Minnesota State Colleges and Universities

1. Minnesota State Colleges and Universities Audit Committee Meeting November 18, 2008

2. Agenda • Audit Process • Audit Results – Reports Issued • New Standards (SAS 104-111 and GASB 45) • System Management Recommendations • Required Communication • Financial Statement Highlights • Questions and Open Discussion

3. Audit Process • Detailed planning required prior to start of audit, including increased communication before the audit is planned. • Internal controls are analyzed in more detail than prior years. • Risk is assessed, interviews are conducted and audit plan is finalized. • Audit plan executed, including sampling of transactions. • Sample sizes range from 15 to 250 depending on risk, some increasing and some decreasing based on internal controls and related risk. • Weekly conference calls are used to effectively and efficiently complete the audit. • Exit conference is scheduled to review results and management letter comments. • Process is finalized and sent to audit committee for acceptance.

4. Audit Results – Reports Issued • Independent Auditors’ Report on Financial Statements (System Wide and Revenue Fund) – Unqualified Opinion. • Reasonable assurances on statements, which are responsibility of management. • Report References Other Campus Auditors for 2008 and 2007 for campus work and foundations. KDV’s percentage under audit increased due to rotation of campuses. • Report on Internal Control Over Financial Reporting and on Compliance Based Upon the Audit Performed in Accordance With Government Auditing Standards – no material weaknesses, no significant deficiencies at system level or revenue fund level. This compares to no material weaknesses and 4 significant deficiencies at system and revenue fund level in 2007 (scholarship allowance calculation, unrecorded accounts payable, unrecorded interest receivable, journal entry approval).

5. SAS 104-111 • SAS 104-111 establish standards and provide guidance concerning the assessment of risks of material misstatement (whether caused by error or fraud) in a financial statement audit, and the design and performance of audit procedures whose nature, timing, and extent are responsive to the assessed risks. • The objectives are to enhance auditors’ application of audit risk by requiring: • More in-depth understanding of MnSCU and its environment, including its internal control, to identify the risks of material misstatement in the financial statements and what MnSCU is doing to mitigate them. • More rigorous assessment of the risks of material misstatement of the financial statements based on that understanding. • Improved linkage between the assessed risks and the nature, timing, and extent of audit procedures performed in response to those risks. • These standards required MnSCU to invest considerable time to document all significant internal control cycles.

6. GASB Statement 45 • This statement accounts and reports Other Postemployment Benefits Other than Pensions for employers. Note 13 to the financial statements describes the benefits provisions, and relates to postemployment health care coverage that is paid 100 percent by retired employees. • The blending of the rate for all employees causes the implicit subsidy. • Total estimated long-term liability $94.2 Million, determined by Actuarial study. • Current year amortization $6 Million, and is included as a liability of the financial statements. • Amortization period is 30 years, maximum allowed.

7. System Board Comments Security Access – Incompatibilities remain at campus and system level and remains an important long term issue to resolve. Although complete resolution to incompatibilities may not be achievable, continue to work with Information Technology to design new systems with reduced incompatibilities. Documentation of mitigating controls is an important step that MnSCU should continue to implement. Financial Reporting – All 12 campuses continued primary responsibility for their financial statement preparation for 2008. Emphasis should continue on hiring of qualified individuals and ongoing training to reduce the inconsistencies between the level of technical knowledge at the campus level and to further the understanding of results at the campus level. Leave Benefit Accounting – Continue to refine the leave balance reporting and accounting function to improve accuracy of the estimated liability, currently at $126 Million.

8. System Board Comments • Information Technology – Improvements in IT continue to be implemented during 2008. • Continue to follow up on outstanding security issues. • Develop a comprehensive plan to properly test the conversion of accounting data from the old system to the new systems. • Continue to analyze disaster recovery plans and test as deemed appropriate.

9. Component Units • As required by GASB Statement 39. • Includes University Foundations that are “Significant”. Includes Southwest, Winona, Metropolitan State, Mankato, Bemidji, Moorhead, Century, Fergus Area and St. Cloud. • Total Assets at June 30, 2008 totaled $169,897,000 compared to 2007 amount of $159,166,000. • Total Revenues recognized for the year ended June 30, 2008 totaled $35,998,000, a decrease from 2007 amount of $44,097,000. Unrealized investment loss 2008 was ($7,027,000) vs gain 2007 of $3,993,000. • Shown as separate statement in the consolidated MnSCU report to allow the financial statement readers to distinguish between MnSCU and the Foundations.

10. Upcoming Standards • Summary of GASB Statement 49 - Accounting and Financial Reporting for Pollution Remediation Obligations • This Statement addresses accounting and financial reporting standards for pollution (including contamination) remediation obligations, which are obligations to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities such as site assessments and cleanups. The effect this statement will have on fiscal year 2009 basic financial statements has not been determined. • Summary of GASB Statement 51 - Accounting and Financial Reporting for Intangible Assets • In June 2007, the GASB issued Statement No. 51, Accounting and Financial Reporting for Intangible Assets. The objective of this Statement is to establish accounting and financial reporting requirements for intangible assets to reduce reporting inconsistencies, thereby enhancing the comparability of the accounting and financial reporting of such assets among state and local governments. The effect GASB Statement No. 51 will have on the fiscal year 2010 basic financial statements has not yet been determined. • Summary of GASB Statement 52 - Land & Other Real Estate Held as Investments by Endowments • In November 2007, the GASB issued Statement No. 52, Land & Other Real Estate Held as Investments by Endowments. This statement requires that land and real estate held as investments in endowments to be recorded at fair market value. Changes in fair value during the period will be reported as investment income. GASB Statement No. 52 is effective for Minnesota Colleges and Universities for fiscal year 2009. The effect this statement will have on fiscal year 2009 basic financial statements has not been determined.

11. Required Communication • OUR RESPONSIBILITY UNDER GENERALLY ACCEPTED AUDITING STANDARDS AND GOVERNMENT AUDITING STANDARDS – reasonable but not absolute assurance that financial statements are free of material misstatement. Sampling used in testing. No opinion on internal controls. • SIGNIFICANT ACCOUNTING POLICIES – Note 1 to the Financial Statements. GASB 45 new for 2008. • ACCOUNTING ESTIMATES - the most sensitive estimates were depreciation, Allowance for uncollectible A/R, Scholarship Allowances, Workers Compensation Claims, Compensated Absences - reasonable and consistent. • AUDIT ADJUSTMENTS – None significant • DISAGREEMENTS WITH MANAGEMENT - none • CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS – campus auditors via weekly conference calls. • ISSUES DISCUSSED PRIOR TO RETENTION OF INDEPENDENT AUDITORS - normal • DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT – none

12. Summary of Key Indicators

13. Summary of Key Indicators – Revenue Fund

14. Questions and Open Discussion

15. Minnesota State Colleges and UniversitiesFinancial Report SummaryFor the years ended June 30, 2008 and 2007 Audit Committee Meeting November 18, 2008

16. Presentation Overview • Consolidated System-wide & Revenue Fund results • Summarized College and University Audit and Financial results • Other Related Matters

17. System-wide Changes in Financial Position at June 30, 2008 vs. 2007 • Primary driver of change is Capital asset development and renewal • 26 million square feet • $129.2 million increase in capital assets, net of accumulated depreciation • $201.9 million new construction in progress • $84.7 million increase in long-term debt • $90.7 million increase in net assets invested in capital assets, net of debt

18. System-wide Results of Operations—Revenue FY 2008 vs. FY 2007

19. Trend for Expenses Note: About 61% of the FY 2008 $88 million increase in compensation expense is from salaries (including compensated absences) and 39% from fringe/other compensation benefits (includes $6 million first time accrual of other postemployment benefits).

20. Student Growth

21. Trend--Financial Results and Reserves

22. Economy and the Future • 2008 0perating/non-operating revenues increase -- $125.3 million • 2008 operating/non-operating expenses increase -- $124.0 million • 2008 State appropriation increase was nearly 51% of the revenues above • 2008 compensation expense increase was nearly 71% of expenses above

23. Statements of Net Assets $46.5 million new construction in progress Capital assets, net increased $38.5 million Revenue bond debt increased $39.1 million Primary reserve – 9.7 months up from 9.3 months Statements of Revenues, Expenses and Changes in Net Assets Operating revenues -- $83.6 million, up $6.8 million Operating expenses -- $74.0 million, up $5.2 million Operating margin steady at $9.5 million FY 2008 Revenue Fund

24. Summarized Audit and Financial results—Kern DeWenter Viere

25. Rochester Community and Technical College RCTC has a joint use agreement with the City of Rochester for a regional sports complex plus some joint facilities use and cost sharing with Winona SU and the University of Minnesota Winona State University Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes MSU Moorhead Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes MSU, Mankato One contingent litigation liability with a potential settlement in excess of $100k was disclosed in the footnotes. Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes Southwest MSU Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes Kern DeWenter Viere Audits -- Commentary

26. Summarized Audit and Financial results—Larson Allen

27. Century College One contingent litigation liability with a potential settlement in excess of $100k was disclosed in the footnotes. Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes Larson Allen Audit -- Commentary

28. Summarized Audit and Financial results—Virchow Krause

29. St. Cloud State University One contingent litigation liability with a potential settlement in excess of $100k was disclosed in the footnotes. Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes Minneapolis CTC One contingent litigation liability with a potential settlement in excess of $100k was disclosed in the footnotes. Metropolitan State University’s Minneapolis campus is co-located with Minneapolis CTC. Hennepin Technical Several audit adjustments were required with one increasing accounts receivable by $442k and two others reducing unearned revenue by $207k. Minnesota State CTC Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes Bemidji State University A significant deficiency was reported for a group of audit adjustments with a value of about $500k. The largest adjustment was a reduction in salaries payable of about $480k. In addition, the local bank account had not been reconciled as of June 30, 2008. One contingent litigation liability with a potential settlement in excess of $100k was disclosed in the footnotes. Foundation related-party transactions -- disclosed in Footnotes Foundation (component unit) disclosure in Footnotes Metropolitan State University A significant deficiency was reported for inconsistent independent review and approval of journal entries. Foundation related-party transactions -- disclosed in Footnotes along with the co-location at Minneapolis CTC. Foundation (component unit) disclosure in Footnotes Virchow Krause Audits -- Commentary

30. FY 2008 Follow-up Status • Other Postemployment Benefits (OPEB) - Finance Committee discussion at July 2008 meeting • Agreed to defer funding decision (qualified trust contributions) due to uncertainty regarding key actuarial variables and minimal examples of funding in industry • We will monitor actuarial calculations and related industry trends • Reserves - Finance Committee discussion at September 2008 meeting • Continue efforts to bring all colleges and universities to recommended range for Board required reserves • Develop guidelines for Primary Reserve and other accrual measures

31. Wrap Up • Questions • Resolution covering release of audited statements • January 2009 Report to Finance Committee on FY2008Audited Financial Statements • January 2009 Audit Committee discussion on Audit Program • Other