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, 2014 [June 30, 2014]

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
ATLANTA, GEORGIA
REPORT ON AUDIT OF THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2014
Georgia Department of Audits and Accounts Greg S. Griffin State Auditor

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
- TABLE OF CONTENTS -

SECTION I
FINANCIAL
INDEPENDENT AUDITOR'S REPORT
REQUIRED SUPPLEMENTARY INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
BASIC FINANCIAL STATEMENTS
EXHIBITS
A STATEMENT OF NET POSITION
B STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION
C STATEMENT OF CASH FLOWS
D STATEMENT OF FIDUCIARY NET POSITION BOARD OF REGENTS RETIREE HEALTH BENEFIT FUND
E STATEMENT OF CHANGES IN FIDUCIARY NET POSITION 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 FUNDS AVAILABLE AND EXPENDITURES COMPARED TO BUDGET
BY PROGRAM AND FUNDING SOURCE (NON-GAAP BASIS) BUDGET FUND
5 STATEMENT OF CHANGES TO FUND BALANCE BY PROGRAM AND FUNDING SOURCE (NON-GAAP BASIS) BUDGET FUND
6 RECONCILIATION OF BUDGET TO GAAP

Page
i
2 3 4 5 7 8
33 35 37 38 40 42

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
- TABLE OF CONTENTS -

SECTION I
FINANCIAL
SCHEDULES
SUPPLEMENTARY INFORMATION
7 SCHEDULE OF APPROVED BUDGET 8 SCHEDULE OF ALLOTMENTS TO UNITS OF THE UNIVERSITY SYSTEM OF
GEORGIA 9 ANALYSIS OF PRIOR YEAR'S SURPLUS FUNDS COLLECTED FROM
INSTITUTIONS 10 RECONCILIATION OF SALARIES AND TRAVEL

Page
43 44 46 47

SECTION II
COMPLIANCE AND INTERNAL CONTROL REPORTS
INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

SECTION III CURRENT YEAR FINDINGS AND QUESTIONED COSTS SCHEDULE OF FINDINGS AND QUESTIONED COSTS

SECTION I FINANCIAL

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

DEPARTMENT OF AUDITS AND ACCOUNTS
270 Washington Street, S.W., Suite 1-156 Atlanta, Georgia 30334-8400
March 13, 2015

Honorable Nathan Deal, Governor Members of the General Assembly of Georgia Members of the Board of Regents of the University System of Georgia
and Honorable Henry M. Huckaby, Chancellor
INDEPENDENT AUDITOR'S REPORT
Ladies and Gentlemen:
Report on the Financial Statements
We have audited the accompanying basic financial statements (Exhibits A through F) of University System Office (Oversight Unit) of the Board of Regents of the University System of Georgia, a unit of the University System of Georgia, which is an organizational unit of the State of Georgia, as of and for the year ended June 30, 2014.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
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 and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the University System Office's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
14ARL-62

expressing an opinion on the effectiveness of the University System Office's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the basic financial statements referred to above present fairly, in all material respects, the respective financial position of the business type activities and aggregate remaining fund information of the University System Office as of June 30, 2014, and the respective changes in financial position and cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter
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 cash flows of only that portion of the business-type 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 of the State of Georgia as of June 30, 2014, the changes in its financial position or its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
As described in Note 1 to the financial statements, in 2014, the University System Office adopted new accounting guidance, Governmental Accounting Standards Board (GASB) Statement No. 65, Items Previously Reported as Assets and Liabilities. Our opinion is not modified with respect to this matter.
Other Matters
Required Supplementary Information
Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis on pages i through vii and the Schedule of Funding Progress be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquires of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Other Information
Our audit was conducted for the purpose of forming an opinion on the basic financial statements of the University System Office. The accompanying supplementary information (Schedules 2 through 10) is presented for purposes of additional analysis and is not a required part of the basic financial statements.
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The accompanying supplementary information (Schedules 2 through 10) is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting or other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
Other Reporting Required by Governm ent Auditing Standards
In accordance with Government Auditing Standards, we have also issued our report dated March 13, 2015, on our consideration of the University System Office's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the University System Office's internal control over financial reporting and compliance.
Respectfully,

GSG:as 14ARL-62

Greg S. Griffin 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 1931 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 19 members, five of whom are appointed from the state-at-large, and one from each of the 14 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 31 institutions: four research institutions, four comprehensive universities, 10 state universities, and 13 state colleges. These institutions enroll more than 309,000 students and employ approximately 14,000 faculty and 30,000 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.
Overview of the Financial Statements and Financial Analysis
The University System Office is pleased to present its financial statements for fiscal year 2014. The emphasis of discussions about these statements will be on current year data. There are three financial statements presented: the Statement of Net Position; the Statement of Revenues, Expenses and Changes in Net Position; 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 2014 and fiscal year 2013. As custodian of the Board of Regents Retiree Health Benefit Fund, two additional statements are presented: the Statement of Fiduciary Net Position and the Statement of Changes in Fiduciary Net Position.
Statement of Net Position
The Statement of Net Position presents, if applicable, the assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position of the University System Office as of the end of the fiscal year. The Statement of Net Position is a point-of-time financial statement. The Statement of Net Position presents a fiscal snapshot of the University System Office. The Statement of Net Position presents end-of-year data concerning assets (current and noncurrent) plus deferred outflows, and liabilities (current and noncurrent) plus deferred inflows, and net position (assets plus deferred outflows minus liabilities plus deferred inflows). The differences between current and noncurrent assets are discussed in the Notes to the Financial Statements.
From the data presented, readers of the Statement of Net Position are able to determine the assets available to continue the operations of the University System Office and how much the University System Office owes vendors.
Finally, the Statement of Net Position provides a picture of the net position (assets and deferred outflows of resources minus liabilities and deferred inflows of resources) and their availability for expenditure by the University System Office. Net position is divided into three major categories. The first category, net investment in capital assets, provides the University System Office's equity in property, plant and equipment owned by the University System Office. The next category is restricted, which is divided into two categories, nonexpendable and expendable.
i

The corpus of nonexpendable, restricted resources is available only for investment purposes. Expendable, restricted resources 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. Unrestricted resources are available to the University System Office for any lawful purpose.
Statement of Net Position, Condensed

June 30, 2014

June 30, 2013

Assets Current Assets Capital Assets, Net Other Assets

$ 716,759,624 76,643,526 11,409,864

$ 609,427,923 40,872,408 10,588,654

Total Assets

804,813,014

660,888,985

Liabilities Current Liabilities Noncurrent Liabilities

589,857,979 48,000,016

480,082,245 14,831,908

Total Liabilities

637,857,995

494,914,153

Net Position Net Investment in Capital Assets Restricted Nonexpendable Expendable Unrestricted

28,765,831
4,381,979 87,555,656 46,251,553

27,111,543
4,375,648 105,985,171
28,502,470

Total Net Position

$ 166,955,019

$ 165,974,832

Total assets increased by $143,924,029 which was primarily due to an increase of $107,331,701 in the category of current assets and $35,771,118 in capital assets. The majority of the increase in current assets is in cash and cash equivalents and short-term investments categories, which are related to increased investments in the Pooled Investment Fund program by units of the University System of Georgia and their affiliated organizations. The majority of the increase in capital assets is related to the special item transfer of the Georgia Division of Archives and History.
Total liabilities increased for the year by $142,943,842. The increase in liabilities is mostly due to an increase in deposits held for others, in the amount of $103,376,345. The majority of the increase in noncurrent liabilities is related to the special item transfer of the Georgia Division of Archives and History.
The combination of the increase in total assets of $143,924,029 and the increase in total liabilities $142,943,842 yields an increase in net position of $980,187. The increase in net position is primarily in the categories of unrestricted and net investment in capital assets in the amounts of $17,749,083 and $1,654,288, respectively, offset by a decrease in the category of restricted expendable in the amount of $18,429,515. The decrease in the category of restricted expendable was mostly attributable to a decrease in the health insurance reserve due to health care costs increasing at a greater rate than contributions.
ii

Statement of Revenues, Expenses and Changes in Net Position
Changes in total net position as presented on the Statement of Net Position are based on the activity presented in the Statement of Revenues, Expenses and Changes in Net Position. 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, 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 Position, Condensed

June 30, 2014

June 30, 2013

Operating Revenues Operating Expenses

$ 405,409,487 549,425,514

$ 415,087,794 496,930,143

Operating Loss

-144,016,027

-81,842,349

Nonoperating Revenues and Expenses

140,514,816

124,828,722

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

-3,501,211

42,986,373

Other Revenues, Expenses, Gains or Losses

4,481,398

17,793,930

Increase in Net Position

980,187

60,780,303

Net Position at Beginning of Year

165,974,832

105,194,529

Net Position at End of Year

$ 166,955,019

$ 165,974,832

iii

The Statement of Revenues, Expenses and Changes in Net Position reflects a positive year, which is represented by an increase in net position at the end of the year. Some highlights of the information presented on this statement are as follows:

Revenue by Source For the Years Ended June 30, 2014 and June 30, 2013

Operating Revenue Grants and Contracts Sales and Services Other

June 30, 2014
$ 7,740,909 47,234,549
350,434,029

June 30, 2013
$ 8,671,582 42,779,520
363,636,692

Total Operating Revenue

405,409,487

415,087,794

Nonoperating Revenue State Appropriations Grants and Contracts Investment Income

150,052,543 3,776,846 1,331,333

133,164,644 3,673,988 735,047

Total Nonoperating Revenue

155,160,722

137,573,679

Capital Grants and Gifts State
Special Item

4,198,984 282,414

Total Capital Grants and Gifts and Special Item

4,481,398

Total Revenues

$ 565,051,607

17,793,930 17,793,930 $ 570,455,403

Expenses (By Functional Classification) For the Years Ended June 30, 2014 and June 30, 2013

Operating Expenses Public Service Academic Support Institutional Support Scholarships and Fellowships
Total Operating Expenses

June 30, 2014
$ 73,476,071 17,145,093
458,658,788 145,562
549,425,514

June 30, 2013
$ 67,941,063 16,080,213
412,735,594 173,273
496,930,143

Nonoperating Expenses Interest Expense (Capital Assets) Other

1,943,489 12,702,417

880,754 11,864,203

Total Nonoperating Expenses Total Expenses

14,645,906 $ 564,071,420

12,744,957 $ 509,675,100

iv

Operating revenues decreased by $9,678,307 in fiscal year 2014. Although Sales and Services included a 10% increase, revenues decreased in Grants and Contracts and Other categories.
Nonoperating revenues increased by $17,587,043 for the year primarily due to an increase of in State Appropriations.
The compensation and employee benefits category increased by $5,105,021 and primarily affected the Institutional Support and Public Service categories. The increase reflects the addition of staff members and an increased cost of health insurance for the employees of the University System Office.

Supplies and Other Services increased by $44,596,939 during the past year. The increase was primarily associated with an increase in health insurance claims paid for the self-funded plans due to plan changes.

Statement of Cash Flows
The third 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 Position.
Cash Flows for the Years Ended June 30, 2014 and 2013, Condensed

June 30, 2014

June 30, 2013

Cash Provided (Used) By: Operating Activities Noncapital Financing Activities Capital and Related Financing Activities Investing Activities

$ -125,217,255 215,999,715 -6,634,908 -6,912,490

$

-49,642,179

120,427,856

-3,719,365

2,348,604

Net Change in Cash Cash, Beginning of Year

77,235,062 426,099,157

69,414,916 356,684,241

Cash, End of Year

$

503,334,219

$

426,099,157

Capital Assets
The University System Office entered into a forty-year intergovernmental agreement with the Georgia Public Telecommunications Commission (Commission) effective July 1, 2012. The Commission transferred other property and equipment at its headquarters location to the University System Office. In fiscal year 2014, additional building and equipment transactions transferred to the University System Office totaled $4,198,984. The accumulated depreciation transferred totaled $3,554,387. The total value of the building and equipment transferred to date is $32,538,578, and the accumulated depreciation is $14,671,985, for a net book value of $17,866,593. This transfer is
v

required to obtain the use of twenty-year and five-year general obligation bonds sold in the Board of Regents' name on behalf of the Commission. The Commission, an authority created after 1967, cannot have bonds sold on its behalf. The intergovernmental agreement allows the Commission to utilize these funds for the following bond projects:
Communication systems and information systems upgrades, 5 year bonds, $1,780,000 Facility roof replacement and cooling system improvements, 20 year bonds, $1,265,000 The intergovernmental agreement is designed to accommodate future general obligation bond issues for the Commission. All equipment and property will be transferred back to the ownership of the Commission upon termination of this agreement with the Board of Regents. It is anticipated that any current and future bond issues will be paid for in full within twenty years. The Georgia Division of Archives and History was transferred from the Office of the Secretary of State to the University System of Georgia effective July 1, 2013. This transfer of the asset and related lease obligation is noted as a Special Item Transfer on the Statement of Revenues, Expenses and Changes in Net Position. For additional information concerning Capital Assets, see Notes 1, 6, 8, and 10 in the Notes to the Financial Statements.
Long-Term Liabilities
The University System Office had Long-Term Liabilities of $52,000,433, of which $4,000,417 was reflected as current liability at June 30, 2014. For additional information concerning Long-Term Liabilities, see Notes 1, 8 and 10 in the Notes to the Financial Statements.
vi

Health and Dental 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 summary information regarding revenues, expenditures and the related liability for fiscal year 2014 is provided below:

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

June 30, 2014

June 30, 2013

$ 32,737,154 $ 26,269,302

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

360,327,990

325,395,148

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

353,976,121

318,927,296

Unpaid Claims and Claim Adjustments (Current Year IBNR) $ 39,089,023 $ 32,737,154

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

$

9,326,592 $

9,714,307

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

140,920,834

113,908,368

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

138,128,069

114,296,083

Unpaid Claims and Claim Adjustments (Current Year IBNR) $ 12,119,357 $

9,326,592

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 14 for additional information.

Economic Outlook
The University System Office is not aware of any currently known facts, decisions, or conditions that are expected to have a significant effect on the financial position or results of operations during this fiscal year beyond those unknown variations having a global effect on virtually all types of business operations. The University System Office's overall financial position is strong. The University System Office anticipates the current fiscal year will be much like last and will maintain a close watch over resources to maintain the University System Office's ability to react to unknown internal and external issues.

John E. Brown, Vice Chancellor for Fiscal Affairs/Treasurer Board of Regents University System Office

vii

BASIC FINANCIAL STATEMENTS - 1 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) STATEMENT OF NET POSITION JUNE 30, 2014
ASSETS
Current Assets Cash and Cash equivalents Short-term Investments Accounts Receivable, net (Note 3) Receivables - Federal Financial Assistance Receivables - Other Inventories (Note 4) Prepaid Items
Total Current Assets
Noncurrent Assets Investments Notes Receivable, Net Capital Assets, Net (Note 6)
Total Noncurrent Assets
Total Assets
LIABILITIES
Current Liabilities Accounts Payable Salaries Payable Benefits Payable Advances (Note 7) Deposits Held for Other Organizations Lease Purchase Obligations Compensated Absences
Total Current Liabilities
Noncurrent Liabilities Lease Purchase Obligations Compensated Absences
Total Noncurrent Liabilities
Total Liabilities
NET POSITION
Net Investment in Capital Assets Restricted for:
Nonexpendable Expendable Unrestricted
Total Net Position

EXHIBIT "A"
$ 503,334,219 182,945,235 1,136,293 28,997,606 184,558 161,713 716,759,624
9,788,559 1,621,305 76,643,526 88,053,390 804,813,014
3,838,291 70,899
39,089,023 591,497
542,267,852 1,887,142 2,113,275
589,857,979
45,990,553 2,009,463
48,000,016 637,857,995
28,765,831 4,381,979
87,555,656 46,251,553
$ 166,955,019

The notes to the financial statements are an integral part of this statement. - 2 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION JUNE 30, 2014
OPERATING REVENUES
Grants & 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 Supplies and Other Services Depreciation
Total Operating Expenses
Operating Loss
NONOPERATING REVENUES (EXPENSES)
State Appropriations Grants and Contracts
Federal Federal Stimulus Other Investment Income (Endowments, Auxiliary and Other) Interest Expense (Capital Assets) Other Nonoperating Expenses
Net Nonoperating Revenues
Loss Before Other Revenues, Expenses, Gains, or Losses
Capital Grants and Gifts State
Special Item - Capital Asset Transfer (Note 17)
Total Other Revenues, Expenses, Gains or Losses
Increase in Net Position
Net Position - Beginning of Year
Net Position - End of Year

EXHIBIT "B"

$

7,650,673

90,236

47,234,549

350,434,029

405,409,487

33,532,672 9,532,519 38,978 758,433 145,562 3,057,969
493,160,178 9,199,203
549,425,514
-144,016,027
150,052,543
43,912 2,125,805 1,607,129 1,331,333 -1,943,489 -12,702,417
140,514,816
-3,501,211
4,198,984 282,414
4,481,398
980,187
165,974,832
$ 166,955,019

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

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) STATEMENT OF CASH FLOWS JUNE 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES Grants and Contracts (Exchange) Sales and Services Payments to Suppliers Payments to Employees Payments for Scholarships and Fellowships Other Receipts, Net
Net Cash Used by Operating Activities
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES State Appropriations Federal Stimulus - Stabilization Funds Agency Funds Transactions Gifts and Grants Received for Other than Capital Purposes Other Nonoperating Expenses
Net Cash Flows Provided by Noncapital Financing Activities
CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Purchases of Capital Assets Principal Paid on Capital Debt and Leases Interest Paid on Capital Debt and Leases
Net Cash Used by Capital and Related Financing Activities
CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales and Maturities of Investments Sale of Investments Interest on Investments
Net Cash Used by Investing Activities
Net Increase in Cash
Cash and Cash Equivalents - Beginning of Year
Cash and Cash Equivalents - End of Year
RECONCILIATION OF OPERATING LOSS TO NET CASH USED BY OPERATING ACTIVITIES:
Operating Loss Adjustments to Reconcile Operating Loss to Net Cash
Used by Operating Activities Depreciation Change in Assets and Liabilities: Receivables, Net Inventories Prepaid Items Accounts Payable Advances Other Benefits Compensated Absences
Net Cash Used by Operating Activities
NONCASH ACTIVITY Change in Accrued Interest Payable Affecting Interest Paid Change in Fair Value of Investments Recognized as a Component of Interest Income Special Item - Capital Asset Transfer Special Item - Capital Lease Transfer Gift of Capital Assets Reducing Proceeds of Capital Grants and Gifts
The notes to the financial statements are an integral part of this statement.
- 4 -

EXHIBIT "C"

$

8,160,504

47,234,549

-498,859,805

-32,652,814

-145,562

351,045,873

-125,217,255

150,052,543 2,125,805
76,678,264 1,651,041
-14,507,938
215,999,715

-3,098,556 -1,758,223 -1,778,129
-6,634,908

327,400 -7,315,333
75,443
-6,912,490
77,235,062
426,099,157

$

503,334,219

$ -144,016,027
9,199,203
854,081 220,362 384,023 1,065,011 181,945 6,351,869 542,278
$ -125,217,255

$

-165,360

$

1,255,890

$

35,992,108

$

-35,709,694

$

-4,198,984

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
BOARD OF REGENTS RETIREE HEALTH BENEFIT FUND STATEMENT OF FIDUCIARY NET POSITION JUNE 30, 2014
ASSETS Cash and Cash Equivalents Receivables
Employer Employee
Total Assets LIABILITIES Benefits Payable Other Total Liabilities
NET POSITION Net Position Held in Trust for Other Post-Employment Benefits

EXHIBIT "D"

$

6,356,351

4,308,498 1,909,947

12,574,796

12,119,357 373,920
12,493,277

$

81,519

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

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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 POSITION
JUNE 30, 2014
ADDITIONS
Contributions Employer Plan Member Other
Total Contributions
Investment Income Interest/Dividends
Total Additions
DEDUCTIONS
Benefits Life Insurance Premium Expense Administrative Expense
Total Deductions
Net Decrease
Beginning Net Position
Net Position Held in Trust for Other Post-Employment Benefits

EXHIBIT "E"

$ 120,926,456 34,218,671 1,191,846
156,336,973
92,466 156,429,439

142,703,797 3,423,184
10,437,714
156,564,695
-135,256
216,775

$

81,519

The notes to the financial statements are an integral part of this statement. - 7 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

Note 1. Summary of Significant Accounting Policies
Nature of Operations The University System Office serves the state and national communities by providing its students with academic instruction that advances fundamental knowledge, and by disseminating knowledge to the people of Georgia and throughout the country. The University System Office of Georgia's Board of Regents was created in 1931 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 19 members, five of whom are appointed from the stateat-large, and one from each of the 14 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 31 institutions: four research institutions, four comprehensive, 10 state universities, and 13 state colleges. These institutions enroll more than 309,000 students and employ approximately 14,000 faculty and 30,000 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-one (31) State supported member institutions of higher education in Georgia 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 University System Office's 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 University System 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 Reporting Standards.
Legally separate, tax exempt affiliated 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 System Office's assets, liabilities, net position, revenues, expenses, changes in net position and cash flows.

- 8 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

Basis of Accounting For financial reporting purposes, the University System Office is considered a special-purpose government engaged only 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 intra-system transactions have been eliminated.
New Accounting Pronouncements In fiscal year 2014, the University System Office adopted the Governmental Accounting Standards Board (GASB) Statement No. 65, Items Previously Reported as Assets and Liabilities. The provisions of this Statement clarify the use of deferred inflows of resources and deferred outflows of resources. Certain items, including those items which were previously reported as assets and liabilities, will now be reported as outflows of resources or inflows of resources. For fiscal year 2014, the University System Office did not have any deferred outflows of resources or deferred inflows of resources.
In fiscal year 2014, the University System Office adopted Governmental Accounting Standards Board (GASB) Statement No. 66, Technical Corrections - 2012, an amendment to GASB Statements No. 10 and No. 62. The objective of this Statement is to resolve conflicting guidance by amending GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues and GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in PreNovember 30, 1989 FASB and AICPA Pronouncements. GASB Statement No. 10 was amended by removing the provision that limited fund based reporting of an entity's risk and financing activities to certain funds. GASB Statement No. 62 was amended by modifying guidance on (1) operating lease payments that vary from a straight-line basis, (2) purchases of a loan or a group of loans, and (3) recognition of servicing fees on mortgage loans that are sold when the stated service fee rate differs from a current (normal) servicing fee rate.
In fiscal year 2014, the University System Office adopted Governmental Accounting Standards Board (GASB) Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. This Statement establishes accounting and reporting requirements for state and local governments that extend or receive financial guarantees that are nonexchange transactions.
Future Accounting Pronouncements In fiscal year 2015, the University System Office will adopt Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions. The provisions of this Statement establish accounting and financial reporting standards for pensions that are provided to the employees of state and local governmental employers through pension plans that are administered through trusts. Implementation of this Statement will require the Institute to record a liability for its proportionate share of the Net Pension Liability of pension plans in which it participates. Actuarial estimates are currently being made to determine the University System Office's liability, the effects of which are believed to be material.
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 State Investment Pool and the Board of Regents Short-Term Investment Pool.

- 9 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

Short-Term Investments Short-Term Investments consist of investments of 90 days - 13 months, which includes 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 penalty for early withdrawal. The Board of Regents Balanced Income Fund, the Board of Regents Total Return Fund, and portions of the Board of Regents Legal Fund and the Board of Regents Diversified Fund, are included under Short-Term Investments.
Investments Investments include financial instruments with terms in excess of 13 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 Position. Portions of the Board of Regents Legal Fund and the Board of Regents Diversified Fund Pool are included under Investments.
Accounts Receivable Accounts receivable consists of amounts due 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.
Inventories Resale Inventories are valued at cost using the "first in, first out" (FIFO) basis.
Noncurrent Investments Investments that are externally restricted and cannot be used to pay current liabilities are classified as noncurrent assets in the Statement of Net Position.
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, 10 years for library books, and 3 to 20 years for equipment. Residual values generally are 10% of historical costs for infrastructure, buildings and building improvements, and facilities and other improvements.
To fully understand plant additions in the University System, it is necessary to look at the activities of the Georgia State Financing and Investment 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. These bonds 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.

- 10 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

For projects managed by GSFIC, 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 projects managed by the University System Office, the University System Office retains construction-in-progress on its books and is reimbursed by GSFIC. For the year ended June 30, 2014, GSFIC did not transfer any capital additions to the University System Office.
Deposits Held for Other Organizations The University System Office had $542,267,852 in Deposits Held for Other Organizations as of June 30, 2014. Deposits held for others consist of the external portion of the University System of Georgia's Pooled Investment Fund program and other funds held by the University System Office as an agent for various governments or individuals.
Advances Advances include amounts received from grant and contract sponsors that have not yet been earned.
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 Position, and as a component of compensation and benefit expense in the Statement of Revenues, Expenses and Changes in Net Position.
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 Position The University System Office's net position is classified as follows:
Net Investment in Capital Assets 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 the net investment in capital assets. The term "debt obligations" as used in this definition does not include debt of the GSFIC as discussed previously in Note 1 - Capital Assets section.
Restricted - nonexpendable includes endowment and similar type funds, in which donors or other outside sources have stipulated, as a condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may be either expended or added to principal. 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 - expendable includes resources in which the University System Office is legally or contractually obligated to spend in accordance with restrictions imposed by external third parties.

- 11 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

Expendable Restricted include the following at June 30, 2014:

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

$

10,943,575

76,612,081

Total Restricted Expendable

$

87,555,656

Unrestricted Unrestricted represents resources derived from state appropriations, and sales and services of institutional 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) of $88,084.25. Unexpended state appropriations must be refunded to the Office of the State Treasurer.

Unrestricted resources include the following items which are quasi-restricted by management at June 30, 2014:

Reserve for Encumbrances Other Unrestricted

$

21,323,332

24,928,221

Total Unrestricted Net Position

$

46,251,553

When an expense is incurred that can be paid using either restricted or unrestricted resources, the University System Office's policy is to 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 Statement of Revenues, Expenses and Changes in Net Position classify fiscal year activity as operating and nonoperating according to the following criteria:

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

Nonoperating Revenue includes activities that have the characteristics of nonexchange transactions, such as gifts and contributions, and other revenue sources that are defined as nonoperating revenue by GASB No. 9, Reporting Cash Flows of Proprietary 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 Expense includes activities that have the characteristics of nonexchange transactions, such as capital financing costs and costs related to investment activity.

- 12 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

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 University System of Georgia.
At June 30, 2014, the carrying value of deposits was $98,834,317 and the bank balance was $99,326,690. Of the bank balance, $97,271,673 were uninsured. Of these uninsured deposits, $97,271,673 were collateralized with securities held by the financial institution, by its trust department or agency, but not 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.

- 13 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

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.
Legal 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, possessing virtually 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 Diversified fund 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.

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

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 believes that 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). REITs 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.

At June 30, 2014, the carrying value of the University System Office's investments were $603,590,047, which is materially the same as fair value. These investments were comprised entirely of funds invested in the Board of Regents and/or Office of the State Treasurer investment pools as follows:

Investment Maturity

Fair

Less Than

More than

Investment Type

Value

3 months

4 - 12 Months

1 - 5 Years

6 - 10 years

10 years

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

$

4,280,802

$ 1,005,254

$ 3,275,548

61,198,509 287,833,488 $
47,327,138 2,664,362 7,624,557
18,068,420

2,467,742 2,664,362 18,068,420

$ 5,102,149

12,042,031 80,675,077
4,967,692

49,156,478

46,548,602 $ 153,039,918

37,827,566

4,531,880

7,624,557

Other Investments Equity Mutual Funds - Domestic Equity Securities - Domestic Real Estate Investment Fund Other

428,997,276 $ 23,200,524 $ 6,107,403 $ 105,309,357 $ 136,808,194 $ 157,571,798
44,143,303 67,576,588
5,795,194 53,875

Investment Pools Office of the State Treasurer Georgia Fund 1

57,023,811

Total Investments

$ 603,590,047

- 15 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

The Georgia Fund 1 Investment Pool, managed by the Office of the State Treasurer, is not registered with the Securities and Exchange Commission as an investment company. This investment is valued at the pool's share price, $1.00 per share. The Georgia Fund 1 Investment Pool is an AAAf rated investment pool by Standard and Poor's. The Weighted Average Maturity of the Fund is 62 days.
Interest Rate Risk Interest rate risk is the risk that changes in interest rates of debt investments will adversely affect the fair value of an investment. The University System Office's 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, 2014, $428,997,276 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 Quality 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

- 16 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

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 non-investment grade debt issues up to a limit of 15% of the entire portfolio.
The investments subject to credit quality risk are reflected below:

Credit Quality Risk

Fair Value

AAA

AAAm

AA+

Unrated

Related Debt Investments U. S. Agency Securities Implicitly Guaranteed Bond Securities Money Market Mutual Fund Mutual Bond Fund Repurchase Agreements - Underlying U. S., Agency Securities

$ 287,833,488 $ 47,327,138 2,664,362 7,624,557

6,572,561

$

$ 2,664,362

18,068,420

777,153 $ 280,483,774 47,327,138
7,624,557
18,068,420

$ 363,517,965 $ 6,572,561 $ 2,664,362 $ 777,153 $ 353,503,889

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 investments exceeded 5% of the total reported investment amount as of June 30, 2014:

Investment:

Amount:

Federal National Mortgage Association Federal National Mortgage Association Pool Federal Home Loan Mortgage Corporate Pool IShares Core Total U. S. Aggregate

$

69,320,910

$

148,434,260

$

38,696,479

$

37,827,566

Condensed financial information for the investment pool is as follows:

% of Total
11.5% 24.6%
6.4% 6.3%

Statement of Net Position - June 30, 2014

Assets Investments Accrued Interest and Other Receivables

$ 545,960,321 552,040

$ 546,512,361

Net Position Held in Trust for Pool Participants Internal Portion External Portion

$ 26,684,037 519,828,324

$ 546,512,361

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

Statement of Changes in Net Position - For the Year Ended June 30, 2014

Revenues Interest Income Net Increase in Fair Value of Investments

$

8,569,109

19,154,464

Total Revenues

27,723,573

Expenses Operating Expenses
Administrative Expenses

-192,847

Net Increase in Assets Resulting from Operations

27,530,726

Distribution to Participants Capital Transactions

-35,418,274 92,445,940

Total Increase in Assets Resulting from Operations

84,558,392

Net Position July 1, 2013

461,953,969

Net Position June 30, 2014

$ 546,512,361

Note 3. Accounts Receivable Accounts receivable consisted of the following at June 30, 2014:
Federal Financial Assistance Georgia State Financing and Investment Commission Other
Less Allowance for Doubtful Accounts Net Accounts Receivable

$

1,136,293

120,249

28,917,074

30,173,616 39,717

$ 30,133,899

Note 4. Inventories

Inventories consisted of the following at June 30, 2014:

Other
Note 5. Notes/ Loans Receivable

$

184,558

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

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

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 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 USO annual payments of $205,320 through the year 2025. In fiscal year 2014, the University System Office collected $205,320, $93,793 of which represented interest. Total principal collected on the Note Receivable was $111,527. At June 30, 2014, the Notes Receivable balance was $1,621,305. There is no allowance for doubtful collection.
Note 6. Capital Assets
Following are the changes in capital assets for the year ended June 30, 2014:

Beginning Balance July 1, 2013

Special Item
Transfer

Additions

Reductions

Ending Balance June 30, 2014

Capital Assets, Not Being Depreciated:

Land

$ 2,227,424 $

0$

0$

336,009 $ 1,891,415

Capilized Collections

10,000

10,000

Total Capital Assets, Not Being Depreciated

2,237,424

0

0

336,009

1,901,415

Capital Assets, Being Depreciated: Building and Building Improvements Equipment Capital Leases Software

26,861,834 46,882,203 16,921,625 18,830,316

44,297,978

398,128 6,899,412

59,472 48,511

27,259,962 53,722,143 61,171,092 18,830,316

Total Assets Being Depreciated

109,495,978

44,297,978

7,297,540

107,983 160,983,513

Less: Accumulated Depreciation: Building and Building Improvements Equipment Capital Leases Software

9,367,737 41,539,213
5,841,688 14,112,356

8,305,870

588,356 6,264,092 1,503,926
842,829

2,124,665

9,956,093 45,678,640 15,651,484 14,955,185

Total Accumulated Depreciation

70,860,994

8,305,870

9,199,203

2,124,665

86,241,402

Total Capital Assets, Being Depreciated, Net

38,634,984

35,992,108

-1,901,663

-2,016,682

74,742,111

Capital Assets, Net

$ 40,872,408 $ 35,992,108 $ -1,901,663 $ -1,680,673 $ 76,643,526

A special item transfer was made to move assets related to the Division of Archives and History to the University System Office - See Note 17.

- 19 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

Note 7. Advances Advances consisted of the following at June 30, 2014:

Other - Advances

$

Note 8. Long-Term Liabilities

Long-Term liability activity for the year ended June 30, 2014 was as follows:

591,497

Beginning Balance July 1, 2013

Additions

Reductions

Ending Balance June 30, 2014

Current Portion

Leases Lease Obligations

$ 13,760,865 $ 35,875,053 $ 1,758,223 $ 47,877,695 $ 1,887,142

Other Liabilities Compensated Absences

3,580,459

2,461,558

1,919,279

4,122,738

2,113,275

Total Long-Term Obligations $ 17,341,324 $ 38,336,611 $ 3,677,502 $ 52,000,433 $ 4,000,417

Note 9. Significant Commitments

The University System Office had no significant unearned, outstanding, construction or renovation contracts as of June 30, 2014.

Note 10. Lease Obligations

The University System Office is obligated under various operating leases for the use of real property (land, buildings, and office facilities) and equipment, and also is obligated under capital leases and installment purchase agreements for the acquisition of real property.

CAPITAL LEASES

Capital leases are generally payable in installments ranging from monthly to annually and have terms expiring in various years between 2014 and 2052. Cash payments for fiscal year 2014 were $3,536,352 of which $1,778,129 represented interest. Total principal paid on capital leases was $1,758,223 for the fiscal year ended June 30, 2014. Interest rates range from 4.00 percent to 14.02 percent. The following is a summary of the carrying values of assets held under capital lease at June 30, 2014:

Net Position

Outstanding

Held Under

Balances per

Accumulated

Capital Lease Lease Schedules

Description

Gross Amount

Depreciation

at June 30, 2014 at June 30, 2014

(+)

(-)

(=)

Land - (PPV Only) Buildings - (PPV Only)

$

50,600

$

50,600 $

50,600

61,171,092 $ 15,651,484

45,519,608

47,827,095

Total Assets Held Under Capital Lease

at June 30, 2014

$

61,221,692 $ 15,651,484 $ 45,570,208 $ 47,877,695

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

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.
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, 2014 was $4,237,848 due to the addition of $165,359 in capitalized interest to the principal balance.
The University System Office also has capital leases for the ITS building in Athens with an outstanding balance in the amount of $9,105,000 and the Georgia Archives building in Morrow with an outstanding balance of $34,534,847 at June 30, 2014.
OPERATING LEASES
The University System Office has one operating lease for office space used by the Georgia Public Library System. The lease term began in fiscal year 2012 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, 2014, were as follows:

Real Property and Equipment

Capital

Operating

Leases

Leases

Year Ending June 30: 2015 2016 2017 2018 2019 2020 - 2024 2025 - 2029 2030 - 2034 2035 - 2039 2040 - 2044 2045 - 2049 2050 - 2052

$

3,643,581 $

189,055

3,948,756

194,798

3,970,656

200,653

3,976,706

206,734

4,001,656

212,927

20,248,132

219,345

15,866,588

10,653,784

179,918

179,918

179,917

107,950

Total Minimum Lease Payments

$

66,957,562 $ 1,223,512

Less: Interest

19,079,867

Principal Outstanding

$

47,877,695

The University System Office's fiscal year 2014 expense for rental of real property and equipment under operating leases was $4,472,125.

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

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 10 years of creditable service and attainment of age 60 or 30 years of creditable service regardless of age. Additionally, there are some provisions allowing for early retirement after 25 years of creditable service for members under age 60.
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

- 22 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

retirement. Post-retirement cost-of-living adjustments may be made to members' benefits provided the members were hired prior to July 1, 2009. The normal retirement pension is payable monthly for life; however, options are available for distribution of the member's monthly pension, at reduced rates, to a designated beneficiary upon the member's death. Death and disability benefits are also available through ERS.

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 2014 were based on the June 30, 2011 actuarial valuation as follows:

Old Plan* New Plan GSEPS

18.46% 18.46% 15.18%

*13.71% exclusive of contributions paid by the employer on behalf of old plan members

Members become vested after 10 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 30 years of creditable service, regardless of age, or after 10 years of service and attainment of age 60. A member is eligible for early retirement after 25 years of creditable service.

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

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 40 years. Early retirement benefits are reduced by the lesser of one-twelfth of 7% for each month the member is below age 60 or by 7% for each year or fraction thereof by which the member has less than 30 years of service. 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 10 years of service. If a member terminates with less than 10 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, 2014 were 6.00% of annual salary. Employer contributions required for fiscal year 2014 were 12.28% of annual salary as required by the June 30, 2011 actuarial valuation.

The following table summarizes the University System Office contributions by defined benefit plan for the years ending June 30, 2014, June 30, 2013, and June 30, 2012 (dollars in thousands):

Fiscal Year

ERS

Required

Percentage

Contribution

Contributed

TRS

Required

Percentage

Contribution

Contributed

2014 2013 2012

$

312,767

$

195,569

$

112,663

Regents Retirement Plan

100% 100% 100%

$ 2,921,150 $ 2,453,831 $ 2,057,251

100% 100% 100%

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

Funding Policy The 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 2014, the employer contribution was 9.24% for the participating employee's earnable compensation. Employees contribute 6% of their earnable compensation. Amounts attributable to all plan contributions are fully vested and non-forfeitable at all times.

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

The University System Office and the covered employees made the required contributions of $494,081 (9.24%) and $320,182 (6%), respectively.
VALIC, 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 parttime 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 2014 amounted to $13,907 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 offers its employees and retirees access to four different healthcare plan options. For the University System of Georgia's Plan Year 2014, the following healthcare plan options were available:
BlueChoice HMO Health Savings Account (HSA) Open Access POS Open Access Point-of-Service (POS) Kaiser Permanente HMO
The University System Office and participating employees and retirees pay premiums to the healthcare plan options to access benefits coverage. The respective health plan options are included in the financial statements of the Board of Regents of the University System of Georgia - University System Office. All units of the University System of Georgia share the risk of loss for claims associated with the

- 25 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

self-insured plans; including the HSA Open Access POS. the Open Access POS and the BlueChoice HMO. The reserves for these plans are considered to be a self-sustaining risk fund. The Board of Regents has contracted with Blue Cross Blue Shield of Georgia to serve as the claims administrator for the self-insured healthcare plans. In addition to the self-insured healthcare plan options offered to the employees of the University System of Georgia, a fully insured HMO healthcare plan option is also offered to System employees through Kaiser Permanente.
The prescription drug plan was administered through Express Scripts. Pharmacy drug claims are processed in accordance with guidelines established for the Board of Regents' Prescription Drug Benefit Program. Generally, claims are submitted to the plan administrator for verification, processing and payment. The plan administrator 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 30, 2013, and June 30, 2014 is shown below:

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

June 30, 2014

June 30, 2013

$ 32,737,154 $ 26,269,302

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

360,327,990

325,395,148

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

353,976,121

318,927,296

Unpaid Claims and Claim Adjustments (Current Year IBNR) $ 39,089,023 $ 32,737,154

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

$

9,326,592 $

9,714,307

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

140,920,834

113,908,368

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

138,128,069

114,296,083

Unpaid Claims and Claim Adjustments (Current Year IBNR) $ 12,119,357 $

9,326,592

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,

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

and as such, is covered by the State of Georgia risk management program administered by DOAS. Premiums for the risk management program are charged to the various state organizations by DOAS to provide claims servicing and claims payment.
A self-insured program of professional liability for its employees was established by the Board of Regents of the University System of Georgia under powers authorized by the Official Code of Georgia Annotated Section 45-9-1. The program insures the employees to the extent that they are not immune from liability against personal liability for damages arising out of the performance of their duties or in any way connected therewith. The program is administered by DOAS as a Self-Insurance Fund.
Note 13. Contingencies
Amounts received or receivable from grantor agencies are subject to audit and adjustment by grantor agencies. This could result in refunds to the grantor agency for any expenditure disallowed under grant terms. The amount of expenditures which may be disallowed by the grantor cannot be determined at this time although the University System Office expects such amounts, if any, to 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 Report for the fiscal year ended June 30, 2014.

Note 14. Post-Employment Benefits Other Than Pension Benefits
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.
The Board of Regents Retiree Health Benefit Plan is a single employer defined benefit plan. Financial statements and required supplementary information for the Plan are included in the publicly available Consolidated Annual Financial Report of the University System of Georgia.
Membership of the plan consisted of the following at June 30, 2014:

Retirees and Beneficiaries Receiving Benefits Active Plan Members'

$

20,583

38,092

Total

$

58,675

- 27 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

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 2014 plan year, the employer rate was around 80% of the total health insurance cost for eligible retirees and the retiree rate was around 20%. 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 2014, the University System of Georgia contributed $120,926,456 to the plan, for current premiums or claims. Plan members receiving benefits contributed $34,218,671 for current premiums or claims.
As of June 30, 2014, there were 108 University System Office employees who had retired or were disabled that were receiving these post-employment health and life insurance benefits. For the year ended June 30, 2014, the University System Office recognized as incurred $509,870 of expenditures, which was net of $239,088 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.
The following table shows the components of the University System's annual OPEB cost for fiscal year 2014, 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):

- 28 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

June 30, 2014

Annual Required Contribution Interest on Net OPEB Obligation Adjustment to Annual Required Contribution

$

403.3

69.9

-63.4

Annual OPEB Cost (Expense)

409.8

Less: Contributions Made

-120.9

Increase in Net OPEB Obligation

288.9

Net OPEB Obligation - Beginning of Year

1,562.6

Prior Year Adjustment - Life Insurance Contributions

-8.4

OPEB Obligation - End of Year

$ 1,843.1

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

Contribution

Percentage of Annual OPEB Cost Contributed

Net OPEB Obligation

2012 2013 2014

$ 349.6 $ $ 367.8 $ $ 409.9 $

88.8 91.8 120.9

Funded Status and Funding Progress

25.4% $ 25.0% $ 29.5% $

1,278.2 1,562.6 1,843.1

Actuarial Valuation
Date

Actuarial Value of Assets
(a)

Actuarial Accrued Liability
(b)

Unfunded AAL (UAAL) (b-a)

Funded Ratio (a/b)

Annual Covered Payroll
(c)

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

7/1/2011 $ 7/1/2012 $ 7/1/2013 $

123,230 $ 3,494,501,238 $ 165,684 $ 3,758,969,936 $ 216,775 $ 4,095,304,172 $

3,494,378,008 3,758,804,252 4,095,087,397

0.0% $ 2,526,211,986 0.0% $ 2,466,313,700 0.0% $ 2,594,800,486

138.3% 152.4% 157.8%

- 29 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

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 multiyear 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:

(1) Valuation Date (2) Cost Method (3) Asset Method (4) Amortization Method (5) Amortization Period (6) Interest Rate (7) Inflation (8) Salary Growth (9) Salary Scale (10) Initial Health Care Trend
(11) Ultimate Trend* (12) Year Ultimate Trend is reached

July 1, 2013 Projected Unit Credit Market Value Level Percent of Payroll, Closed 30 Years 4.50% 2.50% 3.00% 4.00% 8.00% Pre-Medicare 7.5% Medicare 4.50% 2030

* Includes an inflation assumption of 2.5% Please note that the Investment Rate of Return percentage can change.

- 30 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2014

EXHIBIT "F"

Note 15. Natural Classifications with Functional Classifications

The University System Office's operating expenses by functional classification for fiscal year 2014 are shown below:

Functional Classification

Scholarships

Total

Public

Academic

Institutional

and

Operating

Natural Classification

Service

Support

Support

Fellowships

Expenses

Salaries

Staff

$

Employee Benefits

Other Personal Services

Travel

Scholarships and Fellowships

Utilities

Supplies and Other Services

Depreciation

2,948,931 $ 851,456
91,074
1,449,941 63,042,964
5,091,705

578,619 $ 30,005,122

166,076

8,514,987

38,978

30,508

636,851

$

244

1,607,784

16,234,030 413,883,184

135,616

3,971,882

$ 145,562

33,532,672 9,532,519 38,978 758,433 145,562 3,057,969
493,160,178 9,199,203

Total Operating Expenses

$ 73,476,071 $

17,145,093 $ 458,658,788 $

145,562 $ 549,425,514

Note 16. Affiliated Organizations
In accordance with GASB Statement No. 39, Determining Whether Certain Organizations are Component Units and GASB No. 61, The Financial Reporting Entity: Omnibus which are amendments of GASB Statement No. 14, The Reporting Entity which became effective for the year ended June 30, 2004, the University System Office Foundation is a legally separate, tax-exempt organization whose activities primarily support the University System Office, a unit of the University System of Georgia (an organizational unit of the State of Georgia). The State Accounting Office determined Component Units of the State of Georgia, as required by GASB Statement No. 39 and No. 61 should not be assessed in relation to their significance to University System Office, but instead based on their significance to the State of Georgia.
The University System Office Foundation has been determined significant to the State of Georgia for the year ended June 30, 2014, and as such, is reported as a component unit in the Comprehensive Annual Financial Report of the State of Georgia (CAFR). Significant affiliated organizations issue separate audited financial statements that can be obtained from University System Office.
Note 17. Special Item Transfer
The Georgia Division of Archives and History was transferred from the Office of the Secretary of State to the University System of Georgia effective July 1, 2013. On July 1, 2013, the Georgia Archives building had a reported gross book value of $44,297,978 and accumulated depreciation of $8,305,870, for a net book value of $35,992,108. The building was acquired in 2003 through a 50 year annually renewable lease with The University Financing Foundation. The remaining net lease obligation at the date of transfer was $35,709,694. This net effect of this transfer of the asset and related lease obligation of $282,414 is noted as a Special Item Transfer on the Statement of Revenues, Expenses and Changes in Net Position. See Note 6 for additional information.

- 31 -

REQUIRED SUPPLEMENTARY INFORMATION

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) SCHEDULE OF FUNDING PROGRESS JUNE 30, 2014

SCHEDULE "1"

Actuarial Valuation
Date

Actuarial Value of Assets
(a)

7/1/2011 $ 7/1/2012 $ 7/1/2013 $

123,230 $ 165,684 $ 216,775 $

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

Unfunded AAL (UAAL) (b-a)

3,494,501,238 $ 3,758,969,936 $ 4,095,304,172 $

3,494,378,008 3,758,804,252 4,095,087,397

Funded Ratio (a/b)

Covered Payroll (c)

0.0% $ 0.0% $ 0.0% $

2,526,211,986 2,466,313,700 2,594,800,486

UAAL as a Percentage of Covered
Payroll ((b-a)/c)
138.3% 152.4% 157.8%

BOARD OF REGENTS RETIREE HEALTH BENEFIT FUND SCHEDULE OF EMPLOYER CONTRIBUTIONS

Fiscal Year

Required Contribution

Percentage Contributed

2012 2013 2014

$ 345,297,650 $ 362,426,199 $ 403,314,315

25.7% 23.0% 30.0%

- 33 -

SUPPLEMENTARY INFORMATION - 34 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) BALANCE SHEET (NON-GAAP BASIS) BUDGET FUND JUNE 30, 2014
ASSETS
Cash and Cash Equivalents Investments Accounts Receivable
Federal Financial Assistance Other Prepaid Expenditures Inventories
Total Assets
LIABILITIES AND FUND EQUITY
Liabilities Accrued Payroll Encumbrances Payable Accounts Payable Unearned Revenue
Total Liabilities
Fund Balances Reserved Department Sales and Services Indirect Cost Recoveries Restricted/Sponsored Funds Uncollectible Accounts Receivable Property Reserves Inventories Unreserved Surplus
Total Fund Balances
Total Liabilities and Fund Balances

SCHEDULE "2"

$ 49,154,514.68 3,597,992.86
1,136,292.59 3,006,048.97 1,059,497.63
184,558.32
$ 58,138,905.05

$

70,898.89

21,323,331.81

965,413.98

591,496.66

22,951,141.34

21,883,750.77 450,736.00
6,773,262.46 39,716.59
5,767,655.32 184,558.32
88,084.25
35,187,763.71

$ 58,138,905.05

Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a special purpose framework.
- 35 -

(This page left intentionally blank)

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
SUMMARY BUDGET COMPARISON AND SURPLUS ANALYSIS REPORT (NON-GAAP BASIS) BUDGET FUND
YEAR ENDED JUNE 30, 2014

SCHEDULE "3"

REVENUES
State Appropriation State General Funds
Other Funds
Total Revenues
ADJUSTMENTS AND PROGRAM TRANSFERS
CARRY-OVER FROM PRIOR YEARS
Transfers from Reserved Fund Balance
Total Funds Available
EXPENDITURES
Archives Public Libraries Regents Central Office Medical College of Georgia Hospital and Clinics Georgia Public Telecommunications Commission Georgia Radiation Therapy Center Georgia Military College Special Funding Initiative Teaching
Total Expenditures
Excess of Funds Available over Expenditures
FUND BALANCE JULY 1
Reserved Unreserved
ADJUSTMENTS
Prior Year Payables/Expenditures Unreserved Fund Balance (Surplus) Returned
to Office of the State Treasurer Year Ended June 30, 2013
Unreserved Fund Balance (Surplus) Returned to Board of Regents - University System Office Year Ended June 30, 2013
Early Return of Surplus Remitted to the Office of the State Treasurer Year Ended June 30, 2014
Early Return of Surplus Remitted to Board of Regents - University System Office Year Ended June 30, 2014
Prior Year Reserved Fund Balance Included in Funds Available
FUND BALANCE JUNE 30

BUDGET

ACTUAL

VARIANCE FAVORABLE (UNFAVORABLE)

$

150,535,683.00 $

150,535,683.00 $

73,922,987.00

66,486,472.02

224,458,670.00

217,022,155.02

0.00

0.00

0.00 -7,436,514.98
-7,436,514.98
0.00

0.00 224,458,670.00

25,542,940.15 242,565,095.17

25,542,940.15 18,106,425.17

5,082,087.00 37,537,156.00
8,401,788.00 28,297,463.00 14,513,070.00
3,779,621.00 2,288,309.00 4,826,082.00 119,733,094.00

224,458,670.00

$

0.00

4,794,329.79 35,204,489.44
8,401,787.55 28,297,463.00 14,513,070.00
3,779,621.00 2,288,309.00 4,825,829.30 105,847,486.04
207,952,385.12
34,612,710.05 $

287,757.21 2,332,666.56
0.45 0.00 0.00 0.00 0.00 252.70 13,885,607.96
16,506,284.88
34,612,710.05

25,987,577.47 72,299.05

566,881.00

-4,213,298.94

4,140,999.89

-763,317.01

326,852.35 -25,542,940.15

$

35,187,763.71

SUMMARY OF FUND BALANCE
Reserved Department Sales and Services Indirect Cost Recoveries Restricted/Sponsored Funds Uncollectible Accounts Receivable Property Reserves Inventories
Total Reserved
Unreserved Surplus

Total Fund Balance
Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a special purpose framework.

- 37 -

$

21,883,750.77

450,736.00

6,773,262.46

39,716.59

5,767,655.32

184,558.32

35,099,679.46

88,084.25

$

35,187,763.71

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
STATEMENT OF FUNDS AVAILABLE AND EXPENDITURES COMPARED TO BUDGET BY PROGRAM AND FUNDING SOURCE (NON-GAAP BASIS) BUDGET FUND YEAR ENDED JUNE 30, 2014

Archives State Appropriation State General Funds Other Funds
Total Archives
Public Libraries State Appropriation State General Funds Other Funds
Total Public Libraries
Regents Central Office State Appropriation State General Funds
Medical College of Georgia Hospital and Clinics State Appropriation State General Funds
Georgia Public Telecommunications Commission State Appropriation State General Funds
Georgia Radiation Therapy Center Other Funds
Georgia Military College State Appropriation State General Funds
Special Funding Initiative State Appropriation State General Funds
Teaching State Appropriation State General Funds Other Funds
Total Teaching
Total Operating Activity

Original Appropriation

Amended Appropriation

Final Budget

Current Year Revenues

$

4,151,428.00 $

4,151,428.00 $

4,151,428.00 $

4,151,428.00

532,671.00

836,175.00

930,659.00

1,519,004.38

4,684,099.00

4,987,603.00

5,082,087.00

5,670,432.38

31,497,624.00 5,222,400.00
36,720,024.00

31,497,624.00 5,451,232.00
36,948,856.00

31,497,624.00 6,039,532.00
37,537,156.00

31,497,624.00 3,707,171.84
35,204,795.84

8,401,788.00

8,401,788.00

8,401,788.00

8,401,788.00

28,297,463.00

28,297,463.00

28,297,463.00

28,297,463.00

14,513,070.00

14,513,070.00

14,513,070.00

14,513,070.00

3,625,810.00

3,779,621.00

3,779,621.00

3,779,621.00

2,288,309.00

2,288,309.00

2,288,309.00

2,288,309.00

3,751,082.00

4,826,082.00

4,826,082.00

4,826,082.00

55,035,451.00 95,805,609.00
150,841,060.00

59,812,419.00 60,366,347.00
120,178,766.00

56,559,919.00 63,173,175.00
119,733,094.00

56,559,919.00 57,480,674.80
114,040,593.80

$ 253,122,705.00 $ 224,221,558.00 $ 224,458,670.00 $ 217,022,155.02

Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a special purpose framework.
- 38 -

SCHEDULE "4"

Funds Available Compared to Budget

Prior Year

Adjustments and

Total

Carry-Over

Program Transfers

Funds Available

Variance Positive (Negative)

Expenditures Compared to Budget

Variance

Actual

Positive (Negative)

Excess of Funds Available
Over Expenditures

$

0.00 $

0.00

0.00

0.00 $ 0.00
0.00

4,151,428.00 $ 1,519,004.38
5,670,432.38

0.00 $ 588,345.38
588,345.38

4,151,425.98 $ 642,903.81
4,794,329.79

2.02 $ 287,755.19
287,757.21

2.02 876,100.57
876,102.59

0.00 0.00
0.00

0.00 0.00
0.00

31,497,624.00 3,707,171.84
35,204,795.84

0.00 -2,332,360.16
-2,332,360.16

31,497,622.85 3,706,866.59
35,204,489.44

1.15 2,332,665.41
2,332,666.56

1.15 305.25
306.40

0.00

0.00

8,401,788.00

0.00

8,401,787.55

0.45

0.45

0.00

0.00

28,297,463.00

0.00

28,297,463.00

0.00

0.00

0.00 0.00

0.00

14,513,070.00

0.00

3,779,621.00

0.00

14,513,070.00

0.00

3,779,621.00

0.00 0.00

0.00 0.00

0.00

0.00

2,288,309.00

0.00

2,288,309.00

0.00

0.00

0.00

0.00

4,826,082.00

0.00

4,825,829.30

252.70

252.70

0.00 25,542,940.15
25,542,940.15

0.00 0.00
0.00

56,559,919.00 83,023,614.95
139,583,533.95

0.00 19,850,439.95
19,850,439.95

56,559,585.35 49,287,900.69
105,847,486.04

333.65 13,885,274.31
13,885,607.96

333.65 33,735,714.26
33,736,047.91

$ 25,542,940.15 $

0.00 $ 242,565,095.17 $

18,106,425.17 $ 207,952,385.12 $

16,506,284.88 $

34,612,710.05

- 39 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
STATEMENT OF CHANGES TO FUND BALANCE BY PROGRAM AND FUNDING SOURCE (NON-GAAP BASIS) BUDGET FUND YEAR ENDED JUNE 30, 2014

Archives State Appropriation State General Funds Other Funds
Total Archives
Public Libraries State Appropriation State General Funds Other Funds
Total Public Libraries
Regents Central Office State Appropriation State General Funds
Medical College of Georgia Hospitals and Clinics State Appropriation State General Funds
Georgia Public Telecommunications Commission State Appropriation State General Funds
Georgia Radiation Therapy Center Other Funds
Georgia Military College State Appropriation State General Funds
Special Funding Initiative State Appropriation State General Funds
Teaching State Appropriation State General Funds Other Funds
Total Teaching
Total Operating Activity
Prior Year Reserves Not Available for Expenditure Inventories Uncollectible Accounts Receivable

Beginning Fund Balance July 1

Fund Balance Carried Over from
Prior Period as Funds Available

Return of Fiscal Year 2013
Surplus

Prior Period Adjustments

$

0.00 $

0.00 $

0.00 $

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

1,193.88 0.00
1,193.88

0.00 0.00
0.00

-1,193.88 0.00
-1,193.88

569.90 0.00
569.90

5,742.30

0.00

-5,742.30

194.22

0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00

5.92

0.00

-5.92

0.00

39,732.87 25,568,564.23
25,608,297.10
25,615,239.20

0.00 -25,542,940.15
-25,542,940.15
-25,542,940.15

-39,732.87 -25,624.08
-65,356.95
-72,299.05

497,232.00 68,884.88
566,116.88
566,881.00

404,920.73 39,716.59

0.00 0.00

0.00 0.00

0.00 0.00

Budget Unit Totals

$

26,059,876.52 $ -25,542,940.15 $

-72,299.05 $ 566,881.00

Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a special purpose framework.
- 40 -

SCHEDULE "5"

Other Adjustments

Early Return Fiscal Year 2014
Surplus

Excess of Funds Available
Over Expenditures

Ending Fund Balance June 30

Analysis of Ending Fund Balance

Reserved

Surplus

Total

$

0.00 $

0.00

0.00

0.00 $ 0.00
0.00

2.02 $ 876,100.57
876,102.59

2.02 $ 876,100.57
876,102.59

0.00 $ 876,100.57
876,100.57

2.02 $ 0.00
2.02

2.02 876,100.57
876,102.59

0.00 0.00
0.00

0.00 0.00
0.00

1.15 305.25
306.40

571.05 305.25
876.30

0.00 0.00
0.00

571.05 305.25
876.30

571.05 305.25
876.30

0.00

0.00

0.45

194.67

0.00

194.67

194.67

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

252.70

252.70

0.00

252.70

252.70

0.00 220,362.41
220,362.41
220,362.41

-436,464.66 0.00
-436,464.66
-436,464.66

333.65 33,735,714.26
33,736,047.91
34,612,710.05

61,100.99 34,024,961.55
34,086,062.54
34,963,488.80

0.00 33,999,303.98
33,999,303.98
34,875,404.55

61,100.99 25,657.57
86,758.56
88,084.25

61,100.99 34,024,961.55
34,086,062.54
34,963,488.80

-220,362.41 0.00

0.00 0.00

0.00 0.00

184,558.32 39,716.59

184,558.32 39,716.59

0.00 0.00

184,558.32 39,716.59

$

0.00 $

-436,464.66 $

34,612,710.05 $ 35,187,763.71 $ 35,099,679.46 $

88,084.25 $ 35,187,763.71

Summary of Ending Fund Balance Reserved
Department Sales and Services Indirect Cost Recoveries Restricted/Sponsored Funds Uncollectible Accounts Receivable Property Reserves Inventories Unreserved Surplus
Total Ending Fund Balance - June 30

$ 21,883,750.77 450,736.00
6,773,262.46 39,716.59
5,767,655.32 184,558.32
$
$ 35,099,679.46 $

$ 21,883,750.77 450,736.00
6,773,262.46 39,716.59
5,767,655.32 184,558.32

88,084.25

88,084.25

88,084.25 $ 35,187,763.71

- 41 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) RECONCILIATION OF BUDGET TO GAAP YEAR ENDED JUNE 30, 2014

SCHEDULE "6"

Presented below is a reconciliation of the fund balance of the Budget Fund, as reported on Schedule 3, to Net Position of business-type activities, as reported on Exhibit A.

Total Fund Balances - Budget Fund - Non-GAAP Basis (Schedule "3")

$

Amounts reported for Business-Type Activities in the Statement of Net Position are different because:

Capital Assets used in Business-Type Activities are not reported in the Budget Fund.

Uncollectible accounts receivable are reported as an asset and reserved fund balance in the Budget Fund and as a contra-asset account on the Statement of Net Position.

Notes Receivable reported on the Statement of Net Position is not reported in the Budget

Changes in the Fair Market Value of Investments are recognized on the Statement of Net Position, but are not reported in the Budget Fund.

Agency Fund activities are not reported as a component of the Budget Fund. Assets Liabilities Total Net Effect of Agency Fund Activity

$ 542,267,852.00 -542,267,852.00

Endowment Fund activities are not reported as a component of the Budget Fund. Assets

Health Insurance Fund activities are not reported as a component of the Budget Fund. Assets Liabilities Total Net Effect of Health Insurance Fund Activity

$ 116,960,656.00 -40,348,576.00

The budgetary basis of accounting implemented by the State of Georgia recognizes expenditures when encumbered. The following adjustments were made to eliminate this activity for reporting on the Statement of Net Position. Payables reported in the Budget Fund that are based on encumbrances are eliminated for GAAP reporting. Payables for goods and services provided in the current fiscal year reported in the Budget Fund as encumbrances payable are reported as accounts payable for GAAP reporting. Total Net Effect of Encumbrance Activity

$ 21,323,331.81 592,784.64

Certain Liabilities are not due and payable in the current period and therefore are not reported as liabilities in the Budget Fund. Capital Leases Payable Compensated Absences Payable Total Liabilities

$ -47,877,695.00 -4,122,738.00

35,187,763.71 76,643,526.00
-39,717.00 1,621,305.00 2,632,398.84
0.00 4,381,979.00 76,612,080.00
21,916,116.45
-52,000,433.00

Net Position of Business-Type Activities (Exhibit "A")

$

166,955,019.00

The supplementary information presented on Schedules 1, 2, 3 and 4 was prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a special purpose framework. The information was derived from, and relates directly to, the same information used to prepare the financial statements. However, the budgetary statutes and regulations of the State of Georgia require reporting of certain information that is not in accordance with generally accepted accounting principles. Presented on this schedule is a reconciliation of the fund balance of the Budget Fund, as reported on Schedule 1, to Net Position of business-type activities, as reported on Exhibit A.
- 42 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) SCHEDULE OF APPROVED BUDGET YEAR ENDED JUNE 30, 2014

SCHEDULE "7"

REVENUES State Appropriation Other Funds Total Revenues
CARRY-OVER FROM PRIOR YEARS Transfers from Reserved Fund Balance
Total Funds Available

ORIGINAL APPROPRIATION

FINAL APPROVED
BUDGET

LESS: BUDGET TRANSFERS TO OTHER UNITS

TOTAL

$ 1,883,128,792.00 $ 1,885,486,702.00 $ 1,734,951,019.00 $ 150,535,683.00

4,521,194,857.00

5,126,948,916.00

5,053,025,929.00

73,922,987.00

6,404,323,649.00

7,012,435,618.00

6,787,976,948.00

224,458,670.00

0.00

0.00

0.00

0.00

$ 6,404,323,649.00 $ 7,012,435,618.00 $ 6,787,976,948.00 $ 224,458,670.00

EXPENDITURES
Agricultural Experiment Station Archives Athens and Tifton Veterinary Laboratories Cooperative Extension Service Enterprise Innovation Institute Forestry Cooperative Extension Forestry Research Georgia Military College Georgia Public Telecommunications Georgia Radiation Therapy Center Georgia Tech Research Institute Marine Institute Marine Resources Extension Center Medical College of Georgia Hospital and Clinics Public Libraries Regents Central Office Research Consortium Skidaway Institute of Oceanography Special Funding Initiative Teaching Veterinary Medicine Experiment Station Veterinary Medicine Teaching Hospital
Total Expenditures

$

72,785,946.00 $

99,958,196.00 $

99,958,196.00 $

0.00

4,684,099.00

5,082,087.00

0.00

5,082,087.00

4,944,522.00

6,367,072.00

6,367,072.00

0.00

54,449,313.00

67,193,497.00

67,193,497.00

0.00

17,662,612.00

19,229,016.00

19,229,016.00

0.00

1,071,179.00

1,451,365.00

1,451,365.00

0.00

12,812,680.00

14,478,344.00

14,478,344.00

0.00

2,288,309.00

2,288,309.00

0.00

2,288,309.00

14,513,070.00

14,513,070.00

0.00

14,513,070.00

3,625,810.00

3,779,621.00

0.00

3,779,621.00

229,506,478.00

336,815,482.00

336,815,482.00

0.00

1,200,848.00

1,340,819.00

1,340,819.00

0.00

2,524,781.00

2,954,781.00

2,954,781.00

0.00

28,297,463.00

28,297,463.00

0.00

28,297,463.00

36,720,024.00

37,537,156.00

0.00

37,537,156.00

8,401,788.00

8,401,788.00

0.00

8,401,788.00

6,104,447.00

6,104,447.00

6,104,447.00

0.00

4,865,489.00

5,613,568.00

5,613,568.00

0.00

25,303,326.00

26,703,326.00

21,877,244.00

4,826,082.00

5,859,983,538.00

6,305,726,498.00

6,185,993,404.00

119,733,094.00

2,569,841.00

2,569,841.00

2,569,841.00

0.00

10,008,086.00

16,029,872.00

16,029,872.00

0.00

$ 6,404,323,649.00 $ 7,012,435,618.00 $ 6,787,976,948.00 $ 224,458,670.00

See notes to the financial statements.

- 43 -

RESEARCH UNIVERSITIES
Georgia Institute of Technology Georgia Regents University Georgia State University University of Georgia
COMPREHENSIVE UNIVERSITIES
Georgia Southern University Kennesaw State University University of West Georgia Valdosta State University
STATE UNIVERSITIES
Albany State University Armstrong Atlantic State University Clayton State University Columbus State University Fort Valley State University Georgia College and State University Georgia Southwestern State University Savannah State University Southern Polytechnic State University University of North Georgia
STATE COLLEGES
Abraham Baldwin Agricultural College Atlanta Metropolitan State College Bainbridge State College College of Coastal Georgia Dalton State College Darton State College East Georgia State College Georgia Gwinnett College Georgia Highlands College Georgia Perimeter College Gordon State College Middle Georgia State College South Georgia State College
OTHER
Skidaway Institute of Oceanography

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
SCHEDULE OF ALLOTMENTS TO UNITS OF THE UNIVERSITY SYSTEM OF GEORGIA YEAR ENDED JUNE 30, 2014

AGRICULTURAL EXPERIMENT
STATION

COOPERATIVE EXTENSION SERVICE

ENTERPRISE INNOVATION INSTITUTE

FORESTRY COOPERATIVE
EXTENSION

FORESTRY RESEARCH

GEORGIA TECH
RESEARCH INSTITUTE

$ 7,187,612.00

$ 5,588,520.00

$ 35,233,027.00 $ 29,365,384.00

$ 495,191.00 $ 2,562,254.00

$ 35,233,027.00 $ 29,365,384.00 $ 7,187,612.00 $ 495,191.00 $ 2,562,254.00 $ 5,588,520.00

See notes to the financial statements.

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SCHEDULE "8"

MARINE INSTITUTE

MARINE RESOURCES EXTENSION
CENTER

RESEARCH CONSORTIUM

SKIDAWAY INSTITUTE OF OCEANOGRAPHY

SPECIAL FUNDING INITIATIVE

TEACHING

VETERINARY MEDICINE EXPERIMENT STATION

VETERINARY MEDICINE TEACHING HOSPITAL

TOTAL

$ 5,896,551.00 $ 714,567.00 $ 1,179,252.00

$ $ 15,910,827.00
500,850.00

203,653,907.00 157,745,503.00 187,199,459.00 314,382,854.00 $

2,569,841.00 $

$ 386,135.00

222,326,590.00 173,656,330.00 187,700,309.00 386,888,505.00

207,896.00

101,000.00 593,000.00
97,293.00

81,637,310.00 82,120,547.00 43,708,877.00 48,576,484.00

81,637,310.00 82,429,443.00 44,301,877.00 48,673,777.00

162,133.00 361,750.00 3,664,741.00
58,500.00

18,940,821.00 28,838,670.00 23,251,922.00 32,819,897.00 20,341,136.00 29,038,579.00 11,811,436.00 18,671,267.00 21,375,236.00 45,277,086.00

18,940,821.00 28,838,670.00 23,414,055.00 33,181,647.00 24,005,877.00 29,038,579.00 11,869,936.00 18,671,267.00 21,375,236.00 45,277,086.00

117,000.00
133,900.00 176,250.00

13,421,632.00 8,907,405.00
10,007,069.00 13,841,960.00 14,043,992.00 15,537,414.00
7,617,744.00 39,791,420.00 14,486,960.00 56,886,594.00 11,161,745.00 34,214,617.00 11,163,133.00

13,421,632.00 8,907,405.00
10,007,069.00 13,958,960.00 14,043,992.00 15,537,414.00
7,617,744.00 39,791,420.00 14,486,960.00 56,886,594.00 11,295,645.00 34,390,867.00 11,163,133.00

$

1,214,869.00

1,214,869.00

$ 714,567.00 $ 1,179,252.00 $ 6,104,447.00 $

1,214,869.00 $ 21,877,244.00 $ 1,620,472,676.00 $ 2,569,841.00 $ 386,135.00 $ 1,734,951,019.00

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
ANALYSIS OF PRIOR YEAR'S SURPLUS FUNDS COLLECTED FROM INSTITUTIONS YEAR ENDED JUNE 30, 2014

SCHEDULE "9"

RESEARCH INSTITUTIONS
Georgia Institute of Technology Georgia Regents University Georgia State University University of Georgia
REGIONAL UNIVERSITIES
Georgia Southern University Kennesaw State University University of West Georgia Valdosta State University
STATE UNIVERSITIES
Albany State University Armstrong Atlantic State University Clayton State University Columbus State University Fort Valley State University Georgia College and State University Georgia Southwestern State University Savannah State University Southern Polytechnic State University University of North Georgia
STATE COLLEGES
Abraham Baldwin Agricultural College Atlanta Metropolitan College Bainbridge College College of Coastal Georgia Dalton State College Darton State College East Georgia State College Georgia Gwinnett College Georgia Highlands College Georgia Perimeter College Gordon State College Middle Georgia College South Georgia College
OTHER
Skidaway Institute of Oceanography

COLLECTED

$

189,417.89

232,745.00

296,954.34

844,888.16

185,134.52 52,636.12 39,630.45
206,392.54

341,210.64 0.00
12,122.29 172,880.91
45.60 32,788.47
2,235.05 16,183.35 146,623.14 313,142.66

266.48 53,872.37 17,960.91
411.18 5,470.28 589,224.61
831.47 0.00
9,299.50 15,274.97 58,840.15 288,125.74 26,924.68

7,466.42

$ 4,158,999.89

See notes to the financial statements

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT) RECONCILIATION OF SALARIES AND TRAVEL YEAR ENDED JUNE 30, 2014

SCHEDULE "10"

Totals per Annual Supplement
Accruals June 30, 2014 June 30, 2013
Compensated Absences June 30, 2014 June 30, 2013
Adjustments Shared Services on Jointly Staffed Personnel Accounts Receivable for Georgia Institute of Technology for Managed Grants Baldwin, Lisa Betkowski, Teresa Bhatt, Rachana Bradley, Annette Caldwell, Leslie DeVries, Nicole Foxman, Michael Joyce, Teresa King, Greg Kirkwood, Diane Loftis, Rich Mast, Amy Monsaas, Judy Noble, Linda Overcash, Penny Pearman, Randy Rogers, Mike Roy, Rob Rugg, Ed Sizemore, Jon Stickel, George Todd, Robert Watts, Rob
Reimbursements Carver, Curt Foxman, Mike Gatewood, Stan Malik, Mazhar Shaw, Jennifer Trezvant, Brenda
Vacation Payouts
Unidentified Variance

SALARIES

$

32,451,887 $

TRAVEL 758,433

70,899 -29,376

3,829,761 -3,326,019

-32,022 93,575 61,551 -6,000 48,178
5,383 -10,319 -95,432 78,791 58,000
-800 2,547 -87,120 99,027 168,075 65,929 100,921 -5,760 26,664 19,250 122,019 53,522 111,839 -276,945
-16,000 -17,877
-8,000 -6,800
-247 115
-15,927
-617

- 47 -

$

33,532,672 $

758,433

SECTION II COMPLIANCE AND INTERNAL CONTROL REPORTS

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

DEPARTMENT OF AUDITS AND ACCOUNTS
270 Washington Street, S.W., Suite 1-156 Atlanta, Georgia 30334-8400
March 13, 2015

Honorable Nathan Deal, Governor Members of the General Assembly of Georgia Members of the Board of Regents of the University System of Georgia
and Honorable Henry M. Huckaby, Chancellor
INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
Ladies and Gentlemen:
We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the basic financial statements of the University System Office as of and for the year ended June 30, 2014, and have issued our report thereon dated March 13, 2015.
Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered the University System Office's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the University System Office's internal control. Accordingly, we do not express an opinion on the effectiveness of the University System Office's internal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying Schedule of Findings and Questioned Costs, we identified certain deficiencies in internal control that we consider to be material weaknesses and significant deficiencies.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and

2014YB-40

corrected on a timely basis. We consider the deficiency described in the accompanying Schedule of Findings and Questioned Costs as item FS-472-14-02 to be a material weakness.
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiency described in the accompanying Schedule of Findings and Questioned Costs as item FS-472-14-01 to be a significant deficiency.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the University System Office's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
The University System Office's Response to Findings
The University System Office's response to the findings identified in our audit is described in the accompanying Schedule of Findings and Questioned Costs. The University System Office's response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it.
Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity's internal control and compliance. Accordingly, this communication is not suitable for any other purpose.
Respectfully submitted,

GSG:as 2014YB-40

Greg S. Griffin State Auditor

SECTION III 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, 2014

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

FS-472-14-01 Deficiencies in Controls over Capital Assets

Control Category: Internal Control Impact:

Capital Assets Financial Reporting and Disclosure Significant Deficiency

Description: Capital asset activity recorded by the University System Office contained significant errors and omissions.

Criteria: The Board of Regents' Business Procedures Manual Section 11.4 Mandatory Physical Equipment Inventory Requirements states in part, "All institutions within the University System of Georgia must conduct a mandatory physical equipment inventory annually. The results of this inventory will be updated into the equipment inventory systems utilized by the institution to satisfy state reporting requirements."

The University System Office should also maintain capital asset records in accordance with capitalization guidelines and instructions provided in Section 7 of the Board of Regents' Business Procedures Manual.

Further, a system of internal control over financial reporting does not stop at the general ledger. Management is responsible for implementing a system of internal control over the preparation of financial statements prepared in accordance with generally accepted accounting principles (GAAP).

Condition: The following deficiencies were noted during our review of capital assets and GAAP basis financial statements:

1. The University System of Georgia did not perform a complete physical inventory of equipment items during the fiscal year. A sample of 27 equipment items revealed the following deficiencies:

a. The asset location was not properly updated within the accounting system for 15 items. b. Two items could not be located. c. The asset tag was not properly attached to one item located during the sample.

2. A review of current year capital asset activity revealed that an administrative review and approval was not performed over several post-closing adjustments related to capital asset activity, which resulted in the following errors.

a. Proceeds from the sale of capital assets were inappropriately netted with purchases of capital assets on the Statement of Cash Flows in the amount of $2,113,650.
b. Georgia State Financing and Investment Commission activity of $124,849 was inappropriately included as purchases of capital assets on the Statement of Cash Flows.
c. Net capital assets of $2,945,607 were reported as current year additions. However, these items should have been recorded as capital assets in the prior year.
d. The University System Office made an adjustment of $2,461,068 in error which netted additions and deletions reported in Note 6 of the Notes to the Financial Statements.

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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2014
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS
Questioned Cost: N/A
Cause: In discussing these issues with University System Office management, deficiencies related to the physical inventory of equipment occurred as a result of turnover of personnel within Business Services. Errors related to post-closing adjusting entries, cash flows, and cut-off and completeness of activity were attributable to deficiencies in the design of the financial statement preparation process. Controls were not designed appropriately to ensure that the financial statements and post-closing adjusting entries were review by someone other than the preparer.
Effect or Potential Effect: Failure to accurately record, maintain and monitor capital assets could result in potential misappropriation of assets. In addition, misrepresentation of the University System Office's financial position, results of operations and cash flows could occur.
Recommendation: The University System Office should review the accounting controls and procedures currently in place, identify weaknesses, and design and implement procedures necessary to strengthen controls over the preparation of the financial statements and maintenance of capital asset records. This should include, but not be limited to, a physical inventory of equipment performed annually and an administrative review and approval of the financial statements and post-closing adjusting entries.
Views of Responsible Officials and Corrective Action Plans: We concur with this finding. The University System Office acknowledges that sufficient controls and procedures were not in place for the preparation of the annual financial statements as related to capital assets due to transitions in personnel and related duties. The University System Office is currently reviewing and reassigning job duties to ensure that capital asset activity including additions, retirements and transfers are properly reflected on the financial statements. The University System Office is also researching methods to gain efficiencies in maintenance and performance of equipment inventory to ensure that annual physical equipment inventory is performed in a timely manner.
Contact Person: Kristi Fuss, Controller Telephone: (404) 962-3224; E-mail: Kristi.Fuss@usg.edu
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BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2014

FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS

FS-472-14-02 Deficiencies in Controls over Calculation of Benefits Payable

Control Category: Internal Control Impact:

Expenditures/Liabilities/Disbursements Significant Deficiency

Description: The University System Office improperly calculated the liability for claims that were incurred but not yet reported (IBNR).

Criteria: The University System Office management is responsible for designing internal control procedures for accumulating relevant, sufficient and reliable data on which to base estimates. There should be an adequate review of the sources of relevant factors, the development of assumptions, reasonableness of assumptions and resulting estimates, consideration of the need to use the work of specialists and consideration of changes in previously established methods to arrive at accounting estimates.

Condition: A review of the IBNR calculation revealed that an administrative review and approval was not performed related to the estimate, which resulted in the following errors.

1. A duplication of pharmacy claims and other mathematical errors occurred which resulted in an overstatement of benefits payable reported on the Statement of Net Position and Statement of Fiduciary Net Position of $4,511,289 and $5,691,124, respectively. Adjustments were made to the financial statements to correct this error.

2. The amounts included in the reconciliation of total estimated claims liabilities reported in Note 12 of the Notes to the Financial Statements were calculated incorrectly. Adjustments were made to the Note to the Financial Statements to correct this error.

Questioned Cost: N/A

Cause: In discussing these issues with University System Office management, these errors were attributable to deficiencies in the design of controls related to estimating the claims IBNR liability. Controls were not designed appropriately to ensure that the estimate was review by someone other than the preparer.

Effect or Potential Effect: Failure to accurately record the IBNR liability has resulted in significant misstatements to the financial statements for the University System Office.

- 3 -

BOARD OF REGENTS OF THE UNIVERSITY SYSTEM OF GEORGIA UNIVERSITY SYSTEM OFFICE (OVERSIGHT UNIT)
SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2014
FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS Recommendation: The University System Office should review the accounting controls and procedures currently in place, identify weaknesses, and design and implement procedures necessary to strengthen controls over the calculation of the IBNR liability. This should include, but not be limited to, an administrative review and approval of the IBNR calculation. Views of Responsible Officials and Corrective Action Plans: Deficiencies in Controls over Calculation of Benefits Payable We concur with this finding. The University System Office is currently reviewing controls and procedures to ensure that activity reflected on the annual financial statements is properly calculated, recorded and reviewed. The University System Office is reassigning fiscal year accounting duties to ensure that a thorough review of the annual financial statements is performed by an accounting manager who is not involved in the development of the annual financial report. Contact Person: Kristi Fuss, Controller Telephone: (404) 962-3224; E-mail: Kristi.Fuss@usg.edu FEDERAL AWARD FINDINGS AND QUESTIONED COSTS No matters were reported.
- 4 -