Board of Regents of the University System of Georgia, University System Office (Oversight Unit), report on audit of the financial statements for the fiscal year ended June 30, 2010

BOARD OF REGENTS OF
THE UNIVERSITY SYSTEM
OF GEORGIA
UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
REPORT ON AUDIT OF THE FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED
JUNE 30,2010
i ~I r m d ~ & m e noft
Audits and Accounts
Russell Wb EJjn.t~. u,

BOARD OF REGENTS OF THE UNIVERSlTY SYSTEM OF GEORGIA UNIVERSITYSYSTEM OFFICE (OVERSIGHT UNIT) - TABLE OF CONTENTS -
SECTION I FINANCIAL
INDEPENDENT AUDITOR'S COMBINED REPORT ON BASIC FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
REQUIRED SUPPLEMENTARY INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS
BASIC FINANCIAL STATEMENTS EXHIBITS
A STATEMENTOFNETASSETS B STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS C STATEMENT OF CASH FLOWS D STATEMENT OF FIDUCIARY NET ASSETS
BOARD OF REGENTS RETIREE HEALTH BENEFIT FUND E STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS
BOARD OF REGENTS RETIREE HEALTH BENEFIT FUND F NOTES TO THE FINANCIAL STATEMENTS SCHEDULES
REQUIRED SUPPLEMENTARY INFORMATION 1 SCHEDULE OF FUNDING PROGRESS
SUPPLEMENTARY INFORMATION 2 BALANCE SHEET (NON-GAAP BASIS) BUDGET FUND 3 SUMMARY BUDGET COMPARISON AND SURPLUS ANALYSIS REPORT
(NON-GAAP BASIS) BUDGET FUND 4 STATEMENT OF PROGRAM REVENUES AND EXPENDITURES BY FUNDING
SOURCE COMPARED TO BUDGET (NON-GAAP BASIS) BUDGET FUND
5 SCHEDULE OF APPROVED BUDGET

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) - TABLE OF CONTENTS -
SECTION I FINANCIAL SCHEDULES SUPPLEMENTARY INFORMATION 6 SCHEDULE OF ALLOTMENTS TO UNITS OF THE UNIVERSITYSYSTEM OF GEORGIA
7 ANALYSIS OF PRIOR YEAR'S SURPLUS FUNDS COLLECTED FROM
INSTITUTIONSAND REDISTRIBUTEDTO INSTITUTIONSWITH DEFICITS
8 ANALYSIS OF EARLY REMllTANCE OF CURRENT YEAR SURPLUS FUNDS
COLLECTED FROM INSTITUTIONS 9 RECONCILIATION OF SALARIES AND TRAVEL
SECTION II CURRENT YEAR FINDINGS AND QUESTIONED COSTS SCHEDULE OF FINDINGS AND QUESTIONED COSTS

SECTION I FINANCIAL

Russell W. Hinton
STATE AUDITOR
(404)656-2174

DEPARTMENOTF AUDITSAND ACCOUNTS
270 Washington Street, S.W., Suite 1-156 Atlanta, Georgia 30334-8400
February 7 , 2 0 1 1

Honorable Sonny Perdue, Governor Members of the General Assembly of Georgia Members of the Board of Regents of the UniversitySystem of Georgia
and Honorable Erroll B. Davis, Jr., Chancellor
INDEPENDENT AUDITOR'S COMBINED REPORT ON BASIC FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
Ladies and Gentlemen:
We have audited the accompanying financial statements of the business-type activities and the aggregate remaining fund information (Exhibits A through F) of the University System Office (Oversight Unit) of the Board of Regents of the University System of Georgia, an organizational unit of the State of Georgia, as of and for the year ended June 30,2010. These financial statements are the responsibility of the University System Office's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University System Office's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 1,the financial statements of the University System Office are intended to present the financial position and changes in financial position, and where applicable, cash flows of only that portion of the activities of the State of Georgia that is attributable to the transactions of the University System Office. They do not purport to, and do not, present fairly the financial position and changes in financial position, and where applicable, cash flows of the State of Georgia, in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the basic financial statements referred to above present fairly, in all material respects, the financial position of the business-type activities and aggregate remaining fund information of the University System Office as of June 30, 2010, and the respective changes in financial position, and where applicable, cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Management's Discussion and Analysis and the Schedule of Funding Progress are not a part of the basic financial statements but are required supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of this required supplementary information. However, we did not audit this information and express no opinion on it.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements of the University System Office taken as a whole. The accompanying supplementary information (Schedules 2 through 9) is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Respectfully submitted,
~ u & s eWl l . Hinton, CPA, CGFM State Auditor

REQUIRED SUPPLEMENTARY INFORMATION

UNIVERSITY SYSTEM OFFICE
Management's Discussion and Analysis
Introduction
The University System Office of Georgia's Board of Regents was created in 1 9 3 1 as part of a reorganization of Georgia's state government. With this act, public higher education in Georgia was unified for the first time under a single governing and management authority. The governor appoints members to the Board, who each serve seven years. Today, the Board of Regents is composed of 18 members, five of whom are appointed from the state-at-large, and one from each of the 1 3 congressional districts. The Board elects a chancellor who serves as its chief executive officer and the chief administrative officer of the University System.
The Board oversees 35 institutions: four research institutions, two regional universities, 1 3 state universities, eight state colleges, and eight two-year colleges. In addition, one marine research institute is governed by the Board. These institutions enroll more than 301,000 students and employ approximately 12,000 faculty and 31,000 staff to provide teaching and related sewices to students and the communities in which they are located.
The University System Office also serves as custodian of the Board of Regents Retiree Health Benefit Fund, for University System of Georgia retiree health and life insurance benefits.
Ovewiew of the FinancialStatemenls and FinancialAnalysis
The University System Office is proud to present its financial statements for fiscal year 2010. The emphasis of discussions about these statements will be on current year data. There are three primary financial statements presented: the Statement of Net Assets; the Statement of Revenues, Expenses and Changes in Net Assets; and the Statement of Cash Flows. This discussion and analysis of the University System Office's financial statements provides an overview of its financial activities for the year. Comparative data is provided for fiscal year 2010 and fiscal year 2009. As custodian of the Board of Regents Retiree Health Benefit Fund, two additional statements are presented: the Statement of Fiduciary Net Assets and the Statement of Changes in Fiduciary Net Assets.
Statement of Net Assets
The Statement of Net Assets presents the assets, liabilities, and net assets of the University System Office as of the end of the fiscal year. The Statement of Net Assets is a point of time financial statement. The purpose of the Statement of Net Assets is to present to the readers of the financial statements a fiscal snapshot of the University System Office. The Statement of Net Assets presents end-of-year data concerning Assets (current and noncurrent), Liabilities (current and noncurrent), and Net Assets (assets minus liabilities). The difference between current and noncurrent assets will be discussed in the Notes to the Financial Statements.
From the data presented, readers of the Statement of Net Assets are able to determine the assets available to continue the operations of the University System Office. They are also able to determine how much the University System Office owes vendors.
Finally, the Statement of Net Assets provides a picture of the net assets (assets minus liabilities) and their availability for expenditure by the University System Office. Net assets are divided into three major categories. The first category, invested in capital assets, net of debt, provides the University System Office's equity in property, plant and equipment owned by the University System Office. The

next asset category is restricted net assets, which is divided into two categories, nonexpendable and expendable. The corpus of nonexpendable restricted resources is only available for investment purposes. Expendable restricted net assets are available for expenditure by the University System Office but must be spent for purposes as determined by donors and/or external entities that have placed time or purpose restrictions on the use of the assets. The final category is unrestricted net assets. Unrestricted net assets are available to the University System Office for any lawful purpose of the UniversitySystem Office.
Statement of Net Assets, Condensed

Assets
Current Assets Capital Assets, Net Other Assets
Total Assets

June 30,2010

June 30,2009

Liabilities Current Liabilities Noncurrent Liabilities

Total Liabilities
Net Assets Invested in Capital Assets, Net of Debt
Restricted - Nonexpendable Restricted- Expendable Unrestricted
Total Net Assets

$ 30,659,141 3,612,043
30,458,910 13,093,562

$ 29,769,741 3,612,043
12,363,257 12,193,835

The total assets of the University System Office increased by $65,602,974. A review of the Statement of Net Assets will reveal that the increase was primarily due to increases in Cash and Cash Equivalents of $50,526,890 and Short-Term Investments of $8,004,881. These increases are primarily related to the external portion of the Board of Regents investment pool funds. Capital Assets, net decreased by $1,300,021, as depreciation expense and asset retirements outpaced capital additions during fiscal year 2010.
The total liabilities for the year increased by $45,718,194. This increase is also directly related to the external portion of the Board of Regents investment pool funds. The combination of the increase in total assets of $65,602,974 and the increase in total liabilities of $45,718,194 yields an increase in total net assets of $19,884,780. The increase in total net assets is primarily in the category of Restricted Expendable Net Assets, in the amount of $18,095,653.

Sfatement of Revenues, Expenses and Changes in Net Assets
Changes in total net assets as presented on the Statement of Net Assets are based on the activity presented in the Statement of Revenues, Expenses and Changes in Net Assets. The purpose of the statement is to present the revenues received by the University System Office, both operating and nonoperating, and the expenses paid by the University System Office, operating and nonoperating, and any other revenues, expenses, gains and losses received or spent by the University System Office. Generally speaking operating revenues are received for providing goods and services to the various customers and constituencies of the University System Office. Operating expenses are those expenses paid to acquire or produce the goods and services provided in return for the operating revenues, and to carry out the mission of the University System Office. Nonoperating revenues are revenues received for which goods and services are not provided. For example state appropriations are nonoperating because they are provided by the Legislature to the University System Office without the Legislature directly receiving commensurate goods and services for those revenues.
Statement of Revenues, Expenses and Changes in Net Assets, Condensed

June 30,2010

June 30,2009

Operating Revenues Operating Expenses

Operating Loss

$ -124,779,492

$ -155,363,774

Nonoperating Revenues and Expenses

138,371,177

152,034,405

Income (Loss) Before Other Revenues, Expenses, Gains or Losses

$ 13,591,685

$ -3,329,369

Other Revenues, Expenses, Gains or Losses

5,591,885

18,903,431

Increase in Net Assets

Net Assets at Beginning of Year, as Originally Reported

$ 57,938,876

$ 36,317,126

Prior Year Adjustments

Net Assets at Beginning of Year, Restated $ 58,640,086

$ 42,364,814

Net Assets at End of Year

The Statement of Revenues, Expenses and Changes in Net Assets reflects a positive year, with an increase in net assets at the end of the year. Some highlights of the information presented on the Statement of Revenues, Expenses and Changes in Net Assets are as follows:

Revenue by Source For the Years Ended June 30,2010 and June 30,2009

June 30,2010

Operating Revenue

Grants and Contracts

$

Sales and Services of Educational Departments

Other

8,382,332 30,665,389 206,646,317

Total Operating Revenue

Nonoperating Revenue State Appropriations Grants and Contracts Investment Income Other

Total Nonoperating Revenue

$ 154,370,870

Capital Gifts and Grants State

Total Revenues

Expenses (By Functional Classification) For the Years Ended June 30,2010 and June 30,2009
June 30,2010
Operating Expenses Instruction Research Public Service Academic Support Student Services Institutional Support Scholarships and Fellowships
Total Operating Expenses
Nonoperating Expenses Interest Expense (Capital Assets) Other
Total Nonoperating Expenses
Total Expenses

June 30,2009 June 30,2009

Operating revenues decreased by $9,264,439 in fiscal year 2010. Although both Grants and Contracts and Departmental Sales and Services revenue showed declines, the predominant decrease of $5,882,254 occurred in Other Operating Revenues. This decrease was a result of decreased enrollment in Board of Regents self-insured health plans.

Nonoperating revenues increased by $1,150,828 for the year despite a decrease of $2,192,744 in State Appropriations. This was largely due to increases in both Investment and Grants and Contracts income compared to prior year.
Operating expenses by functional category showed significant decreases in Instruction, Public Service and Institutional Support categories. These decreases are a result of decreased spending due to reductions in State Appropriations, decreased health claims expenses due to lower enrollment in the Board of Regents self-insured health plans compared to prior year and the reclassification of the Georgia Public Telecommunications payment from operating expenses to nonoperating expenses.

Statement of Cash F/ows
The final statement presented by the University System Office is the Statement of Cash Flows. The Statement of Cash Flows presents detailed information about the cash activity of the University System Office during the year. The statement is divided into five parts. The first part deals with operating cash flows and shows the net cash used by the operating activities of the University System Office. The second section reflects cash flows from noncapital financing activities. This section reflects the cash received and spent for nonoperating, noninvesting, and noncapital financing purposes. The third section deals with cash flows from capital and related financing activities. This section deals with the cash used for the acquisition and construction of capital and related items. The fourth section reflects the cash flows from investing activities and shows the purchases, proceeds, and interest received from investing activities. The fifth section reconciles the net cash used to the operating income or loss reflected on the Statement of Revenues, Expenses and Changes in Net Assets.
Cash Flows for the Years Ended June 30,2010 and June 30,2009, Condensed

June 30,2010

June 30,2009

Cash Provided(Used)By: Operating Activities Noncapital FinancingActivities Capital and Related FinancingActivities InvestingActivities

$ -137,912,646 198,67 1,246 -10,905,554

$ -144,444,625 122,497,660 -8,132,589

Net Change in Cash Cash, Beginningof Year
Cash, End of Year

CapitalAssets
The University System Office had significant capital asset additions during fiscal year 2010. A Shared Services Center opened in April, 2010 in Sandersville, Georgia. This facility was acquired through capital lease at a value of $3,578,343 plus capitalized interest of $35,783. The shared services concept is being implemented to unify and consolidate the University System's separate business functions.

Since fiscal year 2006, the Georgia Public Telecommunications Commission ("the Commission") transfers property and equipment to the University System Office through an intergovernmental agreement. These assets are located at its tower sites throughout the State. In fiscal year 2010, additional equipment was transferred to the University System Office under this arrangement. The value of the equipment transferred in fiscal year 2010 was $5,591,885. In addition, $434,116 (net book value) in equipment disposals were recorded. The total value of the land, building and equipment transferred to date is $44,408,580, and the accumulated depreciation is $24,507,871, for a net book value of $19,900,709.
The transfer was required for the Commission to obtain the use of five-year, general obligation bonds sold in the University System Office's name on behalf of the Commission. The Commission, an authority created after 1967, cannot have bonds sold on its behalf. An intergovernmental agreement has been executed between the Commission and the University System Office that allows the Commission to utilize these funds for the digital conversion of the towers and antennae. The bonds were sold September 7, 2005, and the agreement with the University System Office expires at the end of the five-year period when the bonds are paid in full. All equipment will be transferred back to the ownership of the Commission at the expiration of the intergovernmental agreement.
The University System Office adopted the Governmental Accounting and Standards Board (GASB) Statement No. 51, Accounting and Reporting for Intangible Assets. The provisions of this Statement generally required retroactive reporting for intangible assets acquired after June 30, 1980, with the exception of those intangible assets that have indefinite useful lives and those that are considered internally generated. Accordingly, distance learning software acquired and expensed in fiscal year 2002 was added to Capital Assets during fiscal year 2010 at its historical cost of $1,750,000. Prior year depreciation expense on this software was $1,414,583, resulting in a net effect of $335,417 increase to Capital Assets, net on the Statement of Net Assets, and net decrease in operating expenses on the Statement of Revenues, Expenses and Changes in Net Assets. Due to the immateriality of this net effect, beginning net assets were not restated as a result of adopting GASB Statement No. 51.
The remaining significant capital asset additions include costs associated with the General Ledger database consolidation and Business Intelligence software.
For additional information concerning Capital Assets, see Notes 1,6, 8 and 1 0 in the Notes to the Financial Statements.
Long- Term Liabilities
The University System Office had Long-Term Liabilities of $25,123,948 of which $6,168,944 was reflected as current liability at June 30, 2010.
For additional information concerning Long-Term Liabilities, see Notes 1and 8 in the Notes to the Financial Statements.
Health and Denial Insurance
The University System Office is the fiscal agent for health and dental insurance for all of the institutions in the University System of Georgia. The financial information for all related health and dental insurance transactions is included on the face of the statements, including the liability for claims incurred but not reported. The summary information regarding revenues, expenditures and the related liability for fiscal year 2010 is provided below:

Employees: Unpaid Claims and Claim Adjustments (Prior Year IBNR)
Incurred Claims and Claim Adjustments Expenses -
Provisionsfor lnsured Events of the Current Year
Payments-Claims and Claim Adjustments Attributable To lnsured Events of the Current Year and Prior Years
Unpaid Claims and Claim Adjustments (CurrentYear IBNR)
Retirees: Unpaid Claims and Claim Adjustments (Prior Year IBNR)
Incurred Claims and Claim Adjustments Expenses -
Provisionsfor lnsured Events of the Current Year
Payments- Claims and Claim Adjustments Attributable To Insured Events of the Current Year and Prior Years
Unpaid Claims and Claim Adjustments (Current Year IBNR)

June 30,2010 $ 21,827,567

June 30,2009 *
$ 24,048,856

$ 15,654,000

$

6,626,917

$ 21,827,567

$

6,702,660

93,657,332

$

6,756,000

91,512,153

$

6,626,917

* Prior year claims incurred and paid have been adjusted in this schedule for a correction in
the breakout between Active and Retired employees. Beginning and ending IBNR liabilities are not affected by this correction.
Retiree Health Benefit Fund
The University System Office is the custodian for the Board of Regents Retiree Health Benefit Fund. This fund was authorized pursuant to Official Code of Georgia Annotated Section 47-21-21 for the purpose of accumulating funds necessary to meet employer costs of retiree post-employment health insurance benefits. Please see Note 1 4 for additional information.
Economic Outlook
Revenues for the State of Georgia for fiscal year 2010 were approximately 9% less than in fiscal year 2009. As a result, all agencies experienced budget reductions again in fiscal year 2010. Regents System Office had a total reduction of 12.5%. Reductions for the Office of Information and Instructional Technology and Georgia Public Libraries were 8.8%and 5.4%, respectively. For fiscal year 2011, revenues continue to cause concern, and each agency has been requested to submit plans to the Governor's office for possible 4, 6 and 8%reductions. Due to these continuing state budget constraints, the University System Office will maintain an even closer watch over resources to ensure the University System Office's ability to react to unknown internal and external issues.
Usha Ramachandran, Vice Chancellor for Fiscal Affairs/Treasurer The Board of Regents UniversitySystem Office

BASIC FINANCIAL STATEMENTS

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) STATEMENT OF NET ASSETS JUNE 30.2010
ASSETS
Current Assets Cash and Cash Equ~valents Short-Term Investments Accounts Receivable, Net (Note 3 ) Federal FinancialAssistance Other lnventor~es(Note 4) Prepaid Items
Total Current Assets
Noncurrent Assets Investments Notes Receivable Capital Assets, Net (Note 6)
Total NoncurrentAssets
Total Assets
LIABILITIES
Current Liablllties Accounts Payable Salaries Payable Benef~tsPayable Deferred Revenue (Note 7) Deposits Held for Other Organizations Lease Purchase Obligations Compensated Absences
Total Current Liabilities
Noncurrent Liabilities Lease Purchase Obligations Compensated Absences
Total Noncurrent Liabil~ties
Total Liabilities
NET ASSETS
Invested in Capital Assets, Net of Related Debt Restricted for:
Nonexpendable Expendable Unrestricted
Total Net Assets
The notesto the financ~asl tatements are an integral part of this statement.
-2-

EXHIBIT "A"

BOARD OF REGENTS OF THE UNIVERSITYSYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
STATEMENT OF REVENUES, EXPENSES AN0 CHANGES IN NET ASSETS YEAR ENDED JUNE 30.2010
OPERATING REVENUES
Grants and Contracts Federal Other
Sales and Services Other Operating Revenues
Total Operating Revenues
OPERATING EXPENSES
Salaries Staff
Employee Benefits Other Personal Services Travel Scholarships and Fellowships Utilities Suppl~esand Other Services Depreciation
Total Operating Expenses
Operating Income (Loss)
NONOPERATING REVENUES (EXPENSES)
State Appropriations Grants and Contracts
Federal Federal Stimulus Other Interest and Other Investment Income Interest Expense Other Nonoperating Revenues/Expenses
Net Nonoperating Revenues
Income (Loss) Before Other Revenues. Expenses, Gains, or Losses
Capital Grants and Gifts State
Increase (Decrease) in Net Assets
Net Assets - Beginning of Year, Restated
Net Assets - End of Year

EXHIBIT "B"

The notes to the financial statements are an lntegral part of this statement.
- 3 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSIW SYSTEM OFFICE (OVERSIGHT UNIT) STATEMENT OF CASH FLOWS YEAR ENDEDJUNE 30.2010
CASH FLOWS FROM OPERATING ACTIVITIES Grants and Contracts Sales and Servlces Payments to Suppliers Paymentsto Employees Payments for Scholarships and Fellowships Other Recelpts (Payments)
Net Cash Provided (Used) by Operatmg Activities
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES State Approprlatlons Other NonoperatingRece~pts(Payments) Agency Funds Transactions Gifts and Grants Receivedfor Other than Capital Purposes Note Receivable COlleCt10nS
Net Cash Flows Provlded (Used) by Noncapital FinancingActivities
CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceedsfrom Sale of CapitalAssets Purchases of Capltal Assets Principal Pald on Capital Debt and Leases lnterest Pald on Capital Debt and Leases
Net Cash Provided (Used) by Cappal and Related Financing Act~vlties
CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales and Maturities of Investments lnterest on Investments
Net Cash Prov~ded(Used) by InvestingActlvlties
Net Increase (Decrease) in Cash
Cash and Cash Equivalents - Beglnnlngof Year
Cash and Cash Eaulvalents- End of Year
RECONCILIATIONOF OPERATING LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Operating Income (Loss) Adjustmentsto Reconcile Operating lncome to Net Cash
Provlded (Used) by OperatingActivities Depreciation Change in Assets and L~abilities: Accounts Receivable, Net lnventor~es Prepaid Items Notes Receivable, Net Accounts Payable Deferred Revenue Compensated Absences
Net Cash Prov~ded(Used) by OperatingAct~vities
NONCASH ACTlVlN Flxed Assets Acquired by lncurrlng Capltal Lease Obligations Change In Fair Value of Investments Recognized as a Component of lnterest lncome Change In Accrued lnterest PayableAffect~nglnterest Pald Glft of Cap~taAl ssets Reducing Proceeds of Capital Grants and Gifts
Tne notes to the financial statements are an integral part of this statement

BOARD OF REGENTS OF THE UNIVERSIN SYSTEM OF GEORGIA UNIVERSINSYSTEM OFFICE (OVERSIGHTUNIT)
BOARD OF REGENTS RETIREE HEALTH BENEFIT FUND STATEMENT OF FIDUCIARY NET ASSETS JUNE 3 0 , 2 0 1 0
ASSETS Cash and Cash Equivalents
LlABlLlTl ES Benefits Payable
NET ASSETS Net Assets Held in Trust for Other Post-Employment Benef~ts

EXHIBIT "DM

The notes t o the financial statements are an integral part of this statement. -5-

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
BOARD OF REGENTS RETIREE HEALTH BENEFIT FUND STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS
YEAR ENDED JUNE 30,2010
ADDITIONS Contributions Employer Plan Member Total Contributions lnvestment Income Net Appreciation in Fair Value of Investments Interest/Dividends Total lnvestment Income Less: Investment Expense Net lnvestment Income Total Additions
DEDUCTIONS Benefits L ~ f eInsurance Premium Expense Administrative Expense Total Deductions Net Increase/Decrease
Beginning Net Assets
Net Assets Held in Trust for Other Post-Employment Benefits

EXHIBIT "EM

The notes to the financial Statements are an integral part of this Statment.
- 6

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

EXHIBIT "F"

Note 1. Summary of SignificantAccounting Policies
Nature of Operations The University System Office of Georgia's Board of Regents was created in 1 9 3 1 as part of a reorganization of Georgia's state government. With this act, public higher education in Georgia was unified for the first time under a single governing and management authority. The governor appoints members to the Board, who each serve seven years. Today, the Board of Regents is composed of 18 members, five of whom are appointed from the state-at-large, and one from each of the 1 3 congressional districts. The Board elects a Chancellor who serves as its chief executive officer and the chief administrative officer of the University System.
The Board oversees 35 institutions: four research institutions, two regional universities, 13 state universities, eight state colleges, and eight two-year colleges. In addition, one marine research institute is governed by the Board. These institutions enroll more than 301,000 students and employ approximately 12,000 faculty and 31,000 staff to provide teaching and related services to students and the communities in which they are located.
The University System Office also serves as custodian of the Board of Regents Retiree Health Benefit Fund, for University System of Georgia retiree health and life insurance benefits.
Reporting Entity The University System Office is the administrative central office for the thirty-five (35) Statesupported, member institutions of higher education in Georgia and one marine research institute, which comprise the University System of Georgia, an organizational unit of the State of Georgia. The University System Office also is the custodian of a Fiduciary Fund for retiree health and life insurance benefits. The accompanying financial statements reflect the operations of the University System Office as a separate reporting entity and as custodian of the Board of Regents Retiree Health Benefit Fund.
The Board of Regents has constitutional authority to govern, control and manage the University System of Georgia. This authority includes but is not limited to the power to designate management, the ability to significantly influence operations, the authority to control institutions' budgets, the power to determine allotments of State funds to member institutions and the authority to prescribe accounting systems and administrative policies for member institutions. The University System Office does not have authority to retain unexpended State appropriations (surplus) for any given fiscal year. Accordingly, the University System Office is considered an organizational unit of the Board of Regents of the UniversitySystem of Georgia reporting entity for financial reporting purposes because of the significance of its legal, operational, and financial relationships with the Board of Regents as defined in Section 2100 of the Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Re~ortinRStandards.
Legally separate, tax exempt organizations whose activities primarily support units of the University System of Georgia, which are organizational units of the State of Georgia, are considered potential component units of the State. See Note 16 for additional information.
Financial Statement Presentation 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 University's assets, liabilities, net assets, revenues, expenses, changes in net assets and cash flows.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

New Accounting Pronouncements In fiscal year 2010, the University System Office adopted the Governmental Accounting and Standards Board (GASB) Statement No. 51, Accounting and Reporting for Intangible Assets. The provisions of this Statement generally required retroactive reporting for intangible assets acquired after June 30, 1980, with the exception of those intangible assets that have indefinite useful lives and those that are considered internally generated. Accordingly, distance learning software acquired and expensed in fiscal year 2002 was added to Capital Assets during fiscal year 2010 at its historical cost of $1,750,000. Prior year depreciation expense on this software was $1,414,583, resulting in a net effect of $335,417. Due to the immateriality of this net effect, beginning net assets were not restated as a result of adopting GASB Statement No. 51.
In addition, the University System Office adopted GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. The provisions of this Statement impacts disclosure regarding derivative instruments entered into by the state and local governments. Derivative disclosures, if any, will be identified in Note 2.
Basis of Accounting For financial reporting purposes, the University System Office is considered a special-purpose government engaged in business-type and fiduciary activities. Accordingly, the University System Office's 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. All significant intrasystem transactions have been eliminated.
The UniversitySystem Office has the option to apply all Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989, unless FASB conflicts with GASB. The University System Office has elected to not apply FASB pronouncements issued after the applicable date.
Cash and Cash Equivalents
Cash and Cash Equivalents consist of petty cash, demand deposits and time deposits in authorized financial institutions, and cash management pools that have the general characteristics of demand deposit accounts. This includes the Board of Regents Short-Term Investment Pool.
Short-Term lnvestments Short-Term lnvestments consist of investments of 9 0 days - 1 3 months. This would include certificates of deposits or other time restricted investments with original maturities of six months or more when purchased. Funds are not readily available and there is a penaltyfor early withdrawal.
lnvestments lnvestments include financial instruments with terms in excess of 1 3 months, certain other securities for the production of revenue, land, and other real estate held as investments by endowments. The University System Office accounts for its investments at fair value. Changes in unrealized gain (loss) on the carrying value of investments are reported as a component of investment income in the Statement of Revenues, Expenses and Changes in Net Assets. The Board of Regents Legal Fund, the Board of Regents Balanced Income Fund, the Board of Regents Total Return Fund, and the Board of Regents Diversified Fund are included under Investments.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

Accounts Receivable Accounts receivable consists of receivables from other institutions within the University System of Georgia, primarily for health insurance premiums. Accounts receivable also includes amounts due from the Federal government, state and local governments, or private sources, in connection with reimbursement of allowable expenditures made pursuant to the University System Office's grants and contracts. Accounts receivable are recorded net of estimated uncollectible amounts.
lnventories Resale lnventories are valued at cost using the "first in, first out" (FIFO) basis.
Noncurrent lnvestments lnvestments that are externally restricted and cannot be used to pay current liabilities are classified as noncurrent assets in the Statement of Net Assets.
Capital Assets Capital assets are recorded at cost at the date of acquisition, or fair market value at the date of donation in the case of gifts. For equipment, the University System Office's capitalization policy includes all items with a unit cost of $5,000 or more, and an estimated useful life of greater than one year. Renovations to buildings, infrastructure, and land improvements that exceed $100,000 and/or significantly increase the value or extend the useful life of the structure are capitalized. Routine repairs and maintenance are charged to operating expense in the year in which the expense was incurred. Depreciation, which also includes amortization of intangible assets such as water, timber, and mineral rights, easements, patents, trademarks, and copyrights, as well as software is computed using the straight-line method over the estimated useful lives of the assets, generally 40 to 60 years for buildings, 20 to 25 years for infrastructure and land improvements, 1 0 years for library books, and 3 to 20 years for equipment. Residual values will generally be 10% of historical costs for infrastructure, buildings and building improvements, and facilities and other improvements.
To obtain the total picture of plant additions in the University System, it is necessary to look at the activities of the Georgia State Financingand lnvestment Commission (GSFIC)- an organization that is external to the System. GSFIC issues bonds for and on behalf of the State of Georgia, pursuant to powers granted to it in the Constitution of the State of Georgia and the Act creating the GSFIC. The bonds so issued constitute direct and general obligations of the State of Georgia, to the payment of which the full faith, credit and taxing power of the State are pledged.
For projects managed by GSFIC, the GSFIC retains construction in progress on its books throughout the construction period and transfers the entire project to the University System Office when complete. For the year ended June 30, 2010, GSFIC transferred equipment for the Georgia Public Telecommunications Commission to the University System Office valued at $5,591,885.
Deposits Held for Other Organizations The University System Office had $215,376,456 in Deposits Held for Other Organizations as of June 30, 2010. Deposits held for others consist of the external portion of the University System of Georgia's Pooled lnvestment Fund program and other funds held by the University System Office as an agent for various governments or individuals.
Deferred Revenues Deferred revenues include amounts received from grant and contract sponsors that have not yet been earned.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

EXHIBIT "F"

Compensated Absences Employee vacation pay is accrued at year-end for financial statement purposes. The liability and expense incurred are recorded at year-end as compensated absences in the Statement of Net Assets, and as a component of compensation and benefit expense in the Statement of Revenues, Expenses and Changes in Net Assets. The University System Office had accrued liability for compensated absences in the amount of $3,027,114 as of July 1,2009. For fiscal year 2010, $2,015,834 was earned in compensated absences and employees were paid $1,835,848, for a net increase of $179,986. The ending balance as of June 30, 2010 in accrued liability for compensated absences was $3,207,100.
Noncurrent Liabilities Noncurrent liabilities include (1) liabilities that will not be paid within the next fiscal year; (2) capital lease obligations with contractual maturities greater than one year; and (3) other liabilities that, although payable within one year, are to be paid from funds that are classified as noncurrent assets.
Net Assets The University's net assets are classified as follows:
Invested in capital assets, net of related debt: This represents the University System Office's total investment in capital assets, net of outstanding debt obligations related to those capital assets. To the extent debt has been incurred but not yet expended for capital assets, such amounts are not included as a component of invested in capital assets, net of related debt. The term "debt obligations" as used in this definition does not include debt of the GSFlC as discussed previously in Note 1- Capital Assets section.
Restrided net assets - nonexpendable: Nonexpendable restricted net assets consist of 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 either be expended or added to principal. The University System Office may accumulate as much of the annual net income of an institutional fund as is prudent under the standard established by Code Section 44-15-7 of Annotated Code of Georgia.
Restricted net assets - expendable: Restricted expendable net assets include resources in which the University System Office is legally or contractually obligated to spend resources in accordance with restrictions imposed by external third parties.

Expendable Restricted Net Assets include the following:

Restricted - E&G and Other Organized Activities $ Health Insurance Reserve (US0 only)

12,985,451 17,473,459

Total Restricted Expendable

Unrestrided net assets: Unrestricted net assets represent resources derived from state appropriations and sales and services of educational departments. These resources are used for transactions relating to the educational and general operations of the University System Office, and may be used at the discretion of the governing board to meet current expenses for those purposes, except for unexpended state appropriations (surplus). Unexpended state appropriations must be remitted to the Office of Treasury and Fiscal Services. At June 30, 2010, there was a surplus balance of $187,870.38 to be refunded.

BOARD OF REGENTS OF THE UNIVERSI7Y SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

EXHIBIT "F"

Unrestricted Net Assets includes the following items which are quasi-restricted by management.

Reserve for Encumbrances Other Unrestricted

Total Unrestricted Net Assets

$

13,093,562

When an expense is incurred that can be paid using either restricted or unrestricted resources, the University System Office's policy is t o first apply the expense towards unrestricted resources, and then towards restricted resources.

Income Taxes The University System Office, as a political subdivision of the State of Georgia, is excluded from Federal income taxes under Section 115(1) of the Internal Revenue Code, as amended.

Classification of Revenues and Expenses The University System Office has classified its revenues as either operating or nonoperating revenues in the Statement of Revenues, Expenses and Changes in Net Assets according to the following criteria:

Operating Revenues: Operating revenues include activities that have the characteristics of exchange transactions, such as (1) departmental sales and services, (2) most Federal, state and local grants and contracts, and (3) health insurance premiums received from institutions within the University System of Georgia for self-insured health plans offered.

Nonoperating Revenues: Nonoperating revenues include activities that have the characteristics of nonexchange transactions, such as gifts and contributions, and other revenue sources that are defined as nonoperating revenues by GASB No. 9, Reporting Cash Flows of Proprietaty and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, and GASB No. 34, such as state appropriations and investment income.

Operating Expenses: Operating expense includes activities that have the characteristics of exchange transactions.

Nonoperating Expenses: Nonoperating expense includes activities that have the characteristics of nonexchange transactions, such as capital financing costs and costs related to investment activity.

Restatement of Prior Year Net Assets The University System Office has a restatement of prior year net assets, increasing beginning net assets by $701,210. This restatement is related to the prior year operations of the Shared Services Center, which was reported by Macon State College in fiscal year 2009. Due to the financial significance of the Shared Services Center in fiscal year 2010 and projected future significance, this prior year activity has been transferred to the University System Office in fiscal year 2010.

The Shared Services Center revenue and expenses for fiscal year 2010 are included in the University System Office's Statement of Revenues, Expenses and Changes in Net Assets.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

Note 2. Deposits and Investments
Deposits The custodial credit risk for deposits is the risk that in the event of a bank failure, the University System Office's deposits may not be recovered. Funds belonging to the State of Georgia (and thus the University System Office) 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 UniversitySystem of Georgia.
At June 30, 2010, the carrying value of deposits was $7,909,553 and the bank balance was $10,980,996. Of the University System Office's deposits, $10,933,428 were uninsured but collateralized with securities held by the financial institution's trust department or agent in the University System Office's name.
Investments The University System Office serves as fiscal agent for various units of the University System of Georgia and cooperative organizations. The University System Office pools the monies of these organizations with the University System Office's monies for investment purposes. The University System Office cannot allocate pool investments between the internal (University System) and external (cooperative organizations) investment pool portions. The investment pool is not registered with the SEC as an investment company. The fair value of the 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.

BOARD OF REGENTS OF THE UNIVERSrrY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

EXHIBIT "F"

The University System Office maintains investment policy guidelines for each pooled investment fund that is offered to qualified University System participants. These policies are intended to foster sound and prudent responsibility each institution has to the citizens of Georgia and which conforms to the Board of Regents investment policy. All investments must be consistent with donor intent, Board of Regents policy, and applicable Federal and state laws.
Units of the University System of Georgia and their affiliated organizations may participate in the Pooled Investment Fund program. The overall character of the pooled fund portfolio should be one of above average quality, possessing at most an average degree of investment risk.
Short-Term Fund The Short-Term fund provides a current return and stability of principal while affording a means of overnight liquidity for projected cash needs. The investment maturities of the fund will range between daily and two years.
Lepal Fund The Legal fund provides an opportunity for greater income and modest principal growth to the extent possible with the securities allowed under Georgia Code 50-17-59 and 50-17-63. The average maturity of this fund will typically range between five and ten years, with a maximum of thirty years for any individual investment. The overall character of the portfolio should be one of treasury and agency quality, possessingvirtually no degree of financial risk.
Balanced Income Fund The Balanced Income fund is designed to be a vehicle to invest funds that are not subject to the state regulations concerning investing in equities. This fund is comprised of fixed income, equity and cash equivalent instruments.
The equity allocation range shall be between 30% and 40%, with a target of 35% of the total portfolio. The fixed income (bond) portion of the portfolio shall be between 60% and 70%, with a target of 65% of the total portfolio. Reserves for contingencies and stock and bond purchases are expected to comprise the balance of the fund. Reserves and excess income should be invested at all times in practical amounts. Reserves can be invested in high quality institutional money market mutual funds or other high quality, short-term instruments.
Total Return Fund The Total Return fund is another pool designed to be a vehicle to invest funds that are not subject to state regulations concerning investing in equities. This pool offers the greatest percentage of overall equity exposure, with well over half of the funds typically invested in equities.
The equity allocation range shall be between 60% and 70%, with a target of 65% of the total portfolio. The fixed income (bond) portion of the portfolio shall be between 30% and 40%, with a target of 35% of the total portfolio. Reserves for contingencies and stock and bond purchases are expected to comprise the balance of the fund. Reserves and excess income should be invested at all times in practical amounts. Reserves can be invested in high quality institutional money market mutual funds or other high quality, short-term instruments.
Diversified Fund The Diversifiedfund is designed to gain further diversification and increase exposures to assets that have lower correlation to equity and bond markets by utilizing alternative asset classes. In addition, this fund is constructed to build an optimal portfolio where return is increased and risk is reduced.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

The equity allocation range shall be between 50% and 75%of the portfolio. The fixed income (bond) portion of the portfolio shall be between 20% and 40%. The portfolio may also consist of Hedge Funds, Real Estate and Venture Capital/Private Equity/Post Venture Capital.
Hedge Funds -The investment approach to this asset class is to use a multi-strategy, multi-manager fund of hedge funds. The Board of Regents believesthat a fund of fund strategy will provide the best access to a highly diversified pool of hedge fund strategies and managers.
Real Estate - The Board of Regents' approach to investing in this asset class is to use real estate investment trusts (REITs). RElTs are more liquid than owning commercial real estate and diversification can be achieved by purchasing a mutual fund.

Venture Capital/Private Equity/Post Venture Capital -This asset class is the riskiest and most volatile permitted investment opportunity. This asset should be considered as an additional diversification investment strategy due to the low correlation with stock and bonds.
Reserves for contingencies and stock and bond purchases are expected to comprise the balance of the fund. Reserves and excess income should be invested at all times in practical amounts. Reserves can be invested in high quality, institutional money market mutual funds or other high quality, short-term instruments.
The University System Office's investments as of June 30, 2010 are presented below. All investments are presented by investment type and debt securities are presented by maturity.

Investment Type

Fair Value

Less Than 1Year

lnvestment Maturity 1- 5 Years 6 - 1 0 years

More than 1 0 Years

Debt Securities U. S. Treasuries U. S. Agencies Explicitly Guaranteed Implicitly Guaranteed Mutual Bond Fund Repurchase Agreements

$

472,963

$ 472,963

4,156,774

143,423,376 $ 7,386,387 $ 18,669,979

28,266,278

1,421,822

27,802,879 27,802,879

1,677,212 $ 2,479,562

9,400,609 107,966,401

22,820,692

4,023,764

Other Investments Bond/Equity Mutual Funds Equity Mutual Funds Equity Securities - Domestic Real Estate lnvestment Fund

1,412,945 14,665,2 1 2 28,812,234
2,540,787

Total Investments

$ 251,553,448

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

lnterest Rate Risk lnterest rate risk is the risk that changes in interest rates of debt investments will adversely affect the fair value of an investment. The Board of Regents policy for managing interest rate risk is contained in the investment policy guidelines for the various pooled funds:

1. In the Short-Term fund, the average maturity of the fixed income portfolio shall not exceed three years.

2.

In all the other pooled funds, the average maturity of the fixed income portfolio shall

not exceed ten years.

3. Fixed income investments, except in the Diversified Fund, shall be limited to U. S. government agency and corporate debt instruments that meet investment eligibility under Georgia Code 50-17-63.

4. The fixed income target allocation is defined in the investment policy guidelines for each pooled investment fund. These targets may be modified upon recommendation of the fund's investment manager and approval by the Board of Regents.

Custodial Credit Risk Custodial credit risk for investments is the risk that, in the event of a failure of the counterparty to a transaction, the University System Office will not be able to recover the value of the investment or collateral securities that are in the possession of an outside party. The University System Office's policy for managing custodial credit risk for investments is:

1. The University System Office has appointed a Federally regulated banking institution as custodian. The custodian performs its duties to the standards of a professional custodian and is liable to the University System Office for claims, losses, liabilities and expenses arising from its failure to exercise ordinary care, its willful misconduct, or its failure to otherwise act in accordance with the contract.

2. All securities transactions are to be settled on a delivery vs. payment basis through an approved depository institution such as the Depository Trust Company or the Federal Reserve.

3. Repurchase agreements are to be collateralized by United States Treasury securities at 102%of the market value of the investment at all times.

At June 30, 2010, $204,668,226 of the University System Office's applicable investments were uninsured and held by the investment's counterparty in the University System Office's name.

Credit Oualitv Risk Credit quality risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The University System Office's policy for managing credit quality risk is contained in the investment policy guidelines for the various pooled investment funds:

1. In all pooled funds except the Diversified Fund, all debt issues must be eligible investments under Georgia Code 50-17-63. Portfolios of debt security funds also must meet the eligible investment criteria under the same code section.

2. The Diversified Fund is permitted to invest in noninvestment grade debt issues up to a limit of 15%of the entire portfolio.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

The investments subject to credit quality risk are reflected below:

Fair Value

Unrated

Related Debt lnvestments

U. S. Agencies

$

Mutual Bond Fund

RepurchaseAgreements - Underlying

U. S. Agency Securities

143,423,376 $ 143,423,376

28,266,278

28,266,278

27,802,879

27,802,879

EXHIBIT "F"

Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of a government's investment in a single issuer. The University System Office's policy for managing concentration of credit risk is to diversify investments to the extent that any single issuer shall be limited to 5%of the market value in a particular investment fund. The following U. S. Agency investments exceeded 5% of the total reported investment amount as of June 30, 2010:

lnvestm ent:

Amount:

% of TotaI

Federal National Mortgage Association Federal Home Loan Mortgage Corporation Repurchase Agreements Ishares Equity Securities

$ 100,381,798 $ 42,469,069 $ 27,802,878 $ 21,140,706

40 % 17 % 11 %
8 %

Condensed financial information for the investment pool is as follows:

Statement of Net Assets -June 30,2010

Assets lnvestments Accrued Interest and Other Receivables

Net Assets Held in Trust for Pool Partici~ants Internal Portion External Portion

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

Statement of Changes in Net Assets - For the Year Ended June 30, 2010

Revenues Interest Income Net lncrease (Decrease)in Fair Value of Investments

Total Revenues

$ 14,032,032

Ex~enses Operating Expenses
Administrative Expenses

Net Increase (Decrease) in Assets Resultingfrom Operations

$ 13,590,652

Distribution to Participants Capital Transactions

Total Increase (Decrease) in Assets Resultingfrom Operations

$ 79,961,028

Net Assets July 1,2009

169,153,985

Net Assets June 30, 2010

Note 3. Accounts Receivable
Accounts receivable consisted of the following at June 30, 2010:
Business-type Activities: Federal Financial Assistance Other

EXHIBIT "F"

Less Allowance for Doubtful Accounts
Net Accounts Receivable
Note 4. Inventories
Inventories consisted of the following at June 30, 2010:
Other
Note 5. Notes Receivable
The Georgia Education Authority (University), (GEA (U)), was authorized to acquire, construct and operate housing accommodations for students of any institution under the control of the Board of Regents of the University System of Georgia. The GEA (U) constructed a dormitory on the campus of Georgia Southern University (GSOU) and financed the construction by obtaining a loan in 1994 from the U. S. Department of Education in the amount of $3,000,000 at an interest rate of 5.5% for a term of thirty years. In July 2007, GEA (U) met and resolved to no longer conduct business as a state

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

authority and dispose of all its assets and liabilities. As a result of that decision, a Note Receivable that is payable from GSOU was transferred by Resolution from GEA (U) to the University System Office (USO) in fiscal year 2008. GSOU has an obligation to send the US0 annual payments of $205,320 through the year 2025. In fiscal year 2010, the University System Office collected $205,320, $115,551 of which represented interest. Total principal collected on the Note Receivable was $89,769. At June 30, 2010, the Notes Receivable balance was $2,033,301. There is no allowance for doubtful collection recorded.

Note 6, Capital Assets Followingare the changes in capital assets for the year ended June 30,2010:

Beginning Balance July 1,2009 (Restated)

Additions

Reductions

Ending Balance June 30,2010

Capital Assets, Not Being Depreciated: Land Capitalized Collections Construction Work-In-Progress

$

2,376.824 $

50,600

$

2,427,424

10,000

10,000

1,532,950

$

1,532,950

0

Total Capital Assets, Not Being Depreciated $

3,919,774 $

50,600 $

1,532,950 $

2,437.424

Capital Assets, Being Depreciated:

Buildings and Building Improvements

$

217,978

$

217.978

Equipment

57,283,568 $

6,663.644 $

2,863,087

61,084.125

Capital Leases

47,385,816

3,554,245

50,940.061

Software

9,386,491

4,608,825

13,995,316

Total Assets Being Depreciated

$

114,273,853 $ 14,826,714 $

2,863,087 $

126,237.480

Less: Accumulated Depreciation:

Buildings and Building Improvements

$

0 $

4,905

$

4.905

Equipment

35,997,701

5,853,586 $

2,498,766

39,352,521

Capital Leases

23,999,672

6,299,198

30,298.870

Software

4,234,738

2,207,881

6,442.619

Total Accumulated Depreciation

$

64,232,111 $ 14,365,570 $

2,498,766 $

76,098.915

Total Capital Assets, Being Depreciated. Net $

50,041.742 $

461.144 $

364,321 $

50,138,565

Capital Assets, Net

Since fiscal year 2006, the Georgia Public Telecommunications Commission ("the Commission") transfers property and equipment to the University System Office through an intergovernmental agreement. These assets are located at its tower sites throughout the State. In fiscal year 2010, additional equipment was transferred to the University System Office under this arrangement. The value of the equipment transferred in fiscal year 2010 was $5,591,885. In addition, $434,116 (net book value) in equipment disposals were recorded. The total value of the land, building and equipment transferred to date is $44,408,580, and the accumulated depreciation is $24,507,871, for a net book value of $19,900,709.

BOARD OF REGENTS OF THE UNIVERSrrY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

EXHIBIT "F"

Note I. Deferred Revenue
Deferred revenue consisted of the following at June 30, 2010:

Other Deferred Revenue
Note 8. Long-TermLiabifities Long-Term liability activity for the year ended June 30, 2010 was as follows:

Begrnning Balance July 1.2009

Additions

Reductions

Ending Balance June 30,2010

Current Portion

Lease Lease Obligation

$

24,106,269 $

3,640,628 $

5,830,049 $

21,916,848 $ 4,200,644

Other Liabilities Compensated Absences

3,027,114

2,015,834

1,835,848

3,207,100

1,968,300

Total Long-Term Obligations $

27,133,383 $

5,656,462 $

7,665,897 $

25,123,948$ 6,168,944

Note 9. Significant Commitments
The University System Office had no significant unearned, outstanding construction or renovation contracts executed as of June 30, 2010.

Note 10. Lease Obligations
The University System Office is obligated under various capital leases for the acquisition of real property and equipment.
CAPITAL LEASES The University System Office has 22 capital leases payable in monthly installments with terms expiring in various years between 2 0 1 1 and 2030. Expenditures for fiscal year 2010 were $6,795,184, of which $965,135 represented interest. Total principal paid on capital leases was $5,830,049 for the fiscal year ended June 30, 2010. Interest rates range from 2.62% to 14.02%. The following is a summary of the carrying values of assets held under capital lease at June 30, 2010:
Land Buildings Equipment

Total Assets Held Under Capital Lease

$ 20,691,791

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 University System Office entered into two new capital lease obligations in the current year.

BOARD OF REGENTS OF THE UNIVERSrrY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

In October 2009, the University System Office entered into a copier capital lease with a third party in the amount of $26,502. The lease is for a term of five years at 14.02% interest. The outstanding principal balance on this lease at June 30, 2010 was $21,328.
In April 2010, the University System Office entered into a capital lease with a third party for the Shared Services Center in the amount of $3,578,343. The leased assets include land and a building located in Sandersville, Georgia. The lease expires in January, 2030, with an interest rate of 4%. Payments on the lease do not begin until the sixth year of the twenty year lease term. The outstanding principal balance as of June 30, 2010 was $3,614,126 due to the addition of $35,783 in capitalized interest to the principal balance.
The University System Office also has various capital leases for equipment and a capital lease for one building with outstanding balances at June 30, 2010 in the amount of $6,777,617 and $11,503,777, respectively.
OPERATING LEASES The University System Office has one operating lease for office space used by the Georgia Public Library System. The lease term begins in fiscal year 2 0 1 1 and is annually renewable through fiscal year 2020.
FUTURE COMMITMENTS Future commitments for capital leases and for noncancellable operating leases having remaining terms in excess of one year as of June 30, 2010, were as follows:

Real Pro~ertavnd Eaui~ment

Capital

Operating

Leases

Leases

Year EndingJune 30: 2011 2012 2013 2014 2015 2016 - 2020
2021- 2025 2026 - 2030
Total Minimum Lease Payments

$ 29,073,963 $ 1,957,680

Less: Interest Principal Outstanding

7,157,115

The University System Office's fiscal year 2010 expense for rental of real property and equipment under operating leases was $1,558,836.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSrrY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

Note 11. Retirement Plans
The University System Office participates in various retirement plans administered by the State of Georgia under two major retirement systems: Employees' Retirement System of Georgia (ERS System) and Teachers Retirement System of Georgia. 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 system offices. The significant retirement plans that the University System Office 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.
Employees' Retirement System of Georgia The ERS System is comprised of individual retirement systems and plans covering substantially all employees of the State of Georgia except for teachers and other employees covered by the Teachers Retirement System of Georgia. One of the ERS System plans, the Employees' Retirement System of Georgia (ERS), is a cost-sharing multiple-employer defined benefit pension plan that was 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 and has the powers and privileges of a corporation. ERS acts pursuant to statutory direction and guidelines, which may be amended prospectively for new hires but for existing members and beneficiaries may be amended in some aspects only subject to potential application of certain constitutional restraints against impairment of contract.
On November 20, 1997, the Board created the Supplemental Retirement Benefit Plan (SRBP-ERS) of ERS. SRBP-ERS was established as a qualified governmental excess benefit plan in accordance with Section 415 of the Internal Revenue Code (IRC) as a portion of ERS. The purpose of the SRBP-ERS is to provide retirement benefits to employees covered by ERS whose benefits are otherwise limited by IRC Section 415. Beginning January 1,1998, all members and retired former members in ERS are eligible to participate in the SRBP-ERS whenever their benefits under ERS exceed the limitation on benefits imposed by IRC Section 415.
The benefit structure of ERS is established by the Board of Trustees under statutory guidelines. Unless the employee elects otherwise, an employee who currently maintains membership with ERS based upon State employment that started prior to July 1,1982, is an "old plan" member subject to the 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 the modified plan provisions. Effective January 1,2009, newly hired State employees, as well as rehired State employees who did not maintain eligibility for the "old" or "new" plan, are members of the Georgia State Employees' Pension and Savings Plan (GSEPS). ERS members hired prior to January 1,2009 also have the option to change their membership to the GSEPS plan.
Under the old plan, new plan, and GSEPS, a member may retire and receive normal retirement benefits after completion of 1 0 years of creditable service and attainment of age 6 0 or 3 0 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.
Retirement benefits paid to members are based upon a formula adopted by the Board of Trustees for such purpose. The formula considers the monthly average of the member's highest 24 consecutive calendar months of salary, the number of years of creditable service, and the member's age at retirement. Post-retirement cost-of-living adjustments may be made to members' benefits

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

EXHIBIT "F"

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.
Member contribution rates are set by law. 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 University System Office pays member contributions in excess of 1.25% of annual compensation. Under the old plan, these University System Office 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 University System Office is required to contribute at a specified percentage of active member payroll established by the Board of Trustees determined annually in accordance with actuarial valuation and minimum funding standards as provided by law. These University System Office contributions are not at any time refundable to the member or his/her beneficiary.
Employer contributions required for fiscal year 2010 were based on the June 30, 2007 actuarial valuation for the old and new plans and were set by the Board of Trustees on September 18, 2008 for GSEPS as follows:
Old Plan* New Plan GSEPS
* 5.66% exclusive of contributions paid by the employer on behalf of old plan members
Members become vested after 1 0 years of service. Upon termination of employment, member contributions with accumulated interest are refundable upon request by the member. However, if an otherwise vested member terminates and withdraws his/her member contributions, the member forfeits all rights to retirement benefits.
Teachers Retirement System of Georgia The Teachers Retirement System of Georgia (TRS) is a cost-sharing multiple-employer defined benefit plan created in 1943 by an act of the Georgia General Assembly to provide retirement benefits for qualifying employees in educational service. A Board of Trustees comprised of active and retired members and ex-officio State employees is ultimately responsible for the administration of TRS.
On October 25, 1996, the Board created the Supplemental Retirement Benefit Plan of the Georgia Teachers Retirement System (SRBP-TRS). SRBP-TRS was established as a qualified governmental excess benefit plan in accordance with Section 415 of the Internal Revenue Code (IRC) as a portion of TRS. The purpose of SRBP-TRS is to provide retirement benefits to employees covered by TRS whose benefits are otherwise limited by IRC Section 415. Beginning July 1, 1997, all members and retired former members in TRS are eligible to participate in the SRBP-TRS whenever their benefits under TRS exceed the IRC Section 415 imposed limitation on benefits.
TRS provides service retirement, disability retirement, and survivor's benefits. The benefit structure of TRS is defined and may be amended by State statute. A member is eligible for normal service retirement after 3 0 years of creditable service, regardless of age, or after 1 0 years of service and attainment of age 60. A member is eligible for early retirement after 25 years of creditable service.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

Normal retirement (pension) benefits paid to members are equal to 2% of the average of the member's two highest paid consecutive years of service, multiplied by the number of years of creditable service up to 4 0 years. Early retirement benefits are reduced by the lesser of one-twelfth of 7% for each month the member is below age 6 0 or by 7% for each year or fraction thereof by which the member has less than 3 0 years of service. It is also assumed that certain cost-of-living adjustments, based on the Consumer Price Index, will be made in future years. Retirement benefits are payable monthly for life. A member may elect to receive a partial lump-sum distribution in addition to a reduced monthly retirement benefit. Death, disability and spousal benefits are also available.

TRS is funded by member and employer contributions as adopted and amended by the Board of Trustees. Members become fully vested after 1 0 years of service. If a member terminates with less than 1 0 years of service, no vesting of employer contributions occurs, but the member's contributions may be refunded with interest. Member contributions are limited by State law to not less than 5% or more than 6% of a member's earnable compensation. Member contributions as adopted by the Board of Trustees for the fiscal year ended June 30, 2010 were 5.25% of annual salary. The member contribution rate will increase to 5.53% effective July 1,2010. Employer contributions required for fiscal year 2010 were 9.74% of annual salary as required by the June 30, 2007 actuarial valuation. The employer contribution rate will increase to 10.28% effective July 1, 2010.

The following table summarizes the University System Office contributions by defined benefit plan for the years ending June 30,2010, June 30,2009, and June 30,2008:

ERS

Required

Percent

Contribution Contributed

TRS

Required

Percent

Contribution Contributed

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 is 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 a principal administrator, 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 (AIG-VALIC, American Century, 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.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

Funding Policy The University System Office 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 2010, the employer contribution was 9.24% of the participating employee's earnable compensation. Employees contribute 5%of their earnable compensation. Amounts attributable to all plan contributions are fully vested and nonforfeitable at all times.
The University System Office and the covered employees made the required contributions of $364,355 (9.24%) and $197,162 (5%),respectively.
AIG-VALIC, American Century, Fidelity, and TIAA-CREF have separately issued financial reports which may be obtained through their respective corporate offices.
Georgia Defined Contribution Plan
Plan Description The University System Office participates in the Georgia Defined Contribution Plan (GDCP) which is a single-employer defined contribution plan established by the General Assembly of Georgia for the purpose of providing retirement coverage for State employees who are temporary, seasonal, and part-time and are not members of a public retirement or pension system. GDCP is administered by the Board of Trustees of the Employees' Retirement System of Georgia.
Benefits A member may retire and elect to receive periodic payments after attainment of age 65. The payment will be based upon mortality tables and interest assumptions to be adopted by the Board of Trustees. If a member has less than $3,500 credited to his/her account, the Board of Trustees has the option of requiring a lump sum distribution to the member in lieu of making periodic payments. Upon the death of a member, a lump sum distribution equaling the amount credited to his/her account will be paid to the member's designated beneficiary. Benefit provisions are established by State statute.
Contributions Member contributions are seven and one-half percent (7.5%)of gross salary. There are no employer contributions. Contribution rates are established by State statute. Earnings are credited to each member's account in a manner established by the Board of Trustees. Upon termination of employment, the amount of the member's account is refundable upon request by the member.
Total contributions made by employees during fiscal year 2010 amounted to $40,159 which represents 7.5% of covered payroll. These contributions met the requirements of the plan.
The Georgia Defined Contribution Plan issues a financial report each fiscal year, which may be obtained from the ERS offices.
Note 12. Risk Management
The University System of Georgia offered its employees and retirees access to two different selfinsured healthcare plan options - a PPO/PPO Consumer healthcare plan, and an indemnity healthcare plan. The indemnity plan was discontinued effective January I s t , 2010. The University System Office and participating employees and retirees paid premiums to either of the self-insured healthcare plan options to access benefits coverage. The respective self-insured healthcare 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 University System of Georgia share the risk of loss

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSIlY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

EXHIBIT "F"

for claims associated with these plans. The reserves for these two plans are considered to be a selfsustaining risk fund. Both self-insured healthcare plan options provide a maximum lifetime benefit of $2,000,000 per person.

The Board of Regents has contracted with Blue Cross Blue Shield of Georgia, a wholly owned subsidiary of Wellpoint, to serve as the claims administrator for the two self-insured healthcare plan products. All claims submitted by program participants are remitted directly to Blue Cross Blue Shield of Georgia from various organizational units for verification of coverage, processing and payment through a bank account maintained for this purpose by Blue Cross Blue Shield of Georgia. Blue Cross Blue Shield of Georgia maintains an eligibility file based on information furnished by the various organizational units of the University System of Georgia. In addition t o the two different selfinsured healthcare plan options offered to the employees of the University System of Georgia during the fiscal year, a fully insured HSA/High Deductible PPO healthcare plan and two fully insured HMO healthcare plan options are also offered to System employees.

The prescription drug plan is administered through Medco Health Solutions. Pharmacy drug claims are processed in accordance with guidelines established for the Board of Regents' Prescription Drug Benefit Program. Generally, claims are submitted by participating pharmacies directly to Medco Health Solutions for verification, processing and payment. Medco Health Solutions maintains an
eligibility file based on information furnished by Blue Cross - Blue Shield on behalf of the various
organizational units of the University System of Georgia.

A reconciliation of total estimated claims liabilities for employees and retirees for the fiscal years ended June 3 0 , 2 0 1 0 and June 30,2009 is shown below:

Employees; Unpaid Claims and Claim Adjustments (Prior Year IBNR)

June 30,2010 June 30,2009 *
$ 21,827,567 $ 24,048,856

Incurred Claims and Claim Adjustments Expenses Provisions for Insured Events of the Current Year

181,684,842

204,169,368

Payments - Claims and Claim Adjustments Attributable To Insured Events of the Current Year and Prior Years
Unpaid Claims and Claim Adjustments (CurrentYear IBNR)

187,858,409

206,390,657

$ 15,654,000 $ 21,827,567

Retirees: Unpaid Claims and Claim Adjustments (Prior Year IBNR)

$ 6,626,917 $

6,702,660

Incurred Claims and Claim Adjustments Expenses -
Provisionsfor lnsured Events of the Current Year
Payments - Claims and Claim Adjustments Attributable
To Insured Events of the Current Year and Prior Years

93,657,332

91,512,153

Unpaid Claims and Claim Adjustments (Current Year IBNR) $ 6,756,000 $

6,626,917

* Prior year claims incurred and paid have been adjusted in this schedule for a correction in the breakout
between Active and Retired employees. Beginningand ending IBNR liabilities are not affected by this correction.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSrrY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

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 University System Office, 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 23. 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 expenditures that are disallowed under grant terms. The amount of expenditures which may be disallowed by the grantor cannot be determined at this time although the University System Office expects such amounts, if any, t o be immaterial to its overall financial position.
Litigation, claims and assessments filed against the University System Office (an organizational unit of the Board of Regents 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 Reportfor the fiscal year ended June 30, 2010.
Note 14. Post-Employment Benefits Other Than Pension Benefits
Plan Description The Board of Regents Retiree Health Benefit Fund (the "Plan") is a single-employer, defined benefit, healthcare plan administered by the University System Office. The plan was authorized pursuant to Official Code of Georgia Annotated Section 47-21-21 for the purpose of accumulating funds necessary to meet employer costs of retiree post-employment health insurance 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.

BOARD OF REGENTS OF THE UNIVERSrrY SYSTEM OF GEORGIA UNIVERSIfY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

EXHIBIT "F"

The Board of Regents of the University System of Georgia issues a publicly available financial report that includes financial statements and required supplementary information for the Plan within its Consolidated Annual Financial Report. This report may be obtained at the following website address: htto://~~~.usq.edu/fiscaflfairs/reportina/annual fin rep/
Membership of the plan consisted of the following at June 30, 2010:

Retirees and Beneficiaries Receiving Benefits Terminated Plan Members Entitled To But Not
Yet Receiving Benefits Active Plan Members

$

17,471

0 37,076

Total

Summary of Significant Accounting Policies The financial statements of the Plan are prepared using the accrual basis of accounting. Employer contributions are recognized in the period in which they are due. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan.
Funding Policy The contribution requirements of plan members and the University System of Georgia, as employer, are established and may be amended by the Board of Regents. The Plan is substantially funded on a "pay-as-you-go" basis; however, amounts above the pay-as-you-go basis may be contributed annually, either by specific appropriation or by Board designation.
Organizational units of the Board of Regents of the University System of Georgia pay the employer portion for group insurance for eligible retirees. The employer portion of health insurance for its eligible retirees is based on rates that are established annually by the Board of Regents for the upcoming plan year. For the 2010 plan year, the employer rate was approximately 72% of the total health insurance cost for eligible retirees and the retiree rate was approximately 28%. 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 retiree.
For fiscal year 2010, the University System of Georgia contributed $69,888,771 to the plan, for current premiums or claims. Plan members receiving benefits contributed $27,198,290 for current premiums or claims.
The University System Office had 7 8 employees who had retired or were disabled that were receiving these post-employment health and life insurance benefits as of June 30, 2010. For the year ended June 30, 2010, the University System Office recognized as incurred $369,907 of expenditures, which was net of $133,167 of participant contributions.
Annual OPEB Cost and Net OPEB Obligation The University System of Georgia's annual other post-employment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities over a period not to exceed thirty years.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

The following table shows the components of the University System's annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the University System's net OPEB obligation to the Retiree Health Benefit Fund (dollar amounts in millions):

Annual Required Contribution Interest on Net OPEB Obligation Adjustment to Annual Required Contribution
Annual OPEB Cost (Expense) Less: Contributions Made
Increase in Net OPEB Obligation
Net OPEB Obligation - Beginningof Year *

$ 381.7 17.8 -25.2
$ 374.3 69.9
$ 304.4 395.5

Net OPEB Obligation - End of Year

$ 699.9

Since the net OPEB obligation to the Retiree Health Benefit Fund is a liability of the entire University System and not only the University System Office, the annual OPEB cost and net OPEB obligation are reported in the Consolidated Annual Financial Report of the University System of Georgia.

The University System's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for the Retiree Health Benefit Plan for the current and past two fiscal years were as follows (dollar amounts in millions):

Annual OPEB Cost and Net OPEB Obligation

Fiscal Year Ended

Annual
OPEB
Cost *

Percentage of Annual OPEB Cost
Contributed *

Net
OPEB
Obligation *

* An error was discovered in the methodology for determining the split between retiree and active
employee claims expense, which resulted in an increase in retiree claim cost that was absorbed by the employer. As a result, employer contributions to the Retiree Health Benefit Fund have been increased by $21.1 million and $20.4 million in fiscal years 2009 and 2008, respectively. Because the plan contributions and expenses increased by the same amounts, a restatement to the beginning net assets reported in the Retiree Health Benefit Fund financial statements was not necessary. However, the increased employer contributions in fiscal year 2009 and 2008 impacted both the Annual OPEB cost and Net OPEB Obligation amounts reported in these notes. Therefore, the Annual OPEB cost and Net OPEB Obligation has been restated to reflect the correction of this error.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

EXHIBIT "F"

Funded Status and Funding Progress

Actuarial Valuation
Date

Actuarial Value of
Assets
(a)

Actuarial Accrued Liability (AAL)Projected Unit Credit
(b)

Unfunded AAL (UAAL) (b-a)

Funded Ratio (a/ b)

Covered Payroll (c)

UAALas a Percentage of Covered
Payroll ((b-a)/c)

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the Notes to the Financial Statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.

Actuarial Methods and Assumptions Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. Additional information as of the latest actuarial valuation follows:

Valuation date Actuarial cost method Amortization method Asset Valuation method Remaining amortization period Actuarial assumptions:
lnvestment rate of return* Healthcare cost trend rate* Ultimate trend rate Year of Ultimate trend rate

July 1,2010 with results rolled back to July 1,2009 Projected Unit Credit Level Dollar, Closed, 28 year Market Value of Assets 28 years

* Includesan inflationassumption of 2.5%
Please note that the lnvestment Rate of Return percentage can change.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30,2010

EXHIBIT "F"

Note 15. Natural CC/asficationswith Functional Classifiwtions
The University System Office's operating expenses by functional classification for fiscal year 2010 are shown below:
Functional Classification

Natural Classification

Instruction

Research

Public Service

Academic Support

Salaries Employee Benefits Other Personal Services Travel Scholarships and Fellowships Utilities Supplies and Other Services Depreciation

3,403 1,207,466
1,057

139,924

1,019,102 70,990.281
177,227

17,784 15,266,254
629,629

Total Operating Expenses

Natural Classification

Student Services

Functional Classification

Scholarships

Institutional

and

Support

Fellowships

Total Operating Expenses

Salaries Employee Benefits Other Personal Services Travel Scholarships and Fellowships Utilities Supplies and Other Services Depreciation
Total Operating Expenses

Note 16. Amiated Oryanizations
In accordance with GASB Statement No. 39, Determining Whether Certain Organiations are Component Uni&, the University System of Georgia Foundation, Inc. has been determined to be a legally separate, tax exempt organization whose activities primarily support the University System Office of the Board of Regents of the UniversitySystem of Georgia (an organizational unit of the State of Georgia). The State Accounting Office has determined Component Units of the State of Georgia, as required by GASB Statement No. 39, should be assessed in relation to their significance to the State of Georgia. Accordingly, the University System Office has not included financial activity for the University System of Georgia Foundation, Inc., in these financial statements.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2010

EXHIBIT "F"

The University System of Georgia Foundation, Inc. has been determined significant to the State of Georgia for the year ended June 30, 2010, and as such, is reported as a discretely presented component unit in the Comprehensive Annual Financial Report of the State of Georgia (CAFR). The significant discretely presented component units issue separate audited financial statements that can be obtained from the Board of Regents of the University System of Georgia.

(This page left intentionally blank)

SUPPLEMENTARY INFORMATION

BOARD OF REGENTS OFTHE UNIVERSITY SYSTEM OF GEORGIA UNIVERSIW SYSTEM OFFICE (OVERSIGHT UNIT) SCHEDULE OF FUNDING PROGRESS YEAR ENDEDJUNE 30,2010

SCHEDULE "1"

Actuarial Valuation
Date
July 1,2007 $ July 1,2008 $ July 1,2009 $

Actuarial Value of Assets
(a)
0 $ 290.000 $ 10,566,000 $

BOARD OF REGENTS RETIREE HEALTH BENEFIT FUND SCHEDULE OF FUNDING PROGRESS

Actuarial Accrued Liab~lity(AAL) Projected Unit
Credit (b)

Unfunded AAL (UAAL) (b-a)

Funded Ratio (0)

Covered Payroll (c)

1,985,200.000 $ 1,985,200,000 3,258,200,000 $ 3,257,910.000 3,129,508,000 $ 3,118,942,000

0.0% $ 0.0% $ 0.3% $

2,201,804,000 2,372,385,000 2,399,532,000

UAAL as a Percentage of Covered
Payroll ((b-a)/c)

BOARD OF REGENTS RETIREE HEALTH BENEFIT FUND SCHEDULE OF EMPLOYER CONTRIBUTIONS

Fiscal Year

Percentage Contributed

Required Contribution

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) BALANCE SHEET (NON-GAAP BASIS) BUDGET FUND JUNE 30,2010
ASSETS
Cash and Cash Equivalents Investments Accounts Receivable
Federal Financial Assistance Other Prepa~dExpenditures Inventories
Total Assets
LIABILITIES AND FUND EQUITY
Liabilities Accounts Payable Accrued Payroll Encumbrances Payable Deferred Revenue
Total Liabilities
Fund Balances Resewed Departmental Sales and Services lndlrect Cost Recoveries Restricted/Sponsored Funds UncollectibleAccounts Recervable Inventories Property Sale Unreserved Surplus
Total Fund Balances
Total Liab~litiesand Fund Balances

SCHEDULE "2"

Actual amounts were preparedon a prescribed bass of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles.

(This page left intentionally blank)

BOARD OF REGENTS OF THE UNNERSITY SYSTEM OF GEORGIA UNIVERSIiT SYSTEM OFFICE (OVERSIGHT UNIT)
SUMMARY BUDGET COMPARISONAND SURPLUSANALYSIS REPORT (NON-GAAP BASIS) BUDGEi FUND
YEAR ENDED JUNE 3 0 . 2 0 1 0

REVENUES
State Approprlatlon SIate General Funds Tobacco Funds
Federal Funds Other Funds
Total Revenues
Transfer from Reserved Fund Balance
Total Funds Avallable
EXPENDITURES
Georgla Mllltary College Georg~aPubl~cTelecommunications MCG Hospltal and Cllnlcs Publ~cLlbrarles Regenw Central Offlce Research Consortium Special Funding lnltlatlve Teacnlng
Excess of Funds Avallable over Expenditures
FUND BAMNCE JULY2
Reserved Unresewed
ADJUSTMENTS
Pr~oYr ear Payables/Expenditures Prlor Year Reoe~vables/Revenues Increase (Decrease) in Inventories Unreserved Fund Balance (Surplus) Returned
to Office of Treasury and FhscalServlceS Year Ended June 30, 2 0 0 9
Unreserved Fund Balance (Surplus) Returned
- to Board of Regents Unlverslty System Office
Year Ended June 30.2009 Early Remittance of Surplus Returned to
Dfflce of Treasury and Fiscal Sewices Early Remlnance of Surplus Returned to
- Board of Regents University System Ofice
Pr~orYear Resened Fund Balance Included in Funds Avaolable
FUND BALANCE JUNE 3 0
SUMMARY OF FUND B A l A N E
Reserved Departmental Sales and Services Indirect Cost Reoover~es Restricted/Sponsored Funds Uncollectibla Accounts Receivable Inventories Propeq Sale
Total Reserved
Unresewed Surplus
Total Fund Balance
Actual amounts were prepared on a prescribed bass of accounsng that demonstrates compliance w ~ t hbudgetary statutes and regulations of the State of Georgia, w h ~ c his a comprenenSlve bass of accountlng other than generally accepted accounting principles

ORIGINAL BUDGET

FINAL BUDGEl

ACTUAL

- VARIANCE
FAVORABLE (UNFAVORABLE)

e o m o OF REGENTSOF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITYSYSTEM OFFICE [OVERSIGHTUNIT)
STATEMENTOF PROGRAM RNENUESAND MPENDITURESBY FUNDING SOURCE COMPARED TO BUDGET (NON-GAAP BASIS) BUDGET FUND YEAR ENDEDJUNE 30.2010

Georda Mllltaty Ccllege State Approprlat~on State General Funds

Orlbnal Appropnatlon

Ftnal Budget

Current Year Revenues

Funds Ava~lableCompared to Budget

Prior Year Carry-Over

Total Funds Available

varlance ~csltlve (Nemtlve)

Georaa Publlc Telecommunloatlons State Approprlauon State General Funds

MCG HosplOl and Cllnlcs State Appmpnat~on State General Funds

Publlc Llbrsr~ss State Approprlatlon State General Funds other Funds
Total Publlc Lobrarles

Regents Central Otflce State Apprapr~at~an SIate General Funds

Ussearoh Consortium State Approprlatlon State General Funds Tobacco Funds
Total Researoh Consoltlum

S m l a l Fundlng lnltlatlve State Approprlatlon State General Funds

Teaching State Approprlatlon State General Funds Federal Funds Amer~canRecovery and RelnvestmentAct of 2009 Federal Stabtliratlon Funds Other Funds

$

51.538.048 0 0 $

80.442.51000 $

53.667 332 00 $

0.00 $

0 00 31.705.905 0 0

450.000 00 40.145 467 00

422 590 16 36,331,533 53

0 00 20.383.298.03

53.667 332 00 5 -26.775.17800

422 590 16 56.714 8 3 1 5 6

-27.409 8 4 16,569,364 56

- Grand Tatab All Programs

$

- 196 858.357 00 $ 224.204 434 0 0 $

193,270.552 53 $

20 383.298 03 $

- 213.653 850 5 6 $ -10,550,583 44

Actual amounts Were preparedon a prmcrbed basis of accountlngthat demonstrates complfancewnh budgetliy statutes and regulauonsof the State of Georea whtch 4s a comprenenslveMSIS of acmuntlng other than generallyaccepted accounting prlnclples

EkpendituresCompared w Budget

Var~ance

PElbve

Actual

(Negabve)

Actual FundsAvatlable
Over/(Under) Expend~tures

Early

Praar Penad

Other

Rernnrtance

--- Mjusbnents Mjustments

of Surplus

Program Fund
Balances

Transfers

Program Fund Balances

Reserve

Surplus

Total Fund BBDnte

5 34 711574 00 $
506330684

67 132 00 1 13669316

OM) $ OM)---

7.73301 5 0 00

0008 0 00

000 $ 0 00

7.733 0 1 $ 000

0 00 $ 000

000s 0 00

7733016 0 00

773301 0 00

Unexpendable Reserves Uncolectlble Accounts Receivable lnventorles

39.716 59 197 453.15

(This page left intentionally blank)

REVENUES
State Appropriation Federal Funds Other Revenues Retained

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) SCHEDULE OF APPROVED BUDGET YEAR ENDED JUNE 30.2010

ORIGINAL APPROPRIATION

FINAL APPROVED
BUDGET

LESS: BUDGET TRANSFERS TO OTHER UNITS

TOTAL

EXPENDITURES
Advanced Technology Development Center/Econom~c Development lnstltute
Agr~culturalExperlment Stat~on Atllerls and Tlfton Veterlnary Laborator~es Cooperative Extension Service Forestry Cooperative Extens~on Forestry Research Georaa Military College Georg~aPublic Telecornmun~cat~ons Georgla Radiation Therapy Center Georgla Tech Research lnstltute MCG Hospitals and Clln~cs Marine lnst~tute Mar~neResources Extens~onCenter Payments to Georg~aCancer Coalit~on Publlc Llbrarles Regents Central Office Research Conson~um Sk~dawaylnstltute of Oceanography Speclal Fund~nglnlt~atlve Teachlng Veterlnary Medlc~neExperlment Statlon Veterlnaty Med~clneTeach~ngHospltal

See notes to the financial statements.

RCSURCH INSTITUTIONS
GeorOa 1notltute of Technolo@ Gsowa State Unovenrty Msdical College of Georgra Unlvcrslry of Gcarsa
REGIONALUNIVERSITIES
STATE UNIVERSITIES
Albany s m t e un,vers,t, lirmVongAUanfl0 Smte Univcrslty Augusta $taw univer,,v C l a y M Slate Unlverllty co1umbua State U","Crplh ~ o rvtalley state unwersm Gsw@aCollege and State Unlvenlh Gemsa Southwestern State Unlvcrsrty
nemmaw s m unwen,ty
am Geargra Callege and Stare Unlvers~ry Savannah stat untverarty Soumorn PolytsEhnlc Statc unlverrly u n ~ v w a t yofwest Geareta
Abraham Baldwln Agricultural College College aiCoastal G c w a Dalton Smte Calleec Galnc)vllle StateCallsgs Gaorgra Gwmnsu Colbge Gmrdon CQl1sge Mason State College Mlddle Georgla Callege
TWOYEAR COLLEGES
Auanta Ms"apol6mn College BBlnMldge Call*& D a m n College East Gaargra Callegc Gaorgla HnghlandsCullcgc Goorgls Perimeter Callcgc South Oeorgls Cdlegc Waycross Callepe

BOARD OF REGENTS OF THE UNlVERSlM SYSTEM OF GEORGIA UNlVERSllYSYSTEM OFFICEIOVERSIGHTUNITI
SCHEDULEOFALLQTMZNR5TOUNITS OFTHEUNIVERSrTYSVSTEM OFGEORGIO YE4R ENDEDJUNE30 2 0 1 0

ADVANCED TECHNOLOGY DEVELOPMENT
CENTER/ ECONOMIC DNEOPMENT INSTITUTE

AGRICULTURAL EXPERIMENT STATION

CWPERATIVE

FORESTRY

EXTENSION

COOPERATIVE

FORESTRY

--- SERVICE

EUENSION

RESEARCH

GEORGIA TECH
RESERRCH INSTITUTE

MRlNE INSTITUTE

see ndsa to the finanolal rutemeob,

PAYMENTS

MARINE

TO

RESOURCES

GEORGIA

EXIENSION

CANCER

RESEARCH

- CENTER - COALITION CONSORTIUM

SKIOAWAY INSTITUTE OF OCEMlOGReiPHY

SPECIAL FUNDING INITIATIVE

TEACHING

VETERINARY MEDICINE
UPERIMENT STATION

VFIERINMY MEOIWNE TEACHING HOSPITAL

TOTAL

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
ANALYSIS OF PRIOR YEAR'S SURPLUS FUNDS COLLECTED FROM INSTITUTIONS AND REDISTRIBUTED TO INSTITUTIONS WITH DEFICITS YEAR ENDEDJUNE 30,2010

SCHEDULE "7"

RESEARCH INSTITUTIONS
Georgia Institute of Technology Georgia State University Medical College of Georgia Universityof Georgia
REGIONAL UNIVERSITIES
Georgia Southern University Valdosta State University
STATE UNIVERSITIES
Albany State University Clayton State University Columbus State University Fort Valley State University Georgia College and State University Georgia SouthwesternState University North Georgia College and State University Savannah State Universiw Southern Polytechnic State Un~versity
STATE COLLEGES
Abraham Baldwin Agricultural College Dalton State College Gainesville State College Georgia Gwinnen College Gordon College Macon State College Middle Georgia College
TWO-YEAR COLLEGES
Atlanta Metropolitan College Bainbridge College Darton College East Georgia College Georgia Highlands College Georgia Perimeter College South Georgia College Waycross College

COLLECTED

REDISTRIBUTED

Current Funds - Unrestricted
Surplus

See notesto the financial statements.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNlVERSllY SYSTEM OFFICE (OVERSIGHT UNIT)
ANALYSIS OF EARLY REMITTANCE OF CURRENT YEAR SURPLUS FUNDS COLLECTED FROM INSTITUTIONS YEAR ENDEDJUNE 30.2010

SCHEDULE "8"

RESEARCH INSTITUTIONS
Georgia Institute of Technology Georgia State University Medical College of Georgia Universityof Georgia
REGIONAL UNIVERSITIES
Georgia Southern University Valdosta State Unlverslty
STATE UNIVERSITIES
Albany State University Armstrong Atlantic State University Augusta State University Columbus State Un~versity Georgia College and State University Kennesaw State University North Georgia College and State University Southern Polytechn~cState University Universityof West Georgia
STATE COLLEGES
Dalton State College GainesvilleState College Georgia Gwinnett College Gordon College Macon State College Middle Georgia College
TWO-YEAR COLLEGES
Atlanta Metropolitan College Darton College East Georgia College Georgia Highlands College Georgia Perimeter College South Georgia College

COLLECTED

See notes to the financial statements.

(This page left intentionally blank)

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) RECONCILIATIONOF SALARIESAND TRAVEL YEAR ENDEDJUNE 30,2010

SCHEDULE "9"

Totals per Annual Supplement
Accruals - Payroll June 30,2010 June 30,2009
Compensated Absences June 30,2010 June 30,2009
Adjustments Shared Serv~ceson Jointly Staffed Personnel
Unidentified Variance

SALARIES

$

28,336,219 $

TRAVEL 332,316

SECTION II CURRENT YEAR FINDINGS AND QUESTIONED COSTS

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30,2010

FINANCIAL STATEMENT FINDINGS AND OUESTIONED COSTS

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 controls 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 University System Office's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or 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.

Any identified deficiencies in internal controls that we did not consider to be significant deficiencies and/or material weaknesses have been communicated to management and those charged with governance within a separate management letter dated February 7, 2011. Internal control deficiencies identified during the course of this engagement that were considered to be significant deficiencies and/or material weaknesses are presented below:

ACCOUNTING CONTROLS (OVERALL) Inadequate Internal Controls over Payroll Consolidation and Outsourcing Project Significant Deficiency Finding Control Number: FS-472-10-01

Condition:

The University System failed to adequately plan and monitor the Shared Services Center Initiative project which included the outsourcing of employee compensation. The University System appears to have moved forward with the project in an effort to meet deadlines despite critical pieces of the project plan being incomplete. The University System did not have the ability to ensure the information maintained in the financial accounting system provided accurate information for financial reporting and decision making.

Criteria:

AlCPA Professional Standards, AU 319.04, states that internal control is a process - affected by an entity's board of directors, management and other personnel - designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (a) reliability of financial reporting, (b) effectiveness and efficiency of operations, and (c) compliance with applicable laws and regulations.

Questioned Cost:

N/A

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30,2010

FINANCIAL STATEMENT FINDINGS AND OUESTIONED COSTS

ACCOUNTING CONTROLS (OVERALL) lnadequate Internal Controls over Payroll Consolidation and Outsourcing Project Significant Deficiency Finding Control Number: FS-472-10-01

Information:

During June 2008, the University System of Georgia's Board of Regents voted to approve moving forward with the Shared Services Initiative with payroll consolidation as the first component. The Shared Services Initiative project was to provide consolidation and streamlining of the Universities' administrative support functions into a "Shared Services Center" to ensure efficient and effective service delivery. As a result of a competitive bid process, Automatic Data Processing, Inc. (ADP) was selected as the provider of a consolidated payroll system as Phase I of the Shared Services Initiative. The implementation of the Shared Services Initiative affected 3 4 units of the University System of Georgia (USG).

We noted the following deficiencies:

The overall management and monitoring of the project by the USG was not adequate to protect the fiscal and technical interests of the USG. Adequate attention was not given to financial reporting during the planning, risk assessment, and design phases of the project plan. Payroll issues unique to Higher Education were not addressed in the design phase. Key functionality, the General Ledger interface, was not complete prior to the implementation date; therefore, upon implementation the institutions had no systematic mechanism to record employee compensation expense on the General Ledger. Users were not adequately trained and lacked an understanding of the system. The users did not have the knowledge to adequately resolve identified variances. At implementation, the USG failed to provide adequate tools to assist users in performing reconciliations. This deficiency was not addressed until May 2010 - ten months after the implementation date. lnadequate monitoring of rate tables resulted in processing errors for two months. Numerous contracts associated with the project were not approved and/or signed by appropriate, authorized USG personnel in accordance with USG rules and regulations.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30,2010

FINANCIAL STATEMENT FINDINGS AND OUESTIONED COSTS

ACCOUNTING CONTROLS (OVERALL) Inadequate Internal Controls over Payroll Consolidation and Outsourcing Project Significant Deficiency Finding Control Number: FS-472-10-01

Consultants employed by the USG requested and approved modifications to original contracts and approved invoicesfor payment. USG did not appear to consistently approach invoice approval to protect their interest.

Cause:

The University System failed to provide the appropriate level of oversight related to the Shared Services project. This lack of oversight resulted in management's failure to ensure that key elements of the Shared Services lnitiative project plan were completed before project implementation. Additionally, University System management was not actively involved in contract administration and monitoring to ensure that the USG's interests were protected.

Effect:

Failure to implement adequate internal controls and the lack of monitoring key components of the project exposed the University System to unnecessary risk from both a fiscal and technical perspective. Problems resulting from key functionality not being completed prior to implementation plagued each unit of the University System involved in the project. To ensure that business operations continued, throughout the fiscal year, each unit spent significant resources to identify issues and process payroll.

Recommendation:

The University System should continue to review the controls and procedures currently in place associated with the Shared Services Project Initiative. Management should identify weaknesses, and design and implement procedures necessary to strengthen controls over the accounting functions, financial reporting and monitoring of the project. Additionally, management should assess whether an appropriate foundation and a fully developed and strongly administered plan is in place related to Shared Services Initiative project before proceeding to ensure that the ultimate goals of the project are met.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
SCHEDULE OF FINDINGSAND QUESTIONEDCOSTS YEAR ENDED JUNE 30,2010

FIhANCIALSTATEMENT FINDINGS AND OUESTIONED COSTS

EXPENDlTURES/LlABlLlTlES/DlSBURSEMENTS GENERAL LEDGER Inadequate Internal Controls Significant Deficiency Finding Control Number: FS-472-10-02

Condition:

Accounting procedures of the University System Office were insufficient to provide adequate internal control over the recording of health benefit claims expense and the processing of journal entries.

Criteria:

Management of the University System Office is responsible for designing and maintaining internal controls that provide reasonable assurance that transactions are properly processed and reported.

Questioned Cost:

N/A

Information:

Expenditures/Lia biIities/Disbursements Management has implemented certain monitoring procedures designed to detect errors in the processing and recording of claims health benefit expenses related to the Retiree Health Benefit Fund. However, these procedures were not adequate in detecting errors in a timely manner. An error was discovered in the methodology for determining the split between retiree and active employee claims expense, which resulted in an increase in retiree claim cost that was absorbed by the employer. Adjustments were made to the financial statements to correct the effects of this error.

General Ledger Accounting procedures are designed so that certain employees enter and post journal entries within the GeorgiaFirst accounting system. A second level approval occurs manually. The controls associated within the manual approval which occurs outside GeorgiaFirst, was not designed to prevent or detect unapproved journal entries from being posted. Our testing revealed instances where unapproved journal entries were posted within the accounting system.

In addition, employees with the ability to enter and post journal entries within the accounting system have other job duties, such as bank reconciliation, that reduces the effectiveness of potential compensating controls.

Cause:

Management did not properly design procedures to ensure that errors are detected in a timely manner.

Effect:

Misstatements could occur and not be corrected in a timely manner.

Recommendation:

Management of the University System Office should strengthen internal controls in place related to the monitoring of health benefit claims expense to ensure that errors are detected in a timely manner.

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30,2010
FINANCIAL STATEMENT FINDINGSAND QUESTIONEDCOSTS
EXPENDITURES/LIABILlTlES/DISBURSEMENTS GENERAL LEDGER Inadequate Internal Controls Significant Deficiency Finding Control Number: FS-472-10-02
In addition, management of the University System Office should strengthen internal controls in place to ensure that accounting procedures related to the initiation and authorization of journal entries are adequately designed to prevent or detect unapproved journal entries from being posted within the accounting system. We recommend that management either separate the ability to initiate and post journal entries within the accounting system or implement mitigating compensating controls outside the accounting system using system generated data.
FEDERAL AWARD FINDINGS AND QUESTIONED COSTS
No matters were reported.