NEW ISSUE – BOOK ENTRY ONLY RATINGS: Standard & Poor’s: “AA” Moody’s: “Aa2” (See “RATINGS” herein)
In the opinion of Bond Counsel, assuming compliance with certain covenants of the University, interest on the 2015 Bonds is excludable from gross income of the owners of the 2015 Bonds for federal income tax purposes under existing law, as currently enacted and construed. Interest on the 2015 Bonds is not an item of tax preference for purposes of either individual or corporate alternative minimum tax; however, interest on the 2015 Bonds is taken into account in determining adjusted current earnings for purposes of the corporate alternative minimum tax as more fully described under the caption “TAX MATTERS” herein. In the opinion of Bond Counsel, under the laws of the Commonwealth of Pennsylvania as presently enacted and construed, the 2015 Bonds are exempt from personal property taxes in Pennsylvania and the interest on the 2015 Bonds is exempt from Pennsylvania personal income and corporate net income tax. See “TAX MATTERS” herein.
$182,165,000 THE PENNSYLVANIA STATE UNIVERSITY Bonds, Series A of 2015 - $65,210,000 Refunding Bonds, Series B of 2015 - $116,955,000
Dated: Date of Delivery Due: September 1, as shown on the inside cover page
The Pennsylvania State University Bonds, Series A of 2015 (the “Series 2015A Bonds”) and The Pennsylvania State University Refunding Bonds, Series B of 2015 (the “Series 2015B Bonds” and, together with the Series 2015A Bonds, the “2015 Bonds”) are general unsecured obligations of The Pennsylvania State University (the “University”). The 2015 Bonds are issuable as fully registered bonds without coupons and, when issued, will be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company (“DTC”), New York, New York. DTC will act as securities depository for the 2015 Bonds. Purchases of the 2015 Bonds will be made in book-entry form. Purchasers will not receive certificates representing their beneficial ownership interest in the 2015 Bonds. Registered owners shall mean Cede & Co., as aforesaid, and shall not mean the actual purchasers of the 2015 Bonds. As long as Cede & Co. is the registered owner of the 2015 Bonds, payment will be made to the beneficial owners of the 2015 Bonds via DTC by its participants. See “BOOK- ENTRY ONLY SYSTEM” herein.
Interest on the 2015 Bonds is payable initially on September 1, 2015 and semiannually thereafter on each March 1 and September 1 (each, an “Interest Payment Date”) until maturity. The 2015 Bonds are issuable only in registered form without coupons in denominations of $5,000 or any integral multiple thereof within the maturity. Interest on the 2015 Bonds will be paid by check or draft mailed, or under certain conditions paid by wire transfer, to the persons in whose names such 2015 Bonds are registered at the close of business on the fifteenth day of the month immediately preceding the applicable Interest Payment Date. Principal of the 2015 Bonds will be payable at the designated corporate trust office of The Bank of New York Mellon Trust Company, N.A., Pittsburgh, Pennsylvania, as Trustee, or at the designated corporate trust office of any successor trustee.
The Series 2015A Bonds are being issued to finance (1) the acquisition, construction and equipping of two data center facilities to house computer systems and associated components, including telecommunication, storage and disaster recovery systems, one located at the Penn State University Park Campus and one located at the Penn State Hershey Campus; (2) the acquisition, construction and equipping of a student enrichment center located at the Penn State Harrisburg Campus; (3) the acquisition, construction and equipping of a housing and food service warehouse and the expansion of the bakery located at the Penn State University Park Campus; (4) other capital projects consistent with the University’s capital plan; and (5) the payment of all or a portion of the costs of issuance of the Bonds. The Series 2015B Bonds are being issue to finance (1) the current refunding of all of The Pennsylvania State University Bonds, Series 2004A and all of The Pennsylvania State University Bonds, Series 2005; and (2) the payment of all or a portion of the costs of issuance of the 2015 Bonds.
THE 2015 BONDS ARE GENERAL UNSECURED OBLIGATIONS OF THE UNIVERSITY, AND ARE NOT A DEBT OF THE COMMONWEALTH OF PENNSYLVANIA OR ANY POLITICAL SUBDIVISION, AGENCY OR INSTRUMENTALITY THEREOF (OTHER THAN THE UNIVERSITY) AND ARE PAYABLE SOLELY FROM THE SOURCES REFERRED TO IN THE 2015 BONDS AS DESCRIBED HEREIN. NEITHER THE CREDIT NOR THE TAXING POWER OF THE COMMONWEALTH OF PENNSYLVANIA NOR ANY POLITICAL SUBDIVISION, AGENCY OR INSTRUMENTALITY THEREOF IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OR REDEMPTION PRICE OF, OR INTEREST ON, THE 2015 BONDS. THE UNIVERSITY HAS NO TAXING POWER.
The 2015 Bonds are subject to optional and mandatory sinking fund redemption prior to maturity. See “REDEMPTION” herein.
The 2015 Bonds are offered, when, as and if issued and received by the Underwriters, subject to prior sale, withdrawal or modification of the offer without notice and the approval of legality by Greenberg Traurig, LLP, Philadelphia, Pennsylvania, Bond Counsel. Certain legal matters will be passed upon for the University by Stephen S. Dunham, its Vice President and General Counsel, and for the Underwriters by their counsel, Cohen & Grigsby, P.C., Pittsburgh, Pennsylvania. It is expected that the 2015 Bonds will be available for delivery through the facilities of The Depository Trust Company in New York, New York on or about June 3, 2015. BARCLAYS BofA Merrill Lynch J.P. Morgan Securities Morgan Stanley Wells Fargo Securities
The date of this Official Statement is May 6, 2015. $182,165,000 THE PENNSYLVANIA STATE UNIVERSITY Bonds, Series A of 2015 - $65,210,000 Refunding Bonds, Series B of 2015 - $116,955,000
Dated: Date of Delivery Due: September 1, as shown below Interest Payable: March 1 and September 1 First Interest Payment: September 1, 2015
MATURITY SCHEDULE, INTEREST RATES, AND YIELDS
SERIAL MATURITIES – SERIES 2015A Bonds
Due Amount of Series September 1 2015A Bonds Interest Rate Yield 2016 $1,430,000 2.000% 0.45% 2017 1,460,000 4.000 0.83 2018 1,520,000 4.000 1.18 2019 1,580,000 5.000 1.43 2020 1,660,000 5.000 1.64 2021 1,740,000 5.000 1.87 2022 1,830,000 5.000 2.06 2023 1,920,000 5.000 2.27 2024 2,015,000 5.000 2.48 2025 2,115,000 5.000 2.58 2026 2,220,000 5.000 2.73** 2027 2,335,000 5.000 2.88** 2028 2,450,000 5.000 3.00** 2029 2,570,000 5.000 3.07** 2030 2,700,000 5.000 3.14** 2031 2,835,000 5.000 3.20** 2032 2,980,000 5.000 3.26** 2033 3,125,000 5.000 3.30** 2034 3,280,000 5.000 3.34** 2035 3,445,000 5.000 3.38**
$20,000,000 5.000% Series 2015A Term Bond Due September 1, 2040, Yield 3.49%**
SERIAL MATURITIES – SERIES 2015B Bonds
Due Amount of September 1 Series 2015B Bonds Interest Rate Yield 2015 $5,375,000 1.000% 0.08% 2016 3,580,000 2.000 0.45 2017 3,665,000 4.000 0.83 2018 3,820,000 4.000 1.18 2019 3,975,000 5.000 1.43 2020 4,180,000 5.000 1.64 2021 4,395,000 5.000 1.87 2022 4,620,000 5.000 2.06 2023 4,860,000 5.000 2.27 2024 5,105,000 5.000 2.48 2025 5,375,000 5.000 2.58 2026 5,650,000 5.000 2.73** 2027 5,940,000 5.000 2.88** 2028 6,245,000 5.000 3.00** 2029 6,565,000 5.000 3.07** 2030 6,900,000 5.000 3.14** 2031 7,260,000 5.000 3.20** 2032 7,630,000 5.000 3.26** 2033 8,020,000 5.000 3.30** 2034 8,435,000 5.000 3.34** 2035 5,360,000 5.000 3.38**
______** Priced to the first par call date of September 1, 2025.
OFFICERS OF THE UNIVERSITY
Eric J. Barron ...... President Nicholas P. Jones ...... Executive Vice President and Provost David J. Gray ...... Senior Vice President for Finance and Business/Treasurer A. Craig Hillemeier ...... Senior Vice President for Health Affairs and Dean, College of Medicine Rodney P. Kirsch ...... Senior Vice President for Development and Alumni Relations Stephen S. Dunham …………………………………………………...Vice President and General Counsel
BOND COUNSEL Greenberg Traurig, LLP Philadelphia, Pennsylvania
TRUSTEE The Bank of New York Mellon Trust Company, N.A. Pittsburgh, Pennsylvania
UNDERWRITERS Barclays Capital Inc. New York, New York
UNDERWRITERS' COUNSEL Cohen & Grigsby, P.C. Pittsburgh, Pennsylvania
FINANCIAL ADVISOR Public Financial Management, Inc. Philadelphia, Pennsylvania
The information set forth herein has been obtained from the University and other sources that are believed to be reliable, but such sources are not guaranteed as to accuracy or completeness, and the information is not to be construed as a representation by the Underwriters and, except for the information concerning the University in Appendix A – Information Concerning The Pennsylvania State University and Appendix B – Audited Financial Statements of The Pennsylvania State University – Fiscal Years ended June 30, 2014 and June 30, 2013, is not to be construed as a representation by the University. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the University since the date hereof.
No dealer, broker, salesman or other person has been authorized by the Underwriters or the University to give any information or to make any representations other than those in this Official Statement, and if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, and there shall not be any sale of, the 2015 Bonds in any jurisdiction in which it is unlawful to make such offer, solicitation or sale.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE 2015 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME WITHOUT NOTICE.
THE ORDER AND PLACEMENT OF MATERIALS IN THIS OFFICIAL STATEMENT, INCLUDING THE APPENDICES, ARE NOT TO BE DEEMED TO BE A DETERMINATION OF RELEVANCE, MATERIALITY OR IMPORTANCE, AND THIS OFFICIAL STATEMENT, INCLUDING THE APPENDICES, MUST BE CONSIDERED IN ITS ENTIRETY. THE OFFERING OF THE 2015 BONDS IS MADE ONLY BY MEANS OF THE ENTIRE OFFICIAL STATEMENT.
THE 2015 BONDS HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACT. THE REGISTRATION OR QUALIFICATION OF THE 2015 BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF THE SECURITIES LAWS OF CERTAIN STATES, IF ANY, IN WHICH THE 2015 BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN CERTAIN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE 2015 BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.
This Official Statement and the information herein are subject to completion or amendment without notice. Under no circumstances shall this Official Statement constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.
All quotations from and summaries and explanations of provisions of laws and documents in this Official Statement do not purport to be complete and reference is made to such laws and documents for full and complete statements of their provisions. Any statements made in this Official Statement involving estimates or matters of opinion, whether or not expressly so stated, are intended merely as estimates or opinions and not as representations of fact. The information and expressions of opinion contained herein are subject to change without notice; neither the delivery of this Official Statement nor any sale of the 2015 Bonds shall under any circumstances create any implication that there has been no change in matters described herein since the date of this Official Statement.
TABLE OF CONTENTS
INTRODUCTORY STATEMENT ...... 1 The University ...... 1 Security; Other Indebtedness ...... 1 THE 2015 PROJECT ...... 1 SOURCES AND USES OF FUNDS ...... 2 DESCRIPTION OF THE 2015 BONDS ...... 2 BOOK-ENTRY ONLY SYSTEM ...... 3 REDEMPTION ...... 5 Mandatory Redemption ...... 5 Optional Redemption ...... 5 Notice of Redemption ...... 5 Selection of Bonds for Redemption ...... 6 SECURITY FOR THE 2015 BONDS ...... 7 BONDHOLDERS' RISKS ...... 7 General ...... 7 Revenues ...... 7 State and Federal Legislation ...... 7 Covenant to Maintain Tax-Exempt Status of the 2015 Bonds ...... 7 Research ...... 8 Failure to Appropriate ...... 8 Economic Factors Beyond the University's Control ...... 8 Enforceability of Remedies; Bankruptcy ...... 8 No Debt Service Reserve Fund ...... 8 Other Risk Factors ...... 9 CONTINUING DISCLOSURE UNDERTAKING ...... 9 TAX MATTERS ...... 11 Tax Exemption ...... 11 State Tax ...... 11 FINANCIAL ADVISOR ...... 12 CERTAIN RELATIONSHIPS ...... 12 LEGAL MATTERS ...... 12 LITIGATION MATTERS ...... 12 LIMITED OBLIGATIONS ...... 12 UNDERWRITING ...... 13 RATINGS ...... 13 INDEPENDENT AUDITORS ...... 14 MISCELLANEOUS ...... 14
Appendix A - Information Concerning The Pennsylvania State University Appendix B - Audited Financial Statements of The Pennsylvania State University – Fiscal Years ended June 30, 2014 and June 30, 2013 Appendix C - Summary of Certain Provisions of the Indenture Appendix D - Proposed Form of Bond Counsel Opinion
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OFFICIAL STATEMENT OF THE PENNSYLVANIA STATE UNIVERSITY
$182,165,000 THE PENNSYLVANIA STATE UNIVERSITY BONDS, SERIES A OF 2015 - $65,210,000 REFUNDING BONDS, SERIES B of 2015 - $116,955,000
INTRODUCTORY STATEMENT
The purpose of this Official Statement of The Pennsylvania State University (the "University"), which includes the cover page and inside cover page and the Appendices, is to furnish certain information with respect to the issuance and sale of $182,165,000 principal amount of The Pennsylvania State University Bonds, Series A of 2015 (the "Series 2015A Bonds") and The Pennsylvania State University Refunding Bonds, Series B of 2015 (the "Series 2015B Bonds" and, together with the Series 2015A Bonds, the "2015 Bonds"). The 2015 Bonds are being issued under a Trust Indenture dated as of June 1, 2015 (the "Indenture") between the University and The Bank of New York Mellon Trust Company, N.A., as Trustee (the "Trustee") to finance the 2015 Project described below under "THE 2015 PROJECT."
The University
The University is a not-for-profit corporation organized and existing under the laws of the Commonwealth of Pennsylvania (the "Commonwealth"), having its principal place of operation at the Borough of State College, Centre County, in the Commonwealth, and an instrumentality of the Commonwealth for the education of youth and the land grant institution of the Commonwealth. The University was originally chartered in 1855. Credit enrollment for the Fall 2014 semester totaled 95,973 students. University Park offers over 160 baccalaureate and associate degree majors through 12 academic colleges. An additional 106 baccalaureate programs and 23 associate degree programs are offered at other locations. (See Appendix A and Appendix B for more information concerning the University.)
Security; Other Indebtedness
The 2015 Bonds are issued under and secured by the Indenture and are general unconditional and unsecured obligations of the University. The University has other series of bonds outstanding under separate indentures and may issue additional bonds under separate indentures in the future on a parity with the 2015 Bonds. See "SECURITY FOR THE 2015 BONDS."
THE 2015 PROJECT
The Series 2015A Bonds are being issued to finance (1) the acquisition, construction and equipping of two data center facilities to house computer systems and associated components, including telecommunication, storage and disaster recovery systems, one located at the Penn State University Park Campus and one located at the Penn State Hershey Campus; (2) the acquisition, construction and equipping of a student enrichment center located at the Penn State Harrisburg Campus; (3) the acquisition, construction and equipping of a housing and food service warehouse and the expansion of a bakery located at the Penn State University Park Campus; (4) other capital projects consistent with the University’s capital plan; and (5) the payment of all or a portion of the costs of issuance of the Bonds (collectively, the "New Money Project").
The Series 2015B Bonds are being issued to finance (1) the current refunding of all of The Pennsylvania State University Bonds Series 2004A and all of The Pennsylvania State University Bonds, Series 2005 (collectively, the "Refunded Bonds"); and (2) the payment of all or a portion of the costs of issuance of the 2015 Bonds (collectively, the "Refunding Project").
SOURCES AND USES OF FUNDS
The following table shows the sources and uses of Series 2015A Bond proceeds for the New Money Project.
Sources of Funds: Series 2015A Bond Issue Par Amount $65,210,000.00 Plus: Original Issue Premium 9,786,314.80 Total Sources of Funds: $74,996,314.80
Uses of Funds: Deposit to Expenditures Fund $74,650,970.08 Costs of Issuance1 345,344.72 Total Uses of Funds: $74,996,314.80
The following table shows the sources and uses of Series 2015B Bond proceeds for the Refunding Project.
Sources of Funds: Series 2015B Bond Issue Par Amount $116,955,000.00 Plus: Original Issue Premium 17,871,646.05 Total Sources of Funds: $134,826,646.05
Uses of Funds: Refunding of Series 2004A Bonds $50,689,527.78 Refunding of Series 2005 Bonds 83,530,393.75 Costs of Issuance1 606,724.52 Total Uses of Funds: $134,826,646.05
1 An estimated amount to pay for costs of issuance including Underwriters' discount, legal, financial advisor, rating agency and trustee fees, printing costs and certain other fees and expenses.
DESCRIPTION OF THE 2015 BONDS
The 2015 Bonds are initially dated the date of their issuance and delivery, are issuable in authorized denominations of $5,000 and any integral multiple thereof, and mature in the principal amounts and on the dates set forth on the inside cover page of this Official Statement. The 2015 Bonds bear interest from the date of delivery, payable on September 1, 2015 and semi-annually thereafter on March 1 and September 1 (each, an "Interest Payment Date") of each year thereafter, at the rates per annum set forth on the inside cover page of this Official Statement until the University's obligation with respect to the payment of the principal thereof shall be discharged as provided in the Indenture.
Subject to the provisions relating to the book-entry only system described below, the principal and redemption price of the 2015 Bonds shall be payable at the Pittsburgh, Pennsylvania office of the Trustee or any other office of the Trustee designated as provided in the Indenture, or at the designated office of any successor trustee or co-paying agent (the "Designated Office"), in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts. Interest on the 2015 Bonds at the rates per annum shown on the inside cover page hereof, in like coin or currency will be paid by check mailed on the applicable Interest Payment Date to the registered owners of such 2015 Bonds as shown on the registration books kept by the Trustee at the close of business on the fifteenth day of the month immediately preceding the applicable Interest Payment Date ("Record Date"). Owners of $1,000,000 or more in aggregate principal amount of the 2015 Bonds may receive payments of interest by wire transfer to a designated bank account in the United States if a written request therefor has been filed with the Trustee at least ten (10) days but not more than thirty (30) days before the payment date to which it relates.
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Interest which is due and payable on any March 1 or September 1, but which cannot be paid on such date from available funds under the Indenture, shall thereupon cease to be payable to the registered owners entitled thereto as of such date. At such time as sufficient funds are available for the payment of such overdue interest, the Trustee shall establish a special payment date and a special record date in respect thereof. The Trustee shall mail a notice specifying each date so established to each registered owner of the 2015 Bonds, such notice to be mailed at least 10 days prior to the special record date.
The transfer or exchange of any 2015 Bond shall be registered at the Designated Office of the Trustee. No charge shall be made to a registered owner for any transfer or exchange of 2015 Bonds, except for taxes or governmental charges relating thereto. The Trustee shall not be required to transfer or exchange any 2015 Bond after the same shall have been selected for redemption in whole or in part.
BOOK-ENTRY ONLY SYSTEM
THE INFORMATION PROVIDED UNDER THIS HEADING HAS BEEN PROVIDED BY THE DEPOSITORY TRUST COMPANY ("DTC"), NEW YORK, NEW YORK. NO REPRESENTATION IS MADE BY THE UNIVERSITY OR THE UNDERWRITERS AS TO THE ACCURACY, COMPLETENESS OR ADEQUACY OF SUCH INFORMATION PROVIDED BY DTC OR AS TO THE ABSENCE OF MATERIAL ADVERSE CHANGES IN SUCH INFORMATION SUBSEQUENT TO THE DATE HEREOF.
DTC will act as securities depository for the 2015 Bonds. The 2015 Bonds will be issued as fully- registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered 2015 Bond certificate will be issued for each maturity of the 2015 Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world's largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org. Purchases of 2015 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the 2015 Bonds on DTC's records. The ownership interest of each actual purchaser of each 2015 Bond ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2015 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in 2015 Bonds, except in the event that use of the book-entry system for the 2015 Bonds is discontinued.
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To facilitate subsequent transfers, all 2015 Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of 2015 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2015 Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such 2015 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of 2015 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the 2015 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the documents relating to the 2015 Bonds. For example, Beneficial Owners of 2015 Bonds may wish to ascertain that the nominee holding the 2015 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them. Redemption notices shall be sent by the Trustee to DTC. If less than all of the 2015 Bonds of a maturity are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such 2015 Bonds to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the 2015 Bonds unless authorized by a Direct Participant in accordance with DTC's MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the University as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the 2015 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Payments of principal of and interest on the 2015 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts, upon DTC's receipt of funds and corresponding detail information from the University or the Trustee, on the payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Trustee, or the University, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the University or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. Under the Indenture, payments made by the Trustee to DTC or its nominee shall satisfy the University's obligation under the Indenture to the extent of the payments so made. DTC may discontinue providing its services as securities depository with respect to the 2015 Bonds at any time by giving reasonable notice to the University or the Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, 2015 Bond certificates are required to be printed and delivered as provided in the Indenture. The University may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, 2015 Bond certificates will be printed and delivered to DTC. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the University believes to be reliable, but is not guaranteed as to accuracy, completeness or adequacy by, and is not to be construed as a representation by, the Underwriters, the Trustee, or the University. NEITHER THE UNIVERSITY NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DIRECT PARTICIPANTS, INDIRECT PARTICIPANTS, BENEFICIAL OWNERS OR ANY OTHER PERSON NOT SHOWN ON THE REGISTRATION BOOKS OF THE TRUSTEE AS BEING A BONDHOLDER FOR: (1) SENDING TRANSACTION STATEMENTS; (2) MAINTAINING, SUPERVISING OR REVIEWING, OR THE ACCURACY OF, ANY RECORDS MAINTAINED BY DTC OR ANY
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PARTICIPANT OR OTHER NOMINEES OF SUCH BENEFICIAL OWNERS; (3) PAYMENT OR THE TIMELINESS OF PAYMENT BY DTC TO ANY PARTICIPANT, OR BY ANY PARTICIPANT OR OTHER NOMINEES OF BENEFICIAL OWNERS TO ANY BENEFICIAL OWNER, OF ANY AMOUNT DUE IN RESPECT OF THE PRINCIPAL OF OR REDEMPTION PREMIUM, IF ANY, OR INTEREST ON BOOK- ENTRY 2015 BONDS; (4) DELIVERY OR TIMELY DELIVERY BY DTC TO ANY PARTICIPANT, OR BY ANY PARTICIPANT OR OTHER NOMINEES OF BENEFICIAL OWNERS TO ANY BENEFICIAL OWNERS, OR ANY NOTICE (INCLUDING NOTICE OF REDEMPTION) OR OTHER COMMUNICATION WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE TO BE GIVEN HOLDERS OR OWNERS OF BOOK-ENTRY 2015 BONDS; (5) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENT IN THE EVENT OF ANY PARTIAL REDEMPTION OF BOOK-ENTRY 2015 BONDS; OR (6) ANY ACTION TAKEN BY DTC OR ITS NOMINEE AS THE REGISTERED OWNER OF BOOK- ENTRY 2015 BONDS. In the event that the Book-Entry Only System is discontinued and the Beneficial Owners become registered owners of the 2015 Bonds, the 2015 Bonds will be transferable in accordance with the provisions of the Indenture.
REDEMPTION
The 2015 Bonds are subject to redemption prior to maturity as follows:
Mandatory Redemption
The Series 2015A Bonds maturing on September 1, 2040 are subject to mandatory sinking fund redemption on September 1 of each year, at a redemption price equal to 100% of the principal amount of the Bonds to be redeemed, plus accrued interest, if any, to the redemption date, in the amounts set forth below:
Mandatory Sinking Fund Redemption for Series 2015A Bonds Maturing on September 1, 2040
Year Amount
2036 $3,620,000 2037 3,800,000 2038 3,990,000 2039 4,190,000 2040* 4,400,000 ______*Maturity
Optional Redemption
The 2015 Bonds, or portions thereof in integral multiples of $5,000, maturing on and after September 1, 2026, are subject to redemption at the written direction of the University, in whole or in part at any time on or after September 1, 2025, in such order of their maturity as the University shall determine and by lot within a maturity, upon payment of a redemption price equal to 100% of the principal amount thereof, together with interest accrued to the date fixed for redemption.
Notice of Redemption
The Trustee shall cause notice of any redemption of 2015 Bonds to be mailed by first class mail to the registered owners of all 2015 Bonds to be redeemed at the registered addresses appearing in the registration books maintained by the bond registrar. Each such notice shall (i) be mailed at least thirty (30) days and not more than sixty (60) days prior to the date fixed for redemption, (ii) identify the 2015 Bonds to be redeemed, specifying the name of the issue, the date of the issue, the stated maturity, the series designation, the CUSIP numbers and certificate numbers assigned to the 2015 Bonds, (iii) state whether the redemption is optional or mandatory, specify the date fixed for redemption and the redemption price and (iv) state that on the date fixed for redemption the 2015 Bonds called for redemption will be payable at the Designated Office of the Trustee designated in such notice upon presentation and surrender thereof, that from that date interest will cease to accrue and that no representation is made
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as to the accuracy or correctness of the CUSIP numbers printed therein or on the 2015 Bonds. If at the time of mailing of any notice of redemption (other than a mandatory sinking fund redemption), the University shall not have deposited with the Trustee funds sufficient to redeem all the 2015 Bonds called for redemption, such notice shall state that such redemption is subject to the deposit of the redemption funds with the Trustee not later than the date fixed for redemption and shall be of no effect unless such funds are so deposited. Failure to give notice in the manner described in this paragraph with respect to any 2015 Bond, or any defect in such notice, shall not affect the validity of the proceedings for redemption for any 2015 Bond with respect to which notice was properly given.
If the University deposits with the Trustee funds sufficient to pay the principal amount or redemption price of any 2015 Bonds becoming due at maturity, by call for redemption or otherwise, together with interest on such 2015 Bonds to the due date, the interest on such 2015 Bonds will cease to accrue on the due date, and thereafter the registered owners will be restricted to the funds so deposited as provided in the Indenture.
Selection of Bonds for Redemption
If a 2015 Bond is of a denomination larger than $5,000, a portion of such 2015 Bond may be redeemed, but such 2015 Bonds shall be redeemed only in the principal amount of $5,000 each or any integral multiple thereof.
The Indenture provides that if the 2015 Bonds are not presented for payment when the principal thereof becomes due, either at maturity or otherwise and if the University shall have deposited in trust with the Trustee, or left with it in trust if previously so deposited, funds sufficient to pay the principal thereof (and the premium, if any), together with all interest due thereon to the date of maturity, for the benefit of the registered owner thereof, all liability of the University to the registered owner for the payment of the principal and the interest (and all liability of the University to the registered owner thereof for the premium, if any) shall forthwith cease, determine and be completely discharged, unless the Trustee shall, as permitted by the Indenture, thereafter pay the amounts so deposited with the Trustee for the payment hereof or of any interest (or of any premium) to the University, in which case the registered owner thereof shall thereafter look only to the University for payment and then only to the extent of the amounts so received by the University without interest thereon.
In case an Event of Default, as defined in the Indenture, shall occur, the principal of all 2015 Bonds at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be rescinded by either the Trustee or the Owners of a majority in principal amount of the 2015 Bonds outstanding.
The 2015 Bonds are transferable by the registered owner thereof, in person or by duly authorized attorney, at the Designated Office of the Trustee, upon surrender of the 2015 Bond for cancellation, accompanied by a duly executed instrument of transfer in form approved by the University, and upon payment of any taxes or other governmental charges incident to such transfer; and upon any such transfer a new registered 2015 Bond or 2015 Bonds, of the same maturity, in the same aggregate principal amount and in authorized denominations, will be issued to the registered transferee or transferees in exchange therefor. The person in whose name the 2015 Bond is registered shall be deemed and regarded as the owner thereof for all purposes; and the University and the Trustee shall not be affected by any notice to the contrary. Payment of or on account of the principal thereof and premium (if any) and interest thereon shall be made only to or upon the order in writing of the registered owner thereof; and all such payments shall be valid and effectual to satisfy and discharge the liability upon the 2015 Bonds to the extent of the sum or sums so paid.
The 2015 Bonds do not pledge the credit or the taxing power of the Commonwealth of Pennsylvania or any political subdivision thereof. The University has no taxing power.
No recourse under or upon any obligation, covenant or agreement contained in the Indenture, or in any 2015 Bond thereby secured, or because of any indebtedness thereby secured, shall be had against any past, present or future member of the Board of Trustees, director or officer, as such, of the University, or of any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceedings or otherwise; it being expressly agreed and understood that the Indenture, the 2015 Bonds and the obligations thereby secured, are solely corporate obligations of the University, and that no personal liability whatsoever shall attach to, or be incurred by such members of the Board of Trustees, directors or
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officers, as such, of the University or of any such successor corporation, or any of them, because of the incurrence of the indebtedness thereby authorized, or under or by reason of any of the obligations, covenants or agreements contained in or implied from the Indenture or in any of the 2015 Bonds thereby secured.
SECURITY FOR THE 2015 BONDS
The 2015 Bonds are general unsecured obligations of the University, are not a debt of the Commonwealth of Pennsylvania or any political subdivision, agency or instrumentality thereof (other than the University) and are payable solely from the general revenues of the University and funds held under the Indenture for such payment. Neither the credit nor the taxing power of the Commonwealth of Pennsylvania nor any political subdivision, agency or instrumentality thereof is pledged to the payment of the principal or redemption price of, or interest on, the 2015 Bonds. The University has no taxing power and has no power at any time or in any manner to pledge the credit or the taxing power of the Commonwealth or any political subdivision or instrumentality thereof. The principal of and premium, if any, and interest on the 2015 Bonds are secured by all funds held in trust pursuant to the Indenture (other than the Rebate Fund).
BONDHOLDERS' RISKS
General
Except as noted herein, the 2015 Bonds are payable solely from certain funds held by the Trustee under the Indenture. No representation or assurance can be given to the effect that the University will have sufficient moneys available to meet the University's payment obligations with respect to the 2015 Bonds.
Revenues
Future legislation, competition from the other educational institutions, regulatory actions, economic conditions, changes in the number of students in attendance at the University, reduced funding support from governmental research moneys and Commonwealth appropriations, or other factors could adversely affect the amount of money the University has available to meet its payment obligations with respect to the 2015 Bonds. The Underwriters have not made any independent investigation of the extent to which any such factors will have an adverse impact on the available moneys of the University.
State and Federal Legislation
In recent years, the activities of institutions similar to the University and non-profit, tax-exempt colleges and universities have been subjected to increasing scrutiny by federal, state and local legislative and administrative agencies, including the United States Congress, the Internal Revenue Service, the Pennsylvania General Assembly and local taxing authorities. Various proposals have been considered previously or are presently being considered at the federal, state and local levels which would restrict the definition of tax-exempt or non-profit status, impose new restrictions on the activities of tax-exempt, non-profit corporations, and/or tax or otherwise burden the activities of such corporations, including proposals to (i) broaden or strengthen federal and local tax law provisions respecting unrelated business income of non-profit corporations, or (ii) reduce or eliminate real estate tax exemptions available to charitable organizations. There can be no assurance that future changes in the laws, rules, regulations, interpretations and policies relating to the definition, activities and/or taxation of non-profit, tax-exempt corporations will not have material adverse impact on the future operations or costs of the University.
Covenant to Maintain Tax-Exempt Status of the 2015 Bonds
The tax-exempt status of the 2015 Bonds is based on the continuing compliance by the University and the Medical Center with certain covenants contained in the Indenture and a Tax Certificate to be executed and delivered by the University on the date of issuance and delivery of the 2015 Bonds. These covenants relate generally to restrictions on the use of facilities financed or refinanced with proceeds of the 2015 Bonds, arbitrage limitations, rebate of certain excess investment earnings, if any, to the federal government and the maintenance by the Medical Center of its status as a corporation organized under Section 501(c)(3) of the Internal Revenue Code of 1986, as
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amended. Failure to comply with such covenants could cause interest on the 2015 Bonds to become subject to federal income taxation retroactive to the date of issuance of the 2015 Bonds.
Research
The University conducts research activities sponsored by various entities, including agencies and departments of the federal government, the Commonwealth, the local governmental entities, companies and foundations.
The University's ability to retain research staff and meet budgetary forecasts is in part dependent on receiving research funding from federal and state agencies, as well as other sponsors. There can be no assurance that these agencies and sponsors will continue to support research at their current levels. In addition, there are other organizations that compete with the University for these grants and contracts. There can be no assurance that the University will continue to receive an equal amount of research grants and contracts in the future.
Failure to Appropriate
During the fiscal year ending June 30, 2014, approximately 5.3% of the operating revenues of the University came from an annual appropriation from the Commonwealth. The Commonwealth has no obligation to appropriate funds sufficient to enable the University to meet its current fiscal and education needs. A failure to appropriate funds could materially adversely affect the University's ability to repay the Bonds. See Appendix A – "Information Concerning The Pennsylvania State University -- Appropriations" herein.
Economic Factors Beyond the University's Control
The financial condition of the University as well as the market for the 2015 Bonds could be adversely affected by a variety of factors beyond the University's control including general local, state, national and international economic conditions (i.e., inflation, unemployment and demographics). There can be no assurance that an adverse event will not occur which might affect the market price or the market for the 2015 Bonds. If a significant event should occur in the affairs of the University, the market for the 2015 Bonds and their market value could be adversely affected.
Enforceability of Remedies; Bankruptcy
The remedies available to Bondholders upon an Event of Default under the Indenture are in many respects dependent upon judicial action which will be subject to discretion or delay. Under existing law and judicial decisions, including specifically the Federal Bankruptcy Code, the remedies specified in the Indenture may not be readily available or may be limited. A court may decide not to order specific performance.
The various legal opinions to be delivered concurrently with the original delivery of the 2015 Bonds will be qualified as to enforceability of the various legal instruments by limitations imposed by bankruptcy, reorganization, insolvency or other similar laws of legal or equitable principles affecting creditors' rights.
A federal bankruptcy proceeding would act as an automatic stay of the commencement or continuation of any judicial, administrative or other proceeding against the University or its properties. Moreover, the University's status as an instrumentality of the Commonwealth of Pennsylvania raises the question of whether Chapter 9 of the United States Bankruptcy Code (entitled Adjustment of Debts of a Municipality) would apply to a bankruptcy proceeding involving the University rather than Chapter 11 (entitled Reorganization). In either case, claims of creditors could be modified by a final plan approved by a bankruptcy court and, in the case of a Chapter 11 proceeding, approved by the required percentage of certain classes of creditors. State court receivership proceedings also could be available.
No Debt Service Reserve Fund
The Indenture does not establish a debt service reserve fund.
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Other Risk Factors
In the future, the following factors, among others, may adversely affect the operations of the University to an extent that cannot be determined at this time.
(1) Employee strikes and other adverse labor actions that could result in a substantial reduction in revenues without corresponding decreases in costs or additional unionization of the University's work force occurs with consequent impact on wage scales and operating costs of the University.
(2) Increased cost and decreased availability of public liability insurance or liabilities that may arise in the future from existing but unknown risks that are not covered by insurance.
(3) Changes in the demand for higher education in general or for programs offered by the University in particular.
(4) Cost and availability of energy.
(5) High interest rates, which could strain cash flow or prevent borrowing for needed capital expenditures.
(6) Changes in market valuations which could reduce the value of the University's investments.
(7) Student loan funds or other aid that permits many students the opportunity to pursue higher education are decreased, the interest rate on such funding is increased or such funding is subjected to increased regulation. Similarly, economic factors could result in increased defaults on student loans held by the University.
(8) Increases in employee compensation expenses (including, but not limited to, wages, health care and other fringe benefits), as well as increases in pension and post retirement obligations, owed by the University to its employees.
(9) Changes in the management of the University or in the strategic direction or mission of the University or changes in the investment policies or other financial decisions of the University.
(10) Changes in the competitive higher education marketplace.
(11) Decreases in state appropriations or other governmental funding or revenues.
(12) Financial stress on the already competitive health care environment in Pennsylvania and its impact on the Medical Center and therefore indirectly on the University.
(13) Any failure by the University to comply with any federal, state or local law, rule or regulation, including but not limited to, financial aid, research grants and contracts, environmental and other health and safety matters, resulting in sanctions, fines or other penalties
(14) The occurrence of natural disasters, acts of terrorism (including cyber terrorism), acts of war, imposition of governmental embargoes or sanctions, riots, or any other similar events, which may damage the facilities of the University, interrupt utility service, or otherwise impair the operations other University.
CONTINUING DISCLOSURE UNDERTAKING
In accordance with the requirements of Rule 15c2-12 (the "Rule") promulgated by the Securities and Exchange Commission (the "SEC"), the University (being an "obligated person" with respect to more than $10 million of outstanding securities, including the 2015 Bonds, within the meaning of the Rule) has covenanted to provide certain financial information and other operating data to the Municipal Securities Rulemaking Board (the
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"MSRB") via the MSRB's Enhanced Municipal Market Access System ("EMMA"). Such financial information and other operating data will be provided not later than 180 days after the end of each fiscal year of the University, commencing with the fiscal year ending June 30, 2015. The financial information and other operating data to be filed with respect to the University (collectively, the "Annual Report") includes the following:
The financial statements of the University for the most recent fiscal year, with information of the type presented in Appendix B hereto and prepared in accordance with generally accepted accounting principles (as more particularly described in Note 2 to the University's audited financial statements included in Appendix B), applied on a consistent basis, and audited by the University's public accountants in accordance with generally accepted auditing standards.
The following information shall be provided as of a recent date:
A summary of the enrollment at the University for the current academic year of the University (with information of the type set forth under the heading "Enrollment" in Appendix A hereto);
A summary of applications, acceptances and matriculating students at the University for the current academic year of the University, including comparative information for the immediately preceding academic year (with information of the type set forth under the heading "Enrollment – Demand Statistics" showing Freshman Applications, Acceptances and Matriculation in Appendix A hereto);
A summary of undergraduate full-time tuition and room and board for the current academic year of the University (with information of the type set forth under the heading "Tuition" in Appendix A hereto); and
A summary of Pennsylvania Resident and Non-Resident Graduate and Undergraduate tuition and room and board to University students for the current academic year (with information of the type set forth under the heading "Tuition and Room and Board" in Appendix A hereto).
A summary of any significant and financially material litigation to which the University is a party.
The University is required to notify the MSRB, via the EMMA system, of any failure by the University to provide any of the annual financial information and operating data described above within 180 days of the end of each fiscal year of the University.
The University also has undertaken to provide notice to the MSRB in a timely manner not in excess of ten (10) business days after the occurrence of the event, via the EMMA system, of the occurrence of any of the following events with respect to the 2015 Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on any credit enhancement reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the 2015 Bonds or other material events affecting the tax- exempt status of the 2015 Bonds; (7) modifications to the rights of owners of the 2015 Bonds, if material; (8) bond calls, if material, and tender offers; (9) defeasances; (10) the release, substitution, or sale of property securing repayment of the 2015 Bonds, if material; and (11) rating changes on the 2015 Bonds or on any other debt for which the University is obligated; (12) bankruptcy, insolvency, receivership or similar events with respect to the University; (13) the consummation of a merger, consolidation, or acquisition involving the University or the sale of all or substantially all of the assets of the University, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material.
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The University may from time to time choose to provide notice of the occurrence of certain other events, or to provide other information which may be relevant to an investment in the 2015 Bonds, in addition to the notices of the events or other information specified above, but the University is not obligated to provide notice of any event whether or not material, or to provide any information, other than the notices and information described herein.
The University shall no longer be obligated to provide Annual Reports and notices of events with respect to the 2015 Bonds, as set forth above, if and when the University no longer remains an "obligated person" with respect to the 2015 Bonds within the meaning of the Rule as when, for example, the 2015 Bonds have been fully paid and discharged or the 2015 Bonds have been defeased in accordance with the provisions of the Indenture. In addition, the undertaking of the University set forth above shall be modified without consent of the holders of the 2015 Bonds to reflect changes in the Rule or to conform to the requirements of any rule or regulation adopted by the SEC that replaces or supersedes the Rule.
The obligation of the University is intended by the University to be for the benefit of the beneficial owners of the 2015 Bonds and may be enforced by any beneficial owner of the Bonds; provided, however, that the right of a beneficial owner of the 2015 Bonds to enforce the provisions of such undertaking is limited to a right to obtain specific enforcement of the University's obligations thereunder, and any failure by the University to comply with the provisions of such undertaking will not constitute an Event of Default with respect to the 2015 Bonds.
TAX MATTERS Tax Exemption
In the opinion of Bond Counsel, assuming compliance with certain covenants of the University designed to assure compliance with requirements of the Internal Revenue Code of 1986, as amended (the "Code"), interest on the 2015 Bonds is excludable from gross income for federal income tax purposes under existing law, as currently enacted and construed. Interest on the 2015 Bonds is not an item of tax preference under the Code for purposes of determining the alternative minimum tax imposed on individuals and corporations; however, interest on the 2015 Bonds is taken into account in determining the alternative minimum tax imposed on certain corporations.
Ownership of the 2015 Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, S corporations with “excess net passive income,” individual recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry the 2015 Bonds. Interest on a Bond held by a foreign corporation may be subject to the branch profits tax imposed by the Code. Bond Counsel expresses no opinion as to any such collateral tax consequences. Purchasers of 2015 Bonds should consult their own tax advisors as to such collateral tax consequences.
The Code sets forth certain requirements which must be met subsequent to the issuance and delivery of the 2015 Bonds for interest thereupon to remain excludable from the gross income of the owners of the 2015 Bonds for federal income tax purposes. The University and the Medical Center will covenant to comply with such requirements in the tax certificate. Noncompliance with such requirements may cause interest on the 2015 Bonds to be required to be included in the gross income of the owners of the 2015 Bonds for federal income tax purposes, retroactive to the date of issuance of the 2015 Bonds or as of some later date.
State Tax
Under the laws of the Commonwealth of Pennsylvania as presently enacted and construed, the 2015 Bonds are exempt from personal property taxes in Pennsylvania, and interest on the 2015 Bonds is exempt from Pennsylvania personal income tax and corporate net income tax.
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FINANCIAL ADVISOR
The University has retained Public Financial Management, Inc., Philadelphia, Pennsylvania as financial advisor (the “Financial Advisor”) in connection with the issuance of the 2015 Bonds. The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information contained in the Official Statement. Public Financial Management is an independent advisory firm and is not engaged in the business of underwriting, trading or distributing municipal securities or other public securities.
CERTAIN RELATIONSHIPS
A member of the Board of Trustees of the University is a Portfolio Manager/Private Wealth Advisor at Morgan Stanley, one of the co-managers. In addition, in the normal course of business, the Trustee and/or one or more of the underwriters and/or their affiliates may have a credit or other financial relationship with the University from time to time.
LEGAL MATTERS
Legal matters incident to the authorization, issuance and sale of the 2015 Bonds will be passed upon by Greenberg Traurig, LLP, Philadelphia, Pennsylvania, appointed on behalf of the University as Bond Counsel. A copy of the proposed form of opinion of Bond Counsel is set forth in Appendix D to this Official Statement.
Certain legal matters will be passed upon for the University by its Vice President and General Counsel. Certain legal matters will be passed upon for the Underwriters by their counsel, Cohen & Grigsby, P.C., Pittsburgh, Pennsylvania. Bond Counsel and the Vice President and General Counsel to the University are the only parties rendering an opinion on the 2015 Bonds.
LITIGATION MATTERS
The University, as with other similar institutions, is subject to a variety of suits and proceedings arising in the ordinary course of business. In the opinion of the University, no such litigation currently pending against it would, if determined adversely to the University, have a material adverse effect on its financial condition.
There is no litigation of any nature now pending or threatened restraining or enjoining the issuance, sale, execution or delivery of the 2015 Bonds or in any way contesting or affecting the validity of the 2015 Bonds, or any proceedings of the University taken with respect to the issuance or sale thereof, the pledge or application of any new moneys or security provided for the payment of the 2015 Bonds, or the existence or power of the University.
LIMITED OBLIGATIONS
The 2015 Bonds will not constitute nor create any debt or liability of the Commonwealth of Pennsylvania or any political subdivision thereof, or a loan of the credit of the Commonwealth of Pennsylvania or any political subdivision thereof, or a pledge of the faith and credit of the Commonwealth of Pennsylvania, any political subdivision, agency or instrumentality thereof (other than the University). The 2015 Bonds are general unsecured obligations of the University and are payable solely from the sources provided under the Indenture. The University has no taxing power. The members, officers or employees of the University shall have no liability with respect thereto in their individual capacities.
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UNDERWRITING
The 2015 Bonds are being purchased by Barclays Capital Inc. and the underwriters listed on the cover page hereof (the "Underwriters") at a purchase price of $209,324,262.28 (representing the par amount of the 2015 Bonds of $182,165,000, plus original issue premium of $27,657,960.85, less underwriting discount of $498,698.57), pursuant to a Bond Purchase Agreement between Barclays Capital Inc., as representative of the Underwriters, and the University. The Bond Purchase Agreement for the 2015 Bonds provides that the Underwriters will purchase all 2015 Bonds, if any are purchased, and requires that the University certify to the Underwriters that this Preliminary Official Statement and the Official Statement do not contain any untrue statement of a material fact or omit any statement of any material fact, pertaining to the University, as the case may be, necessary to make the statements therein not misleading. In addition, the University agrees to indemnify the Underwriters against losses, claims, damages and liabilities arising out of any such untrue statement or omission pertaining to the University. The Underwriters intend to offer the 2015 Bonds to the public at the initial public offering prices set forth on the inside front cover page of the Official Statement, which prices may be changed by the Underwriters from time to time without any requirement of prior notice.
The Underwriters may offer and sell the 2015 Bonds to certain dealers (including dealers depositing the 2015 Bonds into investment trusts) at prices lower than the public offering prices set forth on the inside front cover page of the Official Statement.
J.P. Morgan Securities LLC ("JPMS"), one of the Underwriters of the 2015 Bonds, has entered into negotiated dealer agreements (each, a "Dealer Agreement") with each of Charles Schwab & Co., Inc. ("CS&Co.") and LPL Financial LLC (“LPL”) for the retail distribution of certain securities offerings at the original issue prices. Pursuant to each Dealer Agreement each of CS&Co. and LPL will purchase 2015 Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any 2015 Bonds that such firm sells.
Morgan Stanley, parent company of Morgan Stanley & Co. LLC., an underwriter of the 2015 Bonds, has entered into a retail distribution arrangement with Morgan Stanley Smith Barney LLC. As part of the distribution arrangement, Morgan Stanley & Co. LLC may distribute municipal securities to retail investors through the financial advisor network of Morgan Stanley Smith Barney LLC. As part of this arrangement, Morgan Stanley & Co. LLC may compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the 2015 Bonds.
Wells Fargo Bank, National Association ("WFBNA"), one of the underwriters of the Series 2015 Bonds, has entered into an agreement (the "Distribution Agreement") with its affiliate, Wells Fargo Advisors, LLC ("WFA"), for the distribution of certain municipal securities offerings, including the Series 2015 Bonds. Pursuant to the Distribution Agreement, WFBNA will share a portion of its underwriting or remarketing agent compensation, as applicable, with respect to the Series 2015 Bonds with WFA. WFBNA also utilizes the distribution capabilities of its affiliate Wells Fargo Securities, LLC ("WFSLLC"), for the distribution of municipal securities offerings, including the Series 2015 Bonds. In connection with utilizing the distribution capabilities of WFSLLC, WFBNA pays a portion of WFSLLC's expenses based on its municipal securities transactions. WFBNA, WFSLLC, and WFA are each wholly-owned subsidiaries of Wells Fargo & Company. Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including Wells Fargo Bank, National Association
RATINGS
Standard & Poor's Ratings Service and Moody's Investors Service (together, the "Rating Agencies") have assigned the 2015 Bonds ratings of "AA" and "Aa2”, respectively. Any explanation of these ratings may only be obtained from the respective Rating Agencies. Generally, the Rating Agencies base their ratings on information and materials supplied to them and on their own investigations, studies and assumptions. There is no assurance that any such rating will remain for any given period of time or that it will not be lowered or withdrawn entirely by the applicable Rating Agency if in its judgment circumstances so warrant. Any such downward change or withdrawal of the rating assigned by a Rating Agency to the 2015 Bonds may have an adverse effect on the marketability of the 2015 Bonds.
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INDEPENDENT AUDITORS
The financial statements of The Pennsylvania State University as of and for the years ended June 30, 2014 and June 30, 2013, included in Appendix B to this Official Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing therein.
MISCELLANEOUS
All of the summaries of the provisions of the 2015 Bonds and the Indenture contained in this Official Statement and all other summaries and references to other materials not purporting to be quoted in full, are only brief outlines of certain provisions thereof and are made subject to all of the detailed provisions thereof, to which reference is hereby made for further information. Copies of such documents are on file at the office of the Trustee in Pittsburgh, Pennsylvania.
All estimates and assumptions herein have been made on the best information available and are believed to be reliable, but no representations whatsoever are made that such estimates or assumptions are correct or will be realized. So far as any statements herein involve matters of opinion, whether or not expressly so stated, they are intended merely as such and not as representations of fact.
The information hereinabove set forth, and that which follows in the Appendices, should not be construed as representing all of the conditions affecting the University or the 2015 Bonds.
This Official Statement is approved and delivered by the University.
THE PENNSYLVANIA STATE UNIVERSITY
By: /s/ Joseph J. Doncsecz Joseph J. Doncsecz Associate Vice President for Finance and Corporate Controller
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APPENDIX A
INFORMATION CONCERNING THE PENNSYLVANIA STATE UNIVERSITY
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APPENDIX A
THE PENNSYLVANIA STATE UNIVERSITY
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APPENDIX A TABLE OF CONTENTS
Introduction ...... A-2 Main Campus at University Park ...... A-2 Organization and Governance Board of Trustees ...... A-2 University Officers ...... A-7 Educational Activities of The Pennsylvania State University at Other Locations ...... A-10 Physical Plant ...... A-11 Enrollment...... A-12 Demand Statistics...... A-13 Research ...... A-14 University Employment ...... A-15 Tuition ...... A-17 Appropriations ...... A-18 Financial Aid ...... A-18 Planning and Budgeting Process ...... A-20 Summary Financial Information ...... A-20 Fundraising ...... A-20 Operating Funds ...... A-21 Endowments ...... A-21 Litigation Matters...... A-22 Existing Indebtedness ...... A-22 Future Borrowing ...... A-22 Penn State Health ...... A-22
A-1 Appendix A applies to the University and includes some information for the Milton S. Hershey Medical Center and Penn State Health. Information about other affiliates of the University including the Corporation for Penn State is not included in this Appendix. The Audited Financial Statements found in Appendix B to this Official Statement include, on a consolidated basis, the financial statements of the University, the Corporation for Penn State, the Milton S. Hershey Medical Center and its subsidiaries.
INTRODUCTION
The Pennsylvania State University (the “University”) was originally chartered by an Act of the Legislature of the Commonwealth of Pennsylvania (the “Commonwealth”) on February 22, 1855 as the “Farmers’ High School of Pennsylvania”. The Morrill Act (also known as the Land Grant Act), passed by Congress in 1862, was accepted by the Pennsylvania Legislature in 1863 and the University was designated as the institution in the Commonwealth to receive the benefits of the Morrill Act.
Today, the University, as the Commonwealth’s land grant university, exists as a multi-campus public research university that educates students from Pennsylvania, the nation and the world, and improves the well-being and health of individuals and communities through integrated programs of teaching, research, and service.
MAIN CAMPUS AT UNIVERSITY PARK
To fulfill its mission, the University’s main campus at University Park offers a wide range of choices for academics in the college town of State College, Pennsylvania. A large variety of programs is offered at this campus, ranging from Accounting to World Languages Education in over 160 baccalaureate and associate degree majors offered through 12 academic colleges. The University Park location is by far the University’s largest campus with over 40,000 undergraduate and 6,000 graduate students.
ORGANIZATION AND GOVERNANCE
Board of Trustees
The Board of Trustees of the University (the “Board of Trustees”) is the corporate body established by the University’s charter with overall responsibility for the government and welfare of the University and all the interests pertaining thereto. In the exercise of its responsibilities, the Board of Trustees delegates day to day management and control of the University to the President, with certain reserved powers as set forth in the University’s Bylaws.
The Board of Trustees is currently comprised of 30 voting members and two non-voting members, who have been appointed or elected as listed below. At its November 14, 2014 meeting, the Board voted to expand to 38 members, with 36 voting members and two non-voting members. The new members will include a full-time undergraduate, graduate or professional student, a faculty member, the immediate past president of the Penn State Alumni Association, and three at- large trustees. The new members, excluding the immediate past president of the Penn State Alumni Association, will be elected during the May 2015 meeting and the new members, including the immediate past president of the Penn State Alumni Association, will begin their terms in July 2015.
A-2
1. Members Ex Officio (3 voting, 2 non-voting)
Thomas W. Wolf Dr. Eric J. Barron Governor President Commonwealth of Pennsylvania The Pennsylvania State University (Non-voting) (Non-voting)
Pedro A. Rivera Russell C. Redding Acting Secretary Acting Secretary Pennsylvania Department of Education Pennsylvania Department of Agriculture
Cynthia A. Dunn Acting Secretary Pennsylvania Department of Conservation and Natural Resources
In addition, the Governor has appointed John Hanger, Secretary of Policy and Planning, as a non-voting observer.
2. Appointed by the Governor (6)
Two voting members are appointed each year for a three-year term, and are subject to confirmation by the Pennsylvania State Senate.
Clifford G. Benson, Jr. Allison S. Goldstein Chief Development Officer Graduate Assistant Buffalo Sabres Penn State University
Kathleen L. Casey Todd L. Rucci Senior Advisor Government and Community Patomak Global Partner, LLC Relations Officer, PAP Technologies (Vice Chair of the Board of Trustees)
Mark H. Dambly Paul H. Silvis President Head Coach Pennrose Properties, LLC SilkoTek
A-3 3. Elected by the Alumni (9)
Three voting members are elected each year by qualified alumni for three-year terms.
Edward “Ted” B. Brown, III Ryan J. McCombie President & CEO Retired United States Naval Captain (SEAL) KETCH Consulting, Inc.
Barbara L. Doran William F. Oldsey Portfolio Manager/Private Wealth Independent Consultant/Educational Publishing; Advisor, Morgan Stanley Operating Partner, Atlas Advisors
Robert C. Jubelirer Alice W. Pope Partner, Obermayer, Associate Professor Rebmann, Maxwell & Hippel St. John’s University
Albert L. Lord Adam J. Taliaferro Investor Healthcare Alliance Liaison Former CEO, Sallie Mae Corporation Bristol Myers Squibb
Anthony P. Lubrano President A.P. Lubrano & Company, Inc.
4. Elected by Delegates from Agricultural Societies (6)
Two voting members are elected each year by organized agricultural societies within the Commonwealth for three-year terms.
Donald G. Cotner Betsy E. Huber President Immediate Past Master Cotner Farms, Inc. Pennsylvania State Grange
Keith W. Eckel Keith E. Masser Sole Proprietor and President Chairman & Chief Executive Officer Fred W. Eckel and Sons Farms, Incorporated Sterman Masser, Incorporated (Chairman of the Board of Trustees)
M. Abraham Harpster Carl T. Shaffer Co-Owner Owner Evergreen Farms, Inc. Carl T. Shaffer Farms
A-4 5. Members Elected by Board Representing Business and Industry (6)
Two voting members representing business and industry endeavors are elected each year by the Board of Trustees for three-year terms.
Richard K. Dandrea Ira M. Lubert Attorney, Eckert Seamans Chairman and Co-Founder, Independence Cherin & Mellott, LLC Capital Partners and Lubert Adler Partners, LP.
Kenneth C. Frazier Daniel S. Mead Chairman, President & Chief Executive Officer President and CEO Merck & Company, Incorporated Verizon Wireless
Edward R. Hintz, Jr. Walter C. Rakowich President Retired CEO Hintz Capital Management, Incorporated Prologis
6. Emeritus Trustees
All Emeritus Trustees are non-voting.
H. Jesse Arnelle Samuel E. Hayes, Jr. Attorney Former Secretary of Agriculture, Commonwealth of PA and Former Legislator, House of Representatives, Commonwealth of PA
Cynthia A. Baldwin David R. Jones Retired Justice, Supreme Retired Assistant Managing Editor Court of Pennsylvania The New York Times
James S. Broadhurst Edward P. Junker III Chairman, Eat’n Park Retired Vice Chairman Hospitality Group, Inc. PNC Bank Corporation
Charles C. Brosius Rodger A. Madigan Retired President Retired State Senator Marlboro Mushrooms 23rd Senatorial District
Walter J. Conti Robert D. Metzgar Retired Owner, Cross Former President, North Penn Keys Inn/Pipersville Inn Pipe & Supply, Incorporated
Donald M. Cook, Jr. Joel N. Myers Retired President President SEMCOR, Incorporated AccuWeather, Inc.
Marian U. Barash Coppersmith Anne Riley Retired Chairman of the Board English Teacher The Barash Group
Robert M. Frey Barry K. Robinson Attorney-at-Law Attorney-at-Law Fred & Tiley, P.C.
Steve A. Garban L.J. Rowell, Jr. Senior Vice President for Finance and Retired Chairman and Chief Executive Operations/Treasurer Emeritus Officer, Provident Mutual Life Insurance
A-5 6. Emeritus Trustees (continued)
Cecile M. Springer Boyd E. Wolff President Retired, Owner and Operator Springer Associates Wolfden Farms
Paul V. Suhey Quentin E. Wood Orthopedic Surgeon Retired Chairman of the Board and Chief Martin & Suhey Orthopedics Executive Officer, Quaker State Corporation
Helen D. Wise Edward P. Zemprelli Former Deputy Chief of Staff for Programs and Attorney Secretary of the Cabinet, Governor’s Office
In the event of the death, resignation or removal during the term of a trustee, the Chair of the Board of Trustees has the authority to name a successor to fill such trustee’s unexpired term, except in the case of trustees appointed by the Governor and ex-officio trustees, who may only be replaced by the Governor.
Regular meetings of the Board of Trustees are held at such times and places as the Board of Trustees from time to time determines. At present, the Board of Trustees meets regularly six times a year. All meetings of the Board of Trustees are open to the public, with appropriate provisions for executive sessions. Special meetings of the Board of Trustees may be called at any time by the Chair of the Board or by seven members of the Board of Trustees.
A-6
University Officers
The President of the University The President is the Chief Executive Officer of the University, having the powers delegated by the Board of Trustees. The President of the University reports to the Board of Trustees.
Eric J. Barron became President of the University on May 12, 2014. Previously, he had been President of Florida State University from 2010 to 2014. He also served as director of the National Center for Atmospheric Research (2008-2010), as dean of the Jackson School of Geosciences at the University of Texas at Austin (2006-2008), and for 20 years at Penn State (1986-2006), including Dean of the College of Earth and Mineral Sciences from 2002-2006.
Over the decades, Dr. Barron has lent his significant expertise in the areas of atmospheric science and the geosciences to many national committees and federal organizations, including contributions as chair of the National Oceanic and Atmospheric Administration's (NOAA) science advisory board and nearly 20 years of service as the chair of multiple National Research Council committees and boards. Throughout his career he has earned numerous accolades and awards, including Penn State's Wilson Award for Excellence in Teaching (1999); the National Aeronautic and Space Administration's (NASA) Distinguished Public Service Medal (2003); and the Bridge Builders Leadership Award from the Martin Luther King Foundation of Florida (2012).
Dr. Barron holds a B.S. in geology from Florida State, and an M.S. and a Ph.D. in oceanography from the University of Miami.
Executive Vice President and Provost of the University The principal officer of academic affairs is the Executive Vice President and Provost of the University. Among other duties, the Executive Vice President is responsible for administration of the University’s resident instruction, continuing education and research programs and procedures, and for the general welfare of the faculty and students. The Executive Vice President is also responsible for policy decisions in the absence of the President.
Dr. Nicholas Jones assumed responsibilities as Executive Vice President and Provost of the Pennsylvania State University on July 1, 2013. As Provost, he is the chief academic officer of the University, responsible for the academic administration of the University’s resident instruction, research, and continuing education, and for the general welfare of the faculty and students. In his role as Executive Vice President, he serves as the chief executive officer in the President’s absence, and is centrally involved in most operations of the University. He also serves as Professor in the College of Engineering.
In other University service, Dr. Jones chairs the meetings of the Council of Academic Deans and the Academic Leadership Council. He serves on President’s Council and is an ex officio member of the University Faculty Senate and Senate Council. He chairs the University Strategic Planning Council which is developing a University-wide Strategic Plan for 2015-16 through 2019-20.
Dr. Jones holds an M.S. and Ph.D. in Civil Engineering from California Institute of Technology. His undergraduate degree in Civil Engineering is from the University of Auckland in his home country of New Zealand. He came to Penn State from Johns Hopkins University where he served as the Benjamin T. Rome Dean of the Whiting School of Engineering and previously as Professor and Chairman of Civil Engineering. He also served for two years as Professor and Head of the Department of Civil and Environmental Engineering at the University of Illinois at Urbana-Champaign.
His approach to leadership is characterized by collaboration, innovation, and developing strategic partnerships and cross- disciplinary initiatives. He has received several awards for teaching and for research, and he maintains a professional association with the American Society of Civil Engineers.
A-7 Vice President and General Counsel The Vice President and General Counsel serves as the chief legal officer for the University. The Office of General Counsel provides legal services to the Board of Trustees, the President, other officers, faculty and staff in their official capacities. The Office serves all of Penn State’s campuses and colleges, administrative units and affiliated entities controlled by the University, including the Hershey Medical Center.
Stephen S. Dunham has served as Vice President and General Counsel of the University since July 16, 2012. He previously served as Vice President and General Counsel of The Johns Hopkins University, as a partner in the law firm of Morrison and Foerster, and as Vice President and General Counsel of the University of Minnesota. Mr. Dunham received a B.A. from Princeton University and a J.D. from the Yale Law School.
Senior Vice President for Finance and Business/Treasurer The Senior Vice President for Finance & Business/Treasurer is responsible for the management of Finance & Business and the strategic planning process for the unit, which includes the offices of Auxiliary and Business Services, Commonwealth Operations, Corporate Controller, Diversity and Inclusion, Enterprise Project Management, Ethics and Compliance, Human Resources, Internal Audit, Investment Management, Physical Plant, and University Police and Public Safety. The Senior Vice President for Finance & Business/Treasurer also leads financial, endowment, business and administrative activities at all Penn State campuses. In this capacity, the Senior Vice President for Finance & Business/Treasurer serves as a member of the Board of Directors for the Penn State Hershey Medical Center and the Penn State Hershey Health System. In addition, the Senior Vice President for Finance & Business/Treasurer serves as a member of the President’s Council, the Penn State Investment Council, and the Board of Directors for the Corporation for Penn State.
David J. Gray became Senior Vice President for Finance and Business/Treasurer in February 2012. David came to Penn State with a wide range of experience, much of it in higher education. He most recently served as Senior Vice President for Administration, Finance, and Technology and University Treasurer for the University of Massachusetts. While at UMass, he also served in the positions of Chief Information Officer and Vice President for Information Technology, Chief Executive Officer of UMass Online, and as interim CEO of UMass Online. Prior to joining the University of Massachusetts, David served as the Vice Chancellor for Information Technology for the Pennsylvania State System of Higher Education from 1995 to 2000 and as the Assistant Vice Chancellor for Financial Management from 1990 to 1995. David also served in various administrative, policy formulation, and financial management posts for the State of New Jersey and Commonwealth of Pennsylvania.
David received his B.A. degree in Political Science and Master’s in Public Administration from The Pennsylvania State University.
Senior Vice President for Development and Alumni Relations The Senior Vice President for Development and Alumni Relations is responsible for planning, coordinating and directing the fund-raising and alumni programs for the University. The Senior Vice President for Development and Alumni Relations coordinates with academic and administrative units to develop a complete approach to the continued development of private support for the University.
Rodney P. Kirsch was promoted to Senior Vice President for Development and Alumni Relations in 2006 after serving as Vice President for Development and Alumni Relations since February of 1996. He had previously served as Senior Vice President for Development (1994 to 1996) and Vice President for Development (1989 to 1994) at the Indiana University Foundation. From 1988 to 1989, he was employed by the University of California at Berkeley as Executive Director Capital Campaign and from 1985 to 1988 as Senior Associate Director and Regional Director Capital Campaign.
Mr. Kirsch holds a B.A. in English from the University of North Dakota and an M.S. in College Student Personnel/Higher Education Administration from Indiana University.
A-8
Chief Executive Officer, Penn State Hershey Medical Center, Senior Vice President for Health Affairs, Penn State and Dean, Penn State College of Medicine The Senior Vice President for Health Affairs, Penn State and Dean, Penn State College of Medicine serves as Chief Executive Officer of Penn State Hershey Medical Center. In this capacity the Senior Vice President for Health Affairs is responsible to the President and is the chief academic officer for the College of Medicine.
A. Craig Hillemeier, M.D., was appointed dean of the Penn State College of Medicine, CEO of Penn State Hershey Medical Center and Health System, and Senior Vice President for Health Affairs for Penn State in July 2014.
Dr. Hillemeier joined Penn State Hershey in 2001 as chair of pediatrics and medical director of Penn State Hershey Children's Hospital. He also served as vice dean for clinical affairs at Penn State Hershey and director and chief operating officer of Penn State Hershey Medical Group since its inception in 2008.
Dr. Hillemeier oversaw the development and opening of the new Penn State Hershey Children's Hospital in spring 2013. Under his leadership, both the predecessor and the new Children's Hospital have scored greater than the 90th percentile on inpatient patient satisfaction surveys and have been named among the nation's best since 2010. As vice dean for clinical affairs, Dr. Hillemeier oversaw the growth of Penn State Hershey Medical Group to include nearly 900 physicians and 300 advanced practice clinicians, 64 practice sites across central Pennsylvania, and more than one million outpatient visits each year.
Dr. Hillemeier holds an undergraduate degree from the University of Iowa and earned his M.D. from Loyola University Medical School, where he then completed a residency in pediatrics. He is board-certified in pediatrics and pediatric gastroenterology and is immediate past chair of the American Academy of Pediatrics.
A-9 EDUCATIONAL ACTIVITIES OF THE PENNSYLVANIA STATE UNIVERSITY AT OTHER LOCATIONS
The main campus of the University is located in University Park, Centre County, Pennsylvania, and offers the degree programs described above under “MAIN CAMPUS AT UNIVERSITY PARK”. Additionally, the University operates five campuses offering baccalaureate degree programs and select graduate offerings. The baccalaureate campus colleges are: Abington, Altoona, Erie, Berks and Harrisburg, with Erie and Harrisburg also offering graduate programs. In addition, the University College, comprised of 14 campuses across the Commonwealth, offers associate and baccalaureate degree programs in certain fields of study:
The 14 Commonwealth Campuses of the University College are:
Beaver (Beaver County) Mont Alto (Franklin County) Brandywine (Delaware County) New Kensington (Westmoreland County) DuBois (Clearfield County) Schuylkill (Schuylkill County) Fayette (Fayette County) Shenango (Mercer County) Greater Allegheny (Allegheny County) Wilkes-Barre (Luzerne County) Hazleton (Luzerne County) Worthington Scranton (Lackawanna County) Lehigh Valley (Lehigh County) York (York County)
In aggregate, the 19 Commonwealth campuses offer 106 distinct baccalaureate programs and 23 distinct associate degree programs in a variety of allied health, business, technology and sciences fields. They also offer instruction for the first two years in most of the University’s baccalaureate majors available for completion at University Park and other locations.
In addition to the above, the University has the following campuses with special missions:
The College of Medicine is in Hershey, Pennsylvania, at The Milton S. Hershey Medical Center and is owned and operated by the University. It awards the doctor of medicine degree and, in conjunction with the Graduate School, Ph.D. and M.S. degrees in certain health-related fields. The Milton S. Hershey Medical Center was originally founded in 1963 with a gift from The Milton S. Hershey Trust and is one of the leading teaching hospitals in the country. The relationship of the Medical Center with the University is more fully described in footnote 11 of the Audited Financial Statements in Appendix B to this Official Statement and additional information is also provided below under Penn State Health.
Penn State Great Valley near Philadelphia, offers master’s degree studies in several fields.
The Pennsylvania College of Technology (formerly Williamsport Area Community College) became a wholly-owned subsidiary of the Corporation for Penn State in 1989, by act of the State legislature. The College offers courses and degree programs focused on technology and practical arts.
Dickinson Schools of Law: In 2000, Penn State and The Dickinson School of Law in Carlisle, Pa., merged, and in 2006, a campus of that law school was established at University Park. The law school then operated as a single, unified law school with campuses in Carlisle and University Park. In June 2014, the American Bar Association approved the University’s request to operate each of its two campuses as fully and separately accredited law schools. In the fall of 2015, Dickinson Law in Carlisle, Pa., and Penn State Law in University Park, Pa., will admit their first class of separate students.
Dickinson Law, located in Carlisle, PA, is one of two independently and fully accredited law schools of The Pennsylvania State University, offering all of the resources of a world-class, public research institution. Dickinson Law has a well-deserved reputation for producing first-rate lawyers, and is particularly noted for its advocacy training and public interest program. The Law School recently announced a revitalized curriculum, introducing a number of core lawyering skills and extra-legal competencies, such as Lawyering in a Global World. In addition to new coursework, Dickinson Law also requires students to complete 12 credits of experiential learning – with at least 6 of these credits earned in one of four in-house legal clinics, an approved externship placement, or in the semester-in-practice program – a requirement that goes beyond the minimum the
A-10 ABA necessitates. Balancing the doctrinal knowledge provided from a high quality legal education and hands- on, practical training, Dickinson Law will prepare students to be practice-ready upon graduation.
Penn State Law, located on the University Park campus, offers a J.D. program as well as graduate programs for internationally trained lawyers. The school’s mission is to educate a diverse student body in the intellectual foundations, ethical principles and practical skills necessary for success in today's legal professions; to produce scholarship responsive to legal and social needs and to foster a culture of service within the legal profession and society; and to contribute to the intellectual life and mission of The Pennsylvania State University.
The School of International Affairs is connected closely with Penn State Law and is predicated on the professional orientation of both schools, their mutual emphasis on the practical application of knowledge for solving complex social problems, the significant overlap in the careers that graduates of both schools pursue, and Penn State Law’s academic depth with respect to international and comparative law and economic development. The School of International Affairs was officially launched on July 1, 2007. The program is housed within Penn State Law at University Park.
Outreach and Cooperative Extension Programs
Penn State has the largest unified outreach organization in American higher education, with more than 296 Outreach delivery sites in Pennsylvania, and serves people from all 50 states and from over 80 countries. With an annual operating budget of over $233 million and more than 1,074 employees, Outreach supports all of the University’s academic colleges, campuses, centers, and Cooperative Extension offices. In collaboration with 1,100 faculty members, Outreach offers over 120 degree and certification programs and approximately 900 unique courses.
Outreach and Cooperative Extension programs supplement and extend the means of traditional university learning. Instruction is provided through undergraduate and graduate credit courses, noncredit classes, short courses, conferences, seminars, instructional television, computer-assisted instruction, teleconferences, distance education and other innovative programs.
Penn State World Campus
The University is a recognized leader in on-line education and has more than 100 years of experience in delivering distance education. The World Campus is a Distance Learning environment where students and faculty, separated by time zones and continents, can learn together through information technology, providing access to the University’s finest academic resources. The World Campus is a University-wide, technology-based delivery initiative that is extending some of Penn State’s signature academic programs, for which there is an identified market need nationally or internationally, to learners around the world. World Campus enrollment in fall 2014 exceeded 10,800, with approximately 6,000 additional non-World Campus students taking classes through World Campus.
PHYSICAL PLANT
The University Park Campus is located in Centre County, Pennsylvania, with over 8,400 acres of land of which approximately 540 acres comprise the central campus. The University Park Campus has 954 buildings.
The Milton S. Hershey Medical Center (the “Medical Center”) is located in Derry Township, Pennsylvania, near Hershey, approximately 12 miles east of Harrisburg, Pennsylvania. The development of the Medical Center was made possible by a $50 million award from the The Milton S. Hershey Trust in 1963. Additional construction funds for the Hershey Medical Center amounting to over $21 million were obtained from the U. S. Public Health Service.
The University, at all campus locations and research centers, owns or occupies approximately 22,700 acres of land. Capital expansion and renewal is on-going at the University with funds being provided by a combination of state funding, private fund-raising, self-supporting operations, tuition funds designated for capital improvements, and other University funds. (For a description of certain contractual obligations for building construction, see “Contractual Obligations” under footnote 12 of the Audited Financial Statements in Appendix B to this Official Statement.)
A-11 ENROLLMENT
The following table depicts the total credit enrollment at the University from 2010 through 2014. The total credit enrollment includes full-time plus part-time students enrolled in degree credit programs, and is based on the fall semester headcount. Total credit enrollment does not include non-credit students enrolled in such areas as continuing education and correspondence courses. In addition, the University annually enrolls approximately 28,100 students in its non-credit continuing education programs.
Total Credit Enrollment The Pennsylvania State University 2010-2014 Other Campuses Fall Total Semester University Park Enrollment Enrollment
2010 44,920 48,314 93,234
2011 45,234 48,175 93,409
2012 45,396 47,718 93,114
2013 46,220 48,260 94,480
2014 46,606 49,367 95,973
Note: Other Campus Enrollments include on-line World Campus enrollments, Dickinson Law students and Penn State Law students. SOURCE: University Budget Office, The Pennsylvania State University.
Total Credit Enrollment
University Park Campus 2010-2014
Fall Undergraduate Graduate Total Semester
2010 38,594 6,326 44,920
2011 38,954 6,280 45,234
2012 39,192 6,204 45,396
2013 40,085 6,135 46,220 2014 40,541 6,065 46,606
Note: Dickinson Law and Penn State Law students are included in Other Campus Enrollment; therefore Dickinson Law and Penn State Law students are not included in University Park Campus enrollments. SOURCE: University Budget Office, The Pennsylvania State University
A-12 DEMAND STATISTICS
The table below depicts the number of fall semester freshman applications for admission to the University at all campuses for the years 2010 through 2014 who paid the required fee which must accompany a formal application.
Demand Statistics The Pennsylvania State University 2010-2014 Percent of Freshman Applicants Applicants Year Applications Acceptances Accepted Matriculates Enrolled
2010 53,548 43,995 82% 14,614 27%
2011 57,572 44,432 77% 14,356 25%
2012 58,692 45,319 77% 13,747 23%
2013 53,619 41,384 77% 14,471 27%
2014 63,549 45,890 72% 14,469 23%
SOURCE: University Budget Office, The Pennsylvania State University.
Approximately 27.1 percent of total undergraduate enrollments are out-of-state students, excluding World Campus. Total undergraduate enrollments for out of state students including World Campus is 29.2 percent.
A-13 RESEARCH
Penn State derives its research funding from a broad base of sources, depicted below, reflecting a diversity of initiatives across academic disciplines. Penn State’s research expenditures totaled $813.1 million in fiscal year 2013-2014. The table below depicts a five-year comparison of research expenditures by source.
Research Expenditures (in thousands) 2009-10 2010-11 2011-12 2012-13 2013-14 Sponsored Grants & Contracts Department of Agriculture $13,139 $15,246 $15,316 $17,911 $18,125 Department of Commerce 1,611 1,885 4,345 5698 3,553 Department of Defense 173,111 163,804 177,051 207,603 198,383 Department of Education 11,645 11,007 7,484 5,748 5,512 Department of Energy 18,484 23,788 37,842 50,513 40,157 Department of Health & Human Services 120,968 129,138 132,235 129,847 117,296 Department of the Interior 1,430 1,658 1,507 1,506 1,389 Department of Transportation 6,198 5,517 7,000 6,779 7,270 Environmental Protection Agency 897 1,029 1,074 1,084 1,368 National Aeronautics & Space Administration 19,437 16,906 14,901 13,482 11,912 National Science Foundation 58,898 60,164 62,283 63,609 66,930 Other Federal Agencies 39,060 39,812 37,692 27,264 20,510 Subtotal Federal $464,878 $469,954 $498,730 $531,044 $492,405
Commonwealth of Pennsylvania 38,079 32,229 28,096 32,045 33,553 Subtotal Government $502,957 $502,183 $526,826 $563,089 $525,958
Industry and Other 103,772 107,373 110,123 101,035 100,909 Total Sponsored Grants & Contracts $606,729 $609,556 $636,949 $664,124 $626,867
Appropriations Agricultural State 25,252 25,252 20,454 20,454 21,140 Other State 20,498 20,498 15,783 16,572 16,572 Agricultural Federal 7,490 7,132 8,698 6,254 8,823 Total Appropriations $53,240 $52,882 $44,935 $43,280 $46,535
Total External Funds $659,969 $662,438 $681,884 $707,404 $673,402
Total University Funds $120,097 $142,351 $125,618 $140,811 $139,723 Grand Total $780,066 $804,789 $807,502 $848,215 $813,125
SOURCE: Office of Sponsored Programs, The Pennsylvania State University
A-14 UNIVERSITY EMPLOYMENT
Total full-time employment at the University has increased over the past decade. As the following table indicates, approximately 30 percent of total full-time University employees are classified as academic, with about 70 percent classified as staff and technical service personnel. Approximately 37 percent of the faculty is tenured.
The table below depicts full-time employment at the University from 2010 through 2014.
The Pennsylvania State University Full-Time Employees Fall Semester 2010-2014 All Locations Except Hershey, Dickinson and Penn College
2010 2011 2012 2013 2014
Administration 105 105 108 106 113
Academic Administration 182 169 172 172 174
Academic 4,740 4,717 4,753 4,844 4,916
Staff Exempt & Non Exempt 8,629 8,456 8,471 8,629 8,897
Technical Services 2,476 2,428 2,409 2,428 2,452
Total 16,132 15,875 15,913 16,179 16,552
SOURCE: University Budget Office, The Pennsylvania State University.
Technical service employees employed by the University at all locations except Hershey, consisting of approximately 2,600 individuals, are represented by Teamsters Local Union No. 8. The current collective bargaining agreement became effective on July 1, 2014 and expires on June 30, 2017.
Technical service employees employed by The Milton S. Hershey Medical Center in Hershey, consisting of approximately 950 individuals, are represented by Teamsters Local Union No. 776. The current collective bargaining agreement became effective on July 1, 2013 and expires on June 30, 2016.
Registered nurses and certified registered nurse practitioners employed by the University at the Student Health Center at University Park and at several of the Commonwealth Campuses of the University, consisting of approximately 20 individuals, are represented by OPEIU Health Care Pennsylvania, Local 112. The current collective bargaining agreement became effective on July 1, 2013 and expires on September 30, 2016.
Registered nurses employed by The Milton S. Hershey Medical Center in Hershey, consisting of approximately 1,500 individuals, are represented by SEIU Healthcare Pennsylvania, CTW, CLC. The current collective bargaining agreement became effective on April 1, 2015 and expires on March 31, 2018.
A-15 The University provides and funds certain employee benefits. All new University employees must enroll in either the Commonwealth of Pennsylvania State Employees’ Retirement System (the “Retirement System”) or an alternate retirement plan with Teachers Insurance Annuity Association–College Retirement Equities Fund (TIAA-CREF). The University pays all of the employer share of the Retirement System, and the University employees comprise about 5.9 percent of the Retirement System members. The University’s expenditures for retirement benefits for both retirement plans for the fiscal year ended June 30, 2014 totaled approximately $131 million. The University also has certain liabilities with respect to postretirement benefits. (See footnote 10 of the Audited Financial Statements in Appendix B to this Official Statement for further information concerning such postretirement benefits, including the current benefit obligation of the University and certain projections of this benefit obligation based on certain healthcare cost trend rate assumptions.)
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A-16 TUITION
Depicted in the following table are the annual tuition rates applicable at the University Park Campus for the school years 2010-11 through 2014-15. Penn State’s tuition rates vary by campus, student level, and residency. Tuition rates also vary by program of study. Provided in the table below are the tuition rates for 1st year students. The University’s full tuition schedules are available at http://tuition.psu.edu.
Tuition University Park Campus Academic Years 2010-11 through 2014-15
Lower Division Tuition Pennsylvania Academic Year Other Room and Board (1) Residents 2010-11 $14,412 $26,276 $8,370
2011-12 $15,124 $27,206 $8,740
2012-13 $15,562 $27,864 $8,990
2013-14 $16,090 $28,664 $9,370
2014-15 $16,572 $29,522 $9,770
(1) Residence hall charge shown for double room and meal plan option 3. SOURCE: University Budget Office, The Pennsylvania State University.
Comparative tuition for Pennsylvania Residents for similar Pennsylvania public institutions appears below.
Comparative Tuition Academic Years 2010-11 through 2014-15
Undergraduate 2010-11 2011-12 2012-13 2013-14 2014-15
The Pennsylvania State University $14,412 $15,124 $15,562 $16,090 $16,572
University of Pittsburgh $14,076 $15,272 $15,730 $16,240 $16,872
Temple University $11,834 $13,006 $13,006 $13,406 $14,006
SOURCE: University Budget Office, The Pennsylvania State University.
A-17 APPROPRIATIONS
State appropriations fund approximately 13% of the University’s general fund budget. Below is a summary of the last five years of annual State appropriations for Penn State.
Appropriations (in thousands) 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 General Support * $304,449 $203,404 $214,110 $214,110 $214,110 ARRA ** 15,115 0 0 0 0 Pennsylvania College of Technology 13,623 12,905 13,584 15,584 17,584 PCT ARRA ** 676 0 0 0 0 Agricultural College Land Scrip Fund 0 44,737 44,737 46,237 46,237 Medical *** 13,136 6,536 6,536 11,816 11,816 TOTAL $346,999 $267,582 $278,967 $287,747 $289,747
SOURCE: University Budget Office, The Pennsylvania State University.
* 2010-2011 General Support includes $55.231M of funding for Agricultural Research and Cooperative Extension.
** Federal stimulus funds under the American Recovery and Reinvestment Act of 2009 (“ARRA”).
*** Represents State and Federal Medical Assistance funds available to The Milton S. Hershey Medical Center. These funds are provided through the Pennsylvania Department of Public Welfare.
A-18 FINANCIAL AID
50,867 undergraduate, degree-seeking students received some form of financial aid during 2013-2014. Below is a table detailing that financial aid:
Non-need- Financial Aid (in thousands) Need-based based Scholarships / Grants Federal $96,130 $11,191 Commonwealth of Pennsylvania 56,014 179 Institutional and external funds awarded by the University 70,564 19,198 Scholarships/grants from external sources 13,988 29,367 Total Scholarships/Grants $236,696 $59,935 Self-Help Student loans $338,171 $54,917 Federal Work-Study 4,069 N/A Total Self-Help $342,240 $54,917 Parent Loans $124,384 $20,543 Tuition waivers $18,470 $14,266 Athletic awards $5,940 $8,964 Total Aid $727,730 $158,625
SOURCE: Office of Student Aid, The Pennsylvania State University.
A-19 PLANNING AND BUDGETING PROCESS
Penn State’s strategic planning is both a “top-down” and “bottom-up” process. Planning occurs across departments, academic colleges, and administrative units, as well as at the university-wide level. The University has had a continuous institution-wide strategic planning process since 1983 in which all units have been asked to submit strategic plans every three to five years. Although the length of the planning cycle has varied, what has remained constant is the University’s commitment to on-going planning, improvement and assessment.
The University’s current planning cycle began in June 2013 when each unit head was asked to develop a five-year strategic plan for the period from 2014-15 through 2018-19. The plans were to focus on a vision of where the unit would be in the next five to ten years; a discussion of specific strategies for achieving the vision; plans, progress and initiatives in learning outcomes assessment (academic units only), strategic performance indicators appropriate to unit level goals; an indication of how elements of diversity would be incorporated in the strategic plan; a discussion of how recommendations of the Academic Program and Administrative Services Review Core Council factor into strategic management; information on practices that promote integrity and ethical behavior; a discussion on how the unit is contributing to the goals for sustainability; and a discussion of the correlation of strategic initiatives to budget planning and adjustments.
To better accommodate the presidential search schedule and allow the new president an opportunity to influence development of the overall strategic plan during his or her first year in office, the next cycle of the University-wide Strategic Plan was delayed for one year. In November of 2014, a University-wide Strategic Planning Council was appointed to develop an overall Penn State Strategic Plan for 2015-16 through 2019-20. This plan is expected to be completed in summer 2015.
Through the strategic planning and budgeting process, Penn State has taken aggressive steps to reallocate its resources to areas of high priority, reduce costs, and create more effective and efficient ways of operating, while enhancing academic quality.
Since 1992, a deliberate process of budget reallocation and cost saving initiatives has been incorporated into the strategic planning process. These mechanisms provide the means to reallocate financial resources to fund strategic priorities and critical operating needs. Guided by the strategic planning process, colleges, campuses and support units have reallocated nearly $305 million over the last twenty-three years.
SUMMARY FINANCIAL INFORMATION
The University’s audited financial statements as of and for the years ended June 30, 2014 and 2013 are included in Appendix B to this Official Statement.
FUNDRAISING
The most recent campaign, For the Future, began on January 1, 2007 and concluded on June 30, 2014 with a sum of $2.188 billion, 109% of goal. The following table details the past five years of total fundraising.
Total Fundraising (in thousands) Gifts to Gift Receipts New Commitments Gifts from Alumni Endowment 2009-10 $203,388 $273,810 $65,090 $68,705 2010-11 $274,832 $353,292 $131,422 $113,960 2011-12 $208,677 $223,736 $70,939 $63,413 2012-13 $237,779 $263,553 $87,598 $79,686 2013-14 $271,101 $342,470 $84,164 $97,369
A-20 OPERATING FUNDS
The Non-Endowed Funds are operating funds that provide a source of liquidity for working capital over the annual operating cycle of the University, and serve the interim and longer term needs of the University for plant renewals and replacements, debt service, and capital additions. Non-Endowed Funds are invested in a manner that emphasizes capital preservation and meets cash flow requirements of future University liabilities, while achieving modest growth in the principal value to accommodate future inflation. Following is a summary of University operating fund investments:
Operating Fund Investments ($ in thousands) 6/30/10 6/30/11 6/30/12 6/30/13 6/30/14 Money markets $80,271 $42,324 $22,851 $23,566 $4,798 Fixed income U.S. government/agency 762,213 800,625 1,109,549 1,060,474 1,080,516 U.S. corporation 396,793 417,292 550,953 618,582 707,819 Foreign 163,275 145,551 158,451 137,270 157,154 Other 176,098 292,382 100,675 137,704 160,283 Equities 57,928 76,688 79,674 83,571 126,952 Private Capital 3,217 5,939 6,813 6,065 7,137 Total $1,639,795 $1,780,801 $2,028,966 $2,067,232 $2,244,659
In addition, the University invests a portion of operating funds in the Long-Term Investment Pool (LTIP). Operating Funds invested in the LTIP as of June 30, 2014 totaled $1,145.6 million.
ENDOWMENT FUNDS
Endowed and similar funds are pooled on a market value basis for endowment fund investment management purposes and use a “total return” approach which emphasizes total investment return as the basis for endowment spending. During 2013-2014, the University had an endowment spending policy of approximately 4.5% of a five-year rolling average of the endowment’s market value. (For additional information regarding investments and endowments, see footnotes 3, 4 and 5 of the Audited Financial Statements in Appendix B to this Official Statement.) Following is a summary of University pooled endowment funds:
Endowments ($ in thousands) Fiscal year 2010 2011 2012 2013 2014 Investment Performance Endowment (annualized net returns) 14.3% 23.2% 3.5% 11.3% 17.9%
Market Values Endowment $1,341,500 $1,708,400 $1,765,000 $1,933,200 $2,285,000 Similar Funds 97,600 122,700 90,000 95,700 113,500 Endowment & Similar Funds $1,439,100 $1,831,100 $1,855,000 $2,028,900 $2,398,500
Gifts & Other Additions $62,500 $136,300 $76,200 $73,900 $92,200 Current Spending $63,400 $66,000 $70,800 $71,500 $75,400
Annualized total return on the pooled endowment funds averaged 10.7% for the three-year period ended June 30, 2014. A-21 For financial statement purposes, University investments are reported at fair market value.
LITIGATION MATTERS
Please refer to footnote 12 of the Audited Financial Statements in Appendix B to this Official Statement for a summary of litigation and contingency matters. The University has continued to pursue settlements of and has settled or authorized settlements of a number of the known claims and civil litigation described therein.
EXISTING INDEBTEDNESS
Please refer to footnotes 7 and 8 of the Audited Financial Statements in Appendix B to this Official Statement for descriptions of the University’s long-term debt and operating leases. As more fully described in footnote 7, the University's Series 2009B Bonds, of which $74,235,000 currently are outstanding, are variable rate bonds bearing a fixed rate of interest through May 31, 2015. The University expects to remarket the Series 2009B Bonds at a fixed rate of interest for a one-year period expiring on May 31, 2016. As described in footnote 7, a self-liquidity program is in place for the Series 2009B Bonds so the University will have to provide liquidity in the event of insufficient remarketing proceeds.
FUTURE BORROWINGS
In September 2013, the University’s Board of Trustees authorized $750 million of new borrowing and guarantees of indebtedness for the entire University including projects at The Milton S. Hershey Medical Center. Within the total borrowing authorized by the Board, the University has previously issued new debt of $21 million (as included in existing indebtedness). Thus, a portion of the $729 million of remaining borrowing authority will be allocated to the new money portion of the bonds and the balance remains fully available for use through fiscal 2017-2018. The University also periodically enters into capitalized lease agreements, which are included in existing indebtedness. In the future, the University (or its subsidiaries) may elect to refinance existing indebtedness or elect to finance additional capital projects through the use of borrowed monies or capitalized leases. In addition to the foregoing, the University’s affiliate, the Pennsylvania College of Technology, has borrowed and may in the future borrow for capital purposes. Such borrowings have not been guaranteed by the University and are not legally binding on the University.
PENN STATE HEALTH
The University is the sole member and controls the operations of The Milton S. Hershey Medical Center (“Medical Center”), a Pennsylvania non-profit corporation qualified as tax-exempt under Section 501(c)(3) of the Internal Revenue Code. The Medical Center operates a teaching hospital, outpatient clinics and related health care facilities principally located in Dauphin County, Pennsylvania, on the campus known as The Milton S. Hershey Medical Center of the Pennsylvania State University. The 500 bed teaching hospital and clinics serve as the primary clinical training facilities for the Penn State College of Medicine, also located on the campus. Revenues of the Medical Center for the fiscal year ended June 30, 2014 were approximately $1.4 billion. Fund transfers from the Medical Center to the University, totaling approximately $74 million for the fiscal year ended June 30, 2014, provided a substantial portion of the funds to support general operations of the College of Medicine.
The University has moved to expand its health care enterprise through affiliations and acquisitions of other regional health care organizations in order to (a) assure continued financial and educational support for the College of Medicine, (b) achieve the size and scale necessary for changes in payment methodologies and participation in managing the health care needs of defined populations, and (c) improve quality and patient outcomes while reducing costs. To achieve these goals, the University has incorporated a new, Pennsylvania nonprofit corporation named “Penn State Health”, which will seek tax-exempt status under Section 501(c)(3) of the Internal Revenue Code.
Penn State Health has recently entered into an agreement to acquire Saint Joseph’s Regional Health Network (“SJRHN”), a 204 bed community hospital located in Berks County, Pennsylvania, including outpatient clinics with annual revenue of approximately $220 million for the fiscal year ended June 30, 2014. Subject to pending regulatory review, closing of this transaction is expected to occur on July 1, 2015.
A-22
Penn State Health has finalized the terms of an Affiliation Agreement with PinnacleHealth of Harrisburg, Pennsylvania (the “Affiliation Agreement”), which has been approved by the Boards of Directors of the parties and is expected to be executed soon. PinnacleHealth is a community health system comprised of three hospitals with a total of 610 inpatient beds, outpatient clinics, freestanding imaging centers and other health care facilities located primarily in Dauphin and Cumberland County, Pennsylvania. Total revenues for the fiscal year ended June 30, 2014 were $882 million. Under the terms of the Affiliation Agreement:
1) PinnacleHealth, the Medical Center and SJRHN will be brought under common control of Penn State Health. 2) The University will remain the sole member of Penn State Health; the Board of Directors of Penn State Health will be reconstituted to include eight appointees of the University and eight appointees of PinnacleHealth. Following expiration of the initial terms of these directors, 12 of the 16 director positions will become self-perpetuating, 3 directors will continue to be appointed by the University, and the CEO of Penn State Health will serve on the Board ex officio. 3) Penn State Health will contribute a minimum of approximately $56 million annually to the University as academic support for the College of Medicine, to be adjusted going forward for gain-sharing and inflation. 4) The CEO of Penn State Health will be appointed by the President of the University (subject to approval of the University Board of Trustees and Penn State Health Board of Directors) and may be removed by the President. The CEO will also serve as the Senior Vice President for Health Affairs of Penn State and Dean of the Penn State College of Medicine. 5) The University will commit to provide or facilitate at least $300 million of capital funding during the first five years, through borrowing, fund raising, capital leases or other sources. 6) Major strategic initiatives and capital budgets of Penn State Health will be subject to approval of the University. 7) The University will reserve the right to assume direct operating control of Penn State Health in the event of non-payment of academic support, negative EBIDA for two consecutive fiscal years, insolvency or bankruptcy.
The financial statements of the Medical Center are currently consolidated with the University’s financial statements. Immediately following the closing of the Affiliation Agreement, the Medical Center’s financial statements may no longer be consolidated with the University’s financial statements, principally because of the composition of Penn State Health’s Board of Directors. For the year ended June 30, 2014, the Medical Center had revenues and expenses of $1,471 million and $1,351 million, respectively.
The PinnacleHealth transaction is currently under anti-trust review by the Federal Trade Commission and the Pennsylvania Attorney General. Review for compliance with charitable organization and trust obligations is also underway. Closing is scheduled for December 31, 2015.
A-23
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APPENDIX B
AUDITED FINANCIAL STATEMENTS OF THE PENNSYLVANIA STATE UNIVERSITY – FISCAL YEARS ENDED JUNE 30, 2014 AND JUNE 30, 2013
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Audited Financial Statements
The Pennsylvania State University Fiscal Year Ended June 30, 2014 T H E P E N N S Y L V A N I A S T A T E U N I V E R S I T Y
UNIVERSITY OFFICERS as of November 14, 2014
ERIC J. BARRON President
STEPHEN S. DUNHAM Vice President and General Counsel
DAVID J. GRAY Senior Vice President for Finance and Business/Treasurer
A. CRAIG HILLEMEIER Chief Executive Officer, Penn State Milton S. Hershey Medical Center; Senior Vice President for Health Affairs, Penn State University; and Dean, Penn State College of Medicine
NICHOLAS P. JONES Executive Vice President and Provost
RODNEY P. KIRSCH Senior Vice President for Development and Alumni Relations CONTENTS
Operating Revenues by Source 2
Operating Expenses by Function 3
Letter of Transmittal 5
Independent Auditors’ Report 6
Consolidated Financial Statements:
Statements of Financial Position 8
Statements of Activities 10
Statements of Cash Flows 12
Notes to Consolidated Financial Statements 13 OPERATING REVENUES BY SOURCE ($5.1 billion)
For the Year Ended June 30, 2014 ($ in millions)
Government grants and contracts $632.8 (12.3%) Auxiliary enterprises $406.7 (7.9%)
Private gifts, grants and contracts Medical Center $332.3 $1,470.9 (6.4%) (28.6%)
Commonwealth of Pennsylvania appropriation $275.9 (5.3%)
Endowment spending and other investment income $189.4 (3.7%) Recovery of indirect costs $149.0 (2.9%) Other sources $85.7 (1.7%)
Tuition and fees, net of discount $1,606.1 (31.2%)
2 OPERATING EXPENSES BY FUNCTION ($4.6 billion)
For the Year Ended June 30, 2014 ($ in millions)
Research $775.3 (16.9%)
Auxiliary enterprises $366.1 (8.0%)
Medical Center Academic $1,351.1 support (29.5%) $342.9 (7.5%)
Institutional support $306.8 (6.7%)
Student services $171.5 (3.8%) Public service $79.0 (1.7%)
Instruction $1,186.9 (25.9%)
3 This Page is Intentionally Blank.
4 (814) 865-1355 (814) 863-0701
Joseph J. Doncsecz The Pennsylvania State University Associate Vice President for Finance and Corporate Controller 408 Old Main University Park, PA 16802-1505
October 24, 2014
Dr. Eric J. Barron, President The Pennsylvania State University
Dear Dr. Barron:
The audited consolidated financial statements of The Pennsylvania State University and subsidiaries (the "University") for the fiscal years ended June 30, 2014 and 2013 are presented on the accompanying pages. These financial statements represent a complete and permanent record of the finances of the University as of and for the years then ended.
These financial statements have been audited by Deloitte & Touche LLP, independent auditors, and their report has been made a part of this record.
Respectfully submitted,
Joseph J. Doncsecz Associate Vice President for Finance and Corporate Controller
Senior Vice President for Finance and Business, and Treasurer
An Equal Opportunity University
5 Deloitte & Touche LLP 1700 Market Street Philadelphia, PA 19103-3984 USA Tel: +1 215 246-2300 Fax: +1 215 569-2441 www.deloitte.com INDEPENDENT AUDITORS’ REPORT
To the Board of Trustees of The Pennsylvania State University University Park, Pennsylvania
We have audited the accompanying consolidated financial statements of The Pennsylvania State University and its subsidiaries (the "University”), which comprise the consolidated statements of financial position as of June 30, 2014 and 2013, 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 Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; 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 auditor’s 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 University'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 University'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.
Member of Deloitte Touche Tohmatsu
6 Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the University as of June 30, 2014 and 2013, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
October 24, 2014
7 THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ASSETS JUNE 30, 2014 AND 2013 (in thousands)
June 30, 2014 June 30, 2013 Current assets: Cash and cash equivalents $ 1,028,529 $ 983,256 Short-term investments 365,851 200,273 Deposits held for others 57,014 44,166 Accounts receivable, net of allowances of $72,957 and $66,974 527,213 492,404 Contributions receivable, net 63,573 50,411 Loans to students, net of allowances of $384 and $584 8,163 10,683 Inventories 35,484 31,406 Prepaid expenses and other assets 114,963 115,463 Total current assets 2,200,790 1,928,062
Noncurrent assets: Deposits held by bond trustees 2,551 2,551 Contributions receivable, net 150,891 127,726 Loans to students, net of allowances of $2,319 and $2,497 52,654 48,161 Deferred bond costs, net 5,095 5,181 Total investment in plant, net 3,944,252 3,730,764 Beneficial interest in perpetual trusts 15,498 13,252 Investments 5,319,035 4,816,961 Other assets 19,841 17,958 Total noncurrent assets 9,509,817 8,762,554
Total assets $ 11,710,607 $ 10,690,616
See notes to consolidated financial statements.
8 THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION LIABILITIES AND NET ASSETS JUNE 30, 2014 AND 2013 (in thousands)
June 30, 2014 June 30, 2013 Current liabilities: Accounts payable and other accrued expenses $ 526,815 $ 660,096 Deferred revenue 271,684 264,727 Long-term debt 47,177 43,650 Present value of annuities payable 5,597 5,276 Accrued postretirement benefits 53,350 51,390 Total current liabilities 904,623 1,025,139
Noncurrent liabilities: Deposits held in custody for others 40,619 50,804 Deferred revenue 1,952 6,969 Long-term debt 934,311 961,758 Present value of annuities payable 45,554 36,979 Accrued postretirement benefits 1,847,056 1,643,651 Refundable United States Government student loans 46,318 45,300 Other liabilities 206,649 210,919 Total noncurrent liabilities 3,122,459 2,956,380 Total liabilities 4,027,082 3,981,519
Net assets: Unrestricted - Undesignated 1,637 1,635 Designated for specific purposes 3,182,328 2,757,846 Net investment in plant 2,473,238 2,246,228 Total unrestricted - The Pennsylvania State University 5,657,203 5,005,709 Noncontrolling interest 961 831 Total unrestricted 5,658,164 5,006,540 Temporarily restricted 694,240 484,375 Permanently restricted 1,331,121 1,218,182 Total net assets 7,683,525 6,709,097
Total liabilities and net assets $ 11,710,607 $ 10,690,616
See notes to consolidated financial statements.
9 THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2014 (in thousands) Temporarily Permanently Unrestricted Restricted Restricted Total Operating revenues and other support: Tuition and fees, net of discounts of $153,724 $ 1,606,079 $ - $ - $ 1,606,079 Commonwealth of Pennsylvania - Appropriations 275,931 - - 275,931 Special contracts 71,750 - -71,750 Department of General Services projects 82,337 - - 82,337 United States Government grants and contracts 478,699 - - 478,699 Private grants and contracts 184,722 - - 184,722 Gifts and pledges 104,947 42,672 - 147,619 Endowment spending 75,383 - - 75,383 Other investment income 113,349 674 - 114,023 Sales and services of educational activities 66,758 - - 66,758 Recovery of indirect costs 148,988 - - 148,988 Auxiliary enterprises 406,685 - - 406,685 Medical Center revenue 1,470,925 - - 1,470,925 Other sources 18,925 - - 18,925 Net assets released from restrictions 25,649 (25,649) - - Total operating revenues and other support 5,131,127 17,697 - 5,148,824 Operating expenses: Educational and general - Instruction 1,186,941 - - 1,186,941 Research 775,321 - - 775,321 Public service 78,960 - - 78,960 Academic support 342,876 - - 342,876 Student services 171,484 - - 171,484 Institutional support 306,833 - - 306,833 Total educational and general 2,862,415 - - 2,862,415 Auxiliary enterprises 366,101 - - 366,101 Medical Center expense 1,351,131 - - 1,351,131 Total operating expenses 4,579,647 - - 4,579,647
Increase in net assets from operating activities 551,480 17,697 - 569,177
Nonoperating activities: Gifts and pledges - - 114,659 114,659 Current year investment returns 279,217 193,815 9,087 482,119 Endowment appreciation utilized (47,077) - - (47,077) Changes in funds held by others in perpetuity - 363 1,702 2,065 Write-offs and disposals of assets (5,141) - - (5,141) Nonperiodic change in postretirement benefit plan (126,985) (126,985) Actuarial adjustment on annuities payable - (2,010) (12,509) (14,519) Increase in net assets from nonoperating activities 100,014 192,168 112,939 405,121
Increase in net assets - The Pennsylvania State University 651,494 209,865 112,939 974,298
Noncontrolling interest: Excess of revenues over expenses 130 - - 130 Increase in net assets noncontrolling interest 130 - - 130
Increase in total net assets 651,624 209,865 112,939 974,428
Net assets at the beginning of the year 5,006,540 484,375 1,218,182 6,709,097
Net assets at the end of the year $ 5,658,164 $ 694,240 $ 1,331,121 $ 7,683,525
See notes to consolidated financial statements.
10 THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2013 (in thousands) Temporarily Permanently Unrestricted Restricted Restricted Total Operating revenues and other support: Tuition and fees, net of discounts of $127,987 $ 1,548,974 $ - $ - $ 1,548,974 Commonwealth of Pennsylvania - Appropriations 272,431 - - 272,431 Special contracts 65,712 - - 65,712 Department of General Services projects 49,890 - - 49,890 United States Government grants and contracts 503,517 - - 503,517 Private grants and contracts 182,661 - - 182,661 Gifts and pledges 74,454 16,827 - 91,281 Endowment spending 71,459 - - 71,459 Other investment income 100,094 592 - 100,686 Sales and services of educational activities 66,054 - - 66,054 Recovery of indirect costs 153,662 - - 153,662 Auxiliary enterprises 378,290 - - 378,290 Medical Center revenue 1,372,500 - - 1,372,500 Other sources 15,998 - - 15,998 Net assets released from restrictions 76,783 (76,783) - - Total operating revenues and other support 4,932,479 (59,364) - 4,873,115 Operating expenses: Educational and general - Instruction 1,129,431 - - 1,129,431 Research 806,333 - - 806,333 Public service 82,221 - - 82,221 Academic support 327,327 - - 327,327 Student services 167,061 - - 167,061 Institutional support 376,602 - - 376,602 Total educational and general 2,888,975 - - 2,888,975 Auxiliary enterprises 347,606 - - 347,606 Medical Center expense 1,232,710 - - 1,232,710 Total operating expenses 4,469,291 - - 4,469,291
Increase/(decrease) in net assets from operating activities 463,188 (59,364) - 403,824
Nonoperating activities: Gifts and pledges - - 68,521 68,521 Current year investment returns 56,633 62,315 8,103 127,051 Endowment appreciation utilized (35,180) - - (35,180) Changes in funds held by others in perpetuity - 424 353 777 Write-offs and disposals of assets (2,000) - - (2,000) Nonperiodic change in postretirement benefit plan 283,416 283,416 Actuarial adjustment on annuities payable - (1,208) (3,159) (4,367) Increase in net assets from nonoperating activities 302,869 61,531 73,818 438,218
Increase in net assets - The Pennsylvania State University 766,057 2,167 73,818 842,042
Noncontrolling interest: Excess of revenues over expenses 57 - - 57 Increase in net assets noncontrolling interest 57 - - 57
Increase in total net assets 766,114 2,167 73,818 842,099
Net assets at the beginning of the year 4,240,426 482,208 1,144,364 5,866,998
Net assets at the end of the year $ 5,006,540 $ 484,375 $ 1,218,182 $ 6,709,097
See notes to consolidated financial statements.
11 THE PENNSYLVANIA STATE UNIVERSITY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2014 AND 2013 (in thousands) June 30, 2014 June 30, 2013 Cash flows from operating activities: Increase in net assets $ 974,428 $ 842,099 Adjustments to reconcile change in net assets to net cash provided by operating activities: Actuarial adjustment on annuities payable 14,519 4,366 Contributions restricted for long-term investment (115,854) (100,126) Interest and dividends restricted for long-term investment (60,684) (61,553) Net realized and unrealized gains on long-term investments (512,770) (132,907) Depreciation expense 275,369 251,407 Amortization expense 536 480 (Gain)/loss on early extinguishment of debt 25 (213) Write-offs and disposals of assets 4,693 16,000 Contributions of land, buildings and equipment (27,089) (14,821) Buildings and equipment provided by Pennsylvania Department of General Services (222) (1,293) Contribution to government student loan funds 431 154 Provision for bad debts 54,115 49,433 Increase in deposits held for others (12,848) (40,601) Increase in receivables (132,791) (90,238) Increase in inventories (4,013) (503) (Increase)/decrease in prepaid expenses and other assets (5,725) 14,598 (Decrease)/increase in accounts payable and other accrued expenses (68,638) 80,820 Increase in deferred revenue 1,184 18,564 Increase/(decrease) in accrued postretirement benefits 205,365 (169,858) Net cash provided by operating activities 590,031 665,808 Cash flows from investing activities: Purchase of land, buildings and equipment (450,139) (434,933) Advances on student loans (11,013) (9,836) Collections on student loans 8,983 8,320 Proceeds from sale of donated financial assets 159 - Purchase of investments (39,148,432) (40,907,840) Proceeds from sale of investments 38,919,400 40,068,438 Net cash used in investing activities (681,042) (1,275,851) Cash flows from financing activities: Contributions restricted for long-term investment 115,854 100,126 Interest and dividends restricted for long-term investment 60,684 61,553 Payments of annuity obligations (5,620) (5,297) Proceeds from notes payable 10,000 - Principal payments on notes, bonds and capital leases (45,322) (163,604) Proceeds related to government student loan funds, net of collection costs 688 658 Net cash provided by/(used in) financing activities 136,284 (6,564) Net increase/(decrease) in cash and cash equivalents 45,273 (616,607) Cash and cash equivalents at the beginning of the year 983,256 1,599,863 Cash and cash equivalents at the end of the year $ 1,028,529 $ 983,256 Supplemental disclosures of cash flow information (Note 2) See notes to consolidated financial statements.
12 THE PENNSYLVANIA STATE UNIVERSITY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
1. THE UNIVERSITY AND RELATED ENTITIES
The Pennsylvania State University (“the University”), which was created as an instrumentality of the Commonwealth of Pennsylvania (“the Commonwealth” or “Pennsylvania”), is organized as a non-profit corporation under the laws of the Commonwealth. As Pennsylvania’s land grant university, the University is committed to improving the lives of the people of Pennsylvania, the nation and the world through its integrated, tri-part mission of high-quality teaching, research and outreach.
Basis of Presentation
The financial statements of the University include, on a consolidated basis, the combined financial statements of The Milton S. Hershey Medical Center (“TMSHMC” or “Medical Center”), a not-for-profit corporation and Penn State Hershey Health System, Inc. (“Health System”) and The Corporation for Penn State and its subsidiaries (“the Corporation”). See Note 11 for additional information about TMSHMC and the Health System. The Corporation is a non-profit member corporation organized in 1985 for the exclusive purpose of benefiting and promoting the interests of the University, the Corporation’s sole member. The Corporation’s financial statements consist primarily of the assets and revenues of The Pennsylvania College of Technology (“Penn College”), a wholly-owned subsidiary of the Corporation. All significant transactions between the University, TMSHMC and the Corporation have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The University’s consolidated financial statements are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (GAAP). The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) is the source of authoritative GAAP.
The University’s consolidated financial statements include statements of financial position, activities and cash flows. In accordance with FASB ASC requirements, net assets and the changes in net assets are classified as permanently restricted, temporarily restricted or unrestricted.
Permanently restricted net assets consist primarily of the historical amounts of endowed gifts. Additionally, contributions receivable and remainder interests, which are required by donors to be permanently retained, are included at their estimated net present values.
Temporarily restricted net assets consist of contributions receivable and remainder interests whose ultimate use is not permanently restricted. In addition, the excess of current market value over the historical cost of permanently restricted endowments is classified as temporarily restricted net assets.
Unrestricted net assets are all the remaining net assets of the University. Net unrealized losses on permanently restricted endowment funds for which historical cost exceeds market value are recorded as a reduction to unrestricted net assets.
Revenue from temporarily restricted sources is reclassified as unrestricted revenue when the circumstances of the restriction have been fulfilled. Donor-restricted revenues whose restrictions are met within the same fiscal year are reported as unrestricted income.
13 Notes to Consolidated Financial Statements
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts on the financial statements and the disclosure of contingencies and commitments. Actual results could differ from those estimates.
Revenue Recognition
Tuition revenue is recognized in the fiscal year in which the substantial portion of the educational term occurs. Institutional financial aid provided by the University for tuition and fees is reflected as a reduction of tuition and fee revenue. Revenues for auxiliary enterprises are recognized as the related goods and services are delivered and rendered. Grant revenues are recognized as the eligible grant activities are conducted. Payments received in advance for tuition, goods and services are deferred.
Unconditional promises to give are recognized as revenues and receivables in the year made and consist of written or oral promises to contribute to the University in the future. Contributions receivable are recorded with the revenue assigned to the appropriate category of restriction. The amounts are present valued based on timing of expected collections.
TMSHMC and Health System have agreements with third-party payors that provide for payments to TMSHMC and Health System at amounts different from their established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. In addition, net patient service revenue is net of provision for bad debts of $50.1 million and $43.6 million for the years ended June 30, 2014 and 2013, respectively. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined or such estimates change.
TMSHMC provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than established rates. The Medical Center does not pursue collection of amounts determined to qualify as charity care; they are not reported as net patient service revenue. The amounts of direct and indirect costs for services and supplies furnished under the Medical Center’s charity care policy totaled approximately $20.2 million and $20.0 million for the years ended June 30, 2014 and 2013, respectively, and is based on a ratio of the Medical Center’s operational costs to its gross charges. The amount of charges foregone for services and supplies furnished under the Medical Center’s charity policy during 2014 and 2013 totaled approximately $56.3 million and $54.9 million, respectively.
Fair Value of Financial Instruments
The University has provided fair value estimates for certain financial instruments in the notes to the financial statements. Fair value information presented in the financial statements is based on information available at June 30, 2014 and 2013. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable and other accrued expenses approximate fair value because of the terms and relatively short maturity of these financial instruments. The carrying values of the University's loans to students are also reasonable estimates of their fair value, as the total outstanding loans to students as of June 30, 2014 and 2013 have been made at the rates available to students for similar loans at such times. Investments are reported at fair value as disclosed in Note 3. The fair value of the University's bonds payable is disclosed in Note 7. See Note 5 for further discussion of fair value measurements.
14 Notes to Consolidated Financial Statements
Cash Flows
The following items are included as supplemental disclosure to the statements of cash flows for the years ended June 30: (in thousands of dollars) 2014 2013 Interest paid $ 44,673 $ 46,798 Non-cash acquisitions of land, buildings and equipment 38,470 32,723
Capitalized costs accrued related to construction are $46.2 million and $44.8 million as of June 30, 2014 and 2013, respectively. Taxes paid for 2014 and 2013 are considered immaterial. Cash and cash equivalents include certain investments in highly liquid instruments with initial maturities of 90 days or less, except for such assets held by the University’s investment managers as part of their long-term investment strategies. Short- term investments include other current investments held for general operating purposes with maturities greater than three months but less than 12 months.
Accounts Receivable
Accounts receivable, net at June 30 consists of the following:
(in thousands of dollars) 2014 2013
Grants and contracts, net of allowance of $1,211 and $1,241 $ 222,981 $ 166,963 Patient accounts receivable, net of allowance of $60,108 and $54,759 172,104 173,582 Student receivables, net of allowance of $6,689 and $6,434 30,946 33,178 Investment and interest receivable 58,765 78,419 Other, net of allowance of $4,949 and $4,540 42,417 40,262 Total accounts receivable, net $ 527,213 $492,404
The University maintains allowances for doubtful accounts to reflect management’s best estimate of probable losses inherent in receivable balances. Management determines the allowances for doubtful accounts based on known factors, historical experience, and other currently available evidence. Receivables are written off when management determines they will not be collected.
Related to patient accounts receivable associated with services provided to patients who have third-party coverage, management analyzes contractually due amounts and provides an allowance for doubtful accounts (for example, for expected uncollectible deductibles and copayments or for payors who are known to be having financial difficulties that make the realization of amounts due unlikely). For receivables from self-pay patients the Medical Center and Health System records a provision for bad debts in the period of service on the basis of its past experience, which indicates that many patients are unable or unwilling to pay the portion of their bill for which they are financially responsible. In estimating the allowance for doubtful accounts, account age is taken into consideration. The difference between the standard rates (or the discounted rates if negotiated) and the amounts actually collected after all reasonable collection efforts have been exhausted is charged off against the allowance for doubtful accounts.
Loans to Students
Loans to students are disbursed to qualified students based on need and include loans granted by the University from institutional resources and under federal government loan programs. Students have a grace period until repayment is required based upon the earlier of graduation or no longer achieving at least half-time enrollment status. The grace period varies depending on the type of loan. Loans accrue interest after the grace period and are repaid directly to the University. Loans to students are uncollateralized and carry default risk. At June 30, 2014 and 2013, student loans represent 0.5% and 0.6% of total assets, respectively.
15 Notes to Consolidated Financial Statements
The availability of funds for loans under federal government revolving loan programs is dependent on reimbursements to the pool from repayments of outstanding loans. Funds advanced by the federal government of $46.3 million and $45.3 million at June 30, 2014 and 2013, respectively, are ultimately refundable to the government and are classified as liabilities in the consolidated statements of financial position. Outstanding loans cancelled under the program result in a reduction of the funds available to loan and a decrease in the liability to the federal government.
At June 30, 2014 and 2013, loans to students consisted of the following:
(in thousands of dollars) 2014 2013
Loans to students: Federal government loan programs: Perkins loan program $ 44,337 $ 42,789 Health Professions Student Loans and Loans for Disadvantaged Students 117 197
Federal government loan programs 44,454 42,986 Institutional loan programs 19,066 18,939 63,520 61,925
Less allowance for doubtful accounts: Balance, beginning of year (3,081) (2,733) Provision for doubtful accounts 378 (348) Balance, end of year (2,703) (3,081)
Loans to students, net $ 60,817 $ 58,844
Allowances for doubtful accounts are established based on prior collection experience and current economic factors which, in management’s judgment, could influence the ability of loan recipients to repay the amounts according to the terms of the loan. Further, the University does not evaluate credit quality of student loans receivable after the initial approval of the loan. Loans to students are considered past due when payment is not received by the due date, and interest continues to accrue until the loan is paid in full or written off. When loans to students are deemed uncollectible, an allowance for doubtful accounts is established.
The University considers the age of the amounts outstanding in determining the collectability of loans to students. The aging of the loans to students based on days delinquent and the related allowance for doubtful accounts at June 30, 2014 and 2013 are as follows: (in thousands of dollars) 30 days Over or less 31-60 days 61-90 days 91 days Total 2014 Loans to students: Federal government loan programs $ 42,955 $ 705 $ 64 $ 730 $ 44,454 Institutional loan programs 18,271 239 34 522 19,066
Total loans to students 61,226 944 98 1,252 63,520
Allowance for doubtful accounts: Federal government loan programs (1,297) Institutional loan programs (1,406) Total allowance for doubtful accounts (2,703)
Total loans to students, net $ 60,817
16 Notes to Consolidated Financial Statements
(in thousands of dollars) 30 days Over or less 31-60 days 61-90 days 91 days Total 2013 Loans to students: Federal government loan programs $ 41,367 $ 656 $ 86 $ 877 $ 42,986 Institutional loan programs 18,310 280 23 326 18,939
Total loans to students 59,677 936 109 1,203 61,925
Allowance for doubtful accounts: Federal government loan programs (1,432) Institutional loan programs (1,649) Total allowance for doubtful accounts (3,081)
Total loans to students, net $ 58,844
Inventories
Inventories are stated at the lower of cost or market, generally on the first-in, first-out basis.
Investments
The University’s noncurrent investments represent the University’s endowment and other investments held for general operating purposes. The University’s investments are reported at fair value in the accompanying financial statements. Investments in equity securities with readily determinable fair values and all investments in debt securities are reported at fair values with gains and losses included in the consolidated statements of activities. In the management of investments, the University authorizes certain investment managers to purchase derivative securities to attain a desired market position; and the University may directly invest in derivative securities to attain a desired market position. The University does not trade or issue derivative financial instruments other than through the investment management practices noted above. The University records derivative securities at fair value with gains and losses reflected in the consolidated statements of activities.
The estimated fair value amounts for marketable debt, equity and fixed income securities held by the University have been reviewed by the University and determined using available market information as supplied by the various financial institutions that act as trustees or custodians for the University. For non-liquid holdings, generally limited partnership investments in private real estate, venture capital, private equity, natural resources, and private debt, estimated fair value is determined based upon financial information provided by the general partner. This financial information includes assumptions and methods that were reviewed by University management. The University believes that the estimated fair value is a reasonable estimate of market value as of June 30, 2014 and 2013. Because the limited partnerships are not readily marketable, the estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a ready market existed, and such differences could be material.
Income on operating investments and income used for the annual distribution under the annual spending policy for endowments are reported in operating revenues within the consolidated statement of activities.
Beneficial Interest in Perpetual Trusts
The University is the beneficiary of certain perpetual trusts held and administered by outside trustees. The fair value of these trust assets has been recorded as permanently restricted net assets and related beneficial interest in perpetual trusts in the consolidated financial statements.
17 Notes to Consolidated Financial Statements
Investment in Plant
Total investment in plant as of June 30 is comprised of the following:
(in thousands of dollars) 2014 2013
Land $ 123,532 $ 116,050 Buildings 5,354,902 5,043,463 Improvements other than buildings 587,492 559,877 Equipment 1,186,744 1,100,431 Total plant 7,252,670 6,819,821 Less accumulated depreciation (3,308,418) (3,089,057) Total investment in plant, net $ 3,944,252 $ 3,730,764
The value of land, buildings, and equipment is recorded at cost or, if received as gifts, at fair value at date of gift. The University does not capitalize the cost of library books. Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Useful lives range from 4 to 50 years for buildings, 10 to 20 years for improvements other than buildings, and 1 to 20 years for equipment. Depreciation expense was $275.4 million and $251.4 million for the fiscal years ended June 30, 2014 and 2013, respectively. The University has certain building and equipment lease agreements in effect which are considered capital leases that are included as long-term debt in the statements of financial position. These leases have been capitalized at the lower of fair market value or net present value of the minimum lease payments. Buildings and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. The capitalized cost and accumulated depreciation of the leases at June 30, 2014 and 2013 was $127.9 million and $42.5 million, and $135.5 million and $41.8 million, respectively.
Accounts Payable and Other Accrued Expenses
Accounts payable and other accrued expenses at June 30 consist of the following:
(in thousands of dollars) 2014 2013
Accounts payable (non-Medical Center) $ 231,910 $ 366,637 Medical Center accounts payable and other accrued expenses 186,570 187,667 Accrued payroll and other related liabilities 89,851 87,300 Accrued bond interest 13,093 13,674 Student deposits 5,391 4,818 Total accounts payable and other accrued expenses $ 526,815 $ 660,096
Impairment of Long-Lived Assets
Long-lived assets, which include investment in plant and definite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. An impairment loss is recognized in change in net assets in the period that the impairment occurs.
Asset Retirement Obligations
Under ASC 410-20, Asset Retirement and Environmental Obligations – Asset Retirement Obligations, organizations must accrue for costs related to legal obligations to perform certain activities in connection with retirement, disposal, or abandonment of assets. The obligation to perform the asset retirement activity is not conditional even though the timing or method may be conditional.
18 Notes to Consolidated Financial Statements
The University has identified asbestos abatement and the decommissioning of the Breazeale Nuclear Reactor as conditional asset retirement obligations. These obligations are reported as part of other noncurrent liabilities within the consolidated statement of financial position. The following table details the change in liabilities for the years ended June 30:
(in thousands of dollars) Balance as of June 30, 2012 $ 61,934 Accretion expense 7,651 Liabilities settled (4,293) Balance as of June 30, 2013 65,292 Accretion expense 5,229 Liabilities settled (4,188) Balance as of June 30, 2014 $ 66,333
Annuities Payable
Annuities payable consist of annuity payments currently due and the actuarial amount of annuities payable. The actuarial amount of annuities payable is the present value of the aggregate liability for annuity payments over the expected lives of the beneficiaries.
Income Taxes
The University files U.S. federal and state tax returns. The statute of limitations on the University’s federal returns generally remains open for three years following the year they are filed. In accordance with ASC 740 Income Taxes Topic, the University continues to evaluate tax positions and has determined there is no material impact on the University financial statements.
Recent Accounting Pronouncements
In October 2012, the FASB issued ASU 2012-05, “Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows.” This guidance provides clarification on how entities classify cash receipts arising from the sale of certain donated financial assets in the statement of cash flows. This guidance is effective for the University beginning July 1, 2013. The adoption of this guidance did not have a material impact on its consolidated statement of cash flows.
In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities.” This guidance provides clarification on the scope of the offsetting disclosure requirements in ASU 2011-11. This guidance is effective for the University beginning July 1, 2013. The adoption of this guidance did not have a material impact on its consolidated financial statements.
In February 2013, the FASB issued ASU 2013-04, “Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” This guidance requires entities to measure obligations resulting from the joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance is effective for the University beginning July 1, 2014 with early adoption permitted. The University has not yet evaluated the impact this guidance may have on its consolidated financial statements.
In April 2013, the FASB issued ASU 2013-06, “Services Received from Personnel of an Affiliate”. This update specifies guidance for not-for-profit entities to apply in recognizing and measuring services received from personnel of an affiliate. This guidance is effective for the University beginning after June 15, 2014 with early adoption permitted. The University has not yet evaluated the impact this guidance may have on its consolidated financial statements.
19 Notes to Consolidated Financial Statements
3. INVESTMENTS
Investments by major category as of June 30 are summarized as follows:
(in thousands of dollars) 2014 2013
Money markets $ 213,878 $ 371,987 Fixed income: U.S. government/agency 1,190,248 1,174,609 U.S. corporate 803,990 706,291 Foreign 408,364 372,515 Other 169,962 146,617 Equities 1,742,632 1,342,487 Private capital 1,155,812 902,728 Total $ 5,684,886 $ 5,017,234
Other fixed income investments consist of collateralized mortgage obligations, mortgage-backed securities and asset-backed securities. Equity investments are comprised of domestic and foreign common stocks. Private capital consists primarily of interests in private real estate, venture capital, private equity, natural resources, private debt, commodities and hedge fund limited partnerships.
Futures contracts, which are fully cash collateralized, comprise the University’s directly held derivative instruments at June 30, 2014 and 2013, respectively, are marked to market daily and are included in the fair value of the University’s investments. The fair value of derivative instruments is included in the fair value of the University’s investments within the money market category. Futures contracts have minimal credit risk because the counterparties are the exchanges themselves. Fully cash collateralized derivative securities comprised $172.8 million, 3.0% of total investments, and $270.5 million, 5.4% of total investments at June 30, 2014 and 2013, respectively. The University’s derivatives consist of S&P 500 and Treasury futures and are employed as a low cost, passive investment vehicle with daily liquidity which allows the University to maintain desired market exposure in light of irregular cash flows.
The following schedules summarize the investment return and its classification in the consolidated statement of activities for the years ended June 30:
(in thousands of dollars) Temporarily Permanently 2014 Unrestricted Restricted Restricted Total
Dividends and interest $ 141,655 $ 674 $ 9,087 $ 151,416 Net realized gains 45,538 28,535 - 74,073 Net unrealized gains 233,679 165,280 - 398,959 Total returns $ 420,872 $ 194,489$ 9,087$ 624,448
(in thousands of dollars) Temporarily Permanently 2013 Unrestricted Restricted Restricted Total
Dividends and interest $ 136,373 $ 592 $ 8,103 $ 145,068 Net realized gains 38,563 21,898 - 60,461 Net unrealized gains 18,070 40,417 - 58,487 Total returns $ 193,006 $ 62,907 $ 8,103$ 264,016
20 Notes to Consolidated Financial Statements
4. ENDOWMENT NET ASSETS
The University’s endowment includes both donor-restricted endowment funds and funds designated to function as endowments. As required by GAAP, net assets associated with endowment funds, including funds designated to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions.
The ASC Not-for-Profit Entities Presentation of Financial Statements Subtopic (ASC Subtopic 958-205) provides guidance on the net asset classification of donor-restricted endowment funds for not-for-profit organizations subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) and improves disclosure about an organization’s endowment funds regardless of whether the organization is subject to UPMIFA. The Commonwealth of Pennsylvania has not adopted UPMIFA but rather has enacted Pennsylvania Act 141 (“PA Act 141”). PA Act 141 permits an organization’s trustees to define income as a stipulated percentage of endowment assets (between 2% and 7% of the fair value of the assets averaged over a period of at least three preceding years) without regard to actual interest, dividend, or realized and unrealized gains.
The University has interpreted PA Act 141 to permit the University to spend the earnings of its endowment based on a total return approach, without regard to the fair value of the original gift. As a result of this interpretation, the University classifies as permanently restricted net assets the original value of gifts donated to the permanent endowment, the original value of subsequent gifts to the permanent endowment, and accumulations 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. Funds functioning as endowments are established at the direction of University management and are classified as unrestricted net assets due to the lack of external donor restrictions. Gains and losses attributable to permanent endowments are recorded as temporarily restricted net assets and gains and losses attributable to funds functioning as endowments are recorded as unrestricted net assets.
From time to time, due to unfavorable market fluctuations, the fair value of some assets associated with individual donor-restricted endowment funds may fall below the level that donors require to be retained as a perpetual fund, while other assets are unaffected to the same extent and maintain or exceed the level required. The aggregate amount of deficiencies at June 30, 2014 and 2013 was $1.0 million and $2.5 million, respectively, reported in unrestricted net assets on the consolidated statement of activities. Subsequent investment gains will be used to restore the balance up to the fair market value of the original gift. Subsequent gains above that amount will be recorded as temporarily restricted net assets.
Endowment net asset composition by type of fund as of June 30:
(in thousands of dollars) Temporarily Permanently 2014 Unrestricted Restricted Restricted Total
Donor-restricted endowment funds $ (959) $ 521,680 $ 1,146,955 $ 1,667,676 Funds functioning as endowments 596,738 - - 596,738 Total net assets $ 595,779 $ 521,680 $ 1,146,955 $ 2,264,414
(in thousands of dollars) Temporarily Permanently 2013 Unrestricted Restricted Restricted Total
Donor-restricted endowment funds $ (2,530) $ 338,970 $ 1,067,081 $ 1,403,521 Funds functioning as endowments 520,622 - - 520,622 Total net assets $ 518,092 $ 338,970 $ 1,067,081 $ 1,924,143
21 Notes to Consolidated Financial Statements
Changes in endowment net assets for the years ended June 30:
(in thousands of dollars) Temporarily Permanently 2014 Unrestricted Restricted Restricted Total
Endowment net assets, beginning of the year $ 518,092 $ 338,970 $ 1,067,081 $ 1,924,143 Endowment return: Endowment earnings 28,306 20 3,054 31,380 Net realized gains 47,077 28,374 - 75,451 Net unrealized gains 63,399 155,123 - 218,522 Reclassification of funds with deficiencies 1,571 (1,571) - - Total endowment return 140,353 181,946 3,054 325,353 Contributions - 764 76,820 77,584 Endowment spending (75,383) - - (75,383) Transfers to create funds functioning as endowments 12,717 - - 12,717 Endowment net assets, end of the year $ 595,779 $ 521,680 $ 1,146,955 $ 2,264,414
(in thousands of dollars) Temporarily Permanently 2013 Unrestricted Restricted Restricted Total
Endowment net assets, beginning of the year $ 486,802 $ 284,539 $ 1,001,580 $ 1,772,921 Endowment return: Endowment earnings 36,279 80 3,605 39,964 Net realized gains 35,180 21,351 - 56,531 Net unrealized losses 20,830 34,900 - 55,730 Reclassification of funds with deficiencies 2,405 (2,405) - - Total endowment return 94,694 53,926 3,605 152,225 Contributions - 505 61,896 62,401 Endowment spending (71,459) - - (71,459) Transfers to create funds functioning as endowments 8,055 - - 8,055 Endowment net assets, end of the year $ 518,092 $ 338,970 $ 1,067,081 $ 1,924,143
The University has adopted investment and spending policies for endowment assets that attempt to provide a relatively predictable stream of funding to programs supported by its endowment while seeking to maintain, over time, the purchasing power of the endowment assets. The overall management objective for the University’s pooled endowment funds is to preserve or grow the real (inflation-adjusted) purchasing power of the assets through a prudent long-term investment strategy. This objective would be achieved on a total return basis. Under these policies, as approved by the Board of Trustees and the Penn State Investment Council, the primary investment objective of the University’s pooled endowment is to attain a real total return (net of investment management fees) that at least equals a total annual effective spending rate of 5.25% (program spending of 4.5% plus administrative costs of 0.75%) over the long term.
To satisfy its long-term rate-of-return objectives, the University relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The University targets diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. The endowment assets of the University are invested in a broad range of equities and fixed income securities, thereby limiting the market risk exposure in any one institution or individual investment.
The University has a policy of appropriating for distribution each year a certain percentage (4.5% for 2014 and 2013) of its pooled endowment fund’s average fair market value over the prior five years preceding the
22 Notes to Consolidated Financial Statements
fiscal year in which the distribution is planned. Accordingly, over the long term, the University expects the current spending policy to allow its endowment to provide generous current spending while preserving “intergenerational equity”. This is consistent with the University’s objective to maintain the purchasing power of the endowment assets held in perpetuity as well as to provide additional real growth through new gifts and investment returns.
5. FAIR VALUE MEASUREMENTS
The University utilizes the following fair value hierarchy, which prioritizes into three broad levels, the inputs to valuation techniques used to measure fair value:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the measurement date. Such instruments valued at Level 1, primarily consist of securities that are directly held and actively traded in public markets.
Level 2 – Inputs other than unadjusted quoted prices that are observable for the asset or liability, directly or indirectly, including quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means. Level 2 measures include University interests in certain debt instruments and commingled investment funds which NAV is used as a practical expedient. These funds are redeemable at NAV as of the measurement date, generally within 90 days.
Level 3 – Unobservable inputs that cannot be corroborated by observable market data. Level 3 instruments primarily consist of investment funds for which NAV is used as a practical expedient. The University does not have the ability to redeem the funds at NAV as of the measurement date.
In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The University’s assessment of significance of a particular item to the fair value measurement in its entirety requires judgment, including consideration of inputs specific to the asset.
23 Notes to Consolidated Financial Statements
The following table presents information as of June 30, 2014 about the University’s financial assets and liabilities that are measured at fair value on a recurring basis:
Quoted Prices in Significant Active Markets Other Significant For Identical Observable Unobservable Assets Inputs Inputs Total (in thousands of dollars) Level 1 Level 2 Level 3 Fair Value
Assets: Long-term Investment Pool: Money markets $ 48,692 $ 160,388 $ - $ 209,080 Fixed income U.S. government/agency 85,285 24,447 - 109,732 U.S. corporate - 96,171 - 96,171 Foreign 64,007 187,203 - 251,210 Other - 9,679 - 9,679 Equities 906,248 588,246 121,186 1,615,680 Private capital - 397,295 751,380 1,148,675 Total $ 1,104,232 $1,463,429 $ 872,566 $ 3,440,227
Operating investments: Money markets $ 4,592 $ 206 $ - $ 4,798 Fixed income U.S. government/agency 646,086 434,286 144 1,080,516 U.S. corporate 44,646 663,173 - 707,819 Foreign 8,070 149,084 - 157,154 Other 10,627 146,451 3,205 160,283 Equities 124,989 - 1,963 126,952 Private capital - - 7,137 7,137 Total $ 839,010 $ 1,393,200 $ 12,449$ 2,244,659
Deposits held by bond trustees: Fixed income U.S. government/agency $ - $ 2,551 - $ 2,551 Total $ - $ 2,551$ - $ 2,551
Beneficial interest in perpetual trusts $ - $ - $ 15,498 $ 15,498
Liabilities: Present value of annuities payable $ - $ - $ 51,151 $ 51,151
24 Notes to Consolidated Financial Statements
The following table presents information as of June 30, 2013 about the University’s financial assets and liabilities that are measured at fair value on a recurring basis:
Quoted Prices in Significant Active Markets Other Significant For Identical Observable Unobservable Assets Inputs Inputs Total (in thousands of dollars) Level 1 Level 2 Level 3 Fair Value
Assets: Long-term Investment Pool: Money markets $ 86,754 $ 261,667 $ - $ 348,421 Fixed income U.S. government/agency 84,168 29,967 - 114,135 U.S. corporate 4,229 83,480 - 87,709 Foreign 60,260 174,985 - 235,245 Other - 8,913 - 8,913 Equities 822,353 373,406 63,157 1,258,916 Private capital - 307,741 588,922 896,663 Total $ 1,057,764 $ 1,240,159 $ 652,079 $ 2,950,002
Operating investments: Money markets $ 23,360 $ 206 $ - $ 23,566 Fixed income U.S. government/agency 574,415 485,921 138 1,060,474 U.S. corporate - 618,582 - 618,582 Foreign - 137,270 - 137,270 Other - 134,890 2,814 137,704 Equities 81,470 798 1,303 83,571 Private capital - - 6,065 6,065 Total $ 679,245 $ 1,377,667 $ 10,320 $ 2,067,232
Deposits held by bond trustees: Fixed income U.S. government/agency $ - $ 2,551 - $ 2,551 Total $ - $ 2,551$ - $ 2,551
Beneficial interest in perpetual trusts $ - $ - $ 13,252 $ 13,252 Liabilities: Present value of annuities payable $ - $ - $ 42,255 $ 42,255
The Long-term Investment Pool (LTIP) is a mutual fund-like vehicle used for investing the University’s endowment funds, funds functioning as endowments, and other operating funds that are expected to be held long-term. A share method of accounting for the LTIP is utilized by the University. Each participating fund enters into and withdraws from the LTIP based on monthly share values. At June 30, 2014 and 2013, fair value of endowment funds and funds functioning as endowments within the LTIP totaled $2,294.6 million and $1,941.1 million, respectively. At June 30, 2014 and 2013, fair value of operating funds included in the LTIP totaled $1,145.6 million and $1,008.9 million, respectively.
25 Notes to Consolidated Financial Statements
The following tables present information related to changes in Level 3 for each category of assets and liabilities for year ended June 30, 2014:
Beneficial (in thousands of dollars) Long-term Operating Interest in Investment Pool Investments Perpetual Trusts Assets: Beginning balance $ 652,079 $ 10,320 $ 13,252 Total realized and unrealized gains 175,790 1,454 2,035 Purchases 175,566 747 291 Sales (130,869) (72) (80) Transfers into (out of) Level 3 - - - Ending balance $ 872,566 $12,449 $ 15,498 Present Value of Annuities Payable Liabilities: Beginning balance $ 42,255
Actuarial adjustment of liability (633) Gifts 10,135 Sales (606) Withdrawal from program - Ending balance $ 51,151
The following tables present information related to changes in Level 3 for each category of assets and liabilities for year ended June 30, 2013:
Beneficial (in thousands of dollars) Long-term Operating Interest in Investment Pool Investments Perpetual Trusts Assets: Beginning balance $ 607,407 $ 10,778 $ 12,891 Total realized and unrealized Gains/(losses) 60,065 (388) 361 Purchases 165,678 75 - Sales (135,294) (145) - Transfers into (out of) Level 3 (45,777) - - Ending balance $ 652,079 $ 10,320 $ 13,252 Present Value of Annuities Payable Liabilities: Beginning balance $ 43,167
Actuarial adjustment of liability 4,679 Gifts 642 Sales (6,233) Withdrawal from program - Ending balance $ 42,255
For the year ended June 30, 2014, there were no transfers of assets between Level 3 and Level 2. For the year ended June 30, 2013, $45.8 million of Level 3 assets were transferred to Level 2 as a result of the expiration of lock-up periods for two marketable alternative funds; now these investments may be redeemed within 90 days of June 30.
There were no transfers of investments between Level 1 and Level 2 in 2014 and 2013.
26 Notes to Consolidated Financial Statements
The following table presents the fair value and redemption frequency for those investments whose fair value is not readily determinable and is estimated using the net asset value per share or its equivalent as of June 30, 2014: Unfunded Redemption Redemption (in thousands of dollars) Fair Value Commitment Frequency Notice Period
Commingled Funds: Quarterly/ Non-U.S. Equity $ 617,223 Daily/Monthly 5-90 days Subtotal $ 617,223
Marketable Investment Partnerships: Absolute Return $ 17,135 Quarterly 65 days Quarterly/ Distressed Debt 58,506 Semi Annual 60-90 days Commodities 106,388 Monthly 30-60 days Opportunistic 171,103 Quarterly 30 days Directional Long/Short 62,818 Monthly 30 days Subtotal $ 415,950
Non-Marketable Investment Partnerships: Private Real Estate $ 101,360 $ 45,193 Venture Capital 213,012 112,579 Private Equity 248,263 211,614 Natural Resources 131,240 77,675 Private Debt 45,987 51,040 Subtotal $ 739,862 $498,101
Total $ 1,773,035 $498,101
The following table presents the fair value and redemption frequency for those investments whose fair value is not readily determinable and is estimated using the net asset value per share or its equivalent as of June 30, 2013: Unfunded Redemption Redemption (in thousands of dollars) Fair Value Commitment Frequency Notice Period
Commingled Funds: Quarterly/ Non-U.S. Equity $ 362,061 Daily/Monthly 5-90 days Subtotal $ 362,061
Marketable Investment Partnerships: Absolute Return $ 20,173 Quarterly 65 days Quarterly/ Distressed Debt 52,152 Semi Annual 60-90 days Commodities 84,271 Monthly 30-60 days Opportunistic 140,181 Quarterly 30 days Directional Long/Short 27,580 Quarterly 30-90 days Subtotal $ 324,357
Non-Marketable Investment Partnerships: Private Real Estate $ 88,567 $ 19,788 Venture Capital 144,712 83,095 Private Equity 234,203 141,606 Natural Resources 91,306 69,809 Private Debt 19,583 20,031 Subtotal $ 578,371 $334,329
Total $ 1,264,789 $334,329
27 Notes to Consolidated Financial Statements
Commingled funds include investments that aggregate assets from multiple investors and are managed collectively following a prescribed strategy. Redemptions vary from daily to quarterly with required notification of 90 days or less. The non-U.S. equity strategy is invested in developed and developing countries outside of the United States, and spans the entire equity capitalization spectrum. These collective portfolios preclude the need to obtain securities registration in foreign countries. One commingled fund has 2 years remaining on a 3-year gate and a second is 50% redeemable in three years. The two make up approximately 12.9% and 6.8%, respectively of commingled portfolio.
Marketable Investment Funds include several hedge funds whose underlying positions are traded via public securities markets. Liquidity terms range from quarterly to annually with advance notification for redemption ranging from 30 to 90 days. The fair values of the investments for each fund in this category have been estimated using the net asset value of the Long Term Investment Pool’s (LTIP) share holdings in the fund. Five major investment strategies are included within this category. Absolute Return refers to relative value strategies. Directional refers to equity long/short strategies in both U.S. and non-U.S. markets. Opportunistic refers to global multi-strategy. Distressed Debt refers to securities rated below investment grade, along with non-rated debt. Commodities refer to publicly traded commodity instruments primarily including futures and options.
Nonmarketable Investment Partnerships include limited partnership interests in a variety of illiquid investments. The fair values of the investments for each fund in this category have been estimated using the net asset value of the LTIP’s ownership interest in partner’s capital and cannot be redeemed. Realizations from each fund are received as the underlying investments are liquidated or distributed, typically within 10 years after initial commitment. Unfunded commitments represent remaining commitments of the LTIP’s drawdown funds as of June 30, 2014 and 2013, respectively. Five major investment strategies are included within this category. Private Real Estate includes properties primarily located in the U.S. Venture Capital includes non-public startups and enterprises in early stages of growth located globally. Private Equity includes buyouts of previously public companies as well as enterprises that are planning to go public in the near future, including funds focusing on opportunities outside the U.S. Natural Resources largely include companies primarily involved in oil and natural gas in addition to a variety of other natural resources. Private Debt includes global private credit securities rated below investment grade as well as non-rated debt.
6. CONTRIBUTIONS RECEIVABLE
Contributions receivable are summarized as follows as of June 30:
(in thousands of dollars) 2014 2013
In one year or less $ 71,374 $ 57,002 Between one year and five years 79,253 63,742 More than five years 133,163 119,990 283,790 240,734 Less allowance (6,911) (5,704) Less discount (62,415) (56,893) Contributions receivable, net $ 214,464 $ 178,137
Contributions receivable are discounted at rates ranging from 0.11% to 2.81% and 0.15% to 2.87% at June 30, 2014 and 2013, respectively. The discount rates for prior periods ranged from 0.15% to 6.28%.
At June 30, 2014 and 2013, the University has received bequest intentions and certain other conditional promises to give of $98.2 million and $85.8 million, respectively. These intentions and conditional promises to give are not included in the consolidated financial statements.
28 Notes to Consolidated Financial Statements
The following table summarizes the change in contributions receivable, net during the year ended June 30, 2014: (in thousands of dollars) Balance beginning of year $ 178,137 New pledges 115,112 Collections on pledges (72,056) Increase in allowance (1,207) Increase in unamortized discounts (5,522) Balance at the end of year $ 214,464
7. LONG-TERM DEBT
The various bond issues and capital lease obligations that are included in long-term debt in the statements of financial position consist of the following at June 30:
(in thousands of dollars) 2014 2013
The Pennsylvania State University Bonds Series 2010 $ 135,035 $ 135,035 Series 2009A 107,840 114,075 Series 2009B 74,235 74,235 Series 2008A 77,670 77,670 Series 2008B 3,035 3,980 Series 2007A 87,595 88,125 Series 2007B 60,630 63,515 Series 2005 83,650 85,700 Series 2004A 51,475 52,835 Refunding Series 2002 25,960 41,655
Pennsylvania Higher Educational Facilities Authority University Revenue Bonds (issued for The Pennsylvania State University) Series 2006 3,335 3,545 Series 2004 3,655 3,905 Series 2002 3,650 4,020
Lycoming County Authority College Revenue Bonds (issued for Penn College) Series 2012 24,685 24,685 Series 2011 39,050 39,050 Series 2008 55,000 55,000 Series 2005 10,060 11,085 Series 1993 3,500 5,250
Total bonds payable 850,060 883,365
Unamortized bond premiums 35,273 38,008
Note payable and capital leases Note payable 10,000 - Capital lease obligations 86,155 84,035
Total notes payable and capital leases 96,155 84,035
Total long-term debt $ 981,488 $ 1,005,408
29 Notes to Consolidated Financial Statements
Interest rate Debt issuance mode Interest rates Payment ranges and maturity (in thousands of dollars) The Pennsylvania State University Bonds $3,655 to $6,595 through March 2030 with $21,805 and $44,245 due March Series 2010 Fixed 3.375% - 5.00% 2035 and 2040 Series 2009A Fixed 4.00% - 5.00% $5,540 to $9,320 through March 2029 Series 2009B Variable 0.15% June 2031 Series 2008A Fixed 5.00% $1,840 to $7,695 through August 2029 Series 2008B Fixed 3.50% - 3.75% $975 to $1,050 through August 2016 $550 to $700 through August 2022, with $11,115 and $70,905 due August 2028 Series 2007A Fixed 3.70% - 4.50% and 2036 Series 2007B Fixed 5.00% - 5.25% $3,030 to $5,955 through August 2027 $2,150 to $2,745 through September 2019 with $15,990, $20,550, and $32,485 Series 2005 Fixed 3.75% - 5.00% due September 2024, 2029, and 2035 $1,425 to $1,825 through September 2019, with $10,625, $13,635, and $17,515 Series 2004A Fixed 4.50% - 5.00% due September 2024, 2029, and 2034 Refunding Series 2002 Fixed 5.25% $4,585 to $16,540 through August 2016
Pennsylvania Higher Education Facilities Authority (“PHEFA”) University Revenue Bonds $220 to $280 through 2020, with $1,610 Series 2006 Fixed 4.10% - 5.125%* due September 2025 $260 to $325 through 2019, with $1,905 Series 2004 Fixed 4.30% - 5.00%* due September 2024 $385 to $425 due through 2017, Series 2002 Fixed 4.40% - 5.00%* with $2,435 due March 2022 * Annual interest costs to the University for interest rates greater than 3.00% are subsidized by PHEFA.
Lycoming County Authority College Revenue Bonds Series 2012 Fixed 2.00% - 5.00% $410 to $2,635 through May 2032 Series 2011 Fixed 3.00% - 5.50% $70 to $5,230 through July 2030 Series 2008 Fixed 3.50% - 5.50% $1,455 to $4,140 through October 2037 Series 2005 Fixed 5.00% $505 to $1,855 through January 2025 Series 1993 Fixed 6.15% $450 to $478 through November 2015
The Series 2009B Bonds are currently paying interest on a variable rate basis at a long term rate for the period June 1, 2014 through May 31, 2015. The University has the option to convert to another variable rate (daily, weekly, monthly or flexible) or to a fixed rate basis (such rates are generally determined on a market basis) at respective conversion dates. The bonds currently pay interest at 0.15% with adjustment on the respective date to the rate the remarketing agent believes will cause the bonds to have a market value equal to the principal. The 2009B bondholders have the right to tender bonds on the purchase dates while such bonds bear interest at the daily, weekly or monthly rate. The 2009B Bonds were issued subject to the self-liquidity program established by the University on the date of issuance pursuant to which the University will provide liquidity for the 2009B Bonds from its general funds in the event of insufficient remarketing proceeds.
30 Notes to Consolidated Financial Statements
Maturities and sinking fund requirements on bonds payable for each of the next five fiscal years and thereafter are summarized as follows: Annual Year Installments (in thousands of dollars)
2015 $ 35,330 2016 24,320 2017 28,780 2018 24,455 2019 28,805 Thereafter 708,370 $ 850,060
The fair value of the University's bonds payable is estimated based on current rates offered for similar issues with similar security, terms and maturities using available market information as supplied by the various financial institutions who act as trustees or custodians for the University. At June 30, 2014, the carrying value and estimated fair value of the University's bonds payable, including issuance premiums, are $885.3 million and $917.8 million, respectively. At June 30, 2013, the carrying value and estimated fair value of the University's bonds payable, including issuance premiums, were $921.4 million and $939.4 million, respectively. Certain bond issues have associated issuance premiums, these issuance premiums total $35.3 million and $38.0 million at June 30, 2014 and 2013, respectively and are presented within the statement of financial position as long- term debt. These issuance premiums will be amortized over the term of the respective outstanding bonds.
Note payable and capital leases
A $10 million note payable due annually through June 2024 is included within the consolidated statements of financial position at June 30, 2014. The note payable bears interest at 2.60%.
The University has certain building and equipment lease agreements in effect which are considered capital leases. Future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of June 30, 2014 are as follows:
Year (in thousands of dollars) 2015 $ 15,010 2016 13,895 2017 12,888 2018 10,253 2019 8,244 Thereafter 132,232 Total minimum lease payments 192,522 Less imputed interest (106,367) Capital lease obligation 86,155 Current portion 9,265 Long-term portion $ 76,890
31 Notes to Consolidated Financial Statements
8. OPERATING LEASES
The University has certain lease agreements in effect which are considered operating leases. During the year ended June 30, 2014, the University recorded expenses of $21.0 million for leased equipment and $24.7 million for leased building space. During the year ended June 30, 2013, the University recorded expenses of $22.0 million for leased equipment and $22.6 million for leased building space.
Future minimum lease payments under operating leases as of June 30, 2014 are as follows:
Year (in thousands of dollars)
2015 $ 22,532 2016 16,534 2017 13,149 2018 10,057 2019 8,587 Thereafter 37,490
Total minimum lease payments $ 108,349
9. RETIREMENT BENEFITS
The University provides retirement benefits for substantially all regular employees, primarily through either contributory defined benefit plans administered by the Commonwealth of Pennsylvania State Employees' Retirement System and The Public School Employees' Retirement System or defined contribution plans administered by the Teachers Insurance and Annuity Association – College Retirement Equity Fund and Fidelity Investments. The University is billed for its share of the estimated actuarial cost of the defined benefit plans ($50.9 million and $35.9 million for the years ended June 30, 2014 and 2013, respectively). The University’s total cost for retirement benefits, included in expenses, is $168.1 million and $146.6 million for the years ended June 30, 2014 and 2013, respectively.
10. POSTRETIREMENT BENEFITS
The University sponsors a retiree medical plan covering eligible retirees and eligible dependents. This program includes a Preferred Provider Organization (“PPO”) plan for retirees and their dependents who are not eligible for Medicare, a Medicare Advantage PPO plan and a Medicare Supplement plan. In addition, the University provides retiree life insurance benefits at no cost to the retiree.
Employees who were hired prior to January 1, 2010 are eligible for medical coverage and life insurance after they retire if either of the following requirements are satisfied:
x they are at least age 60 and have at least 15 years of regular full-time employment and participation in a University-sponsored medical plan immediately preceding the retirement date x regardless of age, if they have at least 25 years of regular full-time service. The last 10 of those 25 years of University service must be continuous and they must participate in a University -sponsored medical plan during the last 10 years immediately preceding the retirement date.
The retiree PPO medical plan and the life insurance coverage are self-funded programs, and all medical claims, death benefits and other expenses are paid from the unrestricted net assets of the University. The Medicare Advantage PPO plan and the Medicare Supplement plan are fully insured. The retirees pay varying amounts for coverage under the medical plan.
For those employees who were hired after December 31, 2009, the University will contribute funds each month on their behalf to a retirement healthcare savings plan. This plan is designed to help pay for qualified medical and health-related expenses in retirement, including the purchase of a health insurance policy.
32 Notes to Consolidated Financial Statements
Retirees will be eligible to access their Penn State Retirement Savings Account when they are no longer actively employed at Penn State and have satisfied either of the following requirements:
x completed 25 years of continuous full-time service and are age 60 or older x completed a minimum of 15 years of continuous full-time service and are age 65 or older.
Included in unrestricted net assets at June 30, 2014 and 2013 are the following amounts that have not yet been recognized in net periodic postretirement cost: unrecognized prior service cost (benefit) of ($64.6) million and ($86.3) million and unrecognized actuarial loss of $652.9 million and $547.6 million, respectively.
The following sets forth the plan's benefit obligation, plan assets and funded status reconciled with the amounts recognized in the University's consolidated statements of financial position at June 30:
Change in benefit obligation: (in thousands of dollars) 2014 2013
Benefit obligation at beginning of year $ 1,695,041 $ 1,864,899 Service cost 44,844 56,194 Interest cost 78,696 77,943 Actuarial gain (88,390) (95,754) Benefits paid (47,661) (43,840) Plan assumptions 217,876 (164,401)
Benefit obligation at end of year $ 1,900,406 $ 1,695,041
Change in plan assets: (in thousands of dollars) 2014 2013
Fair value of plan assets at beginning of year $ - $ - Employer contributions 47,661 43,840 Benefits paid (47,661) (43,840) Fair value of plan assets at end of year $ - $ -
Funded status $ (1,900,406) $ (1,695,041) Unrecognized prior service cost (benefit) - - Unrecognized net actuarial loss - - Accrued postretirement benefit expense $ (1,900,406) $ (1,695,041)
Net periodic postretirement cost includes the following components for the years ended June 30: (in thousands of dollars) 2014 2013
Service cost $ 44,844 $ 56,194 Interest cost 78,696 77,943 Amortization of prior service cost (21,699) (21,699) Amortization of unrecognized net loss 24,200 44,960 Net periodic postretirement cost $ 126,041 $ 157,398
The assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation was 7.50% and 8.00% for the years ended June 30, 2014 and 2013, respectively, reduced by 0.50% per year to a fixed level of 5.00%. The weighted average postretirement benefit obligation discount rate was 4.50% and 5.00% for the years ended June 30, 2014 and 2013, respectively.
If the healthcare cost trend rate assumptions were increased by 1% in each year, the accumulated postretirement benefit obligation would be increased by $367.2 million and $318.1 million as of June 30, 2014 and 2013, respectively. The effect of this change on the sum of the service cost and interest cost components of the net periodic postretirement benefit cost would be an increase of $27.4 million and $32.3 million as of June 30, 2014 and 2013, respectively. If the healthcare cost trend rate assumptions were decreased by 1% in
33 Notes to Consolidated Financial Statements
each year, the accumulated postretirement benefit obligation would be decreased by $294.3 million and $256.6 million as of June 30, 2014 and 2013, respectively. The effect of this change on the sum of the service cost and interest cost components of the net periodic postretirement benefit cost would be a decrease of $21.0 million and $24.5 million as of June 30, 2014 and 2013, respectively.
Gains and losses in excess of 10% of the accumulated postretirement benefit obligation are amortized over the average future service to assumed retirement of active participants.
Postretirement benefits expected to be paid for the years ended June 30 are as follows:
(in thousands of dollars) 2015 $ 53,350 2016 58,513 2017 63,596 2018 68,020 2019 72,598 2020-24 429,097
11. THE MILTON S. HERSHEY MEDICAL CENTER AND PENN STATE HERSHEY HEALTH SYSTEM
The University’s wholly-owned subsidiary, TMSHMC, owns the assets of the clinical enterprise of the Hershey Medical Center complex. The University owns the Hershey Medical Center complex, including all buildings and land occupied by the Medical Center and operates the College of Medicine. The clinical facilities of the Hershey Medical Center complex are leased to TMSHMC. TMSHMC makes certain payments to support the College of Medicine.
The Health System is a corporate investor in healthcare joint ventures, which are supportive of the missions of the Medical Center. The Health System was organized in 1995 as a wholly-owned subsidiary of the Corporation for the purpose of organizing components of an integrated health care delivery system. The Health System recorded non-controlling interest related to the acquisition of additional ownership interest in a joint venture. This noncontrolling interest is recorded in the net assets within the consolidated statements of financial position with a value at June 30, 2014 and 2013 of $961,000 and $831,000, respectively.
On June 26, 2014, a letter of intent and term sheet (“agreement”) was executed between the University, the Medical Center, the Health System and Pinnacle Health System. The purpose of the agreement was to set forth certain non-binding understandings and certain binding agreements between the parties. The intent is to form a new Health Enterprise in central Pennsylvania. This new collaborative innovative enterprise would bring together a high-performing university medical center and a community health system. It would provide increased access to a wider range of services and full spectrum of care to patients over a broad geographic base. Both systems will continue to operate independently and as normal until an integration is finalized and all necessary approvals are obtained.
12. CONTINGENCIES AND COMMITMENTS
Contractual Obligations
The University has contractual obligations for the construction of new buildings and for additions to existing buildings in the amount of $814.6 million of which $619.8 million has been paid or accrued as of June 30, 2014. The contract costs are being financed from available resources and from borrowings.
Letters of Credit
The University has available letters of credit in the amount of $19.1 million and $20.5 million as of June 30, 2014 and 2013, respectively. These letters of credit are used primarily to comply with minimum state and federal regulatory laws that govern various University activities. The fair value of these letters of credit approximates contract values based on the nature of the fee arrangements with the issuing banks.
34 Notes to Consolidated Financial Statements
Guarantees
The University has a contract with a third party whereby the third party acts as an agent of the University in connection with procurement of electricity. The University guarantees the payment of the obligations of the third party incurred on behalf of the University to counterparties. No liabilities related to guarantees have been recorded as of June 30, 2014.
Self-Insurance
The University has a coordinated program of commercial and self-insurance for medical malpractice claims at TMSHMC through the use of a qualified trust and a domestic captive insurance company in combination with a self-insured retention layer and is supplementing this program through participation in the Pennsylvania Medical Care Availability and Reduction of Error Fund (“Mcare Fund”), in accordance with Pennsylvania law. An estimate of the present value, discounted at 2% for the years ended June 30, 2014 and 2013, respectively, of the medical malpractice claims liability in the amount of $96.4 million and $96.7 million is recorded as of June 30, 2014 and 2013, respectively.
On July 1, 2003, TMSHMC became self-insured for all medical malpractice claims asserted on or after July 1, 2003, for all amounts that are below the coverage of the TMSHMC’s excess insurance policies and not included in the insurance coverage of the Mcare Fund. Under the self-insurance program, TMSHMC is required to maintain a malpractice trust fund in an amount at least equal to the expected loss of known claims. The balance of this trust fund was $19.7 million and $20.7 million at June 30, 2014 and 2013, respectively. TMSHMC intends to fund any claims due during the next year from cash flows from operations.
With approval from the Pennsylvania Department of Labor and Industry (“PA-DLI”), the University elected to self-insure potential obligations applicable Pennsylvania workers' compensation. Certain claims under the program are contractually administered by a private agency. The University purchased insurance coverage for excess obligations over $600,000 per incident. An estimate of the self-insured workers' compensation claims liability in the amount of $10.1 million and $10.9 million, discounted at 0.75%, is recorded as of June 30, 2014 and 2013, respectively. The University has established a trust fund, in the amount of $12.8 million and $12.7 million at June 30, 2014 and 2013, respectively, as required by PA-DLI, to provide for the payment of claims under this self-insurance program. TMSHMC is self-insured for workers’ compensation claims and has purchased an excess policy through a commercial insurer which covers individual claims in excess of $500,000 per incident for workers’ compensation claims.
The University and TMSHMC are self-insured for certain health care benefits provided to employees. The University and TMSHMC have purchased excess policies which cover employee health benefit claims in excess of $500,000 and $350,000 per employee per year, respectively. The University and TMSHMC provide for reported claims and claims incurred but not reported.
Litigation and Contingencies
In November 2011, the University was made aware of certain allegations in a Commonwealth of Pennsylvania Grand Jury presentment. Various legal proceedings and investigations have arisen as a result of such allegations, including criminal proceedings against former officers and employees of the University. Certain claims and civil litigation have been filed against the University with anticipation that other complaints could be filed. The University accrued $59.7 million for 26 of 32 known claims at June 30, 2013 with such claims subsequently paid during fiscal year 2014. These costs were included in institutional support within the consolidated statement of activities. Two of the claims were deemed to have no merit through the due diligence process. Subsequently, the University has been notified of five additional claims, bringing known claims to 37, two of which were made known to the University subsequent to June 30, 2014. Without having knowledge of the number and nature of unknown claims and in view of the inherent difficulty of predicting the outcome of our remaining eleven known claims, each with their own unique circumstances that give rise to their alleged claims, and given the various stages of the proceedings, we are unable to predict the outcome of these matters or the ultimate legal and financial liability, and at this time cannot reasonably estimate the possible loss or range of loss. Accordingly, no amounts have been accrued in the 2014 financial statements for these claims although a loss is reasonably possible in future periods which could have a material adverse effect on our current and future financial position, results of operations and cash flows.
35 Notes to Consolidated Financial Statements
For the years ended June 30, 2014 and 2013, the University has incurred costs, net of insurance reimbursements totaling $15.6 million and $17.3 million, respectively, for internal investigation, legal, communications and other related costs. These costs are included in institutional support within the consolidated statement of activities. Insurance reimbursements for the years ended June 30, 2014 and 2013 totaled $64,000 and $249,000, respectively. Amounts paid directly by insurance carriers for the years ended June 30, 2014 and 2013 totaled $2,681,000 and $2,994,000, respectively.
The University has submitted claims to insurance carriers at June 30, 2014 related to the claims settled and certain legal costs incurred to date. Amounts of future insurance reimbursement are unknown as of June 30, 2014 and as a result no insurance recovery accruals have been recorded in the 2014 financial statements.
Based on its operation of the Medical Center (see Note 11), the University, like the rest of the healthcare industry, is subject to numerous laws and regulations of federal, state and local governments. Compliance with these laws and regulations can be subject to government review and interpretation, as well as regulatory actions. Recently, government reviews of healthcare providers for compliance with regulations have increased. Although the University believes it has done its best to comply with these numerous regulations, such government reviews could result in significant repayments of previously billed and collected revenues from patient services.
On July 12, 2013, the University received a preliminary report from the U.S. Department of Education based on the program review of the University’s compliance with the Clery Act, a federal law related to campus safety. The Department of Education will make a final program review determination after the process is complete. The outcome and financial impacts of the program review are unknown as of the date the consolidated financial statements were issued.
Various other legal proceedings have arisen in the normal course of conducting University business. The outcome of such litigation is not expected to have a material effect on the financial position of the University.
13. SUBSEQUENT EVENTS
The University has evaluated subsequent events through October 24, 2014, the date on which the consolidated financial statements were issued. It did not identify any subsequent events to be disclosed other than those below or previously noted.
36 T H E P E N N S Y L V A N I A S T A T E U N I V E R S I T Y
BOARD OF TRUSTEES
as of June 30, 2014
APPOINTED MEMBERS ELECTED BY BOARD REPRESENTING BY THE GOVERNOR EX OFFICIO BUSINESS AND INDUSTRY
CLIFFORD G. BENSON, JR. ERIC J. BARRON JAMES S. BROADHURST Chief Development Officer President Chairman Buffalo Sabres The Pennsylvania State University Eat'n Park Hospitality Group, Incorporated
KATHLEEN L. CASEY THOMAS W. CORBETT JR. RICHARD K. DANDREA Senior Advisor Governor Attorney Patomak Global Partners, LLC Commonwealth of Pennsylvania* Eckert Seamans Cherin & Mellott, LLC
MARK H. DAMBLY CAROLYN C. DUMARESQ KENNETH C. FRAZIER President Acting Secretary Chairman, President & Chief Executive Officer Pennrose Properties, LLC Pennsylvania Department of Education Merck & Company, Incorporated
ALLISON S. GOLDSTEIN ELLEN M. FERRETTI EDWARD R. HINTZ, JR. Graduate Assistant Secretary President The Pennsylvania State University Pennsylvania Department of Hintz Capital Management, Incorporated Conservation and Natural Resources TODD L. RUCCI KAREN B. PEETZ Government and Community Relations Officer GEORGE D. GREIG President PAP Technologies Secretary Bank of New York Mellon Pennsylvania Department of Agriculture PAUL H. SILVIS LINDA B. STRUMPF Head Coach *JENNIFER BRANSTETTER Retired Chief Investment Officer SilcoTek Governor's Non-Voting Representative The Helmsley Charitable Trust Director of Policy and Planning Office of the Governor
ELECTED ELECTED BY DELEGATES FROM BY ALUMNI AGRICULTURAL SOCIETIES
MARIANNE E. ALEXANDER RYAN J. MCCOMBIE DONALD G. COTNER President Emerita of the Retired, United Stated Navy President Public Leadership Education Network Cotner Farms, Inc. JOEL N. MYERS H. JESSE ARNELLE President KEITH W. ECKEL Attorney AccuWeather, Incorporated Sole Proprietor and President Fred W. Eckel and Sons Farms, Incorporated EDWARD "TED" B. BROWN WILLIAM F. OLDSEY President & CEO Independent Consultant/Educational Publishing; M. ABRAHAM HARPSTER KETCHConsulting, Inc. Operating Partner, Atlas Advisors Co-Owner, Evergreen Farms, Inc.
BARBARA L. DORAN ADAM J. TALIAFERRO BETSY E. HUBER Portfolio Manager/Private Wealth Advisor Healthcare Alliance Liaison Immediate Past Master, Pennsylvania State Grange Morgan Stanley Bristol Myers Squibb KEITH E. MASSER ANTHONY P. LUBRANO Chairman & Chief Executive Officer President, A.P. Lubrano & Company, Inc. Sterman Masser, Incorporated
CARL T. SHAFFER President Pennsylvania Farm Bureau
EMERITI TRUSTEES
CYNTHIA A. BALDWIN STEVE A. GARBAN L. J. ROWELL, JR. Retired Justice Senior Vice President for Finance Retired Chairman and Supreme Court of Pennsylvania and Operations/Treasurer Emeritus Chief Executive Officer The Pennsylvania State University Provident Mutual Life Insurance CHARLES C. BROSIUS Retired President DAVID R. JONES CECILE M. SPRINGER Marlboro Mushrooms Retired Assistant Managing Editor President, Springer Associates The New York Times WALTER J. CONTI HELEN D. WISE Retired Owner EDWARD P. JUNKER III Former Deputy Chief of Staff for Cross Keys Inn/Pipersville Inn Retired Vice Chairman Programs and Secretary of the Cabinet PNC Bank Corporation Governor's Office DONALD M. COOK, JR. Retired President ROGER A. MADIGAN BOYD E. WOLFF SEMCOR, Incorporated Retired State Senator Retired, Owner and Operator 23rd Senatorial District Wolfden Farms MARIAN U. BARASH COPPERSMITH Retired Chairman of the Board ROBERT D. METZGAR QUENTIN E. WOOD The Barash Group Former President Retired Chairman of the Board and North Penn Pipe & Supply, Incorporated Chief Executive Officer ROBERT M. FREY Quaker State Corporation Attorney-at-Law ANNE RILEY Frey & Tiley, P.C. English Teacher EDWARD P. ZEMPRELLI Attorney BARRY K. ROBINSON Attorney-at-Law This publication is available in alternative media on request.
The University is committed to equal access to programs, facilities, admission and employment for all persons. It is the policy of the University to maintain an environment free of harassment and free of discrimination against any person because of age, race, color, ancestry, national origin, religion, creed, service in the uniformed services (as defined in state and federal law), veteran status, sex, sexual orientation, marital or family status, pregnancy, pregnancy-related conditions, physical or mental disability, gender, perceived gender, gender identity, genetic information or political ideas. Discriminatory conduct and harassment, as well as sexual misconduct and relationship violence, violates the dignity of individuals, impedes the realization of the University’s educational mission, and will not be tolerated. Direct all inquiries regarding the nondiscrimination policy to Dr. Kenneth Lehrman III, Vice Provost for Affirmative Action, Affirmative Action Office, The Pennsylvania State University, 328 Boucke Building, University Park, PA 16802-5901, Email: [email protected], Tel (814) 863-0471.
APPENDIX C
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
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APPENDIX C
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
The following are definitions of certain terms used in and a summary of certain provisions of the Indenture. The summary set forth below is not a full statement of the Indenture or any document referred to therein, to which reference is made for the terms and conditions thereof. Copies of the Indenture and the other instruments and documents referred to in this Summary may be obtained from the Trustee.
CERTAIN DEFINITIONS
“Authorized Representative” shall mean, in respect of the University, any of the following: the President, the Senior Vice President for Finance and Business/Treasurer, the Associate Vice President for Finance and Corporate Controller, the Associate Treasurer or the Assistant Treasurer of the University.
“Board” or “Board of Trustees” shall mean the Board of Trustees of the University.
“Bond Owners,” “Bondowners,” “Owners of the Bonds” or “Owners” when used with respect to Bonds, shall mean the Registered Owners of the Bonds. Any reference to a majority or a particular percentage or proportion of the Bond Owners shall mean the owners at the particular time of a majority or of the specified percentage or proportion in aggregate principal amount of all Bonds then Outstanding under the Indenture, exclusive of Bonds held by or for the account of the University, in trust or otherwise (whether or not theretofore issued), and whether held in the treasury of the University or pledged to secure any of its indebtedness; provided, however, that for the purpose of determining whether the Trustee shall be protected in relying upon any direction or consent given or action taken by Bond Owners, only the Bonds which the Trustee knows are so held by or on behalf of the University shall be excluded; and provided further, that Bonds so pledged may be regarded as outstanding for the purposes of this paragraph if the pledgee shall establish to the satisfaction of the Trustee the pledgee’s right to vote such Bonds.
“Business Day” shall mean any day, other than Saturday or Sunday, on which banks in New York, New York and Pittsburgh, Pennsylvania are authorized to do business.
“Code” shall mean the Internal Revenue Code of 1986, as amended.
“Cost” when used with reference to the University Projects, the Hershey Campus Project or any particular capital additions, shall include, in addition to such other items as are included within any proper definition of cost which are capitalized or capitalizable, such allowances or charges, if any, for interest (including, inter alia, interest during construction), taxes, engineering, legal expenses, superintendence, insurance, casualties, costs of issuance related to the Bonds and other items or expenditures as, in the opinion of the signers of an Officer’s Certificate are proper in respect of such Project or any particular capital additions described in such certificate.
“Debt Service Fund” shall mean the fund so designated which is established pursuant to the Indenture.
“Debt Service Requirements”, when used with reference to any period of time and with reference to the Bonds, shall mean the sum of the following:
a. the aggregate of the amounts which, after taking into account all of the Bonds retired prior to the date of the computation, the University shall be required to pay on account of the
interest on such Bonds during such period and on account of the principal of such Bonds which mature by their terms during such period; and
b. the aggregate of the amounts which the University shall be required to deposit with the Trustee or otherwise apply during such period on account of any purchase, amortization, redemption or analogous fund for such Bonds.
“Event of Default” shall mean any Event of Default specified in the Indenture, which continues for the period of time, if any, therein designated.
“Expenditures Fund” shall mean the fund so designated which is established pursuant to the Indenture.
“Hershey Campus Project” shall mean the acquisition, construction and equipping of a data center facility to house computer systems and associated components, including telecommunication, storage and disaster recovery systems located at the Penn State Hersey Campus.
“Hershey Campus Project Account” shall mean the account so designated within the Expenditures Fund, which is established pursuant to the Indenture.
“Hospital Corporation” shall mean The Milton S. Hershey Medical Center, a Pennsylvania non profit corporation.
“Interest Payment Date”, shall mean each March 1 and September 1, commencing on September 1, 2015.
“Officer’s Certificate” shall mean a certificate signed by an Authorized Representative of the University.
“Outstanding”, “Outstanding under the Indenture” or “Outstanding Hereunder” when used with reference to Bonds, shall mean, at any date as of which the amount of outstanding Bonds is to be determined, the aggregate of all Bonds authenticated and delivered under the Indenture, except:
a. Bonds cancelled at or prior to such date;
b. Bonds for the payment of which funds shall have been theretofore irrevocably deposited in trust with the Trustee and which Bonds shall have matured by their terms but shall not have been surrendered for payment;
c. Bonds for the payment or redemption of which (1) sufficient funds (including interest to the date of payment or redemption) or direct obligations of the United States of America, which bear interest at such rates and mature at such times as to provide such funds as and when required for such payment or redemption or (2) obligations of, or obligations guaranteed as to principal and interest by the United States of America or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the United States, shall have been theretofore irrevocably deposited in trust with the Trustee, whether upon or prior to the maturity or the redemption date of such Bonds; provided, further, that if such Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been mailed as provided for in the Indenture or provision satisfactory to the Trustee shall have been made for such mailing; and
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d. Bonds in lieu of and substitution for which other Bonds shall be authenticated by the Trustee and delivered by the University under the provisions of the Indenture.
“Record Date” shall mean each August 15 and February 15, commencing August 15, 2015.
“Registered Owner” shall mean the person or persons in whose name or names a particular Bond shall be registered on the books of the University kept by the Trustee for that purpose in accordance with the provisions of the Indenture.
“Supplemental Indenture” or “Indenture Supplemental Hereto” shall mean any supplemental trust indenture now or hereafter duly authorized and entered into in accordance with the provisions of the Indenture.
“University Projects” shall mean (i) acquisition, construction and equipping of a data center facility to house computer systems and associated components, including telecommunication, storage and disaster recovery systems located at the Penn State University Park Campus; (ii) the acquisition, construction and equipping of a student enrichment center located at the Harrisburg Campus; (iii) the acquisition, construction and equipping of a housing and food service warehouse and bakery expansion located at the Penn State University Park Campus; (iv) other capital projects consistent with the University’s capital plan; and (v) the payment of a portion of the costs of issuance of the Bonds.
“University Projects Account” shall mean the account so designated within the Expenditures Fund, which is established pursuant to the Indenture.
AUTHENTICATION AND DELIVERY OF BONDS
Principal Amount of Bonds Limited - Bonds Equally and Ratably Secured
The aggregate principal amount of Bonds which may be executed by the University and authenticated and delivered by the Trustee and secured by the Indenture is limited to the Bonds and the amount set forth on the cover page of this Official Statement. Subject to certain provisions of the Indenture, all Bonds shall in all respects be equally and ratably secured by the Indenture without preference, priority or distinction on account of the actual time or times of the authentication and delivery or maturity of the Bonds, or any of them.
REVENUES AND FUNDS
Creation of Funds to be held by Trustee
There are created under the Indenture the following Funds and Accounts (collectively, the “Funds” and “Accounts”), to be held by the Trustee:
Debt Service Fund; Expenditures Fund, and within the Expenditures Fund, the University Projects Account and the Hershey Campus Project Account; Rebate Fund; and Clearing Fund.
Payments to and withdrawals from said Funds and Accounts shall be made only for the purposes and upon the terms and conditions set forth in the Indenture.
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Debt Service Fund
The University shall deposit with the Trustee for the credit of the Debt Service Fund on account of the Bonds, at least one Business Day prior to the date of any payment which is due in respect of the Bonds, whether for regularly scheduled principal and interest, principal and interest upon redemption, or otherwise, the amount of such payment.
Expenditures Fund
There shall be deposited to the credit of the accounts within the Expenditures Fund, from the proceeds of the Series 2015A Bonds, the amounts set forth in the Indenture. Payments shall be made out of the Expenditures Fund by the Trustee directly to the payee (which may include the University) upon receipt by the Trustee of an Officer’s Certificate or requisition signed by an Authorized Representative of the University.
Use of Funds
All moneys deposited under the provisions of the Indenture shall be trust funds thereunder and shall be held in trust by the Trustee (except for the Rebate Fund) and applied only for the purposes set forth in the Indenture, and, pending the application thereof in accordance with and subject to the limitations of the Indenture, shall be subject to a lien and charge in favor of the Owners of the Bonds and for the further security of such Owners until paid out as provided in the Indenture. All moneys which the Trustee shall have withdrawn from the Debt Service Fund and deposited with any paying agent for the particular purpose of paying any of the Bonds which have become or are about to become due and payable, or which have been called for redemption, shall be held in trust for the respective owners of such Bonds. Any moneys so held at any time by any paying agent shall, upon request of the Trustee, be paid by such paying agent to the Trustee, which shall thereafter hold such moneys in trust for the respective owners of such Bonds, subject to the provisions of the Indenture.
Investment of Moneys from Debt Service Fund or Expenditures Fund
Any moneys to the credit of the Debt Service Fund or the Expenditures Fund may be invested by the Trustee, upon the written request of the Treasurer, the Corporate Controller, the Associate Treasurer or Assistant Treasurer of the University, in any of the following, to the extent permitted by law (“Qualified Investments”): (i) direct obligations of the United States of America and obligations on which the timely payment of principal and interest is fully and unconditionally guaranteed by the United States of America (“Government Securities”); (ii) stripped securities where the principal-only and interest-only strips of non-callable obligations are issued by the U.S. Treasury and REFCORP Securities stripped by the Federal Reserve Bank of New York; (iii) direct obligations of any agency or instrumentality of the United States of America including, without limitation, the Federal Home Loan Bank System, Federal National Mortgage Association, Export-Import Bank of the United States, Federal Land Bank and Government National Mortgage Association; (iv) deposits, demand deposits, time deposits, trust deposits, trust funds, trust accounts, federal funds, certificates of deposits, including those placed by a third party pursuant to an agreement between the Trustee and the University, interest-bearing deposits or bankers’ acceptances of any bank, including the Trustee or any of its affiliates; (v) deposits, demand deposits, time deposits, trust deposits, trust accounts, federal funds, certificates of deposits, including those placed by a third party pursuant to an agreement between the Trustee and the University and interest-bearing deposits of any bank or savings and loan association, including the Trustee or any of its affiliates, which has combined capital, surplus and individual profits of at least $100,000,000, provided such deposits are fully insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation; (vi) repurchase agreements; (vii) commercial paper; (viii) direct obligations
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of any state of the United States of America or any subdivision or agency thereof or any obligation fully and unconditionally guaranteed by any state, subdivision or agency; (ix) pre-refunded obligations of a state or any political subdivision thereof; (x) investment agreements with, or guaranteed by, a bank (including the Trustee or any of its affiliates), broker-dealer, other financial institution, insurance company or any other entity, provided that (A) moneys invested thereunder may be withdrawn to the extent required under the Indenture without any penalty, premium or charge in an amount not more than necessary to make any payment upon one (1) Business Days’ notice and (B) the agreement is not subordinated to any other obligations of such broker-dealer, insurance company, bank or other entity, and provides that if the issuer defaults under the investment agreement, (1) the issuer’s payment obligations under any such investment agreements shall be fully collateralized by cash or Government Securities or (2) the agreement may be terminated at any time without penalty; (xi) shares of money market funds registered under the Investment Company Act of 1940, as amended, that invest solely in Government Securities and repurchase agreements backed by such Government Securities; including, without limitation, any mutual fund for which the Trustee or an affiliate of the Trustee serves as investment manager, administrator, shareholder servicing agent, and/or custodian or subcustodian, notwithstanding that (1) the Trustee or an affiliate of the Trustee receives fees from such funds for services rendered, (2) the Trustee charges and collects fees for services rendered pursuant to the Indenture, which fees are separate from the fees received by such funds and (3) services performed for such funds and pursuant to the Indenture may at times duplicate those provided to such funds by the Trustee or its affiliates; and (xii) shares of money market mutual funds registered under the Investment Company Act of 1940, as amended, including, without limitation, any mutual fund for which the Trustee or an affiliate of the Trustee serves as investment manager, administrator, shareholder servicing agent, and/or custodian or subcustodian, notwithstanding that (1) the Trustee or an affiliate of the Trustee receives fees from such funds for services rendered, (2) the Trustee charges and collects fees for services rendered pursuant to the Indenture, which fees are separate from the fees received by such funds and (3) services performed for such funds and pursuant to the Indenture may at times duplicate those provided to such funds by the Trustee or its affiliates.
The University will not direct the Trustee to make any investment which would bring the Bonds within the definition of “arbitrage bonds” under Section 148 of the Code or the corresponding Section, if any, of any subsequently enacted Internal Revenue Code, or the regulations and decisions thereunder.
PARTICULAR COVENANTS OF THE UNIVERSITY
Payment of Principal of and Interest on Bonds - Cancellation of Bonds
The University will duly and punctually pay, or cause to be paid, the principal of, and the interest on, all Bonds issued under the Indenture as and when due. Such covenant is the general obligation of the University, payable from all legally available funds of the University. All Bonds paid, redeemed or purchased, either at or before maturity, and all Bonds which shall have been surrendered in exchange for other Bonds under any provision of the Indenture, shall be delivered to the Trustee when such payment, redemption, purchase or exchange is made, and such Bonds shall thereupon be cancelled. All cancelled Bonds shall be held by the Trustee until satisfaction and discharge of the Indenture; provided, however, that Bonds so cancelled may at any time be destroyed by the Trustee which shall execute a certificate of destruction in duplicate describing the Bonds so destroyed; and one executed certificate shall be filed with the Treasurer of the University and the other executed certificate shall be retained in the records of the Trustee.
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Time for Payment of Interest not to be Extended
The University will not directly or indirectly extend or assent to the extension of the time for payment of any interest or claims for the interest on any Bonds and will not directly or indirectly be a party to any arrangement therefor, either by purchasing or refunding or in any manner keeping alive such interest or claims for interest. No claim for interest which in any way at or after maturity shall have been transferred or pledged separate or apart from the Bond to which it relates, or which shall in any manner have been kept alive after maturity by extension or by purchase thereof by or on behalf of the University, shall be entitled to any benefit under the Indenture; provided, however, that the foregoing provisions shall not be applicable to any claim for interest, the time of payment of which shall have been extended pursuant to a plan proposed by the University to all owners of any one or more Bonds.
Vacancy in the Office of Trustee; Further Covenants
Whenever necessary to avoid or fill a vacancy in the office of Trustee, the University will, in the manner provided in the Indenture, appoint a successor Trustee.
Arbitrage Matters
The University covenants with the Trustee and the Owners of the Bonds that, notwithstanding any other provision of the Indenture or any other instrument, it will make no investment, direct the making of any investment or make other use of the proceeds of the Bonds which will cause the Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Code, and the regulations and decisions thereunder, and it further covenants that it will comply with the requirements of Section 148 of the Code and the said regulations and decisions. The University further covenants with the Trustee and the Owners of the Bonds that it will take no action, and will not omit to take any action, which, if such action had been taken or omitted, would have caused the interest on any Bonds to lose any exemption from federal income taxation or otherwise to violate any of the provisions of the Code, compliance with which is requisite to such exemption.
REMEDIES UPON DEFAULT AND EVENTS OF DEFAULT
Events of Default
In case any one or more of the following events (defined as “Events of Default” in the Indenture) shall happen and be continuing, that is to say:
(a) default shall be made in the due and punctual payment of the principal of any Bond when and as the same shall become due and payable, whether at maturity, by declaration or otherwise; or
(b) default shall be made in the due and punctual payment of any installment of interest on any Bond, when and as such interest installment shall become due and payable; or
(c) default shall be made by the University in the performance or observance of any of the covenants, agreements or conditions (other than as described above) on its part in the Indenture or in the Bonds contained, and such default shall continue for a period of thirty (30) days after written notice thereof to the University by the Trustee, or to the University and the Trustee by not less than 25% in aggregate principal amount of the Bond Owners; or
(d) the University shall (1) admit in writing its inability to pay its debts generally as they become due, (2) file a petition or otherwise commence a case in bankruptcy, (3) make a general
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assignment for the benefit of its creditors, (4) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property; or
(e) any proceeding or case shall be instituted or an order entered in any proceeding or case with the consent or acquiescence of the University for the purpose of adjusting the claims of such creditors pursuant to any Federal or State statute now or hereafter enacted, or, if such order or decree, having been entered without the consent or acquiescence of the University, shall not be vacated or discharged within sixty (60) days after the entry thereof, or if such proceeding having been instituted without the consent or acquiescence of the University, shall not be withdrawn, or any order entered therein shall not be vacated or discharged, within sixty (60) days after the institution of such proceeding or the entry of such order; then and in each and every such case (unless the principal of all the Bonds shall already have become and be due and payable), at any time during the continuance of any such Event of Default, the Trustee may, and upon the written request of the Owners of not less than 25% in aggregate principal amount of Bonds Outstanding the Trustee shall, by notice in writing given to the University, declare the principal of all the Bonds then Outstanding and the interest accrued thereon, to be due and payable immediately, and upon any such declaration, all the Bonds then Outstanding shall become and be due and payable immediately, anything in the Indenture or in any of the Bonds contained to the contrary notwithstanding; provided that in the case of the Events of Default described in subparagraphs (d) or (e) no such declaration shall be required, and such acceleration shall occur automatically without any act, notice or declaration by the Trustee.
The foregoing provisions of the Indenture are subject to the condition that if, at any time after the principal of the Bonds have been so declared due and payable (other than upon the occurrence of an Event of Default described in subparagraph (d) or (e) above) and prior to the date of maturity thereof as stated in the Bonds and before any sale of the Trust Estate shall have been made, all arrears of principal and interest upon all the Bonds (with interest at the rate specified in such Bonds on any overdue installment of interest, if any, so far as the same may be legally enforceable) and the reasonable fees and expenses of the Trustee, its agents and attorneys shall either be paid by the University or be collected and paid out of the Trust Estate, and all defaults as aforesaid (other than the payment of principal which has been so declared due and payable) shall have been made good or secured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall have been made therefor, then, and in every such case, either the Trustee or a majority in aggregate principal amount of the Bonds Outstanding, by a writing delivered to the University and the Trustee, may waive such Event of Default and its consequences and rescind such declaration; but no such waiver shall extend to or affect any subsequent Event of Default or impair or exhaust any right or power consequent thereon.
Trustee’s Power to Collect Amounts Due
In case:
(a) default shall be made in the payment of any installment of interest on any Bond, when and as the same shall become due and payable, or
(b) default shall be made in the payment of the principal of any Bond, when and as the same shall become due and payable, whether at maturity thereof or by declaration as authorized in the Indenture; then and in either such event, upon demand of the Trustee, the University will pay to the Trustee, for the benefit of the Owners of the Bonds, the whole amount then due and payable on all Bonds for interest or principal, or both, as the case may be, with interest at the rate specified in such Bonds and, so far as the
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same may be legally enforceable, on the overdue installments of interest, and the Trustee, in its own name and as trustee of an express trust, shall be entitled to recover judgment against the University for the whole amount so due and unpaid.
The Trustee shall, if permitted by law, be entitled to recover judgment as aforesaid either before or after or during the pendency of any proceedings for the enforcement of the lien of the Indenture upon the Trust Estate, and the Trustee in its own name and as trustee of an express trust, shall be entitled to enforce payment of and to receive all amounts then remaining due and unpaid upon any or all of the Bonds for the benefit of the Owners thereof, and shall be entitled to recover judgment for any portion of the indebtedness remaining unpaid, with interest, as aforesaid. No recovery of any such judgment by the Trustee, and no levy of any execution under any such judgment upon the Trust Estate or any part thereof, or upon any other property, shall in any manner or to any extent affect the lien of the Indenture upon the Trust Estate or any part thereof, or any rights, powers or remedies of the Trustee thereunder, and any lien, rights, powers and remedies shall continue unimpaired as before.
The Trustee shall be entitled and empowered, either in its own name, or as trustee of an express trust, or as attorney-in-fact for the Owners of the Bonds, or in any one or more of such capacities, to file such proof of debt, amendment of proof of debt, claim, petition or other document as may be necessary or advisable in order to have the claims of the Trustee and of the Owners of the Bonds (whether such claims be based upon the provisions of the Bonds or of the Indenture) allowed in any equity receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization or other similar proceedings relative to the University or its creditors or affecting its property. The Trustee is irrevocably appointed (and the successive respective Owners of the Bonds by taking and holding the same shall be conclusively deemed to have so appointed the Trustee) the true and lawful attorney-in-fact of the respective Owners of the Bonds, with authority to make and file in the respective names of the Owners of the Bonds, or on behalf of the owners of the Bonds as a class, subject to an appropriate deduction from any such claims of the amounts of any claims filed by any of the Owners of the Bonds themselves, any proof of debt, amendment of proof of debt, claim, petition or other document in any such proceedings and to receive payment of any sums becoming distributable on account thereof, and to execute any such other papers and documents and to do and perform any and all such acts and things for and on behalf of such Owners of the Bonds, as may be necessary or advisable in the opinion of the Trustee in order to have the respective claims of the Trustee and of the Owners of the Bonds against the University or its property allowed in any such proceeding, and to receive payment of or on account of such claims; provided, however, that nothing contained in the Indenture shall be deemed to give to the Trustee any right to accept or consent to any plan of reorganization or otherwise by action of any character in any such proceeding to waive or change in any way any right of any Bond Owner.
Any moneys collected by the Trustee under the Indenture shall be applied in accordance with the Indenture towards payment of the amounts then due and unpaid to the Trustee and upon such Bonds in respect whereof such moneys shall have been collected, ratably and without any preference or priority of any kind, subject to the provisions of the Indenture according to the amounts due and payable upon such Bonds at the date fixed by the Trustee for the distribution of such moneys, upon presentation of the several Bonds for stamping thereon of a notation of such payment, if partly paid, and upon surrender and cancellation thereof, if fully paid.
Conditions to Suit by Individual Bond
No Owner of any Bond shall have the right to institute any suit, action or proceeding, in equity or at law, for the execution of any trust or power conferred by the Indenture, or for the appointment of a receiver, or for the enforcement of any other remedy under or upon the Indenture, unless such Owner shall previously have given the Trustee written notice of some existing default and of the continuance
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thereof, nor unless, also, the Owners of at least 25% in principal amount of the Bonds shall have made written request upon the Trustee and shall have afforded to it a reasonable opportunity either to proceed to exercise the powers granted or to institute such action, suit or proceeding in their own names, nor unless, also, such owners shall have offered to the Trustee security and indemnity reasonably satisfactory to it against the costs and expenses to be incurred in the Indenture or thereby, and the Trustee shall have refused or neglected to comply with such request within sixty (60) days. A majority in aggregate principal amount of the Bond Owners shall have the right, by an instrument in writing executed and delivered to the Trustee, to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee and the time, method and place of exercising any power of trust conferred upon the Trustee under the Indenture. No one or more Owners of Bonds shall have any right in any manner whatever under the Indenture or under the Bonds by his or their action to affect, disturb or prejudice the lien of the Indenture or to enforce any right thereunder, except in the manner therein provided, and all proceedings thereunder, at law or in equity, shall be instituted, had and maintained in the manner therein provided and for the ratable benefit of all Owners of such Bonds. Nothing therein contained shall, however, affect or impair the right, which is absolute and unconditional, of the Owner of any Bond to enforce payment of the principal and interest represented thereby at and after the maturity of such principal or interest, or the obligation of the University, which is also absolute and unconditional, to pay the principal of and interest on each of the Bonds at the times and places in the Bonds expressed.
Restoration of Parties to Original Positions upon Discontinuance of Proceedings
In case the Trustee shall have proceeded to enforce any right under the Indenture and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Trustee, then, and in every such case, the University and the Trustee shall be restored to their former positions and rights thereunder in respect of the Trust Estate, and all rights, remedies and powers of the Trustee shall continue as though no such proceedings had been taken.
Privilege of Electing Remedies; Remedies are Cumulative
Subject to the provisions of the Indenture, nothing in the Indenture contained shall be construed as requiring the Trustee to pursue any particular remedy for the purpose of procuring the satisfaction of the indebtedness secured by the Indenture, but the Trustee may exercise all or any of the rights as provided in the Indenture or which may be given by statute, law or equity or otherwise, in its absolute discretion. No remedy by the terms of the Indenture conferred upon or reserved to the Trustee or the Bond Owners is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to any other remedy given thereunder or now or thereafter existing at law or in equity or by statute.
IMMUNITY OF MEMBERS, MEMBERS OF BOARD OF TRUSTEES, DIRECTORS AND OFFICERS
Indenture and Bonds Solely Corporate Obligations
No recourse under or upon any obligation, covenant or agreement contained in the Indenture, or in any Bonds thereby secured, or because of any indebtedness thereby secured, shall be had against any past, present or future member, member of the Board of Trustees, director or officers, as such, of the University, or of any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceedings or otherwise; it being expressly agreed and understood that the Indenture, and the obligations thereby secured, are solely corporate obligations of the University, and that no personal liability whatsoever shall attach to, or be incurred by, such members of the Board of Trustees, directors or officers, as such, of the University or of
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any successor corporation, or any of them, because of the incurring of the indebtedness thereby authorized, or under or by reason of any of the obligations, covenants or agreements contained or implied from the Indenture or any of the Bonds thereby secured.
THE TRUSTEE
Resignation of Trustee
The Trustee may resign and be discharged of the trust created by the Indenture by giving sixty (60) days’ written notice thereof to the University, specifying the date when it is desired that such resignation shall take effect. Such resignation shall take effect upon the appointment of the successor trustee and such successor’s acceptance of such appointment.
Removal of Trustee
The Trustee may be removed at any time: (i) by the owners of a majority in principal amount of the Bonds then Outstanding and, (ii) so long as no Event of Default has occurred and is continuing, by the University by giving sixty (60) days’ written notice thereof to the Trustee. Such removal shall take effect upon the appointment of the successor trustee and such successor’s acceptance of such appointment.
Appointment of Successor Trustee by University
If at any time the Trustee shall resign or be removed or otherwise become incapable of acting or if at any time a vacancy shall occur in the office of the Trustee for any other cause, a successor Trustee may be appointed by the University by an instrument in writing executed by an Authorized Representative. Every successor to the Trustee appointed pursuant to the Indenture shall be a commercial bank or trust company in good standing and having power so to act, incorporated under the laws of the United States of America or the Commonwealth, and having a capital and surplus of not less than $100,000,000, if there be such an institution willing, qualified and able to accept the trust upon reasonable or customary terms.
If a successor Trustee shall not be appointed within sixty (60) days after the time when such appointment could first be made, any Bond Owner or the retiring Trustee, at the University’s expense, may apply to any court of competent jurisdiction to appoint a successor Trustee. Such court may thereupon, after such notice, if any, as such court may deem proper and prescribe, appoint a successor Trustee.
Notice to Bond Owners of Change in Trustee
The University shall give notice, as provided in the Indenture, to the Owners of all Outstanding Bonds of each resignation of the then Trustee by resignation pursuant to the Indenture, each removal of the then Trustee pursuant to the Indenture and of each appointment of a successor trustee pursuant to the Indenture. Such notice shall include the name and address of the designated corporate trust office of such successor trustee.
CONCERNING THE BOND OWNERS
Evidence of Action by Specified Percentage of Bond Owners
Whenever in the Indenture it is provided that the Owners of a specified percentage or a majority of the Bonds Outstanding thereunder may take any action (including the making of any demand or
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request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the Owners of such specified percentage or majority have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Bond Owners in person or by agent or proxy appointed in writing, or (b) by a combination of such instrument or instruments and any such record of such a meeting of Bond Owners.
MODIFICATION OF THE INDENTURE; SUPPLEMENTAL INDENTURES
Modification of Indenture in Certain Cases Without Consent of Bond Owners
Without the consent of the Bond Owners and notwithstanding any of the provisions of the Indenture, the University and the Trustee from time to time at any time, subject to the conditions and restrictions in the Indenture contained, may enter into any indenture or indentures supplemental thereto, in addition to the supplemental indentures authorized to be entered into by the other provisions thereof, which indenture or indentures supplemental thereto shall thereafter form a part thereof, for any one or more of the following purposes:
(a) To add to the covenants and agreements of the University in the Indenture contained, other covenants and agreements thereafter to be observed, or to surrender any right or power therein reserved to or conferred upon the University;
(b) To convey, transfer, assign and pledge to the Trustee, and to subject to the lien of the Indenture, with the same force and effect as though originally pledged thereunder, additional assets or other property of the University;
(c) To make any other change that does not materially adversely affect the rights of the Owners or the Trustee;
(d) To cure any ambiguity or to cure, correct or supplement any defect, omission or inconsistent provision contained in the Indenture or in any supplemental indenture;
(e) To qualify any of the Bonds for registration under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended;
(f) To qualify the Indenture under the Trust Indenture Act of 1939, as amended;
(g) To make changes necessary, in the Opinion of Counsel, to comply with Sections 103 and 141-150 of the Code;
(h) To make changes necessary to provide for insurance or credit in respect of the Bonds; or
(i) To make such provision in regard to matters or questions arising under the Indenture as may be necessary or desirable and not inconsistent with the Indenture.
Modification of Indenture in Other Cases with Consent of a Majority of Bond Owners
With the consent (evidenced as provided in the Indenture) of the Owners of not less than a majority in principal amount of the Bonds then Outstanding, the University and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental to the Indenture for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, the Indenture or of any supplemental indenture, provided that no such indenture or indentures
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supplemental without the consent of the Owner of every Bond affected thereby, shall (i) extend the time or times of payment of the principal at maturity of, or interest on, any Bond, or reduce the rate of interest thereon or otherwise affect the terms of payment of the principal at maturity of, or interest on, any Bond, or advance the date on which any Bond shall be subject to redemption, or affect the right of any Bond Owner to institute suit for the enforcement of any such payment on or after the respective due dates expressed in the Bonds, (ii) otherwise than as permitted by the Indenture, permit the creation of any lien ranking prior to or on a parity with the lien of the Indenture with respect to the trust estate created thereby or any part thereof, or deprive any Bond Owner of the security afforded by the lien of the Indenture, or (iii) reduce the percentage in principal amount of the Bonds required as set forth in the Indenture to authorize any such modification or alteration.
It shall not be necessary for the consent of the Bond Owners under the Indenture to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof.
Conditions to Trustee’s Executing Supplemental Indenture
The Trustee shall join with the University in the execution of any supplemental indenture which the University is authorized to execute under the provisions of the Indenture upon the delivery by the University to the Trustee of the following:
(a) An opinion of Counsel (i) to the effect that the University and the Trustee are each authorized or permitted to enter into such supplemental indenture pursuant to the provisions of the Indenture, or (ii) to the effect that the University and the Trustee are authorized or permitted to enter into such supplemental indenture pursuant to the provisions of the Indenture and that the consent of the Bond Owners required thereby has been obtained and is evidenced by specified documents meeting the requirements of the Indenture; and
(b) If the Opinion of Counsel shall state that the University and the Trustee are authorized to enter into such supplemental indenture by the provisions of the Indenture, certified copies of the documents evidencing the consent of the Bond Owners as specified in said opinion; and
(c) An opinion of nationally recognized bond counsel to the effect that such supplemental indenture will have no adverse effect on the tax-exempt status of the interest on the Bonds; provided, however, that the Trustee shall not be obligated under any provision of the Indenture to join in any supplemental indenture which, in its opinion, adversely affects its own duties, rights or immunities under the Indenture.
DISCHARGE OF INDENTURE
Full Payment of Moneys to Bond Owners
If the University, its successors or assigns, shall deposit cash or Government Securities in an amount sufficient to pay or cause to be paid unto the Owners of all Bonds Outstanding thereunder the principal and interest to become due thereon at the times and in the manner stipulated therein, then the Indenture and the estate and rights thereby granted shall cease, determine and be void, and thereupon the Trustee shall, upon the written request of the University, release, cancel and discharge the lien of the Indenture, and execute and deliver to the University such instruments as shall be required to satisfy and discharge the lien thereof, and reconvey to the University the estate and title conveyed by the Indenture, and assign and deliver to the University any moneys and other property at the time subject to the lien of
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the Indenture (except moneys held in trust by the Trustee for the payment or redemption of Bonds, which moneys, subject to the provisions of the Indenture, shall continue to be held by the Trustee) which may then be in the possession of the Trustee; but the Trustee shall take any such action only upon receipt of an Officer’s Certificate and an Opinion of Counsel, each stating that in the opinion of the signers all conditions precedent provided for in the Indenture relating to such cancellation, discharge, reconveyance, assignment and delivery have been complied with.
Bonds which are no longer Outstanding shall be deemed to be paid within the meaning of the Indenture; provided that if Bonds are to be redeemed prior to the maturity thereof, notice of such redemption shall have been duly given or provision and expenses satisfactory to the Trustee shall have been made therefor.
The cancellation and discharge of the Indenture, however, shall be without prejudice to the right of the Trustee to be paid any compensation then due to it thereunder, and to be protected and saved harmless by the University from any and all losses and liabilities incurred, costs and expenses, including reasonable counsel fees and expenses, at any time incurred by the Trustee thereunder or connected with any Bond issued thereunder of and from which, if the Indenture had not been cancelled and discharged, the University would have been obligated by the terms of the Indenture to protect and save the Trustee harmless, and the University thereby covenants to protect and save the Trustee harmless of and from such losses, liabilities, costs and expenses.
Bonds Not Presented for Payment
If any Bond shall not be presented for payment when the principal thereof becomes due, either at maturity or otherwise, or at the date fixed for the redemption thereof, and if the University shall have deposited in trust with the Trustee, or left with it in trust if previously so deposited, funds sufficient to pay the principal of such Bond, together with all interest due thereon to the date of maturity thereof or to the date fixed for the redemption thereof, for the benefit of the Owner thereof, respectively, all liability of the University to the Owner of such Bond for the payment of the principal thereof and interest thereon shall forthwith cease, determine and be completely discharged, and thereupon it shall be the duty of the Trustee, subject to the provisions of the Indenture, to hold said fund or funds, uninvested and without liability for interest thereon, for the benefit of the Owner of such Bond, as the case may be, who shall thereafter be restricted exclusively to said fund or funds, or to any fund or funds in the hands of any paying agent thereunder, for any claim of whatsoever nature on such Owner’s part under the Indenture or on, or with respect to, said Bond.
MISCELLANEOUS PROVISIONS
Limitation of Rights Under Indenture to Parties and Bond Owners
Nothing in the Indenture expressed or implied is intended or shall be construed to confer upon, or to give to, any person, other than the parties thereto, their successors and assigns, and the owners of the Bonds, any right, remedy or claim under or by reason of the Indenture or any covenant, condition or stipulation thereof; and the covenants, stipulations and agreements in the Indenture contained are and shall be for the sole and exclusive benefit of the parties thereto, their successors and assigns, and the owners of the Bonds.
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APPENDIX D
PROPOSED FORM OF BOND COUNSEL OPINION
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Proposed Form of Bond Counsel Opinion
June 3, 2015
The Pennsylvania State University State College, Pennsylvania
Barclays Capital Inc. New York, New York
The Bank of New York Mellon Trust Company, N.A. Pittsburgh, Pennsylvania
Re: $65,210,000 The Pennsylvania State University Bonds Series A of 2015 (the “Series 2015A Bonds”) and $116,955,000 The Pennsylvania State University Bonds Series B of 2015 (the “Series 2015B Bonds”)
We have acted as Bond Counsel in connection with the authorization, issuance and sale by The Pennsylvania State University (the “Issuer”) of the above-referenced bonds (the “2015 Bonds”). The 2015 Bonds are being issued under and pursuant to a Resolution enacted by the Board of Trustees of the University on September 20, 2013 and the Trust Indenture dated as of June 1, 2015 (the “Indenture”) between the Issuer and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). All initially capitalized terms used, but not otherwise defined, herein shall have the meanings set forth in the Indenture.
The Series 2015A Bonds are being issued for the purpose of providing funds which, together with other available funds of the Issuer, will be applied to finance: (1) the acquisition, construction and equipping of two data center facilities to house computer systems and associated components, including telecommunication, storage and disaster recovery systems, one located at the Penn State University Park Campus and one located at the Penn State Hershey Campus; (2) the acquisition, construction and equipping of a student enrichment center located at the Harrisburg Campus; (3) the acquisition, construction and equipping of a housing and food service warehouse and the expansion of a bakery located at the Penn State University Park Campus; (4) other capital projects consistent with the University’s capital plan; and (5) the payment of all or a portion of the costs of issuance of the 2015 Bonds (collectively, the “New Money Project”).
The Series 2015B Bonds are being issued for the purpose of providing funds to finance (1) the current refunding of all of the outstanding The Pennsylvania State University Bonds Series 2004A and The Pennsylvania State University Bonds, Series 2005 Bonds; and (2) the payment of all or a portion of the costs of issuance of the 2015 Bonds (collectively, the “Refunding Project”).
The Issuer has made certain covenants designed to assure compliance with the requirements of the Internal Revenue Code of 1986, as amended (the “Code”), including that it will not, directly or indirectly, use or permit the use of any proceeds of the 2015 Bonds or any other funds of the Issuer, or take or omit to take any action, that would cause the 2015 Bonds to be arbitrage bonds within the meaning of the Code. The Issuer has further covenanted that it will comply with all requirements of Section 148 of the Code to the extent applicable to the 2015 Bonds, including the requirements of Section 148(f) of the Code which provides for the rebate of certain arbitrage profits to the United States. Officers of the Issuer responsible for issuing the 2015 Bonds have executed a certificate The Pennsylvania State University Barclays Capital Inc. The Bank of New York Trust Company, N.A. June 3, 2015 Page 2 stating the reasonable expectations of the Issuer on the date of issue as to future events that are material for purposes of the Code pertaining to arbitrage and the exclusion of interest on the 2015 Bonds from the gross income of the holders thereof for federal income tax purposes (the “Tax Certificate”). Also, the Issuer has caused or will cause to be filed with the Internal Revenue Service the applicable reports of the issuance of the 2015 Bonds, as required by Section 149(e) of the Code as a condition of the exclusion from gross income of the interest on the 2015 Bonds.
In our capacity as Bond Counsel, we have examined such matters of law and fact and such documents, records of the Issuer and other instruments as we deemed necessary, including original counterparts, or certified copies of all documents listed in the Closing Index in connection with the issuance of the 2015 Bonds, in order to enable us to render the opinions set forth below. We have also examined an executed Bond and assume that all other 2015 Bonds have been similarly executed and delivered.
In rendering the opinions set forth below, we have relied upon the genuineness, accuracy and completeness of all documents, records, certifications and other instruments we have examined, including, without limitation, the authenticity of all signatures appearing thereon.
On the basis of the foregoing, we are of the opinion that:
1. The Issuer has been duly incorporated under the laws of the Commonwealth of Pennsylvania and is validly existing under Pennsylvania law, with full power and authority to undertake the New Money Project and the Refunding Project, to execute and deliver and perform its obligations under the Indenture and to issue and sell the 2015 Bonds.
2. The Indenture has been duly authorized, executed and delivered by the Issuer and, assuming due authorization, execution and delivery by the other parties thereto, constitutes the legal, valid and binding obligation of the Issuer, enforceable in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws or equitable principles affecting the enforcement of creditors’ rights.
3. The issuance and sale of the 2015 Bonds has been duly authorized by the Issuer; the 2015 Bonds have been duly executed and delivered by the Issuer; and, on the assumption that all 2015 Bonds have been authenticated by the Trustee, such 2015 Bonds are entitled to the benefit and security of the Indenture and the trust created thereby and are legal, valid and binding obligations of the Issuer, enforceable in accordance with their terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws or equitable principles affecting the enforcement of creditors’ rights.
4. The 2015 Bonds constitute general unsecured obligations of the Issuer, payable solely from the general revenues of the Issuer and all amounts, if any, at any time on deposit in or standing to the credit of the funds and accounts (other than the Rebate Fund) established pursuant to the Indenture, together with interest earnings, if any, on amounts in such funds and accounts (other than the Rebate Fund).
5. Assuming the accuracy of the certifications of the Issuer in the Tax Certificate and its continued compliance with its covenants described therein and herein, under existing law as The Pennsylvania State University Barclays Capital Inc. The Bank of New York Trust Company, N.A. June 3, 2015 Page 3 enacted and construed on the date hereof, interest on the 2015 Bonds is excludable from gross income of the holders thereof for federal income tax purposes. Interest on the 2015 Bonds is not an item of tax preference under the Code for purposes of determining the alternative minimum tax imposed on individuals and corporations; however, interest on the 2015 Bonds is taken into account in determining adjusted current earnings for purposes of the alternative minimum tax imposed on certain corporations.
6. Under the laws of the Commonwealth of Pennsylvania as enacted and construed on the date hereof, the 2015 Bonds are exempt from personal property taxes in Pennsylvania and interest on the 2015 Bonds is exempt from Pennsylvania personal income tax and Pennsylvania corporate net income tax.
Except as expressly stated in paragraphs 5 and 6 of this opinion, we express no opinion as to any federal, state or local tax consequences of the ownership of, receipt of interest on, or disposition of, the 2015 Bonds. In giving the opinions set forth in such paragraphs, we have assumed the accuracy of certain representations made by the Issuer, which we have not independently verified, and compliance by the Issuer with covenants described herein and in the Tax Certificate that must be satisfied subsequent to the issuance of the 2015 Bonds. We call your attention to the fact that interest on the 2015 Bonds may become subject to federal income taxation retroactively to the date hereof if such representations or assumptions are determined to have been inaccurate or if the Issuer fails to comply with one or more of such covenants. We have not undertaken to monitor compliance with such covenants or to advise any party as to changes in law or events that may take place after the date hereof that may affect the tax status of interest on the 2015 Bonds.
This opinion is given as of the date hereof, and we assume no obligation to update, revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention, or any changes in law that may hereafter occur.
Very truly yours,
Greenberg Traurig, LLP
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