments $ 1,351,910 $ 828,172 $ 123,215 $ 4,283,878 $ 6,587,175 $6,986,

INVESTMENTS AT FAIR VALUE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

Level 1 investments consist of cash and cash equivalents, equity, and fixed-income securities with observable market prices. Fair value is readily determinable based on quoted prices in active markets. Unsettled trade receivable and payable valua- tions are reflective of cash settlements subsequent to the fiscal year-end and are also categorized as Level 1. The University does not adjust the quoted price for such instruments, even in situations where the University holds a large position and a sale of all its holdings could reasonably impact the quoted price.

Investments that are classified as Level 2 include domestic and foreign equities, as well as fixed income securities that trade in markets that are not considered to be active. Fair value is based on observable inputs for similar instruments in the mar- ket, and obtained by various sources including market participants, dealers, and brokers; the University’s custodian secures pricing for these assets. The fair value of derivative investments is based on market prices from the financial institution that is the counterparty to the derivative.

Level 3 investments have significant unobservable inputs, as they trade infrequently or not at all. The inputs into the deter- mination of fair value are based upon the best information in the circumstance and may require significant management judgment. Investments included in Level 3 consist primarily of the University’s ownership in real estate, oil and mineral rights, limited partnerships, and equity positions in private companies.

C. Investments Using Net Asset Value

The net asset value (NAV) column above represents the University’s ownership interest in certain alternative investments. As a practical expedient, the University uses its ownership interest in the NAV to determine the fair value of all alternative investments that do not have a readily determinable fair value, and have financial statements consistent with the measure- ment principles of an investment company or have the attributes of an investment company. The NAV of these invest- ments is determined by the general partner and is based upon appraisal or other estimates that require varying degrees of judgment. If no public market exists for the investment securities, the general partner will take into consideration, among other things, the cost of the securities, prices of recent significant placements of securities of the same issuer, and subse- quent developments concerning the companies to which the securities relate. The University has performed significant due diligence around these investments to ensure that NAV is an appropriate measure of fair value as of June 30.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

D. Level 3 Investments

The table below presents a summary of Level 3 investment activity. All net realized and unrealized gains/(losses) in the table are reflected in the accompanying consolidated statement of activities. Net unrealized gains/(losses) relate to those financial instruments held by the University at June 30, 2016. There were no significant transfers into or out of Level 3 during the fiscal year ended June 30, 2016.

Level 3 equities not priced by qualified third parties (e.g., brokers, pricing services, etc.) are valued using discounted cash flow, taking into account various factors including nonperformance risk, counterparty risk, and marketability. Investment value is also derived using a market approach through comparison to recent and relevant market multiples of comparable companies. Start-up assets, held by the University’s student-run venture fund or other similar programs, are maintained at or near initial investment amounts due to the nature of the activity.

Fair value at June 30, 2015

Realized gain/(loss)

Unrealized gain/(loss) Purchases Sales

Transfers in/(out) of Level 3

Fair value at June 30, 2016 Equity Domestic equity $ 34,450 $ 8,006 $ (5,009) $ - $ (34,031) $ - $ 3, Foreign equity 22,736 (367) (1,732) 4,489 (7,269) - 17, Hedged equity 3,055 130 (833) 77 (480) - 1, Private equity 20,895 1,254 1,620 20,253 (1,964) - 42,

Fixed income Asset backed fixed income 1,076 - - - (70) - 1, Corporate bonds 4,111 - (144) - (3,840) - 127 Preferred/convertible 5,094 - 143 - (278) - 4, Other fixed income 111 - - - (111) - -

Real assets 22,458 (79) 2,460 2,581 (37) - 27, Other 23,503 (3) (2,665) 3,625 - - 24, Total level 3 investments $ 137,489 $ 8,941 $ (6,160) $ 31,025 $ (48,080) $ - $123,

SUMMARY OF LEVEL 3 INVESTMENT ACTIVITY

Asset class Redemption terms Redemption restrictions* Private equity n/a ** n/a

Real assets n/a ** n/a

Fixed income 50% annual redemption with 90 days notice*** No lock up provisions

Foreign equity Ranges between monthly redemption with 10 days notice, to rolling 3 year redemption with 90 days notice

No lock up provisions

Hedged equity Ranges between quarterly redemption with 30 days notice, to 25% per year redemption with 60 days notice

6.48% has remaining lock up provision of 6 months

Marketable alternatives

Ranges between quarterly redemption with 65 days notice, to 33% redemption per year with 90 days notice

5.97% has remaining lock up of 30 months

Domestic equity Daily redemption with 2 days notice No lock up provisions

• Represents initial investment lock up restriction. No other material redemption restrictions, such as redemption gates, were in place at year end. ** These funds are in private equity structure, with no ability to be redeemed. *** 89.6% of NAV is in private equity structure, with no ability to be redeemed. Redemption provisions for the remaining 10.4% are shown above.

REDEMPTION INFORMATION FOR ALTERNATIVE INVESTMENTS MEASURED USING NET ASSET VALUE

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)

Level 3 asset-backed fixed income investments are valued using discounted cash flows. Preferred/convertible fixed income investments are valued using discounted cash flows or a market approach using a dividend multiplier. Investments in start- up companies, as described above, are valued at or near initial investment amounts.

Level 3 real assets represent directly owned real estate, and oil or mineral rights. To the extent feasible, third party apprais- als are used to value real estate directly owned by the University. If current appraisals are not available, fair value is based on the capitalization rate valuation model or discounted cash flow, corroborated by local market data, if available. Oil and mineral rights are valued based on industry standard revenue multiplier methodologies or discounted cash flow.

The following table provides additional information related to the valuation of the investments classified by the University as Level 3.

The methods described above may produce a fair-value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while the University believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Level 3 fair value Valuation technique(s) Unobservable input

Range (weighted average) Equity Domestic equity $ 3,416 Start-up valuation Foreign equity 17,857 Third-party pricing Hedged equity 1,949 Third-party pricing Private equity 18,016 Discounted cash flow/market comparable (^) Discount rate 3.7% - 12.1% (4.7%)

Discount for lack of marketability 15% - 20% (19.5%) Earnings multiple 8.8x Revenue multiple 1.9x 154 Sales comparison approach Recent transactions 1,823 Start-up valuation 22,065 Third-party pricing Fixed income Asset backed fixed 1,006 Discounted cash flow Discount rate 2.7% - 3.7% (3.4%) Corporate bonds 127 Third-party pricing Preferred/convertible 4,959 Market comparable (^) Dividend multiple 17.3x - 20.8x (20.1x) Real assets 11,940^ Cap rate valuation model^ Capitalization rate 4.5% - 7.0% (5.4%) 5,552 Discounted cash flow Discount rate 15% Years to maturity 12 1,784 Sales comparison approach (^) Recent transactions 4,500 Start-up valuation 3,607 Third-party pricing Other 7,796 Discounted cash flow Discount rate 1.6% - 5.3% (2.1%) Years to maturity 6 - 14 (9) 737 Start-up valuation 15,927 Third-party pricing

Total Level 3 investments $ 123,

QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENT