FHBO Cfs FY2012

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FINANCIAL
REPORT
2012

2012

Discussion of Financial Results (unaudited)

Selected Financial Data (unaudited)

Report of Independent Auditors

Consolidated Statements of Financial Position

Consolidated Statement of Activities

Consolidated Statements of Cash Flows

Notes to Financial Statements

DISCUSSION
OF
FINANCIAL
RESULTS
Case Western Reserve University continued to build on the solid

reflect revenue diversity in a wide array of academic programs

financial resource base during fiscal year 2012 (“FY12”). The

attracting high quality students to a leading research university. Both

University’s net operating activities were positive, working capital

net operating activity and operating surpluses have been positive

initiatives successful, and philanthropic efforts reached new and

in all of the last five years, as well as outperforming annual budgets.

historic levels.

Management is committed to continuing sustainable operating
improvements.

The FY12 financial plan again centered on enhancing core operating
performance, increasing working capital resources, and growing
momentum throughout a comprehensive capital campaign. The
results were a $36 million or 4% operating margin, a $28 million
increase in working capital, and a new record for annual attainment
of $138 million. Capital expenditures continue to reflect targeted
investments, supplemented by philanthropy. There are no current
plans for additional debt.

Increased working capital resources
The University implemented several strategic initiatives to enhance
working capital. Working capital from operating, financing, and
investing activities all increased in FY12, improving liquidity by
$28 million over FY11. This increase was during a period of two
extraordinary cash outlays to fund pension obligations and increased
interest rate swap collateral requirements totaling over $40 million.

Below are additional comments related to the University’s operations
and financial results.

FY12 FINANCIAL HIGHLIGHTS
Solid core operating performance

Record-breaking capital campaign
The University benefitted from the generous support of its donors.
During FY12, the University announced a capital campaign with a $1
billion goal. The attainment achieved in FY12 totaled $138 million,
an historic level and represents a 10% increase over the previous

The University’s stewardship of resources produced net operating

record-setting year of FY11. The University received gifts from over

income of $36 million, a 4% operating margin. A proactive financial

17,000 donors, totaling $92 million as reported on a cash basis.

management plan reflected a balanced budget in FY12 with a

Realized gifts and pledges of $62 million are reported in the financial

planned $2 million surplus. Actual results of a $6.4 million surplus

statements on an accrual basis.
CASE WESTERN RESERVE UNIVERSITY | 1

STATEMENT OF
OPERATIONS
The University manages its daily operations using a Statement
of Operations which is prepared on a modified cash basis and

OPERATING REVENUE
(in thousands of dollars)

1,000,000

presented by natural account class; it is unaudited. The Statement
of Operations measures and reports the management center-based

800,000

95,061

99,132

108,501

118,645

462,994

459,347

activities of the organization. It excludes non-operating transactions,
depreciation expense, differs in its treatment of capital, and excludes
most restricted funds transactions (e.g. restricted gift revenue).
The University produced an operating surplus of $6.4 million in FY12,
compared to a budget of $2.0 million and a $4.5 million surplus in
FY11.

600,000

430,352

419,967

400,000

84,058

85,258

80,584

82,226

278,600

293,140

306,937

313,007

2010

2011

2012

200,000

2009

UNIVERSITY SURPLUS/(DEFICIT)

Other Revenue

Research-related

Endowment

Tuition

in thousands

7,500

All categories with the exception of research-related increased over

6,000

FY11. Research-related declined slightly due to the end of federal

4,500
3,000

stimulus funding made available through the American Recovery and

1,500

Reinvestment Act of 2009.

(1,500)

MANAGEMENT CENTER OPERATING EXPENSES

(3,000)

Operating expenses were $968 million, a $10 million or 1% increase

(4,500)

from FY11. Functional expenses are classified as salaries and

(6,000)

benefits, other direct, and indirect expenses.

(7,500)

2009

2010

2011

2012

Budget

(7,226)

Actual

1,336

(4,278)

332

2,000

2,226

4,499

6,375

OPERATING EXPENSES
(in thousands of dollars)

1,000,000

The FY12 operating results were achieved without use of a Board-

800,000

208,029

213,510

454,103

446,685

283,912

296,322

307,853

2010

2011

190,653

199,551

415,195

419,922

274,562

designated contingency fund of $8.2 million which is retained for use
in subsequent years.
The operating surplus has increased in absolute dollars in each of
the last five years. In addition, the surplus has exceeded plan in each
year as well.

600,000

400,000

200,000

2009

Indirect Expense

MANAGEMENT CENTER OPERATING REVENUES
Operating revenues are classified in four categories: tuition,
endowment, research-related, and other. The University reported
$973 million in revenue, a $14 million or 1% increase from FY11.

2012

Salaries & Benefits

Salaries and benefits and indirect expenses increased due to
inflationary increases, largely salary-related. Other direct expenses
of $447 million declined $7 million or 2% due to the related decline
in research activity mentioned previously, and due to operating
efficiencies.

2 | DISCUSSION OF FINANCIAL RESULTS

Other Direct Expense

CONSOLIDATED
STATEMENT OF
ACTIVITIES
The Statement of Activities includes consolidated results from

The majority of the decline was from returns on operating

operating and non-operating activities of the University to produce

investments, which were down $23 million from FY11. This decrease

change in net assets. In FY12, operating activity contributed $36

was offset in part by a 6% or $1 million increase in returns from

million to net assets.

FHBO and $1 million increase in long-term investment returns
distributed for operations.

OPERATING REVENUES
Total operating revenues were $896 million, a $24 million or 3% drop

Grants and contracts

from FY11. The components of the University’s revenues are shown

Grant and contract revenue includes both awards for Case Western

below; additional detail of operating revenue follows.

Reserve University and also its affiliates, most notably the Cleveland
Clinic Lerner College of Medicine (“CCLCM”).

OPERATING REVENUES
$896 million
Grants and
Contracts
41%

Investment
Returns
9%

Tuition
(net of
financial aid)
22%

Overhead
Recovery
9%

Other
6%

Gifts &
Pledges
7%

Auxiliaries
6%

State me nt of A ctivitie s data

Tuition Income
Gross tuition income of $318 million, including fees and
undergraduate, graduate, summer, and professional tuition,
increased $8 million or 3% over FY11. Gross tuition income is offset
in part by financial aid awarded; the financial aid offset for FY12
was $118 million, resulting in net tuition of $200 million or 22% of

Grants and contracts received for research and training purposes
of $364 million, including $98 million in CCLCM awards, decreased
$5 million or less than 2% from FY11. The total represents 41%
of University operating revenue. The decrease corresponds with
research operating expenses.
Overhead cost recovery
The facilities and administrative cost recovery applicable to federally
sponsored projects and all other sponsored activity was $80 million
in FY12 with no change from FY11. Overhead recovery constituted
9% of operating revenue.
Gifts & Pledges
Gifts & Pledges income of $62 million was down $16 million or 20%
from historic FY11 levels due to a number of one-time gifts being
realized in FY11. As compared to FY10, however, Gifts & Pledges

operating revenues.

income, 7% of operating revenues, was up $7 million.

The net tuition income of $200 million increased $12 million or 6%

Other Revenue

over FY11, with increased revenues realized in graduate and summer

Other revenue of $55 million, an increase of nearly $5 million or 9%

programs.

over FY11, constituted 6% of revenue. Other revenue was provided

Investment Returns

sources.

Investment Returns included $61 million in returns distributed from
the long-term investment pool, $10 million in returns on operating
investments, and $13 million in distributions from funds held by
others (FHBO) for endowment spending. Investment returns in
operations, which represent 9% of operating revenue, totaled $84
million, a decrease of $21 million or 20% from FY11.

by the State of Ohio appropriation, Organized activities, and Other

Auxiliaries
Auxiliary services income of $51 million, which was 6% of operating
revenues, increased $2 million or 3% over FY11. Auxiliary income
is categorized as either “Student,” which is largely Housing, Food,
and Health Services, totaling $40 million, or “Other,” including Rental
Properties and Parking, totaling $11 million for FY12.
CASE WESTERN RESERVE UNIVERSITY | 3

OPERATING EXPENSES

THE UNIVERSITY’S ENDOWMENT

Total expenses of $860 million increased $6 million or less than1%

Case Western Reserve University manages its endowment of

over FY11. The components of the University’s expenses are shown;
additional detail of operating expenses follows.
OPERATING EXPENSES
$860 million

generous donor contributions through employing active risk
management strategies designed to protect and grow portfolio
value in today’s world of volatile markets. Like the University itself,
the investment horizon is in essence perpetual, while investment,

Sponsored research and training

269,865

267,767

Other sponsored projects

27,153

27,090

CCLCM research and training

98,309

100,098

Libraries

22,279

22,122

Student services

22,780

21,886

University services

90,404

90,572

Auxiliary services - students

47,446

50,482

Auxiliary services - other

11,529

11,932

TOTAL OPERATING EXPENSES

859,731 $

- $

859,731 $

853,410

NET OPERATING ACTIVITY

10,694 $

518 $

25,111 $

36,323 $

66,378

(20,004) $

1,744 $

(15,540) $

NON-OPERATING ACTIVITIES
Long-term investment activities
Investment (loss) income
Net (depreciation) appreciation
Total long-term investment activities

2,720 $

71,590

(2,148)

(31,233)

(12,012)

(45,393)

161,987

(22,152)

(28,513)

(10,268)

(60,933)

233,577

(60,366)

(304)

(163)

(60,833)

(59,934)

(4,472)

(2,315)

Long-term investment income and gains distributed
for operations
Change in liabilities due under life-income agreements
Loss on disposal of plant assets
Pension plan changes other than periodic benefit costs

(1,680)

(6)

(55,655)

10,390

(1,642)

293

Other non-operating activity

(1,642)

Net assets released from restrictions

61,616

NET NON-OPERATING ACTIVITY

CHANGE IN NET ASSETS

Beginning Net Assets
ENDING NET ASSETS

(79,879) $

FINANCIAL STATEMENTS

(89,647) $

(786)
(15,689) $

9,422 $

(185,215) $

(148,892) $

182,005

(69,185) $

(89,129) $

215,901

883,118

874,522

1,973,541

1,725,158

146,716 $

793,989 $

883,944 $

1,824,649 $

1,973,541

The accompanying notes are an integral part of the consolidated financial statements.
10

(60,830)

248,383

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended
June 30

In thousands of dollars

2012

2011

CASH FLOWS FROM OPERATING ACTIVITIES
Change in net assets

(148,892)

248,383

Adjustments to reconcile change in net assets to net cash provided by (used for) operating activities:
Depreciation

63,356

Amortization of bond issuance costs
Amortization of bond premiums
Increase in capital appreciation notes

65,364

128

(755)

(732)

1,044

1,452

Net unrealized depreciation (appreciation) in the fair market value of investments

34,371

(119,688)

Realized gains on investments

(6,897)

(96,276)

Increase to annuities payable resulting from actuarial adjustments

4,472

2,315

Gifts of property and equipment

(377)

(495)

Receipt of contributed securities

(3,429)

(3,731)

Loss on disposal of plant assets

1,680

(20,729)

(18,840)

Decrease (increase) in accounts and loans receivable, net

19,938

(24,769)

Increase in pledges receivable, net

(6,936)

(9,528)

Contributions restricted for long-term investment

Decrease in prepaid expenses and other assets
Decrease (increase) in funds held in trust by others
Increase in accounts payable and accrued expenses

1,346

706

12,012

(42,039)

8,450

584

Increase (decrease) in deferred income and other liabilities

11,705

(3,923)

Decrease in refundable advances

(1,055)

(85)

Increase (decrease) in accrued pension liability

40,709

(9,320)

NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES

10,111

6,899

(10,488)

CASH FLOWS FROM INVESTING ACTIVITIES
Student loans
Collected

Issued

(7,839)

Proceeds from the sale of investments
Purchase of investments
Proceeds from the sale of plant assets
Purchases of property, plant, equipment and books
NET CASH PROVIDED BY INVESTING ACTIVITIES

6,274
(7,240)

2,713,818

2,962,458

(2,654,842)

(2,916,302)

1,005

2,126

(50,948)

(41,912)

8,093

3,202

5,404

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in federal advances for student loans

Contributions restricted for long-term investment

2,976

20,729

18,840

Proceeds from short-term debt

15,000

Repayment of short-term debt

(15,000)

Repayment of notes and bonds payable

(10,489)

(9,839)

Increase to annuities payable resulting from new gifts
Decrease to annuities payable resulting from payments
NET CASH PROVIDED BY FINANCING ACTIVITIES

NET INCREASE IN CASH AND CASH EQUIVALENTS

Cash and cash equivalents, beginning of year
CASH AND CASH EQUIVALENTS, END OF YEAR

1,147

1,258

(4,788)

(5,249)

9,801

28,005

105,900

7,986
2,902
102,998

133,905

105,900

16,968

15,334

SUPPLEMENTAL DATA:
Interest paid in cash
Noncash investing activities:
Contributions of securities and other noncash assets
Change in accounts payable for fixed assets

3,806

4,226

101

The accompanying notes are an integral part of the consolidated financial statements.
CASE WESTERN RESERVE UNIVERSITY

| 11

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation

costs from grants and contracts, and auxiliary services

Case Western Reserve University (the “University”) is an Ohio not-

revenues.

for-profit corporation that operates a private research university

 Revenues related to sponsored research and other sponsored

in Cleveland, Ohio. The consolidated financial statements of the

program agreements which are considered exchange

University as of June 30, 2012, and for the year then ended, as

transactions.

well as summarized information for the year ended June 30,
2011, have been prepared in accordance with accounting
principles generally accepted in the United States of America.

 Unrestricted funds functioning similar to endowment and
related investment returns.
 Gifts with donor-imposed restrictions, if the restriction is

Accordingly, the accompanying consolidated financial statements

anticipated to be met within the current fiscal year of the

have been prepared on the accrual basis of accounting and

University.

include the accounts of the University and all wholly-owned
subsidiaries.

The University wholly owns two subsidiaries. Triangle Residential
LP is a limited partnership formed in 2005 that owns and
operates two apartment buildings and a parking garage located
in the Ford-Euclid-Mayfield Road area. The University is the sole
limited partner. The general partner is Triangle Residential LLC,
also a wholly-owned subsidiary of the University, formed in 2005.
The University, through Triangle Residential LP, plans to operate
the properties pending finalization of plans to develop an arts,
entertainment and residential complex in the area. All material
transactions between the University and its subsidiaries have
been eliminated.

Net Asset Categories

 Investments in plant assets.
 All expenses of the University.

TEMPORARILY RESTRICTED net assets include investment
returns from endowments and gifts for which donor-imposed
restrictions have not been met. This restriction on temporarily
restricted endowment returns (income and realized and
unrealized gains and losses) is released when appropriations are
distributed for use and the funds have been spent. The category
also includes pledges receivable and life-income gifts for which
the ultimate purpose of the proceeds is not permanently
restricted.

PERMANENTLY RESTRICTED net assets include gifts, trusts and
pledges on which donors have imposed the restriction that the
corpus is maintained in perpetuity and only the investment

Standards for external financial reporting by not-for-profit

returns be made available for program operations. In the case of

organizations require that resources be classified for reporting

trusts, gains and losses are added to the gift amount. Gifts

purposes into three net asset categories according to donor-

restricted by donors to provide loans to students are also

imposed restrictions:

included in permanently restricted net assets.

UNRESTRICTED net assets are available for any purpose

Expirations of temporary restrictions on net assets are reported

consistent with the University’s mission. Unrestricted net assets

as reclassifications between the applicable classes of net assets.

and related activity include the following:

Donor required matching from University funds and donor
release or clarification of restrictions is also included in this

 All revenues traditionally classified as unrestricted resources

category.

of the University, including tuition and fees, unrestricted gifts,
investment returns on unrestricted funds designated to
function as endowment, recovery of facility and administrative

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

The Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Codification (“ASC”) 958, “Not for Profit

Entities,” in August 2008. The standard provides guidance on the

are received are reported with unrestricted contribution

net asset classification of donor restricted endowment funds for

revenues. Contributions of assets other than cash are reported

a not-for-profit organization that is subject to an enacted version

at their estimated fair value at the date of gift. Contributions

of the Uniform Prudent Management of Institutional Funds Act

scheduled to be received after one year are discounted using a

(“UPMIFA”) and expands disclosures about an organization's

market rate (Note 3).

endowment (both donor restricted and board designated funds).
The University’s Board of Trustees (“the Board”) has interpreted

Grants and Contracts (Government and Private)

UPMIFA as requiring the preservation of the original gift as of the

Revenues from government and private grants and contracts are

gift date of the donor restricted endowment funds absent explicit

recognized as earned in accordance with the terms of the grant

donor stipulation to the contrary. As a result of this

or contract. Any government payment received before it has

interpretation, the University classifies as permanently restricted

been expended is recorded as a refundable advance. Projects

net assets, (a) the original value of gifts donated to the permanent

funded by government grants that incur expenses prior to

endowment, (b) the original value of subsequent gifts to the

payment receipt are recorded as revenue with a corresponding

permanent endowment, and (c) accumulations to the permanent

receivable.

endowment made in accordance with the direction of the
applicable donor gift instrument at the time the accumulation is
added to the fund. The remaining portion of the donor restricted
endowment fund that is not classified as permanently restricted
net assets is classified as temporarily restricted net assets until
those amounts are appropriated for expenditure by the
University in a manner consistent with the standard of prudence
prescribed by UPMIFA.

Contributions
Contributions, including unconditional pledges to give and
irrevocable trusts held by others with the University as the
beneficiary, are recognized as revenues in the period received or
promised. They are classified as unrestricted, temporarily
restricted, or permanently restricted net assets depending upon
the donor’s intent.

Contributions restricted for the acquisition of land, buildings and
equipment are reported as temporarily restricted revenues.
These contributions are reclassified to unrestricted net assets
when the assets are placed in service. Promises to give that are
subject to donor-imposed stipulations that the corpus be
maintained in perpetuity are recognized as increases in
permanently restricted net assets.

Investment Returns on Operating Investments
Beginning in fiscal 2011, the University has invested excess
operating funds and certain board designated funds with the
University’s investment pool. The operating funds are invested
alongside other funds and receive a pro-rata portion of income,
expenses, gains, and losses of the pool.
Cash and Cash Equivalents
The University considers all highly liquid investments with an
original maturity of 90 days or less when purchased as cash and
cash equivalents, except those amounts managed by investment
managers as part of the investment pool that do not belong to
operations, or unspent bond proceeds, which are classified as
investments.

Operating Investments, at Market
Operating investments include all other current investments with
original maturities greater than three months that are used to
support operations. These investments include obligations of
triple A rated banks, various United States Government agencies,
and internal operating funds invested in the University’s
investment pool. Although the pool primarily invests in mid to
long term investments, the pool maintains a sufficient investment
mix that allows operating assets to be liquidated upon demand.

Conditional promises to give are not recognized until the
conditions on which they depend are substantially met. Gifts
whose restrictions are met in the same fiscal year in which they

CASE WESTERN RESERVE UNIVERSITY

| 13

Investments

produce pricing information on an ongoing basis. Market price

Investments are made within guidelines authorized by the Board.

data are generally obtained from exchange or dealer markets.

Investments are initially recorded at cost at date of acquisition or
fair value at date of donation in the case of gifts. Ownership of

Level 2 — Pricing inputs other than Level 1 that are observable,

marketable securities is recognized as of the trade date.

either directly or indirectly, such as quoted prices for similar

Endowment returns are calculated net of internal and external

assets or liabilities; quoted prices in markets that are not active;

investment management expenses.

or other inputs that are observable or can be corroborated by
observable market data for substantially the same term of the

Investments are stated at fair value as defined by ASC 820, “Fair

assets or liabilities. Inputs are obtained from various sources

Value Measurements and Disclosures.” Fair value is defined

including market participants, dealers and brokers.

under ASC 820 as the exchange price that would be received for
an asset or paid to transfer a liability, i.e., an exit price, in the

Level 3 — Unobservable inputs that are supported by little or

principal or most advantageous market for the asset or liability in

no market activity and that are significant to the fair value of

an orderly transaction between market participants on the

the assets or liabilities.

measurement date.
Collections
The fair value of all debt and equity securities with readily

The University’s collections of historically significant artifacts,

determinable fair values are based on quotations obtained from

scientific specimens, and art objects are held for education,

national securities exchanges. The alternative investments, which

research, scientific inquiry, and public exhibition. Their value is

are not readily marketable, are carried at estimated fair values as

not reflected in the University’s consolidated financial statements.

provided by the investment managers. The University reviews
and evaluates the values provided by the investment managers
and agrees with the valuation methods and assumptions used in
determining the fair value of the alternative investments. Those
estimated fair values may differ significantly from the values that
would have been used had a ready market for these securities
existed. Realized gains and losses on investments are included in
investment income. Average cost is generally used to determine
gains or losses on securities sold. Unrealized changes in the fair
value of investments are shown as net unrealized appreciation or
depreciation.

The following describes the hierarchy of inputs used to measure
fair value and the primary valuation methodologies used by the
University for financial instruments measured at fair value on a
recurring basis (Note 6). The three levels of inputs are as follows:

Level 1 — Quoted unadjusted prices in active markets for
identical assets or liabilities. An active market is one in which
transactions occur with sufficient frequency and volume to

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

Funds Held in Trust by Others
Funds held in trust by others are assets held and administered by
outside trustees from which the University derives income or
residual interest. Funds held in trust by others are reported at
their fair value as of June 30, 2012 and 2011, which approximates
the present value of the future income flows from these funds.

Income received from funds held in trust by others is classified as
temporarily restricted net assets until those amounts are
appropriated for expenditure by the University. Income
appropriated within the same year is classified as unrestricted.
Unrealized changes in the fair value of investments are shown as
net unrealized appreciation or depreciation in permanently
restricted net assets.

Fixed Assets
When capital assets are sold or disposed, the carrying value of
such assets and any accumulated depreciation are removed from
the asset accounts. Any resulting gain or loss on disposal is

recognized in the non-operating portion of the statement of

Use of Estimates

activities.

Financial statements using accounting principles generally
accepted in the United States of America rely on estimates. At

Expenditures for construction in progress are capitalized as

June 30, management makes certain estimates and assumptions,

incurred and depreciated when placed into service. All

which affect assets and liabilities, disclosures of contingent assets

identifiable direct costs including other costs incurred to ready

and liabilities, and reported revenues and expenses during the

the asset for its intended use are included in the cost of the

period. Actual results may differ from these estimates.

project. The University capitalizes interest on borrowings to
finance facilities, net of any investment income earned through

Comparative Information

the temporary investment of project borrowings, during

The consolidated statement of activities includes prior year

construction until the project has been substantially completed.

summarized comparative information in total, but not by net
asset category. Such information does not include enough detail

Asset Retirement Obligations

to constitute a presentation in conformity with accounting

The University accounts for asset retirement obligations in

principles generally accepted in the United States of America.

accordance with ASC 410, “Asset Retirement Environmental

Accordingly, such information should be read in conjunction with

Obligations.” The University accrues for asset retirement

the University’s consolidated financial statements for the year

obligations in the period in which they are incurred if sufficient

ending June 30, 2011, from which it was derived.

information is available to reasonably estimate the fair value of
the obligation. Over time, the liability is accreted to its settlement

Income Taxes

value. Upon settlement of the liability, the University will

The University is exempt from federal income tax to the extent

recognize a gain or loss for any difference between the

provided under section 501(c)(3) of the Internal Revenue Code.

settlement amount and liability recorded.

The University is classified as an organization that is not a private
foundation under section 509(a) of the Internal Revenue Code

Allocation of Certain Expenses

because it is described in sections 509(a)(l) and 170(b)(l)(A)(ii) and,

The consolidated statement of activities presents expenses by

as such, gifts to the University qualify for deduction as charitable

function. Some expenses — such as depreciation, amortization,

contributions. The University is exempt from federal income tax,

and expenses related to the operation of the physical plant — are

however; it is required to pay federal income tax on unrelated

allocated by square footage. Interest expense is allocated to the

business income. The University did not have any material

functions that derive the greatest benefit from the facilities

income tax liabilities for the years ended June 30, 2012 and 2011.

financed.

ASC 740, “Income Taxes,” prescribes a recognition threshold and
measurement requirements for financial statement recognition

Retirement Plans
The University accounts for its defined benefit postretirement
plan in accordance with ASC 715 “Compensation - Retirement
Plans.” The University recognizes the overfunded or
underfunded status of a defined benefit postretirement plan as
an asset or liability in its consolidated statement of financial

and measurement of a tax position taken or expected to be taken
in a tax return. In addition, ASC 740 provides guidance on
recognition, classification and disclosure requirements for
uncertain tax provisions. The University has no financial reporting
requirements associated with ASC 740 for the years ended June
30, 2012 and 2011.

position in the year in which the change occurs, with an offsetting
impact to unrestricted net assets.

Reclassifications
Certain amounts in the 2011 consolidated financial statements
have been reclassified to conform to the 2012 presentation.

CASE WESTERN RESERVE UNIVERSITY

| 15

2. ACCOUNTS AND LOANS RECEIVABLE
Accounts and loans receivable of the University at June 30, 2012

operate, the level of delinquent loans, and the past history of the

and 2011, in thousands of dollars, were as follows:

various borrowers and the University.

2012

2011

ACCOUNTS RECEIVABLE, NET
Grants, contracts and others

49,414

Students
STUDENT LOANS, NET
ACCOUNTS AND LOANS RECEIVABLE, NET

69,051

1,934

2,697

51,333

49,932

102,681

121,680

Factors also considered by management when performing its
assessment, in addition to general economic conditions and the
other factors described above, included, but were not limited to,
a detailed review of the aging of the various receivables and
loans, and a review of the default rate by loan category in

Allowances for doubtful accounts:
Accounts receivable

3,496

3,322

Loans receivable

2,076

1,751

comparison to prior years. The level of the allowance is adjusted
based on the results of management’s analysis.

Management regularly assesses the adequacy of the allowance

Management considers the allowance for doubtful accounts

for doubtful accounts by performing ongoing evaluations of the

losses to be prudent and reasonable. Furthermore, the

various components of the accounts receivable and student loan

University’s allowance is general in nature and is available to

portfolios, including such factors as the differing economic risks

absorb losses from any loan category. Management believes that

associated with each category, the financial condition of specific

the allowance for doubtful accounts at June 30, 2012 is adequate

borrowers, the economic environment in which the borrowers

to absorb credit losses inherent in the portfolio as of that date.

3. PLEDGES RECEIVABLE
Unconditional promises to give are included in the consolidated

losses to be prudent and reasonable. Management believes that

financial statements as pledges receivable and revenue of the

the allowance for doubtful accounts at June 30, 2012 is adequate

appropriate net asset category. Multi-year pledges are recorded

to absorb any uncollectible pledges as of that date.

after discounting to the present value of expected future cash
flows. Unconditional promises to give at June 30, 2012 and 2011,

Pledges receivable at June 30, 2012 and 2011, had the following

are expected to be realized in the following periods:

restrictions:

2012
In one year or less

11,173

2011
$

9,327

Between one year and five years

55,015

45,567

More than five years

13,805

18,521

79,993

73,415

Less: Discount

(6,911)

(7,584)

Less: Allowance

(3,956)

(3,641)

TOTAL PLEDGES RECEIVABLE, NET

69,126

62,190

Management follows a similar approach as described in Note 2
for accounts and loans receivable in evaluating the adequacy of
the allowance for doubtful accounts for pledges receivable.
Management considers the allowance for doubtful accounts

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

2012
Department programs and activities

32,277

2011
$

26,011

Endowments for scholarships and
department programs and activities
Building construction
TOTAL PLEDGES RECEIVABLE, NET

18,270

17,337

18,579

18,842

69,126

62,190

Pledges have been discounted at the market rate. Uncollectible
pledges totaling $4,042 (2012) and $2,314 (2011) were written off
against the allowance for uncollectible pledges.

The University had conditional pledge commitments totaling
$48,048 (2012) and $40,891 (2011).

4. LONG TERM INVESTMENTS
The University holds long term investments for permanently

University invests through traditional investments as well as

restricted endowment funds, donor restricted funds, annuity

operating an investment pool that works similar to a mutual fund

assets, Board designated funds and excess operating assets that

(see Note 5). The University’s long term investments at June 30,

are able to be invested in longer term investments. The

2012 and 2011, were as follows:

2012
Operating investments, at market

87,304

2011
$

77,914

Investments, held for long term
purposes
TOTAL INVESTMENTS

Cash & cash equivalents

1,229,017

1,321,428

$ 1,316,321

$ 1,399,342

2012

2011

53,799

207,530

Domestic stocks

68,117

56,716

International securities

36,444

41,686

28,503

13,816

Bonds
Government and municipal
Corporate

26,947

30,164

183,080

186,435

11,217

1,150

Venture capital

78,331

77,945

Private equity

267,556

278,205

Hedge funds

412,188

359,101

Mutual funds
Derivatives
Limited partnerships and other

Other

48,521

44,244

101,618

102,350

$ 1,316,321

$ 1,399,342

2012

2011

Equity real estate
TOTAL INVESTMENTS

The investments were held for the following purposes:

Endowment

911,980

964,548

Donor restricted funds

247,219

295,186

University investments

97,499

78,661

Annuities

51,450

52,673

7,856

7,971

317

303

$ 1,316,321

$ 1,399,342

Funds held for the benefit of others
Agency funds
TOTAL INVESTMENTS

CASE WESTERN RESERVE UNIVERSITY

| 17

5. ENDOWMENT AND SIMILAR FUNDS
Endowment Funds

endowment made in accordance with the gift instrument at

The purpose of endowment funds is to generate in perpetuity

the time the accumulation is added to the fund.

operating revenue to support specific activities or for general
institutional use. Endowments represent only those net assets

The remaining portion of donor-restricted endowment funds

that are under the control of the University. Gift annuities,

that are not classified in permanently restricted net assets is

interests in funds held in trust by others and pledges

classified as temporarily restricted net assets until those

designated for the endowment but not yet received are not

amounts are appropriated and spent in accordance with the

considered components of the endowment.

endowment purpose by the University.

The state of Ohio has enacted legislation that incorporates the

Similar Funds

provisions outlined in the Uniform Prudent Management of

The University has made the decision to co-invest and treat in

Institutional Funds Act (UPMIFA). UPMIFA stipulates that

a similar fashion as endowment funds, certain funds that have

unless directed otherwise in the gift instrument, donor-

been purpose-restricted by donors. These funds were not

restricted assets in an endowment fund are restricted assets

given to the University with the understanding that the gift

until appropriated for expenditure by the institution.

amount would be maintained in perpetuity; however, the

Accordingly, the following items are recorded as permanently

Board has moved to treat these funds in the same fashion as

restricted net assets:

an endowment fund. Accordingly, the Board, at its option, may
elect to change that treatment and spend these funds in
accordance with donor wishes without the constraints of the

 The original value of initial gifts donated to the permanent

University endowment spending formula. These funds follow

endowment.

the same rules as above; however, no portion is permanently

 The original value of subsequent gifts to the permanent

restricted.

endowment.
 For those endowment funds with donor-specified
reinvestment provisions, accumulations to the permanent

Temporarily

Permanently

Restricted

Unrestricted
Donor restricted endowment funds

(20,079) $

Donor temporarily restricted funds
TOTAL ENDOWMENT AND SIMILAR FUNDS

452,087 $
260,630

(20,079) $

712,717

Total
2012

531,255 $
-

531,255

2011

963,263 $
260,630

1,223,893

1,016,382
283,637

1,300,019

Investment Pool

similar funds are invested in a broadly diversified portfolio

The Board’s interpretation of its fiduciary responsibilities for

designed to produce long-term rates of return that sustain or

endowment and similar funds is to preserve intergenerational

increase the real spending contribution from endowed and

equity to the extent possible. This principle holds that future

similar assets and to mitigate downturns in a single sector.

beneficiaries should receive at least the same level of economic
support that the current generation enjoys. To that end,

Unless otherwise directed in the gift instrument, both

investment goals are formulated to earn returns over the long-

endowment and similar funds are pooled for efficient investment

term that equal or exceed the board-approved distribution rates

purposes.

plus the impacts of inflation. The University’s endowment and

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

Prior to 2012, a unit market value for the pool was used to

While the policy provides guidance for the level of spending

account for pooled transactions. The unit market value at June

permitted (allocation), the actual spending will vary from the

30, 2011 was $41.68 (2011); however, beginning in fiscal year

spending allocation based on the timing of actual expenditures.

2012, the pool is accounted for on a dollarized method of

Funds are transferred from the investment pool to the

accounting similar to a money market fund where each unit is

University’s operating account after they have been spent in

worth $1 and accounted for on a per endowment or account

accordance with the endowment and similar funds requirements.

basis. The total investment return for the pooled investments,

The physical movement of cash and investments between the

net of external manager fees, approximated -1.58% (2012) and

investment pool and operating accounts occurs on a periodic

18.82% (2011).

basis as determined by the University and its process to maintain
the proper balance between liquidity and remaining invested.

Spending Policy
The Board has approved an endowment spending policy for
pooled investments based on a hybrid formula. The objective of
this two-pronged approach is to provide support for operations,
preserve intergenerational equity, and insulate programming
supported by endowment and similar funds from short-term
fluctuations in the investment markets. The two components are:
 A constant growth component seeks to provide growth in
annual spending equal to the rate of academic inflation as
measured by the Higher Education Price Index.
 A market value component based on 5% of the average of the
three previous calendar year-end market values.
Specific appropriation for expenditure of funds under the policy
occurs each spring when the Board approves the operating
budget for the following year. The fiscal 2012 pooled endowment
and similar funds spending allocation approximated 4.76% of
beginning market value totaling $63,769. For fiscal 2011, pooled
endowment and similar funds spending allocation was $2.015 per

For years where actual investment return exceeds actual
approved spending, the difference remains in temporarily
restricted net assets; years in which the actual endowment and
similar funds return is less than distributions under the policy, the
shortfall is covered by realized returns from prior years. The
fiscal 2012, pooled endowment and similar funds distribution was
funded from a combination of current year investment income
and prior year accumulated realized gains. For fiscal 2011,
pooled endowment and similar funds distribution was funded
from current year investment income.
In addition to the general distribution described above, the Board
has authorized a temporary supplemental distribution of
previously reinvested income and realized appreciation to
support certain development-related activities. This distribution,
which is slated to phase out by 2015, totaled $7,900 in both 2012
and 2011.

unit totaling $63,846.

CASE WESTERN RESERVE UNIVERSITY

| 19

Changes in endowment and similar funds net assets for fiscal year 2012 are as follows:

Temporarily

Permanently

Restricted

Unrestricted

Total
2012

2011

1,300,019 $

1,154,155

Endowment and similar funds
net assets, beginning of year

(8,018) $

797,937 $

510,100 $

Investment income

12,523

163

12,686

16,256

Realized and unrealized gains

(32,292)

182,702

TOTAL INVESTMENT RETURN

(19,769)

163

(19,606)

198,958

Contributions

1,215

21,655

22,870

23,396

Current year withdrawals

(8,241)

(663)

(8,904)

(6,532)

Current year expenditures

(70,486)

(69,958)

(12,061)

12,061

Reclassification of deficits
in donor-designated funds
ENDOWMENT AND SIMILAR FUNDS
NET ASSETS, END OF YEAR

(20,079) $

712,717

531,255

1,223,893

1,300,019

Occasionally, the fair market value of assets associated with

the investment of recently established endowments, and

individual donor-restricted endowment funds may fall below the

authorized appropriation that was deemed prudent.

value of the original gift amounts. When deficits exist in donor-

Of the amount classified as temporarily restricted endowment

restricted funds, they are classified as a reduction of unrestricted

net assets, $452,087 (2012) and $514,300 (2011) represents the

net assets. Deficits of this nature reported in unrestricted net

portion of perpetual endowment funds subject to time and

assets were $20,079 (2012) and $8,018 (2011). These deficits

purpose restrictions under Ohio’s enacted version of UPMIFA.

resulted from unfavorable market fluctuations that occurred after

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

6. FAIR VALUE MEASUREMENTS
Financial instruments carried at fair market value as of June 30, 2012 and 2011 by the ASC 820 valuation hierarchy are as follows:
Significant
June 30, 2012

INVESTMENTS
Cash & cash equivalents
Domestic stocks
International securities
Bonds
Government and municipal
Corporate
Mutual funds
Derivatives
Limited partnerships and other
Venture capital
Private equity
Hedge funds
Other
Equity real estate
TOTAL INVESTMENTS

Quoted Prices

Other

Significant

in Active

Observable

Unobservable

Markets
(Level 1)

Inputs
(Level 2)

Inputs
(Level 3)

FUNDS HELD IN TRUST BY OTHERS

PENSION PLAN ASSETS (Note 9)
Cash & cash equivalents
Mutual funds
Limited partnerships and Other
Hedge funds
Other
Equity real estate
TOTAL PENSION PLAN ASSETS (Note 10)

46,979 $
27,238
10

29,524
11,408

53,799
68,117
36,444

174,413
-

28,503
26,947
8,435
11,217

232
-

28,503
26,947
183,080
11,217

146
213
248,999

79,309
391
198,003

78,331
267,556
332,879
47,984
101,405
869,319

78,331
267,556
412,188
48,521
101,618
$ 1,316,321

285,756

- $
-

13,448
46,237

6,820 $
11,355
25,026

Total

13,448 $
46,237

59,686

55,071
55,071

5,092
383
4,814
10,289

ASSETS AT FAIR VALUE

308,685

253,074

1,165,364

Interest rate swaps payable

- $

34,038 $

34,038

LIABILITIES AT FAIR VALUE

34,038

60,163
383
4,814
125,046

$ 1,727,123

CASE WESTERN RESERVE UNIVERSITY

| 21

Significant
June 30, 2011

Quoted Prices

Other

Significant

in Active

Observable

Unobservable

Markets

Inputs

(Level 1)

(Level 2)

(Level 3)

5
4,956
156,791
-

FUNDS HELD IN TRUST BY OTHERS

PENSION PLAN ASSETS (Note 9)
Cash & cash equivalents
Mutual funds
Limited partnerships and Other
Hedge funds
Other
Equity real estate
TOTAL PENSION PLAN ASSETS (Note 10)

48,432 $
28,928
96

159,098 $
11,263
31,037
13,811
25,208
29,488
1,150

146
213
239,567 $

101,289
74
372,418 $

Total

- $
16,525
10,553

207,530
56,716
41,686

156
-

13,816
30,164
186,435
1,150

77,945
77,945
278,205
278,205
257,812
359,101
44,024
44,244
102,137
102,350
787,357 $ 1,399,342
297,768

297,768

1,759 $
42,619

- $
-

1,759
42,619

44,378 $

- $

53,358
2,215
4,334
59,907 $

53,358
2,215
4,334
104,285

ASSETS AT FAIR VALUE

283,945

Interest rate swaps payable

- $

20,571 $

- $

20,571

LIABILITIES AT FAIR VALUE

20,571

372,418

1,145,032

$ 1,801,395

Level 2 Investment Information

funds are observable and obtained through the fund in which the

Investments included in Level 2 consist primarily of the

University invests.

University’s ownership in assets through “fund of funds”
investments. In these types of arrangements, the University
invests in investment pools or mutual fund type arrangements

Level 3 Investment Information

through banks, dealers, brokers and other intermediaries. While

Investments included in Level 3 consist primarily of the

the asset value of the direct investments in the pool or mutual

University's ownership in alternative investments (principally

fund is not published, the underlying investments within those

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

limited partnership interests in hedge funds, private equity, real

prices of recent significant placements of securities of the

estate, real assets and other similar funds), beneficial interests in

same issuer, subsequent developments concerning the

funds held in trust by others, and portions of investments in the

companies to which the securities relate, or other estimates

pension assets. Level 3 investments are more difficult to value

requiring varying degrees of judgment. The University regularly

due to the following:

reviews, evaluates and performs significant due diligence

 The value of certain alternative investments represents the

around these investments to ensure that the values provided

ownership interest in the net asset value of the respective

by the investment managers are appropriate measures of fair

partnership.

value. The University agrees with the valuations and
assumptions used in determining the fair value of these

 The fair values of the securities held by limited partnerships

investments.

that do not have readily determinable fair values are
determined by the general partner based on appraisals or
other estimates that require varying degrees of judgment.

A roll forward of the consolidated statement of financial position
amounts for financial instruments classified by the University

 If no public market exists for the investment securities, the fair

within Level 3 of the fair value hierarchy is as follows:

value is determined by the general partner taking into
consideration, among other things, the cost of the securities,
Mutual Funds

Other &
Venture

& Domestic
Stocks

Beginning balance,
July 1, 2011

Realized gains (losses)

Int'l Securities

16,681 $

Capital

10,553 $

Private Equity Hedge Funds

Equity Real

Funds Held

Estate

by Others

Total

77,945 $ 278,205 $ 311,170 $ 106,471 $ 344,007

$ 1,145,032

(1,154)

2,300

17,902

4,291

1,792

661

11,383

855

387

(12,058)

110

3,188

(15,401)

(11,536)

Purchases

7,355

13,668

36,078

127,000

11,897

8,776

204,774

Settlements

(4,509)

(15,969)

(52,571)

(51,242)

(17,129)

(3,920)

(145,340)

(53,358)

78,331

$ 267,556

$ 106,219

$ 334,123

and investment

25,792

income
Unrealized gains (losses)

Transfers out of Level 3
ENDING BALANCE,
JUNE 30, 2012

29,756

11,408

$ 337,971

$ 1,165,364

The net realized and unrealized gains and losses in the table

University believes its valuation methods are appropriate and

above are included in the University’s consolidated statement of

consistent with other market participants, the use of different

activities in one of two financial statement lines: Investment (loss)

methodologies or assumptions to determine the fair value of

income or Net (depreciation) appreciation. In the case of pension

certain financial instruments could result in a different estimate

assets, net realized and unrealized gains and losses are

of fair value at the reporting date.

recognized in the financial statement line Pension plan changes
other than periodic benefit costs.

As a practical matter, the University is permitted under U.S.
generally accepted accounting principles (“US GAAP”) to estimate

The pricing inputs and methods described above could produce

the fair value of an investment at the measurement date using

a fair value calculation that may not be indicative of net realizable

the reported net asset value (“NAV”) without further adjustment

value or reflective of future fair values. Furthermore, while the

unless the entity expects to sell the investment at a value other

CASE WESTERN RESERVE UNIVERSITY

| 23

than NAV or if the NAV is not calculated in accordance with US

transparency and valuation procedures in place, the ability to

GAAP. The University’s investments in private equity, real estate

redeem at NAV at the measurement date, and existence of

and certain hedge funds in the absolute return portfolio are fair

certain redemption restrictions at the measurement date.

valued based on the most current NAV.

The guidance also requires additional disclosures to enable users

The University performs additional procedures including due

of the financial statements to understand the nature and risk of

diligence reviews on its investments in investment companies and

the University’s investments. Furthermore, investments which

other procedures with respect to the capital account or NAV

can be redeemed at NAV by the University on the measurement

provided to ensure conformity with US GAAP. The University has

date or in the near term are classified as Level 2. Investments

assessed factors including, but not limited to, managers’

which cannot be redeemed on the measurement date or in the

compliance with Fair Value Measurement standard, price

near term are classified as Level 3.

Unfunded
Fair Value

Category
Domestic Stocks (a)
International Securities (b)
Corporate Bonds (c)
Limited partnerships and other
Venture capital (d)
Private equity (e)
Hedge funds (f)
Other (g)
Equity real estate (h)
TOTAL

Commitments

39,898
35,887
15,808
78,331 $
267,556
352,708
47,984
101,405
939,577 $

20,948
68,003
33,494
53,297
175,742

Redemption
Redemption Frequency

Notice Period

quarterly, annually
monthly, quarterly
monthly

45 - 90 days
30 - 90 days
30 days

quarterly, annually
monthly, quarterly, annually

30 - 90 days

(a) Domestic stocks include equity securities domiciled in the

United States. Fund liquidity is daily, monthly, quarterly, semi-

securities in Fortune 500 companies. 1/3 of the fund may be

annual, annual, and up to a maximum period of two years.

liquidated every 30 days.

Approximately 53% of domestic equity exposure is accessible

(d) Venture capital includes several private equity funds that

within six months or less; with 26% accessible on a daily basis.

invest primarily in technology, health care or clean technology

Approximately 14% of the net asset value in this class has a

industries. While the portfolio is U.S. centric, there are small

lock up period of February 1, 2013.

allocations to companies in foreign markets. The funds
typically provide money and resources to entrepreneurs to

(b) International securities include equity securities

finance a start-up company or product, with the hope that the

domiciled in countries outside of the United States including

company experiences exceptional growth and therefore

developed and emerging markets.

would produce a successful investment. The funds invest at
different stages of a company’s growth, some very early and

Approximately 48% of the net asset value can be accessed on
a daily basis after October of 2012, 16% can be accessed on a
quarterly basis, and the remaining balance over a period of 13 years, most of which being accessible over the next 1-2
years.

others at a later stage where the company may already
produce revenues. The valuations for these investments have
been estimated using the manager’s fair market values, which
have been vetted to make sure they meet the ASC 820
guidelines. These investments can never be redeemed with
the funds. As these investments age in duration, distributions
will be received from these funds as the underlying portfolio
companies are sold in the market. It is estimated that the

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

underlying investments within the funds would be fully

(g) Other includes various direct private investments as well

liquidated over the next 7-12 years.

as private funds that do not fall within the other categories
listed. Examples would include an Eastern Europe agriculture

(e) Private equity includes several private equity funds that

fund, some private U.S. oil and gas partnerships and various

invest across all industries. While the portfolio is U.S. centric,

stakes in local private organizations. For the funds, the

there has been an increasingly larger allocation to companies

valuations have been estimated using manager’s fair market

in foreign markets. The funds typically invest capital into

values, which have been vetted to make sure they meet the

more mature companies for a minority or majority of

ASC 820 guidelines. These investments can never be

ownership and through operational and financial expertise,

redeemed with the funds. As these investments age in

generate a return of capital greater than the original amount

duration, distributions will be received from these funds as

invested. The valuations for these investments have been

the underlying portfolio companies are sold in the market. It

estimated using the manager’s fair market values, which have

is estimated that the underlying investments within the funds

been vetted to make sure they meet the ASC 820

would be fully liquidated over the next 7-10 years.

guidelines. These investments can never be redeemed with
the funds. As these investments age in duration, distributions

(h) Equity real estate includes private real estate funds that

will be received from these funds as the underlying portfolio

invest primarily in the United States. Some of these private

companies are sold in the market. It is estimated that the

partnerships also make investments internationally, primarily

underlying investments within the funds would be fully

in Europe, India and Brazil. The private funds make

liquidated over the next 7-12 years.

investments in various real estate types, such as office,
industrial, retail and multi-family properties. The valuations

(f) Hedge funds includes hedge fund investments across a

for these investments have been estimated using the

multitude of strategies including long/short equity, long/short

manager’s fair market values, which have been vetted to

commodity, global macro, multi-strategy, event-driven, credit,

make sure they meet the ASC 820 guidelines. These

fund of hedge funds, and emerging markets. The vast

investments can never be redeemed with the funds. As these

majority of these investments are U.S. based, but some may

investments age in duration, distributions will be received

invest internationally. Investment managers may make

from these funds as the underlying properties are sold in the

investment decisions based on top down macroeconomic

market. It is estimated that the underlying investments within

analysis or bottom up company or theme specific analysis;

the funds would be fully liquidated over the next 5-7 years.

managers may shift portfolios from net long to net short
positioning but on balance tend to carry a net long exposure

Derivative Information

within their portfolios. The estimated fair values of the

The use of financial derivative instruments is governed by the

investments are received on a monthly basis from the fund

University’s Investment Policy Statement, which is approved and

administrators. Final valuations are typically received around

overseen by the Investment Committee of the Board of

mid-month for most funds but in some instances funds will

Trustees. The University assumes many risks as a result of its

report final valuations on a quarterly basis in accordance with

investment decisions and investment holdings. Many risks are

the reporting period specified in the fund legal

discussed in the Investment Policy Statement:

documents. Fund liquidity varies across the hedge fund

Manager risk – the risk that a manager underperforms similar

category from monthly, quarterly, annually, and up to a

managers, benchmarks, or appropriate indices.

maximum period of three years. Approximately 33% of the

Benchmark risk – the risk of harm caused by constructing,

net asset value in this class has a lock up period ranging from

selecting, or managing to an inappropriate benchmark.

three to fourteen months from June 30, 2012

CASE WESTERN RESERVE UNIVERSITY

| 25

Peer risk – the risk that one’s peers generate better investment

Shortfall risk – the risk that investment returns will be lower than

performance, thereby boosting the relative size of their

expected, causing a failure to accomplish investment or financial

endowments and enhancing their competitive advantage.

objectives.

Market risk – the risk that the value of an investment will
decrease due to market moves.

The University seeks to mitigate these risks by using derivative

Interest rate risk – the risk that an investment’s value will change

transactions. At the macro level of the investment portfolio,

due to a change in the absolute level of interest rates, the

derivative transactions also create cost-effective beta exposure

spread between two rates, the shape of the yield curve, or any

that may replace a fund or investment manager, add alpha,

other interest rate relationship.

support liquidity management, and reduce the impact of extreme

Concentration – the risk of being too concentrated in one

negative market conditions. The derivative instruments used

particular security, manager, strategy, sector or asset class, thus

include futures, total return swaps, and over-the-counter options.

being vulnerable to poor performance stemming from lack of
diversification.

Futures: An Equity Index Future is a standardized obligation to

Absolute return risk – the ability to generate positive absolute

buy or sell a market index, at a certain date in the future

returns, not just in favorable markets, but also in uncertain and

(settlement date), at a specified price (futures price). Equity Index

negative phases measured over a business cycle.

Futures are typically cash-settled. Trading Medium: Exchange A

Currency risk – the risk that currency fluctuations or trends

single clearing house (e.g., Options Clearing Corporation, for the

reduce the value of investments in non-U.S. markets.

Chicago Board Options Exchange) is the counterparty to both

Commodity risk – refers to the uncertainties of future market

parties involved in the contract. Futures trade a premium or

values and the size of future income caused by fluctuation in the

discount to the cash index level based on the following

prices of commodities (energy, agricultural, precious and

theoretical formula: Futures Fair Value = Cash Index Value +

industrial metals) due to demand/supply imbalances.

Expected Interest Income prior to contract expiry - Expected

Leverage – the risk that significant volatility or losses will be

Dividend Income prior to contract expiry – Expected Lending

generated by the use of debt designed to magnify returns.

Income prior to contract expiration. The value of a futures

Counterparty risk – the risk that one party to a transaction does
not make complete or timely payment of margin, swap cash
flow, bond proceeds, or other similar payments.
Credit risk – the possibility that a bond issuer will default by
failing to pay interest or repay principal in a timely manner.
Tail risk – a form of portfolio risk that arises when the possibility
that an investment will move more than three standard
deviations from the mean is greater than what is shown by a
normal distribution.
Liquidity risk – the inability to sell or trade securities at fair
market value within a short period of time; also, the risk that
sufficient cash is not maintained, or cannot be accessed, to meet
short-term obligations.
Inflation risk – the risk that rising prices significantly erode the
effective purchasing power of the portfolio, as measured by the
University’s cost inflation.

contract converges to that of the underlying index at expiration.
The investor posts an initial margin and a maintenance margin
which represents a small portion of the overall notional value
(usually 12%-18% of the notional value). Collateral between the
counterparties is exchanged daily based on the mark to market
performance of the futures contract. Used to gain beta exposure
to an index on the long side and to hedge out beta exposure on
the short side. Used primarily as a manager replacement
strategy.

Total Return Swap (TRS): A TRS is a non-standardized agreement
whereby one party makes periodic cash payments based on a set
rate (e.g., LIBOR) while another party makes periodic cash
payments based on the total return of an underlying index. The
total return payer agrees to pay the total return of the underlying
index to the total return receiver. The total return receiver agrees
to receive future total return, and pay periodic payments to the
total return payer. Trading Medium: Over-The-Counter (OTC).

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

Total Return Swaps offer synthetic exposure to beta returns while

Over-The-Counter (OTC). Transacted via ISDA/CSA agreement

avoiding the transaction and administrative costs of owning the

between counterparties. Subject to counterparty credit risk; if

actual underlying equity shares. Subject to counterparty credit

collateral is posted between parties, counterparty credit risk can

risk; if collateral is posted between parties, counterparty credit

be mitigated. Options/Option structures allow investors to

risk can be mitigated. Transacted via ISDA/CSA agreement

customize the risk/return profile of existing portfolios. For

between counterparties. There is no initial or maintenance

example: Investors who are underweight equities and have a

margin posting. Collateral between the counterparties is

moderately positive outlook can obtain enhanced equity

exchanged daily based on the mark to market performance of

exposure by capping returns with or without a leveraged payoff.

the swap. Used to gain beta exposure to an index on the long

More bearish investors can opt for downside protection to

side and to hedge out beta exposure on the short side. The swap

reduce risk. Collateral between the counterparties is exchanged

resets on a periodic basis (monthly or quarterly), at which point

daily based on the mark to market performance of the Option or

the LIBOR rate is reset and the gains/losses cash settled. A new

Option Structure. At maturity the Option or Option structure is

notional value reflecting the settled gains/losses is established at

cash settled. Prior to maturity, Options/Option structures may

this point. The next measurement begins with the new notional

trade above or below their intrinsic value due to various factors

value. There may be a breakup fee if the swap is terminated

such as time, volatility, interest rates, skew, delta, gamma etc. The

earlier than its expiration date. Used primarily as a manager

value eventually converges to intrinsic value at maturity. Used for

replacement strategy.

beta replacement strategies, alpha strategies or hedging
strategies.

Options: Options or Option structures are non-standardized
agreements whereby one party makes or receives one payment

The following table provides detailed information on the

at the time of initial transaction to/from a counterparty and may

derivatives included in the investment portfolio as of June 30 and

make or receive a second payment to/from the counterparty at

where they are located in the consolidated statements of

the expiration date of the agreement based on an individual

financial position.

option or a combination of individual options. Trading Medium:
2012
Location

Derivative Type

Notional

Level 1 Fair

Level 2 Fair

Level 3 Fair

Amount

Value

Investments
Total return swaps

$ 107,264 $

Options (over-the-counter)
Interest rate hedges
Yield curve hedges

- $

4,902 $

26,363

5,864

78,187

316

145,471

135

TOTAL DERIVATIVES, 2012

11,217

2011
Location

Derivative Type

Notional

Level 1 Fair

Level 2 Fair

Level 3 Fair

Amount

Value

Investments
Total return swaps
Options (over-the-counter)
TOTAL DERIVATIVES, 2011

32,230 $
383,094

- $
-

(19) $
1,169

1,150

CASE WESTERN RESERVE UNIVERSITY

| 27

The following table provides detailed information on the effect

portfolio which is reflected in the consolidated statement of

the derivatives had on the overall performance of the investment

activities:

Location

Derivative Type

2012

2011

Investment Income
Options (over the counter)

(27,738) $

48,254

(10,255)

27,029

(37,993) $

75,283

(4,613) $

Futures contracts
Unrealized gains (losses)
Options (over the counter)
Total return swaps

(1,133)

(2,866)

EFFECT OF DERIVATIVES

230

(7,479) $

(45,472) $

(903)
74,380

7. PROPERTY, PLANT, EQUIPMENT, AND BOOKS
Property, plant, equipment and books are stated at cost, less

Components of property, plant, equipment and books are as

accumulated depreciation. Depreciation is computed on the

follows:

straight-line method over the estimated useful life of 40 years for
buildings, 5 to 12 years for equipment, and 10 years for books.

2012
$

Land and land improvements

38,359

2011
$

38,875

1,137,051

1,129,256

266,343

284,847

Library books

37,067

35,865

Construction-in-progress

27,818

7,898

1,506,638

1,496,741

Building and building improvements
Equipment and software

(776,001)

Less: accumulated depreciation
TOTAL PROPERTY, PLANT, EQUIPMENT AND BOOKS, NET

730,637

(751,481)
$

745,260

The above assets include $492,376 leased from the Ohio Higher

the University’s consolidated financial statements is the obligation

Education Facility Commission (OHEFC). The University may

for related bonds issued by the OHEFC.

purchase each of the leased assets for a nominal amount at the
end of the lease period. Therefore, these assets have been

Depreciation expense included in the Statement of Activities is

capitalized and are included in the above listing. Also included in

$63,356 (2012) and $65,364 (2011).

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

8. NOTES AND BONDS PAYABLE
Notes and bonds payable are as follows:

Ohio Higher

Series 1988

Interest Rate
7.85 - 7.90%

Maturity
2011-2013

Education Facility
Commission

Series 1990
Series 1994

6.50 - 7.13%
6.00 - 6.25%

2011-2020
2014-2018

11,650
20,000

revenue notes and

Series 1997

4.90 - 6.25%

2011-2014

5,105

6,525

bonds:

Series 2001

Variable

2011-2022

12,200

12,615

Series 2002A

Variable

2023-2031

64,875

Series 2004A 3.625 - 5.00%

2016-2034

75,670

Series 2006

3.75 - 5.25%

2012-2044

82,490

Series 2008A
Series 2008B

Variable
Variable

2030-2044
2030-2044

60,000
67,500

Series 2008C 4.00 - 5.00%

2014-2033

50,490

Series 1966
Series 1971

3.00 - 3.50%
3.00%

2011-2016
2011-2016

535
-

665
535

.25 - .43%

2030

63,000

6.75%
4.12%

2011-2018
2011-2018

467
5,205

543
5,890

-n/a-

2011-2019

2,400

2,850

Part A

4.96%

2011-2041

12,082

12,268

Part B

5.33%

2011-2041

4,163
550,166

4,224
559,611

U.S. Government
housing bonds:
Ohio Higher
Education Facility

2012
12,334

2011
17,821

Commission
commercial paper:
Ohio Higher
Education Facility
Commission capital
lease:
Compass Group
USA, Inc.
HUD Loan:
TOTAL LIABILITY
Unamortized Bond Premium
Ohio Higher

Series 2004A

1,703

1,860

Education Facility

Series 2006

6,487

6,909

Series 2008C
Commission:
TOTAL UNAMORTIZED BOND PREMIUM

1,622
9,812

10,568

1,799

TOTAL NOTES AND BONDS PAYABLE

559,978

570,179

The fair market value of the University’s notes and bonds payable

values were estimated utilizing the discounted future cash

is approximately $578,290 (2012) and $575,020 (2011). These

outflows at rates for similar debt.

CASE WESTERN RESERVE UNIVERSITY

| 29

The U.S government housing bonds are collateralized by

Principal payment requirements for bonds, notes, and capital

securities and pledges of net revenues from the University’s

lease obligations for the next five years and thereafter are as

student housing and dining facilities.

follows:
Scheduled

The Ohio Higher Education Facility Commission (OHEFC)
authorized a $63,000 tax-exempt commercial paper program in

Year

February 2000 to provide construction funds for several
approved capital projects and to refinance earlier projects. In
November 2008, the OHEFC authorized a $27,000 expansion of
that program, to a total size of $90,000, to provide funding for
future projects. The University has issued no additional
commercial paper pursuant to the $27,000 of new authority, and

Total Maximum

Principal

Outstanding

Principal

Payments

VRDO's

Payments

2013 $

11,351

2014

11,182

48,915

60,097

2015

11,755

48,915

60,670

2016

12,593

28,915

41,508

111,915

123,266

2017

13,434

28,915

42,349

Thereafter

489,851

(267,575)

222,276

TOTAL

550,166

the amount outstanding under this program as of June 30 is
$63,000, with maturities not exceeding 270 days from the
issuance date. All commercial paper issued under the terms of
the program must mature no later than February 1, 2030. The
annualized interest cost and credit facility expense for this
program was 0.83% (2012) and 0.97% (2011).

The University has letter of credit agreements, standby bond
purchase agreements and a liquidity agreement with various
financial institutions to purchase the University’s variable rate
demand obligations (“VRDO’s”) and commercial paper if they
cannot be remarketed. Outstanding VRDO’s in the above table
represent amounts payable in the event that bonds are tendered

The University has total revolving lines of credit in the amount of

but not successfully remarketed.

$60,000 with two financial institutions of $30,000 each to finance
working capital. Both lines are subject to review and renewal
annually. There were no amounts outstanding at June 30, 2012.

In May 2008, the OHEFC series 2008 bonds were issued to
refinance the OHEFC series 2004B bonds. The amount
refinanced was $177,826. The variable portion of the debt is
supported by two lines of credit with financial institutions. The
unamortized balance of deferred financing fees is included in
prepaid expenses and other assets. The balance was $1,242
(2012) and $1,284 (2011).

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

Interest expense, including those amounts for interest rate swap
agreements (Note 12), was $21,090 (2012) and $22,812 (2011).

Certain borrowing agreements require that the University comply
with certain covenants. The University is in compliance with these
provisions as of June 30, 2012.

9. RETIREMENT PLANS
The University has both defined benefit and defined contribution
pension plans for its employees. In accordance with provisions of

2012

the Employee Retirement Income Security Act of 1974 (“ERISA”),

BENEFIT OBLIGATION
Discount rate

the University has established a trust to hold plan assets for its

Rate of compensation increase

defined benefit plan. The funded status of the University’s

Measurement date

defined benefit plan is as follows:

Census date

2012
$ 188,337

Benefit obligation at June 30
Fair value of plan assets at June 30

125,046

2011
126,867
104,285

FUNDED STATUS AT JUNE 30

(63,291)

(22,582)

Accumulated benefit obligation

186,742

125,983

2011

4.50%

6.00%

4.25%

6/30/12

6/30/11

7/1/11

7/1/10

NET PERIODIC BENEFIT COST
Discount rate

6.00%

6.25%

Expected return on plan assets

8.50%

Rate of compensation increase

4.25%

The expected long-term rate of return for the defined benefit
plan was estimated using market benchmarks for equities and

Benefit plan costs for the defined benefit plan are as follows:

bonds applied to the plan's target asset allocation. The expected
return on equities was computed utilizing a valuation framework

2012
Net periodic benefit cost

Employer contributions
Benefits paid

6,167

2011
$

5,486

21,113

4,416

3,681

5,192

that projected future returns based on current equity valuations
rather than historical returns. Management estimated the rate
by which the plan assets would outperform the market in the
future based on historical experience adjusted for changes in

Estimated benefits expected to be paid under the defined benefit

asset allocation and expectations for overall lower future returns

plan for the next five years are as follows:

on equities compared to past periods.

Fiscal 2013

4,377

Fiscal 2014

5,047

Fiscal 2015

4,961

Fiscal 2016

5,706

Fiscal 2017

6,058

Amounts expected to be paid between 2018 and 2022 total
$39,217. The University’s estimated employer contribution for
the defined benefit plan in fiscal 2013 will depend on the results
of the July 1, 2012 actuarial valuation and is estimated to be
$9,200.

The investment objective for the defined benefit plan is to
maximize total return with tolerance for slightly above average
risk, in order to meet the obligations that the University has to its
plan beneficiaries. To accomplish this objective, the University
has established a broadly-diversified asset allocation strategy that
includes absolute return strategies (combination of fixed income
and equity securities) (50%), equity investments (30%), bonds and
cash (16%), and real estate (4%). The weightings of the
investments relative to each other in the total portfolio fluctuate
as market conditions vary; they are adjusted regularly to remain
within acceptable ranges.

Weighted-average assumptions used to determine the benefit
obligation and benefit plan costs are as follows:

CASE WESTERN RESERVE UNIVERSITY

| 31

The weighted-average asset allocation for the defined benefit

The estimated amortization of prior year service costs expected

plan is as follows:

in fiscal 2013 totals $160.

Equity securities
Fixed income securities
Real estate
Other
TOTAL ASSET ALLOCATION

2012
60.00%

2011
63.00%

25.00%

31.00%

4.00%

11.00%

2.00%

100.00%

Components of the net periodic benefit cost and other changes
in plan assets that are recognized in the consolidated statement
of activities are as follows:
2012
Change in actuarial losses

TOTAL (GAIN) LOSS RECOGNIZED,

statements of financial position and in unrestricted net assets

UNRESTRICTED NET ASSETS

related to the defined benefit plan are as follows:
2012

2011

STATEMENT OF FINANCIAL POSITION
NET LIABILITY
UNRESTRICTED NET ASSETS
Prior service costs

UNRESTRICTED NET ASSETS

(10,390)

6,167

5,486

(21,113)

(4,416)

40, 709

(9, 320)

(22,582)

Benefit plan costs for the defined contribution plan are $19,499
$

Actuarial losses
AMOUNT RECOGNIZED AS REDUCTION OF

(63,291)

STATEMENT OF ACTIVITIES

(10,104)
(286)

55,655

Net periodic benefit cost
Employer contributions
TOTAL (GAIN) LOSS RECOGNIZED,

(238)

Amortization of prior service cost

The amounts recognized in the University’s consolidated

55,893

2011

160

398

83,555
$

83,715

(2012) and $18,833 (2011).

27,662
$

28,060

10. COMMITMENTS AND CONTINGENCIES
In its normal operations, the University is subject to various

grants from the National Institutes of Health to support work by

claims and lawsuits. In management’s opinion, the resolution of

CCF-based investigators were awarded to and administered

these contingencies will not have a significant adverse effect on

through the University by CCLCM, which operates as an academic

the University’s financial position, operations, or cash flows.

unit of the School of Medicine. Expenditures for research
conducted under this joint agreement totaled $98,309 (2012) and

In April 2006, the Boards of University Hospitals Health System

$100,098 (2011).

and the University approved a new affiliation agreement between
the School of Medicine and University Hospitals of Cleveland

The University is self-insured for workers compensation and

(“UHC”). This agreement significantly strengthened the historical

employee and student medical coverage. Property is

relationship between the entities through the creation of the

commercially insured with an aggregate deductible of $700. The

Case Medical Center, a virtual entity that encompasses certain

University also carries general liability insurance with a deductible

teaching, research and clinical activities of the School of Medicine

of $100 per occurrence. The University believes its reserves for

and UHC.

self-insured risks and the deductible portion of insured risks are
sufficient.

In May 2002, the University entered into an agreement with the
Cleveland Clinic Foundation (“CCF”) to form a new medical

The expected cost to complete construction in progress is

education and research program, the Cleveland Clinic Lerner

approximately $19,825.

College of Medicine (“CCLCM”). Beginning in 2004, research

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

11. RELATED PARTY TRANSACTION
In 1998, the University entered into a thirty-year agreement with

buildings. The amounts purchased were $21,998 (2012) and

the Medical Center Company (a cooperative utility company

$23,108 (2011). No obligation associated with this agreement is

formed by and serving institutions in the University Circle area) to

recorded in the accompanying consolidated financial statements.

purchase chilled water and other utilities for several University

12. DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The University uses floating-to-fixed interest rate swap

generally be corroborated by market data and are classified as

agreements of various durations to manage both its funding cost

Level 2 in the fair value hierarchy.

and the interest rate risk associated with variable rate debt.
Under these swap agreements, the University pays a fixed rate

At June 30, 2012 the University has five interest rate swap

and receives from its counterparty a variable rate payment, each

agreements. Net payments or receipts under the swap

calculated by reference to specified notional principal amounts

agreements are recorded as adjustments to investment and

during the agreement period. Operations are charged the

other income and the incremental expense is disclosed in the

variable rate interest on the corresponding bonds; the difference

table below. Under one agreement in effect at June 30, 2012, the

between the fixed and variable interest amounts under the swap

counterparty pays the University a variable interest rate equal to

agreements is recorded in non-operating revenues and expenses

the Securities Industry and Financial Markets Association (SIFMA)

as investment and other income.

index, and under four other agreements, the counterparty pays a
variable interest rate equal to a percentage of the one month

The University follows accounting guidance that defines fair value,

London Interbank Offered Rate (LIBOR).

establishes a framework for measuring fair value and expands
disclosure requirements about fair value measurements,

The following table provides detailed information on the interest

including derivatives. The University's interest rate swaps are

rate swaps at June 30, 2012, with comparative fair values for June

valued by an independent swap consultant that uses the mid-

30, 2011. The number of swaps is reported based on notional

market levels, as of the close of business, to value the

amount. Information related to the interest rate swap

agreements. The valuations provided are derived from

agreements to which the University is a party, including the

proprietary models based upon well-recognized financial

associated OHEFC borrowing, where applicable, and the liability

principles and reasonable estimates about relevant future market

recognized in the consolidated statements of financial position in

conditions and the University's credit worthiness. The

deferred income and other liabilities are as follows:

University's interest rate swap arrangements have inputs that can

CASE WESTERN RESERVE UNIVERSITY

| 33

Notional
Amount

Interest Rate

12,200

4.34%

Commencement

Aug. 12, 2004

Termination Date

Oct.1, 2022

2012
2011
Level 2 Fair Market Value

Basis

LIBOR

(2,646)

(1,507)

15,000

4.43%

Jun. 5, 2002

Jun. 5, 2022

LIBOR

(4,321)

(2,945)

15,000

3.60%

Sept. 25, 2002

Sept. 25, 2022

LIBOR

(3,254)

(1,799)

35,000

3.81%

Aug. 4, 2004

Aug. 1, 2034

LIBOR

(11,795)

(5,615)

100,000

3.37%

Jan. 3, 2012

Jan. 1, 2017

SIFMA

(12,022)

100,000

3.37%

Jan. 2, 2007

Jan. 1, 2012

SIFMA

100,000
3.37%
Jan. 1, 2012
Jan. 1, 2017
TOTAL INTEREST RATE SWAP AGREEMENT LIABILITY

SIFMA

$ (34,038)

(1,850)
$

(6,855)
(20,571)

Changes in the fair value of derivative instruments are recorded

placed $17,796 (2012) and $2,472 (2011) into such a fund, which

in non-operating revenues and expenses as investment and

is shown in Cash and cash equivalents on the consolidated

other income. The provisions of the swap agreements require

statements of financial position.

that on a weekly basis the University place into an escrow fund
collateral sufficient to limit the counter-party’s financial exposure

Interest expense recorded for the swap agreements in the non-

to the University to no more than $20,000. The University had

operating activities for the year ended June 30 was $6,161 in
2012 and $6,038 in 2011.

13. SUBSEQUENT EVENTS
The University has performed an evaluation of subsequent events
through September 29, 2012, the date on which the consolidated
financial statements were issued. As of the issuance of these
financial statements, the University has begun the underwriting
process to issue up to $30 million of State of Ohio Higher
Education Facility Revenue Refunding Bonds. The bond proceeds
will be placed into escrow to refund certain portions of certain
outstanding State of Ohio Higher Educational Facility Revenue
Bonds Series 2004A as well as portions of obligations under a
Master Lease and Sublease in the Ohio Higher Education Facility
Commission capital lease. All proceeds will be used for
refinancing and will not be used for additional spending or placed
on the statement of financial position. This issuance is expected
to be concluded in the 2

quarter of Fiscal Year 2013.

NOTES TO THE FINANCIAL STATEMENTS – in thousands of dollars

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