The accomplishments and efforts of The University of Arizona in the past year show a commitment in support of its students, staff, faculty and alumni. The quality of education at The University of Arizona continues to be exemplary. Institutional research efforts have resulted in the University's being rated 10th nationally in grant and contract activity for public Research I institutions. Public service efforts are strong and vital in support of the mission of the University. Facing resource constraints, the Institution is preparing to face challenges the future in higher education will bring. Significant investments are planned to improve the physical infrastructure of campus to guarantee future quality and support of undergraduate and graduate programs. The University continues to search for efficiencies in operations and ways to improve management information data. By working collaboratively, progress has been made toward redefining processes and business rules, and then applying technology to assure speed, control and accuracy of completion.

This annual financial report of The University of Arizona is published for use by all interested persons and submitted as a public accounting of the University's financial operations for the fiscal year ended June 30, 1997. The information presented in this report is designed to enable the reader to understand how the University managed its resources to meet the overall mission of the Institution. The financial statements and additional related highlights provide evidence of the Institution's commitment to continued growth and stability as the University prepares for the challenges during the next year.

Comments and questions relating to the information provided in this document are always welcome.

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June 30, 1997, with comparative totals at June 30, 1996

	Current Operating Funds					Nonoperating Funds				Total All Funds
	Unrestricted				Total					Memorandum Only
	General Operating Funds	Designated Funds	Auxiliary Enterprises Funds	Restricted Funds	Current Operating Funds	Student Loan Funds	Endowment and Similar Funds	Agency Funds	Plant Funds	1997	1996
Assets
Cash and investments (See IV)	$21,833	$35,099	$23,465	$15,682	$96,079	$1,493	$75,029	$15,042	$17,603	$205,246	$209,997
Donated land				209	209		1,755		243	2,207	2,750
Notes, accounts receivable and unbilled charges, less allowance: 1997--$1,778; 1996--$1,880	395	2,572	3,490	29,431	35,888	14,260	1,266	620	6,024	58,058	57,869
Prepaid expenses		6,161	75		6,236					6,236	3,408
Inventories and supplies	39	343	7,168		7,550			151		7,701	7,951
Due from other funds		30			30				33	63	122
Physical properties (See V)									1,307,716	1,307,716	1,248,451
Total Assets	$22,267	$44,205	$34,198	$45,322	$145,992	$15,753	$78,050	$15,813	$1,331,619	$1,587,227	$1,530,548
Liabilities and Fund Balances
Liabilities:
Accounts payable	$ 1,780	$ 3,242	$ 3,312	$ 2,779	$11,113		$4	$221	$5,217	$16,555	$17,561
Accrued payroll	9,792	2,524	1,799	6,599	20,714	$6				20,720	17,776
Deferred revenue and deposits	2,529	2,644	4,563	5	9,741	4			83,770	93,515	98,639
Funds held for others								15,592		15,592	10,844
Due to other funds			63		63					63	122
Certificates of participation and capitalized lease obligations (See VII)									63,874	63,874	66,555
Bonds payable (See VI)									240,550	240,550	249,910
Total Liabilities	14,101	8,410	9,737	9,383	41,631	10	4	15,813	393,411	450,869	461,407
Fund Balances (See III)	8,166	35,795	24,461	35,939	104,361	15,743	78,046		938,208	1,136,358	1,069,141
Total Liabilities and Fund Balances	$22,267	$44,205	$34,198	$45,322	$145,992	$15,753	$78,050	$15,813	$1,331,619	$1,587,227	$1,530,548
Fund Balances consist of:
Restricted:
Amount obligated for outstanding purchase orders				$20,343	$20,343	$15				$ 20,358	$ 14,883
US Government grants refundable						12,365				12,365	12,205
Endowment							$41,885			41,885	38,116
Quasi-endowment							22,356			22,356	20,522
General				15,596	15,596	3,363			$ 12,112	31,071	32,638
Designated:
Amount obligated for outstanding purchase orders		$ 3,018	$ 3,609		6,627				5,708	12,335	17,390
Summer sessions		5,295			5,295					5,295	4,703
Quasi-endowment							13,805			13,805	13,304
General	$ 8,166	27,482	20,852		56,500					56,500	64,159
Net Investment in Plant									920,388	920,388	851,221
	$ 8,166	$35,795	$24,461	$35,939	$104,361	$15,743	$78,046		$938,208	$1,136,358	$1,069,141
See Notes (I-X) to Financial Statements.

June 30, 1997, with comparative totals at June 30, 1996

	Current Operating Funds					Nonoperating Funds					Total All Funds
	Unrestricted				Total			Plant Funds
	General Operating Funds	Designated Funds	Auxiliary Enterprises Funds	Restricted Funds	Current Operating Funds	Student Loan Funds	Endowment and Similar Funds	Unexpended Plant Funds	Debt Service Funds	Investment In Plant	Memorandum Only
Revenues and Other Additions
Unrestricted current revenues	$372,883	$113,991	$90,538		$577,412						$577,412	$563,623
Tuition and fees				$41	41		$602				643	569
Federal grants and contracts				178,955	178,955	$153		$1,180			180,288	182,256
State grants and contracts				10,508	10,508						10,508	9,703
Local grants and contracts				3,099	3,099		50				3,149	1,774
Private gifts, grants and contracts				54,170	54,170	24	619	9,162		$ 1,223	65,198	56,060
Federal appropriations				2,379	2,379			2,912			5,291	8,206
State appropriations				855	855	50	7	5,884			6,796	10,898
Investment income including net realized gains				3,137	3,137	97	4,054	37	$862		8,187	5,680
Interest on loans receivable						269					269	331
Additions to plant facilities including amounts expended from current funds: 1997 - $39,629; 1996 - $38,433										81,743	81,743	87,630
Retirement of indebtedness										12,949	12,949	12,022
Other additions								1,124	73	4,900	6,097	13,828
Total revenues and other additions	372,883	113,991	90,538	253,144	830,556	593	5,332	20,299	935	100,815	958,530	952,580
Expenditures and Other Deductions
Educational and general expenditures	366,830	88,390		209,099	664,319						664,319	639,848
Auxiliary enterprises expenditures			79,958		79,958						79,958	82,173
Indirect costs recovered				42,246	42,246						42,246	41,096
Cancellation of loans and provision for bad debt						294					294	28
Administrative and collection costs						159					159	186
Expended for plant facilities (including noncapitalized expenditures of $5,461 in 1997 and $3,663 in 1996)								47,020			47,020	51,921
Interest on indebtedness including $555 capitalized as construction in progress in 1997 and $939 in 1996									19,105		19,105	19,712
Disposal of plant facilities										24,610	24,610	38,699
Refunded to grantors or donors				550	550						550	1,148
Retirement of indebtedness									12,949		12,949	12,022
Other deductions									103		103	110
Total expenditures and other deductions	366,830	88,390	79,958	251,895	787,073	453		47,020	32,157	24,610	891,313	886,943
Transfers Among Funds
Mandatory loan fund matching grants		(5)		(18)	(23)	23
Mandatory principal and interest	(434)	(20,945)	(8,012)		(29,391)			33	29,358
Voluntary, net	525	(17,464)	(2,324)	4,633	(14,630)	(15)	772	21,027	(114)	(7,040)
Total transfers	91	(38,414)	(10,336)	4,615	(44,044)	8	772	21,060	29,244	(7,040)
Net increases (decreases) for the year	6,144	(12,813)	244	5,864	(561)	148	6,104	(5,661)	(1,978)	69,165	67,217	65,637
Fund balances, beginning of year	2,022	48,608	24,217	30,075	104,922	15,595	71,942	12,122	13,339	851,221	1,069,141	1,003,504
Fund balances, end of year	$8,166	$35,795	$24,461	$35,939	$104,361	$15,743	$78,046	$6,461	$11,361	$920,386	$1,136,358	$1,069,141
See Notes (I-X) to Financial Statements.

June 30, 1997, with comparative totals at June 30, 1996

	Unrestricted Funds					Total Current Operating Funds
	General Operating Funds	Designated Funds	Auxiliary Enterprises Funds	Total Unrestricted Funds	Restricted Funds	Memorandum Only
Revenues
State appropriations	$281,453			$281,453	$750	$282,203	$272,320
Tuition and fees	86,509	$43,296	$4,521	134,326		134,326	133,852
Federal grants and contracts		36,693		36,693	140,913	177,606	181,655
State grants and contracts		850	8	858	10,233	11,091	8,621
Local grants and contracts		91	133	224	2,798	3,022	1,912
Private gifts, grants and contracts		8,487	3,672	12,159	44,643	56,802	53,990
Federal appropriations	3,256	4		3,260	1,818	5,078	5,549
Investment and endowment income	1,621	7,865	45	9,531	3,311	12,842	12,312
Sales and services of educational departments		13,418		13,418		13,418	14,178
Sales and services of auxiliary enterprises			82,077	82,077		82,077	80,146
Other	44	3,287	82	3,413	4,651	8,064	7,691
Total current revenues	372,883	113,991	90,538	577,412	209,117	786,529	772,226
Expenditures and Mandatory Transfers
Educational and general:
Instruction	162,321	33,792		196,113	14,885	210,998	204,419
Research	44,541	10,005		54,546	140,401	194,947	193,650
Public service	11,889	896		12,785	20,390	33,175	30,407
Academic support	54,250	3,408		57,658	599	58,257	57,332
Student services	11,555	6,459		18,014	962	18,976	12,884
Institutional support	33,072	17,681		50,753	790	51,543	49,125
Operation and maintenance of plant	26,142	12,712		38,854		38,854	37,037
Scholarships and fellowships	23,060	3,437		26,497	31,072	57,569	54,994
Educational and general expenditures	366,830	88,390		455,220	209,099	664,319	639,848
Mandatory transfers:
Loan fund matching grants		5		5	18	23	38
Principal and interest	434	20,945		21,379		21,379	26,042
Total educational and general	367,264	109,340		476,604	209,117	685,721	665,928
Auxiliary enterprises:
Expenditures			79,958	79,958		79,958	82,173
Mandatory transfers for principal and interest			8,012	8,012		8,012	7,482
Total auxiliary enterprises			87,970	87,970		87,970	89,655
Total expenditures and mandatory transfers	367,264	109,340	87,970	564,574	209,117	773,691	755,583
Other transfers and additions (deductions):
Restricted receipts over transfers to revenue					1,781	1,781	(4,607)
Voluntary transfers, net	525	(17,464)	(2,324)	(19,263)	4,633	(14,630)	(1,944)
Refunded to grantors					(550)	(550)	(1,144)
Net increases (decreases) in fund balances	$ 6,144	$ (12,813)	$ 244	$ (6,425)	$ 5,864	$(561)	$ 8,948
See Notes (I-X) to Financial Statements.

A. Basis of Accounting

The accompanying financial statements present all funds under the authority of the University. The basic criterion for inclusion is the exercise of financial accountability. Financial accountability for the University remains with the State of Arizona; therefore, the University is considered part of the reporting entity for the State's financial reporting purposes. The financial statements do not include related organizations described in Note II.

The financial statements are presented in accordance with generally accepted accounting principles (GAAP) applicable to governmental colleges and universities as set forth in the AICPA College Guide Model as authorized in Governmental Accounting Standards Board (GASB) Statement No. 15. GASB is the recognized standard-setting body for GAAP for State governmental entities including colleges and universities. Accordingly, the financial statements are prepared on the accrual basis of accounting, except that no depreciation expense is reflected. The Statement of Current Operating Funds Revenues, Expenditures and Other Changes is a statement of financial activities for current operating funds during the current reporting period. It is not intended to present the results of operations or the net income or loss for the period as would a statement of income.

The methods of applying GAAP which materially affect the determination of financial position, current operating funds revenues, expenditures and other changes and the changes in fund balances are summarized below.

Investments and donated land are stated at cost or fair market value if donated at the date of acquisition.

Inventories and supplies are stated at the lower of cost (determined by the first- in, first-out method) or market.

Physical properties are stated at cost or fair market value if donated at date of acquisition. Special collections are carried at a nominal value of $1 per collection. Capital expenditures reported as current operating expenditures also appear as additions to the Plant Funds.

Transfer of construction debt from Unexpended Plant Funds to Investment in Plant is accomplished as the construction proceeds are expended. The Statement of Changes in Fund Balances includes $7,040,000 of voluntary transfers all of which are associated with construction and debt. There is no net effect to the Plant Fund group as a whole.

Tuition and fees revenue (net of refunds) includes $23,310,000 of waivers charged to Scholarships and Fellowships and $3,024,000 of waivers for faculty and staff benefits charged to the appropriate expenditure programs to which the applicable personnel relate.

Summer session revenue and expenditures are reported within the fiscal year in which the summer session's program is predominantly conducted.

Revenue and accounts receivable include amounts received and expended by the University under Federal and State funded research, student aid and other programs. Both the direct and indirect costs of these programs are subject to audit by cognizant governmental agencies or their appointees. The University expects that adjustments or repayments, if any, resulting from such audits would not have a significant effect on the financial statements.

The financial information shown for fiscal year 1995-1996 in the accompanying financial statements is included as a basis for comparison with fiscal year 1996- 1997 and represents summarized totals only. Certain prior year items in the accompanying financial statements have been reclassified, without effect on total fund balances, revenues or expenditures, to conform with the current year's classifications.

B. Basis of Presentation

In order to ensure observance of limitations and restrictions placed on the resources available to the University, the accounts of the University are maintained in accordance with the principles of fund accounting. Therefore, the resources are classified for accounting and reporting purposes into funds according to the activities or objectives specified. Separate accounts are maintained for each fund; however, in the accompanying financial statements, individual funds having similar characteristics have been combined into fund groups.

Current Operating Funds are used primarily to account for transactions which are expended in performing the primary and support missions of the University. They include the following fund groups:

The General Operating Funds account for activities related to the University's State appropriated budgets as approved by the Arizona State Legislature and Arizona Board of Regents.

The Designated Funds account for the recovery of indirect costs from sponsored research, academic year tuition retained by the University, summer session and extension teaching programs, unrestricted gifts, departmental sales and services, and income from operating funds' investments. The resources in these funds have been designated for specific purposes by the Arizona Board of Regents and the University Administration.

The Auxiliary Enterprises Funds account for substantially self-supporting activities that provide services to the student body, faculty, and public. Auxiliary enterprises include student housing, bookstores, student union, stores, intercollegiate athletics and others.

The Restricted Funds account for governmental and private gifts, grants and contracts. The purposes are restricted by the external donor or supporting agency. Funds not used for the restricted purpose may revert to the sponsor or donor. Therefore, revenues of the Restricted Funds are reported only to the extent of expenditures and mandatory transfers in the Statement of Current Operating Funds Revenues, Expenditures and Other Changes.

Nonoperating Funds include the following fund groups:

The Student Loan Funds account for loans, financed primarily by the Federal government, made to assist students in the financing of their education.

The Endowment and Similar Funds account for private gifts and other funds requiring that the principal be invested in perpetuity and only the income be used for the purpose specified by the donor. Quasi-endowments have been established by the Arizona Board of Regents or the University Administration for the same purpose as endowments except both the principal and the income may be expended.

The Plant Funds account for activities relating to University properties. They include the (1) Unexpended Plant Funds, (2) Debt Service Funds, and (3) Investment in Plant Funds. The Unexpended Plant Funds represent amounts which have been appropriated or designated for purchases of land, improvements, buildings, and equipment. The Debt Service Funds represent funds set aside to provide for payments of indebtedness primarily pursuant to terms of bond and trust indentures. The Investment in Plant Funds represent the total of property, buildings, equipment, and related liabilities.

The Agency Funds account for assets held by the University as custodian or fiscal agent for others; therefore, the transactions of this fund do not affect the Statement of Changes in Fund Balances. Agency accounts include funds held for the University Physicians, Inc., Arizona Student Financial Aid Trust for Arizona State University and Northern Arizona University, Boyce Thompson Arboretum and others.

Changes in the use of resources require an accounting transfer of the resources to the fund with the activity or objective to be accomplished. Mandatory transfers are those required to meet legally binding agreements such as bond indentures. Other transfers result from decisions by the Arizona Board of Regents or the University Administration as to permitted use of funds.

II. RELATED ORGANIZATIONS

The financial statements of The University of Arizona do not include the operations of the University of Arizona Foundation, Inc., the University Physicians, Inc., the Arizona Research Park Authority and the Campus Research Corporation.

The University Foundation, Inc. is a nonprofit corporation controlled by a separate Board of Directors. The principal goals of the Foundation are to support The University of Arizona through various fund-raising activities, and to contribute funds to the University for support of various programs.

According to the audited financial statements of the Foundation for the year ended June 30, 1996, assets, liabilities, revenues and expenditures totaled $133 million, $24 million, $41 million, and $33 million, respectively.

The University Physicians, Inc. (UPI) is a nonprofit corporation established to provide medical services and to support The University of Arizona in its teaching and research missions. UPI is controlled by a Board of Directors, comprised of the Dean, all clinical department heads, twelve other faculty physicians, and four community members. The primary purpose of UPI is to assist the University's College of Medicine in achieving the fulfillment of its teaching and research. According to the audited financial statements of UPI for the year ended June 30, 1996, assets, liabilities, revenues and expenditures totaled $77 million, $27 million, $93 million, and $92 million, respectively.

The Arizona Research Park Authority (ARPA) is a nonprofit corporation created with the permission of the Arizona Board of Regents (ABOR) and designated by Arizona law as a political subdivision of the State, governed by a separate board of directors which by law may not include officers or employees of ABOR. ARPA was established under the State's industrial development authority statute to assist in the acquisition, improvement, and operation of university research parks and related properties. In August 1994, ARPA, with the approval of ABOR, sold $98 million nontransferable special revenue bonds to International Business Machines Corporation (IBM) to enable the University to acquire from IBM a 345-acre developed industrial site (the "Research Park") near Tucson, Arizona, together with 1,000 acres of adjacent unimproved land (collectively, the University of Arizona Science and Technology Park or the "Park"). The transaction was accomplished through the following steps: (1) the University agreed to pay $98 million to IBM for title to the entire Park; (2) ARPA and Campus Research Corporation jointly agreed to lease the developed portion of the Park from the University for a period of 30 years with a prepaid rental of $98 million; (3) ARPA subleased 79% of the building space in the developed portion of the Park to IBM for periods of up to 30 years for a rental sufficient to pay debt service on ARPA's bonds; and (4) ARPA used the $98 million received from its bond sale to make the rental prepayment to the University which, in turn, applied the money to purchase the entire Park from IBM. The bonds are payable solely from lease rentals paid by IBM. If IBM defaults or cancels its lease, the bonds must be surrendered and discharged. Title to the entire Park resides in the University and neither the Park nor any payments by the University secures ARPA's bonds. Audited financial statements are not available.

The Campus Research Corporation (CRC) is a nonprofit corporation governed by a separate Board of Directors and was established to assist the University in the acquisition, improvement and operation of the Research Park and related properties. CRC leases from the University the remaining 21% of the building space of the Research Park that is not leased to ARPA (see preceding paragraph). CRC is responsible for developing presently undeveloped portions of the research park and for subleasing to the University or to third parties existing unoccupied space, newly developed space, and space now occupied by IBM or its subtenants once the current subleases expire. The University is responsible only for payment of its proportional share of operation expenses. All income received by CRC from its activities, after payment of expenses and financial reserves, will be turned over to the University. Audited financial statements are not available.

III. COMPENSATED ABSENCES

The University has not made accruals for vacation pay and other compensated absences. If the accruals were made, General Operating Fund, Designated Fund, Auxiliary Enterprises Fund and Restricted Fund liabilities would be increased by approximately $11,403,000, $2,042,000, $1,941,000, and $3,976,000, respectively. The University management believes that this omission does not have a significant effect on the accompanying financial statements as a whole based on materiality and considering that the General Operating Fund liability would be funded by the subsequent year's appropriations from the State Legislature.

IV. CASH AND INVESTMENTS

The University follows Arizona Board of Regents policies which require that deposits be made only to accounts authorized by the Board and at depository banks that have been approved. Pooled operating investments are restricted to the purchase of collateralized time certificates of deposit and repurchase agreements with commercial banks, and United States obligations such as Treasury bills, notes, bonds and obligations of agencies sponsored by the United States Government.

Gifts and grants received as endowments or for restricted purposes are invested according to conditions stipulated by the donor or grantor; however, if no conditions are imposed, such funds are usually invested in one of two consolidated endowment pools. The consolidated endowment pools function as highly-diversified investment funds under the control of the University Investment Committee whose responsibility is to define, develop, and implement investment objectives, policies and restrictions relating to the endowment funds held by the University. The primary investment objective of one pool is maximum long-term total return from income and capital appreciation at an acceptable level of risk and volatility. The primary investment objective of the other pool is to maximize the current income earned. The separately held endowment funds are separately invested according to the terms of the donor's gift or the administrator.

Cash and securities on deposit with trustees are held in trust for the University by various commercial banks. Trust funds are invested by the trustee in accordance with the Board's authorizing resolutions. At year-end, the University's bank balance is $3,438,000. Of this balance, $150,000 is covered by federal depository insurance. The remaining balance is collateralized by U.S. Government obligations held by an agent of the bank in the name of the State of Arizona.

Securities are collateralized as follows:

1. Certificates of deposit are covered by FDIC or SIPC insurance.

2. Repurchase agreements are collateralized by U.S. Government obligations held by the University's custodial bank in the University's name.

3. Common stocks, preferred stocks and corporate bonds are held by the University's custodial bank in the name of the University in a book entry system. These securities were either purchased from a broker/dealer or a financial institution by the University.

4. U.S. Treasury and Agency Government obligations:

   1. $92,807,000 are held by the University's custodial bank in the name of the University in a book entry system. These securities were either purchased from a broker/dealer or a financial institution by the University or by investment managers on behalf of the University.

   2. $9,539,000 are held by trustees. Bond funds held by trustees include money market funds invested in U.S. Government obligations and repurchase agreements collateralized by U.S. Government obligations, and obligations of agencies sponsored by the Federal Government held in the trustee's Federal Reserve Bank account. These securities are recorded in the University's name in the records of the trustee. The trustee acts as both custodial and purchasing agent for these investment transactions.

5. Endowment funds held by trustees include deposits, mutual funds, common stocks, corporate bonds, U.S. Government obligations, obligations of agencies sponsored by the Federal Government and mortgage backed notes receivable. These deposits and securities are held by the trustees as irrevocable trusts in the names of the individual donors for the benefit of the University according to the donors' stipulations.

6. At June 30, 1997, the University held investment contracts with both a major insurance company and a bank amounting to $1,503,000 of proceeds from the 1994A Certificates of Participation and $1,187,000 of proceeds from the 1994B Certificates of Participation, respectively.

   1. The Guaranteed Investment Contract (GIC) with the insurance company is uncollateralized. The insurance company is rated Aa3/AA and there is a provision in the contract requiring collateralization of the investment with U.S. Government obligations if the company's rating falls below A2 by Moody's or below A by Standard & Poors, or the University has the option to terminate the contract.

   2. The Bank Investment Contract (BIC) is also uncollateralized. The bank is rated Aaa/AAA and there is a provision in the contract whereby if the bank's rating falls below Aa but is at least A by Moody's and below AA but is at least A by Standard & Poors, then the bank must collateralize the investment with U.S. Government obligations. If the rating falls below A/A, then the University has the option to terminate the contract.

Deposits and Investments at June 30, 1997, consist of the following:

The cash overdraft results from an aggressive short-term investment policy in which the University invests its funds until outstanding checks are cashed.

Deposits and Investments at June 30, 1997, by management areas are as follows:

V. PHYSICAL PROPERTIES

Physical Properties at June 30, 1997, consist of the following:

In addition to expenditures through June 30, 1997, it is estimated that $48,600,000 will be required to complete projects under or planned for construction. Of that amount $4,255,000 is contractually encumbered.

VI. BONDS PAYABLE

Bonds Payable at June 30, 1997, consist of the following:

Principal and interest on bonds outstanding at June 30, 1997, are secured by a pledge of registration fees, tuition, rentals and other charges and such obligations are generally callable by the University. Revenue bond debt service requirements to maturity, including $143,396,000 of interest, are as follows:

Cash and securities on deposit with trustees, restricted for retirement of bonded indebtedness and renewals and replacements, are $506,000 and $707,000 respectively, at June 30, 1997, as required by the bond indentures. In addition, $1,436,000 was held by trustees for payment of future construction costs.

In fiscal years 1977, 1990, 1992 and 1993 the University refunded in advance of maturity certain outstanding revenue bonds. At June 30, 1997, the outstanding principal balance of the refunded bonds is $109,090,000 which will be paid by investments held in trust with a carrying value of $87,442,000. These amounts are not included in the accompanying financial statements.

VII. CERTIFICATES OF PARTICIPATION AND LEASE OBLIGATIONS The University has entered into certain operating leases (generally, the leases include options for annual renewal) and other rental agreements for real property, equipment and films generally for periods not in excess of one year. During the 1996-1997 fiscal year, rent expenditures amounted to $9,588,000.

The University has also acquired buildings, computers, tele-communications, farm and other equipment, and agricultural land under various capital leases and certificates of participation (COPs). At June 30, 1997, the balance sheet includes $68,151,000 representing the cost of these assets included in land, buildings, and equipment.

Cash and securities on deposit with the trustee, restricted for retirement of certificates of participation, total $8,821,000 at June 30, 1997. In addition, $1,071,000 is held by trustee for payment of future construction costs.

In 1991 the University refunded in advance of maturity certain outstanding certificates of participation. At June 30, 1997, the outstanding principal balance of the refunded certificates was $14,020,000 which will be paid by investments held in trust with a carrying value of $14,738,000. These amounts are not included in the accompanying financial statements.

Summary of Future Payments at June 30:

VIII. PENSION PLANS

The University participates in one cost-sharing multiple-employer defined benefit pension plan and five defined contribution pension plans. For the year ended June 30, 1997, the University adopted GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers. This statement requires the following disclosures.

A. Defined Benefit Plan

Plan Description. The Arizona State Retirement System (ASRS) administers a cost-sharing multiple-employer defined benefit pension plan that covers general employees of the University. Benefits are established by state statute and provide retirement, death, long-term disability, survivor, and health insurance premium benefits. The ASRS is governed by the Arizona State Retirement System Board according to the provisions of A.R.S. Title 38, Chapter 5, Article 2. The ASRS issues a publicly available financial report that includes its financial statements and required supplementary information. That report may be obtained by writing to the ASRS, 3300 North Central Avenue, P.O. Box 33910, Phoenix, Arizona 85067-3910, or by calling (602) 240-2000 or (800) 621-3778.

Funding Policy. For the year ended June 30, 1997, active ASRS members and the University were each required by statute to contribute at the actuarially determined rate of 3.69 percent (3.20 percent retirement and 0.49 percent long- term disability) of the members' annual covered payroll. The University's portion of contributions to ASRS for the years ended June 30, 1997, 1996, and 1995 were $6,160,000, $6,379,000, and $6,929,000, respectively, which were equal to the required contributions for the year. The Arizona State Legislature establishes and may amend active plan members' and the University's contribution rates. The ASRS pension liability at transition was determined in accordance with the provisions of GASB Statement No. 27 and was zero.

B. Defined Contribution Plans

Plan Description. In accordance with A.R.S. ¤15-1628, University faculty, academic professionals, and administrative officers have the option to participate in defined contribution pension plans. For the year ended June 30, 1997, plans offered by the Teachers Insurance Annuity Association/College Retirement Equities Fund (TIAA/CREF), Variable Annuity Life Insurance Company (VALIC), Fidelity Investments Tax-Exempt Services Company (Fidelity), and Aetna Life Insurance and Annuity Company (Aetna) were approved by the Arizona Board of Regents. These plans are administered by independent insurance and annuity companies approved by the Board. In addition, employees hired before July 1, 1972, have the option to participate in the defined contribution plan administered by the ASRS. Benefits under these plans depend solely on the contributed amounts and the returns earned on investments of those contributions. Contributions made by members vest immediately; University contributions vest after five years of full-time employment. Member and University contributions and associated returns earned on investments may be withdrawn upon termination of employment, death, or retirement. The distribution of member contributions and associated investment earnings are made in accordance with the member's contract with the applicable insurance and annuity company. University contributions and associated investment earnings must be distributed to the member in the form of an annuity paid over a period that is not less than the member's life.

Funding Policy. The Arizona State Legislature establishes and may amend active plan members' and the University's contribution rates. For the year ended June 30, 1997, plan members and the University were each required by statute to contribute an amount equal to 7 percent of a member's compensation. Contributions to these plans for the year ended June 30, 1997, were as follows:

IX. SELF-INSURANCE PROGRAM

The University of Arizona is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The University of Arizona participates in a self-insurance program administered by the State of Arizona, Department of Administration, Risk Management section. Arizona statutes provide that any judgment assessed against the University not covered by insurance would be paid by the State from the self-insurance program or by a future appropriation from the State Legislature.

X. Subsequent Events

In September 1997, the University expects to issue 1997 Certificates of Participation, with a par value not to exceed $3,500,000. This debt will refinance the $3,345,000 of outstanding principal of a capitalized lease for the University Foundation Building. The average interest rate of the new debt is not expected to exceed 4.9%. The capitalized lease will be refinanced to reduce the debt service of the University, with an expected present value savings of over $300,000.

In September 1997, the University expects to issue 1997 short-term Series System Revenue Bonds with a par value of $7,800,000. These bonds will finance the construction of the Life Sciences North Shell Space and the Agriculture Research Complex. The average interest rate is not expected to exceed 5%. During fiscal year 1997-98, the University expects to repay these obligations with proceeds from the issuance of a new series of long-term System Revenue Bonds.

Members of the Arizona State Legislature

The Arizona Board of Regents

We have audited the accompanying balance sheet of The University of Arizona as of June 30, 1997, and the related statements of changes in fund balances and current operating funds revenues, expenditures and other changes for the year then ended. These financial statements are the responsibility of the University's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The University of Arizona as of June 30, 1997, and the changes in its fund balances and its current operating funds revenues, expenditures and other changes for the year then ended in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards, we will also issue a report on our consideration of the University's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grants at a future date.

Our audit was performed for the purpose of forming an opinion on the financial statements of The University of Arizona taken as a whole. The accompanying supplemental schedule of bonds, certificates of participation and capitalized lease obligations as of June 30, 1997, and the supplemental schedule of expenditures of federal awards for the year then ended are presented for purposes of additional analysis and are not a required part of the financial statements. The information in the schedules has been subjected to the auditing procedures applied in the audit of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.

June 30, 1997	Amounts Payable				Debt Service Commitments by Fiscal Year
Issue	Interest Rates	Year of Maturity	Orignal Issue	Currently Outstanding at June 30, 1997	1998	1999	2000	2001	2002	Thereafter
Student Housing Bonds:
1962 - Sonora	3.375%	2002	$ 1,500	$ 306	$ 70	$ 68	$ 66	$ 69	$ 63
1963 - Arizona	3.0 - 3.5%	2003	1,500	313	71	69	67	70	67	$ 3
1965 - Coronado	3.0%	2005	3,000	911	131	132	134	136	137	349
1967 - Married Student Housing	3.75%	2008	2,500	1,105	125	122	123	125	121	731
System Revenue Bonds:
1988 - System Revenue Bonds	6.3 - 7.0%	1999	31,950	1,355	1,199	268
1990A - System Revenue Bonds	6.5 - 9.0%	2003	46,300	8,470	1,780	1,758	1,761	1,766	1,768	1,773
1990B - System Revenue Bonds	6.9 - 9.4%	2003	39,630	6,615	1,410	1,382	1,384	1,381	1,383	1,384
1991 - System Revenue Bonds	6.0 - 8.5%	2010	9,665	4,375	502	504	504	508	507	4,073
1992 - System Revenue Refunding Bonds	3.1 - 6.625%	2011	113,150	110,215	7,559	8,495	13,124	13,121	13,124	118,096
1992A - System Revenue Refunding Bonds	2.9 - 6.2%	2016	55,490	53,005	3,408	3,409	3,409	3,408	3,406	82,860
1993 - System Revenue Refunding Bonds	2.7 - 5.0%	2017	42,085	27,200	5,479	5,473	1,111	1,111	1,116	22,624
1994 - System Revenue Bonds	4.8 - 6.35%	2014	28,500	26,680	2,562	2,564	2,561	2,565	2,564	30,753
Total bonds payable			$375,270	$240,550	$24,296	$24,244	$24,244	$24,260	$24,256	$262,646
Certificates of Participation and Capitalized Lease Obligations:
1991- Telecommunication Certificates	4.6 - 6.5%	2012	25,995	19,845	2,646	2,645	1,847	1,848	1,845	20,121
1992- Educational Certificates	3.2 - 6.4%	2007	4,670	3,770	475	472	472	472	470	2,804
1994A - Residence Life Certificates	4.1 - 5.8%	2014	16,725	16,140	1,468	1,470	1,469	1,471	1,470	17,619
1994B - Maingate Admin Certificates	4.25 - 6.0%	2024	16,170	15,920	1,175	1,178	1,180	1,180	1,180	25,976
Agriculture Demonstration Farm Lease	9.0%	2003	2,282	1,121	250	250	250	250	250	250
University Foundation Building Lease	4.75 - 7.75%	2007	4,950	3,570	485	484	482	483	477	2,853
Other Capitalized Leases	2.86 - 7.00%	Various	4,606	3,508	847	1,229	660	352	226	791
Total certificates of participation and capitalized lease obligations			$75,398	$63,874	$7,346	$7,728	$6,360	$6,056	$5,918	$70,414
Refunded Issues:
Bonds:
1968 - Student Union	5.25 - 5.5%	1998	3,000	190
1977 - Revenue Refunding	6.0%	2002	22,315	19,380
1988 - System Revenue Bonds	7.0 - 7.625%	2011	24,135	24,135
1990A - System Revenue Bonds	6.5 - 9.0%	2015	33,210	32,435
1990B - System Revenue Bonds	6.9 - 9.4%	2016	29,205	28,525
1991 - System Revenue Bonds	6.5 - 8.5%	2017	4,425	4,425
Total refunded bonds			$116,290	$109,090
Certificates of Participation:
1988 Telecommunications Certificates	6.1 - 7.6%	2003	27,595	14,020
Total refunded issues			$143,885	$123,110

Year Ended June 30, 1997
Federal Grantor/Pass-Through Grantor
Funding Agency	Expenditures
Federal Student Financial Aid Programs:
Department of Health & Human Services
Other Financial Aid Programs		$ 146
Subtotal Department of Health & Human Services		146
Department of Education
Federal Pell Grant Program		10,530
Federal Work Study Program		878
Federal Perkins Loan Program		143
Federal SEOG Program		1,029
Other Financial Aid Programs		28
Subtotal Department of Education		12,608
Miscellaneous Federal Agencies
Other Financial Aid Programs		57
Total Federal Student Financial Aid Programs		$ 12,811
Federal Research & Training Programs:
Agency for International Development		$ 2,043
Department of Agriculture
Agriculture Extension Service		3,643
Agriculture Experiment Station		1,909
U.S. Department of Agriculture		4,305
U.S. Forestry Service		822
Subtotal Department of Agriculture		10,679
Department of Commerce		1,522
Department of Defense
Air Force		9,685
Army		2,926
Navy		2,891
Defense Advanced Research Projects Agency		207
Subtotal Department of Defense		15,709
Department of Education		3,953
Department of Energy		3,827
Department of Health & Human Services
Agency for Health Care Policy and Research		964
Division of Medicine		336
U.S. Department of Health & Human Services		5,333
Health Resources and Services Administration		1,633
National Cancer Institute		10,403
National Heart, Lung, & Blood Institute		4,821
National Institute on Aging		952
National Institute of Allergy & Infectious Diseases		1,432
National Institute of Child Health/Human Development		1,280
National Institute on Drug Abuse		2,911
National Institute of Diabetes, Digestive & Kidney Diseases		1,794
National Institute of Environmental Health Sciences		4,920
National Institute of General Medical Sciences		4,049
National Institutes of Health		8,872
National Institutes of Mental Health		953
National Institute of Neurological Disorders		1,902
Other Programs		5,991
Subtotal Department of Health & Human Services		58,546
Department of the Interior		4,749
Department of Justice		531
Department of Transportation		53
Department of Veterans Affairs		4,118
Environmental Protection Agency		1,738
National Aeronautics & Space Administration (NASA)
NASA AMES Research Center		505
Goddard Space Flight Center		13,152
NASA Headquarters		3,189
Other Programs		3,059
Subtotal NASA		19,905
National Foundation on the Arts and the Humanities		184
National Science Foundation		20,076
Nuclear Regulatory Commission		916
Smithsonian Institute		1,418
Miscellaneous Federal Agencies		352
Through State Government		1,889
Through Local Government		369
Through For Profits		4,566
Through Nonprofits
Jet Propulsion Laboratory		10,609
Space Telescope Institute		624
Other Programs		5,755
Subtotal Through Nonprofits		16,988
Through Miscellaneous Private		153
Total Federal Research & Training Programs		$ 174,284
Total Federal Awards Expended		$ 187,095
See Notes to Schedule of Expenditures of Federal Awards

A. BASIS OF PRESENTATION

The purpose of the Schedule of Expenditures of Federal Awards is to summarize those expenditures of The University of Arizona for the year ended June 30, 1997, that have been financed by the U.S. government (federal awards). This schedule includes expenditures financed by all federal assistance and procurement relationships entered into directly between The University of Arizona and the federal government, and expenditures of subawards from nonfederal organizations made under federally sponsored agreements. For reporting purposes, federal awards have been classified into two types:

• federal student financial aid programs

• federal research & training programs

The accounting principles followed by The University of Arizona in each of these areas and used in preparing the accompanying schedule are as follows:

Federal Student Financial Aid Programs - Expenditures are recognized on the accrual basis for awards made to students and allowable administrative expenses incurred in connection with the student loan programs. The student financial aid programs are funded by the federal government under various programs. For loan programs only the federal portion of administrative costs are included in the Schedule. Other disbursements are discussed in Notes C and D.

Federal Research & Training Programs - Expenditures for direct costs are recognized as incurred using the accrual method of accounting and the cost principles set forth in OMB Circular A-21, Cost Principles for Educational Institutions. Under those cost principles and requirements of the individual grant agreements, certain types of expenditures are not allowable or are limited as to reimbursement. Moreover, expenditures include a portion of costs associated with general university activities (indirect costs) that are allocated to federal awards under negotiated formulas commonly referred to as indirect cost rates. Indirect costs and related revenues applicable to these cost recoveries are classified as unrestricted expenditures and revenues on the financial statements.

B. The University did not identify Catalog of Federal Domestic Assistance Numbers due to the large number of individual assistance programs. In addition, many of the assistance programs do not have Catalog of Federal Domestic Assistance Numbers as they are specific to the University.

C. The University administers the following Department of Education loan program:

	CFDA Number
Federal Perkins	84.038

For this Department of Education loan program the following information is provided:

Loans outstanding at 6/30/97	$12,240,000
New loans to students FY 96/97	1,801,000
Loans cancelled FY 96/97	103,000

	CFDA Number
Nursing (NSL 2 Programs)	93.364
Health Profession (HPSL 4 Programs)	93.342

For Health and Human Services loan programs the following information is provided:

Loans outstanding at 6/30/97	$2,488,000
New loans to students FY 96/97	269,000
Loans cancelled (recovered) FY 96/97	21,000

D. Federal Family Education Loans are not considered grants to the University since the University is responsible only for determining student eligibility and distributing the loans directly to students. Consequently, such loans distributed by the University during the year ended June 30, 1997, are not included in the Schedule of Expenditures of Federal Awards. However, because the Federal Family Education Loans Program is a Title IV, Higher Education Act student financial assistance program (CFDA number 84.032) sponsored by the U.S. Department of Education, it is considered a federal financial assistance program for single audit purposes. During fiscal year 1996/97 the University distributed approximately $84 million of Federal Family Education Loans to students.

E. Revenues equal to the expenditures reported on the Schedule of Expenditures of Federal Awards are included in the accompanying basic financial statements as follows (in thousands of dollars):

Statement of Current Operating Funds Revenues, Expenditures and Other Changes:
Federal grants and contracts	$177,606
Federal appropriations	5,078
Statement of Changes in Fund Balances - Items not recognized as revenue
Federal portion of financial aid programs
Financial Aid expenditures	143
Administrative Cost Allowance	176
Federal portion of plant funds:
Construction/renovations - current	4,092
Total Federal Awards Expended	$187,095