Armstrong State University, Savannah, Georgia, management report for fiscal year ended 2017 June 30

ARMSTRONG STATE UNIVERSITY
SAVANNAH, GEORGIA
MANAGEMENT REPORT FOR FISCAL YEAR ENDED JUNE 30, 2017
A Member Institution of the University System of Georgia

ARMSTRONG STATE UNIVERSITY - TABLE OF CONTENTS -

SECTION I
FINANCIAL
LETTER OF TRANSMITTAL
SELECTED FINANCIAL INFORMATION
EXHIBITS
A STATEMENT OF NET POSITION - (GAAP BASIS) B STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION -
(GAAP BASIS) C STATEMENT OF CASH FLOWS - (GAAP BASIS) D SELECTED FINANCIAL NOTES
SUPPLEMENTARY INFORMATION
SCHEDULES
1 BALANCE SHEET - (STATUTORY BASIS) BUDGET FUND 2 SUMMARY BUDGET COMPARISON AND SURPLUS ANALYSIS REPORT
(STATUTORY BASIS) BUDGET FUND 3 STATEMENT OF FUNDS AVAILABLE AND EXPENDITURES COMPARED TO BUDGET
BY PROGRAM AND FUNDING SOURCE (STATUTORY BASIS) BUDGET FUND
4 STATEMENT OF CHANGES TO FUND BALANCE BY PROGRAM AND FUNDING SOURCE (STATUTORY BASIS) BUDGET FUND

Page
2 3 4 6
24 25 26 28

SECTION II FINDINGS, QUESTIONED COSTS AND OTHER ITEMS SCHEDULE OF FINDINGS, QUESTIONED COSTS AND OTHER ITEMS

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SECTION I FINANCIAL

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Greg S. Griffin
STATE AUDITOR
(404) 656-2174

DEPARTMENT OF AUDITS AND ACCOUNTS
270 Washington Street, S.W., Suite 1-156 Atlanta, Georgia 30334-8400
August 31, 2017

Honorable Nathan Deal, Governor Members of the General Assembly of Georgia Members of the State Board of Regents of the University System of Georgia
and Dr. Jennifer L. Frum, Interim President Armstrong State University
Ladies and Gentlemen:
This Management Report contains information pertinent to the Armstrong State University's compliance with the requirements of the Southern Association of Colleges and Schools Commission on Colleges (COC) Core Requirement 2.11.1 (Financial resources) of as of and for the year ended June 30, 2017. Additionally, we audited Armstrong State University's Federal Student Aid programs for the year ended June 30, 2017 to meet the requirements of COC Comprehensive Standard 3.10.2. Included in this report is a section on findings and other items for any matters that came to our attention during our engagement, including results of our audit of the Federal Student Aid programs. The other information contained in this report is the representation of management. Accordingly, we do not express an opinion or any form of assurance on it.
Additionally, we have performed certain procedures at Armstrong State University to support our audit of the basic financial statements of the State of Georgia presented in the State of Georgia Comprehensive Annual Financial Report and the issuance of a State of Georgia Single Audit Report pursuant to the Single Audit Act Amendments, as of and for the year ended June 30, 2017.
This report is intended solely for the information and use of the management of Armstrong State University, members of the Board of Regents of the University System of Georgia and the Southern Association of Colleges and Schools - Commission on Colleges and is not intended to be and should not be used by anyone other than these specified parties.
Respectfully,

Greg S. Griffin State Auditor

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SELECTED FINANCIAL INFORMATION - 1 -

ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY As defined by Official Code of Georgia Annotated (O.C.G.A) 20-3-50, Armstrong State University (the Institution) is part of the University System of Georgia (USG), an organizational unit of the State of Georgia (the State) under the governance of the Board of Regents (Board). The Board has constitutional authority to govern, control and manage the USG. The Board is composed of 19 members, one member from each congressional district in the State and five additional members from the state-at-large, appointed by the Governor and confirmed by the Senate. Members of the Board serve a seven year term and members may be reappointed to subsequent terms by a sitting governor.
The Institution does not have the right to sue/be sued without recourse to the State. The Institution's property is the property of the State and subject to all the limitations and restrictions imposed upon other property of the State by the Constitution and laws of the State. In addition, the Institution is not legally separate from the State. Accordingly, the Institution is included within the State's basic financial statements as part of the primary government as defined in section 2100 of the Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards.
The accompanying basic financial statements are intended to supplement the State's Comprehensive Annual Financial Report (CAFR) by presenting the financial position and changes in financial position and cash flows of only that portion of the business-type activities of the State that is attributable to the transactions of the Institution. They do not purport to, and do not, present fairly the financial position of the State as of June 30, 2017, the changes in its financial position or its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying basic financial statements should be read in conjunction with the State's CAFR. The State's CAFR as of and for the year ended June 30, 2017 has not been issued as of the release of this report. The most recent State of Georgia CAFR can be obtained through the State Accounting Office, 200 Piedmont Avenue, Suite 1604 (West Tower), Atlanta, Georgia 30334 or found at https://sao.georgia.gov/comprehensive-annual-financial-reports.
BASIS OF ACCOUNTING AND FINANCIAL STATEMENT PREPARATION The financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) as prescribed by the GASB and are presented as required by these standards to provide a comprehensive, entity-wide perspective of the Institution's assets, deferred outflows, liabilities, deferred inflows, net position, revenues, expenses, changes in net position and cash flows.
The Institution's business-type activities financial statements have been presented using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. Grants and similar items are recognized as revenues in the fiscal year in which eligibility requirements imposed by the provider have been met. All significant intra-Institution transactions have been eliminated.

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

NEW ACCOUNTING PRONOUNCEMENTS For fiscal year 2017, the Institution adopted Governmental Accounting Standards Board (GASB) Statement No. 82, Pension Issues-an amendment of GASB Statements No. 67, No. 68, and No. 73. This Statement addresses accounting and financial reporting issues regarding (1) the presentation of payroll-related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (plan member) contribution requirements.
For fiscal year 2017, the Institution adopted Governmental Accounting Standards Board (GASB) Statement No. 80, Blending Requirements for Certain Component Units-an amendment of GASB Statement No. 14. This statement amends the blending requirements for the financial statement presentation of component units of all state and local governments. The additional criterion requires blending of a component unit incorporated as a not-for-profit corporation in which the primary government is the sole corporate member. The additional criterion does not apply to component units included in the financial reporting entity pursuant to the provisions of Statement No. 39, Determining Whether Certain Organizations Are Component Units. The adoption of this statement does not have a significant impact on the Institution's financial statements.
For fiscal year 2017, the Institution adopted GASB Statement No. 78, Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans. The objective of this statement is to address a practice issue regarding the scope and applicability of Statement No. 68, Accounting and Financial Reporting for Pensions. The adoption of this statement does not have a significant impact on the Institution's financial statements.
For fiscal year 2017, the Institution adopted GASB Statement No. 77, Tax Abatement Disclosures. This statement requires governments that enter into tax abatement agreements to disclose certain information about the agreements. The adoption of this statement does not have a significant impact on the Institution's financial statements.
For fiscal year 2017, the Institution adopted GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. This statement replaces Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. It also includes requirements for defined contribution other postemployment benefit (OPEB) plans that replace the requirements for those OPEB plans in Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, as amended, Statement No. 43, and Statement No. 50, Pension Disclosures. The objective of this statement is to improve the usefulness of information about postemployment benefits other than pensions. The adoption of this statement does not have a significant impact on the Institution's financial statements.

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

DUE FROM USO - CAPITAL LIABILITY RESERVE FUND The Capital Liability Reserve Fund (Fund) was established by the Board of Regents to protect the fiscal integrity of the USG to maintain the strongest possible credit ratings associated with Public Private Venture (PPV) projects and to ensure that the Board of Regents can effectively support its long-term capital lease obligations. The Fund is financed by all USG institutions participating in the PPV program. The Fund serves as a pooled reserve that is managed by the University System Office. The Fund shall only be used to address significant shortfalls and only insofar as a requesting USG institution is unable to make the required PPV capital lease payment to the designated cooperative organization. The Fund will continue as long as the USG has rental obligations under the PPV program. At the conclusion of the Institution's participation in the program, funds will be returned to the Institution. The balance included on the Institution's Statement of Net Position represents the Institution's contribution to the Fund.
NET POSITION The Institution's net position is classified as follows:
Net Investment in Capital Assets: This represents the Institution's total investment in capital assets, net of accumulated amortization/depreciation and reduced by outstanding debt obligations related to those capital assets. Deferred outflows of resources and deferred inflows of resources that are attributable to the acquisition, construction or improvement of capital assets or related debt are included in Net Investment in Capital Assets. If there are significant unspent related debt proceeds or deferred inflows of resources at the end of the reporting period, the portion of the debt or deferred inflows of resources attributable to the unspent amount are not included in Net Investment in Capital Assets.
Restricted non-expendable: includes endowment and similar type funds, in which donors or other outside sources have stipulated, as a condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may be either expended or added to principal. For Institution-controlled, donorrestricted endowments, the by-laws of the Board of Regents of the University System of Georgia permits each individual Institution to use prudent judgment in the spending of current realized and unrealized endowment appreciation. Donor-restricted endowment appreciation is periodically transferred to restricted-expendable accounts for expenditure as specified by the purpose of the endowment. The Institution maintains pertinent information related to each endowment fund including donor; amount and date of donation; restrictions by the source of limitations; limitations on investments, etc.
Restricted expendable: includes resources in which the Institution is legally or contractually obligated to spend resources in accordance with restrictions by external third parties.
Unrestricted: Unrestricted represents resources derived from student tuition and fees, state appropriations, and sales and services of educational departments and auxiliary enterprises. These resources are used for transactions relating to the educational and general operations of the Institution, and may be used at the discretion of the Institution to meet current expenses for those purposes, except for unexpended state appropriations (surplus) in the amount of $32,980.84. Unexpended state appropriations must be refunded to the Office of the State Treasurer. The resources also include auxiliary enterprises, which are substantially self-supporting activities that provide services for students, faculty and staff.

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

SCHOLARSHIP ALLOWANCES Scholarship allowances are the differences between the stated charge for goods and services provided by the Institution, and the amount that is paid by students and/or third parties making payments on the students' behalf. Certain governmental grants, such as Pell grants, and other Federal, state or nongovernmental programs are recorded as either operating or non-operating revenues in the Institution's financial statements. To the extent that revenues from such programs are used to satisfy tuition and fees and other student charges, the Institution has recorded contra revenue for scholarship allowances. Student tuition and fees and auxiliary revenues reported on the Statement of Revenues, Expenses and Changes in Net Position are net of discounts and allowances of $12,097,606 and $86,438, respectively.
NOTE 2: DEPOSITS AND INVESTMENTS
DEPOSITS The custodial credit risk for deposits is the risk that in the event of a bank failure, the Institution's deposits may not be recovered. Funds belonging to the State of Georgia (and thus the Institution) cannot be placed in a depository paying interest longer than ten days without the depository providing a surety bond to the State. In lieu of a surety bond, the depository may pledge as collateral any one or more of the following securities as enumerated in the Official Code of Georgia Annotated Section 50-17-59:
1. Bonds, bills, notes, certificates of indebtedness, or other direct obligations of the United States or of the State of Georgia.
2. Bonds, bills, notes, certificates of indebtedness or other obligations of the counties or municipalities of the State of Georgia.
3. Bonds of any public authority created by the laws of the State of Georgia, providing that the statute that created the authority authorized the use of the bonds for this purpose.
4. Industrial revenue bonds and bonds of development authorities created by the laws of the State of Georgia.
5. Bonds, bills, certificates of indebtedness, notes or other obligations of a subsidiary corporation of the United States government, which are fully guaranteed by the United States government both as to principal and interest and debt obligations issued by the Federal Land Bank, the Federal Home Loan Bank, the Federal Intermediate Credit Bank, the Central Bank for Cooperatives, the Farm Credit Banks, the Federal Home Loan Mortgage Association and the Federal National Mortgage Association.
6. Guarantee or insurance of accounts provided by the Federal Deposit Insurance Corporation. The Treasurer of the Board of Regents is responsible for all details relative to furnishing the required depository protection for all units of the University System of Georgia.

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

At June 30, 2017, the carrying value of deposits was $14,224,469 and the bank balance was $15,990,783. Of the Institution's deposits, $15,990,783 were uninsured. Of these uninsured deposits, $15,990,783 were collateralized with securities held by the financial institution's trust department or agency, but not in the Institution's name.

INVESTMENTS At June 30, 2017, the carrying value of the Institution's investments were $8,533,994, which is materially the same as fair value. These investments were comprised entirely of funds invested in the Board of Regents investment pools as follows:

Investment Pools Board of Regents Short-Term Fund Diversified Fund

$ 5,155,375 3,378,619

Total Investment Pools

$ 8,533,994

The Board of Regents Investment Pool is not registered with the Securities and Exchange Commission as an investment company. The fair value of investments is determined daily. The pool does not issue shares. Each participant is allocated a pro rata share of each investment at fair value along with a pro rata share of the interest that it earns. Participation in the Board of Regents Investment Pool is voluntary. The Board of Regents Investment Pool is not rated. Additional information on the Board of Regents Investment Pool is disclosed in the audited Financial Statements of the University System of Georgia. This audit can be obtained from the Georgia Department of Audits and Accounts Education Audit Division or on their web site at http://www.audits.ga.gov.

NOTE 3: ACCOUNTS RECEIVABLE Accounts receivable consisted of the following at June 30, 2017:

Student Tuition and Fees Auxiliary Enterprises and Other Operating Activities Federal Financial Assistance Georgia State Financing and Investment Commission Due from Affiliated Organizations Due from Other USG Institutions Other
Less Allowance for Doubtful Accounts
Net Accounts Receivable

$

1,107,120

839,955

963,951

793,146

10,613

220,862

666,149

4,601,796 359,302

$

4,242,494

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

NOTE 4: CAPITAL ASSETS

Following are the changes in capital assets for the year ended June 30, 2017:

Beginning

Balance

July 1, 2016

Additions

Reductions

Capital Assets, Not Being Depreciated:

Land

$

5,318,254 $

- $

- $

Construction Work-In-Progress

3,462,670

2,660,633

6,122,289

Ending Balance June 30, 2017
5,318,254 1,014

Total Capital Assets Not Being Depreciated

8,780,924

2,660,633

6,122,289

5,319,268

Capital Assets, Being Depreciated: Infrastructure Building and Building Improvements Facilities and Other Improvements Equipment Library Collections Capitalized Collections Total Capital Assets Being Depreciated/Amortized

3,782,462 139,277,403
3,246,634 12,375,002 10,835,372
16,575 169,533,448

356,416 4,050,395 1,865,755
320,581 362,501
6,955,648

155,287 433,684 19,139 608,110

4,138,878 143,327,798
4,957,102 12,261,899 11,178,734
16,575 175,880,986

Less: Accumulated Depreciation: Infrastructure Building and Building Improvements Facilities and Other Improvements Equipment Library Collections Capitalized Collections Total Accumulated Depreciation/Amortization
Total Capital Assets, Being Depreciated/Amortized, Net

1,801,932 46,067,086
2,121,195 8,706,079 10,259,224
7,018 68,962,534
100,570,914

143,510 3,603,376
161,129 1,005,448
216,314 414
5,130,191
1,825,457

Capital Assets, Net

$ 109,351,838 $ 4,486,090 $

275,116 19,139 294,255
313,855
6,436,144 $

1,945,442 49,670,462
2,282,324 9,436,411 10,456,399
7,432 73,798,470
102,082,516
107,401,784

A comparison of depreciation expense for the last three fiscal years is as follows:

Fiscal Year

Depreciation Expense

2017 2016 2015

$

5,130,191

$

5,017,090

$

6,715,967

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

NOTE 5: ADVANCES (INCLUDING TUITION AND FEES) Advances (Including Tuitions and Fees) consisted of the following at June 30, 2017:

Prepaid Tuition and Fees Other - Advances
Total Unearned Revenue

$ 2,432,809 434,296
$ 2,867,105

NOTE 6: LONG-TERM LIABILITIES The Institution's Long-Term Liability activity for the year ended June 30, 2017 was as follows:

Beginning Balance July 1, 2016

Additions

Reductions

Ending Balance June 30, 2017

Current Portion

Leases Lease Obligations

$ 38,938,031 $

673,694 $

953,523 $

38,658,202 $

1,238,420

Other Liabilities Compensated Absences Net Pension Liability

1,936,777 24,075,146

1,381,009 7,545,928

1,333,972 139,364

1,983,814 31,481,710

1,388,670

Total

26,011,923

8,926,937

1,473,336

33,465,524

1,388,670

Total Long-Term Obligations $ 64,949,954 $

9,600,631 $

2,426,859 $

72,123,726 $

2,627,090

NOTE 7: NET POSITION

Changes in Net Position for the year ended June 30, 2017 are as follows:

Beginning

Balance

July 1, 2016

Additions

Reductions

Ending Balance June 30, 2017

Net Investment in Capital Assets

$ 66,920,129 $

4,447,515 $ 4,941,351 $ 66,426,293

Restricted Net Position

3,291,750

17,779,960

17,268,944

3,802,766

Unrestricted Net Position

(6,224,552)

83,616,099

82,031,018

(4,639,471)

Total Net Position

$ 63,987,327 $ 105,843,574 $ 104,241,313 $ 65,589,588

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

The amounts within each category at June 30, 2017 were as follows:

NET POSITION

Net Investment in Capital Assets

$

Restricted for Nonexpendable Permanent Endowment

Expendable Restricted E&G and Other Organized Activities

Unrestricted Auxiliary Operations Reserve for Encumbrances Other Unrestricted USO Reserve Fund

Total Unrestricted

TOTAL NET POSITION

$

66,426,293
3,479,659
323,107
19,378,658 2,813,625
(27,052,616) 220,862
(4,639,471) 65,589,588

NOTE 8: ENDOWMENTS
Donor Restricted Endowments: Investments of the Institution's endowment funds are pooled, unless required to be separately invested by the donor. For Institution controlled, donor-restricted endowments, where the donor has not provided specific instructions, the Board of Regents permits Institutions to develop policies for authorizing and spending realized and unrealized endowment income and appreciation as they determined to be prudent. Realized and unrealized appreciation in excess of the amount budgeted for current spending is retained by the endowments. Current year net appreciation for the endowment accounts was $290,108 and is reflected as expendable restricted net position.
For endowment funds where the donor has not provided specific instructions, investment return of the Institution's endowment funds is predicated on the total return concept. Annual payouts from the Institution's endowment funds are based on a spending policy which limits spending to 4.25% of the endowments principal's market value. To the extent that the total return for the current year exceeds the payout, the excess is added to principal. If current year earnings do not meet the payout requirements, the Institution uses accumulated income and appreciation from restricted expendable net asset endowment balances to make up the difference.
NOTE 9: LEASE OBLIGATIONS
The Institution is obligated under various capital and operating leases for the acquisition or use of real property and equipment.

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

CAPITAL LEASES Capital leases are generally payable in installments ranging from monthly to annually and have terms expiring in various years between 2017 and 2039. Expenditures for fiscal year 2017 were $2,520,385 of which $1,566,862 represented interest. Total principal paid on capital leases was $953,523 for the fiscal year ended June 30, 2017. Interest rates range from 2.00 percent to 5.00 percent. The following is a summary of the carrying values of assets held under capital lease at June 30, 2017:

Outstanding

Net Assets Held

Balances

Under Capital

per Lease

Accumulated

Lease at

Schedules at

Description

Gross Amount

Depreciation

June 30, 2017

June 30, 2017

(+)

(-)

(=)

Leased Buildings & Building Improvements $

51,688,801 $ 15,957,413 $ 35,731,388 $ 38,658,202

Certain capital leases provide for renewal and/or purchase options. Generally purchase options at bargain prices of one dollar are exercisable at the expiration of the lease terms.

The following capital lease schedule lists the pertinent information for each lease including the building name, lessor, total principal amount, lease term, lease begin date, lease end date, and remaining long-term debt as of June 30, 2017.

Description

Lessor (1)

CAPITAL LEASE SCHEDULE

Original Principal

Lease Term

Begin Date

End Date

Outstanding Principal Balance at
June 30, 2017

Student Rec Center Armstrong Center Student Union

EPFI Foundation $ EPFI Foundation EPFI Foundation

5,284,696 17,506,253 23,162,477

26 Years 26 Years 26 Years

July 2006 June 2010 March 2010

May 2033 $ May 2035 June 2039

12,042,032 3,374,124
23,242,046

Total Leases

$ 45,953,426

(1) These capital leases are with related entities.

$

38,658,202

OPERATING LEASES The Institution's non-cancellable operating leases have remaining terms of more than one year expire in various fiscal years from 2018 through 2021. All agreements are cancellable if the State of Georgia does not provide adequate funding, but that is considered a remote possibility. In the normal course of business, operating leases are generally renewed or replaced by other leases. Operating leases are generally payable on a monthly basis.
Facilities and equipment rented through operating leases are not recorded as assets on the balance sheet. Operating lease expenditures totaled $819,819 for the fiscal year ended June 30, 2017.

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

FUTURE COMMITMENTS Future commitments for capital leases (which here and on the Statement of Net Position includes other installment purchase agreements) and for noncancellable operating leases having remaining terms in excess of one year as of June 30, 2017, were as follows:

Real Property and Equipment

Capital

Operating

Leases

Leases

Year Ending June 30:
2018 2019 2020 2021 2022 2023 - 2027 2028 - 2032 2033 - 2037 2038 - 2042

$

2,715,525 $

2,734,680

2,771,216

2,762,477

2,749,801

14,005,579

14,120,713

11,036,523

3,230,006

842,967 796,374 844,873
70,577 -

Total Minimum Lease Payments

56,126,520 $

2,554,791

Less: Interest

17,468,318

Principal Outstanding

$ 38,658,202

NOTE 10: RETIREMENT PLANS
The Institution participates in various retirement plans administered by the State of Georgia under two major retirement systems: Teachers Retirement System of Georgia (TRS) and Employees' Retirement System of Georgia (ERS). These two systems issue separate publicly available financial reports that include the applicable financial statements and required supplementary information. The reports may be obtained from the respective administrative offices.
The significant retirement plans that the Institution participates in are described below. More detailed information can be found in the plan agreements and related legislation. Each plan, including benefit and contribution provisions, was established and can be amended by State law.
A. Defined Benefit Plans:
Teachers Retirement System of Georgia and Employees' Retirement System of Georgia
Summary of Significant Accounting Policies
Pensions: For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Teachers Retirement System of Georgia (TRS) and Employees' Retirement System (ERS), additions to/deductions for TRS's and ERS's fiduciary net position have been determined on the same basis as they are reported by TRS and ERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value.
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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

General Information about the Teachers Retirement System
Plan description: All teachers of the Institution as defined in 47-3-60 of the Official Code of Georgia Annotated (O.C.G.A.) are provided a pension through the Teachers Retirement System of Georgia (TRS). TRS, a cost-sharing multiple-employer defined benefit pension plan, is administered by the TRS Board of Trustees (TRS Board). Title 47 of the O.C.G.A. assigns the authority to establish and amend the benefit provisions to the State Legislature. TRS issues a publicly available financial report that can be obtained at www.trsga.com/publications.
Benefits provided: TRS provides service retirement, disability retirement, and death benefits. Normal retirement benefits are determined as 2% of the average of the employee's two highest paid consecutive years of service, multiplied by the number of years of creditable service up to 40 years. An employee is eligible for normal service retirement after 30 years of creditable service, regardless of age, or after 10 years of service and attainment of age 60. Ten years of service is required for disability and death benefits eligibility. Disability benefits are based on the employee's creditable service and compensation up to the time of disability. Death benefits equal the amount that would be payable to the employee's beneficiary had the employee retired on the date of death. Death benefits are based on the employee's creditable service and compensation up to the date of death.
Contributions: Per Title 47 of the O.C.G.A., contribution requirements of active employees and participating employers, as actuarially determined, are established and may be amended by the TRS Board. Contributions are expected to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. Employees were required to contribute 6% of their annual pay during fiscal year 2017. The Institution's contractually required contribution rate for the year ended June 30, 2017 was 14.27% of annual Institution payroll. Institution contributions to TRS were $2,579,780 for the year ended June 30, 2017.
General Information about the Employees' Retirement System
Plan description: ERS is a cost-sharing multiple-employer defined benefit pension plan established by the Georgia General Assembly during the 1949 Legislative Session for the purpose of providing retirement allowances for employees of the State of Georgia and its political subdivisions. ERS is directed by a Board of Trustees. Title 47 of the O.C.G.A. assigns the authority to establish and amend the benefit provisions to the State Legislature. ERS issues a publicly available financial report that can be obtained at www.ers.ga.gov/formspubs/formspubs.
Benefits provided: The ERS Plan supports three benefit tiers: Old Plan, New Plan, and Georgia State Employees' Pension and Savings Plan (GSEPS). Employees under the old plan started membership prior to July 1, 1982 and are subject to plan provisions in effect prior to July 1, 1982. Members hired on or after July 1, 1982 but prior to January 1, 2009 are new plan members subject to modified plan provisions. Effective January 1, 2009, new state employees and rehired state employees who did not retain membership rights under the Old or New Plans are members of GSEPS. ERS members hired prior to January 1, 2009 also have the option to irrevocably change their membership to GSEPS.
Under the old plan, the new plan, and GSEPS, a member may retire and receive normal retirement benefits after completion of 10 years of creditable service and attainment of age 60 or 30 years of creditable service regardless of age. Additionally, there are some provisions allowing for early retirement after 25 years of creditable service for members under age 60.

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

Retirement benefits paid to members are based upon the monthly average of the member's highest 24 consecutive calendar months, multiplied by the number of years of creditable service, multiplied by the applicable benefit factor. Annually, postretirement cost-of-living adjustments may also be made to members' benefits, provided the members were hired prior to July 1, 2009. The normal retirement pension is payable monthly for life; however, options are available for distribution of the member's monthly pension, at reduced rates, to a designated beneficiary upon the member's death. Death and disability benefits are also available through ERS.
Contributions: Member contributions under the old plan are 4% of annual compensation, up to $4,200, plus 6% of annual compensation in excess of $4,200. Under the old plan, the state pays member contributions in excess of 1.25% of annual compensation. Under the old plan, these state contributions are included in the members' accounts for refund purposes and are used in the computation of the members' earnable compensation for the purpose of computing retirement benefits. Member contributions under the new plan and GSEPS are 1.25% of annual compensation. The Institution's contractually required contribution rate, actuarially determined annually, for the year ended June 30, 2017 was 24.69% of annual covered payroll for old and new plan members and 21.69% for GSEPS members. The Institution's contributions to ERS totaled $42,239 for the year ended June 30, 2017. Contributions are expected to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability.
Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions
At June 30, 2017, the Institution reported a liability for its proportionate share of the net pension liability for TRS and ERS. The net pension liability was measured as of June 30, 2016. The total pension liability used to calculate the net pension liability was based on an actuarial valuation as of June 30, 2015. An expected total pension liability as of June 30, 2016 was determined using standard roll-forward techniques. The Institution's proportion of the net pension liability was based on contributions to TRS and ERS during the fiscal year ended June 30, 2016. At June 30 2016, the Institution's TRS proportion was 0.151626%, which was a decrease of 0.004287% from its proportion measured as of June 30, 2015. At June 30, 2016, the Institution's ERS proportion was 0.004219%, which was a decrease of 0.004147% from its proportion measured as of June 30, 2015.
For the year ended June 30, 2017, the Institution recognized pension expense of $3,322,114 for TRS and $(92,749) for ERS. At June 30, 2017, the Institution reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:

Differences between expected and actual experience Changes of assumptions Net difference between projected and actual earnings on pension plan investments Changes in proportion and differences between University contributions and proportionate share of contributions University contributions subsequent to the measurement date
Total

Deferred Outflows of Resources

TRS Deferred Inflows of Resources

ERS Deferred Outflows of Resources

Deferred Inflows of Resources

$

466,019 $

154,690 $

- $

461

810,790

-

1,690

-

3,957,319

-

20,291

-

298,625 2,579,780
$ 8,112,533 $

625,628 -
780,318 $

42,239
64,220 $

125,027 -
125,488

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

The Institution contributions subsequent to the measurement date of $2,579,780 for TRS and $42,239 for ERS are reported as deferred outflows of resources and will be recognized as a reduction of the net pension liability in the year ended June 30, 2017. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows:

Year Ended June 30:

TRS

ERS

2018 2019 2020 2021 2022

$

573,356 $

$

573,355 $

$

2,168,245 $

$

1,404,120 $

$

33,359 $

(99,230) (21,997) 10,940
6,780 -

Actuarial assumptions: The total pension liability as of June 30, 2016 was determined by an actuarial valuation as of June 30, 2015 using the following actuarial assumptions, applied to all periods included in the measurement:

Teachers Retirement System:

Inflation Salary increases Investment rate of return

2.75% 3.25 9.00%, average, including inflation 7.50%, net of pension plan investment expense, including inflation

Post-retirement mortality rates were based on the RP-2000 White Collar Mortality Table with future mortality improvement projected to 2025 with the Society of Actuaries' projection scale BB (set forward on year for males) for service retirements and dependent beneficiaries. The RP-2000 Disability Mortality Table with future mortality improvement projected to 2025 with Society of Actuaries' projection scale BB (set forward two years for males and four years for females) was used for death after disability retirement. Rates of mortality in active service were based on the RP-2000 Employee Mortality Table projected to 2025 with projection scale BB.

The actuarial assumptions used in the June 30, 2015 valuation were based on the results of an actuarial experience study for the period July 1, 2009 June 30, 2014.

Employees' Retirement System:

Inflation Salary increases Investment rate of return

2.75%
3.25 7.00%, including inflation 7.50%, net of pension plan investment expense, including inflation

Post-retirement mortality rates were based on the RP-2000 Combined Mortality Table with future mortality improvement projected to 2025 with the Society of Actuaries' projection scale BB and set forward 2 years for both males and females for service retirements and dependent beneficiaries. The RP-2000 Disabled Mortality Table with future mortality improvement projected to 2025 with Society of Actuaries' projection scale BB and set back 7 years for males and set forward 3 years for females was used for death after disability retirement. There is a margin for future mortality improvement in the tables used by the System. Based on the results of the most recent experience study adopted by the Board on December 17, 2015, the numbers of expected future deaths

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

are 9-12% less than the actual number of deaths that occurred during the study period for service retirements and beneficiaries and for disability retirements. Rates of mortality in active service were based on the RP-2000 Employee Mortality Table projected to 2025 with projection scale BB.

The actuarial assumptions used in the June 30, 2015 valuation were based on the results of an actuarial experience study for the period July 1, 2009 June 30, 2014.

The long-term expected rate of return on TRS and ERS pension plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected nominal returns, net of pension plan investment expense and the assumed rate of inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table:

Asset class

TRS Target Allocation

Long-Term ERS Target Expected Real Allocation Rate of Return*

Fixed income Domestic large equities Domestic mid equities Domestic small equities International developed market equities International emerging market equities Alternatives

30.00% 39.80%
3.70% 1.50% 19.40% 5.60% 0.00%

30.00% 37.20%
3.40% 1.40% 17.80% 5.20% 5.00%

(0.50)% 9.00%
12.00% 13.50%
8.00% 12.00% 10.50%

Total

100.00% 100.00%

* Rates shown are net of the 2.75% assumed rate of inflation

Discount rate: The discount rate used to measure the total TRS and ERS pension liability was 7.50%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that employer and State of Georgia contributions will be made at rates equal to the difference between actuarially determined contribution rates and the member rate. Based on those assumptions, the TRS and ERS pension plan's fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability.

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

Sensitivity of the Institution's proportionate share of the net pension liability to changes in the discount rate: The following presents the Institution's proportionate share of the net pension liability calculated using the discount rate of 7.50%, as well as what the Institution's proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentage-point lower (6.50%) or 1-percentage-point higher (8.50%) than the current rate:

Teachers Retirement System:
Institution's proportionate share of the net pension liability

1% Decrease (6.50%)

Current discount rate
(7.50%)

1% Increase (8.50%)

$ 48,691,028 $ 31,282,134 $ 16,948,780

Employees' Retirement System:
University's proportionate share of the net pension liability

1% Decrease (6.50%)

Current discount rate
(7.50%)

$

270,463 $

199,576 $

1% Increase (8.50%)
139,167

Pension plan fiduciary net position: Detailed information about the pension plan's fiduciary net position is available in the separately issued TRS and ERS financial reports which are publically available at www.trsga.com/publications and www.ers.ga.gov/formspubs/formspubs, respectively.

B. Defined Contribution Plan

Regents Retirement Plan

Plan Description The Regents Retirement Plan, a single-employer defined contribution plan, is an optional retirement plan that was created/established by the Georgia General Assembly in O.C.G.A. 47-21-1 et.seq. and administered by the Board of Regents of the University System of Georgia. O.C.G.A. 47-3-68(a) defines who may participate in the Regents Retirement Plan. An "eligible university system employee" is a faculty member or all exempt full and partial benefit eligible employees, as designated by the regulations of the Board of Regents. Under the Regents Retirement Plan, a plan participant may purchase annuity contracts from four approved vendors (VALIC, Fidelity, and TIAA-CREF) for the purpose of receiving retirement and death benefits. Benefits depend solely on amounts contributed to the plan plus investment earnings. Benefits are payable to participating employees or their beneficiaries in accordance with the terms of the annuity contracts.

Funding Policy The Institution makes monthly employer contributions for the Regents Retirement Plan at rates adopted by the Teachers Retirement System of Georgia Board of Trustees in accordance with State statute and as advised by their independent actuary. For fiscal year 2017, the employer contribution was 9.24% for the participating employee's earnable compensation. Employees contribute 6% of their earnable compensation. Amounts attributable to all plan contributions are fully vested and nonforfeitable at all times.

The Institution and the covered employees made the required contributions of $1,592,447 (9.24%) and $1,034,056 (6%), respectively.

VALIC, Fidelity, and TIAA-CREF have separately issued financial reports which may be obtained through their respective corporate offices.

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

NOTE 12: RISK MANAGEMENT
The USG offers its employees and retirees under the age of 65 access to four different healthcare plan options. For the USG's Plan Year 2017, the following healthcare plan options were available:
BlueChoice HMO Comprehensive Care Consumer Choice HSA Kaiser Permanente HMO
The Institution, participating employees and retirees pay premiums to the healthcare plan options to access benefits coverage. The respective health plan options are included in the financial statements of the Board of Regents of the University System of Georgia University System Office. All units of the USG share the risk of loss for claims associated with the self-insured plans; including the BlueChoice HMO, Comprehensive Care, and Consumer Choice HSA Plan.
Retirees age 65 and older participate in a secondary healthcare coverage for Medicare-eligible retirees and dependents provided through a retiree healthcare exchange option. The USG makes contributions to a health reimbursement account, which can be used by the retiree to pay premiums and out-ofpocket healthcare-related expenses.
The Department of Administrative Services (DOAS) has the responsibility for the State of Georgia of making and carrying out decisions that will minimize the adverse effects of accidental losses that involve State government assets. The State believes it is more economical to manage its risks internally and set aside assets for claim settlement. Accordingly, DOAS processes claims for risk of loss to which the State is exposed, including general liability, property and casualty, workers' compensation, unemployment compensation, and law enforcement officers' indemnification. Limited amounts of commercial insurance are purchased applicable to property, employee and automobile liability, fidelity and certain other risks.
The Institution, as an organizational unit of the Board of Regents of the University System of Georgia, is part of the State of Georgia reporting entity, and as such, is covered by the State of Georgia risk management program administered by DOAS. Premiums for the risk management program are charged to the various state organizations by DOAS to provide claims servicing and claims payment.
A self-insured program of professional liability for its employees was established by the Board of Regents of the University System of Georgia under powers authorized by the Official Code of Georgia Annotated Section 45-9-1.
The program insures the employees to the extent that they are not immune from liability against personal liability for damages arising out of the performance of their duties or in any way connected therewith. The program is administered by DOAS as a Self-Insurance Fund.
NOTE 13: CONTINGENCIES
Amounts received or receivable from grantor agencies are subject to audit and adjustment by grantor agencies. This could result in refunds to the grantor agency for any expenditure disallowed under grant terms. The amount of expenditures which may be disallowed by the grantor cannot be determined at this time although the Institution expects such amounts, if any, to be immaterial to its overall financial position.

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ARMSTRONG STATE UNIVERSITY SELECTED FINANCIAL NOTES JUNE 30, 2017

EXHIBIT "D"

Litigation, claims and assessments filed against the Institution (an organizational unit of the University System of Georgia), if any, are generally considered to be actions against the State of Georgia. Accordingly, significant litigation, claims and assessments pending against the State of Georgia are disclosed in the State of Georgia Comprehensive Annual Financial Report for the fiscal year ended June 30, 2017.
NOTE 14: POST-EMPLOYMENT BENEFITS OTHER THAN PENSION BENEFITS
Pursuant to the general powers conferred by the Official Code of Georgia Annotated Section 20-3-31, the Board of Regents of the University System of Georgia has established group health and life insurance programs for regular employees of the University System of Georgia. It is the policy of the Board of Regents to permit employees of the University System of Georgia eligible for retirement or that become permanently and totally disabled to continue as members of the group health and life insurance programs. The policies of the Board of Regents of the University System of Georgia define and delineate who is eligible for these post-employment health and life insurance benefits. Organizational units of the Board of Regents of the University System of Georgia pay the employer portion for group insurance for affected individuals. With regard to life insurance, the employer covers the total cost for $25,000 of basic life insurance. If an individual elects to have supplemental, and/or, dependent life insurance coverage, such costs are borne entirely by the employee.
The Board of Regents Retiree Health Benefit Plan is a single-employer, defined benefit plan. Financial statements and required supplementary information for the Plan are included in the publicly available Consolidated Annual Financial Report of the University System of Georgia. The Institution pays the employer portion of health insurance for its eligible retirees based on rates that are established annually by the Board of Regents for the upcoming plan year.
As of June 30, 2017, there were 218 employees who had retired or were disabled that were receiving these post-employment health and life insurance benefits. For the year ended June 30, 2017, the Institution recognized as incurred $1,698,991 of expenditures, which was net of $185,698 of participant contributions.
NOTE 15: SUBSEQUENT EVENT
The Board of Regents of the University System of Georgia (USG) has directed the Chancellor of the USG to pursue consolidation of Georgia Southern University and Armstrong State University, pending Southern Association of Colleges and Schools Commission on Colleges (SACSCOC) approval. If approved by the accreditation agency and the Board of Regents of the University System of Georgia the consolidation will be effective in January 2018.

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SUPPLEMENTARY INFORMATION - 23 -

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SECTION II FINDINGS, QUESTIONED COSTS AND OTHER ITEMS

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ARMSTRONG STATE UNIVERSITY SCHEDULE OF FINDINGS, QUESTIONED COSTS AND OTHER ITEMS
YEAR ENDED JUNE 30, 2017

COMMUNICATION OF INTERNAL CONTROL DEFICIENCIES

The auditor is required to communicate to management and those charged with governance control deficiencies identified during the course of the financial statement audit that, in the auditor's judgment, constitute significant deficiencies or material weakness.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Internal control deficiencies identified during the course of this engagement that were considered to be significant deficiencies and/or material weaknesses are presented below:

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

No matters were reported.

FEDERAL AWARD FINDINGS AND QUESTIONED COSTS

FA -2017-001 Monitoring of Logical Access Controls

Compliance Requirement:
Internal Control Impact: Compliance Impact: Federal Awarding Agency: Pass-Through Entity: CFDA Number and Title: Federal Award Number: Questioned Cost:

Activities Allowed or Unallowed Eligibility Material Weakness Nonmaterial Noncompliance U. S. Department of Education None 84.SFA Student Financial Assistance Cluster Program P268K171292 (Year: 2017) $14,114.00

Description: Institution policies and procedures were insufficient to provide adequate monitoring of the activities of personnel with access to the student information system used to process student financial assistance awards.

Criteria: Management of the Institution is responsible for monitoring logical access controls that provide reasonable assurance that transactions are properly processed and reported, including the awarding of financial assistance to students.

Condition: Our review of the established internal control structure associated with the student information system revealed deficiencies in the monitoring of logical access controls intended to protect student financial assistance information from unauthorized access, manipulation and corruption.

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ARMSTRONG STATE UNIVERSITY SCHEDULE OF FINDINGS, QUESTIONED COSTS AND OTHER ITEMS
YEAR ENDED JUNE 30, 2017
FEDERAL AWARD FINDINGS AND QUESTIONED COSTS
The details related to these deficiencies have been provided to Institution Management in accordance with Official Code of Georgia Annotated 50-6-9.
Questioned Cost: Questioned costs of $14,114.00 were identified for one student who received student financial assistance in excess of their eligible need.
Cause: In discussing these deficiencies with management, they stated that the cause was directly related to ineffective monitoring of user access to the student financial assistance processes.
Effect or Potential Effect: Failure to maintain adequate internal controls related to logical access increases the risk that misappropriation of assets, fraud, errors, irregularities and/or noncompliance with Federal regulations could occur.
Recommendation: Management should review and enhance their policies and procedures to ensure the monitoring of activities performed by users with access to the student information system. Additionally, management should ensure proper segregation of duties as it relates to student financial assistance processes.
Views of Responsible Officials and Corrective Action plans: We concur with this finding. Management is currently reviewing, monitoring, and developing procedures to provide adequate controls of personnel with access to the student information system used to process student financial assistance awards. Additionally, the cost in question of $14,114.00 has been returned to the Department of Education.
OTHER ITEMS (NOTED FOR MANAGEMENT'S CONSIDERATION)
Untimely Enrollment Reporting Observation: Our testing of 19 students who withdrew during the Fall 2016 and Spring 2017 semesters revealed that 14 of the students' withdrawn enrollment statuses were not reported to the National Student Loan Data System (NSLDS) within the required 30 days or 60 days if a roster file was previously scheduled to be submitted.
Recommendation: The Institution should implement policies and procedures to ensure that all changes in student enrollment statuses are reported in a timely manner.
Views of Responsible Officials and Corrective Action Plans: We concur with this deficiency. Management has developed and implemented processes to update enrollment data in NSLDS as students withdraw from the University during the semester.
Contact Information: Tracey Mingo Director, Financial Aid tmingo@georgiasouthern.edu 912.478.1263 912.344.2624
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