26 Chapter 3: Financial Audit School cash balances held by the university are pooled with other university funds and are either federally insured or covered by collateral held by the state director of finance in the name of the university. School cash balances held by the foundation and RCUH are also pooled with their other cash balances and amounts in excess of federally insured limits are uncollateralized. The school’s cash and cash equivalents at June 30, 2002 are held as follows: At June 30, 2002, the school held cash amounts of $7,270,179 that were subject to externally imposed purpose restrictions and are reported on the statement of net assets as restricted cash and cash equivalents. The composition of accounts receivable at June 30, 2002 is summarized as follows: The school operates the state’s Hyperbaric Treatment Center out of a local hospital. At June 30, 2002, $770,554 of outstanding Hyperbaric Treatment Center receivables due from patients and third party insurance providers were included in nongovernmental accounts receivable; $556,687 of this balance has been outstanding for more than 180 days and is also included in the allowance for doubtful accounts. The school’s total bad debt expense for FY2001-02 of $159,974 was due to the increase in the balance of the allowance for doubtful Hyperbaric Treatment Center accounts receivable from the prior year. Student loans receivable is reported separately on the statement of net assets in the amount of $55,110, net of an allowance for doubtful accounts of $1,050 as of June 30, 2002. The school’s student loan receivable accounts are administered under the foundation. University of Hawaii $ 9,322,927 University of Hawaii Foundation 2,738,880 State Treasury 554,966 Research Corporation of the University of Hawaii 135,486 $ 12,752,259 Note 3 - Receivables Federal government $ 2,622,636 State and local governments 3,413,974 Nongovernmental 2,283,674 $ 8,320,284 Less allowance for doubtful accounts (729,426) Accounts receivable, net $ 7,590,858 This is trial version www.adultpdf.com 27 Chapter 3: Financial Audit Contributions receivable is also reported separately in the statement of net assets in the amount of $251,034 as of June 30, 2002. There was no allowance for doubtful accounts associated with this balance. At June 30, 2002, school endowment investments with fair values of $4,112,174 and $6,371,539 were held in investment pools in the university and the foundation, respectively. Therefore, specific information about the type of investments that comprise the school’s endowment investment balance was not available. The university and foundation’s endowment investment pools at June 30, 2002 were comprised of the following investment types: The cumulative appreciation in fair value of donor-restricted endowments that are available for expenditure amounted to $306,487 at June 30, 2002 and is reflected in restricted expendable net assets at year- end. At June 30, 2002, the school had $235,038 of short-term endowment investments that were held by the foundation outside of the investment pool to comply with donor restrictions. This balance was comprised mainly of investments in domestic equities. During FY2001-02, the school’s endowment investments (including investments bought, sold, and held during the year) depreciated in value by $1,483,114. Capital asset activity for the year ended June 30, 2002 was as follows: Note 4 - Investments Note 5 - Capital Assets University of Hawaii University of Hawaii Foundation Corporate stocks 71% 51% Bonds 13 14 U.S. government obligations 16 9 Other 0 26 100% 100% Beginning Balance Additions Retirements Ending Balance Furniture, fixtures, and equipment $ 4,900,512 $ 833,638 $ (225,918) $ 5,508,232 Less accumulated depreciation (3,517,473) (399,498) 217,887 (3,699,084) Capital assets, net $ 1,383,039 $ 434,140 $ (8,031) $ 1,809,148 This is trial version www.adultpdf.com 28 Chapter 3: Financial Audit Depreciation expense amounted to $381,858 in FY2001-02. The difference of $17,640 between depreciation reported and total additions to accumulated depreciation reflected above is due to the transfer of a fully depreciated asset from another university unit in FY2001-02. The loss on retirement of capital assets amounted to $8,031 in FY2001- 02 and is reflected in the statement of revenues, expenses, and changes in net assets as a non-operating expense. The net capital asset balance at June 30, 2002 includes capital assets held under capital leases with a total net book value of $61,660. Payroll fringe benefit costs related to employee salaries funded from state appropriated general funds are paid directly by the State and not imposed on the school. In FY2001-02, this cost amounted to approximately $2,335,600 and is reflected as fringe benefit expense and included in state appropriation revenue in the statement of revenues, expenses, and changes in net assets. Pension Benefits Substantially all eligible employees of the school are members of the Employees’ Retirement System of the State of Hawaii (ERS), a cost- sharing, multiple-employer, public employee retirement plan. The ERS provides retirement benefits as well as death and disability benefits. Section 88, Hawaii Revised Statutes, establishes and amends benefit provisions. Prior to June 30, 1984, the plan consisted of only a contributory option. In 1984, legislation was enacted to add a new, noncontributory option for members of the ERS who are also covered under social security. Persons employed in positions not covered by Social Security are precluded from the noncontributory option. The noncontributory option provides for reduced benefits and covers most eligible employees hired after June 30, 1984. Employees hired before that date were allowed to continue under the contributory option or to elect the noncontributory option and receive a refund of employee contributions. All benefits vest after five and ten years of credited service under the contributory and noncontributory options, respectively. Most members of the contributory plan are required to contribute 7.8 percent of their salary. The ERS provides basic pension benefits to individuals receiving pensions. Employer contributions to the ERS are comprised of normal cost plus level annual payments required to liquidate the unfunded accrued liability of the ERS. Note 6 - Payroll Fringe Benefit Costs Note 7 - Employee Benefits This is trial version www.adultpdf.com 29 Chapter 3: Financial Audit For the year ended June 30, 2002, total salaries for school employees covered by the ERS and total salaries for all school employees were approximately $27,977,600 and $33,843,300, respectively. The university and school are periodically required to contribute an actuarially determined amount to the ERS. The university and school were not required to contribute to the ERS in FY2001-02. The ERS issues a Comprehensive Annual Financial Report that includes financial statements and required supplementary information, which may be obtained by writing to the Employees’ Retirement System of the State of Hawaii, 210 Merchant Street, Suite 1400, Honolulu, Hawaii, 96813. The following data was obtained from the disclosures contained in the Comprehensive Annual Financial Report for the year ended June 30, 2001: Number of employers as of March 31, 2001: Basis of Accounting The financial statements of the ERS are prepared using the accrual basis of accounting. Employer and member contributions are recognized in the period in which the contributions are due. Benefits and refunds are recognized when due and payable in accordance with the plan’s terms. Method Used to Value Investments Plan investments are reported at fair value. Where appropriate, the fair value includes disposition costs. Short-term investments are reported at cost, which approximates fair value. Securities traded on a national or international exchange are valued at the last reported sales price at current exchange rates. Mortgages are valued on the basis of future principal and interest payments, and are discounted at prevailing interest rates for similar instruments. The fair value of real estate investments and real estate owned are based on independent appraisals and estimated values. Other Benefits All regular employees, with certain exceptions, earn vacation leave at the rate of one and three-quarters working days for each month of service. Employees who are entitled to annual vacation may accumulate for the State 1 Counties 4 Total employers 5 This is trial version www.adultpdf.com 30 Chapter 3: Financial Audit succeeding year or years up to 15 working days of their annual vacation allowance, provided that the total accumulation shall not exceed 90 working days at the end of the calendar year. Accumulated vacation leave, earned but not taken, is reflected as an accrual in the statement of net assets and classified as current or noncurrent based on the estimated payment date. When termination of services takes place, employees are paid for their vacation allowance in a lump sum. Sick leave accumulates at the rate of one and three-quarters working days for each full month of service without limit, but can be taken only in the event of an illness and is not convertible to pay upon termination of employment. Accordingly, accumulated sick leave, earned but not taken, is not reflected as an accrual in the accompanying financial statements. Employees who retire with 60 days of unused sick leave are entitled to three months of service credit in the system. For each additional 20 days or major fraction thereof of unused sick leave they have in excess of 60 days, their service period is increased by one month. The school’s regular employees may enter into deferred compensation arrangements directly with authorized insurance companies or agencies through a payroll deduction plan. Accordingly, the school has no deferred compensation or withholding payable. In addition to providing pension benefits, the state provides certain health care and life insurance benefits to all eligible employees who retire from the school on or after age 62 with at least ten years of service or age 55 with at least 30 years of service under the noncontributory option, and on or after age 55 with at least five years of service under the contributory option. Retirees credited with at least ten years of service, excluding sick leave credit, qualify for free medical insurance premiums; however, retirees with less than ten years must assume a portion of the monthly premiums. All disability retirees who retired after June 30, 1984 with less than ten years of service also qualify for free medical insurance premiums. Free life insurance coverage and dental coverage for dependents under age 19 are also available. Retirees covered by the medical portion of Medicare are eligible to receive a reimbursement of basic medical coverage premiums. Contributions are based upon negotiated collective bargaining agreements, and are funded by the state as accrued. The school’s share of post-retirement health care and life insurance benefits expenses for the year ended June 30, 2002 was approximately $541,150. Capital Leases Capital leases of equipment are recorded at the lower of the present value of the minimum lease payments or the fair market value of the asset at Note 8 - Post- Retirement Health Care and Life Insurance Benefits Note 9 - Lease Obligations This is trial version www.adultpdf.com 31 Chapter 3: Financial Audit acquisition. Interest rates on capitalized leases vary from 10.5 percent to 12.3 percent. Future minimum lease payments as of June 30, 2002 are as follows: Operating Leases The school leases space for certain research and training activities, including a hyperbaric treatment center and a geriatric teaching center. These non-cancelable operating leases expire at various dates through FY2003-04. Future minimum lease payments under these operating leases are as follows: Long-term liability activity for the year ended June 30, 2002 was as follows: By statutory provision, the university prepares a biennium budget for its programs. Budgeted expenditures are derived primarily from Act 259, Session Laws of Hawaii (SLH) 2001, as amended, and from other specific appropriations acts in various Session Laws of Hawaii. Year ending June 30, 2003 $ 21,615 2004 18,205 2005 13,863 2006 10,710 2007 2,741 Total minimum lease payments $ 67,134 Less amount representing interest (12,565) Present value of future lease payments $ 54,569 Year ending June 30, 2003 $ 241,260 2004 90,920 Total minimum lease payments $ 332,180 Note 10 - Long-Term Liabilities Note 11 - State Appropriation Revenue Beginning Balance Additions Reductions Ending Balance Current Portion Accrued vacation $ 1,134,279 $ 516,276 $ (326,372) $ 1,324,183 $ 699,698 Capital lease obligations 21,322 41,522 (8,275) 54,569 15,393 Total long-term liabilities $ 1,155,601 $ 557,798 $ (334,647) $ 1,378,752 $ 715,091 This is trial version www.adultpdf.com 32 Chapter 3: Financial Audit The school’s share of state appropriations amounted to $15,612,246 in FY2001-02, including $1,346,893 allocated by the university specifically for the Office of Public Health Studies. This amount is combined with non-imposed fringe benefits of approximately $2,335,600 and reported as non-operating state appropriation revenue on the statement of revenues, expenses, and changes in net assets. The school purchases commercial insurance directly from an insurance agent for professional medical malpractice coverage. In addition, the school administers the Medical Malpractice Self-Insurance Reserve Fund to fund costs arising from the defense and settlement of malpractice claims. The reserve was established in 1977 by the Hawaii State Legislature as a special fund account. The net assets related to this reserve amounted to $431,768 at June 30, 2002. No expenditures were made out of this reserve in FY2001-02. The state risk pool and university-purchased commercial insurance policies cover school exposure to various risk of loss related to general tort, education-related tort, theft, damage, errors and omissions, injuries to employees, and natural disasters. The school participates in the university’s self-insurance program for unemployment and workers’ compensation claims. In FY2001-02, the school was assessed a premium based on a percentage (1.45 percent and .2 percent for workers’ compensation and unemployment insurance, respectively) of the salaries of covered employees that are compensated for at least 50 percent time. In return, the university assumes the risk of loss for all current and future claims by school employees. In accordance with GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, as the school does not retain the risk of loss, no liability for unpaid claims has been recorded in the accompanying financial statements. Liabilities related to losses are reported when it is probable that the losses have occurred, the amount of those losses can be reasonably estimated, and the risk of loss is retained with the school. No such liabilities have been reported for the school as of June 30, 2002. There have been no reductions in insurance coverage from coverage in prior years or settlements in the past three fiscal years that were in excess of the school’s insurance coverages. An encumbrance system is used by the school to record outstanding purchase orders and other commitments. This system is used for budget control purposes and no expenses or liabilities are recorded in the school’s financial statements until the related goods or services have Note 12 - Commitments and Contingencies This is trial version www.adultpdf.com 33 Chapter 3: Financial Audit been received. At June 30, 2002, unrestricted and restricted net assets of approximately $375,000 and $4,190,000, respectively, were reserved in the school’s encumbrance system for commitments. To the extent that state appropriated funds are not encumbered at year-end or are encumbered but not paid by a specified period of time after year-end, these funds generally lapse and are returned to the state. As of June 30, 2002, various sponsoring agencies had awarded the school research and training contracts and grants for which the school had yet to meet the associated eligibility requirements that would enable revenue recognition in the accompanying financial statements. Most of the eligibility requirements deal with incurring the appropriate expenses allowed for under the contracts and grants in the appropriate time period. At June 30, 2002, the school held an estimated $72.5 million in contract and grant funds available to be spent in varying time periods ranging from one to five years. Approximately $4,391,765 of this balance is reported as a deferred revenue liability to reflect the unearned revenue associated with funds received in advance from sponsors. The following comprises the deferred revenue balance at June 30, 2002: Both the university and the State of Hawaii provide certain accounting and general administrative services and facilities to the school. The costs of some of these services and facilities are not reflected in the accompanying financial statements. The University Clinical, Education, and Research Associates, Inc. (UCERA – formerly known as University Health Care Associates, Inc.) is a separately incorporated not-for-profit corporation, which contributes to the school’s goal of improving the health care status of the citizens of Hawaii and Pacific area by supporting the academic mission of the school. The organization functions as a practice plan for faculty of the school, providing a vehicle by which clinical revenues can be generated on a limited scale during their non-university, private practice time. The financial information of UCERA has not been included in the accompanying financial statements because the school and university are not financially accountable for this entity. Contracts for professional services are regularly entered into between the school and UCERA. In FY2001-02, total expenditures to UCERA under these agreements amounted to $196,940, including $67,066 in extramurally funded expenditures. Total receipts from UCERA amounted to $111,023 in Federal government $ 809,010 State and local governments 2,323,329 Nongovernmental 1,259,426 Total deferred revenues $ 4,391,765 Note 13 - Related Parties This is trial version www.adultpdf.com 34 Chapter 3: Financial Audit FY2001-02. Amounts due to UCERA at June 30, 2002 amounted to $233,530 and have been included in accounts payable. There were no amounts due from UCERA at June 30, 2002. The Hawaii Residency Program, Inc. is a separately incorporated not-for- profit corporation that coordinates the administration of Hawaii’s residency training programs through a joint effort between the school and several of Oahu’s major hospitals and medical centers. The goal of this coordinated effort is to minimize the aggregate cost of conducting residency training programs while maximizing the benefits and quality of the educational experience for the residents. The financial information of the Hawaii Residency Program, Inc. has not been included in the accompanying financial statements because the school and university are not financially accountable for this entity. The school contracts with the Hawaii Residency Program, Inc. to provide training services. In FY2001-02, total school expenditures to the Hawaii Residency Program, Inc. amounted to $865,964, including $809,222 in extramurally funded expenditures. Amounts due to the Hawaii Residency Program, Inc. at June 30, 2002 amounted to $145,611 and have been included in accounts payable. There were no amounts due from the Hawaii Residency Program, Inc. at June 30, 2002. UCERA’s financial statements were examined by separate independent auditors whose audit report has been provided to the school. The school obtained unaudited financial statements from the Hawaii Residency Program, Inc. as it was not audited in FY2001-02. The following is a condensed summary of the combined financial statements for these organizations based solely upon the financial information provided to the school (unaudited): This is trial version www.adultpdf.com 35 Chapter 3: Financial Audit The university is in the process of constructing a new biomedical science research and education campus, which will house major components of the school’s operations. The new campus site is comprised of 9.1 acres in the Kakaako Waterfront area of Oahu. The project is currently in phase one, which includes the construction of an education and administration building and a biomedical research building. The buildings will comprise over 317,000 net square feet of space. The education and administration building will include: • Educational classrooms, • Simulation and distance learning center, • Auditorium, • Bookstore, • Faculty and staff offices, and • Cafeteria and dining area. Assets Current Assets $ 6,710,668 Noncurrent Assets 202,596 Total Assets $ 6,913,264 Liabilities Current Liabilities $ 3,325,556 Noncurrent Liabilities Total Liabilities $ 3,325,556 Net Assets Restricted Net Assets $ 15,858 Unrestricted Net Assets 3,571,850 Total Net Assets $ 3,587,708 Revenues, Expenses, and Changes in Net Assets Total Operating Revenues $ 15,866,434 Total Operating Expenses (16,293,717) Operating Loss $ (427,283) Nonoperating Revenue, net 183,796 Decrease in Net Assets $ (243,487) Net Assets – Beginning of year 3,831,195 Net Assets – End of year $ 3,587,708 Note 14 - New Biomedical Science Campus This is trial version www.adultpdf.com [...]...Chapter 3: Financial Audit The biomedical research building will include: • Research labs, • Animal research facility, • Research support offices, • Mechanical equipment, central power plant, and loading docks, • Materials management, and • Child care and fitness center Under Act 281, SLH 2000, the Hawaii State Legislature appropriated $875,000 for a project feasibility study Under Act 251,... activities, but has not capitalized the construction in progress costs or the associated debt in the accompanying financial statements These costs are reported on the university s financial statements, and amounted to approximately $10.3 million as of June 30, 2002 These amounts include approximately $7.1 million for the relocation of displaced tenants 36 This is trial version www.adultpdf.com ... 2001, the Legislature appropriated $13 million to fund costs of architectural engineering services, design services, and the relocation of displaced tenants Act 14, SLH 2001, Third Special Session, authorized the university to issue $150 million in revenue bonds to finance the construction of a new biomedical science campus and pledged the support of the State tobacco settlement funds to pay the bonds The. .. The bonds are also backed by the assets of the university Demolition and site work began on September 15, 2002 and October 24, 2002, respectively The education and administration building is expected to be completed in September 2004 and the research building is expected to be completed in July 2005 The school has assumed fiscal and administrative responsibility to support these construction activities, . separate independent auditors whose audit report has been provided to the school. The school obtained unaudited financial statements from the Hawaii Residency Program, Inc. as it was not audited. 90 working days at the end of the calendar year. Accumulated vacation leave, earned but not taken, is reflected as an accrual in the statement of net assets and classified as current or noncurrent based. following comprises the deferred revenue balance at June 30, 2002: Both the university and the State of Hawaii provide certain accounting and general administrative services and facilities to the school. The costs