Break Even Analysis
US2018
Dukefinancial_reports.pdf
Financial Statements 2016/2017
Financial Statements 2016/2017
Financial Statements 2016/2017 1
Table of Contents
2 Letter from The Executive Vice President 4 Discussion of Financial Results for Fiscal Year 2017 11 Statistical Highlights 12 Independent Auditors’ Report 15 Consolidated Balance Sheets 16 Consolidated Statements of Activities 18 Consolidated Statements of Cash Flows 20 Notes to Consolidated Financial Statements 39 Schedule 1—University Balance Sheets
(exclusive of DUHS)
40 Schedule 2—University Statements of Activities (exclusive of DUHS)
42 Schedule 3—University Statements of Cash Flows (exclusive of DUHS)
Duke University Financial Contacts
Timothy W. Walsh Vice President of Finance and Treasurer
Rachel L. Satterfield Associate Vice President for Finance and University Controller
Elizabeth H. Carver Senior Director, Accounting and Reporting
The cover of this report features the new Duke Student Wellness Center, which opened in January 2017, consolidating all student wellness resources and services into one location.
2 Financial Statements 2016/2017
Letter from The Executive Vice President
Fiscal 2017 was exceptional across all major financial fronts for Duke University, including strong investment returns, record levels of philanthropic support, significant capital investments, growth in sponsored research, and positive operating results for both the University and Duke University Health System.
Consolidated net assets increased $1.4 billion to a record high of $13.4 billion, largely reflecting the returns on our investment portfolios. Fiscal 2017 marked the end of the extraordinary leadership of President Richard Brodhead and the conclusion of the Duke Forward campaign, the largest fundraising initiative in Duke’s history, raising $3.85 billion. Fiscal 2017 was also the highest annual giving year in Duke’s history, with $581 million of support provided by alumni and friends of the University.
Duke continued its commitment to capital investment, with significant progress made this year on athletic facilities, student housing, a new student wellness center and an arts center. This trend will continue over the next several years, as the administration focuses on enhancements to undergraduate student housing, investments in the sciences, and expansion at our major hospitals to meet patient needs.
Faculty in the School of Medicine and the Pratt School of Engineering drove continued growth of the Duke’s now $1.2 billion dollar research
enterprise in fiscal 2017. Increased support from the National Institutes of Health was primarily driven by the Duke Clinical Research Institute, which remains the world’s largest academic clinical research organization.
Both the University and DUHS ended the year with positive operating results. This is the second consecutive year of positive margins for the University, with increased support from our endowment and invested balances. DUHS once again delivered strong financial results in fiscal 2017, ending the year with an almost $250 million positive operating margin, largely attributable to increases in patient volumes.
Duke’s financial success reflects the dedication and commitment of our staff, faculty and students, as well as the continued loyalty of the many alumni and friends of Duke. I extend my sincere appreciation for everything they do for our University.
Tallman Trask III Executive Vice President
The Richard H. Brodhead Center for Campus Life
Consolidated Balance Sheet (000’S OMITTED)
4 Financial Statements 2016/2017
Discussion of Financial Results for Fiscal Year 2017
The Discussion of Financial Results (the Discussion) includes highly summarized data and should, therefore, be read in conjunction with the accompanying consolidated financial statements, notes, and supplementary schedules. All figures presented within the Discussion are consolidated and inclusive of Duke University (the “University”) and Duke University Health System, Inc. (DUHS) and collectively referred to herein as Duke, unless specifically designated otherwise.
Net Assets Duke’s consolidated net asset base increased $1.4 billion in fiscal 2017 to $13.4 billion as of June 30, 2017. The increase reflects a 12.7% return on the University’s Long-Term Pool (LTP) investments and a 12.1% return on DUHS’ Health System Pool (HSP) investments, a record level of philanthropic support from alumni and other donors in the final year of the Duke Forward campaign, and positive operating results from both the University and DUHS. Over the past ten (10) years, despite the significant decline in fiscal 2009, consolidated net assets have grown at a compound annual growth rate of 3%.
The following table summarizes the major components of net assets activity in fiscal 2017 and 2016:
The operating results of the University and DUHS are detailed independently later in the Discussion. Nonoperating activities of Duke resulted in a net increase of $1.2 billion to the consolidated net asset base in fiscal 2017 (compared to a net decline of $1.2 billion in fiscal 2016) and include:
➢ Total investment returns of the LTP and HSP of $1.2 billion and negative $381 million for fiscal 2017 and 2016, respectively, less amounts distributed to support operations of $406 million and $394 million for fiscal 2017 and 2016, respectively. Duke’s investment programs and related outcomes are described in more detail within the “Investments/Endowments” segment of this Discussion.
➢ Restricted contributions primarily received for endowment and capital projects ($165 million). Restricted contributions are reported net of amounts released from restrictions of $73 million and $57 million for fiscal 2017 and 2016, respectively.
➢ Nonperiodic changes in defined benefit plans ($130 million increase), reflecting positive investment returns on plan assets, as well as current year increases in the discount rates used to determine the valuations of Duke’s obligations related to the defined benefit pension and postretirement healthcare plans.
➢ Gains from the University’s interests in perpetual trusts held by others, primarily The Duke Endowment ($33 million).
2.0
Consolidated Net Assets ($ in billions)
Consolidated University DUHS
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1.9 2.1
9.9 10.9
9.4
6.4
8.6
1.4
8.0
10.5
7.5
6.1 7.37.8
1.6 2.1
$16
$14
$12
$10
$8
$6
$4
$2
$–
2.6
8.3
12.6
2.9
13.0
9.8
3.0
13.4
9.6
3.2
12.0
2.4
9.6
Summary of Changes in Consolidated Net Assets (in millions)
2017 2016 Operating results – University $ 133 $ 55
Less: Operating support from DUHS (102) (98)
Operating results – DUHS 249 278
Nonoperating results:
Investment return, net of spending 815 (775)
Restricted contributions, net of amounts released from restrictions 165 151
Nonperiodic changes in defined benefit plans 130 (514)
Gains (losses) on interests in perpetual trusts held by others 33 (52)
Other 14 (56)
Total increase (decrease) in consolidated net assets 1,437 (1,011)
Total consolidated net assets $ 13,423 $ 11,986
10.5
FY 2017 University Operating Expenses – $2.70 billion
Professional Services
5%
Salaries and wages
48%
Employee benefits 11%
Interest 3%
Depreciation 8%
Rent, utilities and maintenance
4%
Supplies and materials
4%
Other operating expenses
11%
Net tuition and fees 17%
Government grants
and contracts 21%
Private grants and contracts
19%
Auxiliary enterprises
8%
Investment return designated
for current operations
19%
Contributions 7%
Other income
5%
FY 2017 University Operating Revenues by Source – $2.83 billion
University Operating Performance The operating results of the University are presented in the supplemental Statements of Activities (Schedule 2 on page 40) following the notes to the consolidated financial statements. University operating activities for fiscal 2017 primarily include all revenues and expenses that support education and research efforts, and are discussed in more detail in their respective segments of this Discussion.
The fiscal 2017 operating results of the University improved $78 million compared to fiscal 2016, reflecting an 8.1% increase in operating revenues partially offset by a 5.2% increase in operating expenses.
The fiscal 2017 and 2016 operating revenue increases shown above primarily reflect incremental investment support discussed in the Investments/Endowments section of this discussion. The administration anticipates future growth patterns comparable to the fiscal 2015 and 2014 rates shown.
Total operating revenues for the University increased $212 million to $2.83 billion in fiscal 2017. The University’s major revenue components are summarized below:
➢ Grants and contracts revenue, which increased approximately 6% in fiscal 2017, represents the largest component of University revenue (40%), and is covered in detail within the “Sponsored Programs” segment of this Discussion.
➢ Net tuition and fees reflect gross tuition and fees net of student financial aid provided by the University. Gross tuition and fees ($771 million) increased $38 million, or 5%, over the prior year, reflecting modest rate increases and enrollment growth in certain programs. Student financial aid ($295 million) increased $15 million, or 5%, in fiscal 2017, reflecting the administration’s continued commitment to need-blind admission for undergraduates and strong financial support for graduate and professional students.
➢ Investment return designated for current operations, consisting of endowment spending distributions, returns on other invested funds, and distributions from The Duke Endowment, increased $67 million in fiscal 2017 and totaled $534 million. The changes in each component are covered in more detail within the “Investments/ Endowments” segment of this Discussion.
Operating expenses for the University increased $134 million to $2.70 billion in fiscal 2017. The major components of University operating expenses are summarized below:
➢ Salaries and wages totaled $1.3 billion in fiscal 2017, an $81 million or 7% increase compared to fiscal 2016. This increase primarily reflects fiscal 2017 merit-based salary increases for faculty and staff.
➢ Depreciation expense of $213 million represented 8% of total operating expenses in fiscal 2017, and an increase of $13 million compared to the prior year. Fiscal 2017 capital activity is covered in detail within the “Capital Spending and Debt” segment of this Discussion.
➢ Other operating expenses represented 11% of University operating expenses in fiscal 2017 and include various nonlabor expenses, most notably travel expenses, royalties and public relations expenses.
Year-to-Year Change in University Operating Revenue and Expense (%)
Operating Revenue Operating Expense
10%
5%
0%
-5%
-10%
2013 2014 2015 2016 2017
4.8%
2.4%
3.4%
2.3% 2.5%
3.3%
8.3%
4.1%
8.1%
5.2%
Subrecipient payments
6%
Academic support from DUHS
4%
Financial Statements 2016/2017 5
6 Financial Statements 2016/2017
DUHS Operating Performance As detailed in Note 1 to the consolidated financial statements, DUHS operates as a controlled affiliate of the University, and manages all of Duke’s clinical health operations and facilities. The financial results and financial position of DUHS are consolidated into the financial statements of Duke under financial statement presentation requirements governing colleges and universities. This differs from financial statement presentation requirements governing health care organizations and used by DUHS in their separately issued financial statements. The fiscal 2017 net operating income of $275 million reported in DUHS’ separately-issued consolidated statement of operations represents a decline of $28 million compared to fiscal 2016.
Total DUHS operating revenue for fiscal 2017 increased $204 million, or 6% over the prior year. The increase in revenue was primarily driven by volume growth. Inpatient discharges and average daily census increased 4% and 5%, respectively. Surgical procedures (inpatient and outpatient combined) increased 3%, and outpatient visits, excluding surgical procedures, increased 5% over the prior year.
DUHS operating expenses increased $232 million, or 8%, in fiscal 2017 compared to the prior year. The most significant increases were primarily in labor costs which increased $141 million, or 10%, and medical supplies which increased $60 million, or 8%. The increase in labor costs is attributed to a 6% increase in the number of full- time equivalents (FTEs), as well as a 4% increase in the salary per FTE. The increase in FTEs, including a higher utilization of temporary FTEs, is partly attributed to an increased nursing staff as DUHS made available an additional 41 beds during fiscal 2017 to meet increased inpatient volume demands. In addition to volume
demands causing increased staffing costs, DUHS has worked to hire new nurses to fill permanent positions. This results in an increase in overall salary expense as new nurses do not assume a full patient load while going through orientation and preceptorship. The medical supplies increase is due to increased utilization.
DUHS continues to provide care to patients who meet certain criteria under its financial assistance policies without charge or at amounts less than its established rates. Because DUHS does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue or included in patient accounts receivable. In fiscal 2017, DUHS provided charity care with an estimated cost of $97 million, an increase of $15 million compared to fiscal 2016. Total community benefit as defined by and reported to the Internal Revenue Service was $283 million in fiscal 2017, and combined with an additional $226 million of community investments, DUHS provided $509 million of benefit to the community. This is an increase of 14.6% from $444 million in fiscal 2016, due primarily to the increases in charity care and unreimbursed Medicaid and Medicare.
DUHS operating margins and positive cash flows from operating activities over the last ten (10) years, combined with returns on its invested reserves, allowed DUHS to make transfers to the University in support of the School of Medicine and other University functions of $1.3 billion during this time period. These transfers included a $510 million transfer of cash and investments to the School of Medicine on July 1, 2016, and was comprised of the following two (2) components: (1) $310 million to replenish a $280 million quasi-endowment fund established in June 2006, intended to provide predictable annual support to the School of Medicine from fiscal 2017 through fiscal 2026 and (2) $200 million to establish a new quasi-endowment fund that will provide support beyond July 1, 2026. DUHS continued its history of providing annual operating support for University-based medical faculty research and education with net transfers totaling $102 million to the School of Medicine in fiscal 2017, also included in the $1.3 billion above total.
1 Certain components of nonoperating activities in the DUHS consolidated statement of operations and statements of cash flows are reclassified as operating items in Duke’s consolidated statements of activities and statements of cash flows in order to conform to financial statement presentation generally followed by colleges and universities. Interest payments related to derivative swaps ($15 million) represents the primary component reclassified in fiscal 2017. Duke’s consolidated statements of activities and cash flows include $249 million of income and $419 million of implied cash flows, respectively, from operations related to DUHS for fiscal 2017.
DUHS Operating Income and Cash Flow ($ in millions)1
Income from operations Cash flow from operations
$600
$500
$400
$300
$200
$100
$– 2013 2014 2015 2016 2017
282
275
412
184
96
226 355
494
303
513
Financial Statements 2016/2017 7
Investments/Endowments Responsibility for managing Duke’s investment portfolio rests with DUMAC, Inc. (DUMAC), a separate nonprofit support corporation organized and controlled by Duke. DUMAC invests Duke’s assets across domestic and international asset groups, principally through investment advisory firms and partnerships. Growth of the investment and endowment base is a critical factor in maintaining Duke’s financial strength and flexibility to meet current needs and fund future initiatives.
Duke’s investment portfolio primarily consists of debt, equity, and other investments within the LTP and the HSP. Duke’s investments have grown significantly over the last ten (10) years and total approximately $12.7 billion as of June 30, 2017. Duke’s endowment (including interests in perpetual trusts held by others), representing $7.9 billion of this total, support the current and future operations of the schools, academic departments, libraries and other facilities, and student financial aid.
DUHS accounts for $3.6 billion of Duke’s cash and investment portfolio which primarily represents unrestricted working capital, reinvested operating surpluses, and associated appreciation.
For fiscal 2017, the LTP, in which 98% of the endowment (excluding perpetual trusts) is invested, returned 12.7%. DUMAC seeks to achieve an annualized real rate of return of at least 5.0%, net of fees, to fund the LTP spending rate and to allow growth of the endowment after considering the effects of inflation. The total return on the HSP, a more liquid fund managed for DUHS, was 12.1% in 2017.
As Duke’s investment base, including the endowment, has grown over the last ten (10) years, investment related support has become a larger contributor to the current operations of the University. Investment returns supporting operations, which include endowment spending, withdrawals from quasi-endowments, distributions from The Duke Endowment, and income from invested working capital, grew from $365 million in fiscal 2008 to $534 million in fiscal 2017.
To balance current and future needs, the University employs investment and spending policies designed to provide an appropriate flow of income to the operating budget while preserving the future purchasing power of the endowment assets in perpetuity. The LTP spending rate is set by the administration and approved by the Board of Trustees. For fiscal 2017, rather than increasing the spending rate, the Board approved holding the spending rates flat while releasing a one-time supplementary distribution equal to 3% from all non-financial aid endowments. The effective spending rates for fiscal 2017 – based on June 30, 2016 investment market values – were 5.9% for financial aid endowments and 4.6% for non-financial aid endowments. The HSP is not subject to the University’s spending policies.
In addition, the Board authorizes the use of supplemental endowment distributions from quasi-endowments for special academic development initiatives and to support the operations and maintenance of certain facilities. These supplemental distributions have grown from $67 million in fiscal 2008 to $160 million in fiscal 2017, due largely to two quasi-endowment funds established by transfers from DUHS to the School of Medicine to provide annual academic support through 2026. In addition, the Board approved a $250 million liquidation from central unrestricted quasi-endowments to occur over six years beginning in fiscal 2016. The University withdrew $50 million of the $250 million in fiscal 2017.
Other investment income is another major component of investment returns supporting current operations ($111 million in fiscal 2017). This income can vary significantly based on market returns and, as a result, has generated as much as $137 million of income in fiscal 2011 and as low as $54 million in fiscal 2013. Such support is generated
Fiscal Year Investment Returns
2013 2014 2015 2016 2017
LTP 13.5% 20.1% 4.4% -2.6% 12.7% HSP 13.1% 19.7% 3.0% -3.3% 12.1%
Investment Return Supporting Current Operations ($ in millions – University Only)
Endowment spending distributions Income from The Duke Endowment
Other investment income
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
$600
$500
$400
$300
$200
$100
$–
Growth of Investments and Endowment (June 30 values, $ in billions)
Endowment
$14
$12
$10
$8
$6
$4
$2
$–
8.3
9.4
7.8 8.4
5.6 6.0 4.8
10.9
6.1 6.8
6.8
4.4
5.7
8.7
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
11.0
7.0
Investments
11.2
7.3 7.9
12.7
8 Financial Statements 2016/2017
through the corporate cash management strategies of Duke and is released under protocols approved by the Board of Trustees.
As planned, other investment income increased $20 million compared to fiscal 2016, and primarily represents the fiscal 2017 liquidation of invested working capital.
The graph above reflects a rolling ten-year average of investment returns, and reflects the reality that the University has distributed slightly more from our invested funds than LTP returns have provided during this ten-year period, primarily due to a 24.3% market value decline experienced in fiscal 2009. Absent that unusually negative annual return and the best annual return during this period (24.5% in fiscal 2011), the LTP ten-year annualized investment return was 8.6% as of 2017.
Sponsored Programs The University conducts research in a collaborative interdisciplinary environment among its schools. The School of Medicine is one of the largest biomedical research enterprises in the country with programs focused on the causes, prevention, and treatment of human disease. Campus-based schools under the Provost continue to increase their research activity, primarily within Arts and Sciences, the Pratt School of Engineering, the Sanford School of Public Policy, and the Nicholas School of the Environment.
The United States government is the largest source of grant and contract funding for the University, with 39% of this support from the Department of Health and Human Services, Duke’s cognizant agency. Since 2008, the University’s government grant and contract funding has grown 11%, reflecting the success of our faculty in pursuing support for their research.
Fiscal 2017 government sourced revenue was $596 million, a $39 million, or 7%, increase compared to fiscal 2016. The most notable increase was from the Department of Health and Human Services for projects within Duke Clinical Research Institute (DCRI).
In addition to government sourced grants and contracts, Duke also received $477 million of research support from private sources in fiscal 2017, an increase of $17 million, or 4%, compared to fiscal 2016. This revenue consists primarily of industry and private awards in support of clinical research. DCRI remains the world’s largest academic clinical research organization, generating 45% of Duke’s grant and contract revenue from private sources.
Philanthropy Contributions revenue reported within the consolidated financial statements is calculated based on generally accepted accounting principles (GAAP). This differs from philanthropic support reported by Duke according to the guidelines established by the Council for Advancement and Support of Education (CASE). CASE guidelines represent the philanthropy reporting standard for colleges and universities, and is based on cash collections.
The generosity of alumni and friends in fiscal 2017 helped Duke remain at the forefront of academics, research, and patient care. Under CASE guidelines, philanthropic cash receipts totaled $581 million in fiscal 2017, the highest annual giving year in Duke history.
Fiscal 2013 was Duke’s highest year for philanthropic support on a GAAP-basis ($394 million), with the public announcement of Duke Forward, a comprehensive fundraising campaign, and several individually significant pledges. In fiscal 2017, Duke recorded $370 million in contributions revenue, including pledges, a $42 million, or 13% increase from fiscal 2016.
10-Year Annualized Return 5.0% Real Rate of Return
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0% 2013 2014 2015 2016 2017
6.7%
7.1%
6.0%
7.5%
LTP Ten Year Annualized Investment Returns (%)
10.6%
6.8%
7.4%
10.8%
9.4%
7.2%
Total Grants, Contracts and Similar Agreements ($ in millions)
Government Sources Private Sources Private Diagnostic Clinic
$1,200
$1,000
$800
$600
$400
$200
$–
1,134 1,042 1,052
2013 2014 2015 2016 2017
1,041 1,072
Financial Statements 2016/2017 9
The Duke Forward campaign concluded on June 30, 2017, and surpassed its original $3.25 billion goal by raising $3.85 billion. Record giving by more than 315,000 donors and foundations will provide long-term funding for a range of University-wide initiatives and programs.
For details on the goals and priorities of the campaign and more news on major gifts, visit http://dukeforward.duke.edu.
A reconciliation of the CASE and GAAP totals is provided below (in millions):
Cash gifts per CASE (cash basis) $ 581
Amounts included in grants and similar agreements (gifts per CASE) (161)
Grants and gifts from The Duke Endowment (gifts per CASE) (13)
Net fiscal 2017 change in pledges2 (37)
Total consolidated contributions per GAAP statements $ 370
Additional information on GAAP reporting of contributions revenue and contributions receivable is provided in Notes 2 and 4 of the consolidated financial statements, respectively.
Capital Spending and Debt Over the last decade, the University and DUHS have made significant investments in land, buildings, and equipment. The University invested more than $1.8 billion over the last five years, impacting in excess of one million square feet of new or renovated living, teaching, and research space. DUHS, while owned and controlled by the University, operates under a different business model and has different budgetary considerations. DUHS has increased its net investment in property and equipment by almost $1.0 billion over the last five years.
Capital spending by the University in fiscal 2017 totaled $351 million, a 15% decline over fiscal 2016.
Major capital activity in 2017 for the University included the acquisition of an apartment building located adjacent to Central Campus, significant progress on the construction of the Medical Sciences Research Building III, Duke Arts Center, East Campus Residence Hall, and a new Softball Complex, as well as completion of the Student Wellness Center. A multi- year project to renovate Wallace Wade Stadium was also essentially completed.
➢ The apartment building located adjacent to Duke’s Central Campus will serve as swing space during the renovation of Crowell residence hall and provide options for university use as plans for renovations and additions to Duke’s current housing facilities proceed.
➢ The Medical Sciences Research Building III, scheduled for completion in the summer of 2018, will provide much needed wet lab space as well as space for the relocation of labs that are currently in outdated research facilities.
➢ The East Campus Residence Hall, scheduled for completion in December 2017, will provide 80,000 square feet of living space, including 250 new beds, and allow for the replacement of three aging East Campus dormitories.
➢ The Softball Complex, located on East Campus and scheduled for completion in late summer 2017, will provide a new softball stadium with press boxes, batting cages, offices, and seating for up to 500 fans.
➢ The Student Wellness Center, completed in January 2017, consolidated student health, counseling, psychology, nutrition, and wellness services within one facility on West Campus.
➢ The final stages of the Wallace Wade Stadium renovation will be complete for the start of the 2017 football season and features construction of Blue Devil Tower, a new press and amenities tower, as well as modernization of the bowl and concourse, including new ticket booths, concessions, bathrooms, improved seating, and accessibility options for fans with disabilities.
2 Includes changes to previously reported multi-year pledges, pledges receivable due to new multi-year commitments, and other fiscal 2017 adjustments. 3 DUHS capital spend amounts shown as reported in the separately issued DUHS consolidated financial statements. 4 Fiscal 2017 capital spend amount includes a $50 million purchase of an apartment building to support undergraduate housing.
Restricted for long term investment and capital projects
Unrestricted
Contributions (GAAP-basis, $ in millions)
2013 2014 2015 2016 2017
$450
$400
$350
$300
$250
$200
$150
$100
$50
$–
394
305
370
318 328
Capital Spending ($ in millions)
DUHS3 University4
2013 2014 2015 2016 2017
141
181
411
$450
$400
$350
$300
$250
$200
$150
$100
$50
$–
312
221
230
233
107
189
351
10 Financial Statements 2016/2017
The University’s capital plan calls for $1.2 billion of additional spending over the next five (5) years, including continued focus on undergraduate student housing, as well as investments in the sciences.
DUHS paused from an expansion level of capital spending in fiscal 2015 through 2017, but plans to spend approximately $1.7 billion over the next five (5) years in order to meet strategic capital and maintenance needs. The fiscal 2018 to 2022 capital plan includes the following key strategic projects: (1) a new Duke University Hospital inpatient bed tower to allow full utilization of its licensed bed capacity to better serve patients, as well as clinicians and staff; (2) a new Duke Raleigh Hospital inpatient bed tower and operating room (OR) modernization project that enables Duke Raleigh Hospital to operate its licensed beds as single occupancy rooms, as well as expand OR and perioperative services for growth of key clinical services; (3) a new Duke Regional Hospital addition that consolidates behavioral health services for Durham County on the hospital campus in an efficient and modern new facility and the renovation and expansion of the existing emergency department; and (4) ambulatory projects adding new or expanded sites enabling DUHS to reach new communities and meet growing demand.
Both the University and DUHS have issued various forms of debt as a primary source of capital project funding. Formal comprehensive debt policies provide guidelines for the use of long-term financing, commercial paper, and derivative transactions (in the form of interest rate and other swaps) in order to optimize the debt portfolios. Effective and responsible debt portfolio management enables the University and DUHS to execute their strategic plans for facilities while preserving working capital. The University and DUHS hold ratings of Aa1 and Aa2 with Moody’s and AA+ and AA with Standard & Poor’s, respectively.
In fiscal 2017, the University’s incremental debt increased $265 million primarily due to the issuance of Series 2016A and B bonds. The proceeds were used to refinance existing debt as well as to fund ongoing fiscal 2017 capital projects.
In fiscal 2017, DUHS’ incremental debt increased $582 million primarily due to the issuance of 2017 taxable bonds. The proceeds will be used to finance various capital additions and improvements at its healthcare facilities and pay certain expenses of issuing the bonds.
Looking Ahead In fiscal 2018, the administration’s focus will remain on operating effectively and efficiently in order to protect and advance Duke’s current financial health and commitment to our most important priorities. These include:
➢ Significant investment in the sciences as a component of the new academic strategic plan.
➢ Continued focus on the affordability of a Duke education, and supporting the University’s ongoing commitment to need-blind admissions for undergraduates.
➢ Completion of ongoing capital projects, including the new Medical Sciences Research Building III and the new Arts Building, as well as construction of new undergraduate student residence halls and renovation of existing residences.
➢ Continued focus on the evolving approach to population health models and the healthcare reimbursement environment including the health insurance exchange market, value-based reimbursement, and Medicare and Medicaid changes, all further complicated by the extended period of uncertainty in national healthcare policy.
➢ Planning and execution of strategic capital projects to facilitate future clinical growth plans, including new inpatient bed towers at Duke University Hospital and Duke Raleigh Hospital, a new behavioral health center on the Duke Regional Hospital campus, and numerous planned projects in support of ambulatory and outpatient facilities.
The administration will continue to proactively address financial and other challenges by operating with a strong sense of fiscal responsibility and prudent decision making, while directing Duke’s resources to areas of highest priority and need.
University Debt DUHS Debt5
Outstanding Debt ($ in billions) $2.4
$2.0
$1.6
$1.2
$0.8
$0.4
$– 2013 2014 2015 2016 2017
1.6
1.1
1.6
1.11.1
1.4
1.1
1.9
2.1
1.7
5 Excludes a $125 million capital lease for Duke Regional Hospital.
Financial Statements 2016/2017 11
(dollars in thousands) 2017 2016 2015 2014 2013
Students: Undergraduate 6,388 6,379 6,401 6,390 6,393 Graduate and professional 8,132 8,135 8,100 7,927 7,860 Total fall enrollment 14,520 14,514 14,501 14,317 14,253 Degrees conferred: Baccalaureate 1,848 1,823 1,843 1,831 1,801 Masters 2,578 2,561 2,412 2,477 2,346 Doctorate 885 872 774 781 829 Total degrees conferred 5,311 5,256 5,029 5,089 4,976
Research: Grants, contracts and similar agreements: Federal government sources $ 552,831 $ 504,715 $ 501,471 $ 522,953 $ 521,455 Other government sources $ 47,960 $ 53,030 $ 56,645 $ 54,834 $ 63,496 Other $ 608,287 $ 571,600 $ 538,693 $ 520,089 $ 505,795 Total grants, contracts and similar agreements $ 1,209,078 $ 1,129,345 $ 1,096,809 $ 1,097,876 $ 1,090,746
Patient Care: Discharges 68,483 66,085 64,222 62,733 60,685 Patient days 410,620 390,561 384,584 371,650 354,631 Surgical and endoscopy cases 92,185 90,809 88,729 85,248 86,703 Outpatient visits 2,173,687 2,080,315 1,965,264 1,841,458 1,798,743 Emergency room visits 187,234 186,209 179,549 170,461 170,696
Endowment: Market value of endowment $ 7,911,175 $ 6,839,780 $ 7,296,545 $ 7,036,776 $ 6,040,973 Endowment funds per full-time equivalent student $ 544,847 $ 471,254 $ 503,175 $ 491,498 $ 423,839 Financial aid spending rate 5.9% 5.4% 5.2% 5.9% 6.3% Non-financial aid spending rate 4.6% 4.1% 4.1% 4.4% 4.8% Total LTP rate of return 12.7% (2.6%) 4.4% 20.1% 13.5%
Faculty and Staff: Tenured and tenure track 1,670 1,714 1,740 1,784 1,768 Non-tenure track 1,855 1,713 1,650 1,556 1,481 Total regular rank faculty 3,525 3,427 3,390 3,340 3,249
Staff 47,455 45,898 44,900 44,833 43,907 Total employees 50,980 49,325 48,290 48,173 47,156
Statistical Highlights
Independent Auditors’ Report
The Board of Trustees of Duke University:
We have audited the accompanying consolidated financial statements of Duke University, which comprise the consolidated balance sheets as of June 30, 2017 and 2016, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Duke University as of June 30, 2017 and 2016, and the changes in its net assets and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
KPMG LLP Suite 400 300 North Greene Street Greensboro, NC 27401
Other Matter - Supplementary Information
Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information included in schedules 1 through 3 is presented for the purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.
October 10, 2017
Blue Devil weathervane located on Von der Heyden Pavilion
Financial Statements 2016/2017 15
Consolidated Balance Sheets JUNE 30, 2017 AND 2016 (DOLLARS IN THOUSANDS)
2017 2016 Assets: Cash and cash equivalents $ 639,393 $ 567,313 Accounts receivable, net 644,025 632,714 Prepaid expenses, inventories, and other assets 205,656 193,974 Contributions receivable, net 429,353 441,705 Investments 12,702,248 10,903,426
Deposits with bond trustees 29,331 47,042 Land, buildings, and equipment, net 3,966,033 3,688,461 Interests in perpetual trusts held by others 807,341 774,420
Total assets $ 19,423,380 $ 17,249,055
Liabilities: Accounts payable and accrued payroll $ 728,603 $ 708,292 Deferred revenues and deposits 212,015 202,588 Notes and bonds payable 3,932,719 3,085,714 Annuity and other split-interest obligations 60,369 53,372 Accrued postretirement/postemployment and other benefit obligations 794,479 882,385 Other liabilities 271,855 331,187
Total liabilities 6,000,040 5,263,538
Net Assets: Unrestricted 7,566,743 6,548,920
Temporarily restricted 2,877,968 2,609,315
Permanently restricted 2,978,629 2,827,282
Total net assets 13,423,340 11,985,517 Total liabilities and net assets $ 19,423,380 $ 17,249,055
See accompanying notes to consolidated financial statements.
16 Financial Statements 2016/2017
Consolidated Statements of Activities YEARS ENDED JUNE 30, 2017 AND 2016 (DOLLARS IN THOUSANDS)
2017 2016
Unrestricted Net Assets:
Operating revenues:
Tuition and fees $ 773,540 $ 735,666
Less student aid (294,544) (279,874)
Tuition and fees, net 478,996 455,792
Grants, contracts and similar agreements:
Government sources 600,791 557,745
The Private Diagnostic Clinic, PLLC 130,835 120,395
Other 477,452 451,205
Total grants, contracts and similar agreements 1,209,078 1,129,345
Contributions 132,352 119,791
Investment return designated for current operations:
The Duke Endowment 12,500 12,500
Endowment spending 411,103 364,336
Other investment income 117,539 97,408
Total investment return designated for operations 541,142 474,244
Auxiliary enterprises 234,641 211,766
Patient service revenue, net 3,168,100 2,977,113
Other 245,605 238,108
Net assets released from restrictions 72,775 57,116
Total operating revenues 6,082,689 5,663,275
Operating expenses:
Salaries and wages 2,493,627 2,303,549
Employee benefits 604,259 574,805
Student aid 43,897 42,243
Other operating expenses 2,166,456 2,032,611
Interest expense 126,703 122,821
Depreciation expense 368,017 352,010
Total operating expenses 5,802,959 5,428,039
Operating surplus 279,730 235,236
Financial Statements 2016/2017 17
Consolidated Statements of Activities (continued)
2017 2016
Nonoperating activities:
Net assets released from restrictions $ 83,815 $ 46,134
Investment return in excess of (less than) amounts designated for current operations 515,204 (465,030)
Nonperiodic changes in defined benefit plans 130,351 (513,700)
Other, net 8,723 (54,440)
Change in unrestricted net assets from nonoperating activities 738,093 (987,036)
Change in unrestricted net assets 1,017,823 (751,800)
Temporarily Restricted Net Assets: Contributions 115,845 83,259
Net assets released from restrictions (156,590) (103,250)
Investment return in excess of (less than) amounts designated for current operations 302,009 (311,546)
Other, net 7,389 9,595
Change in temporarily restricted net assets 268,653 (321,942)
Permanently Restricted Net Assets: Contributions 121,923 125,345
Investment return (less than) in excess of amounts designated for current operations (2,003) 2,058
Gains (losses) on interests in perpetual trusts held by others 32,921 (51,708)
Other, net (1,494) (12,653)
Change in permanently restricted net assets 151,347 63,042
Change in total net assets 1,437,823 (1,010,700)
Net assets at beginning of year 11,985,517 12,996,217
Net assets at end of year $ 13,423,340 $ 11,985,517
Certain amounts disaggregated above are presented below in the aggregate:
Contributions $ 370,120 $ 328,395
Investment return 1,356,352 (300,274)
See accompanying notes to consolidated financial statements.
18 Financial Statements 2016/2017
YEARS ENDED JUNE 30, 2017 AND 2016 (DOLLARS IN THOUSANDS)
2017 2016
Cash flows from operating activities:
Change in net assets $ 1,437,823 $ (1,010,700)
Adjustments to reconcile change in net assets to net cash provided by operating activities:
Depreciation expense 368,017 352,010
Nonperiodic changes in defined benefit plans (130,351) 513,700
Provision for bad debt 30,201 73,604
Change in fair value of swap instruments (36,536) 27,829
Loss on extinguishment of debt 33,887 23,156
Loss on disposals of land, buildings, and equipment 2,159 6,563
Restricted contributions received for long-term investment and capital projects (250,120) (223,553)
Permanently restricted investment return 2,003 2,058
Gains on other nonoperating items … (1,956)
Net realized and unrealized (gains) losses on investments (1,197,104) 435,184
(Gains) losses on interests in perpetual trusts held by others (32,921) 51,708
Change in:
Accounts receivable, net (60,538) (58,041)
Prepaid expenses, inventories, and other assets (11,682) (14,040)
Contributions receivable, net 28,269 12,319
Accounts payable and accrued payroll 30,642 (35,412)
Deferred revenues and deposits 9,427 20,081
Annuity and other split-interest obligations 6,997 1,824
Accrued postretirement/postemployment and other benefit obligations 42,445 19,318
Other liabilities (22,796) 25,705
Net cash provided by operating activities 249,822 221,357
Consolidated Statements of Cash Flows
Financial Statements 2016/2017 19
2017 2016
Cash flows from investing activities:
Purchases of investments (14,502,293) (13,459,826)
Proceeds from sales and maturities of investments 13,900,575 13,349,428
Purchases of land, buildings, and equipment (658,079) (590,989)
Disbursements for loans to students (3,832) (6,873)
Repayments of loans by students 6,941 7,128
Change in deposits with bond trustees 17,711 (23,622)
Net cash used in investing activities (1,238,977) (724,754)
Cash flows from financing activities:
Restricted contributions received for long-term investment and capital projects 250,120 221,686
Permanently restricted investment return (2,003) (2,058)
Gains on other nonoperating items … 1,956
Principal payments on notes and bonds payable (812,191) (760,497)
Proceeds from borrowings 1,625,309 1,035,925
Net cash provided by financing activities 1,061,235 497,012 Net change in cash and cash equivalents 72,080 (6,385) Cash and cash equivalents at beginning of year 567,313 573,698
Cash and cash equivalents at end of year $ 639,393 $ 567,313
Supplemental disclosure of cash flow information:
Cash paid for interest (net of amounts capitalized) $ 112,701 $ 107,629
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (continued)
20 Financial Statements 2016/2017
2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements of Duke have been prepared on the accrual basis in conformity with U.S. generally accepted accounting principles (GAAP). Based on the existence or absence of donor- imposed restrictions, Duke classifies resources into three categories: unrestricted, temporarily restricted and permanently restricted net assets.
Unrestricted net assets are free of donor-imposed restrictions. All revenues, gains, and losses that are not temporarily or permanently restricted by donors are included in this classification. All expenses are reported as decreases in unrestricted net assets.
Temporarily restricted net assets are subject to donor-imposed restrictions that will be met either by actions of Duke or the passage of time. These net assets include unconditional pledges, split-interest agreements and accumulated appreciation on donor- restricted endowments that have not yet been appropriated by the Board of Trustees for expenditure.
Permanently restricted net assets are subject to donor-imposed restrictions that require they be maintained permanently by Duke. Generally, the donors’ imposed restrictions of these assets permit Duke to use all or part of the income earned on related investments only for certain general or specific purposes. These net assets
include unconditional pledges, donor-restricted endowments (at historical value), split-interest agreements, and interests in perpetual trusts held by others.
Expirations of temporary restrictions on net assets (i.e., the donor stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as net assets released from restrictions in the consolidated statements of activities. Contributions, including unconditional promises to give, are recognized as revenue in the period received. Contributions for acquisition or construction of plant facilities are released from restrictions in the period in which the assets are placed in service within the nonoperating section on the statements of activities. Contributions which impose restrictions that are met in the same fiscal year they are received are reported as increases in unrestricted net assets.
Operating results (change in unrestricted net assets from operating activity) in the consolidated statements of activities reflect all transactions that change unrestricted net assets, except for contributions for plant facilities (released), investment return in excess of or less than amounts designated for current operations, nonperiodic changes in defined benefit plans, changes in the fair value of derivative financial instruments, losses on the extinguishment of debt, and certain nonrecurring items.
Notes to Consolidated Financial Statements
1. Overview of Duke University Duke University, a North Carolina nonprofit corporation, is a private, coeducational, institution located primarily in Durham, North Carolina, which owns and operates educational and research facilities (the University). Duke University Health System, Inc. (DUHS), a North Carolina nonprofit corporation, is a controlled affiliate of the University. Collectively, the University and DUHS are referred to herein as “Duke.” The University is governed by a Board of Trustees (the Board) with thirty-seven members, consisting of the President of the University and thirty-six members representing private, public, and community interests.
The University’s programs include undergraduate and graduate programs in Arts and Sciences, Engineering, Nursing, and Public Policy and professional schools in Business, Divinity, Environment, Law, Medicine, and Nursing, as well as programs in Allied Health.
DUHS operates a health care system consisting principally of:
y Duke University Hospital – a quaternary care teaching hospital located on the campus of Duke in Durham, North Carolina, licensed for 957 acute care and specialty beds, providing patient care and serving as a site for medical education and clinical research provided by the Duke University School of Medicine (School of Medicine).
y Duke Regional Hospital – a full-service community hospital located in Durham, North Carolina, licensed for 369 acute care beds; Durham Regional is owned by Durham County, North
Carolina and leased to the Durham County Hospital Corporation which has in turn subleased Duke Regional Hospital to DUHS for the identical duration under a forty (40) year automatically renewing “evergreen” lease.
y Duke Raleigh Hospital – a community hospital located in Raleigh, North Carolina, licensed for 186 acute care beds, and providing patient care.
y Duke University Affiliated Physicians, Inc. (DUAP) – a North Carolina nonprofit corporation, doing business as Duke Primary Care, consisting of twenty-six (26) primary care physician practices located in Alamance, Chatham, Durham, Granville, Orange, Vance, and Wake Counties, six (6) urgent care centers located in Durham, Orange, and Wake Counties, and a pediatric practice with two (2) locations in Durham County.
y Durham Casualty Company, Ltd. (DCC) – a wholly owned subsidiary of DUHS, domiciled in Bermuda, insuring a portion of the medical malpractice risks and patient general liability risks of DUHS clinical providers and the The Private Diagnostic Clinic, PLLC (PDC) (see Note 12).
The consolidated financial statements include the University, DUHS and all other operating entities over which Duke has control.
All significant intercompany balances and transactions have been eliminated in consolidation.
(DOLLARS IN THOUSANDS)
Financial Statements 2016/2017 21
Fair Value Measurements Fair value measurements reflected in the consolidated financial statements represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP provides a hierarchy that prioritizes the inputs to fair value measurements based on the extent to which inputs to valuation techniques are observable in the marketplace. The hierarchy assigns a higher priority to observable inputs that reflect verifiable information obtained from independent sources, and a lower priority to unobservable inputs that would reflect Duke’s assumptions about how market participants would value an asset or liability based on the best information available. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of the hierarchy of inputs used to measure fair value are described briefly as follows:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly at the measurement date.
Level 3 – Unobservable inputs for the asset or liability, used in situations in which little or no market activity exists for the asset or liability at the measurement date.
The categorization of fair value measurements by level of the hierarchy is based upon the lowest level input that is significant to the overall fair value measurement for a given asset or liability.
In the event that changes in the inputs used in the fair value measurement of an asset or liability result in a transfer of the fair value measurement to a different categorization (e.g., from Level 3 to Level 2), such transfers between fair value categories are recognized at the end of the reporting period.
Cash and Cash Equivalents Cash equivalents include assets invested in the Short Term Account (STA), all of which can be liquidated within thirty (30) days. Duke utilizes the STA to fund daily cash needs, and such assets, reported at fair value, primarily consist of short-term U.S. Treasury securities, other short-term, highly-liquid investments, and certain fixed income securities. Cash and cash equivalents that are managed as part of Duke’s investments are reported within investments, as these funds are not used for operating needs.
Prepaid Expenses, Inventories, and Other Assets Prepaid expenses, inventories, and other assets primarily include inventories, which are valued at the lower of average cost or fair value.
Contributions Receivable Pledges that represent unconditional promises to give are recognized at fair value as contributions—either temporarily restricted or permanently restricted—in the period such promises are made by donors. Contributions are discounted at a risk-adjusted rate commensurate with the duration of the donor’s payment plan. Amortization of the discounts is recorded as contribution revenue. Allowance is made for uncollectible contributions based upon the administration’s
expectations regarding collection of outstanding promises to give and past collection experience.
The methodology for calculating the allowance for uncollectible contributions is based on the administration’s review of individually significant outstanding pledges, analysis of the aging of payment schedules for all outstanding pledges, as well as other factors including current economic conditions.
In contrast to unconditional promises as described above, conditional promises are not recorded until donor conditions are substantially met.
Investments DUMAC, Inc. (DUMAC), a separate nonprofit support corporation organized and controlled by the University, is responsible for managing investment assets for Duke, The Duke Endowment (see Note 12) and the Employees’ Retirement Plan of Duke University (the ERP).
Valuation – Investments are recorded at estimated fair value. For investments made directly by Duke whose values are based on quoted market prices in active markets, the market price of the investment is used to report fair value. For shares in mutual funds, fair values are based on share prices reported by the funds as of the last business day of the fiscal year. Duke’s interests in alternative investment funds such as fixed income, equities, hedged strategies, private capital, and real assets are generally reported at the net asset value (NAV) reported by the fund managers. Unless it is probable that all or a portion of the investment will be sold for an amount other than NAV, Duke has concluded, as a practical expedient, that the NAV approximates fair value.
Risks – Duke’s investments are exposed to several risks, including liquidity, currency, interest rate, credit, and market risks.
Duke attempts to manage these risks through diversification, ongoing due diligence of fund managers, and monitoring of economic conditions. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in Duke’s consolidated financial statements.
Derivatives are used by Duke and external investment managers to manage market risks. The most common derivative strategies engaged in are total return swaps, credit default swaps, futures and forward contracts, and options. These derivative instruments are recorded at their respective fair values (see Note 11).
Investment Pools – Duke utilizes investment pools known as the University’s Long Term Pool (LTP) and the Health System Pool (HSP) to make University and DUHS investments in diversified portfolios of debt, equity, and other investments. The HSP is structured to provide more liquidity for DUHS than is available within the LTP. Both the LTP and HSP are included in investments on the consolidated balance sheets.
Reporting – Income and realized gains (losses) on investments of working capital are reported as investment return included in operating revenues. Any excess (deficit) of income and realized and unrealized gains (losses) earned on investments above (below) the spending rate (see Note 7), including split-interest agreements, are reported as nonoperating revenues.
22 Financial Statements 2016/2017
Deposits with Bond Trustees Deposits with bond trustees consist of the unexpended proceeds of certain bonds payable, which will be used for construction of certain facilities or payment of debt service. These funds are reported at fair value and are invested by the trustee in short-term, highly liquid securities considered Level 2 in the fair value hierarchy.
Land, Buildings, and Equipment Land, buildings, and equipment are stated at cost at the date of acquisition or fair value at the date of donation. Property and equipment under capital leases are initially valued and recorded based on the present value of minimum lease payments. Useful lives range from 5 to 25 years for land improvements, 10 to 80 years for buildings and utilities, 5 to 10 years for computer software, 3 to 20 years for equipment, motor vehicles, furniture and vessels, and 1 year for library acquisitions. Depreciation is calculated on a straight-line basis over the assets’ estimated useful lives, except for leasehold improvements and property and equipment held under capital leases, which are amortized over the shorter of the expected useful life of the asset or term of the related lease. Depreciation is not calculated on purchases of land, art collections, rare books, and construction in progress.
Conditional asset retirement obligations related to legal requirements to perform certain future activities associated with the retirement, disposal, or abandonment of assets are accrued utilizing site specific surveys to estimate the net present value for applicable future costs (e.g., asbestos abatement or removal). Duke reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment charge is recognized when the fair value of the asset or group of assets is less than the carrying value.
Interests in Perpetual Trusts Held by Others and Split-Interest Agreements Duke is the beneficiary of certain perpetual trusts held and administered by outside trustees, including The Duke Endowment (see Note 12). These trust interests are reported at fair value, based on the value of the underlying assets, which approximates the present value of future income from these trusts. As such, these assets fall within Level 3 of the hierarchy of fair value inputs. Distributions from these trusts are recorded as investment return designated for current operations.
Duke’s split-interest agreements with donors consist primarily of irrevocable charitable remainder trusts for which Duke serves as trustee. Assets held in these trusts are included in investments. Contribution revenues are recognized at the date the trusts are established after recording liabilities for the present value of the estimated future payments to be made to the donors or other beneficiaries. Annuity and other split-interest liabilities are recorded at their present value.
Debt-Related Derivative Instruments Duke utilizes derivative instruments in a limited manner outside of its investment portfolio. As described in Note 11, interest rate swap agreements are used to manage interest rate risk associated with variable rate bond obligations. These instruments are reported in other liabilities on the consolidated balance sheets at fair value. Fair value is estimated based on pricing models that utilize significant observable inputs, such as relevant interest rates, that reflect assumptions market participants would use in pricing the instruments. As such, these
liabilities fall within Level 2 of the hierarchy of fair value inputs. The change in fair value is included as a gain or loss in other nonoperating activities on the consolidated statements of activities. The net settlement amount incurred on the swaps is included in interest expense on the consolidated statements of activities.
Refundable Federal Student Loans Funds provided by the United States Government (U.S. Government) under the Federal Perkins, Nursing, and Health Professions Student Loan programs are loaned to qualified students and may be reloaned after collection. These funds are ultimately refundable to the U.S. Government. The related balances of $36,338 and $36,103 at June 30, 2017 and 2016, respectively, are included in other liabilities on the consolidated balance sheets.
Revenue Recognition Duke’s significant revenue recognition policies are:
Tuition and fees, net – Student tuition and fees are recorded as revenue during the year that the related academic services are rendered. Student tuition and fees received in advance of services to be rendered are recorded as deferred revenue. Student aid provided by Duke for tuition and fees is reflected as a reduction of gross tuition and fee revenue. Student aid does not include payments made to students for services rendered to Duke.
Grants and contracts – Revenues from sponsored grants and contracts, including facilities and administrative (F&A) cost recovery, are recognized when allowable expenditures are incurred under such agreements. F&A cost recovery represents reimbursement, primarily from the federal government, of F&A costs on sponsored activities. Duke’s federal F&A cost recovery rate for research was 59.0% in fiscal 2017 and 2016.
Patient service revenue (net of contractual allowances and discounts) – Patient service revenue is recognized in the period in which services are rendered. DUHS has agreements with third- party payors that provide for payments to DUHS at amounts that are generally less than its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Accordingly, net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as changes to estimates become known and tentative and final settlement adjustments are identified.
DUHS receives supplemental Medicaid payments from the State of North Carolina through a federally approved disproportionate share program (Medicaid DSH). The Medicaid DSH payments are part of the Medicaid Program and are designed to offset a portion of the Medicaid losses. Amounts recognized in net patient service revenue related to fiscal 2017 and 2016 were $155,168 and $154,469, respectively. The Medicaid assessment payments recorded in other operating expenses were $72,412 and $68,032 for fiscal 2017 and 2016, respectively. There can be no assurance that DUHS will continue to qualify for future participation in this program or that the program will not be discontinued or materially modified.
Financial Statements 2016/2017 23
Auxiliary enterprises – Auxiliary enterprises include athletics, residence halls, dining services, parking, and retail stores, which furnish services to students, faculty, and staff. Fee charges are directly related to the costs of services rendered and are recognized accordingly.
Charity Care DUHS provides services at no charge or at a substantially discounted rate to patients who are approved under the guidelines of its financial assistance policy. DUHS does not pursue collection of amounts determined to qualify as charity care. Services qualifying for charity care consideration include emergent and medically necessary services as determined by a DUHS physician. Patient household income in relation to the federal poverty guidelines is included in the determination for charity care qualification. While charity care is excluded from net patient service revenue and receivables, DUHS maintains records to identify and monitor the level of charity care it provides. These records include the amount of charges foregone and estimated costs incurred for services and supplies furnished under its financial assistance policy and other equivalent service statistics. Costs incurred are estimated based on the ratio of total operating expenses to gross charges applied to charity care charges.
Income Taxes Duke is tax-exempt as described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code). As such, Duke is exempt from federal income taxes to the extent provided under Section 501 of the Code. Accordingly, no provision for income taxes is made in the consolidated financial statements. As of June 30, 2017 and 2016, there were no material uncertain tax positions.
New Accounting Pronouncements In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updated (ASU) 2016-14, Not-for Profit
Entities (Topic 958). The ASU reduces the number of net assets from three to two (net assets without donor restrictions and net assets with donor restrictions). Additionally, it increases the quantitative and qualitative disclosures regarding liquidity, and requires expenses to be reported by both their natural and functional classification in one location. ASU 2016-14 is effective for fiscal year 2019.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to in exchange for those goods or services. Additional disclosure is required to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for fiscal year 2019.
Use of Estimates The preparation of the consolidated financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the reporting period as well as the disclosure of contingent assets and liabilities. Actual results ultimately could differ from the administration’s estimates.
Reclassifications Certain June 30, 2016 amounts have been reclassified to conform with changes in classifications adopted in fiscal 2017.
Subsequent Events Duke has evaluated subsequent events from the balance sheet date through October 10, 2017, the date on which the consolidated financial statements were issued. No material subsequent events were identified for recognition or disclosure.
3. Accounts Receivable, net Accounts receivable consists of the following at June 30:
2017 2016
Patient receivables $ 365,185 $ 367,459 Student loan receivables 38,211 43,630 Other receivables 240,629 221,625
Accounts receivable, net $ 644,025 $ 632,714
Patient receivables are reported net of allowances for contractual adjustments and uncollectible accounts of $877,657 and $871,920 at June 30, 2017 and 2016, respectively, and reserves for uncollectible accounts of $47,759 and $61,811 at June 30, 2017 and 2016, respectively.
Concentration of Credit Risk DUHS grants credit without collateral to its patients, most of whom are insured under third-party payor agreements. The related gross receivables at June 30, 2017 included approximately 39% and 50% from commercial payors and U.S. Government sources, respectively, and at June 30, 2016 included approximately 41% and 47%, respectively.
24 Financial Statements 2016/2017
5. Investments The fair value of investments consists of the following at June 30:
2017 2016
Short-term investments $ 1,860,873 $ 1,351,724
U.S. Government securities 74,304 36,978
Fixed income 446,265 251,511
Equities 2,166,937 1,848,048
Hedged strategies 3,329,822 3,105,860
Private capital 2,691,195 2,338,137
Real assets 1,949,079 1,675,291
Other 183,773 295,877
Total investments $ 12,702,248 $ 10,903,426
The composition of Duke’s investments are as follows:
2017 2016 LTP $ 9,097,394 $ 8,462,951
HSP 2,736,773 2,027,028
Nonpooled1 868,081 413,447
Total investments $ 12,702,248 $ 10,903,426
At June 30, 2017 and 2016, $17,885 and $63,928, respectively, was posted as collateral for derivatives and thus not readily available for use. Collateral held is included in short-term investments.
Duke’s investment classes are described in further detail below. Classes include direct holdings, which are generally marketable securities, and interests in funds for which the related investment strategies are described.
Short-term investments includes cash collateral, money market funds, short-term U.S. Treasury, agency, corporate, and other highly liquid debt securities with an aggregate duration of less than a year.
U.S. Government securities includes U.S. Treasury and agency debt securities with maturities of more than one year and funds that invest in these types of investments.
Fixed income includes non-government U.S. and non-U.S. debt securities, funds holding similar securities, and debt-based derivatives.
Equities includes U.S. and non-U.S. stocks, equity-based derivatives and interests in funds that invest predominantly long but also short stocks. Exposure by market is approximately: 20% domestic, 25% developed international, 35% emerging international and 20% global.
Hedged strategies primarily includes interests in funds that invest both long and short in U.S. and non-U.S. stocks, credit-oriented securities and arbitrage strategies. Approximately 70% of the hedged strategies portfolio is invested through equity oriented strategies with the balance split between multi-strategy (20%) and credit strategies (10%) funds and accounts. Virtually all of Duke’s investments in these funds are redeemable, and the underlying assets of the funds are predominately marketable securities and derivatives.
Private capital primarily includes interests in funds or partnerships that hold illiquid investments in venture capital, buyouts, and credit. These funds typically have periods of 10 or more years during which committed capital may be drawn. Distributions are received through liquidation of the underlying assets of the funds, which are anticipated to occur over the next 4 to 10 years. Certain private placement securities may also be held.
Real assets includes interests in funds or partnerships that hold illiquid investments in residential and commercial real estate, oil and gas production, energy, other commodities, and related services businesses. These funds typically have periods of 10 or more years during which committed capital may be drawn. Distributions are received through liquidations of the underlying assets of the funds, which are anticipated to occur over the next 5 to 12 years. Additionally, certain liquid commodity- and real estate-related
4. Contributions Receivable, net Contributions receivable are summarized as follows at June 30:
2017 2016 Unconditional promises expected to be collected in:
Less than one year $ 203,411 $ 204,853
Between one year and five years 255,715 253,889
More than five years 32,267 30,745
Gross contributions receivable 491,393 489,487
Allowance for uncollectible amounts (47,125) (35,444)
Unamortized discount at rates ranging from 0.1% to 7.5% (14,915) (12,338)
Net contributions receivable $ 429,353 $ 441,705
At June 30, 2017 and 2016, the 10 largest outstanding donor pledge balances represented 42% and 46%, respectively, of Duke’s gross contributions receivable.
At June 30, 2017 and 2016, Duke had also received bequest intentions and conditional promises to give of $224,273 and $172,414, respectively. These intentions and conditional promises to give are not recognized as assets or revenues in the consolidated financial statements.
1 Includes $394,882 of unspent proceeds from the issuance of the 2017 taxable bonds described in Note 10.
Financial Statements 2016/2017 25
Investments Fair Value as of June 30, 2017 Level 1 Level 2 Level 3 reported at NAV1 Total
Short-term investments $ 123,896 $ 1,736,977 $ … $ … $ 1,860,873
U.S. Government securities 48,023 26,281 … … 74,304
Fixed income 29,361 365,306 … 51,598 446,265
Equities 1,104,751 188,931 72,660 800,595 2,166,937
Hedged strategies 44,510 76,398 … 3,208,914 3,329,822
Private capital 2,482 … 236,816 2,451,897 2,691,195
Real assets 129,998 (18) 28,173 1,790,926 1,949,079
Other 38,577 136,647 … 8,549 183,773
Total investments $ 1,521,598 $ 2,530,522 $ 337,649 $ 8,312,479 $ 12,702,248
Investments Fair Value as of June 30, 2016 Level 1 Level 2 Level 3 reported at NAV1 Total
Short-term investments $ 70,330 $ 1,281,394 $ … $ … $ 1,351,724
U.S. Government securities 34,786 2,192 … … 36,978
Fixed income 24,430 186,241 … 40,840 251,511
Equities 684,072 149,910 61,637 952,429 1,848,048
Hedged strategies 272,992 80,285 … 2,752,583 3,105,860
Private capital 1,239 … 218,645 2,118,253 2,338,137
Real assets 71,264 7,089 28,180 1,568,758 1,675,291
Other 33,592 256,645 … 5,640 295,877
Total investments $ 1,192,705 $ 1,963,756 $ 308,462 $ 7,438,503 $ 10,903,426
1 Certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
The following is a summary of the levels within the fair value hierarchy for Duke’s investments at June 30:
equities, private placement securities and related derivatives are included.
Other primarily includes other derivative instruments.
Investment return The total return for the LTP (in which 98.1% and 98.7% of Duke’s traditional endowment was invested at June 30, 2017 and 2016, respectively) for fiscal 2017 and 2016 was 12.7% and (2.6%), respectively. The total return for the HSP for fiscal 2017 and 2016 was 12.1% and (3.3%), respectively. Both returns are net of external management fees but before internal costs. The total return for Duke’s endowment, as such, is not calculated.
External management fees paid directly (i.e. segregated investment account fees) totaled $14,166 and $11,098, and internal costs totaled $16,734 and $16,200 in fiscal 2017 and 2016, respectively.
Investment return as reflected in the consolidated statements of activities is summarized as follows for the years ended June 30:
2017 2016 Investment income $ 159,248 $ 134,910
Realized and unrealized gains (losses), net 1,197,104 (435,184)
Total investment return (loss) $ 1,356,352 $ (300,274)
OPERATING The Duke Endowment $ 12,500 $ 12,500
Endowment spending 411,103 364,336
Other investment income 117,539 97,408 Total operating return $ 541,142 $ 474,244
NONOPERATING Investment return in excess of (less than) amounts designated for current operations 815,210 (774,518)
Total investment return (loss) $ 1,356,352 $ (300,274)
26 Financial Statements 2016/2017
As of June 30, 2017 and 2016, redemption frequency and the corresponding notice period for all investments are as follows: Redemption frequency (in days) Redemption Asset Class (if currently eligible)1 notice period (in days)
Short-term investments daily 1
U.S. Government securities daily 1
Fixed income 1 to 30 1 to 30
Equities 1 to 90 1 to 90
Hedged strategies 30 to >365 2 to 100
Private capital N/A N/A
Real assets N/A N/A
Other N/A N/A
The following tables present additional information about Level 3 investments. Both observable and unobservable inputs may be used to determine the fair value of positions that Duke has classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category in the table below may include changes in fair value that were attributable to both observable and unobservable inputs.
Net realized Balance as of and unrealized Net transfers Balance as of June 30, 2016 gains Purchases Sales out June 30, 2017
Equities $ 61,637 $ 11,023 $ … $ … $ … $ 72,660
Private capital 218,645 4,540 40,985 (27,354) … 236,816
Real assets 28,180 7,841 8,867 (16,180) (535) 28,173
Total Level 3 investments $ 308,462 $ 23,404 $ 49,852 $ (43,534) $ (535) $ 337,649
Net realized Balance as of and unrealized Net transfers Balance as of June 30, 2015 losses Purchases Sales (out) in June 30, 2016
Equities $ 64,112 $ (2,475) $ … $ … $ … $ 61,637
Private capital 236,693 (6,213) 48,937 (34,585) (26,187) 218,645
Real assets 24,070 (6,774) 11,056 (9,264) 9,092 28,180
Total Level 3 investments $ 324,875 $ (15,462) $ 59,993 $ (43,849) $ (17,095) $ 308,462
During fiscal 2017, Level 3 securities totaling $535 were reorganized into investments reported at NAV during the year. In fiscal 2016 investments reported at NAV totaling $9,092 became private, restricted, or not publicly traded and were consequently transferred to Level 3. In addition, Level 3 securities totaling $26,187 were reorganized into investments reported at NAV during fiscal 2016. The change in net unrealized gains (losses) related to Level 3 assets still held at June 30, 2017 and 2016 was $23,709 and ($10,102), respectively, recorded in investment return in excess of (less than) amounts designated for current operations on the consolidated statements of activities.
6. Net Assets Temporarily restricted net assets consist of the following at June 30:
2017 2016
Appreciation on donor-restricted endowments $ 2,501,852 $ 2,205,070
Contributions for physical plant 139,093 202,575
Contributions for instruction, research and divisional support 201,426 169,170
Annuity and other split-interest agreements 24,574 19,797
Other 11,023 12,703
Temporarily restricted net assets $ 2,877,968 $ 2,609,315
1 Based on current terms, it is possible that these redemption rights may be restricted or eliminated by the funds in the future in accordance with the underlying fund agreement.
Financial Statements 2016/2017 27
Duke’s endowment consists of over 5,100 individual funds established for a variety of purposes including both donor-restricted endowment funds and funds designated by the Board to function as endowments. The endowment also includes interests in perpetual trusts held by others. Net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions.
Interpretation of Relevant Law The Board has decided to continue to require the preservation of the historic dollar value of endowment funds absent explicit donor stipulations to the contrary. Duke therefore classifies as permanently restricted net assets the sum of (a) the original value of gifts donated
to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) additions to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. Appreciation on donor-restricted endowment funds is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by Duke in a manner consistent with the standard of prudence prescribed by the Uniform Prudent Management of Institutional Funds Act (UPMIFA). The amounts appropriated for expenditure are based on the endowment spending rate per unit and the number of units for each fund. The spending rate is approved by the Board as part of Duke’s operating budget.
7. Endowment
Endowment net assets consist of the following at June 30, 2017:
Temporarily Permanently 2017 Unrestricted Restricted Restricted Total
Donor-restricted endowment funds $ … $ 2,501,852 $ 1,982,993 $ 4,484,845
Board-designated endowment funds 2,618,989 … … 2,618,989
Interests in perpetual trusts held by others … … 807,341 807,341
Total endowed net assets $ 2,618,989 $ 2,501,852 $ 2,790,334 $ 7,911,175
Endowment net assets consist of the following at June 30, 2016:
Temporarily Permanently 2016 Unrestricted Restricted Restricted Total
Donor-restricted endowment funds $ … $ 2,205,070 $ 1,840,083 $ 4,045,153
Board-designated endowment funds 2,020,207 … … 2,020,207
Interests in perpetual trusts held by others … … 774,420 774,420
Total endowed net assets $ 2,020,207 $ 2,205,070 $ 2,614,503 $ 6,839,780
Permanently restricted net assets consist of the following at June 30: 2017 2016
Instruction, research, and student aid:
Donor-restricted endowments $ 1,982,993 $ 1,840,083
Contributions receivable, net 138,401 155,979
Total instruction, research, and student aid 2,121,394 1,996,062
Interests in perpetual trusts held by others 807,341 774,420
Annuity and other split-interest agreements 38,102 38,958
Student loan funds 11,792 17,842
Permanently restricted net assets $ 2,978,629 $ 2,827,282
28 Financial Statements 2016/2017
Changes in endowment net assets for the years ended June 30, 2017 and 2016 are as follows:
Temporarily Permanently Unrestricted Restricted Restricted Total
Balance as of June 30, 2015 $ 2,236,026 $ 2,508,705 $ 2,551,814 $ 7,296,545
Investment return:
Investment income 19,678 40,552 … 60,230
Net depreciation in fair value (94,949) (154,371) (40,666) (289,986)
Total investment loss (75,271) (113,819) (40,666) (229,756)
Contributions … … 103,355 103,355
New Board designated endowment funds 33,972 … … 33,972
Appropriations for expenditure (174,520) (189,816) … (364,336)
Balance as of June 30, 2016 $ 2,020,207 $ 2,205,070 $ 2,614,503 $ 6,839,780
Investment return:
Investment income 28,948 52,734 … 81,682
Net appreciation in fair value 274,279 445,134 36,828 756,241
Total investment return 303,227 497,868 36,828 837,923
Contributions … … 139,003 139,003
New Board designated endowment funds 581,679 … … 581,679
Appropriations for expenditure (210,017) (201,086) … (411,103)
Appropriations for capital (76,107) … … (76,107)
Balance as of June 30, 2017 $ 2,618,989 $ 2,501,852 $ 2,790,334 $ 7,911,175
Spending Policy Duke utilizes the total return concept (income yield and appreciation) in the management of its endowment. Duke has implemented a spending policy designed to stabilize annual spending levels and preserve the real value of the endowment over time. In accordance with Duke’s policy, a predetermined endowment spending rate consistent with Duke’s total return objective has been established and approved by the Board. Should endowment returns prove to be insufficient to support this policy, the balance is provided from accumulated capital gains. Should endowment returns exceed the amounts necessary to attain this objective, the balance is reinvested. The effective spending rates for fiscal 2017 were 5.9% for financial aid endowments and 4.6% for non-financial aid endowments. The annual distribution under the spending policy described above is reported as investment return included in operating revenues. Additionally, the Board authorizes the use of specific amounts of previously reinvested income, capital gains, and principal related to unrestricted funds functioning as endowment for special academic development initiatives and to support the operations and maintenance of certain facilities. The amounts reported in the consolidated statements of activities include supplemental endowment distributions totaling $235,748 and $125,407 in fiscal 2017 and 2016, respectively.
Return Objectives and Risk Parameters Under the policy approved by the Board, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of a benchmark composed of 70% of the MSCI All Country World Index and 30% of the Bloomberg Barclays U.S. Aggregate Bond Index. Duke expects its endowment funds, over long time periods, to provide an average annual real rate of return of approximately 5.0%. Actual returns in any given year may vary from this amount.
Funds with Deficiencies From time to time, the fair value of assets associated with a permanently restricted fund may fall below the fund’s original value. Deficiencies of this nature are reported in unrestricted net assets. Subsequent gains that restore the fair value of such funds to the required level are classified as an increase in unrestricted net assets within the nonoperating activities section of the consolidated statements of activities.
Financial Statements 2016/2017 29
Defined Contribution Retirement Savings Plan
Faculty and staff members of Duke are eligible to participate in a defined contribution plan. Faculty and exempt staff members are eligible to receive employer-provided contributions in this plan. For fiscal 2017 and 2016, Duke contributed $152,164 and $141,308, respectively, to this plan. Duke expects to contribute $156,809 to this plan in fiscal 2018.
Defined Benefit Pension and Postretirement Medical Benefit Plans Duke has a noncontributory defined benefit pension plan for substantially all non-exempt employees. The benefit for this plan is based on years of service and the employee’s compensation during the last 10 years of employment. Duke expects to contribute $21,776 to the plan in fiscal 2018.
At June 30, 2017 and 2016, the accumulated benefit obligation for the pension benefits was $1,892,596 and $1,860,740, respectively. At June 30, 2017 and 2016, the plan was under funded in relation to accumulated benefits by $240,543 and $350,604, respectively.
Duke also sponsors an unfunded, defined benefit postretirement medical plan that covers all full-time employees who elect coverage and
satisfy the plan’s eligibility requirements when they retire. The plan is contributory with retiree contributions established as a percentage of the total cost of medical care for retirees and their dependents. Duke pays all benefits on a current basis. DUHS employees hired after June 30, 2002 are not eligible for DUHS contributions to the cost of this benefit and must bear the full cost themselves if elected at retirement. As a healthcare provider, Duke utilizes an incremental cost approach to determine its liability for the postretirement medical plan. The total liability reflects estimated additional costs to provide medical benefits to retirees within DUHS facilities plus the full cost to provide medical benefits to retirees at facilities other than DUHS.
The measurement date for both the defined benefit pension plan and the postretirement medical benefit plan is June 30. Duke recognizes the full funded status of its defined benefit pension and other postretirement benefit plans in the consolidated balance sheets. Accordingly, the liability for pension benefits as recognized in the consolidated balance sheets represents the actuarially determined projected benefit obligation (PBO) in excess of the fair value of plan assets at year end. The liability for other postretirement benefits as recognized in the consolidated balance sheets represents the actuarially determined accumulated postretirement benefit obligation at year end.
8. Pension and Other Postretirement Benefit Plans
The following tables provide a reconciliation of the plans’ PBO and fair value of assets:
Pension Benefits Postretirement Benefits 2017 2016 2017 2016
Reconciliation of benefit obligation
PBO at beginning of year $ 2,028,803 $ 1,615,110 $ 206,968 $ 184,616
Service cost 83,077 65,861 3,869 3,318
Interest cost 69,962 75,406 7,088 8,094
Actuarial (gain) loss (71,229) 329,289 24,007 20,419
Benefit payments (56,462) (54,163) (8,891) (9,479)
Administrative expenses (estimated) (3,000) (2,700) … …
PBO at end of year $ 2,051,151 $ 2,028,803 $ 233,041 $ 206,968
Reconciliation of fair value for plan assets
Fair value of plan assets at beginning of year $ 1,510,136 $ 1,596,507 $ … $ …
Actual return (loss) on plan assets 180,357 (49,695) … …
Employer contributions 21,057 20,259 … …
Participant contributions 186 173 … …
Benefit payments (56,462) (54,163) … …
Administrative expenses (3,221) (2,945) … …
Fair value of plan assets at end of year $ 1,652,053 $ 1,510,136 $ … $ …
Funded status
Net accrued benefit liability $ (399,098) $ (518,667) $ (233,041) $ (206,968)
30 Financial Statements 2016/2017
The assumptions used in the measurement of Duke’s benefit obligation and benefit cost are shown in the following table:
Pension Benefits Postretirement Benefits
2017 2016 2017 2016
Weighted average assumptions Obligation Cost Obligation Cost Obligation Cost Obligation Cost as of measurement date
Discount rate 3.75% 3.50% 3.50% 4.75% 3.75% 3.50% 3.50% 4.50%
Expected return on plan assets N/A 7.50% N/A 7.50% N/A N/A N/A N/A
Rate of compensation increase 2.50% 2.50% 2.50% 3.00% N/A N/A N/A N/A
In order to determine the benefit obligation as of June 30, 2017, the per capita costs of covered health care benefits was assumed to increase 7.5% for non-Medicare eligible employees and 8.7% for Medicare eligible employees, declining to an ultimate annual rate of increase of 5.0% by 2028 for non-Medicare and Medicare eligible employees. The benefit expense for fiscal 2017 was driven by the rates used to determine the obligation at June 30, 2016, which were 7.5% for non- Medicare eligible employees and 6.9% for Medicare eligible employees declining to an ultimate annual rate of increase of 5.0% by 2023 for non-Medicare eligible employees and 2022 for Medicare eligible employees.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1.0% change in assumed health care cost trend rates would have the following effect:
1.0% Increase 1.0% Decrease
Effect on total of service and $ 1,783 $ (1,459) interest cost components of net periodic postretirement health care benefit cost
Effect on the health care component $ 31,575 $ (26,362) of the accumulated postretirement benefit obligation
The projected payments to beneficiaries under the respective plans for each of the five fiscal years subsequent to June 30, 2017 are as follows:
Pension Postretirement Benefits Benefits
2018 $ 61,499 $ 9,436
2019 64,967 10,228
2020 68,770 10,837
2021 73,760 11,517
2022 79,142 12,110
Projected aggregate payments for pension and postretirement benefits for the five year period ending June 30, 2027 are $486,616 and $67,935, respectively.
The following table provides the components of net periodic benefit cost (reported as employee benefits in the consolidated statements of activities) for the plans for fiscal 2017 and 2016:
Pension Benefits Postretirement Benefits 2017 2016 2017 2016
Service cost $ 83,077 $ 65,861 $ 3,869 $ 3,318
Interest cost 69,962 75,406 7,088 8,094
Expected return on plan assets (118,507) (112,585) … …
Amortization of prior-service cost (asset) 1,814 2,135 … (1,326)
Expected participant contributions (178) (163) … …
Recognized actuarial loss (gain) 19,758 … (80) (2,286)
Net periodic benefit cost $ 55,926 $ 30,654 $ 10,877 $ 7,800
The prior-service costs are amortized on a straight-line basis over the average remaining service period of active participants. The expected amortization of prior-service cost for fiscal 2018 is $1,814 and $0 for the pension and postretirement benefits, respectively. The expected amortization of actuarial losses for fiscal 2018 is $9,025 and $0 for the pension and postretirement benefits, respectively. Unrecognized prior- service costs were $6,705 and $0 and unrecognized actuarial losses were $327,204 and $2,497 for the pension and postretirement benefits, respectively, as of June 30, 2017. Unrecognized prior-service costs were $8,520 and $0 and unrecognized actuarial losses (gains) were $479,827 and ($21,590) for the pension and postretirement benefits, respectively, as of June 30, 2016.
Financial Statements 2016/2017 31
The following is a summary of the levels within the fair value hierarchy for Duke’s plan assets at June 30:
Investments 2017 Fair value as of June 30, 2017 Level 1 Level 2 Level 3 reported at NAV1 Total
Short-term investments $ (154) $ 254,114 $ … $ … $ 253,960
Fixed income 5,833 32,989 … … 38,822
Equities 176,310 29,715 … 126,863 332,888
Hedged strategies 3,104 5,952 … 415,738 424,794
Private capital 389 … 30,062 306,053 336,504
Real assets 17,850 (16) … 238,678 256,512
Other (7,870) 16,443 … … 8,573
Total investments $ 195,462 $ 339,197 $ 30,062 $ 1,087,332 $ 1,652,053
Investments 2016 Fair value as of June 30, 2016 Level 1 Level 2 Level 3 reported at NAV1 Total
Short-term investments $ (557) $ 247,148 $ … $ … $ 246,591
Fixed income 5,506 31,049 … … 36,555
Equities 109,898 13,945 … 173,700 297,543
Hedged strategies 33,301 7,939 … 345,967 387,207
Private capital 195 … 27,855 264,975 293,025
Real assets 9,962 1,018 … 212,338 223,318
Other (6,813) 32,710 … … 25,897
Total investments $ 151,492 $ 333,809 $ 27,855 $ 996,980 $ 1,510,136
Defined Benefit Pension Plan Assets The pension plan’s investment strategy focuses on maximizing total return and places limited emphasis on liability matching and no emphasis on generating income. Over the long term, the plan’s average exposure target is 49% equity (public and private investments in companies), 13% commodity (direct commodity exposure, commodity related equities, and private investments in energy, power, infrastructure and timber), 11% real estate (private real estate and REITs), 13% credit (investment-grade bonds, corporate bonds, bank debt, asset backed securities, etc.), 5% rates (public obligations including treasuries and
agencies), and 9% other (U.S. Treasury Inflation Protected Securities, non-U.S. inflation linked bonds, and absolute return oriented hedge funds).
The expected return on pension plan assets is established at an amount that reflects the targeted asset allocation and expected returns for each component of the plan assets. The expected return was developed using a stochastic forecast model of long-term expected returns for each asset class. The rate is reviewed periodically and adjusted, as appropriate, to reflect changes in the expected market performance or in targeted asset allocation ranges.
1 Certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient have not been categorized in the fair value hierarchy. Plan investments reported at NAV have the same strategies as those in Duke’s investment pools described in Note 5.
32 Financial Statements 2016/2017
The following tables present additional information about Level 3 plan assets. Both observable and unobservable inputs may be used to determine the fair value of positions that the Plan has classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category in the table below may include changes in fair value that were attributable to both observable and unobservable inputs.
Balance as of Net realized and Net transfers Balance as of June 30, 2016 unrealized losses Purchases Sales out June 30, 2017
Private capital $ 27,855 $ (306) $ 5,082 $ (2,569) $ … $ 30,062
Balance as of Net realized and Net transfers Balance as of June 30, 2015 unrealized losses Purchases Sales out June 30, 2016
Private capital $ 31,999 $ (3,266) $ 5,772 $ (2,626) $ (4,024) $ 27,855
During fiscal 2017, there were no transfers between investments reported at NAV and Level 3. During fiscal 2016, Level 3 securities totaling $4,024 were reorganized into investments reported at NAV. The change in net unrealized gains (losses) related to Level 3 assets still held at June 30, 2017 and 2016 was $1,969 and ($2,509), respectively, recorded within nonperiodic changes in defined benefit plans on the consolidated statements of activities.
Land, buildings, and equipment, net, are summarized as follows at June 30: 2017 2016
Land and land improvements $ 355,273 $ 309,096
Buildings and utilities 5,360,704 4,833,782
Computer software 402,712 397,588
Equipment, furniture and vessels 1,535,744 1,446,972
Library and art collections 485,221 457,736
Construction in progress 440,970 547,161
Land, buildings and equipment, gross 8,580,624 7,992,335
Accumulated depreciation (4,614,591) (4,303,874)
Land buildings and equipment, net $ 3,966,033 $ 3,688,461
Interest on borrowings to finance facilities is capitalized during construction, net of any investment income earned through the temporary investment of project borrowings on tax-exempt debt. Total net interest cost of $4,547 and $4,205 was capitalized in fiscal 2017 and 2016, respectively.
Duke has identified conditional asset retirement obligations primarily related to the costs of asbestos removal and disposal that will result from future remediation activity. The liability was estimated using inflation rates ranging from 3.4% to 5.0% and discount rates ranging from 2.7% to 4.6%. Conditional asset retirement obligations recognized at June 30, 2017 and 2016 were $53,117 and $54,158, respectively, and are reported in other liabilities on the consolidated balance sheets.
9. Land, Buildings, and Equipment
Financial Statements 2016/2017 33
Notes and bonds payable at June 30 consist of the following: Outstanding principal Fiscal year Effective
of maturity interest rate 2017 2016
University Tax-Exempt Bonds: Variable-rate bonds
Series 1987A 2018 0.6% $ 6,900 $ 12,900
Series 1991B 2022 0.7% 40,000 40,000
Series 1992A 2027 0.6% 35,240 35,240
Fixed-rate bonds
Series 2006A 2018 4.9% 1,830 285,500
Series 2006B 2043 4.3% … 95,435
Series 2009B 2039 5.0% … 247,090
Series 2014A 2042 5.0% 119,115 119,115
Series 2014B 2045 5.0% 84,710 84,710
Series 2014C 2043 5.0% 33,000 33,000
Series 2015B 2056 5.0% 368,905 368,905
Series 2016B 2045 4.6% 328,605 …
University Taxable Bonds: Fixed-rate bonds
Series 2007A 2037 5.9% 200,000 200,000
Series 2015A 2049 4.1% 175,865 175,865
Series 2016A 2047 3.2% 528,780 …
DUHS Tax-Exempt Bonds: Variable-rate bonds
Series 2005A and B 2028 1.4% 123,530 133,185
Series 2006A, B, and C (see Note 11) 2039 1.2% 121,620 121,620
Series 2012B (see Note 11) 2023 1.5% 28,650 28,650
Series 2016B 2042 1.3% 90,000 90,000
Series 2016C 2042 1.4% 90,000 90,000
Fixed-rate bonds
Series 2010A N/A 4.9% … 120,000
Series 2012A 2042 4.7% 278,305 279,570
Series 2016A 2028 2.0% 155,720 167,075
Series 2016D 2042 3.5% 125,100 …
DUHS Taxable Bonds: Fixed-rate bonds
Series 2017A 2047 3.9% 600,000 …
Tax-exempt commercial paper <1 year 0.7% 33,860 33,860
Taxable commercial paper <1 year 0.7% 60,162 60,162
Other notes payable Various Various 12,922 12,791
Capital lease obligations (see Note 15) Various Various 128,952 125,497
Unamortized premium 179,661 134,997
Debt issuance costs (18,713) (9,453)
Notes and bonds payable $ 3,932,719 $ 3,085,714
10. Notes and Bonds Payable
34 Financial Statements 2016/2017
11. Derivative and Other Financial Instruments Investment strategies employed by DUMAC and investment managers retained by DUMAC incorporate the use of various derivative financial instruments. DUMAC uses these instruments for a number of investment purposes, including hedging or altering exposure to certain asset classes and cost-effectively adding exposures to portions of the portfolio. Positions are expected to create gains or losses that, when combined with the applicable portion of the total investment portfolio, provide an expected result.
During fiscal 2017 and 2016, Duke, or external investment managers on Duke’s behalf, entered into swap agreements, futures contracts, or forward contracts, and acquired warrants or rights to increase, reduce or otherwise modify investment exposures. These instruments expose Duke to risk of an unexpected movement in the fair value of the underlying security, a counterparty failing to meet its obligations, and, in certain circumstances, not being able to unwind a position at current fair market value due to market illiquidity. Duke has established procedures to monitor and manage these risks.
As of June 30, 2017 and 2016, Duke had line of credit agreements totaling $275,000 to supplement working capital and investment commitments, with no outstanding borrowings under these agreements. The lines of credit have varying expiration dates through fiscal 2022.
Fiscal Year Principal Payments
2018 $ 134,092
2019 31,760
2020 32,920
2021 33,970
2022 35,120
Thereafter 3,374,957
Total principal payments $ 3,642,819
Duke capitalizes and amortizes the original issue premium and issue costs related to applicable bond issues in a manner that approximates the interest method. Total amortization expense for issue costs and premiums was $8,683 and $2,920 for fiscal 2017 and 2016, respectively, and is included in interest expense in the consolidated statements of activities.
In October 2016, the University issued Series 2016A taxable bonds in the amount of $528,780, the proceeds of which were used to retire the Series 2009B bonds ($247,090) as well as fund various projects. The issuance includes $21,683 of debt extinguishment costs.
In November 2016, the University issued Series 2016B tax-exempt bonds in the amount of $328,605 the proceeds of which were used to refund the Series 2006A bonds ($281,905) and 2006B bonds ($95,435). The bonds were issued at a premium of $52,038.
In August 2016, DUHS issued Series 2016D tax-exempt bonds in the amount of $125,100 to fund an escrow account that was irrevocably placed with a trustee to meet the principal and interest payments of the Series 2010A bonds ($120,000). The refunding transaction resulted in a loss on extinguishment of debt of $18,328 representing the write-off of the unamortized bond issue costs and the escrow funding requirements for principal and interest payments in excess of the face value of the 2010A refunded bonds. The refunding meets the requirements of derecognition of the bond liability for fiscal year 2017.
In June 2017, DUHS issued Series 2017A taxable bonds in the amount of $600,000, the proceeds of which will be used to finance various capital additions and improvements at healthcare facilities and pay certain expenses of issuing the bonds. DUHS executed a forward treasury rate lock agreement to hedge against potential rising interest rates during the period leading up to the issuance of the bonds. A rate lock payment of $7,889 is included in debt issuance costs.
Trust indentures underlying the DUHS Revenue Bonds contain certain covenants and restrictions. DUHS was in compliance during fiscal 2017 and 2016.
Duke’s investment related derivative exposures, categorized by primary underlying risk, are as follows:
Primary underlying risk as of June 30, 2017 Long Notional Short Notional Derivative assets Derivative liabilities Gain (loss)
Equity Price1 $ 3,286,057 $ 2,010,648 $ 77,764 $ (57,946) $ 174,003
Interest Rate2 2,223,674 2,786,999 3,468 (2,607) 2,156
Commodity Price3 434,008 105,294 9,272 (3,586) (63,764)
Credit4 5,142,806 2,069,005 127,750 (35,553) (15,337)
Foreign currency exchange rate5 294,548 1,493,946 5,191 (24,983) 3,424
Total $ 11,381,093 $ 8,465,892 $ 223,445 $ (124,675) $ 100,482
1 Includes options, swaps, and futures contracts. 2 Includes options, swaps, swaptions, and futures contracts. 3 Includes options and futures contracts. 4 Includes credit default swaps, swaptions, and credit total return swaps. 5 Includes options and forward contracts.
Financial Statements 2016/2017 35
Primary underlying risk as of June 30, 2016 Long Notional Short Notional Derivative assets Derivative liabilities Gain (loss)
Equity Price1 $ 2,325,553 $ 932,984 $ 49,665 $ (38,048) $ 15,024
Interest Rate2 423,368 730,247 3,337 (1,385) (4,456)
Commodity Price3 566,581 261,218 15,082 (12,218) (118,965)
Credit4 4,617,247 1,571,665 174,955 (20,262) 5,265
Foreign currency exchange rate5 274,939 1,142,598 20,650 (15,406) 18,661
Total $ 8,207,688 $ 4,638,712 $ 263,689 $ (87,319) $ (84,471)
As part of relative value strategies, Duke and investment managers on Duke’s behalf entered into credit default swap derivative transactions on investment grade and high yield securities which typically have terms of five years or less to buy and sell credit protection. At June 30, 2017 and 2016, the notional of protection sold was $4,955,891 and $4,098,947 and the notional of protection bought with identical underlying assets was $890,669 and $498,051, respectively. These instruments are included in the credit line of the preceding tables.
Duke’s investment related derivative assets and liabilities at June 30, by counterparty, are as follows:
2017 2016 Cash Collateral Cash Collateral
Assets Liabilities (Held) Pledged Assets Liabilities (Held) Pledge
Counterparty A $ 45,931 $ (28,053) $ (11,626) $ 61,977 $ (5,131) $ (51,190)
Counterparty B 50,903 (23,464) (28,721) 43,137 (7,148) (38,361)
Counterparty C 42,443 (12,508) 39,473 57,205 (15,111) 98,358
Counterparty D 10,053 (6,716) 8,530 34,108 (14,702) 34,197
Counterparty E 5,257 (8,651) 14,903 9,834 (6,471) 12,868
Counterparty F 12,074 (9,873) … 3,418 (12,103) …
Counterparty G 40,192 (15,091) (20,670) 34,133 (1,489) (26,090)
Counterparty H 8,104 (2,686) (6,350) 7,776 (13,328) 12,310
All Others 8,488 (17,633) 510 12,111 (11,853) …
Total $ 223,445 $ (124,675) $ (3,951) $ 263,699 $ (87,336) $ 42,092
In addition, Duke has executed derivative financial instruments in the normal course of managing its debt portfolio using long term strategies. Duke has interest rate swap agreements that are designed to synthetically decrease the variable rate exposure associated with its portfolio of debt. In addition, Duke has a swap agreement designed to reduce the interest rate risk on variable rate indebtedness by utilizing the spread between the yield curves for taxable debt securities and tax-exempt municipal debt securities.
The following table summarizes the general terms for each of Duke’s swap agreements:
Associated Maturity Current notional Effective date debt series date amount Rate Duke pays Rate Duke receives
Interest rate:
August 12, 1993 2012B June 2023 $ 28,650 5.09% SIFMA
May 19, 2005 N/A June 2028 $ 279,955 3.60% 61.5% of one-month LIBOR plus 0.28%
April 1, 2009 Portfolio6 June 2039 $ 127,505 3.80% 67.0% of one-month LIBOR
Basis:
July 6, 2001 N/A July 2021 $ 400,000 SIFMA 72.13% of one-month LIBOR
1 Includes options, swaps, and futures contracts. 2 Includes options, swaps, swaptions, and futures contracts. 3 Includes options and futures contracts. 4 Includes credit default swaps, swaptions, and credit total return swaps. 5 Includes options and forward contracts. 6 Notional amount of the April 2009 Interest Rate Swap declines coincident with the principal schedules for the Series 2006A/B/C bonds. The residual portion is $5,885.
The Private Diagnostic Clinic, PLLC (the PDC) The PDC is a professional limited liability company consisting of physicians practicing primarily within DUHS facilities and PDC clinics. The purpose of the PDC is to provide a structure separate from Duke in which the members of the physician faculty of the School of Medicine may engage in the private practice of medicine and still serve as members of the faculty of the University conducting clinical teaching and medical research. Under multiple agreements between the PDC and Duke, the PDC: (1) makes payments for professional services supplied by Duke to the PDC; (2) pays rent for the PDC’s use of space; and (3) makes payments for the goodwill and other benefits derived from the PDC’s association with Duke. A substantial portion of the payments is used by Duke to support academic programs in the clinical departments of the School of Medicine. These payments totaled $76,758 and $69,328 for fiscal 2017 and 2016, respectively, and are recognized as revenue in grants, contracts and similar agreements in the consolidated statements of activities.
The Duke Endowment Established in 1924 by James Buchanan Duke, The Duke Endowment is a charitable trust created to promote philanthropic purposes by making grants for educational, health care, child care, and religious purposes within North Carolina and South Carolina. The University is a named beneficiary of The Duke Endowment and receives substantial support from The Duke Endowment in the forms of unrestricted operating support and discretionary grants.
While Duke and The Duke Endowment have a common heritage, each having been founded through the generosity of James Buchanan Duke, they are two separate entities, each with its own purposes, office, officers, and trustees. The Duke Endowment has been required by its indenture to distribute certain amounts of income to Duke from the Original Corpus, Corpus Item VIII, and Corpus Item XI, subject to a limited right to withhold by The Duke Endowment trustees. Through June 30, 2017, this right to withhold has never been exercised.
12. Affiliated Organizations
The April 2009 Interest Rate Swap is subject to a mandatory early termination right on June 1, 2020. When this right is exercised, DUHS may revoke it, at which time DUHS’ collateral threshold reduces to $0 for the remainder of the swap agreement.
Duke is exposed to financial loss in the event of nonperformance by a counterparty to any of the financial instruments described above. General market conditions could impact the credit standing of the counterparties and, therefore, potentially impact the value of the instruments on Duke’s consolidated balance sheets. Duke controls this
counterparty credit risk by considering the credit rating, business risk, and reputation of any counterparty before entering into a transaction, monitoring for any change in the credit standing of its counterparty during the life of the transaction, and requiring collateral be posted when predetermined thresholds are crossed. Duke is also exposed to interest rate risk driven by factors influencing the spread between the taxable and tax-exempt market interest rates on its basis swap.
The fair value of each swap is the estimated amount Duke would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value is included in other liabilities on the consolidated balance sheets. The change in fair value is included as a gain or loss in other nonoperating activities on the consolidated statements of activities. The net settlement amount incurred on the swaps is included in interest expense on the consolidated statements of activities. The collateral to support the related swaps is included in short-term investments within investments on the consolidated balance sheets. The debt derivative instruments contain cross-collateralization provisions that require each counterparty to post collateral if the fair value meets certain thresholds.
DUHS derivative instruments contain provisions requiring long-term, unsecured debt to be maintained at specified credit ratings from Moody’s Investor Service and Standard & Poor’s Rating Service. If the ratings of DUHS’s debt were to fall below certain benchmarks, the counterparty could request immediate payment on derivatives in net liability positions. At June 30, 2017, DUHS’s long-term debt ratings exceeded these requirements. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position on June 30, 2017 and 2016 was $80,651 and $117,187, respectively, for which DUHS has posted collateral of $13,675 and $21,869, respectively, in the normal course of business. If the credit-risk related features underlying these agreements were triggered on June 30, 2017 and 2016, DUHS would have been required to post an additional $66,976 and $95,318, respectively, of collateral to its counterparties.
Financial Information Related 2017 2016 to Swap Agreements Fair Value Gain Fair Value Gain (Loss)
August 1993 Interest Rate Swap $ (4,037) $ 2,097 $ (6,134) $ 28
May 2005 Interest Rate Swap (34,522) 18,347 (52,869) (8,320)
April 2009 Interest Rate Swap (40,949) 15,493 (56,442) (17,757)
July 2001 Basis Swap (1,143) 599 (1,742) (1,780)
Total $ (80,651) $ 36,536 $ (117,187) $ (27,829)
36 Financial Statements 2016/2017
Financial Statements 2016/2017 37
Expenses are reported in the consolidated statements of activities in natural categories. Functional expenses for fiscal 2017 and 2016 were categorized as follows:
2017 2016
Health care services $ 2,318,328 $ 2,131,790
Instruction and sponsored research 2,006,520 1,916,648
General administration 1,023,191 959,969
Auxiliary enterprises 299,184 262,474
Student services and aid 155,736 157,158
Total operating expenses $ 5,802,959 $ 5,428,039
Functional expenses are shown in categories recommended by the National Association of College and University Business Officers. Duke’s primary program services are health care services, sponsored and separately budgeted research, and instruction and departmental research. Expenses reported as general administration, auxiliary enterprises, libraries, student services, and student aid are incurred in support of these primary program services.
Plant operation and maintenance expense is allocated to program and supporting activities based upon periodic assessment of facilities usage. Total amounts allocated in fiscal 2017 and 2016 were $162,786 and $161,851, respectively.
13. Functional Expenses
The Duke Endowment trustees now invest for total return in accordance with current investment practices, with the result that (a) the distinction between “principal” and “income” in the traditional sense can no longer be readily identified, if at all, and (b) the traditional “income” that can be identified is often inadequate to meet beneficiary needs. Accordingly, by an Order dated December 15, 2009, the Superior Court of Mecklenburg County, North Carolina further broadened the authority of The Duke Endowment trustees to distribute principal to its beneficiaries.
Unrestricted operating support from The Duke Endowment was $12,500 for fiscal 2017 and 2016. Such amounts are reflected in investment return designated for current operations in the consolidated statements of activities.
Duke received discretionary grant payments from The Duke Endowment of $34,046 and $31,418 for fiscal 2017 and 2016, respectively.
At June 30, 2017 and 2016, the portion of The Duke Endowment’s net assets included in permanently restricted net assets on Duke’s consolidated balance sheets, and from which Duke derives unrestricted operating support, had a fair value of $702,855 and $671,542 respectively. Duke has no equity interest in the principal of The Duke Endowment trust, which had a fair value of approximately $3.5 billion at June 30, 2017.
Members of Duke’s governing boards and senior administration may, from time to time, be associated, either directly or indirectly, with companies doing business with Duke.
Written conflict of interest policies are maintained for members of the governing boards of the University, DUHS, and DUMAC that require, among other things, that no member of a governing board may participate in any decision in which he or she (or an immediate family member) has a material financial interest. Each governing board member is required to certify compliance with the conflict of interest policy on an annual basis and indicate whether Duke does business with an entity in which that member (or an immediate family member) has a material financial interest. When such relationships exist, measures, including written management plans, are taken to mitigate any actual or perceived conflict, including requiring that such transactions be conducted at arm’s length, for good and sufficient
consideration, based on terms that are fair and reasonable to and in the best interests of Duke, and in accordance with applicable conflict of interest laws and policies in effect. No such associations that have been disclosed are considered to be material to the consolidated financial statements.
For members of the senior administration, Duke requires annual disclosure of significant financial interests in, or employment or consulting relationships with, entities doing business with Duke. These annual disclosures cover members of the senior administration and their immediate family members. When such relationships exist, measures are taken to appropriately manage the actual or perceived conflict in the best interests of Duke. No such associations that have been disclosed are considered to be material to the consolidated financial statements.
14. Managing Conflicts of Interest
38 Financial Statements 2016/2017
Construction and Purchase Commitments At June 30, 2017 and 2016, open contracts for the construction of physical properties amounted to $226,761 and $312,745, respectively, and outstanding purchase orders for normal operating supplies and equipment amounted to $16,621 and $14,608, respectively.
Leases Duke leases various machinery, equipment and buildings under operating and capital leases expiring at various dates through 2032. Total rental expense in fiscal 2017 and 2016 for all operating leases was $90,625 and $75,018, respectively.
Future minimum lease payments under noncancelable capital and operating leases as of June 30, 2017 are as follows:
Capital Operating Year Leases Leases Total
2018 $ 10,413 $ 99,463 $ 109,876
2019 9,186 101,066 110,252
2020 8,069 89,544 97,613
2021 8,313 78,911 87,224
2022 8,569 77,334 85,903
Thereafter 269,601 394,096 663,697
Total minimum lease payments 314,151 840,414 1,154,565
Less sublease rentals by the PDC … (23,661) (23,661)
Total minimum payments less subleases 314,151 $ 816,753 $ 1,130,904
Less: Interest portion (185,199)
Capital lease obligations $ 128,952
Medical Malpractice Coverage DCC (see Note 1) insures a portion of the medical malpractice risks and patient general liability risks of DUHS clinical providers and the PDC. The assets, liabilities, and results of operations for DCC have been reflected in the unrestricted net assets of Duke. Policy limits for the years ended June 30, 2017 and 2016 were $110,000 per incident and $145,000 in the aggregate for fiscal 2017 and $155,000 in the aggregate for fiscal 2016. DCC limits its exposure to loss through reinsurance and excess loss agreements.
Estimated professional liability costs include the estimated cost for reported claims incurred in the DCC program. DCC evaluates its estimated professional liability on a discounted actuarial basis. The discount rate at June 30, 2017 and 2016 is 3.5%. Accrued professional liability costs as of June 30, 2017 and 2016 amounted to $38,710 and $34,785, respectively. Cash, investments, and other receivables in this amount have been designated by DUHS to settle these claims. Also included in estimated professional liability costs are estimated
claims incurred but not reported related to DUHS in the amounts of $6,588 and $7,272 as of June 30, 2017 and 2016, respectively.
The estimated liability for professional and general liability claims may be significantly affected if current and future claims differ from historical trends. While the administration monitors reported claims closely and considers potential outcomes as estimated by its actuaries when determining its professional and patient general liability accruals, the complexity of the claims, the extended period of time to settle the claims, and the wide range of potential outcomes complicate the estimation. In the opinion of the administration, adequate provision has been made for this related risk.
Self-Insurance Duke provides employee healthcare benefits, long-term disability benefits, unemployment benefits, and workers’ compensation benefits primarily though employer contributions, participant contributions, and excess loss insurance, and manages those programs through third- party administrators. In the opinion of the administration, adequate provision has been made for the related risks within accounts payable and accrued payroll or accrued postretirement/postemployment and other benefit obligations on Duke’s consolidated balance sheets.
Partnership Investment Commitments There were $1.8 billion of commitments to private capital and real asset investments as of June 30, 2017. These funds may be drawn down over the next several years upon request by the general partners. Duke expects to finance these commitments with available cash and expected proceeds from the sales of securities.
Contingencies Duke is involved in various legal actions occurring in the normal course of activities. While the final outcomes cannot be determined at this time, the administration is of the opinion that the resolution of these matters will not have a material adverse effect on Duke’s financial position.
Duke has been named as a defendant in three lawsuits, alleging false claims, antitrust, and ERISA violations. The administration currently believes that the resolution of these cases will not result in a material impact on the consolidated financial statements.
Laws and regulations governing Medicare, Medicaid, and other federal programs are complex and subject to interpretation. Duke, in part through its compliance program, seeks to ensure compliance with such laws and regulations, and to rectify instances of noncompliance with governmental program rules. Duke believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on Duke’s consolidated financial statements. Compliance with such laws and regulations is subject to future government review and interpretation as well as significant regulatory action, including fines, penalties and exclusion from the Medicare, Medicaid, and other Federal programs.
15. Commitments and Contingencies
Financial Statements 2016/2017 39
2017 2016 Assets: Cash and cash equivalents $ 443,535 $ 174,348
Accounts receivable, net 244,052 232,616
Prepaid expenses, inventories, and other assets 61,962 60,007
Contributions receivable, net 428,559 439,869
Investments 9,290,625 8,129,791
Deposits with bond trustees 28,601 45,323
Land, buildings, and equipment, net 2,479,606 2,229,999
Interests in perpetual trusts held by others 805,474 772,553
Due from Duke University Health System … 510,000
Total assets $ 13,782,414 $ 12,594,506
Liabilities:
Accounts payable and accrued payroll $ 356,081 $ 327,042
Deferred revenues and deposits 204,619 193,688
Notes and bonds payable 2,148,917 1,884,237
Annuity and other split-interest obligations 60,369 53,372
Accrued postretirement/postemployment and other benefit obligations 340,141 370,986
Other liabilities 179,164 174,556
Total liabilities 3,289,291 3,003,881
Net Assets:
Unrestricted 4,693,704 4,211,843
Temporarily restricted 2,834,495 2,565,199
Permanently restricted 2,964,924 2,813,583
Total net assets 10,493,123 9,590,625 Total liabilities and net assets $ 13,782,414 $ 12,594,506
The supplementary information in this schedule presents the balance sheets of the University, exclusive of DUHS.
See accompanying Independent Auditors’ Report.
THE UNIVERSITY (SUPPLEMENTARY INFORMATION) JUNE 30, 2017 AND 2016 (DOLLARS IN THOUSANDS)
Balance Sheets schedule 1
40 Financial Statements 2016/2017
THE UNIVERSITY (SUPPLEMENTARY INFORMATION) YEARS ENDED JUNE 30, 2017 AND 2016 (DOLLARS IN THOUSANDS)
Statements of Activities schedule 2
2017 2016
Unrestricted Net Assets:
Operating revenues:
Tuition and fees $ 771,103 $ 733,497 Less student aid (294,544) (279,874)
Tuition and fees, net 476,559 453,623
Grants, contracts and similar agreements: Government sources 595,899 557,337 The Private Diagnostic Clinic, PLLC 60,464 54,625 Other 477,144 459,817 Total grants, contracts and similar agreements 1,133,507 1,071,779
Contributions 137,956 125,410
Investment return designated for current operations: The Duke Endowment 12,500 12,500 Endowment spending 410,054 363,423 Other investment income 111,239 91,349 Total investment return designated for operations 533,793 467,272
Auxiliary enterprises 234,641 211,765 Operating support from DUHS 102,271 97,937 Other 140,553 135,431 Net assets released from restrictions 72,775 57,116
Total operating revenues 2,832,055 2,620,333
Operating expenses:
Salaries and wages 1,292,757 1,212,257 Employee benefits 297,712 301,721 Student aid 43,897 42,243 Other operating expenses 777,238 743,252 Interest expense 74,745 66,136 Depreciation expense 212,930 199,549 Total operating expenses 2,699,279 2,565,158
Operating surplus 132,776 55,175
Financial Statements 2016/2017 41
2017 2016
Nonoperating activities:
Net assets released from restrictions $ 83,297 $ 43,499 Investment return in excess of (less than) amounts designated for current operations 239,361 (370,175) Nonperiodic changes in defined benefit plans 39,259 (197,652) Other, net (12,832) (4,155) Change in unrestricted net assets from nonoperating activities 349,085 (528,483) Transfers of net assets from DUHS … 510,000 Change in unrestricted net assets 481,861 36,692
Temporarily Restricted Net Assets: Contributions 115,141 81,017 Net assets released from restrictions (156,072) (100,615) Investment return in excess of (less than) amounts designated for current operations 299,166 (310,757) Other, net 11,061 10,106 Change in temporarily restricted net assets 269,296 (320,249)
Permanently Restricted Net Assets: Contributions 121,855 123,252 Investment return (less than) in excess of amounts designated for current operations (1,945) 1,951 Gains (losses) on interests in perpetual trusts held by others 32,921 (51,708) Other, net (1,490) (12,648) Change in permanently restricted net assets 151,341 60,847
Change in total net assets 902,498 (222,710) Net assets at beginning of year 9,590,625 9,813,335 Net assets at end of year $ 10,493,123 $ 9,590,625
Certain amounts disaggregated above are presented below in the aggregate: Contributions $ 374,952 $ 329,679 Investment return 1,070,375 (211,709)
The supplementary information in this schedule presents the statements of activities of the University, exclusive of DUHS. See accompanying Independent Auditors’ Report.
Statements of Activities schedule 2 (continued)
42 Financial Statements 2016/2017
2017 2016 Cash flows from operating activities:
Change in net assets $ 902,498 $ (222,710)
Adjustments to reconcile change in net assets to net cash used in operating activities:
Depreciation expense 212,930 199,549
Nonperiodic changes in defined benefit plans (39,259) 197,652
Provision for bad debt (15,917) 763
Transfers from DUHS … (510,000)
Loss (gain) on extinguishment of debt 15,559 (1,922)
Loss on disposals of land, buildings and equipment 1,277 5,610
Restricted contributions received for long-term investment and capital projects (248,306) (215,652)
Permanently restricted investment loss (gain) 1,945 (1,951)
Gains on other nonoperating items … (1,956)
Net realized and unrealized (gains) losses on investments (938,838) 319,668
(Gains) losses on interests in perpetual trusts held by others (32,921) 51,708
Change in:
Accounts receivable, net (14,545) (19,961)
Prepaid expenses, inventories, and other assets (1,955) (3,050)
Contributions receivable, net 27,227 10,620
Accounts payable and accrued payroll 32,124 (18,790)
Deferred revenues and deposits 10,931 17,173
Annuity and other split-interest obligations 6,997 1,824
Accrued postretirement/postemployment and other benefit obligations 8,414 5,591
Other liabilities 4,608 (2,483)
Net cash used in operating activities (67,231) (188,317)
THE UNIVERSITY (SUPPLEMENTARY INFORMATION) YEARS ENDED JUNE 30, 2017 AND 2016 (DOLLARS IN THOUSANDS)
Statements of Cash Flows schedule 3
Financial Statements 2016/2017 43
2017 2016 Cash flows from investing activities:
Purchases of investments (11,758,100) (11,696,204)
Proceeds from sales and maturities of investments 12,046,104 11,907,758
Purchases of land, buildings, and equipment (466,899) (457,456)
Disbursements for loans to students (3,832) (6,873)
Repayments of loans by students 6,941 7,128
Change in deposits with bond trustees 16,722 (22,274)
Net cash used in investing activities (159,064) (267,921)
Cash flows from financing activities:
Restricted contributions received for long-term investment and capital projects 248,306 215,652
Permanently restricted investment (loss) gain (1,945) 1,951
Gains on other nonoperating items … 1,956
Principal payments on notes and bonds payable (648,322) (368,416)
Proceeds from borrowings 897,443 656,863
Net cash provided by financing activities 495,482 508,006
Net change in cash and cash equivalents 269,187 51,768
Cash and cash equivalents at beginning of year 174,348 122,580
Cash and cash equivalents at end of year $ 443,535 $ 174,348
Supplemental disclosure of cash flow information:
Noncash transfer from DUHS $ 501,417 $ …
The supplementary information in this schedule presents the statements of cash flows of the University, exclusive of DUHS.
See accompanying Independent Auditors’ Report.
Statements of Cash Flows schedule 3 (continued)
2017 football season opening game in Wallace Wade Stadium.
Printed on recycled paper.
