B. Fund Accounting

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 ath letics, 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 that have been appropriate d 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 Fun ds represents 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 Universit y 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 trans fers result from decisions by the Arizona Board of Regents or the University Administration as to permitted use of funds.

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, 1997, assets, liabilities, revenues, and expenditures totaled $166 million, $23 million, $59 million, and $40 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, three faculty physicians, a representative of the twelve clinical department heads, and three 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 t o the audited financial statements of UPI for the year ended June 30, 1997, assets, liabilities, revenues, and expenditures totaled $74 million, $31 million, $96 million, and $102 million, respectively.

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 a greed 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 su bleases 70% 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 prepa yment 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 e ntire 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.

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 30% 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 Park and for subleasing to the University or to thir d parties currently existing unoccupied space, newly developed space, and space now occupied by IBM or its subtenants once the current subleases expire. The University is responsible for payment of a share of operational expenses. All income received by CRC from its activities, after payment of expenses and financial reserves, will be turned over to the University. According to the audited financial statements of CRC for the year ended June 30, 1997, assets, liabilities, revenues, and expenditures totale d $7 million, $5 million, $3 million, and $2 million, respectively.

The University has not made accruals for vacation pay. If the accruals were made, liabilities of the General Operating Funds, Designated Funds, Auxiliary Enterprises Funds and Restricted Funds would be increased by approximately $11,227,000, $1,991,000, $1,920,000, and $4,230,000, 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 liabilities of the Genera l Operating Funds would be funded by the subsequent year’s appropriations from the State Legislature.

For the year ended June 30, 1998, the University adopted GASB Statement No. 31, which requires investments to be stated at fair value. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing pa rties. Investments are valued at quoted market prices, except non-participating interest bearing contracts, which are valued at cost. In accordance with GAAP, the cumulative effect of the accounting change for prior years is shown as an adjustment to b eginning fund balances on the Statement of Changes in Fund Balances. The net increase (decrease) in fair value during the year includes both realized and unrealized net capital gains and losses.

Under Arizona State law and Board of Regents’ policies, the University may invest its pooled operating funds in collateralized time certificates of deposit and repurchase agreements with commercial banks, and United States obligations such as Treasury bil ls, notes, bonds, and obligations of agencies sponsored by the United States Government.

Endowment funds are invested under the direction of an investment committee responsible for defining, developing, and implementing investment objectives, policies, and restrictions. Funds are usually invested in one of two Consolidated Endowment Pools. The primary investment objective of one pool is to maximize 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 ea rned. If donors restrict investments, those funds are invested separately, and the individual endowments bear all changes in value. The University has Endowments totaling $17,525,000, which are held and invested by bank trustees due to donor specificati ons.

Cash and securities on deposit with trustees for debt requirements and future construction costs are held in trust for the University by various commercial banks. Trust funds totaling $29,985,000 are invested by the trustee in accordance with the Board’s authorizing resolutions.

The University of Arizona currently invests all funds for the Arizona Student Financial Aid Trust (ASFAT), which was established by the Arizona Board of Regents and is funded by the Arizona State Legislature and student fees. Funds invested for other uni versities are recorded in the Agency Funds and include the following at fair value: Arizona State University - $8,907,000; Northern Arizona University - $4,007,000; ASU West - $726,000; ASU East - $8,000. The University’s ASFAT funds are recorded in the Endowment Funds at $7,785,000.

Deposits are made only at depository banks approved by the Board. At year-end, the University’s bank balance is $6,470,000. Of this balance, $100,000 is covered by federal depository insurance. The remaining balance is collateralized b y 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 Univer sity.
4. U.S. Treasury and Agency Government obligations:
   1. $108,503,000 is 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. $4,379,000 is held by trustees. 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. U.S. Treasury funds are open-end mutual funds recorded in the University’s name in the records of various bank trustees. Other open-end mutual funds are held in the University’s name.
6. 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 securit ies 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.
7. At June 30, 1998, the University held investment contracts with both a major insurance company and a bank amounting to $1,502,000 of proceeds from the 1994A Certificates of Participation and $1,187,000 of proceeds from the 1994B Certificates of Partic ipation, respectively.
   1. The Guaranteed Investment Contract (GIC) with the insurance company is not collateralized. The insurance company is rated Aa3/AA. 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 not collateralized. 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.