State of Nebraska
NOTES TO THE FINANCIAL STATEMENTS
A. Basis of Presentation. The accompanying general purpose financial statements of the State of Nebraska (the “State”) have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The financial statements of the Colleges and Universities, which are included as discretely presented component units, are based on the American Institute of Certified Public Accountants (AICPA) College Audit Guide model.
The general purpose financial statements have been prepared primarily from accounts maintained by the State Accounting Administrator of the Department of Administrative Services. Additional data has been derived from audited financial statements of certain entities and from reports prescribed by the Accounting Administrator and prepared by various State agencies and departments based on independent or subsidiary accounting systems maintained by them.
B. Reporting Entity. In determining its financial reporting entity, the State has considered all potential component units for which it is financially accountable, and other organizations which are fiscally dependent on the State, or the significance of their relationship with the State are such that exclusion would be misleading or incomplete. The GASB has set forth criteria to be considered in determining financial accountability. These criteria include appointing a voting majority of an organization’s governing body and (1) the ability of the State to impose its will on that organization or (2) the potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the State.
As required by GAAP, these financial statements present the State of Nebraska and its component units. The component units are included in the State’s reporting entity because of the significance of their operational or financial relationships with the State. Complete financial statements of the individual component units that issue separate financial statements, as noted below, can be obtained from their respective administrative offices.
Blended Component Units. The following component units are entities that are legally separate from the State, but are so intertwined with the State that they are, in substance, the same as the State. They are reported as part of the State and blended into the appropriate funds.
NETC Leasing Corporation. The NETC Leasing Corporation is a nonprofit corporation formed by the State in 1999 to acquire property to be leased to and purchased by the Nebraska Educational Telecommunications Commission (NETC), a State agency. The members of the Board of Commissioners of the NETC are appointed by the Governor and appoint and elect the five members of the Board of Directors of the NETC Leasing Corporation. Even though it is legally separate, the NETC Leasing Corporation is reported as if it were part of the State because it provides services entirely to the State. It is reflected in a Special Revenue Fund and the Account Groups.
Nebraska State Building Corporation. The Nebraska State Building Corporation (NSBC) is a nonprofit corporation formed by the State in 1987 to finance the acquisition of property to be used by the State. Even though it is legally separate, the NSBC is reported as if it were part of the State because it provides services almost entirely to the State. It is reflected in a Special Revenue Fund and the Account Groups.
Discretely Presented Component Units. The following component units are entities that are legally separate from the State, but are financially accountable to the State, or their relationships with the State are such that their exclusion would cause the State’s financial statements to be misleading or incomplete. The component units are reported in a separate column to emphasize that they are legally separate from the State and governed by separate boards.
Nebraska State Colleges. The Board of Trustees of the Nebraska State Colleges governs Chadron State College, Peru State College and Wayne State College. The Board of Trustees is also the Board of Directors of the Nebraska State Colleges Facilities Corporation, a nonprofit corporation incorporated in 1983 to finance the repair or construction of buildings or the acquisition of equipment for use by the State Colleges. The Board of Trustees consists of the Commissioner of Education and six members appointed by the Governor. Audit reports have been issued under separate cover.
University of Nebraska. The University of Nebraska consists of the following campuses: University of Nebraska – Lincoln, University of Nebraska at Omaha, University of Nebraska at Kearney, and University of Nebraska Medical Center. The University of Nebraska is governed by an elected eight-member Board of Regents. The Board of Regents is also the Board of Directors of the University of Nebraska Facilities Corporation, a nonprofit corporation organized by the Board of Regents in 1930 to finance buildings and hold them in trust for the University of Nebraska. The University of Nebraska is included as a component unit because it is fiscally dependant on the State. Audit reports have been issued under separate cover.
The colleges and universities are funded chiefly through State appropriations, tuition, federal grants, private donations and grants, and auxiliary operations.
Related Organizations. The State’s officials are responsible for appointing members of boards of other organizations, but the State’s accountability for these organizations does not extend beyond making these appointments. The Governor appoints the boards of the following organizations: Nebraska Educational Facilities Authority, Nebraska Investment Finance Authority, Research and Development Authority, and Wyuka Cemetery.
C. Fund Structure. The State’s accounts are maintained in accordance with the principles of fund accounting to ensure compliance with limitations and restrictions placed on the use of resources available to it. Under fund accounting, individual funds are established for the purpose of carrying on activities or attaining objectives in accordance with specific regulations, restrictions, or limitations. Each individual fund is a self-balancing set of accounts recording cash and other financial resources, together with liabilities and residual equities or balances, and changes therein. In the general purpose financial statements, however, funds that have similar characteristics have been combined into generic fund types as required by GAAP. These generic fund types differ from the State’s budgetary funds that are described in Note 2. A brief description of these fund types and account groups used by the State and the categories into which they are grouped follows:
Governmental Funds. Transactions related to resources received and used for those services traditionally provided by a state government. Governmental funds include:
General Fund. Reflects transactions related to resources received and used for those services traditionally provided by a state government, which are not accounted for in any other fund.
Special Revenue Funds. Reflect transactions related to resources received and used for restricted or specific purposes.
Capital Projects Fund. Reflects transactions related to resources received and used for the acquisition, construction, or improvement of permanent facilities.
Proprietary Funds. Transactions related to activities similar to those found in the private sector. Proprietary funds include:
Enterprise Funds. Reflect transactions used to account for those operations that are financed and operated in a manner similar to private business or where the governing body has decided that the determination of revenues earned, expenses incurred and/or net income is necessary for management accountability.
Internal Service Funds. Reflect transactions used to account for centrally operated services and centrally procured commodities that are provided to other State departments and agencies and other governmental units of the State. The services and commodities are charged to recipient agencies on a cost reimbursement basis.
Fiduciary Funds. Transactions related to assets held by the State in a trust or agency capacity. The State’s fiduciary funds include Pension Trust, Nonexpendable Trust, Expendable Trust, and Agency funds as follows:
Pension Trust Funds. Reflect the transactions, assets, liabilities, and fund equities of State retirement systems.
Nonexpendable Trust Funds. Reflect the transactions, assets, liabilities, and fund equity of trusts whose principal must be maintained intact and whose income is used to fund the activity.
Expendable Trust Funds. Reflect the transactions, assets, liabilities, and fund equity of trusts whose principal and income may be used to fund the activity.
Agency Funds. Reflect amounts held by the State for others.
Account Groups. The Account Groups are maintained to account for general fixed assets and long-term debt not accounted for in other funds of the State.
General Fixed Assets Account Group. Used to account for general fixed assets of the State exclusive of assets held by the proprietary funds and component units.
General Long-Term Debt Account Group. Used to account for long-term obligations of the State including bonds payable, obligations under lease purchase agreements, claims, obligations under other financing arrangements, and compensated absences exclusive of liabilities of the proprietary funds, certain trust funds, and component units.
College and University Funds. The Component Units include College and University Funds that are legally separate from the State but are considered part of the reporting entity. The College and University Funds reflect transactions related to resources received and used in the operation of the State’s institutions of higher education and related medical teaching hospital. The College and University Funds include:
Current Funds, which account for unrestricted funds over which the governing boards retain full control in achieving the institutions’ purposes and restricted funds that may be utilized in accordance with externally restricted purposes.
Loan, Endowment, and Agency funds which account for assets in which the colleges and universities act in a fiduciary capacity.
Plant Funds that account for institutional property acquisition, renewal, replacement, and debt service.
D. Basis of Accounting. The accounting and financial reporting treatment applied to a fund is determined by its measurement focus. All governmental funds and expendable trust funds are accounted for using a current financial resources measurement focus. With this measurement focus, only current assets and current liabilities generally are included on the balance sheet. Operating statements of these funds present increases (i.e., revenues and other financing sources) and decreases (i.e., expenditures and other financing uses) in net current assets.
All proprietary funds, nonexpendable trust funds, and pension trust funds are accounted for on a flow of economic resources measurement focus. With this measurement focus, all assets and all liabilities associated with the operation of these funds are included on the balance sheet. Fund equity (i.e., net total assets) is segregated into contributed capital and retained earnings components. Proprietary fund-type operating statements present increases (i.e., revenues) and decreases (i.e., expenses) in net total assets.
All governmental fund types, expendable trust funds, and agency funds are accounted for on the modified accrual basis of accounting. Revenues and related receivables are recorded in the accounting period that they become both measurable and available, i.e., earned and collected within the next 12 months. Major revenues that are determined to be susceptible to accrual include sales taxes, income taxes, other taxpayer-assessed tax revenues, unemployment compensation taxes, federal grants and contracts, charges for services, and investment income. All other revenue items, including estate taxes, are considered to be measurable and available when cash is received by the State. Receivables not expected to be collected in the next 12 months are offset by deferred revenue. Expenditures are recorded when the related fund liability is incurred. Exceptions to the modified accrual expenditure recognition criteria include principal and interest on general long-term indebtedness and expenditures related to compensated absences, which are recognized when payment is due.
Proprietary fund types, pension trust funds, and nonexpendable trust funds utilize the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. Lottery Fund instant ticket revenue is recognized when tickets are sold to the retailer and on-line revenue is recognized after the drawing is completed for the respective wagers. Lottery Fund prize expense is recognized in the same period that ticket revenue is recognized based on the predetermined prize structure for each game.
In reporting the financial activity of its proprietary funds, the State applies all applicable GASB pronouncements as well as the following pronouncements issued on or before November 30, 1989, unless these pronouncements conflict with or contradict GASB pronouncements: Financial Accounting Standards Board Statements and Interpretations, Accounting Principles Board Opinions, and Accounting Research Bulletins of the Committee on Accounting Procedure.
The College and University Funds are reported on the accrual basis of accounting except that depreciation related to plant fund assets is not recorded and revenues and expenditures of an academic term encompassing more than one fiscal year are reported solely in the fiscal year in which the program is predominately conducted.
E. Cash and Cash Equivalents. In addition to bank accounts and petty cash, this classification includes all short-term investments such as certificates of deposit, repurchase agreements, and U.S. treasury bills having original maturities (remaining time to maturity at acquisition) of three months or less. These investments are stated at cost, which at June 30, 2001, approximated market. Banks pledge collateral, as required by law, to guarantee State funds held in time and demand deposits.
F. Cash on Deposit with Fiscal Agents. Assets held by the trustees for the NETC Leasing Corporation, the Nebraska State Building Corporation, the State Revolving Fund, and the Master Lease Purchase Program are reflected as cash on deposit with fiscal agents. Proceeds of College and University Revenue Bond issuances held in interest bearing accounts, awaiting disbursement, are also recorded as cash on deposit with fiscal agents in the Component Units column.
G. Investments. Investments as reported on the combined balance sheet include long-term investments. Law or legal instruments may restrict these investments. All investments of the State and its component units are stated at fair value based on quoted market prices.
H. Receivables. Receivables are stated net of estimated allowances for uncollectible amounts, which are determined based upon past collection experience and current economic conditions.
I. Inventories. Inventories of materials and supplies are determined by both physical counts and through perpetual inventory systems. Governmental Fund inventories are recorded as expenditures when purchased, with the exception of the Highway Fund and Health and Social Services Special Revenue Fund. The Highway Fund and the Health and Social Services Fund inventories are valued at average cost using the consumption method. Proprietary Funds’ and College and University Funds’ valuation method is primarily at the lower of cost (first-in, first-out) or market.
Food stamps and commodities on hand at June 30, 2001 are reflected as inventories, offset by a like amount of deferred revenue, in the Federal Special Revenue Fund. Food stamp inventory is reported at face value and commodities are reported at fair values established by the federal government at the date received. The amounts of food stamps and commodities distributed during the year, which approximated $61,847,000 and $7,876,000, respectively, are reflected as revenues and expenditures of the Special Revenue Funds.
J. Fixed Assets. General fixed assets are not capitalized in the funds used to acquire or construct them. Instead, capital acquisition and construction are reflected as expenditures in governmental funds, and the related assets are reported in the general fixed assets account group. All fixed assets are valued at cost where historical records are available and at estimated historical cost where no historical records exist. Donated fixed assets are valued at their estimated fair market value on the date received.
At June 30, 2001, buildings were valued at $304,875,000. Of this total, $194,121,000 was valued at estimated historical cost and $110,754,000 was valued at actual historical cost. The estimate of historical cost is based on appraised values as of October 31, 1986, indexed to date of acquisition. All buildings acquired after October 31, 1986, have been valued at historical cost.
Fixed assets do not include infrastructure such as highways, bridges and lighting systems, as these assets are immovable and of value only to the government. Art objects, collections of historical material and other artifacts, although considered valuable are not assigned a value for financial statement purposes. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized.
Generally, equipment that has a cost in excess of $5,000 at the date of acquisition and has an expected useful life of two or more years is capitalized. Substantially all initial building costs, land and land improvements costing in excess of $100,000 are capitalized. Building improvements and renovations in excess of $100,000 are capitalized if a substantial portion of the life of the asset has expired and if the useful life of the asset has been extended as a result of the renovation or improvement.
Assets in the General Fixed Assets Account Group and the College and University Funds are not depreciated. Depreciation of machinery, equipment and buildings in the proprietary fund types is recorded using the straight-line method.
In proprietary funds the following estimated useful lives are used to compute depreciation:
K. Compensated Employee Absences. All permanent employees earn sick and annual leave. Temporary and intermittent employees and Board and Commission members are not eligible for paid leave.
State employees accrue vested annual leave at a variable rate based on years of service. Generally, accrued annual leave cannot exceed 35 days at the end of a calendar year. It is the State’s policy to liquidate unpaid annual leave at June 30 from future sources rather than currently available expendable resources. Accordingly, governmental and expendable trust funds recognize annual leave when it is paid. A long-term liability of $46,105,000 for the accumulated annual leave in governmental and expendable trust funds has been recorded in the General Long-Term Debt Account Group as of June 30, 2001.
Employees accrue sick leave at a variable rate based on years of service. In general, accrued sick leave cannot exceed 180 days. Sick leave is not vested except upon death or upon reaching the retirement eligibility age of 55, at which time, the State is liable for 25 percent of the employee’s accumulated sick leave. It is the State’s policy to liquidate vested sick leave at June 30 from future resources rather than currently available expendable resources. Accordingly, governmental and expendable trust funds recognize sick leave when it is paid. A long-term liability of $38,638,000 for accumulated sick leave expected to be paid as termination payments in governmental and expendable trust funds has been recorded in the General Long-Term Debt Account Group as of June 30, 2001.
Some State agencies permit employees to accumulate compensatory leave rather than paying overtime. It is the State’s policy to liquidate compensatory leave at June 30 from future resources rather than currently available expendable resources. Accordingly, governmental and expendable trust funds recognize compensatory leave when it is paid. A long-term liability of $3,434,000 for the vested portion of the accumulated compensatory leave in governmental and expendable trust funds has been recorded in the General Long-Term Debt Account Group as of June 30, 2001.
All proprietary and similar trust funds recognize the expense and accrued liability when vacation and compensatory leave is earned or when sick leave is expected to be paid as termination payments.
The College and University Funds recognize the expense and accrued liability when sick and vacation leave is earned.
L. Fund Equity Reserves. Reservations of fund balance are established to identify the existence of assets that are not available for subsequent year appropriations (i.e., prepaid items and inventories) or have been legally segregated for specific purposes. Assets of legally restricted budgetary funds are an example of this type of reservation. Reservations of fund balance are also established for assets that are not current in nature, such as long-term loans receivable. Reservations of retained earnings are established for assets that are legally restricted for specific purposes and therefore not available to fund current operations. The Enterprise Fund has reserved retained earnings for long-term deposits with the Multi-State Lottery.
M. Interfund Transactions. Quasi-external transactions are accounted for as revenues, expenditures or expenses. Transactions that constitute reimbursements to a fund for expenditures/expenses initially made from it that are properly applicable to another fund, are recorded as expenditures/expenses in the reimbursing fund and as reductions of expenditures/expenses in the fund that is reimbursed.
All other interfund transactions are reported as transfers. Nonrecurring or non-routine permanent transfers of equity are reported as residual equity transfers. All other interfund transfers are reported as operating transfers.
N. Totals - Memorandum Only. The “Totals - Memorandum Only” column represents an aggregation of individual account balances. The column is presented for overview informational purposes and does not present consolidated financial information since interfund balances and transactions have not been eliminated.
O. Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at fiscal year-end and revenues and expenditures during the reporting period. Actual results could differ from those estimates.
The State’s biennial budget cycle ends on June 30 of the odd-numbered years. By September 15, prior to a biennium, all State agencies, including colleges and universities, must submit their budget requests for the biennium beginning the following July 1. The requests are submitted on forms that show estimated funding requirements by programs, subprograms, and activities. The Governor reviews the agency requests, establishes priorities, and presents the Legislature with one or more pieces of legislation covering the biennium. The Legislature holds hearings on the Governor’s proposed budget, adopts changes and presents final legislation to the Governor. The Governor can either: a) approve the appropriation bill in its entirety, b) veto the bill, or c) line item veto certain sections of the bill. Any vetoed bill or line item can be overridden by a three-fifths majority of the Legislature.
The approved appropriations set spending limits by fund type for programs within each agency. These limits may include up to five budgetary fund types. Thus, the legal level of control is fund type within program within agency. The central accounting system maintains this control. A separate publication titled “Annual Budgetary Report” shows the detail of this legal level of control. This publication is available from the State Accounting Division of the Department of Administrative Services.
Appropriations are made for each fiscal year of the biennium; balances at the end of the first fiscal year are carried over into the second fiscal year, unless directed otherwise by the Legislature. For most appropriations, balances lapse at the end of the biennium.
The budgetary fund types used by the State differ from the generic fund types presented in the general purpose financial statements. The budgetary funds, which are listed below, are generally segregated by revenue sources. Of these seven fund types, only the first five are subject to the spending limits set by the appropriations bills.
General Fund. To account for activities funded by general tax dollars, primarily sales and income taxes.
Cash Reserve and Cash Funds. To account for financial resources used as a reserve for the General Fund if the General Fund balance should become inadequate to meet current obligations, to account for the financing of goods or services provided by a State agency to individuals or entities outside State government on a cost-reimbursement basis, and to account for the revenues and expenditures related to highway construction.
Construction Funds. To account for financial resources to be used for the acquisition or construction of major capital facilities.
Federal Funds. To account for the financial resources related to the receipt and disbursement of funds generated from the federal government as a result of grants and contracts except for federal highway monies accounted for in the Cash Funds.
Revolving Funds. To account for the financing of goods or services provided by one State agency to another State agency on a cost-reimbursement basis.
Trust Funds. To account for assets held in a trustee capacity.
Distributive Funds. To account for assets held as an agent for individuals, private organizations, and other governments and/or other funds.
The accompanying general purpose financial statements were prepared by converting budgetary fund data into the fund format required by GAAP. The Cash Basis of accounting is used for all budgetary fund types.
All State budgetary expenditures for the general, cash, construction, federal and revolving fund types are made pursuant to appropriations that may be amended by the Legislature, upon approval by the Governor. State agencies may allocate appropriations between object of expenditure accounts, except that personal service expenditures that exceed limitations contained in the appropriations bill require Legislative amendment. Any changes in appropriations are made through an annual deficit bill or other legislation. Appropriations from the federal fund type are considered to be estimated and the Legislature has approved an administrative procedure for changing them. During fiscal year 2001, the Legislature passed a deficit appropriation bill that increased the allowable expenditure level in several of the programs.
The State utilizes encumbrance accounting to account for purchase orders, contracts, and other expenditure commitments. However, State law does not require that all encumbrances be recorded in the State’s centralized accounting system and as a result, the encumbrances that were recorded in the accounting system have not been included in the accompanying general purpose financial statements except for the impact as described below.
Under State budgetary procedures, appropriation balances related to outstanding encumbrances at the end of a biennium are lapsed and reappropriated in the first year of the next biennium. In addition, the State Budget Administrator is required by law to review all encumbrances at the end of each biennium. The effect of the State’s current procedures is to include in the budget columns of the Combined Statement of Revenues, Expenditures and Changes in Fund Balances - Budget and Actual the current year’s appropriations plus the amounts reappropriated for encumbrances outstanding at the end of the prior biennium. This procedure indicates the State’s intention to honor the encumbrances at the end of a biennium. The expenditure columns of the Statement include cash payments related to the appropriated and reappropriated amounts. For the year ended June 30, 2001, there were no budgetary funds in which expenditures exceeded appropriations.
Revenues are not budgeted for any funds except for the General Fund tax revenues. For financial reporting purposes, the budget columns for revenues on the Combined Statement of Revenues, Expenditures, and Changes in Fund Balances – Budget and Actual are reflected as being equal to actual revenues for all other revenue categories.
There are no annual budgets prepared for Trust and Distributive Funds and as a result, no budgetary comparisons are presented.
A reconciliation of the budgetary versus GAAP fund equities as of June 30, 2001, follows:
Cash and Cash Equivalents. “Cash and Cash Equivalents” as reported on the combined balance sheet are under the control of the State Treasurer or other administrative bodies as determined by law. All cash deposited with the State Treasurer is initially maintained in a pooled cash account. On a daily basis, the State Treasurer invests cash not needed for current operations with the State’s Investment Council that maintains a short-term investment pool for such investments. Interest earned on these investments is allocated to funds based on their percentage of the investment pool.
Investments. “Investments” as reported on the combined balance sheet include long-term investments. “Investments” are under the control of the State Treasurer or other administrative bodies as determined by law.
Listed below is a summary of the deposit and investment portfolio that comprises the Cash and Cash Equivalents and Investments on the June 30, 2001, combined balance sheet. All securities purchased or held must either be in the custody of the State or deposited with an agent in the State’s name.
Deposits. At June 30, 2001, the carrying amounts of the Primary Government’s deposits were $90,341,000 and the bank balances were $156,738,000. $142,326,000 of the bank balance was covered by federal depository insurance or by collateral held by the State’s agent in the State’s name and $14,412,000 was not collateralized.
State Statutes require that the aggregate amount of collateral securities deposited by a bank with the State Treasurer shall be at least one hundred two percent of the amount of public funds deposited in that bank, less the amount insured by the Federal Deposit Insurance Corporation. During the year the amount of public funds deposited with a bank occasionally exceeded the amount of collateral required by statute. The State Treasurer had compensating balance agreements with various banks totaling $21,187,000 at June 30, 2001.
At June 30, 2001, the carrying amounts of the Component Units’ deposits were $7,982,000 and the bank balances were $9,463,000. Of the bank balances, $1,833,000 was covered by federal depository insurance or by collateral held by the Component Units’ agent in the Component Units’ name, $1,081,000 was collateralized with securities held by the pledging financial institution’s trust department or agent but not in the Component Units’ name and $6,549,000 was not collateralized.
Investments. State Statute Section 72-1246 authorizes the State Investment Officer to invest the State’s funds in accordance with the prudent person rule. The State Investment Officer may not buy on margin, buy call options, or buy put options. Certain State entities are also allowed by statute to invest in real estate and other investments.
The State’s investments are categorized to give an indication of the level of custodial risk assumed by the State at year-end. Category 1 includes investments that are insured or registered or for which the securities are held by the State or its agent in the State’s name. Category 2 includes uninsured and unregistered investments for which the securities are held by the counterparty’s trust department or agent in the State’s name. Category 3 includes uninsured and unregistered investments for which the securities are held by the counterparty or by its trust department or agent but not in the State’s name.
The Pension Trust Funds own approximately 61 percent of the investments that are in Category 1.
A reconciliation of deposits and investments for the Primary Government to the Combined Balance Sheet at June 30, 2001, is as follows (dollars in thousands):
Securities Lending Transactions. State Statute Section 72-1247, authorizes the State Investment Officer to participate in securities lending transactions, where securities are loaned to broker-dealers and banks with a simultaneous agreement to return the collateral for the same securities in the future. The State’s custodial bank administers the securities lending program and receives cash, United States government or government agency obligations, or convertible bonds at least equal in value to the market value of the loaned securities as collateral for securities of the type on loan at year-end. Securities lent at year-end for cash collateral are presented as unclassified in the preceding schedule of custodial risk; securities lent for securities collateral are classified according to the category for the collateral. At year-end, the State had no credit risk exposure to borrowers because the amounts the State owes the borrowers exceed the amounts the borrowers owe the State. The collateral securities can not be pledged or sold by the State unless the borrower defaults. There are no restrictions on the amount of securities that can be loaned, and there were no losses resulting from borrower default during the year.
Either the State or the borrowers can terminate all securities loans on demand. Cash collateral is invested in one of the lending agent’s short-term investment pools that had average durations of 68 and 75 days. Because loans were terminable at will, their duration did not generally match the duration of the investments made with cash collateral. There is no loss indemnification provided to the State by the contract with the custodian.
Derivative Financial Instruments. Derivative instruments are financial contracts whose underlying values depend on the values of one or more underlying assets, reference rates or financial indices. Futures represent commitments to purchase or sell securities or money market instruments at a future date and at a specific price. The State invests in futures contracts related to securities of the U.S. Government or Government Agency obligations, which are traded on organized exchanges, thereby minimizing the State’s credit risk. The net change in the futures contract value is settled daily in cash with the exchanges. At June 30, 2001, the State held $513,905,000 of futures contracts.
A reconciliation of deposits and investments for the Component Units to the Combined Balance Sheet at June 30, 2001, is as follows (dollars in thousands):
Due To/From Other Funds at June 30, 2001, consists of the following (dollars in thousands):
The general fixed assets of the State are those fixed assets used in performance of general governmental functions. They do not include fixed assets of proprietary funds and the component units.
The following is a summary of changes in the general fixed assets account group during the fiscal year (dollars in thousands):
The following is a summary of proprietary fund-type fixed assets at June 30, 2001 (dollars in thousands):
The following is a summary of component unit fixed assets at June 30, 2001 (dollars in thousands):
Article XIII of the State's Constitution prohibits the State from incurring debt in excess of one hundred thousand dollars. However, there is a provision in the Constitution that permits the issuance of revenue bonds for: (1) construction of highways; and (2) construction of water conservation and management structures. At June 30, 2001, there was no outstanding debt for either of these purposes.
The State created the NETC Leasing Corporation for the purpose of acquiring property to be leased to and purchased by the State. In February 2000, the NETC Leasing Corporation issued $22,515,000 of lease rental revenue bonds to construct and acquire digital television facilities and equipment and related facilities. The NETC Leasing Corporation is not subject to State constitutional restrictions on the incurrence of debt, which may apply to the State itself. The obligations outstanding at June 30, 2001 are collateralized by the revenues of the NETC Leasing Corporation, which consist primarily of rental paid by the State. Outstanding bonds payable are reported in the General Long-Term Debt Account Group.
The State created the Nebraska State Building Corporation (NSBC) to finance the purchase of a building used by the State for its data processing and general services operations. In September 1987, the NSBC issued $7,700,000 of lease revenue bonds to finance the purchase of the building. In June 1992, the NSBC issued $7,645,000 of lease revenue bonds to refund the 1987 bonds. The NSBC is not subject to State constitutional restrictions on the incurrence of debt, which may apply to the State itself. The obligations outstanding at June 30, 2001 are collateralized by the revenues of the NSBC, which consist primarily of building rental paid by the State. Outstanding bonds payable are reported in the General Long-Term Debt Account Group.
The Colleges and Universities issue bonds for various purposes including student housing, parking facilities and special event centers. Net revenues from student housing and dining facilities, special student fees and parking facilities fees are pledged to secure the appropriate issues. Outstanding bonds payable are reported in the College and University Funds.
All outstanding bond issues of the University of Nebraska Facilities Corporation and the Nebraska State College Facilities Corporation are general obligations of these corporations. They are separate legal entities that are not subject to State constitutional restrictions on the incurrence of debt, which may apply to the State itself. The obligations outstanding at June 30, 2001 are collateralized by a special allocation of a portion of the State cigarette tax. Outstanding bonds payable are reported in the College and University Funds.
Changes in Primary Government bonds payable for fiscal year 2001 are summarized below (dollars in thousands):
Changes in bonds payable for Component Units for fiscal year 2001 are summarized below (dollars in thousands):
Bond Defeasances – Component Units
In 1993, the University of Nebraska Facilities Corporation issued $45,570,000 of Refunding Bonds, dated July 15, 1993. On September 30, 1997, the University of Nebraska Facilities Corporation deposited $34,764,000 into an irrevocable trust with an escrow agent to defease outstanding 1993 Series Bonds. Outstanding bonds on July 1, 2005 will be redeemed at a price equal to the principal amount plus accrued interest. As a result, the 1993 bonds are considered to be defeased and the liability for these bonds has been removed from bonds payable. At June 30, 2001, $31,140,000 of 1993 bonds are outstanding.
Capital and Operating Leases. The State leases land, office facilities, equipment, and other assets under both capital and operating leases. Although the lease terms may vary, all leases are subject to annual appropriation by the Legislature.
The minimum annual lease payments and the present value of future minimum payments for capital leases as of June 30, 2001 are as follows (dollars in thousands):
Capital leases have been recorded at the present value of the future minimum lease payments as of the date of their inception. The following is an analysis of property and equipment under capital leases as of June 30, 2001 (dollars in thousands):
The minimum annual lease payments for operating leases as of June 30, 2001 are as follows (dollars in thousands):
Primary Government operating lease payments for the year ended June 30, 2001 totaled $11,401,000.
Lessor Transactions. The State also is a lessor of property, primarily farm land leased by the Board of Educational Lands and Funds to farmers and ranchers. At June 30, 2001, the State owned approximately 1.5 million acres of land that was under lease. Under the terms of the leases, the annual payments are subject to change based on annual market analysis. Total rents of $23,692,000 were received under these and other lease agreements for the year ended June 30, 2001.
The following is a summary of changes in the general long-term debt account group during the fiscal year (dollars in thousands):
The additions in compensated absences represent a net increase. “Claims Payable” consists of the long-term portion of Medicaid claims.
The State has entered into special financing arrangements with certain public benefit corporations to fund certain grant programs. Under these arrangements, the State enters into an agreement with a public benefit corporation to issue debt and capitalize a loan program. Money is appropriated from special revenue sources other than State tax receipts to pay the debt service. This arrangement does not violate the constitutional restrictions on the incurrence of debt since debt service is being paid from user fees and not general tax revenues.
Between 1991 and 2001, the State entered into arrangements with the Nebraska Investment Finance Authority to capitalize loan programs to local units of government for wastewater and drinking water treatment facilities.
Changes in these financing arrangements for the fiscal year were as follows (dollars in thousands):
A summary of the future minimum contractual obligations including interest at rates from 3.90 percent to 5.70 percent is as follows (dollars in thousands):
Internal Service Fund contributed capital at June 30, 2001 consisted of the following (dollars in thousands):
There were no changes in contributed capital balances during the year.
Plans Administered by the Public Employees Retirement Board
The Public Employees Retirement Board (the Board), which consists of seven members, was created in 1971 to administer the Nebraska retirement plans then in existence. Those plans were the School, State Employees’, Judges’ and State Patrol plans. In October of 1973, the Board assumed the administration of the Nebraska Counties Retirement System. The plans have been created in accordance with Internal Revenue Code, Sections 401(a) and 414(h). Contribution and benefit provisions are established by State law and may only be amended by the State Legislature.
The Board prepares separate reports for the defined contribution plans and for the defined benefit plans. Copies of these reports that include financial statements and required supplementary information for the plans may be obtained by writing to Public Employees Retirement Systems, P.O. Box 94816, Lincoln, NE 68509-4816, or by calling 402-471-2053.
Basis of Accounting. The financial statements of the plans are prepared using the accrual basis of accounting, and are included as pension trust funds in the accompanying general purpose financial statements. Plan member and employer contributions are recognized in the period in which the contributions are due. Benefits and refunds are recognized when due and payable in accordance with the terms of each plan.
Plan Description and Funding Policy. By State law, there is to be an equitable allocation of expenses among the retirement systems administered by the Board, and all expenses shall be provided from the investment income earned by the various retirement funds. Following is a summary of each of these plans:
State Employees’ Retirement. This plan became effective January 1, 1964, and is a single-employer defined contribution plan established to provide benefits at retirement to general employees of the State. The amounts presented in the accompanying general purpose financial statements for the State Employees’ Retirement System are for the fiscal year ended December 31, 2000.
Participation in the plan is required for all permanent full-time employees upon reaching the age of 30 and completion of 24 months of continuous service. Each member contributes 4.33 percent of their compensation until $864 has been paid and 4.8 percent of pay for the rest of the calendar year. The State matches a member’s contribution at a rate of 156 percent.
As of December 31, 2000, there were 12,861 active members and 1,828 inactive members. Members contributed $18,460,000 and the State contributed $27,525,000 during the year ended December 31, 2000, which was equal to required contributions.
County Employees’ Retirement. In 1973, the State Legislature brought the County Employees’ Retirement System under the administration of the Board. The amounts presented in the accompanying general purpose financial statements for the County Employees’ Retirement System are for the fiscal year ended December 31, 2000.
The plan is a multiple-employer defined contribution plan that covers employees of 91 of the 93 counties. Participation in the plan is required of all employees working 20 or more hours per week upon the completion of 12 months of continuous service and of all elected officials. County employees and elected officials contribute four percent and commissioned law enforcement personnel (for participating counties with an excess of 85,000 inhabitants) contribute six percent of their total compensation. The counties contribute six percent and eight percent, respectively. The State is not required to contribute to this plan.
As of December 31, 2000, there were 5,921 active members and 951 inactive members. Members contributed $5,278,000 and counties contributed $7,344,000 during the year ended December 31, 2000, which were equal to required contributions.
School Retirement. The School Retirement System is a cost-sharing multiple-employer defined benefit pension plan with 603 participating school districts. All regular public school employees in Nebraska, other than those who have their own retirement plan, are members of the system. The benefits are based on both service and contributions.
The State’s contribution is based on an annual actuarial valuation. The employees’ contribution is 7.25 percent of their total pay and the school district’s contribution is 101 percent of the employees’ contribution.
Judges’ Retirement. The Judges’ Retirement System is a single-employer defined benefit pension system. The membership includes judges and associate judges employed by the State for the Supreme Court, Court of Appeals, District Court, Workers’ Compensation Court, County Court, and Juvenile Court. Benefits are based on both service and final average salary. Benefits vest when the judge takes office.
Members’ contributions, a portion of court fees collected, and the State’s contribution, which is based on an annual actuarial valuation, fund the plan. The judges contribute six percent of their salary.
State Patrol Retirement. The State Patrol Retirement System is a single-employer defined benefit pension system for officers of the patrol. The benefits are based on a percentage of the final average salary multiplied by years of service, not to exceed 75 percent of the average salary. Participation is mandated upon employment.
Members are required to contribute eleven percent of their annual pay, which is matched by the State Patrol. The State’s contribution is based on an annual actuarial valuation.
The following schedule presents the primary actuarial assumptions used in the most recent actuarial reports for the single-employer defined benefit contribution plans:
The following table provides the schedules of funding progress for the single-employer defined benefit contribution plans:
Department of Labor, Division of Employment Security Retirement Plan. As of July 1, 2000, the date of the most recent actuarial valuation, there were 178 current or former employees of the Nebraska Department of Labor, Employment Security Division (Federal Special Revenue Fund) who were participants (153 active; 25 inactive) in a defined benefit retirement plan administered by the Principal Financial Group (plan carrier). The plan is fully funded through participants’ contributions and special federal revenues from the U.S. Department of Labor, Employment and Training Administration, which flow through the Federal Special Revenue Fund, and is accounted as a non-contributing plan (no State General Fund Revenues).
The plan includes only employees hired by the Nebraska Department of Labor, Employment Security Division prior to July 1, 1984. Employees becoming eligible for retirement plan participation subsequent to that date are covered by the State Employees’ Retirement plan.
The employees’ contribution rate to the defined benefit plan is set by the Commissioner of Labor at somewhere between zero and seven percent of earnings each year based on an annual review of the financial condition of the plan as presented by the insurance company’s actuaries. The employer contribution is based on an annual Actuarial Valuation Report and includes contributions for prior service. Retirement benefits are based on a percentage formula that includes the employee’s salary and years of credited service.
The July 1, 2000, net present value of assets available for benefits was $75,192,000 that exceeded the present value of future retirement benefits by $1,436,000. The average assumed rate of return used in determining the actuarial value of accumulated plan benefits was 7.5 percent.
The Nebraska Department of Labor’s required and actual current year employer contributions were $0. The total personal services for the Division of Employment was $14,009,000. The total payroll for the active participants in this plan was $5,612,000.
Component Units. The Teachers Insurance and Annuity Association/College Retirement Equity Fund, a privately administered defined contribution retirement plan, provides individual retirement fund contracts for eligible employees of the State Colleges and Universities. Under the plan, eligible employees contribute 3.5 percent to 6.0 percent of monthly earnings and the institutions match the employees’ contributions plus an additional 1.5 percent to 2.5 percent of earnings. Participation in the plan is required upon reaching the age of 30 with two years of continuous service. Voluntary participation is permitted upon reaching the age of 25 and two years of continuous service. The plan benefits are fully vested at the date of contribution. The State assumes no liability for the plan other than payment of contributions.
The total payroll for the State Colleges and Universities for fiscal year 2001 was $571,998,000 of which $417,240,000 was covered by the plan. The institutions’ contributions were $31,247,000 or 7.49 percent of covered payroll and the employees’ contributions were $22,539,000 or 5.40 percent of covered payroll.
Grants and Contracts. The State participates in various federally assisted grant programs that are subject to review and audit by the grantor agencies. Entitlements to these resources are generally conditional upon compliance with the terms and conditions of grant agreements and applicable federal regulations, including the expenditure of resources for allowable purposes. Any disallowance resulting from a federal audit may become a liability of the State.
All State agencies including institutions of higher education are required to comply with various federal regulations issued by the U.S. Office of Management and Budget if such agency or institution is a recipient of federal grants, contracts, or other sponsored agreements. Certain agencies or institutions may not be in total compliance with these regulations. Failure to comply may result in questions concerning the allowability of related direct and indirect charges pursuant to such agreements. It is believed that the ultimate disallowance pertaining to these regulations, if any, will not be material to the overall financial condition of the State.
Litigation. The State is named as a party in legal proceedings that occur in the normal course of governmental operations. Such litigation includes, but is not limited to, claims asserted against the State arising from alleged torts, alleged breaches of contract, condemnation proceedings and other alleged violations of State and Federal laws. It is not possible at the present time to estimate ultimate outcome or liability, if any, of the State for these proceedings. It is the State’s opinion that the ultimate liability for these and other proceedings is not expected to have a material adverse effect on the State’s financial position.
The State also has been named as a party in legal proceedings that occur outside of the normal course of governmental operations. It is not possible at the present time to estimate the ultimate outcome or liability, if any, of the State for these proceedings. The effects of this litigation, if any, will be reflected in future years, as the uncertainties regarding the litigation are determined.
Entergy Arkansas, Inc. and other interested parties have filed a suit against the State of Nebraska and other defendants for $98 million, alleging improper actions in the license review for the low-level radioactive waste facility for the Central Interstate Compact. Trial is currently scheduled for June 2002 in Federal District Court. The State is vigorously defending this lawsuit. It is not possible at this time to estimate the outcome of this appeal or the ultimate liability, if any, of the State as a result of this proceeding.
On June 1, 2000, a District Court opined that the $1.25 million limit on the total amount of damages recoverable in a medical malpractice action was unconstitutional. This case has been appealed to the Nebraska Supreme Court. That court previously determined the Medical Malpractice Act constitutional. Should the court reverse its previous position, it is not possible, at the present time, to estimate the increase in liability to the Excess Liability Enterprise Fund should the limit be eliminated.
Construction Commitments. At June 30, 2001, the State had contractual commitments of approximately $412,596,000 for various highway and building projects. Funding of these future expenditures is expected to be provided as follows (dollars in thousands):
At June 30, 2001, the Colleges and Universities had contracted for the construction of several facilities that are estimated to cost $294,093,000. The approximate remaining costs to complete these facilities were $168,400,000, which will be funded as follows (dollars in thousands):
Through the Department of Administrative Services, Divisions of Risk Management and State Personnel, the State maintains insurance and self-insurance programs. Workers’ compensation, employee liability and general liability are self-insured. The Colleges and Universities are self-insured for a portion of their comprehensive general and property losses. The Colleges and Universities purchase commercial insurance coverage for hospital professional liability. Motor vehicle liability is insured with a $5 million limit and a $300,000 retention per occurrence and employee dishonesty is insured with a $1 million limit with a $10,000 retention per incident. The State insures against property damage, maintaining a policy with a $250 million limit and a $100,000 retention per occurrence. The State also provides insurance for personal property damage. Settled claims have not exceeded this commercial insurance coverage in any of the past three years. The Division of State Personnel maintains health care and life insurance for eligible State employees. These activities are reported in the Risk Management Internal Service Fund.
Claims liabilities are reported when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Liabilities include an amount for claims that have been incurred but not reported. The balance of claims liabilities is determined by an analysis of past, current, and future estimated loss experience. Because actual claims liabilities depend on such factors as inflation, changes in legal doctrines and damage awards, the process used in computing claims liability may not result in an exact amount. Claims liabilities are evaluated periodically to take into consideration recently settled claims, the frequency of claims, and other economic and social factors.
Changes in the balances of claims liabilities during the years ended June 30, 2001, and 2000, were as follows (dollars in thousands):
The State maintains two enterprise funds. The Lottery Fund accounts for all receipts and expenses from the operations of the State Lottery. The Excess Liability Fund accounts for liability insurance coverage provided to health care providers.
Segment information for the fiscal year ended June 30, 2001, is as follows (dollars in thousands):
There were no operating grants, entitlements, tax or shared revenues, or capital contributions during the fiscal year ended June 30, 2001.
Fund balances reserved in the governmental and fiduciary funds consist of the following at June 30, 2001 (dollars in thousands):
On October 1, 1997, the Board of Regents of the University of Nebraska and Bishop Clarkson Memorial Hospital (Clarkson) entered into a Joint Operating Agreement forming the Nebraska Health System (NHS), a Nebraska nonprofit corporation. A Board of Directors comprised of six members appointed by Clarkson and six members appointed by the Board of Regents govern NHS. Upon dissolution of NHS, the University and Clarkson will share equally in the remaining assets. Because the University has an ongoing financial interest in NHS, the University is accounting for the joint venture under the equity method. On October 1, 2000, the lease was amended to extend thirty-seven years. The University has recorded a fifty percent equity in earnings of NHS for the year ended June 30, 2001 totaling approximately $831,000. In addition, to the extent that sufficient funds are available as determined by the NHS Board of Directors, the University will receive an annual capital distribution. A distribution was declared in fiscal year 2000, of which the University received $3,000,000 in July 2001.
In connection with the Joint Operating Agreement, the Board of Regents also entered into an Academic Affiliation Agreement for Education and Research with NHS. In connection with this agreement, NHS has agreed to financially support certain educational, research, operational and clinical activities of the University that further the mission and objectives of NHS. During the year ended June 30, 2001, the University received approximately $19,746,000 of support in connection with the agreement.
Separate financial statements of NHS can be obtained from the Nebraska Health System, 42nd Street and Dewey Avenue, Omaha NE 68105.
The State changed the threshold for capitalizing buildings from $50,000 to $100,000 as of July 1, 2000. The beginning balances were restated to reflect this change in accounting policy. The beginning buildings balance of the General Fixed Asset Account Group was reduced by $17,242,000 as a result of this restatement.
GASB Statements No. 33, Accounting and Financial Reporting for Nonexchange Transactions and No. 36, Recipient Reporting for Certain Shared Nonexchange Revenues, an amendment of GASB Statement No. 33, were implemented during fiscal year 2001. The effect of the change on the accompanying financial statements was an increase of revenues and expenditures in the General Fund of $14,532,000 to reflect the distribution of insurance premium taxes to local governments. These distributions had previously been reflected in an agency fund. In addition, fund balances that had previously been reported as unreserved have been reported as reserved or restricted for restrictions in enabling legislation.
The GASB issued Statement 34, “Basic Financial Statements-and Management’s Discussion and Analysis-for State and Local Governments.” This statement will significantly change the way the State reports their finances to the public. Some of the more significant changes are as follows:
Management discussion and analysis (MD&A). Financial managers of the State will be required to share their insights of the State’s financial performance for the year. The MD&A will provide an analysis of the State’s overall financial position and results of the previous year’s operations and will discuss the capital asset and long-term debt activity. The MD&A will conclude with a description of currently known facts, decisions, or conditions that are expected to have a significant effect on the State’s future financial position and operations.
Government-wide financial statements. The government-wide financial statements will be prepared using full accrual accounting (economic resources measurement focus) for all of the government’s activities. The statement of activities will report expenses and revenues in a format that focuses on the net cost of each of the government’s functions. The statements will distinguish between the governmental and business-type activities of the primary government and its discretely presented component units. Fiduciary activities will be excluded from the statements.
Fund-based financial statements. This will consist of a series of statements that provide information about the State’s major and nonmajor governmental and enterprise funds.
Required supplementary information. A budgetary comparison schedule comparing original, final, and actual information on the budgetary basis for the State’s general fund and major special revenue funds is required.
Infrastructure. The State will be required to report all capital assets, including infrastructure, in the government-wide statement of net assets will report depreciation expense in the statement of activities.
The State will issue financial statements under Statement No. 34 for the fiscal year ending June 30, 2002. This will be the initial implementation incorporating the changes noted above.