select a Public University review financial statements and audit report system.
1,-Identify and analyse the employees pension plan disclosures in the financial
statement Evaluate the impact of the GAASB proposed changes to the pension
liabilities on the financial statements of the institution.
2.- Identify and analyse the economic conditions that will affect the future growth
and success of the institution.
3.- Review and evaluate the treatment of the federal grants such as Pell grants,
supplemental grants and work study on the revenue reported for the institution.
4.- Compare the treatments of endowments, earning on endowments, and
restricted funds with GAASB requirements.
Introduction
- The university of Michigan staff retirement plan is accounted for under the Postemployment
benefits financial obligations that are calculated based on the projected unit credit system.
Actuarial and the assumptions valuation methods were applied for the years ending June 30,
2013/12. The defined contribution retirement benefit plan apply to all employees and its payable
through the Teachers Insurance & Annuity Association, the UM Retirement Equities Fund, also
known as the TIAA-CREF, and the Fidelity Management Trust, FMTC mutual funds. Individual
employees maintain their contracts with TIAA-CREF and are all eligible for the plan based on
their ages and the service requirements. All eligible employees contribute 5% of their pay while
the university matches their contribution with another 10% making a total contribution per
employee to be 15%. The initial contribution begins after the employee has completed the first
year of employment. The total contribution by the employees in the year 2013 amounted to
$122,094 while the university contributed $234,036, in the year 2012, the total contributions by
Public Universities Analysis – University of Michigan 2
employees amounted to $117,127 while the university contributed 226,517 while for 2013 it was
$108,981 and $214,905respectively.
GASB commenced a project to review the pensions accounting standards in the year 2006 and
gave out some proposals in the year 2011. (Governmental Accounting Standards Board, 2011)
The proposals contained in two drafts reviewed pension accounting systems in many ways
however the major three pertained to assets and liabilities. In the first proposal, a blended rate
would be used that reflects the expected rate of return for that portion of liabilities that have been
projected and covered under the high grade returns of the municipal bonds while secondly, the
assets would not be smoothed but valued at market value. Thirdly, the normal entry age or the
level of the percentage payroll would be the only recognized allocation method that would be
utilized for all reporting purposes. The blended rates would maintain the existing current link
that relates to liabilities and the funds or assets used to pay for all liabilities. GASB proposes to
abandon the actuarial methods and instead recommends market valuation of planned assets.
- The state of the economy affects the interest rates and the consumption levels influence the
supply and also the general demand for services such as academic and research facilities. When a
country’s economy is in a recession, the general earnings or income levels of most household
reduces and the amount of saving is also affected by the same margin. Most families that have
been affected by job losses are unable to take their children to colleges. In the year 2008 and also
parts of 2009, the US economy registered a -8% growth, the levels of employment were very low
and actually stood at -4% growth rate whiles the levels of unemployment reached 10%. The
composite of government long term bonds reduced to 4.5% while the CDs for three months stood
at 3% in 2008 early but reduced to almost 0.1% in early 2009 and the GDP was at an all time low
of negative 4.5%.www.research.stlouisfed.org/publications/iet/. The demand of services such
Public Universities Analysis – University of Michigan 3
educational facilities, research and other services also reduce according to the reduction of
household incomes.
The UM intends to increase its annual budget by 2.2% in 2014 while the undergraduate non-
resident students tuition rates will also be increased by 3.2%. Its modernization program is
expected to cost $1.17billion most of which is expected to come from grants, gifts and future
borrowings. The US health care reform is also expected to impact its short-term and long-term
health care programs but the implementation of the reforms are expected to be completed in the
year 2015. (Munnell, Jean-Pierre, Hurwitz, Medenica and Quinby, 2011)
- UM received a total of $43.247 million in Federal Pell grants, the State educational
appropriations were $315.921 million, State and local grants were $8.5 million, Federal grants
and contract amounted to $914.012 million. These amounts were classified under the non-
operating revenues and totaled to 20% of the total revenue registered for the institution. Tuition
and state grants are the highest single revenue sources for the university. - The University of Michigan has diversified its long term investment strategies in order to
maximize its earnings and also to grow its endowment corpus in their real terms. For the year
2013, portfolio long-term percentage was 10.8% while in 2012 it reduced to -0.5%.
The endowment spending smoothes the volatile capital markets. The spending rule together with
the endowment growth supported the distributions which earned UM more than $276 million for
the year ending 2013. GASB proposes that the actuarial method should be abandon and instead
recommends that the market valuation method of planned assets should be used. The total
financial well being of the pension funds is determined by its funded ratio. It’s calculated by the
planned assets divided by the liabilities while the smoothing of liabilities is calculated over five
Public Universities Analysis – University of Michigan 4
year periods. These means the losses in assets that were reported in the year 2009 will be
reported in the year 2012.
References
Governmental Accounting Standards Board. (2011). “Proposed Statement of the Governmental
Accounting Standards Board: Accounting and Financial Reporting for Pensions, an amendment
of GASB Statement No. 27
Munnell, A. H., Jean-Pierre A., Hurwitz, J., Medenica, M. and Quinby, L. (2011) “The Funding
of State and Local Pensions in 2010.” Issue in Brief SLP-17. Chestnut Hill, MA: Center for
Retirement Research at Boston College.
