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NOTES TO FINANCIAL STATEMENTS PART 1 |
NOTES TO FINANCIAL STATEMENTS PART 2
| HOME 6. Land, Buildings and Equipment Land, buildings and equipment at June 30, less accumulated depreciation, in thousands of dollars, are as follows:
Depreciation expense included in operating expenses amounted to $61.4 million and $56.9 million in 1997 and 1996, respectively. 7. Bonds and Notes Payable Bonds and notes payable of the University at June 30, in thousands of dollars, consist of:
Total interest expense incurred on indebtedness was $32.3 million and $26.2 million in 1997 and 1996, respectively. Interest capitalized to land, buildings and equipment totaled $4.5 million in 1997 and $2.9 million in 1996. a. Facilities The University has entered into various agreements to finance its facilities additions, renovations and improvements. Bonds and notes payable outstanding for such purposes at June 30, in thousands of dollars, include:
During 1997, the University issued $135.9 million Series S tax-exempt, variable-rate bonds. The proceeds were used to retire Series B, C, D, LMNO and P, with $109.9 million outstanding, during fiscal year 1997 and will be used to retire Series K, with $26 million outstanding on July 1, 1997, the earliest possible call date. The refunding allows the University to realize present value savings through a restructuring of the University’s debt. The Series S bonds, which mature on July 1, 2027, currently bear interest at a money market municipal rate and are outstanding at varying interest rate periods of 270 days or less. The bonds may be converted from the money market mode to other variable-rate modes or to a fixed-rate mode at the discretion of the University. In the current money market mode, bonds may be tendered for purchase at the end of each rate period. Liquidity for the purchase of Series S bonds that have been tendered but not remarketed will be provided by the University. Pending the redemption of the Series K bonds, proceeds of the Series S bonds were deposited into a refunding account established under the indenture and held by the Trustee, and were invested in authorized investments as directed by the University. The Series Q and R bonds are subject to redemption in annual amounts ranging from $2.8 million to $10.1 million, commencing in 2022. These bonds pay interest to two groups of bondholders at variable and inverse-variable rates, providing the University with an aggregate fixed rate of approximately 6 percent for the duration of the borrowing. The Series Q and R bonds are outstanding for successive periods of approximately 35 days and are remarketed through a formal auction process set forth in the Trust Indenture. In lieu of providing debt service reserve funds for the Series Q, R and S bonds, the University is required to maintain certain balance sheet ratios as defined in the respective agreements. Medium-term notes in the amount of $125 million are recorded net of a discount at June 30, 1997. The notes mature in the year 2096, with a call provision in the year 2026. The bonds bear interest at a fixed rate of 7.375 percent. A portion of the proceeds from the notes was used to retire commercial paper issued in previous years, while the remaining notes have financed new construction and renovation of facilities.
At June 30, 1997, $176.8 million of taxable commercial paper was outstanding. The proceeds from these borrowings were used to finance facilities projects in the amount of $146.6 million and student loans in the amount of $30.2 million. The notes are issued with maturities of no more than one year, in minimum denominations of $100,000 and multiples of $1,000 thereafter. Scheduled maturities of the facilities bonds and notes payable for the next five fiscal years, in thousands of dollars, are as follows:
Commercial paper borrowings and CHEFA Series S bonds have no scheduled maturities and therefore are not included in the above schedule of debt maturities.
b. Student Loan The following variable-rate bonds and notes payable related to the financing of student loan notes and interest receivable were outstanding at June 30, in thousands of dollars:
c. Other Endowment real estate investments are recorded net of nonrecourse first and second mortgage loans obtained from the Credit Lyonnais Bank. In 1997, the terms of the first mortgage loan were modified to extend the maturity date to December 31, 2004 and reduce the interest rate elected by the University pursuant to the agreement to variable LIBOR plus 1.0 percent. The second mortgage loan in the amount of $7 million was made during the year with the same maturity date and interest rate. The outstanding balance of the loans at June 30, 1997 and 1996 totaled $52.0 million and $45.5 million, respectively. Interest on these loans is due monthly. The effective interest rates incurred on this debt during 1997 and 1996 were 6.86 percent and 7.15 percent, respectively. d. Interest Rate Swaps The University has entered into various interest rate swap agreements to manage the interest cost and risk associated with its variable-rate debt portfolios. Under the terms of these agreements, the University pays a fixed rate, determined at inception, and receives variable LIBOR on the respective notional principal amounts. The following schedule presents the notional principal amounts of Yale’s interest rate swaps at June 30, 1997 and the net interest expense incurred during 1997 and 1996 in thousands of dollars:
These financial instruments necessarily involve counterparty credit exposure. The counterparties for these swap transactions are major financial institutions that meet the University’s criteria for financial stability and credit-worthiness. e. Fair Value The fair value of the University's fixed-rate bonds, $246.2 million and $254.4 million at June 30, 1997 and 1996, respectively, is estimated based on quoted market prices for the same or similar issues. The carrying value of commercial paper and variable-rate bonds and notes payable, which reflects varying interest rate periods, on average 90 days, approximates fair value because of the short-term maturity of these instruments. The fair value of other notes payable of $3.5 million represents the present value of future cash flows through the year 2005. The fair value of interest rate swaps is the estimated amount that the University would receive or pay to terminate the agreements taking into account current interest rates and the credit-worthiness of the swap counterparties. At June 30, 1997, the University would pay approximately $2.7 million, including accrued interest, in the event that it terminated these agreements. The total notional amount of $85 million is not recorded on the University's financial statements because there is no exchange of principal. 8. Pension Plans The University maintains the Yale University Retirement Annuity Plan (YURAP) as a contributory plan for faculty and certain staff employees. Participants may direct employee and employer contributions to the Teachers' Insurance and Annuity Association (TIAA) and College Retirement Equities Fund (CREF), as well as other investment options. Pension expense for this plan was $26.8 and $25.2 million in 1997 and 1996, respectively. The University has no liability for unfunded pension costs under this plan. The University also has a noncontributory, defined benefit pension plan ("the Plan") for staff employees. Benefits are based on years of participation and the employee’s highest annual rate of earnings during the last five years of employment. Annual contributions to the Plan are made by the University based upon calculations prepared by the Plan's actuary. Net periodic pension cost for the Plan includes the following components, in thousands of dollars:
The following table sets forth the Plan’s funded status and the accrued liability included in the University’s Statements of Financial Position at June 30, in thousands of dollars:
Assumptions used in determining the obligation and net periodic pension cost are presented below:
Amendments to the Plan during the year that give temporary benefits to participants retiring between 1996 and the year 2000 resulted in a $3 million increase in the projected benefit obligation as of June 30, 1997. 9. Postretirement Medical Benefits In addition to providing pension benefits, the University provides comprehensive health care benefits for retired employees and their eligible dependents. While the University's subsidy of these costs differs among retiree groups, substantially all employees who meet minimum age and service requirements and retire from the University are eligible for these benefits. The University has created a trust to provide for the funding of postretirement medical benefits. Annual contributions are determined by the University and are deposited to the trust quarterly. The designated funding amounts for 1997 and 1996 were $24.8 million and $16.8 million, respectively. Postretirement medical expense includes the following components, in thousands of dollars:
The following table sets forth the plan’s funded status and provides a reconciliation to the accrued liability reported in the Statements of Financial Position at June 30, in thousands of dollars:
Actuarial assumptions used in determining the obligation and periodic postretirement medical expense were:
Plan amendments during the year that introduced employee contributions as well as the choice of participating in a Medicare Risk HMO (Health Maintenance Organization) resulted in a $15 million decrease in the accumulated postretirement benefit obligation as of June 30, 1997. The projected health care cost trend rate assumption has a significant effect on the amounts reported. Rates listed above represent assumed increases in per capita cost of covered claims for 1998 and 1997, respectively. For future years, the rate was assumed to decrease gradually and remain at the ultimate trend rate thereafter. 10. Commitments and Contingencies The University is involved in various legal actions arising in the normal course of activities and is subject to periodic audits and inquiries by various regulatory agencies. Although the ultimate outcome is not determinable at this time, management, after taking into consideration advice of legal counsel, believes that the resolution of these pending matters will not have a materially adverse effect, individually or in the aggregate, upon the University's financial statements. In the normal course of business the University leases facilities under non-cancellable operating leases. Minimum lease payments under these agreements over the next five years, in thousands of dollars, are as follows: 1998 $5,553 1999 5,237 2000 4,875 2001 4,428 2002 4,064 The University has entered into certain agreements to guarantee the debt of others. Under these agreements if the original debt holder defaults on the debt the University may be required to satisfy all or part of the remaining obligation. The total amount of these guarantees is approximately $14.4 million at June 30, 1997. |
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