Financial Statements and Management’s Discussion and Analysis June 30, 2008 Table of Contents Independent Auditors’ Report 1-2 Management’s Discussion and Analysis 3-11 Financial Statements: Balance sheets 12 Statements of revenues, expenses, and changes in net assets 13 Statements of cash flows 14-15 Balance sheet - Foundations 16 Statement of activities - Foundations 17 Notes to financial statements 18-32 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 33-34 Management’s Discussion and Analysis Management’s discussion and analysis (MD&A) provides a broad overview of the State University of New York’s (State University) financial condition as of June 30, 2008 and 2007, the results of its operations for the years then ended, and significant changes from the previous years. Management has prepared the financial statements and related footnote disclosures along with this MD&A. The MD&A should be read in conjunction with the audited financial statements and related footnotes of the State University which directly follows the MD&A. For financial reporting purposes, the State University’s reporting entity consists of all sectors of the State University including the university centers, health science centers (including hospitals), colleges of arts and sciences, colleges of technology and agriculture, specialized colleges, statutory colleges (located at the campuses of Cornell and Alfred Universities), and central services, but excluding community colleges. The financial statements also include the financial activity of The Research Foundation of the State University of New York (Research Foundation), which administers the sponsored program activity of the State University, the State University Construction Fund, (Construction Fund), which administers the capital program of the State University, the auxiliary services corporations and foundations located on its campuses. The foundations meet the criteria under the Governmental Accounting Standards Board (GASB) accounting and financial reporting requirements for inclusion in the State University reporting entity. For financial statement presentation purposes, the combined totals of the foundations are not included in the reported amounts of the State University, but are discretely presented on separate pages in the State University’s financial statements, in accordance with display requirements prescribed by the Financial Accounting Standards Board (FASB) for not-for-profit organizations. The focus of the MD&A is on the State University financial information contained in the balance sheets, the statements of revenues, expenses, and changes in net assets, and the statements of cash flows, which exclude the foundations. Foundation financial statement information is presented separately on pages 16 and 17 of the State University’s financial statements. Financial Highlights At June 30, 2008 and 2007, total assets reported by the State University were $11.15 billion and $10.4 billion and total liabilities were $9.22 billion and $8.14 billion, respectively. Net assets, which total $1.93 billion and $2.27 billion at June 30, 2008 and 2007, experienced a decrease of $336 million in 2008 and an increase of $185 million in 2007. The net assets at June 30, 2008, 2007, and 2006 are summarized in the following categories (in thousands): The change in net assets during 2008 and 2007 was driven by an increase in operating expenses of $366 million in 2008 compared to 2007 and net realized and unrealized losses in 2008 of $35 million compared to net realized and unrealized gains of $234 million in 2007. Revenues, expenses, and the change in net assets for the 2008, 2007, and 2006 fiscal years are summarized as follows (in thousands): Total revenues reported in 2008, 2007, and 2006 were $8.08 billion, $8.16 billion, and $7.26 billion, respectively. Total revenue in 2008 decreased $84 million while revenue in 2007 grew $904 million, compared to the previous year. The revenue decline in 2008 was driven by reductions of $234 million of net realized and unrealized gains, $59 million in state grants and contracts, and $26 million in hospital and clinic revenue from the prior year. These decreases were offset by increases in state appropriations of $61 million, gifts of $52 million, auxiliary enterprises of $51 million, net tuition revenues of $35 million, and other nonoperating revenues of $33 million. Total expenses for 2008, 2007, and 2006 were $8.41 billion, $7.98 billion, and $6.96 billion, respectively. State University expense growth in 2008 and 2007 was $437 million and $1.02 billion, respectively. Expense growth in 2008 compared to 2007 was primarily the result of increases in support services of $133 million, hospital and clinic activity of $99 million, auxiliary enterprises of $76 million, instruction activity of $62 million, interest expense of $40 million, and net realized and unrealized losses of $35 million. Overview of the Financial Statements The financial statements of the State University have been prepared in accordance with U.S. generally accepted accounting principles as prescribed by the GASB. The financial statement presentation consists of comparable balance sheets, statements of revenues, expenses, and changes in net assets, statements of cash flows, and accompanying notes for the June 30, 2008 and 2007 fiscal years. These statements provide information on the financial position of the State University and the financial activity and results of its operations during the years presented. A description of these statements follows: The Balance Sheets present information on all of the State University’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the State University is improving or deteriorating. The Statements of Revenues, Expenses, and Changes in Net Assets present information showing the change in the State University’s net assets during each fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses reported in these statements include items that will result in cash received or disbursed in future fiscal periods (e.g., the receipt of amounts due from students and others for services rendered, or the amount accrued for postemployment benefits earned). The Statements of Cash Flows provides information on the major sources and uses of cash during the year. The cash flow statements portray net cash provided or used from operating, investing, capital, and noncapital financing activities. Balance Sheets The balance sheets present the financial position of the State University at the end of its fiscal years. During the 2008 and 2007 fiscal years, the State University’s total assets increased over the prior years by $745 million and $953 million, while total liabilities increased $1.08 billion and $768 million, respectively. The following table reflects the financial position at June 30, 2008, 2007, and 2006 (in thousands): Current Assets Current assets at June 30, 2008 increased $281 million while current liabilities increased $215 million compared to the previous year. In general, current assets are those assets that are available to satisfy current liabilities (i.e., those that will be paid within one year). Current assets at June 30, 2008 and 2007 consist primarily of cash and cash equivalents of $1.21 billion and $1.06 billion, short-term investments of $301 million and $196 million, and receivables (accounts, interest, appropriations, and grants) of $1.2 billion and $1.19 billion, respectively. During 2008, cash and cash equivalents increased $157 million and short-term investments increased $105 million. Current Liabilities Current liabilities at June 30, 2008 and 2007 consist principally of accounts payable and accrued expenses of $622 million and $547 million, interest on debt of $201 million and $232 million, deferred revenue of $258 million and $183 million, and the current portion of long-term liabilities of $477 million and $444 million, respectively. The increase in current liabilities at June 30, 2008 was driven principally by increases in accounts payable and accrued expenses of $75 million, deferred revenue of $75 million, deposits held in custody for others of $42 million, and the current portion of long-term liabilities of $34 million. Capital Assets, net Since 2003, the State University has received $5.3 billion in cumulative new multi-year capital funding authorizations for State-operated campus educational facilities and $869 million for the State University hospitals. Under the educational facilities program, a majority of the funding is designed to support critical maintenance projects to repair, renovate, or rehabilitate existing State University facilities. During the 2008 and 2007 fiscal years, capital assets (net of depreciation) increased $511 million and $401 million, respectively. The majority of the increase occurred at the State University campuses due to new building construction, renovations, and rehabilitation totaling $395 million and $449 million for the 2008 and 2007 fiscal years, respectively. Equipment additions during 2008 and 2007 of $214 million and $239 million, respectively, also contributed to the increase. Significant projects completed and capitalized during the 2008 fiscal year included construction of a new athletic center at the College at New Paltz, a townhouse complex and community building at Alfred State College, a center of excellence building concentrating on life sciences at the University of Buffalo, a new academic building on the Health Science Center at Syracuse campus and the rehabilitation of a residential facility at the College at Oswego. A summary of capital assets, by major classification, and related accumulated depreciation for the 2008, 2007, and 2006 fiscal years is as follows (in thousands): Other Noncurrent Assets Other noncurrent assets exclusive of capital assets were $2.63 billion and $2.68 billion at June 30, 2008 and 2007, respectively. Noncurrent assets at June 30, 2008 and 2007 include long-term investments of $1.37 billion and $1.4 billion, deposits with trustees of $887 million and $920 million, restricted cash of $74 million and $72 million, and the noncurrent portion of receivables and deferred financing costs of $301 million and $283 million, respectively. Long-term investments at June 30, 2008 and 2007 of $1.37 billion and $1.4 billion represent endowment and similar funds held in separate and distinct investment pools of the State University campuses of $390 million and $426 million, and the Cornell statutory colleges of $721 million and $702 million, respectively, and separately invested funds of $32 million for both years. Long-term investments of the Research Foundation totaled $172 million and $196 million, which includes $76 million and $75 million in investments designated for its post-retirement benefit plan at June 30, 2008 and 2007, respectively. Other long-term investments include investments of the auxiliary services corporations of $28 million and $21 million and the statutory College of Ceramics at Alfred University of $24 million and $25 million at June 30, 2008 and 2007, respectively. During 2008, long-term investments decreased by a total of $35 million due primarily to net realized and unrealized investment losses, allocations to short-term investment vehicles and amounts used to meet spending needs. During fiscal year 2008, deposits with trustees decreased $34 million, which generally represent funds available from the issuance of bonds by the Dormitory Authority of the State of New York (DASNY) used to finance capital projects and maintain debt service reserves for the State University’s facilities. Restricted cash and cash equivalents at June 30, 2008 increased $2 million compared to 2007. During the normal course of operations, the State University has entered into various capital financing arrangements. The unspent cash on those arrangements at June 30, 2008 and 2007 were $58 million and $59 million, respectively. The noncurrent portion of receivables reported at June 30, 2008 and 2007 consisted of accounts, notes, and loan receivables of $114 million and $104 million, appropriation receivables of $90 million and $105 million, and contribution receivables of $30 million and $8 million, respectively. Noncurrent Liabilities Noncurrent liabilities at June 30, 2008 and 2007 of $7.5 billion and $6.63 billion, respectively, are largely comprised of debt on State University facilities, other long-term liabilities accrued for compensated absences and post-retirement benefits, and litigation, as well as an outstanding loan from the State’s short-term investment pool (STIP). The State University capital funding levels and bonding authority are subject to operating and capital appropriations of the State. Funding for capital construction and rehabilitation of educational and residence hall facilities of the State University is provided principally through the issuance of bonds by DASNY. The debt service for the educational facilities is paid by, or provided through a direct appropriation of, the State. The debt service on residence hall bonds is funded primarily from room rents. A summary of noncurrent long-term liabilities at June 30, 2008, 2007, and 2006 is as follows (in thousands): During fiscal year 2008, Personal Income Tax Revenue Bonds (PIT) were issued for the purpose of financing capital construction and major rehabilitation for educational facilities in the amount of $418 million. The State University entered into agreements with DASNY during fiscal year 2008 to issue residence hall facility obligations totaling $145.4 million for the purpose of financing capital construction and major rehabilitation for residential hall facilities. The State University’s credit ratings for educational and residence hall bonds were unchanged in 2008 and 2007. In 2006, Moody’s upgraded the credit ratings for PIT (from A1 to Aa3), educational (from A2 to A1) and residence hall (from A1 to Aa3) bonds compared to the previous year. Standard & Poor’s also upgraded the credit ratings for PIT bonds (from AA to AAA) in 2006. The credit ratings at June 30, 2008 are as follows: PIT Educational Residence Bonds Facilities Halls Moody’s Investors Service Aa3 A1 Aa3 Standard & Poor’s AAA AA- AA- Fitch IBCA AA- A+ A+ Principal payments on educational and residence hall facilities obligations made during 2008 totaled $184.4 million and $24.3 million, in 2007 totaled $389.2 million and $22.9 million, and in 2006 totaled $161.7 million and $21 million, respectively. During fiscal years 2008 and 2007, the long-term portion of the compensated absences and post- retirement benefit obligations liabilities increased $500 million and $611 million, respectively. The State, on behalf of the State University, provides health insurance coverage for eligible retired State University employees and their spouses as part of the New York State Health Insurance Plan (NYSHIP). The State administers NYSHIP and has the authority to establish and amend benefit provisions offered. The State University, as a participant in the plan, recognizes these other postemployment benefits (OPEB) on an accrual basis. The State University’s OPEB plan is financed annually on a pay-as-you go basis. There are no assets set aside to fund the plan. The State University total retirement related payroll during fiscal years 2008 and 2007 was $2.5 billion and $2.4 billion, respectively. The total unfunded actuarial accrued liability as of the July 1, 2006 actuarial valuation was $8.26 billion, or 330% and 344% of the total retirement related payroll of the State University for fiscal years 2008 and 2007, respectively. The Research Foundation sponsors a separate defined benefit post-retirement plan. Contributions are made by the Research Foundation pursuant to a funding policy established by its Board of Directors to cover annual premium costs and to accumulate assets in a board designated investment account. The Research Foundation’s total retirement related payroll during the 2008 and 2007 fiscal years was $224.2 million and $209.1 million, respectively. The total unfunded actuarial accrued liability as of the June 30, 2008 and 2007 actuarial valuations was $233.0 and $220.4 million, or 104% and 105% of the total retirement related payroll expense of the Research Foundation for fiscal years 2008 and 2007, respectively. In prior years, the State University experienced operating cash-flow deficits precipitated by cash-flow difficulties experienced by its three hospitals. As a result, the State University borrowed funds with interest from the short-term investment pool of the State. The amount outstanding under this borrowing, including accrued interest, at June 30, 2008 and 2007 was $110.2 million and $130.4 million, respectively. During fiscal years 2008 and 2007, the total amount paid on these loans was $25.6 million in both years. Refundable government loan funds at June 30, 2008 and 2007 totaled $144.3 million and $141.1 million, respectively. These revolving loan funds are principally those of the federal Perkins and Nursing Loan Programs established with an initial and continued federal capital contribution. Repayments of principal and interest and new contributions are deposited into a revolving loan fund for continual disbursement to students. Statements of Revenues, Expenses, and Changes in Net Assets The statements of revenues, expenses, and changes in net assets present the State University’s results of operations. Total operating revenues of the State University were $4.75 billion in 2008 and 2007 and $4.38 billion in 2006. Nonoperating and other revenues, which includes State appropriations, totaled $3.33 billion, $3.41 billion, and $2.88 billion, for fiscal years 2008, 2007, and 2006, respectively. Total expenses for 2008, 2007, and 2006 were $8.41 billion, $7.98 billion, and $6.96 billion, respectively. Revenue Overview Tuition and Fees, Net Tuition and fee revenue for the 2008, 2007, and 2006 fiscal years, net of scholarship allowances, were $952 million, $918 million, and $880 million, an increase of $35 million and $38 million, in 2008 and 2007, respectively. The increases in 2008 and 2007 were driven by an increase in enrollment and slight increase in fee revenue. Annual average full-time equivalent students, including undergraduate and graduate, were approximately 185,700, 180,200, and 176,800 for the fiscal years ended June 30, 2008, 2007, and 2006, respectively. Hospitals and Clinics The State University has three hospitals (each with academic medical centers) under its jurisdiction - the State University hospitals at Brooklyn, Stony Brook, and Syracuse. Hospital and clinic revenue for the 2008, 2007, and 2006 fiscal years were $1.6 billion, $1.62 billion, and $1.43 billion, respectively. During the 2008 fiscal year, hospital and clinic revenues decreased $26 million compared to the previous year principally due to a decrease in Medicaid Disproportionate Share (DSH) Program revenue from the prior year and an increase in the provisional for uncollectible accounts receivable. Sponsored Research, Grant and Contract Revenue During fiscal year 2008, State University had a slight decrease in its volume of sponsored program activity. Total revenue from federal, state, local, private and capital grants and contracts administered by the Research Foundation was $792 million, $791 million, and $710 million for the fiscal years ended June 30, 2008, 2007, and 2006, respectively. Facilities and administrative recoveries earned on grants and contracts administered by the Research Foundation were $127 million, $124 million, and $123 million for the fiscal periods ending June 30, 2008, 2007, and 2006, respectively. The volume of research and other sponsored programs reported for 2008 and 2007 by the statutory colleges at Cornell University was $147.9 million and $154.3 million, respectively, and Alfred University was $4.3 million for both fiscal years. Revenue from projects sponsored by the federal government and administered by the Research Foundation totaled $340 million and $341 million during 2008 and 2007, respectively. Of these federally-sponsored projects, 54 percent of the funding was received from the Public Health Service for both fiscal years. Other major federal sponsors include the National Science Foundation, the Department of Education, the Department of Defense, the Agency for International Development and the Department of Energy. Revenue from non-federal sponsors (including federal flow-through funds) administered by the Research Foundation totaled $453 million and $450 million for the 2008 and 2007 fiscal years, respectively. In fiscal years 2008 and 2007, the largest non-federal support of sponsored research programs was received from the Empire State Development Corporation. Amounts received under the State’s Tuition Assistance Program decreased $6 million from prior year. Federal grants under the Pell and other federal student aid programs increased $17 million from the previous year. Auxiliary Enterprises The State University’s auxiliary enterprise activity is comprised of sales and services for residence halls, food services, campus store operations, intercollegiate athletics, student health services, parking, and other activities. The residence halls are generally owned, operated and managed by the State University and its campuses. Generally, food services, campus store operations and other services are operated and managed by separately incorporated not-for-profit organizations, commonly referred to as auxiliary services corporations. The residence hall operations and capital programs are financially self-sufficient. Each campus is responsible for the operation of its residence halls program including setting room rates and covering operating, maintenance, capital and debt service costs. Any excess funds generated by residence halls operating activities are separately maintained for improvements and maintenance of the residence halls. Occupancy at the residence halls has risen steadily to 71,605 for the fall of 2007, an increase of 9,619 students since the fall of 2001 and an increase of over 1,251 students compared to the previous year. The overall utilization rate for the fall of 2007 was reported at 96.9 percent. Auxiliary enterprise sales and services revenue totaled $731 million, $680 million, and $637 million in the 2008, 2007, and 2006 fiscal years, respectively. Of these amounts, residence halls operating revenue totaled $325 million, $301 million, and $280 million for 2008, 2007, and 2006, respectively. Increases in revenue were largely due to increases in occupancy levels and modest increases in room rates. Food service operations and other auxiliary services each generated $406 million, $379 million, and $357 million in revenue for fiscal years 2008, 2007, and 2006, respectively. State Appropriations The State University’s single largest source of revenues are State appropriations, which for financial reporting purposes is classified as nonoperating revenues. State appropriations totaled $2.97 billion, $2.91 billion, and $2.46 billion and represented approximately 37 percent, 36 percent, and 34 percent of total revenues for fiscal year 2008, 2007, and 2006, respectively. State support (both direct support for operations and indirect support for debt service and fringe benefits) for State University campus operations, statutory colleges, and hospitals and clinics increased $61 million in 2008 and $451 million in 2007. In 2008, State support for operating expenses increased $176 million, while indirect State support for debt service, fringe benefits, and litigation expenses decreased $115 million compared to 2007. In 2007, state support for debt service, fringe benefits, and litigation expenses increased $328 million compared to 2006, driven principally by the State’s defeasance of $226.2 million of the State University’s debt. Nonoperating and Other Revenue Nonoperating and other revenue excluding State appropriations were $354 million and $503 million for the 2008 and 2007 fiscal years, respectively. This decrease was primarily due to a decrease of $234 million in net realized and unrealized gains offset by an increase in gifts of $52 million and other nonoperating revenues of $33 million. Expense Overview The increase in instruction expense during 2008 of $62 million is predominately from an increase in personal service and related fringe benefit expenses. The increase of $292 million during 2007 was primarily due to an increase of $196 million in postemployment benefits due to the adoption of GASB Statement no. 45. Research expenses decreased $31 million during 2008 and increased $55 million from 2006 to 2007. The decline in 2008 was due to decreased sponsored research expenditure activity at the Research Foundation and Cornell statutory colleges. Support services, which includes expenses for academic support, student services, institutional support, and operation and maintenance of plant, increased $133 million and $282 million during 2008 and 2007, respectively. Institutional support increased $41 million and $121 million, and academic support increased $33 million and $47 million, in the 2008 and 2007 fiscal years, respectively, driven by an increase in personal service and postemployment benefit costs. Operation and maintenance of plant costs increased $43 million and $74 million during 2008 and 2007, respectively, attributable to an increase in capital expenses. In the State University’s financial statements, scholarships used to satisfy student tuition and fees (residence hall, food service, etc.) are reported as an allowance (offset) to the respective revenue classification up to the amount of the student charges. The amount reported as expense represents amounts provided to the student in excess of State University charges. Total scholarships and fellowships, including federal and state grant programs were $554 million and $531 million for the fiscal years ended June 30, 2008 and 2007, respectively. Of this amount, $435 million and $420 million were classified as scholarship allowances and $119 million and $111 million was reported as scholarship expense for fiscal years 2008 and 2007, respectively. Major scholarships and grants received include the State Tuition Assistance Program of $170 million and $176 million, and $153.3 million and $138.7 million from the federal Pell Program during fiscal years 2008 and 2007, respectively. Expenses at the State University’s hospitals and clinics increased $99 million and $226 million during 2008 and 2007, respectively, largely due to an increase in core operating and personal service costs. Also contributing to the growth in expenses in 2007 was an increase in postemployment benefit costs of $148 million. During fiscal years 2008 and 2007, auxiliary enterprise expenses increased $76 million and $56 million, respectively. For the 2008 and 2007 fiscal years, residence halls expenses increased $48 million and $17 million, and food service expenses increased $16 million and $12 million, respectively, primarily due to an increase in occupancy and rates. Other auxiliary enterprise expenses for the years ended June 30, 2008 and 2007 increased $12 million and $27 million, respectively. Depreciation and amortization expense recognized in fiscal years 2008 and 2007 totaled $376 million and $380 million, respectively. Other nonoperating expenses were $352 million and $280 million for the years ended June 30, 2008 and 2007, respectively. Economic Factors That Will Affect the Future The State University is one of the largest public universities in the nation, with headcount enrollment of nearly 218,000 in the fall 2008, on twenty-nine State-operated campuses and five contract/statutory colleges. The State University’s student population is directly influenced by State demographics as the majority of students attending the State University are New York residents. The enrollment outlook remains strong for the State University based on its continued ability to attract quality students for its academic programs coupled with a larger expected number of high school graduates in New York State over the next few years. Full-time equivalent enrollment, excluding community colleges, for the fiscal year ended June 30, 2008, is approximately 185,700, an increase of 5,500 FTE compared to June 30, 2007. New York State appropriations remain the largest single source of revenues. State appropriation revenues are expected to decrease in fiscal year 2009 due to State budget constraints in response to the deteriorating economic conditions. The State University’s continued operational viability is substantially dependent upon a consistent and proportionate level of ongoing State support. For the most recent fiscal year, State appropriations represented 37 percent of the total revenues of the State University. Continued emphasis will be placed on University-wide efforts to control operating costs and enhance other revenue streams, including philanthropy, sponsored programs, and auxiliary revenues. Debt service on educational facilities is paid by the State in an amount sufficient to cover annual debt service requirements; pursuant to annual statutory provisions, each of the University's three teaching hospitals must reimburse the State for their share of debt service costs to finance their capital projects. Since 2003, the State University has received more than $6.1 billion in cumulative new multi-year capital funding authorizations for its State-operated academic facilities and teaching hospitals. Of this total, $869 million is for State University hospitals, and $5.3 billion is for educational facilities. According to the terms of the State's enacted budget for 2009, the educational facility amounts will be supplemented by an additional $550 million each year for the next four years specifically to address ongoing critical maintenance needs of existing facilities, most of which are more than forty years old and thus are scheduled for major building system upgrades or the replacement of crucial building components such as roofs or windows. The State University hospitals, each with academic medical centers, at Brooklyn, Stony Brook and Syracuse serve large numbers of Medicaid and uninsured patients and, as a result, their dependency on the Medicaid DSH Program revenue stream is critical to their continued viability. Their financial and operational capabilities will also continue to be challenged by industry deregulation and managed care. Notes to Financial Statements June 30, 2008 and 2007 1. Summary of Significant Accounting Policies and Basis of Presentation Reporting Entity For financial reporting purposes, the State University of New York (State University) consists of all sectors of the State University including the university centers, health science centers (including hospitals), colleges of arts and sciences, colleges of technology and agriculture, specialized colleges, and statutory colleges (located at the campuses of Cornell and Alfred Universities), central services and other affiliated entities determined to be includable in the State University’s financial reporting entity. Inclusion in the reporting entity is based primarily on the notion of financial accountability, defined in terms of a primary government (State University) that is financially accountable for the organizations that make up its legal entity. The reporting entity includes legally-separate organizations meeting certain financial accountability and fiscal dependency criteria of the State University. Separate legal entities meeting the criteria for inclusion in the blended totals of the State University reporting entity are described below. The State University is included in the financial statements of the State of New York (State) as an enterprise fund as the State is the primary government of the State University. Legally-separate, tax-exempt, affiliated organizations that receive or hold economic resources that are significant to, that are entirely or almost entirely for the direct benefit of, and that can be accessed by, the primary government, its component units, or its constituents are required to be included in the reporting entity using discrete presentation requirements. As a result, the combined totals of the campus-related foundations and student housing corporations (all referred to as foundations) are separately presented as an aggregate component unit on financial statement pages 16 and 17 in the State University’s financial statements in accordance with display requirements prescribed by the Financial Accounting Standards Board (FASB). The Research Foundation of State University of New York (Research Foundation) is a separate, private, nonprofit educational corporation that operates as the fiscal administrator for the majority of the State University’s sponsored programs. The programs include research, training, and public service activities of the State-operated campuses supported by sponsored funds other than State appropriations. The activity of the Research Foundation has been included in these financial statements using GASB measurements and recognition standards. The financial activity was derived from audited financial statements of the Research Foundation for the years ended June 30, 2008 and 2007. Almost all of the State University’s campuses maintain auxiliary services corporations. These corporations are campus-based, nonprofit organizations which, as independent contractors, operate, manage, and promote educationally related services for the benefit of the campus community. Although separate and independent legal entities, these corporations carry out operations which are integrally related to the State University and, therefore, are included in the financial statements of the State University. All of the financial data for these corporations was derived from each entity’s individual audited financial statements, the majority of which have a May 31 or June 30 fiscal year end. The State University Construction Fund (Construction Fund) is a public benefit corporation that designs, constructs, reconstructs and rehabilitates facilities of the State University pursuant to an approved master plan. Although the Construction Fund is a separate legal entity, it carries out operations which are integrally related to the State University and, therefore, the financial activity related to the Construction Fund is included in the State University’s financial statements as of the Construction Fund’s fiscal years end of March 31, 2008 and 2007. The State statutory colleges at Cornell University and Alfred University are an integral part of, and are administered by, those universities. The statutory colleges are fiscally dependent on State appropriations through the State University. The financial statement information of the statutory colleges of Cornell University and Alfred University, have been included in the accompanying financial statements. The operations of certain related but independent organizations, i.e., clinical practice management plans, alumni associations and student associations, 1. Summary of Significant Accounting Policies and Basis of Presentation (continued) do not meet the criteria for inclusion, and are not included, in the accompanying financial statements. The State University administers State financial assistance to the community colleges in connection with its general supervision responsibilities pursuant to State Education Law. However, since these community colleges are sponsored by local governmental entities and are included in their financial statements, the community colleges are not considered part of the State University’s financial reporting entity and, therefore, are not included in the accompanying financial statements. The accompanying financial statements of the State University have been prepared using the economic resources measurement focus and the accrual basis of accounting in accordance with U.S. generally accepted accounting principles as prescribed by the Governmental Accounting Standards Board (GASB). The State University applies all applicable pronouncements of the FASB issued on or before November 30, 1989 that do not conflict or contradict GASB pronouncements. The State University has elected not to apply FASB pronouncements issued after November 30, 1989. During 2007, the State University adopted GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. This Statement establishes standards for the measurement, recognition, and display of other postemployment benefits (OPEB) expenses, the related assets or liabilities and note disclosures in the financial statements. The State University reports its financial statements as a special purpose government engaged in business-type activities, as defined by GASB. Business-type activities are those that are financed in whole or in part by fees charged to external parties for goods or services. The financial statements of the State University consist of classified balance sheets; statements of revenues, expenses, and changes in net assets, that distinguish between operating and nonoperating revenues and expenses; and statements of cash flows, using the direct method of presenting cash flows from operations and other sources. The State University’s policy for defining operating activities in the statement of revenues, expenses, and changes in net assets are those that generally result from exchange transactions, i.e., the payments received for services and payments made for the purchase of goods and services. Certain other transactions are reported as nonoperating activities and include the State University’s operating and capital appropriations from the State, federal appropriations, nonexchange receipts, net investment income, gifts, and interest expense. Resources are classified for accounting and financial reporting purposes into the following four net asset categories: Invested in capital assets, net of related debt Capital assets, net of accumulated depreciation and amortization and outstanding principal balances of debt attributable to the acquisition, construction, repair or improvement of those assets. Restricted – nonexpendable Net assets subject to externally imposed conditions that require the State University retain in perpetuity. Restricted – expendable Net assets whose use is subject to externally imposed conditions that can be fulfilled by the actions of the State University or by the passage of time. Unrestricted, all other categories of net assets Included in unrestricted net assets are amounts provided for specific use by the State University’s colleges and universities, hospitals and clinics, and separate legal entities included in the State University’s reporting entity that are designated for those entities and, therefore, not available for other purposes. The State University has adopted a policy of generally utilizing restricted - expendable funds, when available, prior to unrestricted funds. Revenues Revenues are recognized in the accounting period when earned. State appropriations are recognized when they are made legally available for expend-iture. Revenues and expenditures arising from 1. Summary of Significant Accounting Policies and Basis of Presentation (continued) nonexchange transactions are recognized when all eligibility requirements, including time requirements, are met. Promises of private donations are recognized at fair value. Net patient service revenue for the hospitals is reported at the estimated net realizable amounts from patients, third party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third party payors. Tuition and fees and auxiliary sales and service revenues are reported net of scholarship discounts and allowances. Auxiliary sales and service revenue classifications for 2008 and 2007 were reported net of the following scholarship discount and allowance amounts (in thousands): 2008 2007 Residence halls $ 54,088 49,010 Food service 24,476 22,000 Other auxiliary 24,410 21,945 Cash and Cash Equivalents Cash and cash equivalents are defined as current operating assets that include investments with original maturities of less than 90 days, except for cash and cash equivalents held in investment pools which are included in short-term and long-term investments in the accompanying balance sheets. Investments Investments in marketable securities are stated at fair value based upon quoted market prices. Investment income is recorded on the accrual basis, and purchases and sales of investment securities are reflected on a trade date basis. Any net earnings not expended are included as increases in restricted - nonexpendable net assets if the terms of the gift require that such earnings be added to the principal of a permanent endowment fund, or as increases in restricted - expendable net assets as provided for under the terms of the gift, or as unrestricted. At June 30, 2008 and 2007, the State University had $715 million and $761 million available for authorization for expenditure, $429 million and $459 million from restricted funds, and $286 million and $302 million from unrestricted funds, respectively. The State University’s Board of Trustees has the responsibility of oversight for the State University’s endowment and similar funds, including the establishment of investment objectives and guidelines, asset allocation parameters, and spending policy. The primary investment objective is to preserve the purchasing power of fund assets while providing a relatively predictable, stable, and constant stream of earnings in line with spending needs. The expenditure of available endowment and similar funds income is subject to State appropriation and may be spent at an annual rate of 5 percent increase per unit value per year, subject to certain minimum and maximum spending parameters. The State University investments include domestic and international equity and fixed income securities, real estate and commodity investments, and a limited use of an alternative investment strategy under a fund-of-funds approach. The Investment Committee of the Cornell Board of Trustees establishes the investment policy of the Cornell statutory colleges. Distributions from the pool are approved by the Cornell Board of Trustees and are provided for program support independent of the cash yield and appreciation of investments in that year. Investments in the pool are stated at fair value and include limited use of derivative instruments, including leverage futures, options and other similar vehicles to manage market exposure and to enhance the total return. Alternative investments are valued using current estimates of fair value obtained from the investment manager in the absence of readily determinable public market values. The estimated fair value of these investments is based on the most recent valuations provided by the external investment managers. Because of the inherent uncertainty of valuation for these investments, the investment manager’s estimate may differ from the values that would have been used had a ready market existed. Capital Assets Capital assets are stated at cost, or in the case of gifts, fair value at the date of receipt. Building reno- 1. Summary of Significant Accounting Policies and Basis of Presentation (continued) vations and additions costing over $100,000 and equipment items with a unit cost of more than $5,000 are capitalized. Equipment under capital leases are stated at the present value of minimum lease payments at the inception of the lease. Generally, the net interest cost on debt during the construction period related to capital projects is capitalized and totaled $7.9 million and $9.2 million, in the 2008 and 2007 fiscal years, respectively. Library materials are capitalized and amortized over a ten-year period. Works of art or historical treasures that are held for public exhibition, education, or research in furtherance of public service are capitalized. Capital assets, with the exception of land, construction in progress, and inexhaustible works of art, are depreciated on a straight-line basis over their estimated useful lives, using historical and industry experience, ranging from 3 to 50 years. Deferred Financing Costs Deferred financing costs represent costs incurred for the issuance of bonds that are capitalized and amortized over the life of the related debt. Inventories Inventories held by the State University are primarily stated at the lower of cost or market value on a first-in, first-out basis. Compensated Absences Employees accrue annual leave based primarily on the number of years employed up to a maximum rate of 21 days per year up to a maximum of 40 days. Fringe Benefits Employee fringe benefit costs (e.g., health insurance, worker’s compensation, and pension and post-retirement benefits) are paid by the State on behalf of the State University (except for the State University hospitals, which pay their own fringe benefit costs) at a fringe benefit rate determined by the State. The State University records an expense and corresponding State appropriation revenue for fringe benefit costs based on the fringe benefit rate applied to total eligible personal service costs incurred. Postemployment Benefits Postemployment benefits other than pensions are recognized on an actuarially determined basis as employees earn benefits that are expected to be used in the future. The amounts earned include employee sick leave credits expected to be used to pay for a share of post-retirement health insurance. Tax Status The State University and the Construction Fund are political subdivisions of the State and are, therefore, generally exempt from federal and state income taxes under applicable federal and state statutes and regulations. The Research Foundation and campus auxiliary services corporations are nonprofit organizations as described in Section 501(c)(3) of the Internal Revenue Service Code and are tax-exempt on related income, pursuant to Section 501(a) of the code. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts displayed in the 2007 financial statements have been reclassified to conform to the 2008 presentation. 2. Cash and Cash Equivalents Cash and cash equivalents represent State University funds held in the State treasury, in the short-term investment pool (STIP), or local depositories, and cash held by affiliated organizations. Cash held in the State treasury beyond immediate need is pooled with other State funds for short-term investment purposes. The pooled balances are limited to legally-stipulated investments which include obligations of, or are guaranteed by, the United States, obligations of the State and its political subdivisions, and repurchase agreements. These investments are reported at cost (which approximates fair value) and are held by the State’s agent in its name on behalf of the State University. The New York State Comprehensive Annual Financial Report contains the GASB No. 40 risk disclosures for deposits held in the State treasury. Deposits not held in the State treasury that are not covered by depository insurance and are (a) uncollateralized; (b) collateralized with securities held by a pledging financial institution; or (c) collateralized with securities held by a pledging financial institution’s trust department or agency, but not in the State University or affiliates name at June 30, 2008 and 2007, is as follows (in thousands): Category a Category b Category c 2008 $ 59,238 24,868 4,639 2007 54,022 20,786 2,615 3. Deposits with Trustees Deposits with trustees primarily represent Dormitory Authority of the State of New York (DASNY) bond proceeds needed to finance capital projects and to establish required building and equipment replacement and debt service reserves. Pursuant to financing agreements with DASNY, bond proceeds, including interest income, are restricted for capital projects or debt service. Also included are non-bond proceeds which have been designated for capital projects and equipment. The State University’s cash and investments which comprise deposits with trustees are registered in the State University’s name held by an agent or in trust accounts in the State University’s name. Cash and short-term investments held in the State treasury and money market accounts were approximately $53.9 million and $53.3 million at June 30, 2008 and 2007, respectively. The market value of investments held and maturity are displayed in the table below (in thousands). 4. Investments Investments of the State University are recorded at fair value. Investment income is reported net of investment fees of $4.4 million and $4.2 million for 2008 and 2007, respectively. Investments are comprised of investments of the State University’s endowment and similar funds, the statutory colleges at Cornell University and Alfred University (Alfred Ceramics), the Research Foundation, the 4. Investments (continued) Construction Fund, and the auxiliary services corporations. Pooled investments are held in two separate and distinct investment pools - the State University’s investment pool and Cornell’s long-term investment pool. The investments of the State University’s investment pool are held by the State University’s agent in the State University’s name. Substantially, all of the investments of the State University’s endowment and similar funds are pooled on a fair value basis. Individual funds subscribe to or dispose of units on the basis of the market value per unit at the beginning of the month within which the transaction takes place. Investments of the endowment and similar funds of the Cornell statutory colleges, except for separately invested funds with a fair value of $42.7 million and $39 million at June 30, 2008 and 2007, respectively; are pooled on a fair value basis in Cornell’s long-term investment pool and living trust fund. Individual funds enter or withdraw from the pool based on each fund’s share of the fair value of the pool’s investments. The Research Foundation maintains a diverse investment portfolio and with respect to debt instruments, has a policy of investing in primarily high quality securities. Investments are held with the investment custodian in the Research Foundation’s name. Investments include $82.1 million and $80 million of investments designated for their post-retirement benefit plan at June 30, 2008 and 2007, respectively. Investments of the Construction Fund have been made in accordance with the applicable provisions of the laws of the State and the Construction Fund’s investment policy and consisted primarily of obligations of the United States government and its agencies. These investments are held by the State’s agent in the State University Construction Fund’s name. Investments of the auxiliary services corporations and Alfred Ceramics were derived from each entity’s individual financial statements. The State University’s financial position may be impacted through its market risk positions and by changes in economic conditions. The composition of investments is as follows (in thousands): State University Campuses 2008 2007 Pooled funds: Non-equities $ 92,383 81,458 Equities - domestic 183,112 241,349 Equities - international 125,388 109,667 Total pooled funds 400,883 432,474 Separately invested funds- Non-Equities 83 80 Total invested funds 400,966 432,554 Cornell Statutory Colleges Pooled funds: Non-equities 433,006 380,547 Equities - domestic 181,346 192,704 Equities - international 107,135 128,809 Total pooled funds 721,487 702,060 Short-term and separately invested funds: Non-equities 21,869 17,611 Equities 20,795 21,401 Total short-term and separately invested funds 42,664 39,012 Total invested funds 764,151 741,072 Alfred Ceramics Non-equities 10,054 13,127 Equities 13,933 11,438 Total invested funds 23,987 24,565 Research Foundation Non-equities 209,062 113,792 Equities 179,157 195,925 Total invested funds 388,219 309,717 Auxiliary Services Corporations Non-equities 43,511 43,111 Equities 19,292 18,171 Total invested funds 62,803 61,282 State University Construction Fund Total invested funds - non-equities 29,145 29,763 Total investments $ 1,669,271 1,598,953 Classified as short- term $ 301,093 196,108 Generally, individual investment securities must be of investment grade. The State University maintains a portfolio which possesses an overall weighted average rating by Moody’s and Standard and Poor’s (S&P) of at least A. Private placement securities must be rated A3 or higher by Moody’s or A- or higher by S&P. Parameters exist that allow some 4. Investments (continued) limited investments in non-investment grade; however, investments rated below B3 by Moody’s or B- by S&P are prohibited. Policies are in place that limit fixed income investment duration within certain benchmarks and a highly diversified portfolio is maintained which limits interest rate risk exposure. At June 30, 2008 and 2007, the State University had the following investments and maturities as summarized in Table A. Credit quality ratings of the State University’s investments in debt securities, as described by Moody’s, S&P, and Fitch IBCA as of June 30, 2008 and 2007 are summarized in Table B. 4. Investments (continued) The State University’s exposure to foreign currency risk for investments, held at June 30, 2008 and 2007, was as follows (fair value in thousands): 5. Accounts, Notes, and Loans Receivable At June 30, accounts, notes, and loans receivable were summarized as follows (in thousands): 2008 2007 Tuition and fees $ 30,116 33,171 Allowance for uncollectible (7,419 ) (7,425 ) Net tuition and fees 22,697 25,746 Room rent 7,528 7,052 Allowance for uncollectible (1,748 ) (1,690 ) Net room rent 5,780 5,362 Patient fees, net of contractual allowances 566,565 590,498 Allowance for uncollectible (172,466 ) (162,192 ) Net patient fees 394,099 428,306 Other, net 131,914 122,501 Total accounts and notes receivable 554,490 581,915 Student loans 163,190 154,507 Allowance for uncollectible (21,999) (21,027 ) Total student loans receivable 141,191 133,480 Total, net $ 695,681 715,395 6. Capital Assets Capital assets, net of accumulated depreciation, totaled $5.74 billion and $5.23 billion at fiscal year end 2008 and 2007, respectively. Capital asset activity for fiscal years 2008 and 2007 is reflected in Table C. In the table, closed projects and retirements represent capital assets retired and assets transferred from construction in progress for projects completed and the related capital assets placed in service. 7. Long-term Liabilities The State University has entered into capital leases and other financing agreements with DASNY to finance most of its capital facilities. The State University has also entered into financing arrangements with the New York Power Authority under the statewide energy services program. Equipment purchases are also made through DASNY’s Tax-exempt Equipment Leasing Program (TELP), various state sponsored equipment leasing programs, or private financing arrangements. At June 30, 2008 and 2007, other than facilities obligations, which are included as of March 31, 2008 and 2007, total obligations are summarized in Table D. Educational Facilities The State University, through DASNY, has entered into financing agreements to finance various educational facilities which have a maximum 30-year life. Athletic facility debt is aggregated with educational facility debt. Debt service is paid by, or from specific appropriations of, the State. During the year, Personal Income Tax Revenue Bonds (PIT) were issued for the purpose of financing capital construction and major rehabilitation for educational facilities in the amount of $418.1 million. Residence Hall Facilities The State University has entered into capital lease agreements for residence hall facilities. DASNY bonds for residence hall facilities, which have a maximum 30-year life, are repaid from room rentals and other residence hall revenues. Upon repayment of the bonds, including interest thereon, and the satisfaction of all other obligations under the lease agreements, DASNY shall convey to the State University all rights, title, and interest in the assets financed by the capital lease agreements. Residence hall facilities revenue realized during the year from facilities from which there are bonds outstanding is pledged as a security for debt service and is assigned to DASNY to the extent required for debt service purposes. Any excess funds pledged to DASNY are available for residence hall capital and operating purposes. During the year, the State University entered into agreements with DASNY to issue residential hall facility obligations totaling $145.4 million for the purpose of financing capital construction and major rehabilitation for residential hall facilities. In prior years, the State University defeased various obligations, whereby proceeds of new obligations were placed in an irrevocable trust to provide for all future debt service payments on the defeased obligations. Accordingly, the trust account 7. Long-term Liabilities (continued) assets and liabilities for the defeased obligations are not included in the State University’s financial statements. As of March 31, 2008, $1.31 billion and $346.9 million of outstanding educational and residence hall facility obligations, respectively, were considered defeased. Capital Lease Arrangements The State University leases equipment under DASNY TELP, New York State Personal Income Tax Revenue Bonds, certificates of participation (COPs), vendor financing, or through statewide lease purchase agreements. The State University is responsible for lease debt service payments sufficient to cover the interest and principal amounts due under these arrangements. Loan From State In prior years, the State University experienced operating cash-flow deficits precipitated by cash-flow difficulties experienced by its hospitals. In connection with these cash-flow deficits, as 7. Long-term Liabilities (continued) authorized by State Finance Law, the State University borrowed funds with interest from the short-term investment pool of the State. The amount outstanding under this borrowing from the State at June 30, 2008 was $110.2 million. During the year, $25.6 million was paid on these loans. The State University incurred an interest cost of $5.3 million at an average interest rate of 4.1 percent. 8. Retirement Plans Retirement Benefits There are three major retirement plans for State University employees. The New York State and Local Employees' Retirement System (ERS), the New York State Teachers' Retirement System (TRS), and the Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA/CREF). ERS is a cost-sharing, multiple-employer, defined benefit public plan administered by the State Comptroller. TRS is a cost-sharing, multiple-employer, defined benefit public plan separately administered by a nine-member board. TIAA/CREF is a multiple-employer, defined contribution plan administered by separate boards of trustees. Substantially all full-time employees participate in the plans. Obligations of employers and employees to contribute, and related benefits, are governed by the New York State Retirement and Social Security Law (NYSRSSL) and Education Law. These plans offer a wide range of programs and benefits. ERS and TRS benefits are related to years of credited service and final average salary, vesting of retirement benefits, death and disability benefits, and optional methods of benefit payments. TIAA/CREF is a State University Optional Retirement Program (ORP) and offers benefits through annuity contracts. ERS and TRS provide retirement benefits as well as death and disability benefits. Benefits generally vest after five years of credited service. The NYSRSSL provides that all participants in ERS and TRS are jointly and severally liable for any actuarial unfunded amounts. Such amounts are collected through annual billings to all participating employers. Employees who joined ERS and TRS after July 27, 1976, and have less than ten years of service or membership are required to contribute 3 percent of their salary. Employee contributions are deducted from their salaries and remitted on a current basis to ERS and TRS. Employer contributions are actuarially determined for ERS and TRS. TIAA/CREF provides benefits through annuity contracts and provides retirement and death benefits to those employees who elected to participate in the ORP. Benefits are determined by the amount of individual accumulations and the retirement income option selected. All benefits generally vest after the completion of one year of service if the employee is retained thereafter. TIAA/CREF is contributory for employees who joined after July 27, 1976, who contribute 3 percent of their salary. Employer contributions range from 8 percent to 15 percent depending upon when the employee was hired. Employee contributions are deducted from their salaries and remitted on a current basis to TIAA/CREF. The State University’s total retirement-related payroll was $2.5 billion and $2.4 billion for the June 30, 2008 and 2007 fiscal years, respectively. The payroll for 2008 and 2007 for State University employees covered by TIAA/CREF was $1.57 billion and $1.52 billion, ERS was $874 million and $845 million, and TRS was $84 million for both fiscal years, respectively. Employer and employee contributions under each of the plans were as follows (in millions): 2008 2007 2006 Employer contributions: TIAA-CREF $163.9 157.1 149.4 ERS 48.6 50.7 52.5 TRS 8.3 6.7 6.4 Employee contributions: TIAA-CREF $ 55.7 49.6 40.9 ERS 11.5 10.7 9.5 TRS 1.0 0.9 0.9 The employer contributions are equal to 100 percent of the required contributions under each of the respective plans. The Research Foundation maintains a separate non-contributory plan through TIAA/CREF for substantially all of its employees. Employees become 8. Retirement Plans (continued) fully vested in contributions made by the Research Foundation after three years of service which are allocated to individual employee accounts. Employer contributions are based on a percentage of regular salary and range from 8 percent to 15 percent. The payroll for Research Foundation employees covered by TIAA/CREF for its fiscal year ended June 30, 2008 and 2007 was $337.7 million and $323.5 million, respectively. The Research Foundation pension contributions for fiscal years 2008 and 2007 were $27.5 million and $25.6 million, respectively. These contributions are equal to 100 percent of the required contributions for each year. Each retirement system issues a publicly available financial report that includes financial statements and supplementary information. The reports may be obtained by writing to: New York State and Local Employees' Retirement System 110 State Street Albany, New York 12244 New York State Teachers’ Retirement System 10 Corporate Woods Drive Albany, New York 12211 Teachers Insurance and Annuity Association/ College Retirement Equities Fund 730 Third Avenue New York, New York 10017 Postemployment and Post-retirement Benefits The State, on behalf of the State University, provides health insurance coverage for eligible retired State University employees and their spouses as part of the New York State Health Insurance Plan (NYSHIP). NYSHIP offers comprehensive benefits through various providers consisting of hospital, medical, mental health, substance abuse and prescription drug programs. The State administers NYSHIP and has the authority to establish and amend the benefit provisions offered. NYSHIP is considered an agent multiple-employer defined benefit plan, is not a separate entity or trust, and does not issue stand-alone financial statements. The State University, as a participant in the plan, recognizes OPEB expenses on an accrual basis. Employee contribution rates for NYSHIP are established by the State and are generally 10 percent for enrollee coverage and 25 percent for dependent coverage. NYSHIP premiums are being financed on a pay-as-you-go basis. There are no assets set aside to fund the plan. During the fiscal year, the State, on behalf of the State University, paid health insurance premiums of $234.3 million. The State University’s annual OPEB cost and increase in the OPEB obligation for the years ended June 30 2008 and 2007, was as follows (in thousands): 2008 2007 Annual OPEB cost $ 749,962 712,551 Benefits paid during year (234,293 ) (142,399 ) Increase in OPEB Obligation 515,669 570,152 Net obligation at beginning of year 570,152 Net obligation at end of year $1,085,821 570,152 The components of the State University’s OPEB obligation include the total annual required contribution (ARC) of $718.2 million (comprised of service costs of $395.8 million and amortization of unfunded actuarial liability of $322.4 million), ARC reduction of $20.8 million, and interest costs of $52.6 million. The initial unfunded actuarial accrued liability totaled $8.26 billion as of the July 1, 2006 actuarial valuation date and is being amortized over an open period of thirty years using the level percentage of projected payroll amortization method. The State University total retirement related payroll for the June 30, 2008 fiscal year was $2.5 billion. The actuarial valuation utilizes a frozen entry age actuarial cost method. The actuarial assumptions include a 4.2 percent discount rate, payroll growth rate of 3.5 percent, and an annual healthcare cost trend rate for medical coverage of 10 percent initially, reduced by decrements to a rate of 5 percent after 6 years. Projections of benefits are based on the plan and include the types of benefits provided at the time of each valuation. Actuarial valuations involve estimates of the value of reported amounts and assumptions about the probability of future events 8. Retirement Plans (continued) and actual results are considered for future valuations. The actuarial methods and assumptions used are designed to reduce short-term volatility in reported amounts and reflect a long-term perspective. The Research Foundation sponsors a separate single employer defined benefit post-retirement plan (“Plan”) that provides health insurance and medical benefits that covers substantially all non-student Research Foundation employees. The Research Foundation Board of Directors administers the plan and has the authority to establish and amend the benefit provisions offered. Contribution rates for employees hired after 1985 are 10 percent for employee coverage, and 25 percent for dependent coverage. Contributions by the Research Foundation are made pursuant to a funding policy established by its Board of Directors and were $12.3 million and $11.7 million during the 2008 and 2007 fiscal years, respectively. Assets are held in an unrestricted investment account designated by the Research Foundation Board of Directors and are not considered plan assets in determining the funded status or funding progress of the plan under GASB reporting and measurement standards. The actuarial accrued liability at June 30, 2008 and 2007 was $233 million and $220.4 million, respectively. The payroll expense for employees covered by the Plan for the 2008 fiscal year was $224.2 million. The Plan does not issue stand-alone financial statements. The OPEB obligation and annual OPEB cost for the Research Foundation Plan have been calculated retrospectively using an open transition period of 17 years, at the beginning of the 1991 fiscal year. The Research Foundation’s annual cost and increase in the OPEB obligation for the years ended June 30, 2008 and 2007, was as follows (in thousands): 2008 2007 Annual OPEB cost $ 17,227 34,995 Benefits paid during year (4,580 ) (3,994 ) Increase in OPEB Obligation 12,647 31,001 Net obligation at beginning of year 220,370 189,369 Net obligation at end of year $ 233,017 220,370 The components of the Research Foundation OPEB obligation at June 30, 2008 include the total annual required contribution (ARC) of $237.6 million (comprised of service cost of $10.2 million and amortization of unfunded actuarial accrued liability of $227.4 million), ARC reduction of $235.8 million, and interest costs of $15.4 million. The unfunded actuarial accrued liability is amortized over one year. The cost of the benefits provided under this plan is recognized on an actuarial- determined basis using the projected unit cost method. Under this method, actuarial assumptions are made based on employee demographics and medical trend rates to calculate the accrued benefit cost. The actuarial assumptions include a 7 percent discount rate, and an initial healthcare cost trend rate of 9 percent grading down to 5 percent. A blended discount rate was utilized using the expected investment return on investments designated for the Plan and investments held in the operational pool expected to be used to fund future OPEB obligations. 9. Commitments The State University has entered into contracts for the construction and improvement of various projects. At March 31, 2008, these outstanding contract commitments totaled approximately $615.1 million. The State University is also committed under numerous operating leases covering real property and equipment. Rental expenditures reported for the years ended June 30, 2008 and 2007 under such operating leases were approximately $32.3 million and $29.3 million, respectively. The following is a summary of the future minimum rental commitments under non-cancelable real property and equipment leases with terms exceeding one year (in thousands): Year ending June 30, 2009 $ 28,826 2010 25,380 2011 21,917 2012 17,978 2013 12,468 2014-18 24,825 2019-23 3,178 2024-39 2,093 Total $ 136,665 10. Contingencies The State is contingently liable in connection with claims and other legal actions involving the State University, including those currently in litigation arising in the normal course of State University activities. The State University does not carry malpractice insurance and, instead, administers these types of cases in the same manner as all other claims against the State involving State University activities in that any settlements of judgments and claims are paid by the State from an account established for this purpose. With respect to pending and threatened litigation, the State University has recorded a liability and a corresponding appropriation receivable of approximately $109.2 million at June 30, 2008 ($101.6 million related to hospitals and clinics) for unfavorable judgments, both anticipated and awarded but not yet paid. The State University is exposed to various risks of loss related to damage and destruction of assets, injuries to employees, damage to the environment or noncompliance with environmental requirements, and natural and other unforeseen disasters. The State University has insurance coverage for its residence hall facilities. However, in general, the State University does not insure its educational buildings, contents or related risks and does not insure its vehicles and equipment for claims and assessments arising from bodily injury, property damages, and other perils. Unfavorable judgments, claims, or losses incurred by the State University are covered by the State on a self-insured basis. The State does have fidelity insurance on State employees. 11. Related Parties The State University's single largest source of revenue is State appropriations, which represents approximately 37 and 36 percent of total revenues for the 2008 and 2007 fiscal years, respectively. The State University is dependent on this appropriation to carry on its operations. 12. Federal Grants and Contracts and Third-Party Reimbursement Substantially all federal grants and contracts are subject to financial and compliance audits by the grantor agencies of the federal government. Disallowances, if any, as a result of these audits may become liabilities of the State University. State University management believes that no material disallowances will result from audits by the grantor agencies. The State University hospitals have agreements with third-party payors, which provide for reimbursement to the hospitals at amounts different from their established charges. Contractual service allowances and discounts (reflected through State University hospitals and clinics sales and services) represent the difference between the hospitals established rates and amounts reimbursed by third-party payors. The State University has made provision in the accompanying financial statements for estimated retroactive adjustments relating to third-party payors cost reimbursement items. 13. Subsequent Events The State University entered into agreements with the DASNY to issue obligations totaling $129.4 million for the construction and rehabilitation of residential facilities in September 2008. 14. Foundations Discretely presented component unit information is comprised principally of the campus-related foundations. These foundations are nonprofit organizations responsible for the fiscal administration of revenues and support received for the promotion, development and advancement of the welfare of its campus, the State University, its students, faculty, staff and alumni. The foundations receive the majority of their support and revenues through contributions, gifts and grants and provide benefits to their campus, students, faculty, staff and alumni. In addition, the reported amounts include foundation student housing corporations, nonprofit organizations that operate and administer certain housing and related services for students. All the foundations are exempt from federal income taxes on related income pursuant to Section 501(a) of the Internal Revenue Code. All of the financial data for these organizations was derived from each entity's individual financial statements, reported in accordance with generally accepted accounting principles promulgated by FASB, the majority of which have a June 30 fiscal year end. 14. Foundations (continued) During the years ended June 30, 2008 and 2007, the foundations distributed $42.8 million and $43.8 million, respectively, to the State University principally for scholarships and support of campus program activities. Separately issued financial statements of the foundations and other related entities may be obtained in writing to: The State University of New York System Administration Office of the University Controller State University Plaza, S-421 Albany, New York 12246 Net Asset Classifications Unrestricted net assets represent resources whose uses are not restricted by donor-imposed stipulations and are generally available for the support of the State University campus and foundation programs and activities. Temporarily restricted net assets represent resources whose use is limited by donor-imposed stipulations that either expire by the passage of time or are removed by specific actions. Permanently restricted net assets represent resources that donors have stipulated must be maintained permanently. The income derived from the permanently restricted net assets is permitted to be spent in part or in whole, restricted only by the donors’ wishes. The beginning net asset amounts have been revised from those previously reported to reclassify amounts to conform with donor intentions. As a result, permanently restricted net assets were increased $5.4 million and temporarily restricted and unrestricted net assets were decreased by $5.1 million and $.3 million, respectively. Investments All investments with readily determinable fair values have been reported in the financial statements at fair value. Realized and unrealized gains and losses are recognized in the statement of activities. Gains or losses on investments are recognized as increases or decreases in unrestricted net assets unless their use is temporarily or permanently restricted by explicit donor stipulations or by law. Investments of the State University foundations were $895 million and $900 million as of June 30, 2008 and 2007, respectively. The composition of investments is as follows (in thousands): 2008 2007 Equities - domestic $ 317,949 376,375 Equities - international 156,472 157,981 Non-equities 304,110 256,279 Other investments 116,522 109,340 Total investments $ 895,053 899,975 Capital Assets Capital assets are stated at cost, if purchased, or fair value at date of receipt, if acquired by gift. Land improvements, buildings, and equipment are depreciated over their estimated useful lives using the straight-line method. Capital assets, net of accumulated depreciation, totaled $334 million and $321.8 million at fiscal year end 2008 and 2007, respectively. Capital asset classifications are summarized as follows (in thousands): Land and land improvements $ 15,403 Buildings 327,507 Equipment 32,006 Artwork and library books 16,541 Construction in progress 9,728 Total capital assets 401,185 Less accumulated depreciation 79,433 Capital assets, net $ 321,752 Long-term Debt The Foundations have entered into various financing arrangements, principally through the issuance of Industrial Development Agency bonds and Housing Authority bonds for the construction of student residence hall facilities. The following is a summary of the future minimum annual debt service requirements for the next five years and thereafter (in thousands): Year ending June 30: 2009 $ 9,232 2010 7,334 2011 7,292 2012 10,245 2013 8,428 Thereafter 234,551 $ 277,082